BISRA - Whole Life Costing Analysis
BISRA - Whole Life Costing Analysis
BISRA - Whole Life Costing Analysis
uk
By David Churcher
Supported by
BG 5/2008
This isn’t an exact science and I think you’ll find this report reflects
and understands that. It will even provide you with some guidance on
when it is appropriate to apply the principles and when the potential
benefits are outweighed by the cost of the exercise. However, using
the whole-life costing principles correctly in the right circumstances
should improve your decision-making.
Barry Nealon
Chairman
Reliance Facilities Management
© BSRIA BG 5/2008
ACKNOWLEDGEMENTS
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system,
or transmitted in any form or by any means electronic or mechanical including photocopying,
recording or otherwise without prior written permission of the publisher.
©BSRIA May 2008 ISBN 978 0 86022 676 5 Printed by ImageData Ltd.
This guide has been deliberately kept short by omitting some of the
more complex aspects of whole-life costing. Clients, estates
managers, engineers, consultants, quantity surveyors or cost advisers
will find some parts of the guide more relevant than others, but all are
recommended to read the entire guidance.
© BSRIA BG 5/2008
SUMMARY
In addition, the whole-life costing process forces the client and the
project team to challenge their own assumptions and those of others.
This will lead to proposed solutions that have been thought through
more rigorously and which will stand up to scrutiny. The discipline of
documenting assumptions such as sources of life expectancy and cost data
will significantly assist those who need to examine the analysis at some
future date. The data that is acquired for the whole-life costing models
will also contribute to a building or estate-specific database that can be
re-used in future analyses.
David Churcher
BSRIA, April 2008
© BSRIA BG 5/2008
CONTENTS
2 ALTERNATIVE SOLUTIONS 8
2.1 Identifying alternative solutions 8
2.2 Specifying the fundamentals 9
2.3 Building the whole-life costing models 12
2.4 General data collection 14
2.5 Timing of activities data collection 16
2.6 Cost data collection 17
2.7 Storing data for future use 20
APPENDICES
APPENDICES
APPENDIX A2 – EXAMPLE 44
© BSRIA BG 5/2008
TABLES
FIGURES
FIGURES
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INTRODUCTION TO WHOLE-LIFE
INTRODUCTION COSTING
TO WHOLE-LIFE ANALYSIS
COSTING ANALYSIS
HOW TO USE THIS For ease of use, the process of whole-life costing analysis is broken
GUIDE down into five sequential, colour-coded logical steps that are used
throughout this guide. These are illustrated in Figure 1 (other guides to
whole-life costing may use different numbers of steps, but the overall
process is the same). As the figure also shows, whole-life costing analysis
is an iterative process. The number of iterations will depend on the
degree of precision required from the end result, the type of assumptions
made in Steps 1 and 2, and the quality of the data obtained for the costs
and timings of the activities that make up the project.
Perform calculations
Sensitivity analysis
© BSRIA BG 5/2008
INTRODUCTION TO WHOLE-LIFE COSTING ANALYSIS
THE LONG TERM The built environment is a key ingredient in the UK’s post-industrial
PICTURE OF BUILDING economy. It is a visible statement of our achievement and progress.
OWNERSHIP
This applies both where the built environment is the means to an end,
as in existing factories, warehouses and office buildings, or whether it is
the end in itself, as in new-build and refurbishment work that generates
8-10% of GDP and employment for 2 million people in the UK.
The longevity of the built environment, and of the organisations that use
it, means that its cost cannot be judged just in terms of capital
investment. The operational costs of construction and infrastructure are
significant and have to be taken into account. The precise nature of the
balance between construction cost, operation and maintenance costs, and
the costs of the business processes enclosed in a building, have been
argued in the papers published by the Royal Academy of Engineering
The Long Term Costs of Owning and Using Buildings, and by Hughes,
Ancell, Gruneberg and Hirst, Exposing the Myth of the 1:5:200 Ratio
Relating Initial Cost. The most important message is that these different
types of cost and benefits, traditionally managed by separate groups of
people, are not independent of each other. They all contribute to the
economic value of a project.
The case for higher capital investment in return for lower running costs
or improved worker productivity is there to be argued. Whole-life
costing analysis is one of the tools that can be used to support decision-
making that takes account of the long-term view of the costs and benefits
involved in building and infrastructure projects. Some other relevant
assessments are shown in Figure 2.
This guide shows how these issues can be overcome or dealt with, and
the ways in which whole-life costing analysis can provide valuable
information for appraising projects.
THE CORE PRINCIPLES Whole-life costing analysis involves a number of core principles. If, for
OF WHOLE-LIFE whatever reason, it is decided that these principles are not appropriate
COSTING ANALYSIS
for a project, then whole-life costing analysis is not an appropriate tool
to help decision-making.
© BSRIA BG 5/2008
INTRODUCTION TO WHOLE-LIFE COSTING ANALYSIS
Summary
Whole-life costing analysis is about being approximately right rather than
precisely wrong. These principles also mean that whole-life costing
analysis is not a trivial exercise, and it can take significant resources to
build the models, assemble the data, run and fine-tune the calculations.
Of course it is sensible to keep the amount being spent on the analysis
under review, particularly in comparison with the potential savings.
WHAT WHOLE-LIFE Define future budgets for capital and revenue works
COSTING ANALYSIS Whole-life cost analysis will not calculate the actual amounts of
CANNOT DO
expenditure in future years, but the data collected as part of whole-life
cost analysis can be used to generate these future budget amounts.
© BSRIA BG 5/2008
DEFINING THE PROBLEM
DEFINING THE PROBLEM 2
Someone, usually the client or project sponsor, will have a clear idea of
what they want the project to achieve. This vision of success needs to be
expressed in functional terms. This means describing the problem in
terms of what the end-result has to achieve rather than what it looks like,
what size it is, what colour it is, who manufactures it, and so on. For
example: “Save 25% of energy costs without disrupting the existing use
of the building” (rather than specifying new boilers); or “Accommodate
2
45 new members of staff” (rather than specifying a two-storey, 500 m
office extension).
2 ALTERNATIVE SOLUTIONS
2.1 IDENTIFYING Once the nature of the problem is properly understood, a range of
ALTERNATIVE
SOLUTIONS
solutions can be developed. It is not the purpose of this guide to
explain how these solutions are arrived at, only to say that the analysis
can cope with as much or as little creativity within the project team as
the client allows. The only limitation is that, for realistic comparison,
each solution must deliver the same functionality.
