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Today• What is Whole Life Cost• Worked examples• WLC methods• Rules of thumb • How to do it – tools• Whole life performance – Sustainability
Worked examples• We are selecting between 2 assets
• The options offer the same business benefit
• How do we decide which one to select?– Advertising– Like the rep– Bias– Think one is “better”
• Use logic and structured approach
Worked example 1
Option 1 Capital cost 1 0002 Capital cost 1 500
WLC Finance Matters • Discounted cashflow (methods / ratios)
BUSINESS NEWSThe Headlines... Are you using NPV? It’s the preferred method for assessing business cases on a whole life basis
NetPresentValue
Ignore it at your peril!
IRR Internal Rate of Return- a discount rate by trial anderror found when NPV= 0 thencompare cost of capital
“Profitability measure where options have same lives”
PBP Payback Period- time taken for business caseto break even
“Doesn’t measure return on investment”
NPV Net Present Value- includes costs and benefitsand used widely to compareinvestments
“Measures profitability and least cost and can deal with differing life options”
BCR Benefit to cost ratio- indicates economic valueof business case by the sizeof the ratio
“Measures return on investment only as a ratio. If ratio > 1 then larger the ratio the better”
WLCF definition of WLC
Whole Life Cost is the analysis of all relevant and identifiable
financial cashflows regarding the acquisition and use of an asset.
WLC is• A method to help decision making
• Capital costs
• Revenue costs
• Does it include end of life cost for any project exceeding 10 years?– Demolition is first cost of next project– How do I cost what I don’t know
WLCF definition of WLC
Whole Life Cost is the analysis of all relevant and identifiable
financial cashflows regarding the acquisition and use of an asset.
relevant and identifiable
WLC is• A method to help decision making • Capital costs• Revenue costs• Does it include end of life cost for any
project exceeding 10 years?– Demolition is first cost of next project– How do I cost what I don’t know
• Expressed as an annual cashflow for the life of the asset
What is an asset?• An asset is anything that we buy or
construct
• Can be a facility (building)
• Can be a component
• Any number of assets can be combined
• The asset can be income generating or not.
WLC – The Big PictureBuildBuild
2 Years2 Years
DesignDesign
1 Year1 Year
£17%
£3%
OperateOperate
25 Years25 Years
Run / Maintain£ 40%
Repair£ 30%
PeriodicReplacement / Refurbish
£ 10%
TotalTotal
TotalTotal
DisposeDispose
1 Year1 Year
100%
Cost ofOwnership
£?%£
?%
Source Gardiner & Theobald
Worked example 2
Option 1 2 3 4 51 Capital cost 1 000 1 000
Maintenance 125 125 125 125 125 625Total 1 625
2 Capital cost 1 500 1 500Maintenance 90 90 90 90 90 450Total 1 950
WLC - client’s view
• Compulsion– Climate Change Levy– Carbon Trading– PFI Conditions– Funding
• Concern for Environment
• Value for money
• Competitive Advantage
• Profit
WLC - contractor’s view
• Client driven• Legislation• Leading player in
the industry• Staff benefits• Concern for
Environment
• Supply chain• PR• Corporate credibility• Competitive
Advantage • Long term view• Profit
WLC - supplier’s view• Client driven• Legislation• Leading player in
our sector• Staff benefits• Concern for
Environment
• Supply chain• PR• Corporate credibility• Competitive
Advantage • Long term view• Profit
What is common to all
Profit
Who Do You Work For?
Client Capital Manager Revenue Manager
QS Capital Manager
Architect Capital Manager
Contractor Capital Manager& Architect
M & E Contractor& Architect
Suppliers Contractor
FM Revenue Manager
Where does the Occupier fit in?
Capital costs Cost in Use
Why?
• Time, Visibility and Risk• Construction
– Big Spend – Short Time – Major Risk (perceived)
• FM– Low Spend – Long Time – Lower Risk (perceived)
• Project £100m 10% overspend = £10m• FM £5m annually 10% overspend = £0.5m
per year or £25m over life
Worked example 3Year
Option 1 2 3 4 51 Capital cost 1 000 1 000
Maintenance 125 125 125 125 125 625Refurbishment 700 700Energy 60 60 60 60 60 300Cashflow pa 1 000 185 185 185 885 185 2 625Total 2 625
2 Capital cost 1 500 1 500Maintenance 90 90 90 90 90 450Refurbishment 0Energy 50 50 50 50 50 250Cashflow pa 1 500 140 140 140 140 140Total 2 200
How much does an asset cost?
