Whole Life Costing

Who should read this fact sheet? What is Whole Life Costing?
This fact sheet introduces the principles of whole life Whole Life Costing is defined in the draft
costing for organisations that are new to the subject International Standard, ISO15686 Part V - (see
or in the early stages of working with whole life
references) i as: “economic assessment considering
costing.
all agreed projected significant and relevant cost
Who might be interested in Whole Life Costing? flows over a period of analysis expressed in
monetary value. The projected costs are those
Procurers (clients) and suppliers (for example needed to achieve defined levels of performance,
contractors, consultants or manufacturers) need to including reliability, safety and availability”.
be involved in agreeing the approach if whole life
costing is to be successfully adopted and its benefits Although this definition captures a number of the
realised. essential issues in whole life costing it is not
particularly easy as an introduction, and it may be
Whole life costing is typically adopted by clients who easier to consider the nCRISP definition which is:
have a long term interest in the property concerned.
Often such clients come from the public sector and “the systematic consideration of all relevant costs
own a large portfolio of property – it is a Treasury and revenues associated with the ownership of an
requirement that major capital projects should be let asset”.
taking account of whole life costs – through Design & Neither of these definitions reveal that whole life
Build, PFI or Prime Contracting, or one of the newer
costing is a tool, to assist in making decisions
procurement initiatives such as NHS Estates Procure between different options with different cash flows
21. over a period of time. In this respect it is a form of
Local Authorities often adopt whole life costing as investment analysis.
part of their response to their duty to deliver Best Whole life costing is relevant when considering whole
Value.
estates, whole facilities, individual buildings or
Private clients who intend to own a property over a structures and when comparing alternative
long-term period also want to understand the full cost investment scenarios such as:
of that ownership.
ƒ Retain and refurbish or sell,
Consortia formed to undertake PFI projects are
evidently long term owners and it is important for ƒ alternative designs (such as between framed
them to consider whole life costs as they develop and load-bearing structures) and
their designs and bids and to monitor and control
costs thereafter. ƒ alternative specifications (such as between
timber and metal windows).
Demand from such clients typically causes
designers, contractors and manufacturers to develop It is particularly used to justify whether an alternative
their understanding of whole life costs as applied to with a higher capital cost is justified.
specific projects or their generic services.
Why does Whole Life Costing matter?
Funders and insurers may be interested in whole
life costs as part of their due diligence enquiries into Whole life costs are substantially greater than capital
how robustly bids have been constructed and how or initial costs - it is estimated that the operational
successfully the risks of designing and constructing expenditure will be 5 - 10 times as much as the
buildings have been tackled. capital cost. The Royal Academy of Engineering (see
reference below) found that for a typical office
building, over a 30-year period, the ratio would be
1:5. A similar study on building design and
management (see reference below) indicated the
ratio was 1:10.

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However, even these ratios are small when Most benefit will be obtained if whole life costing is
compared with the ratio of capital expenditure to the taken into account at the earliest stages of design,
operating costs of businesses occupying the building. and in setting initial budgets. Budgets based purely
These two studies estimated company’s staff costs to on previous experience will reflect earlier
be respectively 100 and 200 times as much as their procurement experience based on lowest capital
buildings’ initial costs. These ratios indicate that a 1% costs.
improvement in productivity /output of staff would
effectively pay for the entire capital costs of the The goal is to achieve an initial whole life cost plan,
building. which can be modified as the design and
construction is undertaken and as more details of
What are the benefits of Whole Life Costing for specifications become available.
companies ?
What are the basic steps in Whole Life Costing ?
The benefits for clients, as identified in the Clients
Guide to Whole Life Costing (see references below), 1. Identify capital and operational costs and
include: incomes

2. Identify when they are likely to occur

ƒ encouraging analysis of business needs and
communication of these to the project team 3. Use “discounted cash flow” analysis to bring
the costs back to a common basis – items
ƒ optimising the total cost of ownership / should normally be entered into the analysis
occupation by balancing initial capital and at the current cost and a “real” (excluding
running costs inflation) discount rate applied. Normally this
will be done on a commercial spreadsheet
ƒ ensuring risk and cost analysis of loss of package, which includes equations for
functional performance due to failure or discounted cash flow.
inadequate maintenance occurs.
4. Undertake sensitivity analysis of the
ƒ promoting realistic budgeting for operation, variables such as the discount rate, the study
maintenance and repair period, the predicted design lives of
components, assumptions about running
ƒ encouraging discussion and recording of costs, etc.
decisions about the durability of materials
and components at the outset of the project What costs are taken into account ?

