Ellingham and Fawcett (2006, p. 18) indicate that the net present value method for evaluating an investment cashflow was first developed about 50 years ago and is widely used in many spheres. In property and construction projects it has acquired a special name: whole-life costing. In fact, whole-life costing is simply the application of net present value analysis to construction projects.
Many people will confused about the term of life-cycle costing, whole life costing, and whole life-cycle costing. As stated in Boussabaine and Kirkham study (2004, p. 4), prior to the 1970s, investment decisions made by most clients, developers and professionals was solely on the basis of capital cost. It appear a thought that spending more in capital cost will realize substantial cost savings in long term compared with a cheaper alternative, which we known as 'terotechnology'. This concept was largely ignored because the lack of available data and collection mechanisms, and it shown that investor had no interest in the subsequent operational cost of the building.
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In the early 1970s, the term 'cost-in-use' appear in the industry. It was recognized the concept of cost in use could apply to building and critical structures as to calculate the expenditure related to the operation of an asset. However, it also failed to consider the necessity for accurate future cost forecasting. It required some kind of technology to facilitate this problem (Boussabaine and Kirkham, 2004, p. 5).
Until the mid to late 1970s, 'life-cycle costing (LCC)' emerged as a solution to this problem. It fostered a wide-ranging approach to cost appraisal, encompassing all perceivable cost from construction through to eventual disposal 'the whole life'. By using a variety of forecasting techniques, the analyst was able to demonstrate how increase capital cost could be offset by long-term cost savings (Boussabaine and Kirkham, 2004, p. 5). As stated by Ashworth (1989), LCC is clearly a technique, which (at least in theory) has a potential for the correct financial evaluation of construction works. In should be noted that the concepts of LCC are not new. The principles are based upon economic theories, which have been used in investment appraisal in many areas of industrial and commercial activity. White and Ostwald (Korpi and Ala-Risku, 2008, p.241) show that LCC was originally designed for procurement purposes in the US Department of Defence and Woodward (Korpi and Ala-Risku, 2008, p.241) indicates that LCC is used most commonly in the military sector as well as in the construction industry.
Towards the late 1990s, the concept of 'whole life costing' and 'whole life-cycle costing' emerged. The terms whole life costing and whole life-cycle costing are interchangeable (Boussabaine and Kirkham, 2004, p. 6). Whole life-cycle costing is a relatively new concept to the construction industry. It is essence an evolution of life-cycle costing techniques that are commonly used in many areas of procurement (Boussabaine and Kirkham, 2004, p. 3).
Whole life-cycle costing
1960 1970 1980 1990 2000
Figure 1.1: The evolution timeline of whole life-cycle costing.
(Boussabaine and Kirkham, 2004, p. 4)
Theoretically speaking, there is no different between LCC, WLC and WLCC. Schade (2007, p. 2), in reporting Flanagan and Jewell study, emphasizes that it is just a change of term form "cost in use" to "life cycle costing" and further to "whole life cycle costing", where "whole life appraisal" is the new term globally used today. However, many researcher prefer to use the traditional term, which is life-cycle costing because of it well recognise in the global. Therefore, in this study, LCC is used equivalent to WLC, WLCC and WLA.
According to Boussabaine and Kirkham (2004, p. xi), the construction industry has recently experienced a paradigmatic shift in its approach to product deliver and the achievement of customer satisfaction. Where previously the design and construction teams placed a heavy emphasis on delivering buildings at the lowest capital cost, a greater awareness and desire to consider cost over the whole life of the building have prevailed. Clients now want buildings that demonstrate value for money over the long term, and are not interested simply in the design solution which is the least expensive. These changes have lead to and highlighted the important of whole life-cycle costing approaches to the design, construction and operation of buildings.
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Schade (2007) claims that, production cost is the main cost factor in construction and is often set to the minimum in commonly, which does not necessarily improve the lifetime performance of buildings. Therefore, it is important to show the construction client in the early design phase the relationship between design choices and the resulting lifetime cost.
Boussabaine and Kirkham (2004, p. ix) also note that the award of public construction contracts based on simply the lowest capital cost bid is no longer recognized as good practice; best value must be taken into account and thereby LCC should be fully appraised as part of the decision making process.
The research of Swaffield and McDonald (2007, p. 132) identify that contractors' quantity surveyors generally did consider LCC when procuring new products/elements for Private Finance Initiative projects, but in certain circumstances, such as during exceptionally busy times or when working within tight construction budgets, LCC were not considered and procurement decisions for some product/elements were made on the basis of lowest capital cost.
