What we need is whole-life value

As we know, a dog is for life, not just for Christmas. This cautionary message could apply equally to the construction industry’s attitude to its product: for years it was accustomed to simply putting up buildings then walking away without having to worry about subsequent running and maintenance costs.

Then the PFI came along and compelled contractors to start considering those costs, as they would be picking up the costs for them. Indeed, this was seized upon by advocates of PFI because now the consortiums had an incentive to optimise whole-life costs, which in turn meant better-value public sector buildings.

Or so the theory went. The reality is that PFI procured buildings have been heavily criticised for poor build quality, notably the Cumberland Infirmary in Carlisle. Not only did that building suffer from poor build quality, including leaking roofs, but any alteration the NHS trust wanted to make incurred huge costs – hardly a positive example of low whole-life costs (for more on this, enter “Cumberland Infirmary” into the Building website archive search engine. This will bring up the May 2003 article “We’ve got your results”).

That said, the Cumberland Infirmary was completed in 2000 and was the first hospital PFI. Has the industry moved on from there, and is it now delivering PFI projects where whole-life costs have been honed to perfection? Or are there still barriers preventing the industry from achieving best-value public buildings?

According to Andy Green, a director at cost consultant Faithful & Gould, there are still obstacles to achieving best value. Green has lived and breathed whole-life costing for the past 11 years. He says the PFI market has come a long way for a small group of people, but “a lot of people are still reverting to habit and going for low capital costs”.

He quotes a recent report published by the National Audit Office called Improving Public Services through Better Construction. “It identified four key barriers to successful whole-life costing that I totally endorse,” he says. “First, there’s a lack of clarity on what we mean by whole-life costing. Second, there’s a lack of robust historical data on running costs. Third, people making investment decisions need a tool not just based on cost but other drivers such as time, sustainability, quality and return on investment. It’s done in a vacuum and there’s no way of comparing and evaluating these options. Finally, there is a lack of tangible evidence of the benefits of whole-life costing.”

He is right about what is meant by whole-life costing. For a start, it is fogged by overly complex terminology – lifecycle costing, through-life costing and whole-life value. Furthermore, there is no common agreement what should be included in whole-life cost analyses. Some people might define certain replacement items as capital costs and others might define them as maintenance costs. “If this isn’t structured, your predictions can be completely out of place,” warns Green.

On the other hand, there is some good news here – the Building Cost Information Service is working on a standardised approach to whole-life costing to help tackle this problem (see “The data debate”, below).

Another problem with the PFI is that the client often asks for a high-specification building or for extras that it cannot afford. “If people are asked to give too much, something has got to give and that may not be in the client’s best interest,” says Green. “It has to be affordable for the client and the bidder. If this doesn’t happen then you’re stuffed.” He adds that bidders are often reluctant to pull out of deals going this way because they would have to write off significant bid costs. Clients are happy to proceed, too, because according to Green their stock response is “the industry can use innovation to deliver savings”.

It must be affordable for the client and the bidder. If this doesn’t happen, then you’re stuffed

The tight invitation-to-tender timescale is another problem facing PFI consortiums. In the case of schools this is typically 16 weeks, which is not long to develop and submit a proposal. “The architect goes off on one and comes up with a fancy scheme that is then put against costs,” says Green. “There’s a 11th-hour panic, the scheme is twisted to fit so it’s no surprise when the whole thing goes off the rails.”

Faithful & Gould has collaborated with Constructing Excellence, the RICS and the European Construction Institute to develop a solution to these problems. “What we are trying to do is create a tool so future deals don’t go the same way by providing something basic the industry can use straight away,” explains Green. He says the objective of this toolkit is to achieve whole-life value, which is a more holistic approach than whole-life costing. The problem is whole-life costs address a specific solution and don’t consider whether it is the best solution overall.

Green says whole-life value is simple and likens it to leasing a car. With a car, a purchaser first considers the make and type they want, then once they have decided this they consider what options are available. As they go through this process the monthly cost is flagged up so the buyer makes an informed final choice. “All this information is hidden in the PFI process. Clever clients can deal with this but not clients new to the game,” Green says. “With this you don’t mention whole-life costs; instead you talk about what sort of building you want and how long you want it for.” This tool should go some way towards addressing some of the problems with achieving best value – as, like the well-cared-for dog, PFI is here to stay.

The data debate

One barrier to achieving reliable, comparable whole-life costing data is that there is currently no standardised way of agreeing how the information should be compiled. The Building Cost Information Service is set to address this issue with a standard form for whole-life costing, which should help, as most cost consultants use its data.

The problem is that the BCIS data is used by a wide variety of sectors, all of which view whole-life costing differently. For example, the developer of an office block who lets it on a 25-year lease needs much simpler whole-life cost information than the owner developer who wants everything included. The other problem is what is counted as a capital cost, and what is replacement. Some people might say the replacement of plant is a replacement cost but others might say it is a capital cost.

The BCIS is going to update its standard form of cost analysis, which covers capital costs, and its property occupancy cost analysis early next year, which considers running costs. A document unifying the two will also be published. The way the data is structured will be changed to make whole-life costing data more transparent.

Joe Martin, the executive director of the BCIS, says people will still use the data to suit their sector needs but it will be clear what has been included in their figures. “Hopefully having this new structure should make what has and hasn’t been included more apparent,” says Martin.