The base case and alternatives should have some significant differences
between them. For example in response to a problem to accommodate
45 new staff, the base case could be to convert existing meeting rooms
into new office space and hire external meeting space, alternative 1 could
be to add an extra floor to the existing office building, alternative 2 could
be to lease office space elsewhere in the town.
© BSRIA BG 5/2008
ALTERNATIVE SOLUTIONS
In the case of project ‘Upgrade’, the facilities manager has identified four
alternative ways forward.
Base case Do nothing; retain the existing equipment, and live with existing levels of
energy usage, maintenance and expected service life, replacing the
equipment as and when it reaches the end of its life. The existing boilers
use 250 000 kWh of gas each year and the air handling unit uses 100 000
kWh of electricity. The replacement equipment will have the same
performance as alternative 1.
Alternative 1 Replace the boilers and the air handling unit with items of plant at the
lower end of the available price range, which are 10% more energy efficient
than the existing plant and still require annual maintenance.
Alternative 2 Replace the boilers and the air handling unit with items of plant at the
higher end of the available price range, which are 25% more energy
efficient than the existing plant and require maintenance only every two
years.
Alternative 3 Replace the existing boilers with a combined system comprising a smaller
boiler and a double façade on the south-facing side of the building to pre-
heat internal air in the winter. Maintain the existing air-handling unit but
replace it as per the base case. The combination of a small boiler and the
double façade reduces the gas required for heating by 60%.
For private sector projects, the client or project sponsor must select the
discount rate. For help in setting an appropriate discount rate, it is worth
considering what the discount rate is trying to do. It represents the
premium that an investor would require to get a financial benefit at some
point in the future rather than today. This is the same principal as
earning interest on funds in the bank, or paying interest on money
borrowed. Choosing a discount rate that will be appropriate for a project
lasting many years or decades is like trying to predict interest rates.
© BSRIA BG 5/2008
ALTERNATIVE SOLUTIONS
If a study period measured in years does not provide the level of detail
the analysis requires, then months or weeks can be used. In this case, the
discount rate must be expressed in percent per month or week, to match.
Example of Step 2 Part 2: Specifying the discount rate and study period
Project upgrade The discount rate and study periods are selected in line with corporate
policy. The whole-life costing analysis will use a real discount rate of
5%. The study period has been specified by the company’s directors as
17 years, as this is the length remaining on the lease for the office
building (see page 7).
2.3 BUILDING THE Once the number of alternatives to be modelled has been decided, along
WHOLE-LIFE
COSTING MODELS
with the discount rate and study period, then the work of assembling
the data for each separate model can start. Two types of data are
required:
We will deal with these latter questions in Sections 4 and 5. For now we
will concentrate on the first two questions about timing and cost. The
actual data required to put into the model depends on the nature of the
activity (see Table 2):
Type of activity (see Note 1) Timing data (see Note 2) Cost data (see Note 3)
Lump sum/one-off activity In which year does this activity occur? What would the actual cost or benefit be
in today’s prices?
Typical examples: Use year 0 for activities happening now. Remember that today’s prices can be used
because the discount rate takes care of
initial installation
general inflation.
end-of-life replacement Use year 1, 2, 3, up to the final year of the
study period for activities happening in the
major repair or maintenance work part-
way through the study period future.
decommissioning costs
residual value at end of study period.
Recurring activity Which years do this recurrence start and What is the yearly amount (in today’s
end? prices) associated with this activity?
Typical examples:
annual maintenance/cleaning contracts
energy costs
Specify a range. The earliest start date is Remember that the same amount of cost
staff costs year 1. The latest end date is the final or benefit (using today’s prices) is assumed
rent or lease payments. year of the study period. for each year.
Notes:
1 Depreciation and capital charges are not included in the appraisal (HM Treasury Green Book, paragraph 5.21).
2 All costs and benefits occurring during a year are assumed to be paid or received at the end of the year.
3 The convention in whole-life costing analysis is for costs to be positive and for benefits to be negative.
Every whole-life cost model is just a list of activities with the year when
they occur and their respective cost or benefit. The complexity of the
model depends on the length of the list, and how much detail the
activities go into. As whole-life costing involves many separate
mathematical calculations, computer spreadsheets are the most flexible
software packages to use for building the model. However, proprietary
systems and databases can also be used.
© BSRIA BG 5/2008
ALTERNATIVE SOLUTIONS
For mechanical equipment, the residual value is usually taken as the scrap
or resale value, though for equipment that is beyond the first few years of
its life then the resale value is usually nil. For building components such
as roofing or paving the residual value can be estimated as the unexpired
portion of the expected service life of the component, so that a roof with
an expected life of 30 years would have a residual value equal to 33% of
its installation cost after 20 years when there are 10 years left. Some
building elements, such as wall coverings or paints, are essentially
unrecoverable so will have no residual value at all. In all cases, residual
values are still subject to the appropriate discount factor. In practice this
means that small residual values at the end of a lengthy study period will
have no discernable effect on the outcome of an analysis.
Project timeline
Another useful technique when starting to build whole-life cost models is
the project timeline. This is an intermediate step between the raw data
and the spreadsheet model. Project timelines are particularly helpful to
understand exactly when specified events occur, as in the following
example:
The project is the replacement of air handling equipment in three years time
with existing equipment being used up until this time. The base case uses
central plant with an expected life of 15 years (costing £50 000), the
alternative uses central plant with an expected life of 25 years (costing
£65 000) but where the main fan bearing needs replacement every 10 years
(costing £5000 each time). For clarity it is assumed that residual values are
zero.
It is easy to miss the fact that the initial capital costs occur in year three,
and this must be included in the model so that the right discount factors
are used. In effect, the study period is 28 years. But using a timeline,
this becomes obvious:
This guide uses the layouts adopted in the BSRIA Whole-Life Cost
Calculator, a simple spreadsheet that has been developed by BSRIA to
support its Practical Whole-Life Costing training course. The whole-life
cost models shown in Sections 3 and 4 are in the same layout as the latest
BSRIA spreadsheet. This spreadsheet keeps capital items separate from
operational items so that savings-to-investment ratios can be calculated if
required. It also helps that capital items tend to be lump sums (single
items of expenditure or revenue occurring in a particular year) whereas
operational items tend to be recurring sums where the same cost or
benefit occurs every year. This separation is also helpful because lump
sums and recurring sums are treated differently when the net present
values are calculated. (See Section 3.)
