Transcript Whole Life Costs and Sustainability

Whole Life Costs
Toolkits
Brad Bamfield
[email protected]
[email protected]
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
2 Capital cost
1 000
1 500
WLC Finance Matters
• Discounted cashflow (methods / ratios)
“Profitability measure
where options have
same lives”
IRR Internal Rate of Return
- a discount rate by trial and
error found when NPV= 0 then
compare cost of capital
“Doesn’t measure
return on investment”
PBP Payback Period
- time taken for business case
to break even
NPV Net Present Value
- includes costs and benefits
and used widely to compare
investments
“Measures return on
investment only as a
ratio. If ratio > 1 then
larger the ratio the better”
“Measures profitability
and least cost and can
deal with differing life
options”
BCR Benefit to cost ratio
- indicates economic value
of business case by the size
of the ratio
BUSINESS NEWS
The Headlines...
Net
Present
Value
Are you using NPV?
It’s the preferred method
for assessing business
cases on a whole life basis
Ignore it at your peril!
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.
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 Picture
Design
Build
Operate
Dispose
Total
Run / Maintain
£ 40%
£
£
3%
17%
Repair
£ 30%
£
?%
100%
Cost of
Ownership
Periodic
Replacement / Refurbish
£ 10%
1 Year
2 Years
Source Gardiner & Theobald
25 Years
1 Year
Total
Worked example 2
Option
1 Capital cost
Maintenance
Total
2
Capital cost
Maintenance
Total
1
2
3
4
1 000
125
125
125
125
5
1 000
125 625
1 625
1 500
90
90
90
90
1 500
90 450
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?
Capital costs
Client
Capital Manager
QS
Capital Manager
Architect
Capital Manager
Contractor
Capital Manager
& Architect
M&E
Contractor
& Architect
Suppliers
Contractor
FM
Where does the Occupier fit in?
Cost in Use
Revenue Manager
Revenue Manager
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 3
Option
1 Capital cost
1 000
Maintenance
Refurbishment
Energy
Cashflow pa
1 000
Total
2
Capital cost
1 500
Maintenance
Refurbishment
Energy
Cashflow pa
1 500
Total
1
Year
2
3
125
125
125
60
185
60
185
60
185
4
125
700
60
885
5
1 000
125
625
700
60
300
185 2 625
2 625
90
90
90
90
50
140
50
140
50
140
50
140
1 500
90
450
0
50
250
140
2 200
How much does an asset cost?
1
:
5
• Capital Cost
• Revenue Cost
• Business Cost
:
200
1
5x
200x
The long term costs of owning and using buildings (November 1998)
The Royal Academy of Engineering
WLC rules of thumb
Typical Airport Terminal
Capital
20%
Revenue
80%
Typical Shopping Centre
Typical Office Block
Capital
40%
Capital
45%
Revenue
55%
Revenue
60%
Revenue cost breakdown
• Energy
5% 7%
• Cleaning
• Maintenance
31%
20%
• Admin Services
• Security
• Admin and Management
Insurance
10%
27%
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
Activities in Sustainability
Whole Life
Cost
Economic
Social
Aesthetics
Environmental
Materials
But there are questions
• What is the “Life”?
WLC design life profiles
Building
Element
Life Expectancy Prior to Complete Replacement (Years)
0-5
5-10 10-20 20-40 40-60 60-100 100+
Foundations and Piling
Superstructure
External Cladding
Windows
Roof Coverings
Rainwater Goods
Internal Partitions
Demountable Partitions
Doors and Ironmongery
Finishings Generally
Raised Floors
Floor Coverings
Suspended Ceilings
Fittings and Furnishings
Mechanical Services
Electrical Services
Public Health Services
Builder’s Work
Notes:
Period of Consideration
Discount Rate
- 60 years
- 6%
Total £
Whole
Capital Life
Cost Cost
£
£
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
Owner :Work Breakdown Structure
• List of functions
(eg platform, ticket hall, etc)
• List of asset types
- per function
- per type
Owner : Business Issues
function
Owner : FM CostsBy
By asset type / asset
• Output Levels
• Cleaning
• Maintenance
• Energy
• Rates
• Insurance
• Admin and Management
• ANO (please define)
- Station
- Function
- Asset type
- Asset
• Capital Costs
• Total Project Costs
- Design Fees
- Engineering costs
- Attendance costs
- Management costs
Owner : Assets NOT 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)
• Intervention points
- Replacement and
non-availability
- Cyclical and nonavailability
- Annual and nonavailability
- Adhoc and nonavailability
• 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?
Date: 26/06/02
• Taxation / Capital
Allowances / VAT
• NACs downtime
• Risk
Owner :
Owner : G&T
Whole
Life
Cost
Model
Business case only *
Owner : Model Input Criteria
CAPEX Consultant
• Prices REVEX Asset Maintain
• Test discount rate
• Study period
Key: ** NACs are related to asset availability / performance requirements
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 nonavailability
- Annual and nonavailability
• Maintenance strategy /
plan(s)
Drawn by K. Owen G&T /
Worked example 4
Year
Option
1
Capital cost
Maintenance
Refurbishment
Energy
Cashflow pa
5% Discount
Discounted
cashflow
2
5%
Capital cost
Maintenance
Refurbishment
Energy
Cashflow pa
Discount
Discounted
cashflow
1
2
3
4
5
1 000
125
125
125
60
185
0.86
125
700
60
885
0.81
1 000
1.00
60
185
0.95
60
185
0.90
1 000
176
167
125
60
185
0.77
159
721
143
1 500
90
90
90
90
90
1 500
1.00
50
140
0.95
50
140
0.90
50
140
0.86
50
140
0.81
50
140
0.77
1 500
133
126
120
114
108
1 000
625
700
300
2 625
2 365
1 500
450
0
250
2 200
2 102
What is industry looking for?
•
•
•
•
•
Business Added Value
Performance Improvements
Alternative Solutions/Profiling
Design Lives
Common Standards
• Benchmarking
• Credibility
WLC improves performance
• 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
•
•
•
•
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