Life-Cycle Cost Assessment as a Tool for Retrofits

May 17, 2010

According to the Whole Building Design Guide’s Sustainable Building Technical Manual, over a typical building’s 30-year lifespan, initial construction accounts for about 2 percent of a company’s total costs while maintenance and operation costs account for nearly 6 percent. (Personnel is the company’s remaining cost.) These figures show that reducing a building’s operational costs over its lifespan is critically important. In order to ensure operational cost savings and increase system durability, building owners and facility managers need to evaluate and optimize building performance against industry standards. An effective tool for uncovering the best choices to improve your existing building stock is life-cycle cost assessment (LCCA).

LCCA can offer guidance on early key decisions that garner profitable payback and help you “prospect” a building’s or property’s true asset value throughout its lifespan. LCCA allows you to compare various retrofitting options that may have similar first costs, but varied long-term financial advantages, environmental benefits, and impacts on occupant well being. While it’s true that not all benefits can be quantified, a bottom line that shows net capital savings provides a strong incentive to investigate further.

Reasons to Retrofit
The economic recession spawned a large drop in new construction, and the focus of real estate shifted to building reuse and remodel. The U.S. Energy Information Administration estimates that, by 2030, more than 250 billion square feet of building stock within the United States will consist of renovated existing buildings. Optimized design strategies and proper system execution to ensure that the systems follow predicted performance can reduce a building’s energy costs by approximately 45 percent. Moreover, utilities and government organizations are establishing strong incentive programs that provide grants and discounts to building owners who repair or upgrade to more efficient systems that optimize operations to provide financial, energy, and environmental benefits.

Power of the Long-Term Perspective
Professionals are already relying on LCCA to justify the benefit of system retrofits. Thanks to heightened client interest in this reliable tool, green engineering commissioning agents are using LCCA methods to evaluate building system operations and maintenance during existing building ASHRAE audits and re-commissioning. Over the past 2 years, commissioning firms have seen a significant increase in client investment in LCCAs as part of a process to drive optimal building decisions. According to the Sustainable Building Technical Manual, the U.S. Environmental Protection Agency’s Green Lights program participants realized annual rates of return greater than 30 percent for lighting retrofits. A LCCA estimated that program-related improvements could save more than 65 million kilowatts of electricity among Green Light participants, which would lower the nation’s electric bill by $16 billion annually.

But, not all LCCAs result in recommendations to upgrade systems. Occasionally, LCCA analyses conclude that certain retrofit/replacement measures will not be financially beneficial compared to current operations. For example, a chiller in a 40-year-old building may not meet today’s energy-performance standards, but a newer, more efficient chiller may require a refrigerant recharge every 2 years, resulting in higher maintenance costs. While there are other factors to take into consideration – such as environmental impacts – the existing system may be more profitable from a purely economic standpoint.

System Components
Several tools developed in the past decade have been proven to provide more accurate estimates of the building’s cost savings and its “true market value” with reference to current worth and overall lifespan. The ATHENA® Impact Estimator, BEES, BLLC, ECONPACK, etc. are some professionally recognized LCCA software.

LCCA is a technique for evaluating the final cost of owning a facility and takes into account the sum of a project’s or its system’s design, building, ownership, operating, maintaining, replacing, and disposing costs. Within the LCCA, the optimum cost-saving measure can be identified through a variety of methods:

Net benefits. A method that calculates the difference between the implementation costs and the return on investment to determine the savings.

Savings-to-investment ratio. A method that evaluates the applicability of a particular strategy with respect to its economic worth (including escalation of utility costs, maintenance costs, etc.) within the duration of the system’s anticipated lifespan.

Payback period. Which calculates the time that it takes to equate the investment cost to the return on investment over a time period.

Lowest life-cycle cost. A method that compares various energy- and cost-saving scenarios, and favors the measure that has the least implementation cost to the owner. The lowest life-cycle cost method is the most widely accepted by industry professionals.

How LCCAs Work
In terms of existing building retrofits, the LCCA focuses mainly on the energy, operational, maintenance, and replacement costs, followed by salvage values, net present financial value, and non-monetary benefits. The LCCA evaluates the significant costs among each category and only accounts for those that vary drastically in terms of net savings. All costs need to be entered with respect to the current year’s amount in today’s dollar value. Then, using accepted inflation figures, the LCCA formula estimates what the total cost would be to implement the retrofit or energy-efficiency measure at the end of its predicted lifespan. The engineer then converts the costs back to net present values.

One challenge of the LCCA is that it must be customized to each particular building. Although two buildings may be of the same type, size, and age, it’s not possible to translate one building’s expected performance to another due to differing occupancy trends, rigor of maintenance, training level of facility managers, and optimal design solutions suited with respect to micro-climatic conditions. With increasing market penetrability of LCCA as a building retrofit tool, however, confidence is increasing that engineers may be able to develop acceptable target ranges.

In new construction projects, it’s best to integrate LCCA into the project after conceptual design is complete. LCCA is not well suited to initial systems selection because it can restrict design options. Once the strategies that best achieve your goals have been identified, LCCA can help to refine scenarios to uncover the most fiscally and environmentally responsible systems that work within your design.

Building owners and facility managers are realizing the potential of LCCA as a robust tool for making sound investment choices. The growing evidence that LCCA can help you save a significant amount of money offers a compelling reason to evaluate your existing building systems to find the strategies and systems that work in favor of your building and budget over the long term.

Rasika Savkar is a technical consultant on the Advanced Climate Solutions team at Green Building Services Inc. The Advanced Climate Solutions team develops strategies and analysis that help projects and organizations address their energy use and carbon footprints. Savkar can be reached at (866) 743-4277 or [email protected].

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