At feasibility and outline proposal stages (RIBA stages B and C), only the
design philosophies and big design decisions are considered. There is no
point trying to include information about specific equipment as these
choices have not been made at this stage. For cost data and timing data it
© BSRIA BG 5/2008
ALTERNATIVE SOLUTIONS
As the design becomes more detailed (RIBA stages D, E and F), then it is
appropriate to use more specific information, such as actual
manufacturer-quoted prices or life expectancy data that incorporates
factors reflecting the location of the site, the expected maintenance
regime, the quality of the installation and so on. A detailed explanation
of one model for applying these project specific factors to life
expectancies is given in BS 15686.
2.5 TIMING OF Whether the activities represent lump sums or recurring sums, their
ACTIVITIES DATA
COLLECTION
timing during the project will affect how accurately they can be
estimated.
More accurate
Activities that occur at the start, or near the start, of a project are usually
connected with the initial installation or construction. The timing of
these activities can be estimated quite accurately from construction
programmes and periods required for design or planning permission, or
because the project has pre-determined deadlines (an opening date for a
new supermarket, or the start of an academic year for a school or
university building). It is important to estimate these timings as
accurately as possible. As they occur near the start of the study period
they will have a relatively large effect on the overall whole-life cost.
The timing of activities that occur at the end of the study period is
known precisely once the study period has been established. There are
generally relatively few of these activities, and many of them are related
to the residual value of the building or items of plant at the end of the
study period. As these costs or benefits are the furthest in the future,
they have a relatively small effect on the overall whole-life cost.
The timing of activities that recur throughout the study period are also
known precisely. These may represent annual maintenance, or staff
employment.
Less accurate
Less accurate date relates to one-off activities, occurring at some point
during the study period. These are mainly concerned with replacement
of items of plant or components or parts of the building. The choice of
each replacement date has to be supported by clear explanation. A
starting point would be information from a manufacturer (likely to be
based on ideal operating conditions or on a warranty period), from
standard component life tables (for example, Economic Life Factors
published by CIBSE – but this will be very generic data and may not be
suitable), or from previous experience (usually good project-specific data,
but not many clients or estates owners maintain adequate records).
Least accurate
The least accurate data may be some of the recurring costs, where it is
decided that using a flat rate throughout the whole project is not realistic
because their inflation rate is different from underlying inflation. The
most frequent item modelled in this way is energy cost. This decision is
usually defined by the client or recommended by the cost consultant.
Even so, the way in which these costs will fluctuate will have to be
agreed, and must be documented. For example, it may be assumed that
energy costs can be fixed for five-year periods, but will jump by 5%
above inflation at each re-negotiation. This pattern of inflation should
be based on some specific forecast information, or it must be made
crystal-clear that this is an assumption made by the project team.
© BSRIA BG 5/2008
ALTERNATIVE SOLUTIONS
2.6 COST DATA Ideally, all cost data should be generated through specific quotations or
COLLECTION
estimates so that project-specific characteristics can be taken into
2
account. Industry average £/m costs can be used for feasibility or
scoping studies, provided that the generic nature of these estimates is
clearly understood.
At least the use of a discount rate that allows for general cost inflation
means that obtaining quotes and estimates for costs is made simpler. All
estimates and quotations should be for carrying out the activity
(maintenance, repair, replacement, decommissioning and installation) at
the time the model is developed.
Example of Step 2 Part 3: Collecting data about timing and cost of activities
The following data has been collected by the facilities manager for the four
different alternatives for the aforementioned project upgrade. The
following cost data applies to all the scenarios.
Table 3: Cost data.
Cost item Current cost Price rise/fall on top of inflation (price
escalation)
Gas 4·5 pence per kWh 10% increase every five years
Electricity 13·5 pence per kWh 7% increase every five years
All other items As specified Increase in line with inflation (0% escalation)
For this analysis the facilities manager has decided to ignore equipment
decommissioning costs, and to base the residual value of nearly-new
equipment on straight-line depreciation over five years.
In addition to the general data outlined above, the following specific cost
and timing data has been assembled for each option.
Base case Annual maintenance contracts for the existing plant (boilers plus air-
handling unit) cost £10 000 per year. The boiler is expected to last
another seven years, but will then be replaced with the same boiler that is
being proposed for alternative 1. The air-handling unit is expected to last
another 10 years, but will then be replaced with the same air-handling unit
that is being proposed for alternative 1.
Alternative 1 The immediate (year 0) purchase and installation costs of the low-end
boilers and air-handling unit are £75 000 and £25 000 respectively. The
annual maintenance contracts for these items are the same as for the existing
boilers and air-handling unit. The life expectancies for the new boilers and
air-handling unit are 15 years and 18 years respectively.
Alternative 2 The immediate (year 0) purchase and installation costs of the high-end
boilers and air-handling unit are £110 000 and £37 000 respectively. The
two-yearly maintenance contracts for these items cost £10 000 for the
boilers and £4000 for the air handling unit. The life expectancies for the
new boilers and air-handling unit are 22 years and 25 years respectively.
Alternative 3 The purchase and installation costs of the smaller boiler is £40 000 and it
has a life expectancy of 20 years. The construction cost of the double
façade, associated air-circulation and control equipment is £125 000, and
the air-circulation equipment has a life expectancy of 20 years. A one-year
planning and construction period is required, during which the existing
equipment will still be used. The maintenance for the boiler will cost
£3500 per year. The maintenance of the solar-wall is incorporated into the
maintenance of the air-handling unit at a combined cost of £4000.
The lump-sum cash flows and the annual maintenance charges, have
been put onto project timelines, for each alternative, so that they can be
visualised. Energy costs have not been included to keep the diagrams
clear.
© BSRIA BG 5/2008
ALTERNATIVE SOLUTIONS
Figure 6: Project timelines for the base case and alternatives 1-3.
Energy costs escalating every five years are shown in the following
timeline:
2.7 STORING DATA A client or project team that puts time and effort into generating
FOR FUTURE USE
meaningful data for one whole-life costing model should take steps to
make sure that the data can be used again in the future. At an estate
level, a client with a regular works programme should be able to
compile a valuable database of cost and life expectancy data over a few
years, simply by not throwing away all the effort put into separate
whole-life costing analyses.
Once established, this data set is cheap and easy to maintain and provides
valuable data that is specific to the client, the building or the estate.
When this data is used to build future whole-life costing models these
will be automatically more reliable than models based solely on industry
averages of cost or life expectancy.
© BSRIA BG 5/2008
CALCULATING WHOLE-LIFE
CALCULATING COSTS COSTS
WHOLE-LIFE
This part of the guide explains how the calculations are done. Although
all the maths would be done on a spreadsheet or other software package,
it is important that anyone using whole-life costing understands where
the end-results come from.
