2012/1/11 3.

LCC & LCA Lecture

The University of Hong Kong

CIVL 3003 - Construction Project Management

Life Cycle Costing & Analysis and Sustainability of Built Infrastructure

Ir Dr Robin Yip
BSc MSc PhD MHKIE MICE CEng MIEAust MIPENZ MASCE FHKICM FAIB

The University of Hong Kong

CIVL 3003 - Construction Project Management

The topic contains:

Introduction to:
Sustainable Construction, Life Cycle Costing and Life Cycle Analysis

Life Cycle Costing (LCC) Life Cycle Analysis (LCA)

2

2012/1/11

The University of Hong Kong

A Review on Sustainable Development

World Commission on Environment and Development in its report, the Brundtland Report, Our Common Future (1987), states that development that meets the needs of the present without compromising the ability of future generations to meet their own needs.
Economic Sustainability Growth Development Productivity Trickle-down

Environmental Sustainability Ecosystem integrity Carrying capacity Biodiversity

Social Sustainability Cultural Identity Empowerment Accessibility Stability Equity

Three Attributes of Sustainable Development (Modified from SDU April 2002 http://www.susdev.gov.hk)

Achieving a a balance balance of of these these three three attributes attributes is is imperative imperative !!! !!! Achieving

The University of Hong Kong

Introduction of Sustainable Construction

Being a subset of sustainable development, Sustainable Construction addresses contributions of construction works to the built environment. Kibert (1994) defined sustainable construction as .creating and operating a healthy built environment based on resource efficiency and ecological design.
4

2012/1/11

The University of Hong Kong

Introduction of Sustainable Construction

Seven Principles of Sustainable Construction 1.Reduce resource consumption (Conserve) 2.Reuse resources (Reuse) 3.Use recyclable resources (Renew/recycle) 4.Protect nature (Protect Nature) 5.Eliminate toxics (Non-Toxics) 6.Apply life-cycle costing (Economics) 7.Focus on quality (Quality)

These seven principles apply across the entire life cycle of a built asset from development planning to final disposal Cradle to Grave

The University of Hong Kong

Introduction of Sustainable Construction

Environmental + cost impacts

Embodied energy

Embodied energy

Environmental+ cost impacts

Construction & fitting out Product manufacture, transportation

Environmental + cost impacts

Operation & maintenance

Recurrent energy used by systems

Environmental + cost impacts

Environmental + cost impacts

Raw material acquisition

Embodied energy

Life Cycle of Built Asset

Renovation & demolition

Embodied energy

Cradle (i.e. Birth)

Grave (i.e. Death)

From Cradle to Grave theory the life time of a Built Asset

Materials Consumed and Released over

6

2012/1/11

The University of Hong Kong

Introduction of Sustainable Construction

For the theories of Life Cycle Costing (LCC) and Life Cycle Analysis (LCA), the principles of Sustainable Construction apply to the resources that are needed to create and operate the built asset and the generation of waste matters (solid, liquid and gas) during its entire life cycle from initiation of a development plan to demolition of the built asset with respect to land, materials, water, energy, and ecosystems.
7

The University of Hong Kong

Introduction of Life Cycle Costing

What is Life Cycle Costing ? Life Cycle Costing (LCC) is a process to aid decisionmaking for capital investment. It is an economic assessment of an item, a system, or a facility, in here, we say a construction project. It provides competing considerations on design alternatives by comparing all significant costs of ownership over the economic life of the asset (DellIsola and Kirk, 2003).
8

2012/1/11

The University of Hong Kong

Introduction of Life Cycle Costing

LCC of a built asset is the cost required from creation, operation and disposal after its service life cradle to grave cost of the built asset . Three assessment methods are commonly used by the construction industry: - Simple Pay Back - Net Present Value (NPV) - Internal Rate of Return (IRR)
9

The University of Hong Kong

Introduction of Life Cycle Analysis

What is Life Cycle Analysis? Life Cycle Analysis (LCA) is an objective process to evaluate the environmental burdens of a product, process or activity by identifying and quantifying energy and material uses and releases to the environment. The analysis includes the entire life cycle of the product, process or activity, encompassing extracting and processing of raw materials; manufacturing, transportation and distribution; use, reuse, maintenance; recycling and final disposal (Consoli et al, 1993).
10

2012/1/11

The University of Hong Kong

Introduction of Life Cycle Analysis

The LCA assessment approaches address only environmental impacts and not other consequences of human activities such as economic and social effects. The methods of assessment focus on energy consumption and carbon release throughout the life cycle of the designated study object, it can be a built asset, a product, a process and an activity. Energy consumption and carbon release start from extraction of raw materials, manufacture, construction process, till the end of the products lifetime and disposal, known as Cradleto-grave.
11

