Take note of this statistic — the construction cost of a building represents only 10-20% of its total lifespan expenditure. Life cycle costing (LCC) reveals a thought-provoking insight: Construction is just the tip of the iceberg; the majority of costs, a significant 80-90%, come from maintenance and renovations throughout a building’s life.
Just as we plan for our financial future with savings accounts and retirement plans to ensure a better quality of life, LCC helps businesses and project managers ensure the sustainable financial success of buildings & infrastructures from start to finish.
In this blog we will delve into what life cycle costing is & its impact on construction projects.
Table of contents
What is life cycle costing?
Life cycle costing is a tool that helps construction industry stakeholders estimate how much money will be spent on an asset throughout its useful life. The useful life of an asset is the estimated number of years it will be profitable. This estimate helps determine how long the asset will stay in good condition. Financially, it represents when the asset will benefit the business economically.
This process encompasses all expenses related to an asset from acquisition to disposal or elimination. Unlike traditional cost analysis, which may only emphasize initial purchase costs, LCC also includes operating and maintenance, as well as other expenses that we will explore later.
In the construction sector, life cycle costing is the method used to calculate the total cost of a building, construction material, or machinery over its entire lifetime.
Difference between life cycle costing & life cycle assessment
These two concepts may seem similar, but their main difference lies in their intended purpose. Life cycle assessments (LCA) evaluate the environmental impact of a product or service throughout its entire lifetime, from raw material extraction to disposal or recycling. In contrast, life cycle costing examines the financial implications, focusing on costs.
Put simply: LCA measures the environmental impact of an asset, while LCC evaluates the financial one. However, both methods contribute to sustainable decision-making by addressing several aspects of a resource’s life cycle.
Benefits of performing a life cycle cost analysis
Now that you’ve got the hang of LCC, here’s why conducting a life cycle cost analysis (LCCA) will revolutionize your construction business:
Cutting costs
LCCA provides construction managers with comprehensive insights into the total expenses associated with a building throughout its life. With this information, they can efficiently make data-informed decisions to optimize project value & profitability.
For example, this analysis can help determine whether it is more cost-effective to renovate or demolish a building, considering the estimated costs of each option. It also helps in shaping strategies for design, procurement, and maintenance.
Reduced environmental impact
Engineers and architects can use LCCA to identify costs related to energy consumption, greenhouse gas emissions, and estimated waste generation for buildings. By understanding the costs of the environmental impact, they can choose the best options to reduce them and, consequently, make construction greener.
For instance, replacing traditional concrete with low-carbon concrete alternatives could reduce CO2 emissions by up to 40% by 2030. Similarly, integrating renewable energy sources can significantly reduce a building’s carbon footprint. Applying LCCA in construction projects is essential in the companies’ efforts to reach net-zero CO2 emissions.
Ensuring government compliance
In the construction industry, government regulations ensure that construction projects meet initial quality and safety standards and remain economically sustainable throughout their lifespan. For this reason, the use of LCC analysis is required to evaluate the total costs of an asset and ensure its financial health.
Additionally, adhering to these regulations is crucial for obtaining funding and approval from regulatory bodies. For example, the European Union Directive on Public Procurement (2014/24/EU) mandates that member states consider LCC when assessing bids for public contracts, including those related to construction projects.
How the life cycle costing process works
Every company & startup must tackle the crucial task of finding a financial model that maximizes cost-efficiency for their product or service. Performing a life cycle cost assessment helps accurately forecast the total expenses your business will face when buying a new asset or starting a new project, such as constructing a building. Here are the key phases of the LCC process in a construction project:
Identification of costs: First, you need to identify all the relevant costs associated with the project:
- Acquisition costs: Include expenses such as purchasing the land, materials, permits, and consultant fees from suppliers and contractors involved in the project.
- Operational costs: These cover the expenses for energy and water. The estimated costs are based on design and performance assessments of the building before construction. Actual amounts are measured with utility meters once the building is complete.
- Maintenance costs: Maintenance, repair, and replacement costs in construction are determined during the building acquisition process. For example, these include the costs for regular inspections and servicing of heating, ventilation, and air conditioning (HVAC) systems or for repairing plumbing leaks.
- Refurbishment costs: Relate to future renovation expenses, like updating office spaces or changing their use. For example, in the case of office spaces, it may involve estimating costs for renewing the interior fit-out and services or converting the space from office use to residential (and vice versa).
- End-of-life costs: These are derived from preparing and estimating costs for the eventual deconstruction or demolition of a building. Contractors might adjust these estimates based on design features that make it easier to dismantle the building and recycle or reuse its materials.
Quantification: After identification, it’s time to calculate the identified costs. It is important to consider inflation and other financial factors to make comparisons more thorough. It is advisable to consult with financial experts or specialists to complete this step.
Comparison & decision-making: Once all costs are quantified, they can be compared against each other. This allows us to make smart decisions that consider the entire lifespan of the asset.
Optimization: This analysis enables stakeholders to find the best balance between initial costs and operational & maintenance expenses. This can lead to the selection of designs, materials, and strategies that provide the building with greater long-term value. For example, a material that costs more initially but is more durable might save money over time because it requires less maintenance.
Monitoring & review: Once the building is operational, monitor costs and performance regularly. This ensures initial estimates are accurate and allows for necessary adjustments.
How to calculate life cycle costing
Now that you’ve grasped the essence of LCC, you may want to start calculating it for your current or potential assets. There’s no one-size-fits-all formula for calculating life cycle costs because the costs can vary significantly from asset to asset. But here is the catch. There is a plethora of new software and cutting-edge solutions that are on the market for small to large business owners.
Cemex Ventures enhances life cycle costing through innovation
At Cemex Ventures, we’re looking to invest in leading startups that revolutionize the process of LCC in the building sector. Outbuild is a standout example of implementing disruptive technologies in our investment portfolio.
Outbuild
Formerly known as IPSUM and then ProPlanner, Outbuild is a Chilean startup that developed a Software as a Service (SaaS) for scheduling and planning construction projects based on lean construction and Building Information Modeling (BIM).
It’s important to understand that the link between LCC and Outbuild technology is based on the fact that BIM is not merely software but a methodology. BIM involves a collaborative, real-time approach to creating and managing a building’s data throughout its life cycle, including its costs.
Cemex invested in Outbuild in 2018, one year after being one of the winners of the first edition of Construction Startup Competition. Their web-based collaborative platform is used to build robust construction schedules, allowing trade partners to plan weekly and daily activities, manage resources, and enhance coordination among stakeholders at every project stage.
Does your startup have a solution related to life cycle costing that could revolutionize the construction industry? Expand your network, secure funding, gain exposure to investors, and partner with a renowned industry leader. Contact us today, and a member of our investment team will reach out to you.
