Essay: Evaluating options for University building using Life Cycle Costing

1. Introduction – THE REDMOND BUILDING

The Liverpool John Moores University is looking at their options with this new building and is trying to establish the best option out of three options for this building. The aim of this report is to establish the option most suited to the client (Liverpool John Moores University)
The main purpose of this report is to look at the best option for the university of out a possible three that will make good economic sense for the client. The Redmond building is a property of Liverpool John Moores University. “The new building is to house the Faculty of Business and Law, currently located in the John Foster Building on Mount Pleasant and the Liverpool Screen School which is currently in a rented facility on Edge Lane and the TV studio in Hope Street” (Mount Pleasant Campus General Teaching Building Liverpool John Moores University Stage D Report Issue 1 26.08.09 Contact Joe Morgan/ Helen Dore). Life cycle costing is one of the best ways of determining the real cost of a project, and it has become a tool to aid decision making.
The main of this report is to critically analyse the life cycle costing of three options of future use of this building, and to select the best option for the client (Liverpool John Moores University) based on Life cycle costing and other factors.
Life cycle costing is a practice we all engage in without knowing that is what we are doing. For example a decision to buy a family car will not only be based on how much the initial price of the car is, but consideration is made of the fuel cost, insurance grouping, road tax and other factor that go into owning a car. This concept is like Life cycle costing (LCC) in construction. It takes into consideration the whole costs of construction, use of the building (operational Costs) and finally demolition costs.
According to the French N 2003 “LCC is a tool to assist in assessing the cost performance of construction work, aimed at facilitating choices where there are alternative means of achieving the client’s objectives and where those alternatives differ, not only in their initial costs but also in their subsequent operational costs. It allows these alternatives to be compared on the same basis” The same document states that, LCC accounts for all relevant costs over a defined period of time. It is very important to know the actual cost of a building over its lifetime. That is to say, from the initial construction costs, operational cost, carbon costs, (cost of possible variations) and finally demolition costs. For most public buildings like the Redmonds building it has been stated in the literature that the cost of owning it can be categorised by the ratio 1:5:200, construction cost:maintenance cost:business operating cost Evans Et Al (1998) (Long term costing of owning and using buildings).
This ratio indicates the importance of using life cycle cost, as its share of the whole cost is 1. What the building is to be used for and how the design of the building contribute to that aim constitute 200. (Pearce, D 2003). The Life cycle cost consist of the construction costs, the maintenance, operation, occupancy and end of life cost –BS ISO 15686-5. It defines construction costs as “costs payable by the client, for and in connection with the initial new build works and/or refurbishment works”. The RICs professional Guidance UK 1st edition defines Operational costs as “costs of operating the building and the external works arising from the building itself rather than from occupancy”. It includes cleaning costs utilities, administrative costs, obdurate overheads like insurance and taxes.
In appraising the various options, we will be comparing the various cost centres under the above headings to determine the best option for the client. Though cost will not be the only basis of choice it plays a significant role in the final decision.

2. OPTION ANALYSIS

OPTION 1

The first option is to keep the building as it is and it is to be used for the same purpose for which it was built – housing the Business and Law Faculties. This is what the Redmonds building was originally built for. It was built on GIFA 11500 square metre. In this option, the building is to be used as lecture rooms and offices for lecturers. The design, floor area and specifications for this option remain the same. The use of the building also remain educational.
The cost of construction and the running cost of this option are summarized in the table below.

OPTION ONE COSTS
INITIAL COST 31,560,145
DEMOLITION COST 3,149,360
CARBON COST 178,505
RUNNING COST 19,864,462
TOTAL COST 54,752,472

The table above provide the breakdown of the major components of the cost of having option one. The initial building cost is £31,506,145. This represent the cost of putting up the building. As has been explained above, the total cost using Life Cycle costing involve other cost components. It also has the Carbon cost of £178,505. This figure was calculated using the structural information and other databases. The Running cost which include the cost of utilities, Fabric, services and other came up to £19,864,462. Finally the projected cost of demolition, taking into consideration the situation of the building, the number of floors and the volume of the building came up to £3,149,360. This figure was calculated using the Spons Architecture and building price book 2018.
The chart shows that a large proportion of the cost of this building is in the initial build and the running costs. The initial cost is about 58% of the total costs, followed by the running cost of about 36%. This figures were produced using the BCIS database and the details are set in the appendix.

