The Economic Downturn Bites Hypothesis Construction Essay

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"The relative importance of capital costs over whole life costs will become evident as the economic downturn bites, to the overall detriment of the client's investment."

In this literature review I am going to give an account of information that I have research to identify the important of today's current economic downturn and how it might affect a client then faced with a decision of saving initial capital costs or to consider the whole life span of the building and investing in more durable materials that will last longer. In this day and age the owner of the building could easily change before the life span is up therefore I feel there is not as much thought going into whole life costing at the design phase as there could be. I am going to focus my research to the last 10-12 years to give a more up-to-date account of today's affairs.

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As the economic downturn bites it is becoming hard and hard to obtain funds from the like of the banks and investors. They are becoming more and more concerned with making a return on their investment in a shorter period of time. As a result in this the client is becoming more reluctant to keeping the capital cost to a bare minimum, for example buying a plot of land on the outskirts of a city for an office block instead of in the city centre to later on rent out the office space for a return on their investment.

As the UK has been in recession for since 2008 the banks are still holding onto their money very tightly. This is making it hard to get funding for future construction projects. As a result in this, these projects can sometimes be found to be built with the minimum initial capital costs being invested. As a result in this the whole life span of the building in not being taken into account.

The construction industry has been susceptible to the recent economic recession and has

significantly contracted within the last two years. The Construction Product Association (2010) announced that overall construction activity in the UK contracted for the seventh consecutive quarter in 2010 Q1 and industry experts expressed concern that political uncertainty could further prolong the recession in the industry.

The statistics highlight contraction since 2007 which produced a total construction output of £110,952 million to £97,152 million. Monaghan (2010) emphasised that the construction industry has been one of the worst affected areas of the economy during the economic recession. In agreement, the Chief Executive of the Construction Products Association Michael Ankers (2010) highlighted that construction has been one of the sectors of the economy most affected by the economic recession, and while it is widely believed that the wider economy is now out of recession, the construction industry is going to have to wait for at least another 12 months.

It has long been recognized that it is not satisfactory to evaluate the costs of buildings on the basic of their initial costs alone. Practice and Procedure for the Quantity Surveyor, Christopher J. Willis, Allan Ashworth and J. Andrew Willis, (1994). I feel this statement highlights that whole life costing is becoming more used within the construction industry. Clients' are looking for greater and extensive cost forecasting prediction on the various factors to help them in the design process. The outcome of the whole life cost is to estimate the cost with relation to time of the maintenance over the life spend of the building and give the client different financial strategy options to assist them in the tough decisions that might lie ahead. There is no point in starting a whole life costing exercise if the building is halfway through the construction phase as once the structure's shape and size is established then approximately 80% of the costs have already been decided.

I have come to the conclusion over the past decade there has been a dramatic increase in whole life costing. According to (Buildings and Constructed Assets. Service Life Planning. Lifecycle Costing, British Standards Institute Staff, 2008) states.

"Over the past 50 years or so, lifecycle costing in construction has had its own cycle of life. Every 10 years or so it has been trumpeted as the next big thing, but never quite made it. This time, however, lifecycle costing is here to stay, for two reasons - Private finance initiative (PFI) and global warming. PFI has made it the basis of the commercial agreement between the client and the provider and global warming has made everybody think about the future impact of decisions to build."

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One of the problems that clients have encountered in commissioning whole life cost studies has been the industry's inability to report the results in a consistent way, which makes it impossible to directly compare costing analyses. This led the Office of Government Commerce and other public and private sector organisations to take a keen interest in the international standard that was being prepared with UK input from the British Standards Institution.

As I researched deeper into whole life costing I found that there are also some assumptions that have to be undertaken, for example (:-

Perfect information - it is assumed the appraisal is based on information that is correct and complete. (Whole life costing forum)

Perfect foresight - it is assumed that future events will occur as expected. (Whole life costing forum)

Obviously the real world is not like this and unexpected events can and will usually occur. The bullet points really highlight the importance of the accuracy of the numbers and information gathered for the whole process. As it is done on as an estimate of the costs of maintenance and other raw material in the future it can only be considered as an a rough guide. Therefore some clients might not consider taking up the procedure due to the fee attached to it.

In addition to its difficulties inherent in future cost planning, there are larger issues at stake. It is not just a case of asking 'how much will this building cost me for the next 50 years?' Rather, it is more difficult to know whether a particular building will be required in 50 years' time at all - especially as the current business horizon for many organisations is much closer to 3 years. Quantity Surveyor's Pocket Book, Duncan Cartridge (2009).

Although most principles of whole life costing are well developed in theory, it has not received a wide practical application yet. Larsson and Clark (2000) described whole life costing as 'the dog that didn't bark'. A recent survey undertaken by BRE for DETR indicates that life cycle costing is currently used extensively only in PFI projects and public procurement (Clift and Bourke 1999; CBPP 200b). Other surveys indicate also that building sectors in other international countries have not fully adopted the whole life costing methodology (Wilkinson 1996; Sterner 2000)

The present study was designed to determine the effect of relative importance of capital costs compared to whole life costs backed up with evidence reflecting the economic downturn and to determine the benefits of the clients' investment. After reviewing the literature and coming to my own conclusion I can state that whole life costing in a step forward for the construction industry. Not every client might agree, as the likes of small property developers or private homeowners who only want to develop a one off project like an extension to their existing house. I believe the cost of the extra fees will persuade them in not taking up the idea as it will only be a one off project and will only increase the initial costs. One the other hand, a big construction firm will hugely benefit as the saving and knowledge learned will be able to multiply through all similar current and future projects. The recession has also played a large part as money is scarce and it has change how the client looks at the life span of the a building as they want the best value for money which is going to last them. I also found out that there is a forum on the internet specially designed to gather lots of different information from all different professionals in the construction industry so others can learn from their finds and as a result we will all be able to produce better and more accurate results. My recommendation after completing this review would be that more research could be done into making the process of whole life costing cheaper so it is more widely used within the construction industry for every job. Making the whole construction industry from labour down to material should also be researched to make it as a whole more efficient but still maintaining the quality and function.