Department of Quantity Surveying

Construction Economics
Life Cycle Costing

BY

Mohd Hafiz Saberi

 Lecture Content

At the end of the lecture, students should be able to

explain:

 Objective of LCC
 Definitions of LCC
 Application of LCC
 Factors to consider in the calculation of LCC
 Disadvantages of LCC technique
 INTRODUCTION

 The more complex the building, the more difficult

to make a decision.
 The LCC is an attempt to price as many factors as
possible and to calculate it on single basis for
comparison purposes.
 Economic analysis to determine ‘actual cost’.
 The technique of cost prediction.
 DEFINITIONS

 Flanagan and Norman (1983):

“LCC of an asset as the TOTAL COST of that asset over its operating life,
including the INITIAL acquisition costs and subsequent RUNNING costs.”

 Hoar and Norman (1990):

“LCC of an asset as the present value of the TOTAL COST of the asset
over its operating life including INITIAL capital costs, OCCUPATION costs,
OPERATING costs and the cost or benefit of the eventual DISPOSAL of
the asset at the end of its life.”

 Ashworth (1998):
“LCC of a building or a structure incorporates the TOTAL COST
associated with it FROM INCEPTION through to eventual DEMOLITION. In
addition to cost-in-use it includes all of the costs associated with initial
construction and the cost of final clearance of the site when the building
or structure is no longer required.”
DIFFERENCES BETWEEN LCC AND CIU

 LCC
 LCC of an asset as the TOTAL COST of that asset over its
operating life, including the INITIAL acquisition costs and
subsequent RUNNING costs.

 CIU
 Cost related to the building while the building is in commission
by the owner or occupier.
 OBJECTIVE OF LCC

 Identifies the TOTAL COST (Initial cost, running cost and occupational charges)
 Assists in EFFECTIVE DECISION MAKING when choosing
between several alternatives and methods
 It is a MANAGEMENT METHOD
 details out operation costs during the use of the asset.
 Identifies the areas where the operation cost can be reduced.
 SUMMARY OF TOTAL COST

TOTAL COST
(over the life span of building)

Initial Cost User Cost

Running Cost Occupational Charges

•Land •Repair •Taxes (assessment and

•Construction •Maintenance quit rent)
•Professional fees •Operating charges, •Insurances
•Agency fees, etc fuel, machine/plant •Modifications and
•Operating bills alterations
•Management cost
•Demolition cost
 APPLICATION OF LCC

 COMPARISON between alternative site and/or design

proposals for a new project
 COMPARISON between existing buildings in use to fulfill a
client’s needs and new project
 COMPARISON between similar buildings
 COMPARISON between alternative materials, building
components, installation of mechanical and electrical
system etc.
 COMPARISON between renovation, extension and
modification of building
 FACTORS CONSIDERED IN CALCULATION OF LCC

Investment Life Span

 The phases of investment ownership from acquisition,
management, to its final disposition.
 The period over which the organization using the building
EXPECTS RETURNS from the use of it.
 FACTORS CONSIDERED IN CALCULATION OF LCC (Cont’d)

Building Life Span

 The building use life span is determined by several
factors, which include the method of construction and
the amount of maintenance on the building during its life
span.
 Building can be differentiated by two life spans;
 Physical or Structural Life Span
Building will LOSE THE ENDURANCE at different rates
depends on the construction materials.
 Economic Life Span
The period where the building is EXPECTED TO GENERATE
RETURNS or income.
 FACTORS CONSIDERED IN CALCULATION OF LCC (Cont’d)

Component Life Span

 The length of the component life span depends on;
 the correct choice
 Manufacturer
 Quality
 Installation
 Maintenance
 general repair
 usage of structure
 FACTORS CONSIDERED IN CALCULATION OF LCC (Cont’d)

Interest Rate
 Choosing the interest rate depends on the financial status
of building owner and prediction of the interest rate
movement in long term.

 Why LCC needs interest rate?

 estimation the current or future cost (time value of money)
 FACTORS CONSIDERED IN CALCULATION OF LCC (Cont’d)

Changes In Money Value

 Changes in money value during the building life span
effect the calculation of the LCC.
 Changes in materials cost effect on the result obtained in
LCC comparisons.
 Taken into account if possibility changes in prices will
occur in future and prediction of any changes.
 FACTORS CONSIDERED IN CALCULATION OF LCC (Cont’d)

Obsolescence
 Means “That which is no longer practiced or used, discarded,
out of date, worn out, affected through wearing down,
atrophy or degeneration.”
 Occurs because of RAPID CHANGES in the economy and
technology.
 Building have a SHORTER LIFE SPAN in future because of early
obsolescence.
 DISADVANTAGES OF LCC TECHNIQUE

 Difficulties in determining accurately the maintenance

and running costs of different materials, processes and
systems
 Three types of payments involved;
 Initial (e.g: land purchase, fees)
 Annual (e.g: repair, cleaning)
 Periodic (e,g: painting cost every 5 years)
 Taxes – difficult to predict future tax system
 Interest rate – difficult to choose for long term period
 Inflation – difficult to predict inflation rate
 DISADVANTAGES OF LCC TECHNIQUE (Cont’d)

 Sold as an investment upon completion show little

interest in securing saving on maintenance and running
costs
 Initial building capital is limited not effective the client
spend more on initial construction cost to reduce future
cost on building
 Changes in taste and fashion
 Life span of different buildings, materials and
components are difficult to predict
 LCC CALCULATION METHOD

 Present Value (PV)

 The comparison of money payable in the future and
present is made in the form of ‘Present Value’ or
Discounting Value process. This will provide the
equivalent between the present and future values.
 The relation between the present value and the future
value depends on the interest rate used.

 Annual Equivalent Value (AE)

 Another alternative way to express the same
relationship is by using the ‘Annual Equivalent’. This is
the sum payable each year has the same value as the
PV. All items of lump sum expenditure are expressed
in the form of annual payments which need to be paid
according to a stipulated period