Use Economic Analysis to Evaluate Design Alternatives

by the WBDG Cost-Effective Committee

Last updated: 08-13-2009

Overview

During the energy crisis and inflationary cycles of the 1970s and 1980s, the federal government, as the nation's largest owner and operator of built facilities, was faced with increasing initial construction costs and ongoing operational and maintenance expenses. As a result, facility planners and designers began to use economic analysis to evaluate alternative construction materials, assemblies, and building services with a goal to lower costs. Today, building owners wishing to reduce expenses or increase profits utilize economic analysis to improve their decision making during the course of planning, designing, and constructing a building. Moreover, federal, state, and municipal entities have all enacted legislative mandates—in varying degrees—requiring the use of building economic analysis to determine the most economically efficient or cost-effective choice among building alternatives.

The Economic Analysis Process

The steps to estimate the economic consequences of a decision, as listed in Ruegg's and Marshall's Building Economics—Theory and Practice, are summarized below:

1. Define the problem and the objective.
2. Identify feasible alternatives for accomplishing the objective, taking into account any constraints.
3. Determine whether an economic analysis is necessary, and if so, the level of effort which is warranted.
4. Select a method or methods of economic analysis.
5. Select a technique that accounts for uncertainty and/or risk if the data to be used with the economic method are uncertain.
6. Compile data and make assumptions called for by the economic analysis method(s) and risk analysis technique.
7. Compute a measure of economic performance.
8. Compare the economic consequences of alternatives and make a decision, taking into account any non-quantified effects and the risk attitude of the decision maker.

Types of Economic Analysis Methods

There are many methods available to calculate specific economic performance measures. Used appropriately, these methods allow the planning and design team to analyze the economic consequences of particular design decisions and fairly evaluate alternative approaches.

Life-Cycle Cost Analysis (LCCA) is the basic method recommended in 10 CFR 436A and OMB Circular A-94 for evaluating the economic performance of federal investments in buildings or building systems. It involves computing the Life-Cycle Cost (LCC) for competing design alternatives, considering all significant costs over the economic life of each alternative (expressed in equivalent dollars), then comparing them, and choosing the alternative with the lowest LCC. LCCA is particularly useful in evaluating building performance from an energy consumption perspective (i.e., MEP systems and building envelope). The other methods described below are usually used as supplementary measures of cost-effectiveness to the LCCA.

Value Engineering

The solar photovoltaic system, cool roofing, and energy efficiency upgrades installed at Alameda County's Santa Rita Jail have resulted in net savings of $410,000 in its first year of operation.
(Courtesy of R. Solari)

Apart from, but related to economic analysis methods, Value Engineering (VE) is a systematic evaluation procedure directed at analyzing the function of materials, systems, processes, and building equipment for the purpose of achieving required functions at the lowest total cost of ownership.

According to VE experts Kirk and Dell'Isola, "Value Engineering is a team approach that analyzes a function by systematically developing the answers to such questions as: what is it?; what does it do?; what must it do?; what does it cost?; what other material or method could be used to do the same job without sacrificing required performance or degradation to safety, reliability, or maintainability?" VE is concerned with elimination or modification of anything that adds costs without contributing to the program functional requirements. Reductions in a project's scope or quality to get it into budget are not considered VE—those decisions are simply "cost cutting".

Major public works projects may undergo both VE studies and LCCA, and while the two practices serve separate purposes, their consideration of design alternatives is often interrelated. For example, value engineering can be used to complement a life-cycle cost analysis when selected LCC alternatives cannot be adopted without exceeding the project budget. VE can be utilized to reduce initial costs of design features other than those under study in a LCCA. If the VE effort results in sufficient reduction in initial costs, savings may allow selected LCC alternatives to be adopted within the overall program budget, thus optimizing the long-term cost-effectiveness of the project as a whole.

Perhaps the most challenging aspect of a VE analysis is the evaluation of the non-quantifiable benefits of design, materials, or system attributes. Aesthetics, occupant comfort and performance, environmental impact, historic preservation, and the like may be key design objectives that drive budget decision making and contribute enhanced value to the project.

