Pay Now or Pay Later: Controlling Cost of Ownership from Design Throughout the Service Life of Public Buildings (1991)

Despite obstacles to the application of life-cycle cost analysis, government agencies have recognized that the analysis process can yield benefits in efficient utilization of resources . . . and they have made progress in achieving control of life-cycle cost. In some cases, notably highway pavement and bridge management, this progress has been substantial and offers lessons that are transferrable to buildings and other facilities management. There are, however, government policies and legislation that discourage effective control of life-cycle costs.

The economic principles of discounted cash flow analysis that underlie life-cycle cost analysis have been used in certain areas of government decision making for many years, most notably in the development of large dams and other major capital investment projects.²⁰ Office of Management and Budget (OMB) Circular A-94, issued in 1972, specified the discount rate to be used

in performing these economic analyses and gives limited guidance on how analyses should be conducted.²¹

Sudden increases in petroleum prices and the U.S. energy crisis of the early 1970s were primary factors motivating applications of these principles to buildings. In 1977 President Carter signed Executive Order 12003, "Relating to Energy Policy and Conservation," requiring agencies to prepare plans for cost-effective actions to achieve substantial reductions in energy consumption in existing federal buildings. The 1978 National Energy Conservation Policy Act²² directed the Federal Energy Administration (FEA) to establish a practical and effective methodology to be used by federal agencies in determining what actions would be effective, on the basis of life-cycle costs and savings. The Department of Energy (DOE), the FEA's successor agency, has continued to foster development and application of life-cycle cost analysis to buildings and has issued mandatory analysis guidelines that apply to more than 400,000 federal buildings (Marshall, 1987).

The DOE has continued to update these guidelines documents and (working with the National Institute of Standards and Technology (NIST)) computer programs intended to assist analysts in performing life-cycle cost studies (DOE, 1990; Lippiatt and Ruegg, 1990). Further amendments of the guidelines, proposed in January 1990 (55 FR 2590) to implement the FEA's Improvement Act of 1988 (P.L. 100–615), are expected to become effective in October 1990. The DOE guidelines are oriented primarily toward actions intended to conserve energy or to enhance use of renewable sources of energy, but the methods described include all nonfuel O&M costs as well as investment costs and salvage values. Higher discount rates are currently applied to nonfuel future costs (in effect giving extra weight to future fuel savings as compared to future operating costs).

Other federal agencies have implemented their own regulations or less formal procedures for life-cycle cost analysis. The General Services Administration, for example, uses a life-cycle analysis in considering whether to lease or purchase buildings for government use and in routine project investment evaluations. The Department of Veterans Affairs (VA) justified the development of its Hospital Building System on the basis of life-cycle cost savings to be achieved. The military construction agencies are frequent users of life-cycle analysis principles in making decisions about facilities intended to support specific mission requirements. While there are no generally applicable or accepted principles and procedures for use of life-cycle cost analysis in controlling the costs of ownership for federal facilities, the guidelines and workshops prepared by DOE, NIST, and the Army's Construction Engineering Research Laboratory have done much to disseminate information on these methods.

State governments use life-cycle cost analysis as well. The state of Maryland, for example, uses these procedures in an effort to achieve "optimal energy use and the lowest possible cost of ownership in State-financed and State-assisted building construction," and the state's Department of General Services maintains guidelines for life-cycle cost accounting.²³ The state of Iowa has enacted a requirement²⁴ for life-cycle cost analysis as a design criterion in new construction and in renovation of publicly owned facilities "to optimize energy efficiency at an acceptable life-cycle cost." Florida's 1984 Capital Planning and Budgeting Act²⁵ calls for condition assessments and life-cycle cost evaluations of all state Facilities, updated at least at three-year intervals, as a basis for funding requests to the state's legislature. A 1981 survey identified 26 states that were using life-cycle cost analysis procedures in their facilities programs (Dell'Isola and Kirk, 1981), but, as with federal agencies, there are no generally accepted principles and procedures.