OPTION 2

Option two is to extent the existing building so that it can accommodate an extra 600 students and 150 staff. The use of the building is still educational but an extension is built to accommodate more people. This proposal increases the floor area by 4350 square metres. The extension is to be built at the year 30 point. This is aimed to increasing the capacity of the building. It is also to take advantage of the space provided. The cost figures were taken from the BCIS database as shown in the appendix.

Initial Cost 31,560,145 43.01
Demolition cost 428,983 0.58
Carbon cost EXT 423,173 0.58
EXTENTION COST 18,868,084 25.72
Running Cost 22,090,248 30.11
Total Cost 73,370,633

The life time costs breakdown for this option are shown above. It is immediately recognisable that The Initial costs, running costs, and the cost of the extension, make up the majority of the cost of the building. Thus construction cost, operational costs and maintenance cost make up the majority of this option. The End of life and Environmental costs are next to negligible. Compared to option one, though this option presents a larger building the costs are significantly larger.

OPTION 3

The third option is to convert the original building into a student accommodation. This means that the use of the building is changing. This will change the use of the building from being a lecture block into student accommodation. The aim of this report is to analyse the various options using Life cycle costing to ascertain the best option for the client (Liverpool John Moores University. Markus 1989 seem to agree the importance of converting existing buildings to other use. As this will improve the economic obsolescence.

Initial cost 31,560,145
Running cost 22,028,506
Carbon cost 178,505
Demolition cost 178,505
Conversion cost 10435650
Total Cost 64,381,310

It can be deduced from the table above that nearly 50% of the cost for this option is taken up by the initial cost. The total cost is £64,381,310. This cost will be a determinant of whether this option will be a good option for the client.

OPTIONS ANALYSIS

In carrying out this report data from the BICs database, was used to analyse the various cost components. The details are shown in the Appendix with the actual work sheet showing the breakdown of costs. In the main body of the work, we will be dealing with the COST Totals. Below is a table of the options and the costs. In making the choice of the option costs, economic and social considerations were looked at. According top Hillbrandt 2000

“…three distinct ways. Firstly, the cost of the project as a whole; secondly, the cost of the total project must be related to the work load over time; and lastly, the cost of various alternative workloads at a given point in time must be analysed. The usual cost curves of economic analysis are of this last type”.
As shown in the diagrams below, Option one is the lowest cost options followed option 3 and then option two. But when these costs are calculated on the basis of cost per square metre, option one again comes in as the best option. These are shown in the diagrams below. However Amenuwa,A et al 2016 found that over 100 years 60 percent of building changed their use and this helped to achieve economic, social, and environmental sustainability. This presupposes that, in considering the best option for the client, care must be taken not to only concentrate on cost but also other socio economic issues. The environmental angle must also be taken into consideration. From the tables below, option 3 and 1 have the best carbon footprints.

Option Two also has the building of an extension. This present considerable advantages and also some risks. The advantages are that the building will be able to accommodate more students and lecturers, but it presents the risks of building an extension. The building stage can present low use of the building which can present costs to the client.
TABLE 1

