COST PLANNING &

CONTROL
LECTURE 4:

LIFE CYCLE COSTING

LIFE CYCLE COSTING

Outline

Introduction

Factors considered in Life cycle costing

Concept of obsolescence

Difficulties in assessing life cycle costs

Introduction

A technique of cost prediction by which

the initial construction cost, running &

maintenance costs of a building, or part of

a building can be reduced to a common

measure of their present values.

Introduction Cont

Also known as total cost or ultimate life

cost.

Evaluates alternative cost effective

solutions to specific design problems.
Helps in securing value for money.

Introduction Cont
Life Cycle costs
Initial costs

Land
Construction
Professional
fees

User cost

Occupational
charges

Rates, Insurance
& Alterations

Running costs

Maintenance, cleaning
& operating services
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Factors to consider in LCC

1)

Building life

2)

Component life

3)

Inflation

4)

Discount rate

5)

Costs

Factors to consider in LCC

Building life

1.

Buildings decay and become obsolete with

time hence should be maintained, constantly

repaired, adapted & modernised.

Physical deterioration is caused by:

Weathering factors such as radiation,

temperature, water, normal air constituents, and

wind.

Building life
Physical deterioration is causes cont..

Biological factors such as fungi and bacteria.

Incompatibility factors, chemical or physical.

Use factors such as design, manufacture,

construction, use and maintenance.

Physical deterioration leads to physical

obsolescence due to age, use, and scale of

maintenance.
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The concept of obsolescence

A building has three types of life:

the physical life;

the functional life; and

the economic life

that need to be preserved so as to avoid

negative/reducing effect called

depreciation.
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Obsolescence cont

Physical depreciation: Depreciation on

physical life of a building arising from wear

and tear

Functional obsolescence: Depreciation

on the functional life of a building, arising

from errors/omissions in design (room

sizes, ceiling heights, amenities)

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Obsolescence cont

improvements or rehabilitation works are

carried out to cure functional obsolesce

Economic obsolescence: The loss in

value arising from external conditions that

affect character/degree of utilization,

reduced demand (presence of a nuisance,

outmigration, & economic downturn)

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2. Component life

The lifespan of individual materials &

components have an effect of the building

life. Component life depends on:

Component specification.

Appropriate installation.
Interaction with adjacent materials or
components.
Use and abuse.

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Component life depends on.

Frequency and standards of maintenance.

Local maintenance policies used by

owners and occupiers.

Implication of fashion.

Development of new technologies.

Observed probability of failure.

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3.Inflation

Refers to periodic changes in prices of

goods & services causing money to lose

its purchasing power.

Adjustments for inflation in life cycle
costing takes into account:
Market expectations.
Published short & long term forecasts by the
Central Bank.
Intuitive judgments.

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4.Discount rate

Reduces the future streams of cash flows

to their present values.

Determines the time value of money.

Determined by inflation rate and clients

source of capital (debt or equity).

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5.Costs

Initial cost - Cost of land, construction

cost & professional fees.

Periodic cost such as replacement of

services & painting at say 5 year intervals

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5.Costs cont

Converted to the present value using the

following formula:

where:
r = discount rate
n = period

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5.Costs cont

Annual cost such as cleaning and routine

maintenance are converted to the present

value using the following formula:

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5.Costs cont

Where n is not given, discounting is

computed in perpetuity using the

following formula:

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5.Costs cont

When comparing buildings with varying n

values, discounted values are discounted

by determining their annual equivalent

values using the following formula:

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Difficulties in assessing LCC

Lack of reliable historical data on running

and maintenance costs.

Considerable variation in taxation rates

over the building life.

Difficulties in predicting interest rates &

hence discount rates over long periods.
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Difficulties in assessing LCC

Speculative nature of most developers

uninterested in maintenance issues.

Inadequately understood life cycle costing

techniques and their importance.
Changing tastes, fashion and statutory
requirements for buildings.
Lacking historical data on building and
component life.

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Questions?

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