3.1 NET PRESENT Translating a future item of expenditure (such as a replacement boiler)
VALUES FOR LUMP
SUM COSTS AND
into a present cost is an essential calculation in whole-life costing. The
BENEFITS conversion of a lump sum in the future (whether a cost or a benefit),
into a present value is the basic calculation in whole-life costing. All
other calculations are based on this. The formula that we apply is as
follows:
Present value = future value × discount factor
where the future value is the cost or benefit of any given item at some
point in the future and the discount factor is calculated from the discount
rate and the year in which the cost or benefit occurs. The mathematical
expression for the lump sum discount factor is
1
Discount factor =
(1 + r )n
where r is the discount rate (expressed as a decimal) and n is the year of
occurrence.
Also remember that the future value is the cost or benefit at today’s
prices, as no account needs to be taken for underlying inflation.
Information Description
1. Discount rate Or definition in Step 2 of the analysis
2. Number of regular payments The same as the year of occurrence
3. Amount of each intermediate payment Zero
4. Future value The same as the future cost or benefit
5. Are payments made at the end or Zero, as payments are made at the end of
beginning of each period? each period (see “the future occurs in finite
blocks of time” page 5)
So, for a lump sum present value the following formula can be used in an
Excel worksheet, where PV() is the Excel function:
(The minus sign is included at the beginning of the formula because the Excel PV
function returns a negative value that needs to be turned back into a positive value)
© BSRIA BG 5/2008
CALCULATING WHOLE-LIFE COSTS
For project upgrade, the summary information about discount rate, study
period and the date of the analysis is as follows:
To calculate the lump-sum costs for the four alternatives, the capital
expenditures under each scheme are used, with the relevant years in which
they occur (see the project timelines in Figure 6). This includes all one-off
payments such as initial investment, end-of-life replacement, major repairs,
decommissioning costs and any lump-sum benefits such as residual value at
the end of the study period.
Item description Quantity Unit cost Item cost Year Discount NPV of item Assumptions and
factor source of
information
Replacement air
1 £25 000.00 £25 000.00 10 0·6139 £15 347.83
handling unit
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CALCULATING WHOLE-LIFE COSTS
Item description Quantity Unit cost Item cost Year Discount NPV of item Assumptions and
factor source of
information
Purchase and install
1 £75 000.00 £75 000.00 0 1·0000 £75 000.00
new boiler
Item description Quantity Unit cost Item cost Year Discount NPV of item Assumptions and
factor source of
information
Purchase and install
1 £110 000.00 £110 000.00 0 1·0000 £110 000.00
new boiler
Item description Quantity Unit cost Item cost Year Discount NPV of item Assumptions and
factor source of
information
Purchase and install
1 £40 000.00 £40 000.00 1 0·9524 £38 095.24
new boiler
The outcome of these calculations is that the base case has the lowest whole-life cost, based on lump
sums. So if this was the only information being taken into account, then the golden rule mentioned on
Page 6 would conclude that the base case was the preferred solution.
3.2 NET PRESENT The net present value for a recurring cost such as an annual maintenance
VALUES FOR
RECURRING
charge, represents the amount of capital that needs to be set aside in year
COSTS AND 0 such that the credit that would be received every year by way of
BENEFITS interest if the money were on deposit at the bank, less the regular
payment made every year exactly reduces to £0.00 after the final
payment is made. This can be seen in the chart below, which is for 15
payments of £1000 each year at a 5% discount rate. Each year the
balance grows due to the interest received, and falls due to the payment
being made.
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CALCULATING WHOLE-LIFE COSTS
1. Look up the discount factor for the end of the recurrence period (in
this case 20 years, 4%). Table 8 gives this as 13·5903. Now look up
the discount factor for the year before the start of the recurrence
period. Since the recurring cost starts at the beginning of year 6, the
discount factor is needed for year 5. Table 8 gives this as 4·4518.
2. Subtract one discount factor from the other, giving 9·1385. Apply
this to the recurring cost to give the net present value of the
recurring cost.
© BSRIA BG 5/2008
CALCULATING WHOLE-LIFE COSTS
To calculate net present values for recurring costs, the regular items that
comprise operating and maintenance costs should be used. In the case of
project upgrade, these are the energy costs for gas and electricity, and the
maintenance contracts. The summary information is shown below:
The spreadsheet below shows the recurring costs for the base case, with an
extract from Table 8 (next page), showing where the discount factors for
the electricity calculations have come from.
Item description Units per Unit cost Cost per Start End Discount NPV of Item assumptions
year * year year year factor item and source of
information
Annual maintenance 1 £10 000.00 £10 000.00 1 17 11·2741 £112 740.66
contract (boiler plus
AHU)
- - -
Energy – gas 250 000.00 £0.04500 £11 250.00 1 5 4·3295 £48 706.61
Energy – gas 250 000.00 £0.04950 £12 375.00 6 7 1·4569 £18 029.10
Energy – gas 225 000.00 £0.04950 £11 137.50 8 10 1·9354 £21 555.09
(replacement boiler)
Energy – gas 225 000.00 £0.05445 £12 251.25 11 15 2·6579 £32 562.88
(replacement boiler)
Energy – gas 225 000.00 £0.05990 £13 476.38 16 17 0·8944 £12 053.38
(replacement boiler)
- - -
Energy – electricity 100 000.00 £0.13500 £13 500.00 1 5 4·3295 £58 447.94
Energy – electricity 100 000.00 £0.14445 £14 445.00 6 10 3·3923 £49 001.17
Energy – electricity 90 000.00 £0.15456 £13 910.54 11 15 2·6579 £36 973.13
(replacement AHU)
Energy – electricity 90 000.00 £0.16538 £14 884.27 16 17 0·8944 £13 312.62
(replacement AHU)
* Annual consumption of gas and electricity is stated in Step 2: Part 1.
Spreadsheets for the alternatives are shown opposite. In the recurring costs for the base case and for
Alternative 1 there is one line item for maintenance, since the same payment applies to each year of the
study period. In alternative 2, the fact that maintenance is only required every two years is represented
by a series of single-year recurrences. In fact, these are the same as lump sums, but it is useful to keep
these maintenance costs separate from the proper lump sums so savings-to-investment ratios can be
calculated.
© BSRIA BG 5/2008
CALCULATING WHOLE-LIFE COSTS
In every option, the escalation of gas and electricity prices is dealt with by treating them as separate
recurring costs. It is important to notice that the beginning and end-years do not overlap, and that a
recurring cost calculated from year six to year 10 means, from the beginning of year six to the end of year
10, and therefore does cover a five-year period.