ƒ providing data on actual performance and

operation compared with predicted
performance for use in future planning and
benchmarking

How do we get started ?

Clients need to ask for whole life costing in the brief –
it is not normally included as a standard part of a
commission.
Clients, designers and contractors need to spend
time agreeing the performance requirements that
should be taken into account before the costing
exercise is commenced. Only acceptable solutions
should be costed.

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Values for the costs should be as accurate as Reporting formats and recording results
possible. Greater effort may be required for the most
significant cost variables. Values can be derived The format for reporting Whole Life Costing is often
from: the Net Present Value or NPV – which is a single
figure representing all the future costs and incomes
ƒ a direct estimation from known costs and at their equivalent present value. Annual equivalent
components; costs may be more appropriate in particular
circumstances. The Annual Cost or Annual
ƒ historical data from typical applications; Equivalent Value is a uniform annual amount
equivalent to the project net costs, taking into
ƒ models based on expected performance, account the time value of money throughout the
averages etc; period of analysis. This technique is used to compare
the merits of competing investments where the
ƒ best guesses of future trends in technology, natural replacement cycle is not an exact multiple of
market and application. the period of analysis. The annual equivalent value is
the regular annual cost that, when discounted, equals
For each cost, there should be an associated time the NPV of the investment. By choosing the option
profile of when the cost occurs (or recurs) for Whole with the lowest annual equivalent cost, the option
Life Costing to be carried out. Time profiles of the with the lowest total cost is chosen.
costs may only consist of one occurrence but any
cost spread over time or one which is repeated will Other ratios can also be useful, such as payback
generate a series of cost and time pairs. Costs may periods. Payback is a calculation of the time period it
be fixed or variable over time. These values are most takes to cover investment costs.
readily converted into calculations using a computer
spreadsheet or purpose-built software. ISO 15686-3 describes the audit trail and process of
performance review for service life planning. For
The costs should be expressed in current terms as WLC analysis, records should be retained in
many financial or tax transactions are based on accordance with the guidance in ISO 15686-3. These
actual values at the time rather than the value in records should include:
future (e.g. the current cost of a boiler should be
used, not a projected future cost). ƒ cost calculations;
What other variables are important? ƒ evidence of service life;

Aside from setting the performance criteria, it is ƒ sources of cost data;

essential to determine the following inputs to the
calculation: ƒ discussions on the scope of analysis;

ƒ the discount rate (if set too high it will make ƒ retained copies of software packages/ Whole
future costs appear insignificant) Life Costing models.

ƒ the period of study (often this is the contract There are potential liabilities associated with
period for PFI contracts or the period of providing assessments of Whole Life Costs and/or
foreseeable ownership) service life planning. Record keeping (whether paper
or electronic) should include issues such as
ƒ the format(s) in which whole life costs will be professional indemnity insurance, retention or
recorded and compared handover of records to other parties at later date.

(HM Treasury requirement for public sector

organisations is 3.5% real discount rate, but different
rates will be appropriate for different organisations.)