As Byron A. Ellis (2007, p.1) said, "Designers, engineers and constructors are under pressure from owners to minimize total project cost. Unfortunately, many owners do not understand the concept of total project cost. As a result, they seek to minimize acquisition (first) cost". Economists Alchian and Allen (Byron, 2007, p.1) argue that the term "cost" should never be used by itself; they noted that it should always be identified with "total," "average," or "marginal."
According to Fischer et al (Tah and Aouad, 2007), although the significance of LCC has been recognized as early as 1980s, the current implementation has not been very satisfied due to two major barriers: first barrier is the historical data of building operation and maintenance. Second barrier is the complexity of the procedures and algorithms of calculating the LCC. For example, a building concern thousands of elements and construction method and maintenance activities. A simple change in the building material might take long hours of recalculations, it is therefore difficult to assist users to manipulate the large design and LCC analysis.
However, even the idea of LCC analysis is to help the owner to examine a economically alternative, there will always have the possibility of misleading the decision making by the error result of LCC due to lack of data or unpredictable changes. There have no such as 100% accuracy for LCC analysis because the limitation of forecast ability of human being are impossible to forecast everything that could be happen in future.
This paper addresses the problems above by providing a detail discussion of LCC for assisting and simplifying the application of the technique based on the LCC in construction industry. At the same time reveal the popularity of application of LCC in Malaysian construction industry.
To identified the barriers and difficulties of applying life-cycle costing and to investigate the popularity of application of life-cycle costing in Malaysian construction industry.
To review the categories of cost involved in life-cycle costing analysis.
To identify the barriers and difficulties of applying life-cycle costing in construction industry.
To ascertain the uncertainty of applying life-cycle costing in construction industry.
To investigate the popularity of application of life-cycle costing in Malaysian construction industry.
Scope of Study
The concept of life-cycle costing (LCC) can be use as many sector, to narrow the scope of study, the study will only be focus on the construction industries. Besides that, case study would not conduct to the project for the calculation of LCC because it will be extremely difficult to obtain the large quantity of information across the long term of a building life cycle and data such as the project operation and maintenance cost, replacement cost, disposal cost could be confidential to its owners. Thus, to manually collect this data has to be very costly and time consuming and the missing of any result above will cause inaccurate of result. This study will focus on reviewing the important of application of LCC into construction industry. The first issue to be study in deep is the discussion on the principles, advantages and purposes of LCC analysis. The second issue is to identify the error and the difficulties of applying LCC due to lack of necessary information and unpredictable changes. The third issue is to do a research on the understanding of LCC among owners and their frequency of applying LCC.
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The completion of this study will allow me to have an understanding about the concept of LCC. By identify and analysis on the barriers of applying LCC gives me a basis idea about the difficulty of adoption of LCC practically. In addition, the survey conduct to investigate the popularity of LCC application also allows me to review the reason of slow adoption of LCC in Malaysian construction industry.
The methodology should be targeted at a consistent LCC approach and calculations and should not be aimed at reducing costs but at making more informed and consistent economic, financial and environmental decisions. The study was conducting in four stages. The first phase is the literature review. Second phase will be interview pilot study to the issue. Third phase will be constructing questionnaires. The last phase is to writing the research report.
The literature review started with the important of application of LCC and required data for a LCC analysis. Searching of article about LCC and the searching key words would be whole life-cycle costing, whole cycle costing and life-cycle costing. And the information of search will be limited into construction industry to filtered unnecessary information. The main sources for the literature research were databases, such as Emerald, web of science, Google and library of college Tunku Abdul Rahman.
Data collection will take form of a structured postal questionnaire. However an initial pilot study may be conducted to test the validity of the questionnaire through interviews with relevant parties.
Questionnaires will be conduct and send to respondent. The main ideas of the questionnaires are to test the owners of understanding about LCC, and also research on the preferable of low initial cost or low LCC when owner make decision of choosing alternatives. The questionnaire should be highlighted more prominently, to make it easier for respondents to participate in the final questionnaire survey.
This stage involves writing up the content of the dissertation and should cover the chapters proposed in the following section. The result of interview and questionnaires will be analysis and conclude. Example of LCC analysis will provide by searching through media resources and calculate by myself with simple and reality assumption based on the LCC principles.