Whole life costing - cut costs and improve sustainability

By Mark Warren, Principal at Moorhouse Consulting

In the world of project management, nothing is guaranteed to make you ‘persona non grata’ quicker than surprising your sponsor with unbudgeted cost.  However, there is one possible exception to the rule.  What if, for some short-term pain and re-working of your design and budget, you could significantly increase your programme’s overall return on investment (ROI) and improve your sustainability performance?  Enter the practice of ‘whole life costing’…

Short term pain for long term gain

Whole life costing is about measuring the costs of your asset throughout its entire life cycle, and using that insight to optimise the design so as to minimise the total lifetime cost. It involves predicting and budgeting how much your design options will cost to construct, operate, maintain, renew and eventually replace or decommission.  Doing this not only reduces long-term costs, but also results in a more sustainable project and reduced energy, carbon and reputation risk for your business.

Government has led whole life cost best practice, due in part to the establishment of PPP/PFI.  However, there are many sectors that haven’t yet adopted it. Why? Firstly, the typical separation of their capital and operational management teams who have different goals, performance indicators, incentives and reporting structures doesn’t make whole life costing easy.

Also, significant uncertainty in predicting future costs - due in part to uncertainty in inflation, markets, technology, etc - can seem so overwhelming that the easiest answer is to do nothing, and just focus on the capital cost.  However, this means being precisely wrong, rather than approximately right, and hides the significant consequential costs post construction.

The final factor is a fear of going over budget, in the short term, to the exclusion of all other factors.  This can be avoided if whole life costing is built into the fabric of your project from the start.

Understand your funding and stakeholders

To be effective it is imperative that you understand your funding and contractual obligations across your key stakeholders.  A stakeholder paying for the build only will have a different view to one paying for operational costs over ten years, or the eventual decommissioning.  Aligning objectives and approach right at the beginning of the project lifecycle will allow structural, contractual and funding decisions to be aligned to whole life cost reduction principles.  The result - focussed, intelligent decisions about whether to spend more now to save more in the future, and still meet everyone’s needs. 

How whole life costing works

A good whole life costing tool will financially evaluate each identified design option, over the entire life of the asset, including consideration of the energy usage, greenhouse gas emissions and other externalities.  It should also identify other social, environmental and economic impacts, and any funding, legal or service constraints.  From the outputs, and a comprehensive sensitivity and breakeven analysis, the most appropriate option can then be identified.  The impacts of individual component decisions can be aggregated to help define the best approach to the overall project.

At Moorhouse, our suggested approach to using whole life costing is to take the following steps:

• Design.  Understand the case for whole life costing, change the mindset, obtain organisational buy-in, and establish a clear framework and definition
• Tool.  Implement a simple, flexible tool to assimilate, assess and report on the main design options across your project portfolio
• Support.  Provide clear standards, best practice checklists, and organisational education, awareness, and training.

Gain a critical and sustainable advantage

The UK markets are littered with examples of large projects that could have benefited from using whole life cost thinking. The UK’s nuclear power stations are just one.  Designed and built in the 1950s and 60s, to meet stringent safety and performance requirements, they were not built with ease of maintenance or decommissioning in mind.  The cost of decommissioning, currently estimated to be circa £73BN, is undoubtedly higher than if the design and budgeting approach had included greater consideration of whole life costs and decommissioning activity.

This highlights how up-front capital costs may ultimately be only a small proportion of total costs.  Another area where this is common is IT. The total lifetime costs after installation are significant, including maintenance, training, expansion, upgrades and eventual replacement. Building in scalability, modularisation, and attention to detail on, for example, ease of use and data integrity, can save significant amounts of money over the lifetime of the software.

Conclusion

The application of whole life costing can focus people’s minds on making more considered decisions at the investment stage, through the planning, design and build process. This is never a bad thing!  The practice will result in reduced costs over the lifetime of the asset, and a more integrated and sustainable solution. Framing whole life costing as a facilitator of more sustainable development in your organisation can be a great way of selling in the approach to sceptical colleagues or stakeholders.

© 2009. Moorhouse Consulting Ltd

If you would like to talk to us call on the number below. Alternatively, click on the consultants email address, provide us with your details and we will call you back. We look forward to speaking to you. Contact: Email: Tel: Mark Warren markwarren@moorhouseconsulting.com +44 (0) 20 3004 4482