Managing lifecycle costs

Stakeholders must prioritise lifecycle costing from the inception stage of a project to reduce wastage and reap future cost efficiencies

All project owners start out with the intention to achieve cost efficiency on their projects, not just at the time of development but across the project’s lifecycle. In some cases, however, efforts to estimate lifecycle costs are minimal and other targets are prioritised.

In the construction sector, lifecycle costing involves the assessment of a building’s assets and components in order to estimate the capital expenditure requirements over the course of its useful life.

Two main factors play a significant role in the decision to lower lifecycle costs: the overall costs involved in the various stages to achieve the best results; and the level of knowledge or desire on the developer’s part to ensure the longevity of the asset in the absence of a defined mandate to do so.

Initial costs are bound to increase in the short term if the decision is made to deploy high-quality equipment or materials to achieve efficiency and limit future costs. This may cause the project to overshoot the initial budget. So naturally, future cost efficiency assumes lower priority over current expenses for clients.

It is imperative to ask: who is the targeted end-user? Let us say a developer has sold a building off plan to a purchaser. The transaction is completed and the developer does not stand to gain any advantage from future cost savings.

Therefore, there is little incentive for the developer to take on early-stage costs and shrink potential profit margins for no real payback in the future.

One also needs to assess the viability of creating longterm lifecycle cost plans at the initial stages of a project.

In the case of a new building at the design stage, several assumptions need to be made for a lifecycle plan to run like clockwork, but seldom do all stakeholders follow through as planned.

For example, a piece of equipment may have a life expectancy of 15 years. However, this can increase or decrease depending on the level of maintenance, spares available and overall usage.

In that case, it is preferred to produce lifecycle cost reports after the building has been in operation for some time as surveyors can then assess determining factors such as the level of usage and maintenance.

While tricky, lifecycle costing is possible prior to construction, but the assumptions must be close to reality. For example, if the equipment listed is a substitute with specifications other than the one to be used, the study will prove to be futile.

Better results

Notwithstanding the challenges, the benefits of undertaking this exercise are tangible. Building owners conducting the analysis are better positioned to understand their capital expenditure obligations over a set period of time.

This enables the owner to budget for replacement or refurbishment of major assets, potentially avoiding expensive, reactive repairs. By scheduling replacements, the chances of critical equipment failing are reduced, which helps avoid further losses.

If completed at the design stage itself, lifecycle costing enables the developer to assess options for construction materials, finishes and so on, allowing the team to make recommendations of substitute materials to achieve greater efficiencies. This can also lead to the use of more sustainable materials, which is increasingly becoming a trend.

This practice could then achieve the often elusive goal of waste reduction, more so during the demolition stage at the end of a building’s useful service life, if not the construction stage itself.

Driving change

Despite the benefits, we have yet to see widespread endorsement of lifecycle costing. Similar to the UK and Asia Pacific, in the UAE lifecycle costing studies are seldom conducted at the ideation stage.

A financial budget for a project would account for costs including design, construction and consultants, and each specialist would have to play their part to ensure the most feasible option is being chosen to achieve long-term sustainability while considering budget constraints.

The process would ideally start with the designers. This ensures at the design stage itself that quality equipment suited to the budget is being deployed, setting in motion the wheels that will successfully drive the project through its lifetime.

The analysis, however, is only as good as the data. For the plan to be truly successful, accurate details of all installed assets would need to be programmed into a detailed assessment tool. The data can then be used to analyse estimated service life, predict replacement timelines, and thereby costs, taking into consideration inflation and other regional factors.

In a capital-intensive sector such as construction, an accurate lifecycle cost estimation with prolonged relevance can result in long-term cost savings by reducing the lifecycle budget of the asset.

Therefore, project owners, end-users and consultants should all have an inherent interest in lifecycle costs. To encourage this, the government can play a major role in incentivising stakeholders to accept long-term gain for short-term pain.

This article was originally published in MEED Mashreq Industry Insight.