Some policies and procedures followed by federal agencies actually work against the goals of achieving low life-cycle costs and controlling the costs of ownership throughout a facility's service life. For example, design fees for federal facilities are limited by law²⁶ to no more than 6 percent of the estimated cost of construction. This limitation is sometimes used by agency personnel to argue that the development of design alternatives required for life-cycle cost analysis cannot be accomplished within the scope of the designers' contract.²⁷

Many agencies require value engineering studies prior to construction, and agency policies typically recognize the potential for life-cycle cost savings

at all stages of a facility's service life. However, some agencies routinely include value engineering clauses in their construction contracts, inviting the contractor to conduct his or her own value engineering analysis and to share in any apparent savings realized. Under these value engineering incentive clauses, the contractor's incentives are strongest to reduce first costs, because savings are immediately and obviously realized. Further, funds from construction appropriations may be used to pay contractors for early savings, but these funds are not available to be applied against savings in operations or maintenance.

Legislative budgeting, authorization, and appropriations procedures may also work against controlling life-cycle costs. The lack of distinction in program authorizations between expenditures to construct long-lived facilities and those for procurement of other goods and services with shorter service lives provides strong incentives to reduce a facility's first costs so that other program spending can be maintained. Future expenses for facility O&M may then be raised. Subsequent shortages of funds lead to a deferral of maintenance spending and consequently reduced service life or performance.

Administrative separation of design and construction from operation and maintenance causes similar problems. Staff responsible for administering spending are given incentives to control (usually meaning minimize) their own current expenses, without regard for the concerns of future or prior decision makers.²⁸ The resulting failure to coordinate action to control life-cycle costs is made more severe by a widespread lack of understanding among designers and maintenance personnel of the concerns the others face. The VA, for example, has found that as much as 20 to 30 percent of the operating efficiencies of their technically sophisticated new hospital and research buildings located on older campuses are lost because current maintenance personnel are untrained and unprepared to deal with the new systems.²⁹ Training and documentation of design decisions that influence maintenance practice, of some help in overcoming these problems, are hindered by personnel rotation and designers' lack of sensitivity to the demands for maintenance that new systems may present.

Agency officials and designers note that legislative and administrative pressures to limit spending for facilities have reduced levels of performance expected of government facilities, for those aspects of performance not critical to life safety or public health. Standards set for minimum acceptable levels of performance have evolved instead into design targets not to be exceeded. Such standards, applied to the selection of materials, mechanical systems, and other building subsystems that require regular maintenance or replacement with wear, are likely to increase total costs of ownership. Some government agencies, recognizing the risk that future maintenance will be neglected or operating budgets cut, have tended to set higher standards, preferring to increase estimated life-cycle costs somewhat in an effort to avoid uncontrolled future growth of costs of ownership. However, there are no comprehensive studies that document these effects for federal buildings.

A boom in system expansion in the United States in the 1950s and 1960s that increased dramatically the scale of the nation's investment in highways coincided with rapid advances in computer technology and applications of systems analysis techniques in civil engineering. At the same time, work by development economists at the World Bank and elsewhere began to demonstrate convincingly the direct contribution that pavement conditions have on vehicle operating costs and, in turn, on economic efficiency of a region's transportation system. These forces combined to motivate research and development efforts leading to establishment of practical pavement management systems that, after two decades, are now used routinely by many state transportation agencies to monitor highway facilities, assure maintenance effectiveness, and schedule rehabilitation and replacement of pavements (Hudson, Haas, and Pedigo, 1979).

These management systems, now being extended for use by local government authorities responsible for city and county roadways and for addressing the problems of aging of the nation's highway bridges,³⁰ offer a potentially useful model for how principles of life-cycle cost analysis can be effectively applied to control costs of ownership of government buildings. Researchers in the field are looking toward evolving present systems into larger integrated "total facilities managements" systems useful to administrators of public facilities responsible for underground services and parks and recreation facilities, as well as road pavements (Haas and Hudson, 1987).

