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Procedia Engineering 196 (2017) 565 – 570

Creative Construction Conference 2017, CCC 2017, 19-22 June 2017, Primosten, Croatia

Life cycle costing as an important contribution to feasibility study in

construction projects
Renata Schneiderova Heralova*
Czech Technical University in Prague, Faculty of Civil Engineering, Thakurova 7, 166 29 Prague, Czech Republic

Abstract

The purpose of this paper is to highlight the role of life cycle cost (LCC) analysis in the feasibility study of construction projects,
especially in the public sector. Feasibility study is usually conducted in the early phase of construction projects when the greatest
benefit of LCC can be obtained. The commonly used construction cost minimization approach should be replaced with LCC
optimization. In order to achieve the maximum value for money, all costs incurred over the whole life span must be evaluated.
Life cycle costing is a method of economic analysis directed at all costs related to constructing, operating, and maintaining a
construction project over a defined period of time. The optimization of the LCC of a project, construction or equipment, is
essential for the complex decision-making process. It is then at this point that the solution with the minimum value of LCC can
be chosen. The public sector in the Czech Republic is now beginning to require quantification of LCC when deciding on
construction. In addition, LCC has become a criterion in public tenders. This paper summarizes the experience of assessing
building designs in terms of LCC. Not only public sector benefits are identified and summarized but also some significant
difficulties. Case studies are provided.
©©2017
2017TheTheAuthors.
Authors. Published
Published by Elsevier
by Elsevier Ltd. is an open access article under the CC BY-NC-ND license
Ltd. This
(http://creativecommons.org/licenses/by-nc-nd/4.0/).
Peer-review under responsibility of the scientific committee of the Creative Construction Conference 2017.
Peer-review under responsibility of the scientific committee of the Creative Construction Conference 2017
Keywords: construction project; feasibility study; life cycle cost; public sector

1. Introduction

Buildings as the outcome of construction projects are long-lasting goods and decisions connected with
construction projects have long-term consequences [1]. Yet often, building owners or investors focus only on the
purchase cost when they make decisions about such matters as building design, equipment, energy systems, and they

* Corresponding author. Tel.: 420 22435 4522; fax: 420 224354516.

E-mail address: heralova@fsv.cvut.cz

1877-7058 © 2017 The Authors. Published by Elsevier Ltd. This is an open access article under the CC BY-NC-ND license
(http://creativecommons.org/licenses/by-nc-nd/4.0/).
Peer-review under responsibility of the scientific committee of the Creative Construction Conference 2017
doi:10.1016/j.proeng.2017.08.031
566 Renata Schneiderova Heralova / Procedia Engineering 196 (2017) 565 – 570

then tend to ignore future operation or maintenance costs [2]. They lose a holistic view of real cost in a building, and
this can result in selecting a rather cost-inefficient solution. Life cycle cost (LCC) in general consists of an initial
investment (usually construction costs) and the follow-on costs (ordinary payments - energy, utilities, cleaning and
maintenance, irregular costs for renewal or replacement), while some LCC methods also include the costs of
demolition. [3]. Life cycle costing is a commonly recommended method for searching out cost-optimal solutions for
product design and it has also turned into one of the more often used tools in the design phase of building generally.
The early design phases (programming and pre-design) play a crucial role for the future performance of a
building throughout the life cycle – at this early stage the optimization potential can be enormous at a very small
cost. Bogenstatter points out that these early design stages influence up to 80% of building operational costs[4]. In
the later design phases the possibility of change rapidly decreases with simultaneously increasing costs. The
operating costs proceed to overstep the construction costs by a multiple. The exact exceeding point as well as the
proportion of purchase to operating costs depends on the quality of construction, the intensity of use and the type of
building, as well as on the designated life span. Both academic research and the industry itself claim that an
integrated design process, including life cycle costing and optimization, can significantly reduce the operating and
maintenance costs [3]. The utilization of LCC analysis allows an early estimate of the operational saving potential
and/or collection and assessment of alternatives.

