CIQS - Construction Economist Publication

         Life Cycle Costing and Facilities Management

Article written by Angela Lai - Fall 2017

It has long been the norm that initial capital costs are what clients typically consider and what they focus on. This is inevitable, as this will be the key consideration for the feasibility of most projects and what clients typically understand. However, consideration of long term costs are often not appreciated. I would like to use the analogy of a car - when we buy a car affordability and budget are the initial considerations. Rarely do we consider long term operating costs – how often do we need to service the car, how often do we need to refuel, minor services that may be needed such as oil changes, change in tires and cleaning. Sustainability considerations are also often an after-thought. There is more carbon tax to pay for larger vehicles that emit more carbon. We rarely think of the future costs for two reasons – (1) we probably may not know this information (2) what money we have now to spend is more of a consideration.

With a property investments that involve a great deal of expenditure, long term costs should be more of a consideration – the common notion that building costs is a one-off cost is far from the truth and the costs of a building do not end when the final costs have been negotiated and agreed with the contractor. It is no longer sufficient to just consider the initial capital costs of buildings – the costs during the lifetime of the building will reveal the true financial impact of the investment. Life cycle costs and facilities management (FM) costs for a building over a 30 year cycle are estimated at five times the capital costs and the cost of occupation, which includes energy, salaries and overhead costs which could be 200 times greater (ratio of 1:5:200). Initial capital costs are just the tip of the iceberg.  
Angela Lai, FRICS, PQS, LEED AP O+M is a Partner with Core Two, a property and construction cost consultancy locally based in Vancouver, BC and is on the instructing team for Passive House Canada. Angela has over 17 years’ experience in the construction and development industry spanning South Africa, the UK and Canada. Angela's experience is diverse; she has worked as a cost manager, loan monitor and a management consultant, and she has specialist expertise in sustainability, life cycle and FM costing. She is the current past President of CIQS-BC, past Director for the CIQS National Board and Vice Chair of RICS-BC. In addition, Angela teaches part-time at BCIT and is the instructor for the newly launched QS in Americas Foundation course.

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There is often confusion as to what constitutes life cycle costs and what constitutes facilities management costs. Life cycle costs constitute major repair and replacement – it would include periodic replacement of components such as replacement of a boiler, doors or repainting, but would also include minor replacement such as door hardware, grouting of tiles or replacement of active components of mechanical and electrical equipment. Facilities management costs are more all-encompassing and cover a wide range of areas, which can be categorized as hard, which refers to the physical maintenance of buildings and equipment and soft, which include labor intensive activities such cleaning and catering. The differential between life cycle cost and hard facilities management are often difficult to make, however as a general rule facilities management costs, which are related to the building fabric, are work activities that occur on an annual basis or more frequently such as annual maintenance on equipment and changing light bulbs.  
The traditional service of a quantity surveyor has been on supporting clients on determining initial capital costs, however, our skillset enables us to support them on ‘cradle to grave’ advisory. Quantity surveyors can play a role in and take advantage of opportunities offered to clients, which can be as follows:

Shadow Bid Life Cycle/FM Cost Models and P3 Bid Support
We can provide life-cycle/FM shadow costing as bid support to the private sector partner. Whereas capital costs may be easier to predict, life cycle/FM costs are relatively more difficult to ascertain both in terms of limited actual data and taking into account the competitive requirement of a bid. Industry publications tend to err on the side of caution and the common rule of thumb for life cycle costs i.e. 1% to 2% annual life cycle expenditure as a percentage capex may be too conservative. Benchmarking facilities management costs will depend on what facilities management services are there and may not, be as easy to holistically benchmark.

Life Cycle Option Costing
Just as option costing is done with initial capital costs, life cycle option costing should be undertaken in parallel, which is often not a priority for clients. Clients need to be educated in that choosing a cheaper product could end up costing more in the long run with more frequent repairs and replacement cycles. Life Cycle Option Costing could play a key role in Value Engineering and should be run in conjunction when this is undertaken for initial capital costs.