Finally, for alternative 3, the planning and construction period for the double-façade needs to be
accommodated, so one set of maintenance and energy costs relates just to year 1 when the existing plant is
still being used.
Item description Units Unit cost Cost per Start End Discount NPV of Item
per year year year year factor item assumptions
and source of
information
Maintenance for existing 1 £10 000.00 £10 000.00 1 1 0·9524 £9523.81
boiler and AHU
Energy – gas (existing 250 000 £0.04500 £11 250.00 1 1 0·9524 £10 714.29
boiler)
Energy – electricity 100 000 £0.13500 £13 500.00 1 1 0·9524 £12 857.14
(existing AHU)
Energy – electricity 100 000 £0.13500 £13 500.00 2 5 3·3771 £45 590.79
(existing AHU)
Energy – electricity 100 000 £0.14445 £14 445.00 6 10 3·3923 £49 001.17
(existing AHU)
Energy – electricity 90 000 £0.15456 £13 910.54 11 15 2·6579 £36 973.13
(replacement AHU)
Energy – electricity 90 000 £0.16538 £14 884.27 16 17 0·8944 £13 312.62
(replacement AHU)
© BSRIA BG 5/2008
Item description Units Unit cost Cost per Start End Discount Npv of item Item assumptions
per year year year factor and source of
year information
CALCULATING WHOLE-LIFE COSTS
3.3 SUMMARISING NET Once all the separate net present values have been calculated for the
PRESENT VALUES
lump sum and recurring costs and benefits, these can be added together
to give an overall whole-life cost for each alternative.
3.4 CALCULATING The example used earlier in this section (and much of the discussion so
EQUIVALENT
ANNUAL COSTS
far in this guide), has been working towards a whole-life cost expressed
as a single net present value. If all the alternatives being compared
involve the same study period, then this is all that is needed in order to
apply the golden rule (lowest whole-life cost gives the most
economically advantageous solution). This is the preferred method for
whole-life costing analysis.
However, if the alternatives cannot use the same study period because
this would unfairly favour or penalise one or more options, then a bit
more work is required before comparisons can be made. Another reason
to use dissimilar study periods is where meaningful residual values cannot
be estimated. Remember that residual value is the income from selling
an asset at the end of the study period, either for re-use or for scrap.
This extra step is to use annual cost factors to turn a whole-life cost into
an annual equivalent. This is not as simple as dividing the whole-life cost
by the study period, as the discount rate also needs to be taken into
account. Table 9 in Appendix A1 gives annual cost factors for a range of
discount rates and study periods.
For example, suppose options are being compared for replacing an air
conditioning system. Perhaps the base case involves a chiller with an
expected life of 15 years, and alternative 1 involves a different make of
chiller, possibly more expensive, with an expected life of 19 years. The
running costs will differ, as will the maintenance regimes. A 15-year
whole-life cost cannot be compared with a 19-year whole-life cost as
these options are technically different – one gives four more years of
service than the other. A 19 year study period could be applied in both
cases, in which case the model must include a replacement chiller in the
base case at the end of year 15 and the residual value of the four-year old
chiller at the end of the study period. However, there might not be any
reliable data for this residual value, so including it could reduce the
precision of the whole-life costing.
Instead, two models can be assembled– one over a 15-year period for the
base case, and the other over 19 years for the alternative, using reliable
data. Then we convert the year 0 whole-life costs into equivalent annual
costs, over 15 years and 19 years respectively using annual cost factors.
This gives two annualised whole-life costs for the purposes of
comparison.
Energy cost £2750 per year for 15 years £2500 per year for 19 years
Maintenance contract £1500 per year for 15 years £1300 per year for 19 years
Annual cost factor from Table 9 0·0963 (15 years, 5%) 0·0827 (19 years, 5%)
Equivalent annual cost £12 434 per year £12 481 per year
Despite the capital cost for the base case being much less than that for the
alternative, the equivalent annual cost calculations actually show that
there is very little between the two options, in economic terms. The
golden rule still applies, but now to the equivalent annual costs. So the
base case is slightly more advantageous as it has the lower equivalent
annual cost.
When equivalent annual costs are being used (and quoted in reports), it is
very important that they are not confused with actual budget forecasts. It
is easy to inadvertently introduce this confusion since both are quoted as
£x per year. The actual costs that will be incurred for either of the two
options will be very different from the equivalent annual costs calculated,
not least because the actual annual running costs for energy and
maintenance will go up every year due to inflation.
© BSRIA BG 5/2008
FINE-TUNING
FINE-TUNING WHOLE-LIFE
WHOLE-LIFE COSTCOST MODELS
MODELS
Once the whole-life cost models have been built and the first set of
whole-life costs calculated and compared, the models can be fine-tuned
and tested for sensitivity.
Whole-life costing analysis incorporates many assumptions and estimates.
This includes the timing of future events, such as equipment replacement,
future costs or benefits, and fundamental issues such as the length of the
study period or the discount rate to be applied. Ideally, these estimates
should be equally precise, but that is not always possible. Where particular
suspicions exist about an estimate, different values for this item of data can
be put into the models to gauge the effect. If there are no particularly
suspicious values in the input data, then this step can be bypassed.
The technique used to test the models with different choices of input data
is sensitivity analysis. When different figures for an item are put into the
models, the results will reveal the models’ degree of sensitivity to that
range of data.
Item description Units per Unit cost Cost per Start End Discount NPV of Item assumptions
year year year year factor item and source of
information
Annual maintenance 1 £10 000.00 £10 000.00 1 17 11·2741 £112 740.66
contract (boiler + AHU)
Energy – gas 250 000.00 £0.04500 £11 250.00 1 5 4·3295 £48 706.61
Energy – gas 250 000.00 £0.04500 £11 250.00 6 7 1·4569 £16 390.09
Energy – gas (replacement 225 000.00 £0.04500 £10 125.00 8 10 1·9354 £19 595.54
boiler)
Energy – gas (replacement 225 000.00 £0.04500 £10 125.00 11 15 2·6579 £26 911.47
boiler)
Energy – gas (replacement 225 000.00 £0.04500 £10 125.00 16 17 0·8944 £9055.88
boiler)
Energy – electricity 100 000.00 £0.13500 £13 500.00 1 5 4·3295 £58 447.94
Energy – electricity 100 000.00 £0.14445 £14 445.00 6 10 3·3923 £49 001.17
Energy – electricity 90 000.00 £0.15456 £13 910.54 11 15 2·6579 £36 973.13
(replacement AHU)
Energy – electricity 90 000.00 £0.16538 £14 884.27 16 17 0·8944 £13 312.62
(replacement AHU)
This can be compared with the recurring sums (see the base case shown on page 29). The model now has
a constant unit cost for gas, rather than one that increases every five years. The net present values for each
five-years’ worth of gas have reduced and this has reduced the overall net present value from £416 322.25
to £391 135.11. If the same change is applied to the other alternatives, the following summary of net
present values emerges:
Alternative 2 is still preferred, as it has the lowest whole-life cost. At the other extreme the gas price
escalation could be 30%. This assessment provides the following net present values:
The gap between the base case and alternative 1 has narrowed, to the point where there is no significant
difference between the results. The results can be plotted on a graph as shown in Figure 10:
Figure 10: The effect of different gas price rises on whole-life costs.