The University of Hong Kong

Introduction of Life Cycle Analysis

The Embodied Energy & Carbon of Materials
Embodied energy (carbon) of a building material can be taken as the total primary energy consumed (carbon released) over its life cycle including extraction of raw materials, manufacture, construction process, until the end of the products lifetime and disposal. Embodied energy is normally confined within the boundaries of Cradle-toGate (factory gate) or Cradle-to-Site (site of use) to separate it from operational impacts (Hammond and Jones, 2008). Embodied energy is a concept which scientists have not yet agreed an absolute universal values, because there are many variables that have to be taken into account. However, scientists agree that products can be compared to each other to see which has more and which has less embodied energy.
12

2012/1/11

The University of Hong Kong

Introduction of Life Cycle Analysis

Typical embodied energy units are:
MJ/kg (mega joules of energy needed to make a kilogram of product), tCO2 (tonnes of carbon dioxide created by the energy needed to make a kilogram of product).

Convertion of MJ to tCO2 is not straightforward because different types of energy (oil, wind, solar, nuclear and so on) emit different amounts of carbon dioxide, so the actual amount of carbon dioxide emitted when a product is made depending on the type of energy used in the manufacturing process, e.g. the Australia's Commonwealth Scientific and Industrial Research Organization (CSIRO) gives a global average of 0.098 tCO2 = 1 GJ. This is the same as 1 MJ = 0.098 kgCO2 = 98 gCO2 or 1 kgCO2 = 10.204 MJ.
13

The University of Hong Kong

Introduction of Life Cycle Analysis

What is Green Building Material?
There is NO common consensus on a DEFINITION for GREEN MATERIALS

A Guide to Product Selection and Specification (1999) for Green Building Materials stated that: green building materials are those that use the Earths resources in an environmentally responsible way.

Some rely on Eco-labels

Blue Angel eco-label in Germany Nordic Swan eco-label of the Nordic Countries

14

2012/1/11

The University of Hong Kong

Life Cycle Costing (LCC)

Three LCC calculation methods are:
1. Simple Payback is the time taken for the return on an investment to repay the investment 2. Net Present Value is the sum of money that needs to be invested today to meet all future financial requirements as they arise throughout the life span of the investment 3. Internal Rate of Return is the percentage earned on the amount of capital invested in each year of the life span of the project after allowing for the repayment of the sum originally invested.
15

The University of Hong Kong

Life Cycle Costing (LCC)

Simple payback can be expressed in the form of an equation:

P = I/R
where P = payback period (years), I = amount of capital invested R = annual money returned as a result of the investment

For Example: An investment on a built asset I = 2,000,000 The annual return R = 200,000

The payback period of the investment P = 2,000,000/200,000 = 10 years

16

2012/1/11

The University of Hong Kong

Life Cycle Costing (LCC)

How simple payback provides options for decision making? Table 1 below shows investment options are available for a developer to select for a project development with respect to different annual maintenance costs.

Options A B C D E

Construction Cost (USD) 10 m 8m 15 m 9.5 m 11 m

Maintenance Cost/annum (USD) 400,000 550,000 300,000 500,000 330,000

Table 1: Options of investment in Construction Cost and Maintenance Cost

At real time selection option: - Option B is the lowest in construction cost and highest in maintenance fee - Option C is highest in construction cost and lowest in maintenance cost

17

The University of Hong Kong

Life Cycle Costing (LCC)

How simple payback provides options for decision making with annual expenditures? Table 2 below shows additional investments in construction cost are available for a developer to select different options on project develop with respect to different annual maintenance costs for 30 years operation period.
10m 8m
The payback comparison A &B = Pro ject Construc tion Cost (USD) Maintenance Cost/annum (USD) Life Span (year) Demolitio n Cost (USD) Simple Lifetime Cost (USD)

550 000 400 000 15m 10m =

2000000 150000 5000000 100000

= 13 years

The payback comparison A&C =

= 50 years

A B C D E

10 m 8m 15 m 9.5 m 11 m

400,000 550,000 300,000 500,000 330,000

30 30 30 30 30

100,000 100,000 100,000 100,000 100,000

22.1m 24.6m 24.1m 24.6m 21.0m

The payback comparison A&D =

400 000 300 000 10m 9.5m 500 000 400 000

500000 100000

= 5 years

Similarly, Compare Project A and E

Compare Project B and C Compare Project B and D Compare Project B and E Compare Project C and D Compare Project C and E Compare Project D and E

Table 2: Options of investment in Construction Cost at 30-years Period

Comparison among all options on the construction cost and maintenance cost, the most cost effective selection for a 30-year operation is Option E.

