what is whole life cost analysis

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1 What is whole life cost analysis?

May 2006

BSRIA runs whole life costing training courses, publishes a whole life costing analysis guide andprovidesconsultancy to help companies apply whole life costing to their projects.

The capital cost of a building or the services within a building is only part - and a small part - ofthe total economic pie. The operating and maintenance costs associated with that capital cost can

outweigh the initial investment several times over.

For example, the operating costs of a hospital consume the equivalent of the capital cost every two

to three years. This can continue for 40 years or more. The operating costs of a school canconsume the equivalent of the capital cost every four to five years - and can remain in service for a

century. To consider only the initial cost and accept whatever on-going costs are incurred are akin

to buying a car that you cannot afford to insure or fill with petrol.

The UK government has taken a decision to make all construction procurement choices on the

basis of whole life costs - HM Treasury guidance stipulates this specifically. This general ruling

has been crystallized in Private Finance Initiative (PFI) and Public Private Partnerships (PPP)

contracting.

The focus of PFI and PPP on long-term risk management and long-term operation and

maintenance makes comprehensive whole life costing a necessity. Government procurement

outside of PFI and PPP has an emphasis on whole life costs at all levels - including local authority

and housing association procurement.
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The use of whole life costs in the private sector makes good sense if all parties are to achieve long-

term economic systems and buildings. The lowest cost now culture is incompatible with long-term

profitability; long-term energy efficiency; and systems which are to satisfy end-user requirements.

Confusion

There is a great deal of confusion surrounding whole life costing - what it is, what it does, what it

contains, and what it can be used for. There are many standard texts on the subject of whole life

costing and whole life cost analysis (WLCA). There are also Standards such asBS ISO 15686,together with Government and other guidance in publications such as the H M Treasury Green

Book, Office of Government Commerce (OGC)Procurement Guide 07, andBS EN 60300.

Unfortunately there seems to be no consensus regarding the nomenclature to be used.

To some, whole life costing includes service life planning; to others it means the equivalent annualcost of the project. To yet others the definition of the maintenance regime is primary. Although all

of these issues are important and provide input to, or are an output from whole life cost analysis,

none of them actually are WLCA.

The use oflife cycle costingalso causes a high degree of confusion. Our American colleagues uselife cycle costing to mean whole life costing, but there are many different interpretations in the

UK. In at least one case, life cycle costing is shown as the simple addition of the costs incurred in

each year with no discounting.

Even the OGC uses whole life costing and life cycle costing interchangeably - in the SuccessfulDelivery Toolkitseries the title of the document isLife Cycle Costing, yet its documentAchieving

Excellence Guide No. 7is entitled Whole Life Costing. The two mean the same thing as far as OGC

is concerned.

So, what is whole life costing?

Whole life costing is an integral part of the overall process of turning a client's business related

functional requirements into a physical asset which provides whole life value for that client. The

basis of whole life costing is that the investment of a certain amount of money today will, with theaddition of interest, pay a bill of higher value in the future.

The actual description of WLCA is: "a method of project economic evaluation in which all costs

arising, and benefits accrued from installing, owning, operating, maintaining, and ultimately

disposing of a project are considered to be potentially important to that decision."

There is only one evaluation criterion in whole life cost analysis - that the scheme with the lowestwhole life cost is the preferred choice. This does not mean that the scheme with the lowest whole

life cost MUST be implemented.

WLCA is not a stand-alone activity. As described inBS ISO 15686, WLCA is a part of the overall

process between the client's business case and the commencement of the project to satisfy therequirements of that case.


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