Advancing Life Cycle Economics in the Nordic Countries

Advancing Life Cycle Economics in the Nordic
Countries
Kim Haugbølle,
SBi –Danish Building Research Institute, Denmark (Email: [email protected])
Ernst Jan de Place Hansen,
SBi –Danish Building Research Institute, Denmark (Email: [email protected])
Abstract
Advancing construction and facilities management requires the ability to estimate and evaluate
the economic consequences of decisions in a lifetime perspective. A survey of state-of-the-art on
life cycle economics in the Nordic countries showed that, despite a number of similarities, no
strong convergence of i.a. methodologies has occurred. Thus, a Nordic network of researchers,
practitioners and authorities was established along with national networks. Within these
networks, similarities and differences in approaches were explored. Three conclusions were
reached. First, it was suggested that the configuration of the roles as client, owner and user is
indicative of a client’s interest in life cycle economics. Second, a proposal for a common Nordic
cost classification was put forward. Third, it was argued that there is a strong need to develop
tools and methodologies to depict the cost/value ratio appropriately.
Keywords: Clients, benchmarking, cost classification, value, life cycle cost
1. Introduction
Facilities management is increasingly being recognised as an important strategy for improving
building performance and optimising the economic return on investments. Although differences
exist with respect to purpose, scope and priority, facilities management has now become a mature
field with its own textbooks etc. [1].
An important element in facilities management is the ability to estimate and evaluate the economic consequences of decisions in a lifetime perspective. The potential for a significant reduction
in facilities investment costs is demonstrated in e.g. post offices in Japan [2], and it is shown that
life cycle operations, maintenance and recapitalisation costs over e.g. a 50-year life cycle
represent the greater part of life cycle costs [3]. Nevertheless, the uptake of life cycle economics
has been rather limited. The reluctant uptake has been explained by several factors. Among those
are the fact that management focus is typically directed at the initial construction costs when
making decisions about buildings [3], various types and quality of data [4], and a host of
practical, behavioural and methodological difficulties [5].
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Recently, international convergence on methodology and cost classification has been sought by
ISO (International Organisation for Standardisation). In relation to the ISO 15686 series on
service life planning, Part 5 addresses whole life costing [6]. In parallel, convergence has also
been sought on a Nordic level. Although the Nordic countries more or less share the same visions
and methodologies regarding life cycle costing, different cost classifications and tools are in use
[7]. Thus, the Norwegian government’s building and real estate agency Statsbygg together with
the Danish Building Development Council, a Danish think tank, initiated a Nordic project in
order to establish Nordic networks for knowledge exchange and to develop a common Nordic cost
classification. The purpose of this paper is to report the findings of this project, which is further
described in [8].
2. Methodology
The research methodology included data from three main sources:
§
A survey of state-of-the-art through visits and seminars in each of the Nordic countries
during 1999-2001.
§
An extensive literature review based on searches in Nordic databases.
§
A dialogue approach based on six thematic Nordic workshops and a number of national
network meetings during 2002-2004.
3. Typology of clients
The client’s role is very important in relation to development, implementation and use of life cycle
costing (LCC). Without an active and systematic demand for LCC from the client, the
possibilities of LCC related considerations to make a break-through in the building sector are
very limited. The client must possess a wide competence to handle planning, construction and
operation of buildings. This puts focus on the client’s handling of the relations to all the
stakeholders, i.e. the owner, the customers, the building sector and society (see Figure 1). The
client’s handling of these four relationships requires different capabilities [9]:
§
Relation to the owner: The client must be able to estimate whether investments in a
building project fulfil the estimates and demands for profitability and economic
conditions that apply to the actual business ideas of the owner. The estimates will of
course be different for e.g. social housing, governmental buildings or commercial
facilities.
§
Relation to the customers: A prerequisite for the client’s work is knowledge regarding
the wishes, needs and demands of the customer as well as the will and ability of the
customer to pay. For both unknown and known customers, the client will be the one to
crystallise and specify the requirements to the building. With unknown customers it
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requires knowledge of the market, the supply situation and competition, the customers’
preferences etc. With known customers – e.g. inside own organisation – the ability to
negotiate will often be needed to balance requirements versus costs and other
consequences, etc.
§
Relation to society: The client must have knowledge of society’s requirements to both the
building and to the client’s responsibility, as they are stipulated in laws, regulations, etc.