Although the graph reveals that alternative 2 is always the most economic in the range of values studied, at
higher levels of gas price escalation alternative 3 becomes the second preference. Alternative 1 is always
the least economic option. Note that the line for the base case is not straight. This is because the level of
consumption of gas changes part way through the study period. As gas becomes progressively more
expensive it has a greater effect on the whole-life cost.
© BSRIA BG 5/2008
FINE-TUNING WHOLE-LIFE COST MODELS
Any variable in the whole-life cost models can be analysed for its
sensitivity on the results. Figure 11 shows the results if the discount rate
is altered between 2% and 10%.
Sensitivity analyses can also be carried out for two or more variables at
the same time. However, the scenarios become much more complex
and are outside the scope of this guide.
The purpose of putting time and effort into developing robust whole-life
cost models is to provide reliable information to support decision-
making.
5.1 ALTERNATIVE The most common use of whole-life cost analysis is to be able to select
TECHNICAL
SOLUTIONS
between different alternative solutions to a single problem or scenario.
This uses the golden rule of whole-life costing analysis: The lowest
whole-life cost represents the most economically advantageous option.
This rule works equally well whether the whole-life cost, or the
equivalent annual cost is being studied. Bear in mind that, the level of
precision in the whole-life costing analysis will affect whether or not the
difference between two whole-life costs is significant (see Section 5.3).
The whole-life costs calculated on the basis of the original data are as
follows:
Base case Alternative 1 Alternative 2 Alternative 3
£472 031.51 £502 407.03 £448 700.23 £479 694.34
5.2 INDEPENDENT The results of a whole-life costing analysis can be used to help identify
PROJECTS
suitable candidates from among a basket of independent projects. This is
particularly useful when the available budget for immediate investment
in new projects is not sufficient to allow all of them to go ahead.
© BSRIA BG 5/2008
INTERPRETING THE RESULTS
2. For each project in turn: identify the option with the lowest lump
sum net present value and designate this as the base case for that
project
3. For each project in turn: select the option with the lowest whole-life
cost and calculate the savings-to-investment ratio for that alternative,
in relation to the base case for that project:
Savings - to - investment ratio =
Base case recurring costs - alternative recurring costs
Alternative lump sums - base case lump sums
This equation shows why it is helpful to keep lump sums (investment
costs) separate from recurring sums (operating costs)
To select the projects which will give the maximum saving for the
£7000 investment, the projects need to be sorted according to their
savings-to-investment ratio. Projects are then selected until the
cumulative investment meets the available budget. In this case, projects
A, F, E and C are selected in that order. The use of savings-to-
investment ratio guarantees that this set of projects provides the
maximum cumulative net saving from among those being proposed.
Table 6: Example of projects with maximum savings for a limited initial investment.
5.3 PRECISION IN In earlier sections of this guide much of the data used in whole-life
WHOLE-LIFE
COSTING
costing is only known approximately. The scale of these
ANALYSIS approximations will affect the precision with which the calculated
whole-life costs can be quoted.
If project upgrade used data at detailed design stage, then the whole-life
costs can be expressed as follows:
The conclusion from this reassessment of the whole-life costs is that there
is very little difference between any of the options.
© BSRIA BG 5/2008
INTERPRETING
APPENDIX – LOOK-UP TABLES THE RESULTS A1
7
CONCLUSION
APPENDIX A1 – LOOK-UP TABLES
Table 8: Present value of £1 per year (discount factors for recurring sums).
© BSRIA BG 5/2008
APPENDIX – LOOK-UP TABLES A1
APPENDIX A2 – EXAMPLE
Project: Upgrade At ACME Ltd, the facilities manager expressed concerns at the annual
energy and maintenance costs of the company’s existing heating and
ventilation systems. The facilities manager has been comparing notes with
fellow facilities managers who work for other firms with similar sized offices
2
(2000 m ) and similar patterns of occupancy (weekdays, 07.00 – 19.00 h).
ACME’s directors have asked the facilities manager to investigate the case
for upgrading the systems to provide cost savings for the remainder of their
lease, which has 17 years to run.
To reach this point, the facilities manager had already collected some data
about the systems installed in the building and the operational costs of
running and maintaining them. This came from an inspection of the plant,
documentation in the operation and maintenance manuals, and collation of
the last five years energy bills for gas and electricity.
In the case of project ‘Upgrade’, the facilities manager has identified four
alternative ways forward.
Base case Do nothing; retain the existing equipment, and live with existing levels of
energy usage, maintenance and expected service life, replacing the
equipment as and when it reaches the end of its life. The existing boilers
use 250 000 kWh of gas each year and the AHU uses 100 000 kWh of
electricity.
Alternative 1 Replace the boilers and the air handling unit with items of plant at the
lower end of the available price range, which are 10% more energy efficient
than the existing plant and still require annual maintenance.
Alternative 2 Replace the boilers and the air handling unit with items of plant at the
higher end of the available price range, which are 25% more energy
efficient than the existing plant and require maintenance only every two
years.
Alternative 3 Replace the existing boilers with a combined system comprising a smaller
boiler and a double façade on the south-facing side of the building to pre-
heat internal air in the winter. Maintain the existing air-handling unit but
replace it as per the base case. The combination of a small boiler and the
double façade reduces the gas required for heating by 60%.
Project upgrade The discount rate and study periods are selected in line with corporate
policy. The whole-life costing analysis will use a real discount rate of
5%. The study period has been specified by the company’s directors as
17 years, as this is the length remaining on the lease for the office
building (see page 7).
© BSRIA BG 5/2008
APPENDIX – EXAMPLE A2
The following data has been collected by the facilities manager for the four
different alternatives for the aforementioned project upgrade. The
following cost data applies to all the scenarios.