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How important are maintenance and operational associated with 10 units building cost (capital and
costs for different buildings? rental), and 100 units of employees salary costs over
the lifetime of an office building. From both of these
There is great variability in the relevance of ratios of lifetime costs, it can be argued that an
maintenance and operational costs to different improvement in productivity, or business output value
building types and other facilities, in the typical levels of 0.1 per cent over the lifetime of the building more
of cost, and the relationship of these to capital costs. than pay for its initial cots.
These reflect real differences in the use and design,
in the relative efficiency of particular buildings as References
facilities. Table 1gives an indication of the areas to
look for cost improvements in buildings. D Kernohan, J Gray and J Daish. User participation
in Building Design and Management. Butterworth
How Whole Life Costing analysis is used Architecture. ISBN 075062888X. 2nd edition 1996.
Figure 1 and 2 below show how an analysis of WLC R Evans, R Haryott, N Haste and A Jones. The Long
can be used to select a particular component, or a Term Costs of Owing and Using Buildings. The Royal
particular design from a selection of acceptable Academy of Engineering, Great Peter Street,
alternatives. Note however that the figures shown are London, SW1P 3LW. November 1998.
indicative for the particular projects being analysed.
The relationships between the different costs and 20 steps to encourage the use of Whole Life
when they occur will need to be analysed in every Costing
case. This report, intended for housing organisations in
particular, is to help clients and others to take the first
References steps in adopting a structured management approach
to efficient long-term investment in housing.
Whole Life Costing – A Client’s Guide
A short guide intended for clients and their supply http://www.constructingexcellence.org.uk/sectors/hou
chains, produced by the Construction Clients Forum singforum

Information on energy use and cost effective

BS/ISO 15686 on Service Life Planning improvements – all building sectors
(available from BSI (Tel: 020 8996 9000) or
http://www.bsi-global.com
Action Energy works with organisations large and
small to reduce costs and improve environmental
This multi-part standard provides guidance on how to performance, and alongside Government to tackle
estimate the service life of buildings and climate change. www.actionenergy.org.uk
components. Part 1 is the most appropriate part for a (Tel: 0800 58 57 94).
general audience – it contains general principles and
guidance. Part 2 will be particularly relevant to Information on energy use and cost effective
manufacturers who need to predict service life using improvements – housing only
accelerated test data, and Part 3 is relevant to Energy Efficiency Best Practice in Housing – training, tools
checking whether service life issues have been taken and support for the housing profession.
into account throughout the process. http://www.est.org.uk/bestpractice/
The Royal Academy of Engineering conducted a Cost Data on capital and maintenance /
study of the long-term costs of owning and using operational costs
buildings. They found that for a typical office building, Building Cost Information Service (BCIS) and
over a thirty-year life span, for every unit of capital Building Maintenance Information (BMI) are trading
expenditure, there will be associated 5 units of arms of the Royal institution of Chartered Surveyors
operational expenditure, and 200 units of business – they provide a subscription service and publications
operating cost. David Kernohan, John Gray and John on a wide range of costs, including special reports on
Daish claim a 1:10:100 ratio in which 1 unit of individual cost headings and building types.
operating cost (energy, maintenance and rates), is www.bcis.co.uk Tel: 020 7695 1500

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Table 1 – importance of maintenance and operational costs (based on 2002 - 3 typical cost figures by BMI).

Building Type Cost Heading £/100m2 % of total

(per revenue
annum) costs
Factory Cleaning 750 21%

Utilities 750 21%

Administrative Costs 1,000 28%

Services Maintenance 500 14%

Fabric Maintenance 400 11%

Decorations 150 4%

Offices (air Cleaning 1,200 13%

conditioned)
Utilities 2,050 22%

Administrative Costs 3,050 33%

Services Maintenance 1750 19%

Fabric Maintenance 900 10%

Decorations 250 3%

Hospitals – Cleaning 2,900 36%

General and acute
Utilities 1,050 13%

Administrative Costs 1,500 18%

Services Maintenance 1350 17%

Fabric Maintenance 1000 12%

Decorations 250 3%

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Figure 1 – Analysis of payback period for energy efficient option

Figure 2 – Analysis of alternative floor finishes

Floor Finishes Option WLC (NPV @ 6%)

70,000

60,000

50,000

40,000
Cost (£)

30,000
Option 1 (Carpet - nylon)
20,000 Option 3 (Vinyl)
Option 4 (Lino)
10,000
Option 2 (Carpet wool/nylon)

0
1
4
7
10
13
16
19
22
25
28
31
34
37
40
43
46
49
52
55
58
61

Time (years)

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