The relation to society also includes handling public opinion, architecture and the environment in the broadest sense.
§
Relation to the building sector: The client’s purchase of services like design and
construction from the building sector assumes an ability to formulate relevant
requirements and to organise and manage the process including control and follow-up.
The handling of the relations to the building sector put great demands on the legal
competence as well as the client’s ability to handle risk.
Owner
Business idea
Customer
Users
Society
Client
Laws
Building sector
Building process
Figure 1: The relations of the client to the various stakeholders. Based on [9].
The Nordic project identified four trends that are changing the role of the client in the Nordic
countries. Firstly, public clients increasingly have to operate on market conditions. Secondly, the
ability of the client to handle demands and partners in the building sector that are often
contradictory is becoming more critical in order to achieve better value. Thirdly, the
corresponding national property indices based on the Investment Property Databank (IPD) have
made it easier to compare the profitability of building investments. Fourthly, the behaviour of the
users is increasingly being recognised as decisive for the operation of a facility.
As stated by Bordass who discussed the costs and value of greener buildings and how they are
perceived and assessed [10], a client’s adopting of life cycle costing or not in his practice will to a
large extent depend on his incentives to pursue lifetime considerations. The incentives will in turn
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be determined by how the role as client, owner and user is configured. Based on the Nordic
project three different configurations were found to be possible:
§
Configuration 1 – client only: In this configuration, the client acts as a client only, and
he does not occupy the role of neither owner nor user. Some clients may pursue lifetime
considerations due to ethical concerns, but his economic incentive lies solely with
fulfilling the task at hand –to deliver a building. Since the market pressure and the public
regulation for lifetime considerations have notoriously been weak, he is rather unlikely to
make lifetime considerations. Thus, this type of client was labelled the Hit-and-Run
Client.
§
Configuration 2 – client-owner: In this configuration, the client will act as both a client
and owner (or facility manager), but he will not be the end user of the facility. As Bejrum
et al. [11] convincingly argued, the profitability of a facility lies in the right maintenance
strategy. Thus, this type of client-owner could pursue lifetime considerations since he
might have economic incentives to optimise the performance of the building in question.
This type of client was labelled the Landlord Client.
§
Configuration 3 –client-owner-user: In this configuration, the client will act not only as
a client, but also as both owner and user of the facility. This type of client would in
principle have strong economic incentives to include lifetime considerations in his
decisions, since he is building for his own use and has to pay all the costs. Therefore, he
is likely to be interested in optimising the performance of the building in the long term.
Thus, this type of client was labelled the Integrative Client.
4. Nordic cost classification
For clients who wish to include lifetime considerations in their decision-making it is a prerequisite
that costs are systematically and consistently collected, classified and validated. The Nordic
countries have many years of experience in collecting various key performance indicators.
However, classification of cost and the scope of each system have been different within each
country. Thus, it was a major objective of the Nordic project to put forward a proposal for a
common Nordic classification of costs. Obviously, the ongoing work on ISO 15686-5 [6] was
closely followed. But ISO 15686-5 was discarded, because the terminology was perceived as
inconsistent, the standard contained a mix of normative and informative elements, and the cost
classification was too far away from practical experiences in the Nordic countries. Instead four
other basic requirements were set up and pursued.
First, a distinction must be made between (at least) three main groupings of costs associated with
the acquisition of the building, the building related services, and the non-building related services
(services related to the core business taking place in the building).
Second, the three main groupings must be broken down into main services. To be able to
maintain an overview, the number of main services should not exceed 10. Each of these main
services could be broken down in more details if needed by the individual user, but it was
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suggested that splitting into sub-categories should in principle follow the hierarchical structure
shown below:
§
One-figure level indicates a main service e.g.:
§
Two-figure level indicates a specific service e.g.: 63. Waste handling
§
Three-figure level indicates an activity e.g.:
63.1 Internal transport
63.2 Compression
§
Four-figure level indicates a resource e.g.:
63.1.1 Equipment
63.1.2 Salary
6. CONSUMPTION
Third, a cost classification should be based on existing systems and data e.g. the Norwegian
standard NS 3454 [12], the classification used by Danish Facilities Management [13], and the
Dutch standard NEN 2748 [14].