Table 10: Cost data.
Cost item Current cost Price rise/fall on top of inflation (price
escalation)
Gas 4·5 pence per kWh 10% increase every five years
Electricity 13·5 pence per kWh 7% increase every five years
All other items As specified Increase in line with inflation (0% escalation)
For this analysis the facilities manager has decided to ignore equipment
decommissioning costs, and to base the residual value of nearly-new
equipment on straight-line depreciation over five years.
In addition to the general data outlined above, the following specific cost
and timing data has been assembled for each option.
Base case Annual maintenance contracts for the existing plant (boilers plus air-
handling unit) cost £10 000 per year. The boiler is expected to last
another seven years, but will then be replaced with the same boiler that is
being proposed for alternative 1. The air-handling unit is expected to last
another 10 years, but will then be replaced with the same air-handling unit
that is being proposed for alternative 1.
Alternative 1 The immediate (year 0) purchase and installation costs of the low-end
boilers and air-handling unit are £75 000 and £25 000 respectively. The
annual maintenance contracts for these items are the same as for the existing
boilers and air-handling unit. The life expectancies for the new boilers and
air-handling unit are 15 years and 18 years respectively.
Alternative 2 The immediate (year 0) purchase and installation costs of the high-end
boilers and air-handling unit are £110 000 and £37 000 respectively. The
two-yearly maintenance contracts for these items cost £10 000 for the
boilers and £4000 for the air handling unit. The life expectancies for the
new boilers and air-handling unit are 22 years and 25 years respectively.
Alternative 3 The purchase and installation costs of the smaller boiler is £40 000 and it
has a life expectancy of 20 years. The construction cost of the double
façade, associated air-circulation and control equipment is £125 000, and
the air-circulation equipment has a life expectancy of 20 years. A one-year
planning and construction period is required, during which the existing
equipment will still be used. The maintenance for the boiler will cost
£3500 per year. The maintenance of the solar-wall is incorporated into the
maintenance of the air-handling unit at a combined cost of £4000.
For project upgrade, the summary information about discount rate, study
period and the date of the analysis is as follows:
To calculate the lump-sum costs for the four alternatives, the capital
expenditures under each scheme are used, with the relevant years in which
they occur (see the project timelines in FIG). This includes all one-off
payments such as initial investment, end-of-life replacement, major repairs,
decommissioning costs and any lump-sum benefits such as residual value at
the end of the study period.
© BSRIA BG 5/2008
APPENDIX – EXAMPLE A2
Item description Quantity Unit cost Item cost Year Discount NPV of item Assumptions and
factor source of
information
Replacement air
1 £25 000.00 £25 000.00 10 0·6139 £15 347.83
handling unit
Item description Quantity Unit cost Item cost Year Discount NPV of item Assumptions and
factor source of
information
Purchase and install
1 £75 000.00 £75 000.00 0 1·0000 £75 000.00
new boiler
Residual value of
1 -£45 000.00 -£45 000.00 17 0·4363 -£19 633.35
boiler (2 years use)*
* See assumption about residual value for this analysis in Step 2: Part 3.
Item description Quantity Unit cost Item cost Year Discount NPV of item Assumptions and
factor source of
information
Purchase and install
1 £110 000.00 £110 000.00 0 1·0000 £110 000.00
new boiler
Item description Quantity Unit cost Item cost Year Discount NPV of item Assumptions and
factor source of
information
Purchase and install
1 £40 000.00 £40 000.00 1 0·9524 £38 095.24
new boiler
The outcome of these calculations is that the base case has the lowest whole-life cost, based on lump
sums. So if this was the only information being taken into account, then the golden rule would conclude
that the base case was the preferred solution.
© BSRIA BG 5/2008
APPENDIX – EXAMPLE A2
To calculate net present values for recurring costs, the regular items that
comprise operating and maintenance costs should be used. In the case of
project upgrade, these are the energy costs for gas and electricity, and the
maintenance contracts. The summary information is shown below:
The spreadsheet below shows the recurring costs for the base case, with an
extract from Table 8 (next page), showing where the discount factors for
the electricity calculations have come from.
Item description Units per Unit cost Cost per Start End Discount NPV of Item assumptions
year * year year year factor item and source of
information
Annual maintenance 00 £10 000.00 £10 000.00 1 17 11·2741 £112 740.66
contract (boiler plus
AHU)
- - -
Energy – gas 250 000.00 £0.04500 £11 250.00 1 5 4·3295 £48 706.61
Energy – gas 250 000.00 £0.04950 £12 375.00 6 7 1·4569 £18 029.10
Energy – gas 225 000.00 £0.04950 £11 137.50 8 10 1·9354 £21 555.09
(replacement boiler)
Energy – gas 225 000.00 £0.05445 £12 251.25 11 15 2·6579 £32 562.88
(replacement boiler)
Energy – gas 225 000.00 £0.05990 £13 476.38 16 17 0·8944 £12 053.38
(replacement boiler)
- - -
Energy – electricity 100 000.00 £0.13500 £13 500.00 1 5 4·3295 £58 447.94
Energy – electricity 100 000.00 £0.14445 £14 445.00 6 10 3·3923 £49 001.17
Energy – electricity 90 000.00 £0.15456 £13 910.54 11 15 2·6579 £36 973.13
(replacement AHU)
Energy – electricity 90 000.00 £0.16538 £14 884.27 16 17 0·8944 £13 312.62
(replacement AHU)
* Annual consumption of gas and electricity is stated in Step 2: Part 1.
Spreadsheets for the alternatives are shown opposite. In the recurring costs for the base case and for
Alternative 1 there is one line item for maintenance, since the same payment applies to each year of the
study period. In alternative 2, the fact that maintenance is only required every two years is represented
by a series of single-year recurrences. In fact, these are the same as lump sums, but it is useful to keep
these maintenance costs separate from the proper lump sums so savings-to-investment ratios can be
calculated.
© BSRIA BG 5/2008
APPENDIX – EXAMPLE A2
In every option, the escalation of gas and electricity prices is dealt with by treating them as separate
recurring costs. It is important to notice that the beginning and end-years do not overlap, and that a
recurring cost calculated from year six to year 10 means, from the beginning of year six to the end of year
10, and therefore does cover a five-year period.
Finally, for alternative 3, the planning and construction period for the double-façade needs to be
accommodated, so one set of recurring maintenance costs relates to year 1 when the existing plant is still
being used.