• Capital Cost 1
1 : 5 : 200
The long term costs of owning and using buildings (November 1998)The Royal Academy of Engineering
• Business Cost 200x
• Revenue Cost 5x
WLC rules of thumb
Typical Airport Terminal
Revenue80%
Capital20%
Typical Shopping Centre
Revenue55%
Capital45%
Typical Office Block
Capital40%
Revenue60%
Revenue cost breakdown
• EnergyEnergy
• CleaningCleaning
• MaintenanceMaintenance
• Admin ServicesAdmin Services
• SecuritySecurity
• Admin and Management Admin and Management InsuranceInsurance
7%10%
20%
27%
31%
5%
How do we measure WLC • Total whole life cost ~ TWLC
• Annualised whole life cost ~ AWLC
• Discounted cashflow ~ DCF– £’s x % = a number
• Net present value ~ NPV
• Discount rate– What % should we use?
• Can be used for non financial e.g. kWh
Social
Environmental
Economic
Activities in Sustainability
Whole Life Cost
Materials
Aesthetics
But there are questions
• What is the “Life”?
Notes:Notes:Period of ConsiderationPeriod of Consideration - 60 years- 60 yearsDiscount RateDiscount Rate - 6%- 6%
WLC design life profilesBuildingElement
Foundations and PilingSuperstructureExternal CladdingWindowsRoof CoveringsRainwater GoodsInternal PartitionsDemountable PartitionsDoors and IronmongeryFinishings GenerallyRaised FloorsFloor CoveringsSuspended CeilingsFittings and FurnishingsMechanical ServicesElectrical ServicesPublic Health ServicesBuilder’s Work
Life Expectancy Prior to Complete Replacement (Years) CapitalCost
£
WholeLifeCost
£
Total £Total £
0-5 5-10 10-20 20-40 40-60 60-100 100+
But there are questions
• What is the “Life”?• When does Year 1 start?• What does the Discount Rate include?• Should the Suppliers pick their own Discount
Rate?• What is the right Discount Rate?• What Discount Rate range do we expect?• Do we apply a Test Discount Rate?
Discount Rate• The % is a combination of factors
• Including– The weighted cost of capital of the business– Risk – project and client
• Letting suppliers set own Discount Rate tells us a lot
• See www.wlcf.org.uk for more
What We Need To Do• Develop WLC in your organisation and
your supply chain• Take Small Steps - Progress Slowly• Understand What You Have Achieved• Step back - see the ‘Big Picture’• Benchmark - process not answers• Appropriateness & Fitness - Every
Project is Different
Consultant or Supplier• Who will advise?
• QS, cost consultant, project manager?
• Supplier?
• Each one has a different agenda
• Each one will work at different levels of complexity
• Will the answer be any use?
Whole Life Cost Model – Input Owner’s Map – Stations
Date: 26/06/02 Key: ** NACs are related to asset availability / performance requirements Drawn by K. Owen G&T / Rev 0
By functionBy asset type / asset
Owner : G&T
WholeLifeCostModelBusiness case only *
Business Issues• Output Levels- Station- Function- Asset type- Asset• Capital Costs• Total Project Costs- Design Fees- Engineering costs- Attendance costs- Management costs• Taxation / Capital Allowances / VAT• NACs downtime• Risk
Owner :
Model Input Criteria
• Prices• Test discount rate• Study period
Owner :
FM Costs
• Cleaning• Maintenance• Energy• Rates• Insurance• Admin and Management• ANO (please define)
Owner :
Assets Forming Part of Station Regen
• Design / service life of each asset type/asset• Condition base level to be achieved /maintained• Availability required** / operational strategy / plan(s) to be maintained• Intervention points (to be achieved / maintained)- Replacement and non-availability- Cyclical and non- availability- Annual and non- availability• Maintenance strategy / plan(s)
Owner :
Assets NOT part of Station Regen
Owner :
Work Breakdown Structure• List of functions
(eg platform, ticket hall, etc)• List of asset types- per function- per type
Owner :
• Design / service life of each asset type / asset• Condition base level to be achieved /maintained• Availability required** / operational strategy / plan(s)• Intervention points- Replacement and non-availability- Cyclical and non- availability- Annual and non- availability- Adhoc and non- availability• Maintenance strategy / plan(s)• Are there any areas / assets which are not to be moded• What happens with rest of station eg lifts / escalators?• What else?