Fourth, experiences showed that the difference between ‘Operation’, ‘Maintenance’ and
‘Development’was not well understood in practice. Since the definitions of these services were
critical with respect to negotiating maintenance budgets, to determine rent levels, tax regulations
etc., special attention must be given to define these services.
Table 1: Definitions of main services in the proposal for a common Nordic cost classification.
No
Main service
Definition
1
CAPITAL
All investments towards completion including decommissioning
by the end of use of the facilities.
2
ADMINISTRATION
Activities for administration, required payments and insurance
costs.
3
OPERATION
This account includes daily, weekly and monthly activities that
are repetitive within a one-year period for building and technical
installation systems that must satisfy given functional demands
and requirements.
4
MAINTENANCE
This account includes all activities and efforts put forward in a
period of more than one year. For example, planned
maintenance, replacement and emergency repairs, so that the
building and technical systems satisfy the original level of quality
and functional requirements.
5
DEVELOPMENT
This account includes activities as a result of a change in the
demand of core activities, the authorities, total refurbishment, or
all activities to raise the construction standards in relation to the
original level.
6
CONSUMPTION
This account includes resources in terms of energy, water, and
waste handling.
7
CLEANING
All activities inside and outside needed to meet cleaning
demands satisfactorily.
8
SERVICE
All non-building related activities in support of the core activities.
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The main services are defined in Table 1. ‘Capital’concerns all costs related to the acquisition of
the building. ‘Service’concerns non-building related services. The remaining 6 main services are
building-related services. In Appendix A, the classification of life cycle costs is described further
on a two-figure level. Various activities are at present being undertaken in order to implement this
cost classification.
5. Depicting the cost/value ratio
The ability of the stakeholders to act in accordance with lifetime considerations depends among
other things on whether useful methodologies and tools exist to depict the cost/value ratio. A
number of different tools and methodologies from each of the Nordic countries and the
experiences with their use in practice were scrutinised. In Figure 2 an overall typology of tools
and methodologies are given. The list is not necessarily exhaustive.
VALUE
Investment
Building process
Operation and maintenance
for
MONEY
Market analyses
Cash flow analyses
Value management
Life cycle costing
Customer satisfaction
analyses
Operation plan and budget
Figure 2: Types of tools and methodologies.
Two features were striking. First, the scope of most of the methodologies and tools focused on
either value/quality or cost. Second, the application of most of the methodologies and tools
focused on one overall phase in the building’s life cycle. Although some methodologies and tools
could eventually overlap, the methodologies and tools would rather be complementary. Since the
mutual integration of methodologies and tools was remarkably small, it would be difficult to
assess whether the client got ”value for money”or not. Therefore, one of the great challenges in
the future will be to develop tools and methodologies which can appropriately depict the
cost/value ratio in order to guide more informed decisions.
6. Conclusions
A Nordic project was carried out during the past three years in order to create a stronger
convergence of life cycle economics in the Nordic countries. The purpose of the project was to
establish networks for knowledge exchange and to develop a common Nordic approach to life
cycle economics. Three conclusions were reached.
280
First, it is suggested that the configuration of the roles as client, owner and user is indicative for
the interest of a client in life cycle economics. Three configurations were identified: 1. Client only
– labelled the Hit-and-Run Client. 2. Client-owner – labelled the Landlord Client. 3. Clientowner-user –labelled the Integrative Client.
Second, a proposal for a common Nordic cost classification was put forward. The proposal was
based on, but extended, existing cost classifications and data. Costs were classified in 8 main
groups of services: 1. Capital. 2. Administration. 3. Operation. 4. Maintenance. 5. Development.
6. Consumption. 7. Cleaning. 8. Service.
Third, a number of tools and methodologies available to the construction and real estate cluster
were scrutinised. The tools and methodologies were categorised according to their scope and
application in the life cycle of the building. A striking feature was the relatively weak coupling of
costs and value/quality. Thus, it is argued that there is a strong need to develop tools and
methodologies that can depict the cost/value ratio more appropriately.
Acknowledgements
The authors would especially like to thank the co-editor of the final report [8] Svein Björberg
(Multiconsult, Norway) and the co-authors Björn Marteinsson (Rabygg, Iceland), Christer
Sjöström (KTH Gävle, Sweden), Sakari Pulakka (VTT, Finland), and Kirsten Lindberg and Stein
Rognlien (Statsbygg, Norway). The authors also wish to thank Nordic Innovation Centre for
financial support.