It is important to understand that while some alternatives are quantifiable, qualitative elements such as better aesthetics and increased worker productivity can also influence the economic analysis and decision-making process. Refer to the WBDG page on "Consider Non-Monetary Benefits such as Aesthetics, Historic Preservation, Security, and Safety." Also, note that economic analysis needs to be combined with thorough architectural and engineering analyses. That is, all project alternatives considered should be technically sound and practical, and must meet the project's performance requirements.

Relevant Codes and Standards

In varying degrees, the federal government, state and municipal entities have all ratified legislative mandates requiring building economics analysis be performed on most capital investment programs. Some of the key federal mandates and standards are listed below.

Life-Cycle Cost Analysis (LCCA)

• 10 CFR 436 Subpart A—Federal Energy Management and Planning Programs, Methodology and Procedures for Life-Cycle Cost Analyses
• DOD Tri-Services Memorandum of Agreement (MOA) on "Criteria/Standards for Economic Analyses/Life-Cycle Costing for MILCON Design" (PDF 265 KB, 3 pgs) 1991. Provides guidance on LCCA for military construction design.
• Facilities Standard for the Public Buildings Service P100 - Chapter 1.7 - Life- Cycle Costing by GSA.
• OMB Circular A-94-Guidelines for Benefit-Cost Analysis of Federal Programs

Value Engineering (VE)

• DOD 5000.2-R, Mandatory Procedures for Major Defense Acquisition Programs and Major Automated Information System Acquisition Programs (PDF 2.2 MB, 193 pgs)
• Federal Acquisition Regulation (FAR), Part 52.248, Value Engineering Parts and Clauses (PDF 126 KB, 27 pgs)
• Federal Acquisition Regulation (FAR), Part 48, Value Engineering
• OMB Circular A-131—Value Engineering
• Public Law 104-106, Section 4306 of the National Defense Authorization Act—Value Engineering for Federal Agencies
• United States Code (U.S.C.), Title 41 - Public Contracts, Chapter 7 - Office of Federal Procurement Policy, Section 432 - Value Engineering
• Value Engineering Program Guide for Design and Construction PQ-250 GSA.

Major Resources

WBDG

Design Objectives

Cost-Effective—Utilize Cost Management Throughout the Planning, Design, and Development Process, Cost-Effective—Consider Non-Monetary Benefits such as Aesthetics, Historic Preservation, Security, and Safety

Publications

• Architect's Essentials of Cost Management by Michael Dell'Isola. New York, NY: John Wiley & Sons, Inc., 2002.
• Building Economics for Architects by Thorbjoern Mann. New York, NY: Van Nostrand Reinhold, 1992. ISBN 0-442-00389-7.
• Building Economics: Theory and Practice by Rosalie Ruegg and Harold Marshall. New York, NY: Van Nostrand Reinhold, 1990. ISBN 0-442-26417-8.
• DOD 4245.8-H, Value Engineering
• GSA P-120 Project Estimating Requirements for the Public Building Service
• Life-Cycle Costing for Design Professionals, Second Edition by Stephen Kirk, AIA and Alphonse Dell'Isola, PE. New York, NY: McGraw-Hill, Inc., 1995.
• Life-Cycle Costing Manual for the Federal Energy Management Program by Sieglinde Fuller and S.R. Peterson. NIST Handbook 135. National Institute of Standards and Technology, 1995.
• MIL-HDBK-115A DOD Handbook U.S. Army Reverse Engineering Handbook (Guidance and Procedures)
• NAVFAC P-442 Economic Analysis Handbook

Others

• Federal LCCA Software Tools:
• Building Life-Cycle Cost Program Version 5 (BLCC5)—an economic analysis tool developed by the National Institute of Standards and Technology for the U.S. Department of Energy Federal Management Program.
• ECONPACK for Windows—an economic analysis tool developed by the U.S. Army Corps of Engineers in support of DOD funding requests.
• eVALUator: Building Life-Cycle Cost Assessment Program by DOE.