by dr. sadi a. assaf, dr. abdul mohsin al-hammad, dr. m. osama jannadi, mr. sami abu saad
DESCRIPTION
Assessment of the Problems of Application of Life Cycle Costing in Construction Projects in Saudi Arabia. By Dr. Sadi A. Assaf, Dr. Abdul Mohsin Al-Hammad, Dr. M. Osama Jannadi, Mr. Sami Abu Saad. College of Environmental Design, King Fahd University of Petroleum & Minerals, - PowerPoint PPT PresentationTRANSCRIPT
LIF
E C
YC
LE
CO
ST
ING
LIF
E C
YC
LE
CO
ST
ING
ByBy
Dr. Sadi A. Assaf,Dr. Sadi A. Assaf, Dr. Abdul Mohsin Al- Dr. Abdul Mohsin Al-Hammad,Hammad,
Dr. M. Osama Jannadi, Dr. M. Osama Jannadi, Mr. Mr. Sami Abu SaadSami Abu Saad
ByBy
Dr. Sadi A. Assaf,Dr. Sadi A. Assaf, Dr. Abdul Mohsin Al- Dr. Abdul Mohsin Al-Hammad,Hammad,
Dr. M. Osama Jannadi, Dr. M. Osama Jannadi, Mr. Mr. Sami Abu SaadSami Abu Saad
Assessment of the Problems of Application of Life Cycle
Costing in Construction Projects in Saudi Arabia
Assessment of the Problems of Application of Life Cycle
Costing in Construction Projects in Saudi Arabia
College of Environmental Design, College of Environmental Design, King Fahd University of Petroleum & Minerals, King Fahd University of Petroleum & Minerals,
DhahranDhahran, Saudi Arabia, Saudi Arabia
College of Environmental Design, College of Environmental Design, King Fahd University of Petroleum & Minerals, King Fahd University of Petroleum & Minerals,
DhahranDhahran, Saudi Arabia, Saudi Arabia
LIF
E C
YC
LE
CO
ST
ING
LIF
E C
YC
LE
CO
ST
ING
• IntroductionIntroduction• Objectives of the StudyObjectives of the Study• MethodologyMethodology• Problems of ApplicationsProblems of Applications• Results of the StudyResults of the Study• Other ProblemsOther Problems• ConclusionsConclusions
• IntroductionIntroduction• Objectives of the StudyObjectives of the Study• MethodologyMethodology• Problems of ApplicationsProblems of Applications• Results of the StudyResults of the Study• Other ProblemsOther Problems• ConclusionsConclusions
CONTENTSCONTENTS
LIF
E C
YC
LE
CO
ST
ING
LIF
E C
YC
LE
CO
ST
ING
Life Cycle Costing Concept
O In the past, economic assessment of alternative designs, construction, or other investment has been based on initial
(first cost which ignores the total cost incurred for theinvestment throughout its lifetime.
O The concept of life cycle costing provides an economictool which takes into account total costs for an invest-ment during its life span.
Life Cycle Costing Concept
O In the past, economic assessment of alternative designs, construction, or other investment has been based on initial
(first cost which ignores the total cost incurred for theinvestment throughout its lifetime.
O The concept of life cycle costing provides an economictool which takes into account total costs for an invest-ment during its life span.
1. INTRODUCTION
LIF
E C
YC
LE
CO
ST
ING
LIF
E C
YC
LE
CO
ST
ING
O The life cycle costing can be defined as follows: an economic assessment of alternatives designs,construction, or other investment considering allsignificant costs of initial costs and ownership costsover economic life of each alternative, expressed inequivalent economic units.
O The life cycle costing analysis can not be carried outwithout considering the following:
A - total costsB - concept of the time value of money
O The life cycle costing can be defined as follows: an economic assessment of alternatives designs,construction, or other investment considering allsignificant costs of initial costs and ownership costsover economic life of each alternative, expressed inequivalent economic units.