2. Literature review

2.1. Life cycle costing

The history of LCC began in the US Department of Defense in the mid-1960s. RICS (The Royal Institution of
Chartered Surveyors) introduced a method of collecting data concerning running costs of buildings in 1971 (BMCIS
- Building Maintenance Cost Information Service). The British Ministry of Industry published a document “Life-
cycle costing in the management of assets” in 1977. In 1983, a framework for data collection was published
applicable to establishing a project LCC by Flanagan, Norman [5]. In the mid-1980s attempts were made to relate
LCC more towards construction projects [6]. Recently several research projects have been carried out targeted at
establishing the LCC methodology for the construction industry. One example is Abraham and Dickinson’s [7]
study of the disposal of a building in which LCC calculation is used to quantify disposal costs. Aye et al. [8] used
LCC to evaluate a range of property and construction options for a building. Bogenstatter [4] promoted the usability
of active LCC calculation in the early design phase. He developed a model adopting specific characteristic values of
LCC, i.e. standardized typological figures.
The concept of LCC has been accepted as a British Standard since 1992. The LCC definition was revised in 2000
and incorporated in the ISO 15686 Part 1 - Service Life Planning. LCC is cautiously described by the building and
construction assets standard ISO15686 as: “a technique which enables comparative cost assessments to be made
over a specified period of time, taking into account all relevant economic factors both in terms of initial costs and
future operational costs”.
Recently, a Center for Whole Life Performance has been established at the Building Research Establishment
(BRE) to provide the Secretariat with an industry-led Whole Life Costs Forum (WLCF) [9]. This Forum is intended
to enable members to pool and receive typical WLC information through a members-only database, and produce
industry-accepted definitions, tools, and methodologies. The TG4 group [10] was established as a part of the
working group for sustainable construction in 2001. This was done to prepare a report on calculation of LCC in
construction and to formulate a recommendation as to how LCC should be implemented at the level of European
policy. The outcome is a report “Task Group 4: Life cycle costs in construction“. The latest initiative is the project
of Davis Langdon [11] “A common European methodology for Life Cycle Costing”.
Despite a rapidly developing interest in recommending the LCC approach as beneficial, the acceptance and
utilization of LCC in the construction sector remains limited [12,13,14]. Cole and Sterner [15], Flanagan et al. [16]
as well as Norman [17] suggest that incomplete understanding of LCC’s advantages among industry professionals is
the main cause of the limited acceptance of LCC. These authors pointed out that there exists a gap between theory
and practice. However, neither of them adequately clarifies possible reasons for this gap.
 Renata Schneiderova Heralova / Procedia Engineering 196 (2017) 565 – 570 567

2.2. Feasibility study

Feasibility study is an introductory study undertaken at the very early stage of a construction project. The
objective of any feasibility study is to settle on whether a project is a reasonable proposition. Another goal is to help
determine possible alternatives. A feasibility study helps in the development of additional project documentation
such as the business case, a project execution plan and the strategic brief. The effectiveness of the feasibility study
will influence the accomplishment of a project.
The project feasibility study is traditionally worked out through consideration of financial issues, such as return
on investment, demand and supply in the market, risk analysis for market conditions [18]. Useful feasibility study
should be more than just a set of financial predictions. The crucial need for shifting the traditional approach of
project feasibility study to a new one adopting the principles of sustainable development is promoted in [19]. The
attributes can be divided usually into three major pillars - economic, social and environmental performance aspects.
Designers and engineering consultants should be interviewed at the feasibility stage and asked for a professional
opinion on different alternatives and their influences on project sustainability as a life cycle cost. The
implementation of this new approach suggests the cooperation of all project stakeholders, including government,
clients, architects, engineering consultants, contractors and suppliers [20].