Sensitivity analysis

This section evaluates the scenarios with regard to the chosen option when certain variables change. In this section, we are looking at how the life cycle cost of option one changes when the Net Present Value
According to Potts K et al 2008, “The basis of a sensitivity analysis is to define a likely range of variation for elements of the project data. The final project cost or duration is then assessed for each variation in the data. In effect, a series of what-if estimates is produced”.
In this report the net present Value and inflation will be applied to the cost to see how they can affect the costs of option 1.
NPV 2% 2.50% 3.00% 3.50% 4.00%
TOTAL 56,902,266 54,001,027 51,574,737 49,532,315 47,801,807
The table above show the effect of changes in the total cost of option when different discounting rates are applied. It can be seen that when the Net Present value (NPV) is at 4% the total cost of option 1 goes down to £47,801,807. But when discounted at 2% the cost rises up to £56,902,266. This means that the present value of the cost goes down at a higher interest rate and increases at a lower rate.
The results are shown in the diagram below.
INFLATION AND LCC FOR OPTION 1
With the United Kingdom going through BREXIT, care must be taken to take into consideration all possible situations. In this report, inflation and its movements will be considered. The table below, plots the cost of option 1 based on possible movements of level of inflation.
INFLATION 4.00% 3.50% 3.00% 2.75% 2.50% 2.00%
LCC 223,685,849 188,518,582 160,413,385 148,535,657 137,897,204 119,809,770
Inflation at the moment is set at 2.27% according to the

Assumptions and justifications

The main assumption coming to that help come to these conclusions are as follows:

1. That all the data required to come to these conclusions are what has been used.
2. That all risk are known and taken care of.
3. That the measurements are correct and and the GIFA stated in the question 11500 is what is used.
4. That the scope of works will not change and it is what has been stated in the options.
5. That at demolition for all option, it has to be a closed demolition. and that client has made allowance for dilapidation and disposal inspections.
6. That the base date for all calculations is the first quarter of 2019
7. That the procurement route will remain the same.
8. That the location will be the same.
9. That the dependency and usage of the building will remain the same for each option.
10. That all sunk costs are excluded.
11. That all constructions will be carried out according to the BCIS standard form.

BENCHMARKING

The benchmark running cost was set at £6382 per square metre. The Appendix C show how the benchmark was calculated.
Benchmarking
Benchmark 6382
Discount Rate 27.67556367
176,625.45
20,311,926.44
Running Cost opt 1 19,864,462
The above table seek to compare Running Cost of option 1 and the benchmark. It can be seen that the benchmark figure after carrying out Net Present Value is £20,311,926.44 and the running cost of the same option is £19,864,462. This analysis show that option one is very close to the benchmark. What this means is that, the cost of option 1 over the lifecycle of the project is very close to or in this case slightly lower than similar builds in the same period and geographical area. This further supports the option as the best for the client, as it matches the industry mean cost as shown by the bench mark cost.

Selection of the best option in terms of economic, social and environmental considerations

In this report, it has been decided that the client select option 1 as it is believed to present the best option for the client.
According to Cochran “. . . a loss in value resulting from factors external to the property . . . due to such factors as reduced demand for the product, increased competition, Changes in raw materials supplies, increasing costs of raw materials, Labour or utilities without a corresponding price increase of the product, Inflation, high interest rates, legislation, and environmental considerations . . .. Economic obsolescence can be quantified through analysis Of: (i) Costs required to cure the obsolescence, (ii) Excess operating Capacity or inutility, and (iii) Effects of external factors on the present Value of future benefits associated with the property.”
All building deteriorate over time and the ability to plan for economic obsolescence can lengthen the life of the building. But as stated above, we can quantify economic obsolescence by the cost required to cure it. In this case it is the maintenance and refurbishment cost. Option One presents the lowest running cost of the three option. This is shown in the figure above. The cost of option 2 and 3 will be significantly higher costs to cure the obsolescence due to the nature of use and capacity. Also the effect of external factors such as inflation (economic downturn), has been shown in the sensitivity analysis to have a minimal effect on option 1.
Socially, it is better to keep the building as it is (option 1). The area of the building can safely accommodate a building for lectures instead of a student accommodation. There are issues with the saturation of the area with students. This is having an effect on the value of properties in the area. Though there is some gain (Profit) in going for option 3, the social effect of a students accommodation will be high.
Environmentally, it is better to keep option 1 as it presents the lowest carbon footprint. Carbon cost for the option is £ 178,505

CONCLUSION

Though option 2 and 3 present a good option for the client. It is the considered view of this report that option 1 will best serve the client. This conclusion has been made based on the Life Cycle Costing and other indicators. As a university, option one presents the safest option in terms of value for money.

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30.11.2018