O The life cycle costing analysis can not be carried outwithout considering the following:
A - total costsB - concept of the time value of money
1. INTRODUCTION (Continued)
LIF
E C
YC
LE
CO
ST
ING
LIF
E C
YC
LE
CO
ST
ING
A - Total Costs
O initial costsO ownership costs
O Initial costs. They include the followings:- initial construction costs- design costs- land costs- finance costs
O Owner costs. They include the followings:- operating costs
o maintenance costso utility billso staffing fee
A - Total Costs
O initial costsO ownership costs
O Initial costs. They include the followings:- initial construction costs- design costs- land costs- finance costs
O Owner costs. They include the followings:- operating costs
o maintenance costso utility billso staffing fee
1. INTRODUCTION (Continued)
LIF
E C
YC
LE
CO
ST
ING
LIF
E C
YC
LE
CO
ST
ING
B - The concept of the time value of money
o The value of money today is not equal to thesame amount of money in the past or in thefuture.
o The concept of the time value of moneyconsidered the following:- initial costs (P) (present value)- discount or interest rate (i%)- life time of an investment (n)
B - The concept of the time value of money
o The value of money today is not equal to thesame amount of money in the past or in thefuture.
o The concept of the time value of moneyconsidered the following:- initial costs (P) (present value)- discount or interest rate (i%)- life time of an investment (n)
1. INTRODUCTION (Continued)
LIF
E C
YC
LE
CO
ST
ING
LIF
E C
YC
LE
CO
ST
ING
o To make an equivalent value of money foran assessment along its economic life, manymethods can be used such as:
1. Present worth method
2. Uniform annual method
o To make an equivalent value of money foran assessment along its economic life, manymethods can be used such as:
1. Present worth method
2. Uniform annual method
1. INTRODUCTION (Continued)
LIF
E C
YC
LE
CO
ST
ING
LIF
E C
YC
LE
CO
ST
ING
1. INTRODUCTION (Continued)
First Cost
Annual Maintenance Cost
Annual Labor Cost
Extra Income Taxes
Salvage Value
Life, Years
$26,000,000$26,000,000
$800,000$800,000
$11,000,000$11,000,000
------
$2,000,000$2,000,000
66
Project AProject A
$36,000,000$36,000,000
$300,000$300,000
$7,000,000$7,000,000
$2,600,000$2,600,000
$3,000,000$3,000,000
1010
Project BProject B
An Illustrated Example:An Illustrated Example:
If the minimum required rate of return is 15% , which project should be If the minimum required rate of return is 15% , which project should be selected ?selected ?
Using Uniform Annual Worth MethodUsing Uniform Annual Worth Method
EUAC EUAC AA = $18,442,000 = $18,442,000
EUAC EUAC BB = $16,925,000 = $16,925,000
LIF
E C
YC
LE
CO
ST
ING
LIF
E C
YC
LE
CO
ST
ING
o To identify the problems of application of life cycle costing in Saudi Arabia.
o To assist the relative severity of those problems from point of views of the government and the private sectors.
o To identify the problems of application of life cycle costing in Saudi Arabia.
o To assist the relative severity of those problems from point of views of the government and the private sectors.
2. OBJECTIVES OF THE STUDY
LIF
E C
YC
LE
CO
ST
ING
LIF
E C
YC
LE
CO
ST
ING
This investigation was undertaken into two phases. This investigation was undertaken into two phases.
• The first phase include a literature search and interviews. * The identification of five groups of main problems
and a total of 26 specific problems
• The first phase include a literature search and interviews. * The identification of five groups of main problems
and a total of 26 specific problems
• In the second phase * A survey was conducted to assess the relative
severity of these causes. * The survey was filled buy 11 government agencies
and 12 consulting offices that apply life cycle costing.
• In the second phase * A survey was conducted to assess the relative
severity of these causes. * The survey was filled buy 11 government agencies
and 12 consulting offices that apply life cycle costing.