2.3. Tools for LCC in a feasibility study

A decision-making scheme for the investors, allowing evaluation of not only investment costs, but also of life
cycle savings and benefits is crucial, thus shifting the objective from decision-making based only on the
construction costs towards life cycle costs [21,22]. The main question for sustainable design is how to put economic
optimization into the early design stages. Design decisions made at this project phase are determining the whole life
effectiveness of the building.
In general, the assessment of life cycle costs in the early design phase is based on applying reference values of
comparable buildings. The data for estimation of construction, operating and maintenance costs, is mostly gathered
through regression analysis of existing building data or an aggregation of building elements [3]. The same procedure
is used to estimate the life span of buildings or building elements. A further approach for life cycle costing is
utilization of medium values as a percentage of construction cost as yearly regular payments. Thereby the
construction costs and life span of building elements are used as a basis for the calculation of the building renewal
throughout its life cycle [22]. The issue of reference values remains one of the greatest problems for life cycle
costing, since the data is seldom reliable and even if accessible, then expensive.
Life cycle costing often uses the discounted cash flow method for the calculation of life cycle costs. The most
suitable and most commonly used approaches in assessing the life cycle cost of buildings are the Net Present Value
(NVP) and the Equivalent Annual Cost (EAC). The latter approach is beneficial especially in the case of alternatives
with variable life spans [20].
Four different study periods for buildings may be used in LCC: economic, technical, physical and utility life
spans [23]. Economic life span is an estimate of the building’s profitable time. The technical life span is the
estimated number of years before the technology renders the building obsolete. The physical life span is the
estimated period in which it is physically possible to use the building. Finally, the buildings utility life span is that
estimated within which the building can satisfy established performance standards. In LCC, the economic life span
is the most common since the calculations emphasize a cost minimization perspective [23].

3. Case studies

3.1. Supreme Audit Office: a new owned building or office space rental?

The Supreme Audit Office (SAO) is an independent body that audits all economic activities in the Czech
Republic. The SAO performs a sovereign function and is independent of the legislative, executive, and judicial
powers. Its independence protects the SAO from political influences to the maximum degree. This institutional
568 Renata Schneiderova Heralova / Procedia Engineering 196 (2017) 565 – 570

independence is also supported by adequate financial independence. SAO is currently based in an older office
building, which is leased, and the purchase of a new office building is being considered. The feasibility study, as a
support for decision making, was carried through. An important part of the feasibility study is life cycle costing of
alternatives, which are:

x Building of new base facility – modern efficient certified building, spatially flexible, intelligent building system
for heating, ventilation and air conditioning (HVAC), 17000 m2 BGF, and 62000 m3 enclosed area. Construction
cost is taken from author’s database that includes prices of reference buildings. Rates of replacements and
maintenance are given by studies on the reference buildings. Salvage value of building is an estimate of expected
market value at the end of study period.

x Purchase of current office – 40 year old office building, 16955 m2 BGF, 70000 m3 enclosed area. Purchase cost
is equal to the bid price; operating cost is taken from the accounts. Maintenance and renewal cost is estimated on
the basis of technical condition of building. Salvage value of building is an estimate of expected market value at
the end of study period.

x Office space rental - current state. 40 year old office building, 16955 m2 BGF, 70000 m3 enclosed area.
Operating and rental cost are taken from the accounts.

Table 1. Life cycle costing of alternatives, study period 20 years.

Cost item Building of new Purchase of Office space
base facility current seat rental of current
seat
Construction / Purchase cost (EUR) 21.050.000 15.200.000 0
Rental cost (EUR) 1.860.000 a) 0 12.400.000
Operating cost (EUR) 8.140.000 b) 11.220.000 11.200.000
Maintenance and renewal cost (EUR) 3.590.000 10.320.000 0
Total (EUR) 34.640.000 36.740.000 23.600.000
Salvage value (estimate) (EUR) 15.000.000 10.000.000 0
Total LCC (EUR) 19.640.000 26.740.000 23.600.000
a) rental cost in current seat (620.000 EUR/year) during the realization of new seat (3 year)
b) operating cost in current seat (560.000 EUR/year) during the realization of new seat (3 year), operating cost in new seat 380.000
EUR/year

The result of the feasibility study was a recommendation to build new offices. Total life cycle cost of this alternative
is lowest (see Table 1). The payback period based on the cost savings on rental cost (620.000 EUR/year) and
operating cost (180.000 EUR/year) was calculated. 26 years is acceptable payback period for public sector, because
it is shorter than economic, technical, physical and utility life span. At present (ie. March 2017), project preparation
is already in progress.

3.2. Depository building for Náprstek Museum of Asian, African and American Cultures

The project aims to build a new depository, which will allow relocation of exhibits from the existing non-
compliant repositories to new spaces with appropriate conditions. More than 150,000 exhibits of national and
international importance will be saved, with reserves for the next 50 years, on an area of 4600 m2.
The proposed feasibility study demonstrated the economic sustainability of the construction project. An
important part of the feasibility study was life cycle costing. The minimum, maximum and average levels of life
cycle cost have been calculated – final recapitulation of the LCC is shown in Table 2. Construction cost is taken
from author’s database that includes prices of reference depository buildings. Operational costs are estimated on the
 Renata Schneiderova Heralova / Procedia Engineering 196 (2017) 565 – 570 569

base of reference depository buildings. Rates of replacements and maintenance are given by studies on the reference
buildings.