References
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E & FN Spon.
[2] Minami, K. (2004). Whole life appraisal of the repair and improvement work costs of Post
Office buildings in Japan. Construction Management and Economics, 22, 311-318.
[3] Selman, J. R. and Schneider, R. (2004). The impact of life-cycle cost management on
portfolio strategies. Journal of Facilities Management, 3 (2), 173-183.
[4] Kishk, M. (2004). Combining various facets of uncertainty in whole-life cost modelling.
Construction Management and Economics, 22, 429-435.
[5] Cole, R.J. and Sterner, E. (2000). Reconciling theory and practice of life-cycle costing.
Building Research and Information, 28 (5/6), 368-375.
[6] ISO (2002). ISO/DIS 1568-5 - Buildings and constructed assets - Service life planning Part 5: Whole life costing. Genève: International Organization for Standardisation.
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[7] Haugbølle, K. (2003). Life cycle economics: State-of-the-art in the Nordic countries. In:
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Helsinki: ILCDES 2003 Secretariat, 33-39.
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sluttrapport (LCC for Buildings and Constructions. Nordic main project - final report) (In
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[9] IVA (1997). Kompetensutveckling inom samhällsbyggnad. Byggherren i fokus
(Development of competence in the building sector. The client in focus) (In Swedish).
Stockholm: Royal Swedish Academy of Engineering Sciences (IVA).
[10] Bordass, B. (2000). Cost and value: fact and fiction. Building Research and Information,
28 (5/6), 338-352.
[11] Bejrum, H., Hanson, R. and Johnson, B. G. (1996). Det levande husets ekonomi.
Livscykelekonomiska perspektiv på drift och förnyelse (The economy of the living house. The
perspective of life cycle economics on operation and renewal of buildings) (In Swedish).
Stockholm: SRB, Statens råd för byggnadsforskning.
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[13] Public website, http://www.dfm-key.dk
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Appendix A
Classification of Life Cycle Costs
1
Capital Costs
11 Project costs
This item includes all investments up to the finished construction.
It can be subdivided into contractor costs (similar to enterprise
costs), employee costs (fees, etc) and special costs (taxes, etc).
It will be outlined that the contractor's costs can be divided into
groups with the same rate of depreciation (see attachments).
Land cost should be included. If this is a yearly fixed fee, it
should be calculated to net present value.
19 Remaining costs
Costs for elimination of construction at the end of its useful
lifetime. This can also be the period of use. In some
circumstances the remaining costs can be income. For example,
the sale of the used construction materials for new projects or the
whole building for new use.
2
Administration Costs
21 Taxes and fees
22 External fees
23 Administration and
management
24 Insurance
29 Miscellaneous
3
Property tax and other required official fees (and independent
expenditures) even if the structure is not in use.
This item includes external assistance fees to the management,
e.g. condition survey, legal assistance etc.
Salary to administrative employees. It also includes rent of space
for the use of management department, documentation of the
construction inclusive the management of data based system for
MOMD, the service desk, marketing, internal control, etc.
This item includes fire and burglary. It also includes insurance for
necessary building equipment to the management department.
Casualty insurance and personal property of user is not included
under this insurance.
Example equipment for operation department.
Operation Costs
31 Operation and
Salary and all payments to employees (excluded are
inspection executed by administration, see Account 2) including work clothing, materials
own employees
and equipment (includes car costs, trailers, etc), tools, etc. Work
assignments worth mentioning: lubrication, adjustments and
regulation of technical systems, fire protection, etc. including
filters, bulbs, straps, etc.
283
32 Operation and
This item includes all external agreements (service agreements)
inspection executed by for operation and supervision of elevators, fire alarms, sprinkler
external companies
systems, ventilation systems, etc.
37 Outdoor operation and Salary and all payments to employees (excluded are
inspection executed by administration, see account 2) including work clothing, materials
own employees
and equipment (includes car costs, trailers, etc), tools, etc. for
snow removal, landscape services, operation of technical
construction and systems, etc. (does not include parking
buildings).
38 Outdoor operation and This item includes all outdoor works and agreements like snow
inspection executed by removal, landscape services, operation of technical construction
external companies
and systems, etc. (does not include parking buildings).