3. RESEARCH METHODOLOGY
LIF
E C
YC
LE
CO
ST
ING
LIF
E C
YC
LE
CO
ST
ING
There are five main categories of problems of life cycle costing:
First: Knowledge Problems
Second: Data Problems
Third: Procedures Problems
Fourth: Management Problems
Fifth: Cost Problems
There are five main categories of problems of life cycle costing:
First: Knowledge Problems
Second: Data Problems
Third: Procedures Problems
Fourth: Management Problems
Fifth: Cost Problems
4. PROBLEMS OF APPLICATION
LIF
E C
YC
LE
CO
ST
ING
LIF
E C
YC
LE
CO
ST
ING
First: Knowledge Problems:
1. Unfamiliarity with design-to-cost concept2. Lack of knowledge of the concept 3. Unknown relation between initial cost and future cost4. Unavailability of enough references
First: Knowledge Problems:
1. Unfamiliarity with design-to-cost concept2. Lack of knowledge of the concept 3. Unknown relation between initial cost and future cost4. Unavailability of enough references
4. PROBLEMS OF APPLICATION (Continued)
LIF
E C
YC
LE
CO
ST
ING
LIF
E C
YC
LE
CO
ST
ING
Second: Data Problems
5. Unavailability of capital cost data:
6. Unavailability of maintenance data:
7. Unavailability of operation data:
8. Unavailability of discount or interest rate data
9. Unavailability of time life data
10. Large volume of data needed
11. Unavailability of standard method for collecting &
recording of data
12. Unavailability of data base management system
Second: Data Problems
5. Unavailability of capital cost data:
6. Unavailability of maintenance data:
7. Unavailability of operation data:
8. Unavailability of discount or interest rate data
9. Unavailability of time life data
10. Large volume of data needed
11. Unavailability of standard method for collecting &
recording of data
12. Unavailability of data base management system
4. PROBLEMS OF APPLICATION (Continued)
LIF
E C
YC
LE
CO
ST
ING
LIF
E C
YC
LE
CO
ST
ING
Third: Procedures Problems:
13. Unreliability of decision taken
14. Lack of Integrity of forecast
15. Majority of LCC calculations involve uncertainty
16. Unavailability of qualified staff
17. Unavailability of qualified consultants
Third: Procedures Problems:
13. Unreliability of decision taken
14. Lack of Integrity of forecast
15. Majority of LCC calculations involve uncertainty
16. Unavailability of qualified staff
17. Unavailability of qualified consultants
4. PROBLEMS OF APPLICATION (Continued)
LIF
E C
YC
LE
CO
ST
ING
LIF
E C
YC
LE
CO
ST
ING
Fourth: Management Problems:
18. Unacceptance of the concept
19. Government non-enforcement
20. Management (client) pressure to meet budget limit
21. Management (client) pressure to meet time deadline on
design:
22. Unclear benefits of LCC to management (client)
23. Improper planning and control of management
tasks at different LCC stages
Fourth: Management Problems:
18. Unacceptance of the concept
19. Government non-enforcement
20. Management (client) pressure to meet budget limit
21. Management (client) pressure to meet time deadline on
design:
22. Unclear benefits of LCC to management (client)
23. Improper planning and control of management
tasks at different LCC stages
4. PROBLEMS OF APPLICATION (Continued)
LIF
E C
YC
LE
CO
ST
ING
LIF
E C
YC
LE
CO
ST
ING
Fifth: Cost Problems: 24. Cost to be paid for designer to conduct LCC:25. Cost to be paid for collection of data:26. Difficulties in defining cost elements:
Fifth: Cost Problems: 24. Cost to be paid for designer to conduct LCC:25. Cost to be paid for collection of data:26. Difficulties in defining cost elements:
4. PROBLEMS OF APPLICATION (Continued)
LIF
E C
YC
LE
CO
ST
ING
LIF
E C
YC
LE
CO
ST
ING
Based on a survey of the responses, a severity index was calculated to reflect the severity of each individual problem and problem groups.
The severity indexes were grouped to reflect the respondents' ratings as follows: * Strongly severe 87.5 < I 100* Severe 62.5 < I 87.5 * Somewhat severe 37.5 < I 62.5* Somewhat not severe 12.5 < I 37.5* Not severe 0 < I 12.5
Based on a survey of the responses, a severity index was calculated to reflect the severity of each individual problem and problem groups.
The severity indexes were grouped to reflect the respondents' ratings as follows: * Strongly severe 87.5 < I 100* Severe 62.5 < I 87.5 * Somewhat severe 37.5 < I 62.5* Somewhat not severe 12.5 < I 37.5* Not severe 0 < I 12.5
5. RESULTS OF THE SURVEY
LIF
E C
YC
LE
CO
ST
ING
LIF
E C
YC
LE
CO
ST
ING
Table 1 shows the severity index for individual problems in government agencies.
