The essential aspects of conducting a life-cycle cost analysis (LCCA) and determining the cost-effectiveness of any given construction alternative are the identification of all the relevant inputs and outputs and quantification, when possible, of these as costs and benefits to facilitate informed decision making. Costs can be more readily quantified than benefits because they normally have dollar amounts attached. Benefits are difficult because they often tend to have more intangibles. In analyses, benefits should be as important as costs and deserve to be brought to the attention of decision makers.
Other Quantifiable Benefits
Many investment decisions, especially in industrial applications, have a stated goal defined in terms of required or expected output (e.g. number of kilowatt-hours of electricity produced per year, number of aircraft overhauled per year). The goal is not always quantified, but it is often susceptible to quantification and thus provides a potential measure of benefits associated with the investment. A Benefit/Cost Ratio (BCR) may be determined when the output from the investment can be quantified and a uniform annual cost derived from the life-cycle cost analysis (LCCA). Using the examples provided, typical output of this type would be number of kilowatt-hours of electricity produced (benefit) or completed aircraft overhauls (benefit) per $1,000 (cost). These ratios may be compared for several different alternatives to assist in selection of the most cost-effective.
Despite best efforts to develop quantitative measures of benefits, there are situations that simply do not lend themselves to such an analysis. Certain projects may provide benefits such as improved quality of the working environment, preservation of cultural and historical resources, safety and security of the building occupants, and other similar qualitative advantages. Although they are most difficult to assess, these benefits should be documented and portrayed in a life-cycle cost analysis.
In such instances, written and accurate descriptions of qualitative benefits must be done. This is the least preferred method of analyzing benefits due to its subjectivity and inherent lack of precision. However, under certain conditions, this method must suffice; and if the following guidelines are observed, qualitative statements can make a positive contribution to the analysis.
- Identify all benefits associated with each alternative under consideration. Give complete details.
- Identify the benefits common in kind but not to the same degree among the alternatives. Explain all differences in detail.
To formalize the inclusion of non-monetary costs or benefits in the decision-making process, the analytical hierarchy process (AHP) should be employed. AHP is one of a set of multi-attribute decision analysis (MADA) methods that consider non-monetary attributes (qualitative and quantitative) in addition to common economic evaluation measures when evaluating project alternatives. E 1765-16 Standard Practice for Applying Analytical Hierarchy Process (AHP) to Multiattribute Decision Analysis of Investments Related to Projects, Products, and Processes published by ASTM International presents a procedure for calculating and interpreting AHP scores of a project's total overall desirability when making building-related capital investment decisions.
Following these general guidelines will help to enhance the difficult task of documenting these intangibles that are measured in non-economic terms like aesthetics, safety, or morale, and enhance the value of benefit/cost analyses and make informed decision-making easier.
Quantifying Negative Aspects
It is also noted that in addition to benefits, information concerning negative aspects of alternatives, quantified where possible, should also be included to ensure the objectivity and completeness of the analysis. This information is important in decision making and possibly to the community at large; and may be a determining factor in deciding between possible investment alternatives.
Externalities (also referred to as external effects or spillovers) are an important class of outputs that may be benefits or disadvantages. They are generally defined as outputs involuntarily received or imposed on a person or group because of an action by another and over which the recipient has no control. Air pollution is an example of an externality that is not a benefit. The recipients accrue potential health, aesthetic, and other disadvantages from a polluter for which they receive no compensation.
For most investment decisions (particularly with respect to the public sector), it is not necessary to analyze in depth externalities such as environmental impacts and community economic impacts as part of the life-cycle cost analysis. These aspects of alternatives being considered are usually treated in detail as part of the Environmental Impact Assessment/Environmental Impact Statement process or environmental documentation associated with local and state processes for addressing environmental impacts of construction projects. However, the mention of anticipated impacts (both quantified and qualitative) in life-cycle cost analysis documentation is appropriate.
Relevant Codes and Standards
- P100 Facilities Standard for the Public Buildings Service—Chapter 1.7 Life-Cycle Costing by the General Services Administration (GSA), 2015.
- E 1765-16 Standard Practice for Applying Analytical Hierarchy Process (AHP) to Multiattribute Decision Analysis of Investments Related to Projects, Products, and Processes published by ASTM International.
Cost-Effective—Utilize Cost Management Throughout the Project Life Cycle, Cost-Effective—Use Economic Analysis to Evaluate Design Alternatives, Historic Preservation, Productive, Secure/Safe, Sustainable
- P-120 Project Estimating Requirements for the Public Buildings Service by the General Services Administration (GSA), 2007.
- National Performance Based Design Guide for Buildings by the National Institute of Building Sciences–High Performance Building Council.
- P-442 Economic Analysis Handbook by the by the Naval Facilities Engineering Command (NAVFAC), 2013.