2.3 Economic Sustainability and Structural materials selection
2.3.3 Evaluation Methodology of economic sustainability – LCC
However, such traditional cost-accounting systems lead to incorrect investment decisions concerning environmental costs (Cohan & Gess, 1994;
Hamner & Stinson, 1995). For example, one problem is that maintenance costs and demolition costs appear outside the boundary of the traditional accounting
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system. A popular way of solving this problem has been to suggest the use of Life Cycle Cost (LCC) (Aye, et.al, 2000; Smith and Jaggar, 2007).
2.3.3.1 History of LCC
The development of LCC and similarly structured tools and methods has its origin in the normative neoclassical economic theory which states that firms seek to maximize profits by always operating with full knowledge (Cyert &
March, 1963). This implies that the behaviour of the ‗economic man‘ in neoclassical economic theory is always rational.
The term LCC was first used by the US Department of Defence in the mid- 1960s (Epstein, 1996). In the mid-1980s, attempts were made to adapt LCC to building investments. Recently, several research projects have been carried out with the aim of developing the LCC methodology for the construction industry, and placing LCC in an environmental context.
2.3.3.2 Definition of LCC
In order to understand LCC fully, the following definitions of LCC are listed:
LCC is the cost of an asset, or its parts throughout its life cycle, while fulfilling the performance requirements (BSI, 2008).
LCC is an economic assessment of an item, area, system, or facility that considers all the significant costs of ownership over its economic life, expressed in terms of equivalent dollars. LCC is a technique that satisfies the requirements of owners for adequate analyses of total cost (kirk & Dell'Isola, 1995).
LCC is a mathematical method used to inform or support a decision and is usually employed when deliberating on selection options (Bull, 1993).
Traditional LCC is a technique which enables comparative cost assessments to be made over a specified period, taking into account all relevant economic factors both in terms of initial costs and future operational costs (Glucha & Baumannb, 2004).
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LCC is the total cost of ownership of machinery and equipment, including its cost of acquisition, operation, maintenance, conversion, and/or decommission (NSWTreasury, 2004).
The British Standard Institute (BSI) definition for LCC is adopted in this study because it includes the contents of all the other definitions.
2.3.3.3 Components of LCC
According to BSI (2008), the cost categories of LCC are shown in figure 2.1, which will be adopted in this study to compare the LCC of RC building and steel building.
Figure 2.1 Components of LCC (Source: BSI, 2008)
The components of construction costs (or capital costs) are developed by BSI (2008). This cost category is cited in a considerable amount of research, and is
LCC
Occupancy costs Construction costs
Construction works costs Other construction related costs Client definable costs
Operation costs (annual)
Cleaning costs Utilities costs Administration costs Overhead costs
End of life costs
Disposal inspections Demolish
Reinstatement to meet contractual requirements Non construction costs Finance cost
Taxes Maintenance costs
(annual)
Major replace costs Redecoration
Minor replacement repairs
Unscheduled repairs, replacement and maintenance Grounds maintenance
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adapted to analyze the capital costs of RC frame and steel frame in this study.
The cost breakdown is shown in Figure 2.2.
Figure 2.2 Breakdown of capital costs (Source: BSI, 2008)
As this study focus on structural frames, the capital costs of structural frames were investigated. The rest categories shown in Figure 2.2 (such as costs of finishes, external works and etc.) were not studied by this study.
2.3.3.4 Limitations of LCC
Currently, the application of LCC in the construction industry is still hindered Capital
costs
9. Contractor’s design fee 4. Fittings and furnishings 2. Superstructure
3. Finishes
5. Services
6. External works
7. Preliminaries 8. Contingencies 1. Substructure
Foundation
Basement Excavation Basement Retaining Wall Frame
Upper floor Roof Stairs
External and internal walls Windows and doors Floor finishes
Ceiling finishes Wall finishes
Site works Drainage
External services Minor building works
Demolition and work outside the site
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significantly by a lack of standardized methods and the excuse of a lack of sound data. A government report issued by the Building Research Establishment (Clift & Bourke, 1998) on life cycle costing identified several factors that presently act as barriers to applying the LCC:
The lack of universal methods and standard formats for calculating whole life costs.
The difficulty in integration of operation and maintenance strategies at the design phase.
The requirement for an independently maintained database on performance and cost of building components.
It is found that clients have a lack of interest and trust in the value of whole cost exercise.
The above limitations could be summarized as an overall uncertainty in the reliability of LCC analysis. Although it is partly eliminated by combining risk assessment (Boussabaine & Kirkham, 2004) when computing LCC, the limitations identified above heavily restrict construction firms from making decisions with life cycle concern due to the insufficient amount of statistical information on potential costs. Capital cost or preliminary budget is generally used by most firms as one core indicator of the economic performance of a project (Wong et al., 2003).
The limitations of LCC are mitigated by the following strategies:
Using traditional accounting method formats for calculating whole life costs. In this study, the LCC are used to compute the cash outflow when analysing the NPV and IRR of RC and steel frames.
Identify the maintenance cost differences between an RC frame and a steel frame.
Data collected from investigations on Singapore contractors and designers to obtain local data.
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In addition to giving the NPV of whole life costs, the capital costs, annual maintenance costs, non-construction costs, and end of life costs are separately given in this study.