Table 2. Life cycle costing of depository building (design), study period 20 year.
Cost item Minimum (EUR) Maximum (EUR) Average (EUR)
Construction cost 2.880.000 3.600.000 3.240.000
Operation cost 1.500.000 2.300.000 1.900.000
Maintenance and renewal cost 580.000 720.000 650.000
Total LCC 4.960.000 6.620.000 5.790.000

The final result of the feasibility study was a recommendation to initiate the preparation of construction project
and integrate proposed investment plan in the budget of the Ministry of Culture of the Czech Republic.

4. Benefits and weakness of using LCC in a feasibility study

The greatest difficulty at the early design stage (pre-design) is availability of data for the construction project.
Life cycle costing is a data intensive procedure by reason of the complexity of the building projects and the many
components of a building. The final result of life cycle costing is, therefore, determined by the availability and
reliability of the input data [12]. In the absence of actual data, estimates can be based on past experiences. Data on
costs, life spans and power consumption of various building types and building components can be collected from
estimation standards (for example URS standards or RTS standards in the Czech Republic). These standards provide
data for a ‘typical’ building. Investors commonly have other-than-average requirements for buildings performance,
which has an impact on costs. However, because of regional differences, the location of a building has a big effect
on its final life cycle cost. Data on a completed building, as well as data from the mentioned standards should be
updated for life cycle costing.
A barrier to LCC implementation is low quality data and a lack of industrial standards for reporting the life cycle
performance of buildings. Under these circumstances, it is complicated to produce LCC calculations supporting
‘good’ decisions. Many assumptions and estimations must consequently be made, which indicate that the result of
life cycle costing is, as anticipated, burdened with a high degree of uncertainty.
The time value of money, expressed as a discount rate, depends on inflation, cost of capital, investment
opportunities and personal consumption preferences [23]. If the discount rate is set to 0% this means that the timing
does not matter; the higher the discount rate the more importance is given to the present. Another approach on how
to deal with the time problem is to mark costs expected to increase more than other costs. A diverse rate can thus be
used to indicate relative price changes [23].
In order to use LCC in feasibility studies of construction projects, the decision makers must perceive benefits
from using it. Consequently, using LCC might bring transparency by interpreting a complex reality down to (at least
for the business world and public sector), a familiar dimension - money.
An indirect benefit from performing life cycle costing as a part of a feasibility study for construction projects is
that it may not be the actual monetary figures that provide the decision maker with insight, but instead the actual
involvement in the process of carrying out an LCC. Thus, gathering data, predicting future effects, recognizing
environmental aspects to consider and so on, might be the really substantial benefit, i.e. understanding the
complexity of a construction project by performing the LCC calculation.

5. Conclusion and Recommendation

Public investors are required to meet the objectives of sustainable building, and together they face limited
financial resources and frequently a very strict institutional framework including procurement procedures. Getting to
an equilibrium between the level of energy efficiency and life cycle costs/ benefits serves as a challenge for the
decision making process.
570 Renata Schneiderova Heralova / Procedia Engineering 196 (2017) 565 – 570

Life cycle costing may be performed as part of feasibility studies to find the most cost efficient solution, as part
of a detailed design to determine an in-service budget for the owner, as part of the tender to assess the most
economical bid proposal, or as part of the procedure to choose the optimum operation and maintenance strategy. The
early planning phases (programming and pre-design) play an important role for the future performance of a building
throughout the life cycle. The optimization potential in the early design phases is significant and also cheap.
Using LCC analysis as a decision support for investors in the early building design stages continues to confront
many difficulties. To the fore of these difficulties are the availability of reliable data, diverging life cycle costs
standards, and the disparity between design information availability and the real importance of the design stage for
decisions.

Acknowledgements

This paper was supported by the Grant Agency of the Czech Technical University in Prague, Grant No.
SGS17/025/OHK1/1T/11 and grant No. SGS17/121/OHK1/2T/11.

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