Table 2 shows the severity index for individual problems in consulting offices. In the same manner.
Table 3 shows the severity index for problem groups in government.
Table 4 shows the severity index for problem groups in consulting offices.
Table 1 shows the severity index for individual problems in government agencies.
Table 2 shows the severity index for individual problems in consulting offices. In the same manner.
Table 3 shows the severity index for problem groups in government.
Table 4 shows the severity index for problem groups in consulting offices.
5. RESULTS OF THE SURVEY (continued)
LIF
E C
YC
LE
CO
ST
ING
LIF
E C
YC
LE
CO
ST
ING
Table 1 - Results of Government Agencies' Survey of Problems
Problem DefinitionProblem Definition
[1][1]
StronglyStronglySevereSevere
[2][2]
SevereSevere
[3][3]
SomewhatSomewhatSevereSevere
[4][4]
SomewhatSomewhatNot SevereNot Severe
[5][5]
NotNotSevereSevere
[6][6]
SeveritySeverityIndexIndex
[7][7]
Uniformilization of design-to-cost concept
Lack of knowledge of the concept
Unknown relation between initial and running cost
Unavailability of satisfactoryreferences
44
55
22
55
22
33
33
22
44
22
55
33
11
00
00
11
6868
7777
6464
7373
00
11
11
00
((a)a) Knowledge ProblemsKnowledge Problems
5. RESULTS OF THE SURVEY (continued)
LIF
E C
YC
LE
CO
ST
ING
LIF
E C
YC
LE
CO
ST
ING
Problem DefinitionProblem Definition
[1][1]
StronglyStronglySevereSevere
[2][2]
SevereSevere
[3][3]
SomewhatSomewhatSevereSevere
[4][4]
SomewhatSomewhatNot SevereNot Severe
[5][5]
NotNotSevereSevere
[6][6]
SeveritySeverityIndexIndex
[7][7]
Uniformilization of design-to-cost concept
Lack of knowledge of the concept
Unknown relation between initial and running cost
Unavailability of satisfactoryreferences
33
00
00
11
22
55
44
22
44
44
33
77
22
11
44
22
5656
5252
4040
5050
11
22
11
00
((a)a) Knowledge ProblemsKnowledge Problems
Table 2 - Results of Consulting Offices’ Survey of Problems
5. RESULTS OF THE SURVEY (continued)
LIF
E C
YC
LE
CO
ST
ING
LIF
E C
YC
LE
CO
ST
ING
Table 3 - Severity Index of Problem Groups in GovernmentTable 3 - Severity Index of Problem Groups in Government
Knowledge ProblemsData ProblemsProcedure ProblemsManagement ProblemsCost Problems
Group DescriptionGroup Description
AABBCCDDEE
GroupGroup
70706969747473736161
Average Sev. Average Sev. IndexIndex
5. RESULTS OF THE SURVEY (continued)
LIF
E C
YC
LE
CO
ST
ING
LIF
E C
YC
LE
CO
ST
ING
Table 4 - Severity Index of Problem Groups in FirmsTable 4 - Severity Index of Problem Groups in Firms
Knowledge ProblemsData ProblemsProcedure ProblemsManagement ProblemsCost Problems
Group DescriptionGroup Description
AABBCCDDEE
GroupGroup
49496060565657575555
Average Sev. Average Sev. IndexIndex
5. RESULTS OF THE SURVEY (continued)
LIF
E C
YC
LE
CO
ST
ING
LIF
E C
YC
LE
CO
ST
ING For government agencies:
* Individual problems:
Twenty-four individual problems rated "severe" and two individual problems rated "somewhat severe".
* Problem Groups:Four groups fall in the "severe" category and one
group falls in the "somewhat severe".
For government agencies: * Individual problems:
Twenty-four individual problems rated "severe" and two individual problems rated "somewhat severe".
* Problem Groups:Four groups fall in the "severe" category and one
group falls in the "somewhat severe".
5. RESULTS OF THE SURVEY (continued)
Based on the foregoing results shown in Tables 1, 2, 3 & 4, the following could be indicated:
LIF
E C
YC
LE
CO
ST
ING
LIF
E C
YC
LE
CO
ST
ING
For consulting firms: Individual Problems:
Six individual problems rated as "severe" and twenty problems rated "somewhat severe".
