Lifetime Value

When it comes to analysing the true cost of investing in a new heating system, purchase and installation price is rarely a good guide. Applying the principles of Whole Life Costing leads to a decision based on best lifetime value. Nick Winton of AmbiRad explains.

Specification in the construction process generally involves the selection of robust products that do the job required for the right price – that is, they provide good value for money. In this context, ‘good value’ does not always mean the cheapest capital cost, especially when viewed over the long term. In practice, the lowest cost option can turn out to be very expensive when lifetime running, maintenance and replacement costs are calculated.

The concept of ‘best value’, as opposed to lowest tender price, has prevailed in government contracts for some years. However, studies have shown that in public sector construction projects, budgets are exceeded by up to 50% in three quarters of projects. The focus may still be on the wrong goal – initial capital costs, rather than long-term value.

A 2002 study carried out by Mott MacDonald for HM Treasury concluded that ‘clients need a better understanding of the basis for their estimates’ of budget.

According to government information, the most reliable indicator of ‘value’ in the construction industry is the relationship between long-term costs and the benefit achieved by the end-user. And when it comes to the heating system, best value is gained from the system that achieves the required functionality at lowest cost when calculated over the whole life of the equipment.

Whole-life costs
Whole-life cost analysis is an economic evaluation process solely for the purpose of assessing the true cost of constructing and running a building over a period of time, based on the functional requirements of the building. It is effective for new buildings, including design and build projects, and is a pre-requisite for all PFI contracts.

The technique was originally used by the accountancy profession to compare outcomes when income varies over time, using today’s value or net present value as a starting point. Today, the methodology is used widely in many industries, although uptake in the construction industry is ‘quite small’, according to John Langmaid, Principal Consultant at BSRIA.

He says: “The process has been around for well over half a century, and is gradually gaining popularity as people realise its value. However, it is perceived to be difficult – people imagine they need a degree in economics to understand it, they don’t know where to start and they are not sure about the input or output. It is actually very simple, providing reliable and meaningful information can be obtained from product manufacturers.”

He adds: “This is a proven method of evaluating lifetime costs in order to achieve the lowest cost solution in the long term, but it should never be used as a basis for formulating budgets.”

Methodology
The methodology for whole-life costing for buildings and constructed assets is guided by BS ISO 15686, which addresses the design of a structure or building with a view to its operation through it whole life. The same methodology can be used to evaluate the lifetime costs of a heating system, when all construction parameters – insulation levels, construction type, materials used, etc – are taken into account.

Whole-life cost analysis is very specific, based on answering the question ‘What is the cost of achieving this objective in this way?’. Different solutions may produce very different whole-life costs, so the criteria must be the quality of the heating system and how well it meets the end-user’s need for comfort, quality/reliability and flexibility.

When all these factors have been taken into account, the system which achieves all functional and quality objectives at the lowest lifetime cost will provide the best value.

What to consider
Evaluating the lifetime costs of a heating system for long-term economic performance or profitability requires close analysis and forecast of many factors, including (but not limited to) these considerations:
Cost of consultancy, design and construction
Long-term operational costs
On-going maintenance costs
Utility costs
All relevant construction factors, such as insulation and heat loss levels Internal resources and departmental overheads
Risk allowances Alterations should business requirements change Related health and safety costs Costs associated with disposal and refurbishment.

Clearly, the analysis goes far beyond the purchase price. However, it can mean that the lowest whole life cost solution may not be lowest capital cost – a potential stumbling block where profit margins are squeezed.

Taking a whole life approach means ‘added’ value can be planned in. For example, money spent on engineering a heating system design can save over the long-term on running and maintenance costs. A good system design can achieve greater fuel efficiency, better performance, improved health and safety, increased productivity, and less waste.

Similarly, investment in a high quality, reliable heating product that is more appropriate to the building and user requirements can achieve significant savings over time. AmbiRad has experienced many ‘live’ examples of this, especially in large heating decentralisation projects where old boiler and steam fed radiant panels have been replaced with energy efficiency gas-fired radiant tube heating, with resulting cost savings of up to 70%.

Operating costs
With operational costs far and away the highest element of any commercial or industrial building, reducing costs here can have the most impact on lifetime value. Managed well, this will save more than the price of initial construction or, in the case of a heating system, purchase and installation.

Using the concept of ‘net present value’ for the existing heating system as a baseline, the whole life costs of each alternative solution can be calculated. Accuracy of the cost evaluation depends on reliable information from the manufacturer – estimates of fuel consumption, heat output, anticipated warm-up time and expected heat losses, based on the size of the building and how it is used, should all be available.

Value management and value engineering techniques are invaluable in minimising the potential for waste and inefficiency during the life of the system, and should also be taken into account. A well-designed heating system will match the heating requirements of building occupants and also the shape and size of the structure, where heat is most needed, how it should best be delivered, impact on the construction (eg. reducing the number of roof penetrations, or eliminating ductwork) – to achieve optimum operational costs.

A cost baseline is essential for both completion of the heating installation and estimated operational costs over the life of the system. All costs must be included, from in-house and consultancy costs to decommissioning and disposal, risk allowance and VAT. Ideally, this total should then be benchmarked against another similar project to ensure the estimates are realistic.

In specifying the heating system, it is important to base requirements on output and functional needs, rather than describing the process by which these will be achieved. This allows for flexibility and perhaps more thoughtful or innovative approaches to a heating solution that will meet requirements over the life of the system – for example, responding to alterations in work patterns, downsizing or expansion. Estimates should also allow for upgrade, if necessary, during the life of the system.

RAF Coltishall – 64% annual cost savings
A major energy efficiency programme on the RAF Coltishall air base, begun in 1993, committed to reducing fuel consumption to pre-1990 levels by 2000. Among other methods of achieving this was a decentralisation of the existing, and highly inefficient, high temperature hot water distribution system.

The station energy manager conducted a thorough investigation of the options, including a whole-life costing. His calculations showed that, taking all relevant factors into account, radiant tube heating from AmbiRad was the best value option in the long-term.

His selection was justified when, in just a few months following the installation, energy consumption had reduced dramatically. Comparative running costs over the previous boiler system showed a 64% cut, and CO2 emissions were down by 55%. Discounted savings over the following 10 years amounted to £148,000.

The gas fired radiant systems have impacted positively on the air base’s liabilities in more ways than one; the reduction in fuel consumption has had a positive effect on the Climate Change Levy; plus the equipment is NOT included in the EU ETS (European Union Emissions Trading Scheme) which became operational on 1st Jan 2005, thus limiting the base’s liabilities in carbon dioxide trading.

How long is a life?
The lifetime of a heating system is variable – there is no minimum or maximum time period. The most reliable heating products can last between 20 and 30 years, or even longer. A reasonable average for the purposes of whole-life calculations would be around 25 years.

Whole-life costing analysis is an invaluable source of information on which to justify rational and considered purchasing decisions. It takes the guesswork out of predicted running and maintenance costs and ensures that the relationship between cost and end-user value remains healthy, since the net result should be the installation of the most appropriate system (heating or otherwise) for the building, operating at optimum efficiency and cost.

Web: www.ambirad.co.uk