Pavement management systems (i.e., computer programs and data bases) are used to develop and monitor strategies for designing, maintaining, and renewing a highway's pavement to provide at least the minimum acceptable level of road surface performance, subject to the demands of vehicle loads and

environmental conditions, at the lowest life-cycle cost compatible with desired reliability and available funds. The management system uses a set of data base and analysis modules that provide information upon which government administrators can base their planning, programming, and budgeting decisions and report on highway performance.

Two results of research and development activities have been key to the successful development of pavement management systems:

• characterization of pavement performance in measurable terms that can be related to economic benefits (e.g., longer pavement life and reduced vehicle operating costs) and

• development of reliable analysis tools that relate performance to characteristics of pavement design, maintenance and repair activities, environmental conditions, and service loads (e.g., vehicle types, weights, and numbers) and which then can be used to predict future performance.

In addition, hardware and software to support computer-based management and analysis of large volumes of data and production of information reports in forms understood by decision makers have been important facilitators of pavement management systems development.

While a highway pavement section is much less complex than a large building, efforts to develop similar management tools for buildings have yielded positive results and benefited from lessons learned in pavement management. These efforts have encountered serious problems because neither performance measurement nor life-cycle analysis models are well developed for buildings and their components. As discussed further in Chapter 5, these are areas that warrant research.

Work done so far seems likely to yield effective results. The U.S. Army Corps of Engineers, for example, has developed a management system for bituminous built-up roofs,³¹ and a number of U.S. and international researchers have developed models that would facilitate life-cycle cost management of building energy systems (see Carlsson, 1989, for example). However, these efforts each deal with only a part of the complex multicomponent system that a building represents.

In addition, in sharp distinction with highway pavements, government buildings have no centralized funding mechanism (i.e., analogous to the federally administered fuel tax and construction cost-sharing programs), and no single agency is responsible for construction and management of all facilities. In consequence, it may be more difficult for these steps toward overcoming obstacles to have effective impact on government practices in life-cycle cost management of buildings

Bailey, D. M., D. E. Brotherson, W. Tobiason, and A. Knehans, 1989, ROOFER: An Engineered Management System (EMS) for Bituminous Built-up Roofs, Report M-90/04, U.S. Army Construction Engineering Research Laboratory, Champaign, Ill. December.

Carlsson, B., 1989, Solar Materials Research and Development: Survey of Service Life Prediction Methods for Materials in Solar Heating and Cooling, Swedish Council for Building Research, Stockholm.

Dell'Isola, A., and S. Kirk, 1981, Life-Cycle Costing for Design Professionals, McGraw-Hill, New York.

Federal Construction Council, 1981, "Review of three recommendations on architect-engineer procurement of the Commission on Government Procurement," Transactions of the Federal Construction Council for 1980–81, National Academy Press, Washington, D.C.

Haas, R., and W. R. Hudson, 1987, Future Prospects for Pavement Management, prepared for Second North American Conference on Managing Pavements, Toronto, November 2–6.

Hudson, S. W., R. F. Carmichael III, L. O. Moser, and W. R. Hudson, 1987, Bridge Management Systems, NCHRP Report 300, Transportation Research Board, Washington, D.C., December.

Hudson, W. R., R. Haas, and R. D. Pedigo, 1979, Pavement Management System Development, NCHRP Report 215, Transportation Research Board, Washington, D.C., November.

Lippiatt, B. C., and R. T. Ruegg, 1990, Energy Prices and Discount Factors for Life-Cycle Cost Analysis 1990, Annual Supplement to NBE Handbook 135 and NBS Special Publication 709, NISTIR 85-3273-4 (Rev. 5/90), U.S. Department of Commerce, National Institute of Standards and Technology, Gaithersburg, Md., May.

Marshall, H. E., 1987, "Building economics in the United States," Construction Management and Economics, vol. 5, pp. S43–S52.

U.S. Department of Energy, 1990, Architect's and Engineer's Guide to Energy Conservation in Existing Buildings, two volumes, DOE/RL/0183OPH4, Washington, D.C., April.