Item description Units Unit cost Cost per Start End Discount NPV of Item
per year year year year factor item assumptions
and source of
information
Maintenance for existing 1 £10 000.00 £10 000.00 1 1 0·9524 £9523.81
boiler and AHU
Energy – gas (existing 250 000 £0.04500 £11 250.00 1 1 0·9524 £10 714.29
boiler)
Energy – electricity 100 000 £0.13500 £13 500.00 1 1 0·9524 £12 857.14
(existing AHU)
Energy – electricity 100 000 £0.13500 £13 500.00 2 5 3·3771 £45 590.79
(existing AHU)
Energy – electricity 100 000 £0.14445 £14 445.00 6 10 3·3923 £49 001.17
(existing AHU)
Energy – electricity 90 000 £0.15456 £13 910.54 11 15 2·6579 £36 973.13
(replacement AHU)
Energy – electricity 90 000 £0.16538 £14 884.27 16 17 0·8944 £13 312.62
(replacement AHU)
© BSRIA BG 5/2008
APPENDIX – EXAMPLE A2
Item description Units per Unit cost Cost per Start End Discount NPV of Item assumptions
year year year year factor item and source of
information
Annual maintenance 1 £10 000.00 £10 000.00 1 17 11·2741 £112 740.66
contract (boiler + AHU)
Energy – gas 250 000.00 £0.04500 £11 250.00 1 5 4·3295 £48 706.61
Energy – gas 250 000.00 £0.04500 £11 250.00 6 7 1·4569 £16 390.09
Energy – gas 225 000.00 £0.04500 £10 125.00 8 10 1·9354 £19 595.54
(replacement boiler)
Energy – gas 225 000.00 £0.04500 £10 125.00 11 15 2·6579 £26 911.47
(replacement boiler)
Energy – gas 225 000.00 £0.04500 £10 125.00 16 17 0·8944 £9055.88
(replacement boiler)
Energy – electricity 100 000.00 £0.13500 £13 500.00 1 5 4·3295 £58 447.94
Energy – electricity 100 000.00 £0.14445 £14 445.00 6 10 3·3923 £49 001.17
Energy – electricity 90 000.00 £0.15456 £13 910.54 11 15 2·6579 £36 973.13
(replacement AHU)
Energy – electricity 90 000.00 £0.16538 £14 884.27 16 17 0·8944 £13 312.62
(replacement AHU)
This can be compared with the recurring sums (see the base case shown on page 29). The model now has
a constant unit cost for gas, rather than one that increases every five years. The net present values for each
five-years’ worth of gas have reduced and this has reduced the overall net present value from £416 322.25
to £391 135.11. If the same change is applied to the other alternatives, the following summary of net
present values emerges:
Base case Alternative 1 Alternative 2 Alternative3
NPV lump sums (capital costs and benefits) £68 648.93 £116 442.93 £147 000.00 £172 490.69
NPV recurring sums (operational and maintenance) £391 135.11 £373 880.53 £291 630.59 £301 833.17
NPV of total whole-life cost £459 784.04 £490 323.46 £438 630.59 £474 323.86
Alternative 2 is still preferred, as it has the lowest whole-life cost. At the other extreme the gas price
escalation could be 30%. This assessment provides the following net present values:
Base case Alternative 1 Alternative 2 Alternative3
NPV lump sums (capital costs and benefits) £68 648.93 £116 442.93 £147 000.00 £172 490.69
NPV recurring sums (operational and maintenance) £458 594.71 £413 593.32 £324 724.58 £319 483.30
NPV of total whole-life cost £527 243.64 £530 036.25 £471 724.58 £491 973.99
The gap between the base case and alternative 1 has narrowed, to the point where there is no significant
difference between the results. The results can be plotted on a graph as shown in Figure 10:
Figure 10: The effect of different gas price rises on whole-life costs.
Although the graph reveals that alternative 2 is always the most economic in the range of values studied,
at higher levels of gas price escalation alternative 3 becomes the second preference. Alternative 1 is
always the least economic option. Note that the line for the base case is not straight. This is because the
level of consumption of gas changes part way through the study period. As gas becomes progressively
more expensive it has a greater effect on the whole-life cost.
The whole-life costs calculated on the basis of the original data are as
follows:
© BSRIA BG 5/2008
APPENDIXOF
APPENDIX – GLOSSARY – GLOSSARY
TERMS OF TERMS A3
A3
Base case The first option considered in the whole-life costing analysis. For an
upgrade of existing facilities it is usually the ‘do nothing’ option.
Discount rate The percentage by which costs or benefits occurring one year in the future
are deemed to be less valuable than costs or benefits today. In whole-life
costing analysis, the discount rate is the difference between the interest rate
charged for borrowing money and the inflation rate.
For public sector projects, the discount rate is 3·5% per annum.
Equivalent annual cost The expression of a whole-life cost in annual terms rather than as a year 0
value. Equivalent annual costs are the only way to compare whole-life
costs for two alternatives where the models use different study periods.
Future value The value of a cost or benefit at some point in the future. For example,
the cost of repairing a pump might be £500 in year 8 of the project. Note
that this £500 is the same that this repair would cost today because in
whole-life costing analysis (the effects of general inflation can be
disregarded).
Lump sum cost A cost that occurs in one particular year in the whole-life cost model.
Typical lump sums relate to capital investment such as initial construction,
or plant replacement, or decommissioning costs.
Recurring costs can be expressed as a series of identical lump sum costs, but
this complicates the whole-life cost model and introduces unnecessary
calculations.
Present value The value of a cost or benefit at the present time. A future value is
discounted by applying the discount rate and knowing how many years (or
time periods) into the future it occurs.
Recurring cost Costs that occur at the same amount in successive years. For the simplest
recurring costs the start date is year 1. More complex recurring costs have
a start date after year 1.
Residual value The value of an asset (a site, a building, a component or an item of plant)
at the end of a study period. This is counted as a benefit to the project and
is entered in the whole-life costing model as a negative amount.
Study period The time over which a whole-life costing model is constructed. It is
usually measured in years but does not need to be, provided it is consistent
with the discount rate. For analyses in this guide, the study period always
starts at year 0, which represents ‘today’. Only costs and benefits that
occur within the study period are included in the whole-life costing
model.
Whole-life cost The single result, in monetary terms, from one whole-life costing model
calculated as the total of all the individual net present values from each item
of cost or benefit in the model.
Whole-life costing The mathematical model used to represent the costs and benefits of one of
model the possible solutions being considered within the whole-life costing
analysis. The model runs from year 0 to the end of the study period.
© BSRIA BG 5/2008
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