Problem Groups:All groups fall in the "somewhat severe" category.
For consulting firms: Individual Problems:
Six individual problems rated as "severe" and twenty problems rated "somewhat severe".
Problem Groups:All groups fall in the "somewhat severe" category.
5. RESULTS OF THE SURVEY (continued)
LIF
E C
YC
LE
CO
ST
ING
LIF
E C
YC
LE
CO
ST
ING
For government agencies: * Individual Problems:
Unavailability of qualified consultants, management pressures to meet budget and design limits are the most severe hurdles in the application of LCC, with severity indexes of 82%, 77% and 77% respectively.
* Problem Groups:Procedure problems, management problems and
knowledge problems are the most severe hurdles in the application of LCC with severity indexes of 74%, 73% and 70% respectively.
For government agencies: * Individual Problems:
Unavailability of qualified consultants, management pressures to meet budget and design limits are the most severe hurdles in the application of LCC, with severity indexes of 82%, 77% and 77% respectively.
* Problem Groups:Procedure problems, management problems and
knowledge problems are the most severe hurdles in the application of LCC with severity indexes of 74%, 73% and 70% respectively.
5. RESULTS OF THE SURVEY (continued)
LIF
E C
YC
LE
CO
ST
ING
LIF
E C
YC
LE
CO
ST
ING
For consulting firms:
* Individual Problems:Unavailability of data base management systems
and unavailability of interest rate and life time data are the most severe hurdles in the application of LCC with severity indexes of 67%, 67% and 65% respectively.
* Problem Groups:Data problems, management problems, and
procedure problems are the most severe hurdles in the application of LCC with severity indexes of 60%, 57% and 56% respectively.
For consulting firms:
* Individual Problems:Unavailability of data base management systems
and unavailability of interest rate and life time data are the most severe hurdles in the application of LCC with severity indexes of 67%, 67% and 65% respectively.
* Problem Groups:Data problems, management problems, and
procedure problems are the most severe hurdles in the application of LCC with severity indexes of 60%, 57% and 56% respectively.
5. RESULTS OF THE SURVEY (continued)
LIF
E C
YC
LE
CO
ST
ING
LIF
E C
YC
LE
CO
ST
ING
In government agencies:In government agencies:Contradiction of LCC concept to Contradiction of LCC concept to
government policy which government policy which is based on is based on initial cost in selecting alternatives and in initial cost in selecting alternatives and in
bidding.bidding.
In consulting offices:In consulting offices:Resistance of management to introduction Resistance of management to introduction
of new concepts.of new concepts.
Unclear concepts to clients.Unclear concepts to clients.
Time and cost Time and cost incurred to update the in-house incurred to update the in-house data base data base management system.management system.
In government agencies:In government agencies:Contradiction of LCC concept to Contradiction of LCC concept to
government policy which government policy which is based on is based on initial cost in selecting alternatives and in initial cost in selecting alternatives and in
bidding.bidding.
In consulting offices:In consulting offices:Resistance of management to introduction Resistance of management to introduction
of new concepts.of new concepts.
Unclear concepts to clients.Unclear concepts to clients.
Time and cost Time and cost incurred to update the in-house incurred to update the in-house data base data base management system.management system.
6. OTHER PROBLEMS ADDED BY RESPONDENTS
LIF
E C
YC
LE
CO
ST
ING
LIF
E C
YC
LE
CO
ST
ING
It can be concluded that government agencies and consulting firms, due to the differences of responsibilities and work interest, generally differ in their ranking of the problems that affect LCC application.
However, both parties agreed that the chief cause for not applying LCC in government agencies or the public sectors are:
It can be concluded that government agencies and consulting firms, due to the differences of responsibilities and work interest, generally differ in their ranking of the problems that affect LCC application.
However, both parties agreed that the chief cause for not applying LCC in government agencies or the public sectors are:
7. CONCLUSION
• client or management pressure to meet deadlines for design approval.
• lack of human resources (qualified consultants and staff) and material resources (sufficient data and data quality)
LIF
E C
YC
LE
CO
ST
ING
LIF
E C
YC
LE
CO
ST
ING THANK
YOU
THANK
YOU