= 14.3 years = 28 years = 30 years = 13.6 years = 27.5 years = 13.3 years = 8.8 years

18

2012/1/11

The University of Hong Kong

Life Cycle Costing (LCC)

An acceptable investment appraisal must include two important issues:
- it should take account of all cash flows associated with the investment throughout the period of analysis - it must make proper allowance for the time value of money A number of other considerations like the time span, interest of investment, inflation, taxation, and cash flow etc. must be taken into account, putting in all these economic factors, simple payback may not be an ideal assessment approach.
19

The University of Hong Kong

Life Cycle Costing (LCC)

Net Present Value (NPV) Money has its time value. A sum of money can be invested to earn a rate of interest and accumulate more consecutively. e.g. A sum of 1,000,000 could be invested at a rate of interest 10% per annum. It would have grown to 1.1 million at the end of the one year period.
At the end of the 1st year At the end of the 2nd year At the end of the 3rd year 1,000,000 x (1 + 0.10)1 = 1,100,000 1,000,000 x (1 + 0.10)2 = 1,210,000 1,000,000 x (1 + 0.10)3 = 1,331,000

The sum of money (P) is invested at a rate of interest (r), the amount (C) arising after n years is given by:

C = P (1 + r) n

Net present value is a system which takes account of all the apparent variables acting upon a cash stream. It is a central tool in discounted cash flow (DCF) analysis, and is a standard method for using the time value of20 money to appraise investment on long-term projects.

10

2012/1/11

The University of Hong Kong

Life Cycle Costing (LCC)

Each cash inflow/outflow is discounted back to its present value (PV). Then they are summed. Therefore NPV is the sum of all terms over the designated timeframe. The net present value of re-pavement cost over N years is given as: NPV = P0 + P1 + P2 + P3 +. + PN NPV =
C0 (1 +
N

r)0

C1 (1 + r)1

C2 (1 + r)2

C3 (1 + r)3

+ .. +

CN (1 + r)N

NPV =

Ct (1 + r) t
Where C = estimated cost in year t r = discount rate N = period of analysis in years

t=0

21

The University of Hong Kong

Life Cycle Costing (LCC)

To illustrate how the net present value approach works out on helping decision making in year 2010. The project is to buy back the Eastern Harbour Crossing (EHC), in Chinese abbreviation, from New Hong Kong Tunnel Company with 6 years remaining operation rights. (The figures shown hereunder are fictitiously made up in round figures) This buy back plan will have an immediate (t=0) cash outflow of HK$1billion (10,000 m). Other cash outflows for years 1 to 6 are expected to be HK$10,000,000 (10m) per year. Cash inflows are expected to be HK$30,000,000 (30m) each for years 1 to 6. The assumed rate of return is 10%.

NPV = Year 0 + Year 1 + Year 2 + Year 3 + Year 4 + Year 5 + Year 6 The NPV of buying back EHC now would be HK$9,912.89 million
22

11

2012/1/11

The University of Hong Kong

Life Cycle Costing (LCC)

NPV is an indicator of how much value an investment or project adds to the promoting organization. Appropriately, projects with a positive NPV could be accepted. In financial theory, if there is a choice between two mutually exclusive alternatives, the one requires less cost or yields higher revenue should be selected.

What NPV means?

If NPV > 0 It means that the investment would add value to the organization It means that the investment would subtract value from the organization It means that the investment would neither gain nor lose value for the organization Then the project is acceptable

If NPV < 0

Then the project should be rejected This project adds no monetary value. Decision to accept or reject should be based on other criteria, e.g. benefits of image or strategic positioning, etc.

If NPV = 0

23

The University of Hong Kong

Life Cycle Costing (LCC)

Internal Rate of Return (IRR)
An internal rate of return (IRR) is the Yield, or rate of return of a project or a property. To capitalize the yield, it is meant to express the value of an income based on a given rate of return. The standard equation for converting an income stream into a property value is: Income____ = Value Rate of Return If an income of $1,000 per year is converted to a value based on a 10% rate of return, the value becomes (1000/0.1) = $10,000. Alternately, if the investment is expected a 12% rate of return, the $1,000 annual income converts to a value of (1000/0.12) = $8,333.34. The rate of return is a matter of judgment, whatever rate is considered reasonable is subject to the investors judgment with reference to the present market.
24

12

2012/1/11

The University of Hong Kong

Life Cycle Costing (LCC)

