RSS feedsIn the world of project management, nothing is guaranteed to make you ‘persona non grata’ quicker than surprising your sponsor with unbudgeted cost. But 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’.
Whole life costing is about measuring the costs of an asset throughout its entire life cycle and using that insight to model capital expenditure projects to minimise the total lifetime cost. It involves predicting and budgeting how much different approaches to projects will cost and looking at issues within capital projects such as construction, operation, maintenance and replacement or decommissioning. Doing this will reduce long-term costs and also results in a more sustainable project.
There are plenty of examples of large projects that could have benefited from whole life cost thinking. The UK’s nuclear power stations are just one. Designed and built in the 1950s and 1960s, to meet stringent safety and performance requirements, they were not built with ease of maintenance or decommissioning in mind. The cost of decommissioning, estimated to be circa £73bn, is higher than if the design and budgeting approach had included greater consideration of whole life costs and decommissioning activity.
Another area where this is common is IT. The total lifetime costs after installation are significant, including maintenance, training, expansion, upgrades and replacement. Building in scalability, modularisation and attention to detail on, for example, ease of use and data integrity, can save significant amounts over the lifetime of the software.
Government has led whole life cost best practice, due, in part, to the establishment of PPP/PFI. But why are there so many sectors that haven’t adopted it? First, the typical separation of their capital and operational management teams which have different goals, performance indicators, incentives and reporting structures, doesn’t make whole life costing easy.
Also, predicting future costs – because of uncertainty in inflation, markets and technology – can be 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.
Understanding funding
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 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 is focussed, intelligent decisions about whether to spend more now to save more in the future, and still meet everyone’s needs.
A good whole life costing tool will financially evaluate each element of a capital expenditure project over the entire life of the asset. It will include consideration of factors such as energy usage and greenhouse gas emissions, for instance. 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 break-even 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.
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.
Steps in the right direction
Using whole life costing:
- 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.