Sustainability Option Costing and Carbon Emission Analysis
Unfortunately, one the realities of the construction industry (which has the greatest impact on the environment in terms of resource use, energy use and waste), clients are often not convinced on incorporating sustainable options unless savings can be demonstrated. This can be done through doing a payback analysis determining at what point the energy savings justify the cost of renewable technologies and/or enhanced insulation in the envelope. However, this can also be undertaken through a life cycle analysis using a discounted cash flow, which may present better information than a payback analysis.  Associated with incorporating sustainable options is the impact on carbon emissions - as part of the life cycle analysis we could also provide a carbon analysis study.

Capital Reserve Fund Studies
A capital reserve fund study supports a client in the construction environment on anticipating and preparing for future replacement of assets, and incorporates the technique of life cycle costing. It is a long range financial planning tool that identifies the status of capital reserves and provides a funding plan to offset future major replacement obligations.

In British Columbia, form of a capital reserve fund study in form of depreciation reports has become statutory through the Strata Property Act.  For strata corporations formed on or before December 14, 2011 a depreciation report was required by December 13, 2013 unless they were exempt four or fewer strata lots or if three quarters of the annual vote waives the requirement. The depreciation report is needed every three years. Capital reserve fund studies/depreciation reports are essentially an asset strategy report – supporting clients in knowing their future liabilities is key to making provision for future expenditure.
Considering life cycle and facilities management costs are slowly becoming a client requirement, but whether a client wishes to consider life cycle and facilities management costs is very much dependent on what their value drivers are. A developer developing for sale may not consider having a quantity surveyor provide costs for life cycle and facilities management a useful exercise, unless consideration of long term costs makes it an attractive proposition to purchasers. Purchasers may be swayed if they are purchasing a building that will run efficiently and has the potential to save them money in the long run. An owner occupier would place value on knowing the long term costs as well as ensuring minimum disruption of facilities in use – choice of materials/equipment would be important as this would dictate frequency of replacement cycles.

A developer building for commercial lease would also focus on minimum disruption in use to ensure that tenants are satisfied. However, the focus may be on functional utility and durability of components – the reason being that tenants may change often (necessitating a change in components in any case) and if components are retained, then hopefully minimal work is needed. An example of choice of components may be as detailed as the choice of paint finish e.g. eggshell vs emulsion paint. Egg shell is more durable and you can wash it, which would reduce the paint cycles whereas you cannot wash emulsion paint, hence cycles will tend to be more frequent.

The public sector has long been an advocate of consideration of life cycle and facilities management costs, with many costing commissions requiring consideration of life cycle costs. Also, with public private partnerships (P3) projects it is a key consideration to consider the long term cost of ownership with full transparency. Life cycle costing and facilities management costing usually focuses on the long term building specific costs. However, if consideration of non-construction costs such as revenue streams, staffing costs, catering, reception, etc. is considered then a facilities total return on investment over the long term could be determined. Under LEED v4, credits now support a life-cycle approach in designs and building material choices. In particular through the Energy Atmosphere Credit (Building Commissioning energy audit option, determination of operational cost savings is required to be documented. 
Traditionally we provide clients with a capital cost plan, and potentially a life cycle model (if required). However, there is the potential to produce a ‘cradle to grave’ cost plan which can incorporate life cycle costs, facilities management costs and carbon emissions (both in terms of operational and embodied carbon) and even costs of disposal at the end of its life.

Out Asset Strategy team are currently working on offering clients an enhanced asset strategy service to further assist clients with decision making. Their view is that life cycle and facilities management costing is not a ‘one hit wonder’ and are recommending proactive asset strategy which includes:

Investment decisions upfront through life cycle option costing. This could also include ‘FM’ policing in design team meetings to maximize operations

Life cycle management – to review life cycle funds on a six monthly/annual basis.

Asset strategy assurance, which may include undertaking a condition assessment to determine actual condition of components and ensuring components are not being run to failure and taking remedial action before it occurs.
The role of the Quantity Surveyor is varied and diverse and our skillset enable us to offer clients valued insight into all aspects of their property investment. Our traditional role of capital costs experts can far expand into the realms of supporting clients and offering an all-encompassing asset strategy role.