Whole life costing is the Achilles heel of building services. Clients aren't interested and surveyors only think about capital expenditure. Can engineers devise a strategy to change peoples' minds?
While we criticise clients for purchasing at lowest cost, little seems to be being offered by the industry to change these attitudes. It seems unable to convince clients of the strategic importance of whole life costing.

Perhaps more important is the loss of skill by quantity surveyors in calculating installation costs. There is a dearth of knowledge within the industry on both capital and running costs.

This is both a threat and an opportunity for the building services industry. The threat comes from the inability to prove value, forcing clients to seek advice elsewhere, while the opportunity is the potential for expansion into other markets.

So is whole life costing about to become strategically important? Rethinking construct-ion set the agenda for change. To improve the industry, we have been encouraged to compete on factors other than price, by making value for money explicit throughout the process.

As Sir John Egan said: "Too many clients...still equate price with cost, selecting designers and constructors almost exclusively on the basis of tendered price. This tendency is widely seen as one of the greatest barriers to improvement. The public sector, because of its need to interpret accountability in a rather narrow sense, is often viewed as a major culprit in this respect. The industry needs to...help its clients to differentiate between best value and lowest price."

Design for construction and use is emphasised as a key aspect of delivering improved value to clients. A call is made for design and construction to be integrated into a seamless process, where a building project is delivered as a complete product.

"Design needs to encompass whole life costs, including energy consumption and maintenance costs" says Egan. "Increasingly, clients take the view that construction should be designed and costed as a total package including costs in use and final decommissioning."

The Government's position

These recommendations have been accepted by Government and incorporated into H M Treasury's latest Guidance Notes. These six publications demonstrate the Government's seriousness in departing from its traditional "lowest cost wins" mentality and embracing Rethinking construction's call for value-based procurement. Within it, whole life costing plays a major part, particularly within the first three Guidance Notes.

Guidance Note 1: Essential requirements for construction procurement, outlines the abilities that must be held by the various parties. For the investment decision maker and project owner, they should have an understanding of whole life costing, while the project sponsor is deemed to be competent in the subject.

H M Treasury defines whole life costing as: "a technique to establish the total cost of ownership. In other words, the total cost of building, operating and maintaining a facility for its planned life." The aim is "to understand the commitment...the principles and concepts...to recognise the key aspects, concerns and objectives of whole life costing, and how the results can be used to assist management in the design and decision making process when there is a choice of product."

Guidance Note 2: Value for money in construction procurement, lists whole life costing as a key feature in achieving value for money. In fact, the prime objective of the Government's new procurement regime states: "Best value for money is the optimum combination of whole life costs and quality to meet the customers requirements."

The document's value for money framework asks construction professionals to:

  •  define the project to meet users needs

  •  integrate value and risk management techniques within project management

  • adopt a change control procedure

  •  take account of whole life costing

  •  avoid conflict through teamworking and partnering; and

  •  appoint consultants and contractors on the basis of value for money not lowest price

    A series of 'approval gateways' ensures that projects do not proceed unless the above criteria are satisfied. One of the key criterions for all gateways is to ensure "the design takes full account of maintenance, operating and disposal costs to produce the best value for money whole life solution". Between the second and third of these gateways, senior management is required to undertake a formal 'whole life' design review.

    Guidance Note 3: Appointment of consultants and contractors, states that consultants should be appointed not only on technical skill, but also on their ability to work within a teamwork or partnering relationship. Consultants are especially picked out as being fundamental to the successful strategy.

    "The cost of professional services accounts for less than 2% of the whole life cost of a project. Yet the quality of these services has a direct impact on the remaining 98%," says the guidance. "Even quite large variations in the cost of professional services can become insignificant in relation to the beneficial effect of the whole life cost. However, care must be taken to ensure that value for money is achieved for each consultancy service."

    Guidance Note 7 will cover whole life costs. As it is not yet published, one can only speculate on what it will contain, although Guidance Note 2 provides a clue. This states that value for money must be checked in all tenders, and where design and build has been used, and where alternatives have been submitted, whole life costs must be evaluated for each alternative.

    Ideally, guidance note 7 should give government officials clear instructions on:

  •  selection of appropriate discount rates

  •  realistic guidelines for establishing appropriate lifetimes (60 years is not appropriate)

  •  key attributes that should be held by consultant undertaking costings

  •  links to both value and risk management

  •  method to the assessment of tenders

  •  the balance needed between serviceability and costing

    The role of the property industry

    Traditionally the property industry has had little interest in whole life costing. As the dominant procurer of buildings, completed projects are then transferred onto the market under fully repairing and insuring lease arrangements. The tenant then becomes responsible for maintaining and paying all running costs of the building, while being locked into a 25 y lease.