Any project having a higher return than the cost of borrowing is fundamentally profitable. The higher the return the more the profit is obtainable from the investment. For example, an organization is deciding on investing in a project, it is necessary to calculate the IRR proposed investment. The rate that has been calculated (say 20%) will be compared with the rates of other investment options.
25

The University of Hong Kong

Life Cycle Costing (LCC)

Relationship between IRR and NPV
An initial capital outlay of a project in HK$15,000,000 generates revenues of HK$4,000,000 in each of the ensuing five years. The present value curve and the initial capital outlays at any rate of interest have given out the trend of NPV of the project. The intersection of NPV and the capital outlays gives the IRR. If NPV > 0 Project accepted If NPV < 0 Project rejected

26 Source: Balchin et al (1995)

13

2012/1/11

The University of Hong Kong

Life Cycle Analysis (LCA)

Life Cycle Analysis (LCA) is: - A study to evaluate the environmental burdens of entire life cycle of a product, process or activity - An analysis encompasses extraction and process of raw materials; manufacturing, transportation and distribution; use, reuse, maintenance; recycling and final disposal. - A process to evaluate and implement opportunities to affect environmental improvements. LCA addresses only on environmental impacts and not other consequences of human activities such as economic and social effects.
27

The University of Hong Kong

Life Cycle Analysis (LCA)

LCA is a methodology for assessing the environmental performance of a product over its full life cycle measures a wide range of potential effects, such as: Fossil fuel depletion Other non-renewable resource use Water use Global warming potential Stratospheric ozone depletion Ground ozone (smog) creation Nutrification/eutrophication Acidification and acid deposition Toxic matters release to air
28

14

2012/1/11

The University of Hong Kong

Life Cycle Analysis (LCA)

Much of the focus worldwide to date has been on agreeing the methods and boundaries to be used when making analyses, no commonly accepted agreement has been reached so far. The ISO 14000 series of standards address environmental management systems defined that LCA as a methodology for assessing the environmental performance of a product, process, or service, including built asset, over its entire life cycle. LCA comprises several steps. These steps include inventory analysis, impact assessment, and interpretation of the impacts.
29

The University of Hong Kong

Life Cycle Analysis (LCA)

In ISO Standard 14040, LCA comprises four interrelated phases: 1.- Definition of goal and scope 2.- Inventory analysis 3.- Impact assessment 4.- Interpretation of results Life cycle assessment framework
Goal and scope definition

Inventory analysis

Interpretation

Applications

Impact assessment

Phases of a LCA (sorced from ISO, 1997)

30

15

2012/1/11

The University of Hong Kong

Life Cycle Analysis (LCA)

Goal and Scope Definition: state the reasons of doing LCA, define system boundary, data requirement, assessment method, assumptions and limitations. Inventory Analysis: solicits data of economic flows and environmental intervention within the system boundary. The analysis yields a list of resources input and emissions. Impact Assessment: includes
1. 2. 3. 4. 5. 6. Section of impact categories and indicator; Classification of inventory data into impact categories; Characterization of inventory data within each category and option Normalization; Grouping; and Weighting the characterized results.

Interpretation: observes the results to identify improvement opportunities or compare among alternative processes.
Source: http://www.emsd.gov.hk/emsd/e_download/pee/lceabc_lcea.pdf

31

The University of Hong Kong

Life Cycle Analysis (LCA)

Life cycle assessment framework Goal and scope definition

Inventory analysis

Interpretation

Applications

Impact assessment

LCIA result from Impact Assessment is a complete account of the quantities of resources consumed and emissions incurred during the life cycle of a product
Impact Assessment of LCA under ISO 14040 Source: http://www.emsd.gov.hk/emsd/e_download/pee/lceabc_lcea.pdf

32

16

2012/1/11

The University of Hong Kong

Life Cycle Analysis (LCA)

The assessment of the LCI analysis (LCIA):
Categorization: categorize the impacts on resources consumption and emissions into a range of impact categories. Characterization: convert various types of impacts under each category into equivalent quantities of CO2. Normalization: convert the impact profile into a set of dimensionless numbers. A normalized impact indicator reflects the total quantity of each type of impact incurred in a region or the whole world in a year, on the whole or per capita basis. Grouping: put materials in similar group for the convenience of further study and data analysis. Weighting: scale the normalized impact indicators by weighting approach to yield a single impact indicator through the use of a set of weighting factors. Derivation of the weighting factors is typically through solicitation of expert opinions.
33

The University of Hong Kong

Life Cycle Costing & Analysis and Sustainability of Built Infrastructure

Any Questions?

34

17