Life cycle costing: the cost of owning a building, not just building it
The lowest tender does not always give the cheapest building. Energy, maintenance and replacement over decades can exceed the construction cost. Life cycle costing puts those future costs on the same footing as the capital cost so that options can be compared properly.
By the Caprix AI team · · 8 min read
Key takeaways
- Life cycle cost is the capital cost plus the operating, maintenance, replacement and disposal costs over a chosen period.
- Future costs are discounted to present value, because money later is worth less than money now.
- The discount rate and the study period drive the answer, so test both.
- The method is for comparing options. The difference between them matters more than either total.
- It is most useful for components with high running or replacement costs, such as services, facades and roofs.
What goes into a life cycle cost
Capital
Design and construction, including fees and the client's own costs.
Operation
Energy, water, cleaning, security and management.
Maintenance
Planned servicing and unplanned repairs.
Replacement
Components that wear out before the building does: chillers, lifts, roof coverings, finishes.
End of life
Demolition and disposal, less any residual value.
Outside the count
Income, and business costs such as staff, are normally analysed separately unless the options affect them.
Why future costs are discounted
RM100 spent in ten years is not the same burden as RM100 spent today. Money available now can earn a return in the meantime, so a smaller sum set aside today would cover the future payment. Discounting converts each future cost into that equivalent sum, its present value.
Present value = future cost ÷ (1 + r)n
where r is the discount rate per year and n is the number of years. At 5%, a cost of RM100,000 in year 10 has a present value of about RM61,391. For a cost that repeats every year, the present value of the whole stream is the annual cost multiplied by an annuity factor, (1 − (1 + r)−n) ÷ r.
The net present value of an option is the sum of all its costs, each discounted to today. The option with the lowest net present value of cost is the most economical over the period.
A worked example
A client is choosing between two air conditioning systems for an office and will hold the building for 20 years. The figures are illustrative.
| Option A | Option B | |
|---|---|---|
| Capital cost | RM1,000,000 | RM1,200,000 |
| Energy and maintenance per year | RM80,000 | RM50,000 |
On capital cost alone A is cheaper by RM200,000. Over 20 years at a discount rate of 5%, the annuity factor is 12.462:
- Option A: RM1,000,000 + RM80,000 × 12.462 = RM1,996,977
- Option B: RM1,200,000 + RM50,000 × 12.462 = RM1,823,111
Option B costs more to install and RM173,866 less to own. The extra RM200,000 is repaid by the saving of RM30,000 a year.
Test the assumptions
The result depends on the discount rate, so run it at more than one.
| Discount rate | Annuity factor | Option A | Option B | Cheaper |
|---|---|---|---|---|
| 3% | 14.877 | RM2,190,198 | RM1,943,874 | B by RM246,324 |
| 5% | 12.462 | RM1,996,977 | RM1,823,111 | B by RM173,866 |
| 10% | 8.514 | RM1,681,085 | RM1,625,678 | B by RM55,407 |
A higher discount rate shrinks future savings and favours the option that is cheaper to build. Here B remains ahead at all three rates, but by a narrowing margin, which is the kind of finding a client needs to see. Test the other assumptions the same way:
- Study period. A developer who sells in five years and an owner who occupies for forty will reach different answers from the same data.
- Energy prices. If tariffs rise faster than general prices, the efficient option gains.
- Replacement timing. A component that needs replacing in year 15 instead of year 20 can reverse a result.
Choosing a discount rate
Two conventions are in use, and they must not be mixed. A real rate excludes inflation and is applied to costs stated at today's prices. A nominal rate includes inflation and is applied to costs that have been inflated to the year they occur. Done consistently, both give the same ranking.
The rate itself reflects the client's cost of money: for a commercial owner, typically the cost of capital or the return available elsewhere, and for a public body, a rate set by the government's own appraisal guidance. It is the client's figure to decide. The surveyor's job is to apply it correctly and show how sensitive the answer is to it.
Where it earns its keep
A full life cycle cost of every element is rarely worth the effort. Concentrate on decisions where running or replacement costs are large relative to the capital difference: air conditioning and ventilation plant, lifts, lighting, facade and glazing performance, roof coverings and floor finishes in heavily used areas.
The data is the hard part. Capital costs are well recorded. Maintenance and replacement records are thinner, so state where each figure came from and treat the result as a comparison between options, not a prediction of the bill.
Where Caprix AI fits
Caprix does not produce a life cycle cost model. It supplies the capital side of one: current Malaysian rates for the options being compared, an elemental estimate to set them in context, and Research for the official statistics, such as inflation and interest rates, that inform the assumptions.