AR 17-75 BUILDING ECONOMICS

AND SOCIOLOGY
LIFE CYCLE COST- MODULE IV
TOTAL COST OF BUILDING-
Introduction to general economics in building industry
COSTS
There are numerous costs associated with acquiring, operating,
maintaining, and disposing of a building or building system. Building-related
costs usually fall into the following categories:
Initial Costs—Purchase, Acquisition, Construction Costs
Fuel Costs
Operation, Maintenance, and Repair Costs
Replacement Costs
Residual Values—Resale or Salvage Values or Disposal Costs
Finance Charges—Loan Interest Payments
Non-Monetary Benefits or Costs (These include the satisfaction realized
from enjoying a certain way of life or style of work)
COSTS
Only those costs within each category that are relevant to the decision
and significant in amount are needed to make a valid investment
decision.
Costs are relevant when they are different for one alternative
compared with another.
Costs are significant when they are large enough to make a credible
difference in the LCC of a project alternative.
LIFE CYCLE COST-
Introduction to general economics in building industry
INTRODUCTION
Life cycle costing is defined as the total cost throughout its life including
planning, design, acquisition & support costs & any other costs directly
attributable to owning / using the asset.
By using LCC, total cost of the product can be calculated over the total
span of product life cycle.
Life-Cycle Cost Analysis (LCCA) is a method of economic analysis that
sums all relevant project costs over a given study period in Present
Value (PV) terms
Category of LCC Capital assets :
•Initial costs •Operating costs •Disposal costs
Life cycle costing or LCC is an important factor for comparing the
alternatives and deciding on a particular process for completing a
project.
WHY LCC?
At the start of any project, it is important to understand the costs
involved.
Traditional methods simply look at start up costs, cash flow and profit
or loss
Focused primarily on the manufacturing stage of product life cycle
Pre & post – manufacturing are treated as expenses costs
LCC integrates these aspects in a framework based upon the value of
money over time.
Lowest life-cycle cost (LCC) is the most straightforward and easy-to-
interpret measure of economic evaluation.
CONTRIBUTION TO SUSTAINABLE
CONSTRUCTION
LCC is also a key element in the assessment of environmental
sustainability in construction.
It provides a tool for the economic evaluation of alternative
sustainability options exhibiting different capital, operating costs or
resource usage.
CALCULATION
Life cycle costing or LCC is an important factor for comparing the
alternatives and deciding on a particular process for completing a
project.
The different components taken into account for calculating LCC in
present value are:
LCC = Capital + Replacement cost + Maintenance cost + Energy cost –
Salvage Cost
CALCULATION
Here, Capital is the present worth. Replacement cost that may occur at
a later years need to converted to present worth.
 Maintenance cost is annual maintenance cost and needs to be
converted to present worth and so is the energy cost.
Salvage is the money that is obtained while disposing the machinery at
the end of life cycle period.
INITIAL COSTS
Initial costs may include capital investment costs for land acquisition,
construction, or renovation and for the equipment needed to operate a
facility.
Land acquisition costs need to be included in the initial cost estimate if
they differ among design alternatives. This would be the case, for
example, when comparing the cost of renovating an existing facility with
new construction on purchased land.
OPERATIONAL,MAINTENANCE &
REPAIR(OMR) COSTS
Operational expenses for energy, water, and other utilities are based
on consumption, current rates, and price projections.
Energy, and to some extent water consumption, and building
configuration and building envelope are interdependent, energy and
water costs are usually assessed for the building as a whole rather than
for individual building systems or components.
Labour cost
Spare & maintenance cost
Raw material cost.
SALVAGE/ RESIDUAL/ RESALE/
VALUES OR DISPOSAL COSTS
The residual value of a system (or component) is its remaining value at
the end of the study period, or at the time it is replaced during the
study period.
Residual values can be based on value in place, resale value, salvage
value, or scrap value, net of any selling, conversion, or disposal costs.
INTEGRATING LCC INTO THE
DESIGN PROCESS.
Fundamental Problem:
Having Effective Early Information for:
 Design
 Cost
 Energy
 Sustainability
make good decisions.
 IMPORTANT TERMS IN LCC
Net Present Value- It is the difference between present value of cash inflows and present
value of cash outflows over a period of time. It is used in capital budgeting and investment
planning to analyse the profit of investment.
Net Present Value (NPV)
C (1+i/100) (n-1)
PV= -----------------------
(1+d/100) n
where,
C = any cost element at nth year
I = inflation rate(The inflation rate is the percentage by which prices of goods and services
rise beyond their average levels.)
d = discount rate/ interest rate (The discount rate is an interest rate: Assuming a discount
rate of 10%, the Rs. 1,000 in a year's time would be equivalent of Rs. 909.09 today)
IMPORTANT TERMS IN LCC
Internal Rate of Return- The internal rate of return is a discount rate that
makes the net present value (NPV) of all cash flows from a particular project
equal to zero
Payback period- Amount of time required to recover the cost of an
investment.
Shadow pricing- Estimated price for something that is not normally priced
in the market or sold in the market.
Willingness to pay (WTP) is a concept derived from welfare economics that
is used in economic valuation of environmental goods. It refers to the
maximum amount of income an individual or household is prepared to give
up to obtain more of another good (by keeping utility constant).
For your reference
https://green.harvard.edu/topics/green-buildings/life-cycle-costing