39 Miscellaneous
4
Maintenance Costs
41 Periodical
maintenance of
exterior of the building
42 Periodical
maintenance of
internal of the building
43 Replacement of
exterior
This item includes work on the façade and roof that is necessary
to prevent decay of normal wear and tear.
49 Outdoor
Periodic maintenance and replacement of building components
including technical systems i.e. fountains, asphalt, trees and
bushes, fences and retaining walls. (Does not include parking
buildings).
This item includes work on the interior of the building to prevent
decay with normal wear and tear, for example painting.
This item includes work and efforts that are necessary in order to
accomplish replacement of exterior building components (roofs
and facades). Replacement is relevant when periodic
maintenance no longer satisfy maintaining technical and
functional demands (parts of the building that have shorter
lifetime than the rest of the building).
44 Replacement of
This item includes work and efforts that are necessary in order to
interior
accomplish replacement of the interior of the building.
Replacement is relevant when periodic maintenance no longer
satisfy maintaining technical and functional demands (parts of
the building that have shorter lifetime than the rest of the
building).
45 Emergency repair work This item includes work and efforts that are necessary to correct
for exterior
unforeseen situations. Includes emergency efforts to the façade
and roof and aligning of damages.
46 Emergency interior
This item includes work and efforts that are necessary to correct
repair
unforeseen situations. Includes emergency efforts to the interior
and aligning of damages.
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5
Developing Costs
51 Development and
upgrading of exterior
of the building
This item includes costs for ongoing efforts caused by new
demands from the authority or core business related. For
example, new fire or environment regulations or core business
related. Does not include total refurbishment*.
52 Development and
This item includes costs for ongoing efforts caused by new
upgrading of internal of demands from the authority or core business related. For
the building
example, new fire or environment regulations that gives
retrospective force and thereby includes all buildings and simple
rebuilding (moving doors, spatial walls, etc). Does not include
total refurbishment*.
59 Development and
upgrading outdoor
This item includes costs as followed by demands from activity,
the authority or in connection with total renovating that will
elevate the quality. Does not include total refurbishment*.
*: Total refurbishment (renovation) to accommodate new demands, new users, modernisation, etc. Is to be seen as new
capital costs (a new project).
6
Consumption Costs
61 Energy
62 Water and Drainage
63 Waste Handling
All costs related to energy supplies including oil, electricity and
heating.
All costs related to water consumption including intake water,
waste water including cleaning
This item includes all costs from internal transport, compression,
source separation, collecting (hired container), transporting
related to waste and taxes for landfill.
69 Miscellaneous
7
Cleaning Costs
71 Daily/Periodic
72 Main cleaning
73 Special cleaning
74 Window cleaning
75 Façade cleaning
79 Outdoor cleaning
This item includes daily and weekly cleaning of all surfaces,
including accessories and equipment.
This item includes costs to periodic main cleaning, including
accessories and equipment.
This item includes, for example, floor waxing, etc. And includes
accessories and equipment.
Periodic interior and exterior window cleaning when this usually
gets charged to the owner of the building or respective user.
Costs for façade cleaning including all necessary help. Usually
performed in connection with exterior window cleaning.
This item includes cleaning of cultivated areas. Maintenance of
green areas is not included. (See 3 Operation).
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8
Service Costs
81 Security and safety
Security outside the reception area during normal working hours.
Boundary protection of the building includes operation of entry
points, production of entry cards, etc.
82 Reception/switchboard Total salary costs include social benefits, uniform and service
agreements.
83 Mail
Total salary costs, postage, local transportation, operation and
maintenance of the postal equipment.
84 IT service
Total salary costs, operation and maintenance of all equipment.
85 Moving
Total salary costs, transportation, extra maintenance and
renovation.
86 Catering
Total salary cost to in-house and/or contract personnel, operation
of automated machines, products and articles of consumption of
the kitchen and rent of space.
87 Accessories/copying
Total salary costs, office and data accessories, internal and
external copying, machines and equipment (rentals and service)
papers, etc.
88 Administrative support Total salary costs for in-house or support personnel (doesn't
include administrative personnel in main activities (core
business)).
89 Furniture and
Total salary costs, purchasing and depreciation of furniture and
inventories
inventory. Include rent of storage room.
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