CAPEX ConsultantREVEX Asset Maintain
YearOption 1 2 3 4 5
1 Capital cost 1 000 1 000Maintenance 125 125 125 125 125 625Refurbishment 700 700Energy 60 60 60 60 60 300Cashflow pa 1 000 185 185 185 885 185 2 625
5% Discount 1.00 0.95 0.90 0.86 0.81 0.77 Discounted cashflow 1 000 176 167 159 721 143 2 365
2 Capital cost 1 500 1 500Maintenance 90 90 90 90 90 450Refurbishment 0Energy 50 50 50 50 50 250Cashflow pa 1 500 140 140 140 140 140 2 200
5% Discount 1.00 0.95 0.90 0.86 0.81 0.77Discounted cashflow 1 500 133 126 120 114 108 2 102
Worked example 4
What is industry looking for?
• Business Added Value • Performance Improvements • Alternative Solutions/Profiling • Design Lives• Common Standards
• Benchmarking• Credibility
• Question why do we do things the way we do.
• Why buy in first place?• Can we rent or lease?• When we buy a boiler what are we
really providing?– Heat – What are the alternatives?
WLC improves performance
WLC Improves Performance• Accept we all hate new things & changes
• Adopt simple easy to use processes
• Use them all the time
• Require your supply chain to provide the information
• Ensure that the decision information is accurate
• Validation & accreditation
WLC Tools• Rules of thumb
• Spreadsheet– Simple, easy to use, easy to manipulate
• Proprietary– Restrictive
• WLCF– Uses WLCF view and is supplier based– Can be used for Buildings
The WLCF
WLCF helps you• The web based WLC Comparator Tool• Common Data Structures• Common Calculation Methodologies• Access to Database • Optioneering• Benchmarking• Credibility• Help - You Are Not Alone• Accreditation
WLCF Web Site
The WLCF on line tool
• Access through the Web http://www.wlcftool.com/ • Easy to use• Cheap to use (6 months free to all delegates)• Provides calculation validation• NPV, IRR, TWLC, AWLC• No need to become a member
The Solution Organisation• Whole Life Costs
– Processes– Training
• PFI Bid and tender support
• Sustainability – Environment– Social
• Discount rate tables– http://www.thesolutionorganisation.com/library.html
How to use WLC - Clients• Ask only for the things that will help
• Don’t ask for the impossible
• Ask what, how and when, the tenderers will use WLC
• Ask for the WLC processes & how it will be demonstrated
• Start with something simple – Energy consumption prediction & measure
How to use WLC – Design Team• WLC starts with design,
• Good design starts with WLC
• Ask suppliers for Cost in Use information
• Use WLC when every element within the options is considered
• Don’t jump to conclusions
How to use WLC - Contractors• Understand why the Client needs you to
use WLC
• Develop simple WLC processes that can be used at every decision point
• Develop the reporting process
• Work with your supply chain to develop everyone in it
• Drop suppliers that won’t engage & try
How to use WLC - Suppliers• Start now
– even if your clients don’t ask for it
• What are the costs in use for your products?
• Would you offer supply and maintain?– If not why not?
• Ask your client to help measure the results
Process
• Use the method that suits you
• NPV - allow Discount Rate freedom
• Use for every decision point
• Report the results
Moving on to WLP
• Whole Life Performance
• WLC + Non financial measures– Environmental– Social
• Reduce to NPV and single score– Example
Summary
• WLC– Why– Methods– How– Benefits
• WLCF– On line Tool
• Next steps