    This practice is unique to the UK market and has been responsible for the lack of use of whole life costing within the design phase. Put simply, the procurer of the building is only responsible for the capital cost of construction.

    However, times are changing. With increasing foreign company ownership and worldwide supply based strategies, foreign companies are seeking compatibility within their capital assets or supply arrangements.

    This is beginning to change attitudes within the property industry. Leasing agents must now be flexible in their terms, often now citing leases on five-year arrangements.

    Moreover, the increase in facility management has meant that these companies are now looking at running costs. Also, as companies are now concentrating on core competancies, serviced facilities are becoming the norm. Modern property companies, such as Regus, provide comprehensive offices at a set monthly charge inclusive of running costs.

    Leasing agents and property developers are beginning to follow suit, by offering calculated running costs to prospective tenants. For those interested, this could prove to be the business- boom area.

    The trick for building services is to be at the forefront of this change, rather than playing catch up with new specialists. Engineers' understanding of services costs must be incorporated with the management strategies of value management and risk management. Engineers must also begin the task of assembling themselves with specialist subcontractors and suppliers into supply chains, where branded products of known functions and cost can be provided.

    Prime contracting: a whole life solution?

    The MoD Prime Contracting procurement initiative is being driven by the Building Down Barriers initiative. It was set up by the Department of the Environment, Transport and the Regions, and the Ministry of Defence, to deliver three objectives:
  • to develop a new approach to construction procurement based on supply chain management
  • to demonstrate the benefits of the new approach, in terms of improved value for the client and profitability for the supply chain, through running two pilot projects
  • to assess the relevance of the new approach to the wider UK construction industry Whole life costing plays a major part in this strategy. In the words of the MoD, “Make value explicit: design to meet a functional requirement for a through life cost.” Completed projects are assessed for the first two years on the accuracy of the developed costs. Given that this is a single-point responsibility procurement arrangement, consultants and contractors are collectively held responsible for this accuracy. Studies undertaken by the Tavistock Institute during the two pilot projects showed no decrease in capital costs, but significant savings in whole life costs. These were achieved with the introduction of key suppliers and clients at the detailed design stage. However all parties within the supply chain were severely criticised: “Value engineering of design options has been hampered by established costing and pricing practices within the supply chains. While they are experienced with cost planning, prime contractors and their suppliers are not used to producing reliable prices for building elements rapidly, based on an objective understanding of the costs of construction processes.” Seven key principles were subsequently devised to improve procurement arrangements, two of which specifically address whole life costing. Principle one asks the industry to compete through delivering superior underlying value rather than lower margins. Principle 4 asks the industry to make value explicit, and to design to meet a functional requirement for a through life cost. Both these principles have had trouble in being established. The principle of using whole life costing is based upon the comparison of a cost model of the proposed design against an established historic reference cost of previous MoD properties. This process is meant to lead to two major improvements. The first is greater involvement of the supply chain to rid the construction process of inefficiency in design and assembly. The second improvement is that the end product should have increased value and quality, leading to improved whole life costs. This requires high involvement of the client and project stakeholders within the process. Value management techniques have been extensively used, where all stakeholders, suppliers and designers have met to agree design decisions through rigorous functional analysis. Other problems encountered within the design stage stem from the lack of manufacturers data. Participants in the two pilot projects were confronted with the lack of reliable data on durability for many components necessary for modelling through life costs. Although costs databases exist and cover all the components used in construction processes, information about durability is more scarce, and often poorly supported. Manufacturers do not provide durability data unless required, and often fail to gather or analyse such data in a formalised way. A similar problem was encountered with specialist contractors in the pricing of capital works: it appears that most specialists have abandoned any analytical method of developing total costs based on processes, materials and costs. Instead they rely on trying to predict the overall price that will be tolerated by the marketplace. The two pilot projects are on course to deliver savings of around 10% in both the capital and whole life costs. Moreover, a greater rating of satisfaction is held by the project stakeholders within the final design and functionality. Two interesting notes must be added to this discussion. First, it was recently revealed to the author that the MoD has no methodology in place for comparing two bids on a whole life costing basis. Second, during a recent lecture in Ipswich, a local building services engineer questioned the reasons for the MoD still asking for bids based on 60 year life cycles. Both show that a lot of work remains to be done.

    • Source

    Building Sustainable Design

    Postscript

    Chris Marsh is the manager of the BSRIA Best Practice Programme. For further information on the Best Practice Programme, contact 0845 6065704