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CHANGING THE PARADIGMTraditionally, building owners solicit bids for HVAC upgrades on a first-cost basis. In these cases, the Requests for Proposals (RFPs) ask contractors to present their lowest possible pricing for the initial acquisition of the recommended equipment. Using a first-cost basis to determine the bid outcome on the purchase of supplies or commodities is an accepted industry practice.
But a major HVAC project is a capital asset. Although the installation represents a substantial investment of funding, the upfront cost of HVAC components often represent only 5 percent of the overall investment in terms of total cost of ownership over 20 or more years.
Despite this fact, many organizations continue to purchase HVAC upgrades on a first-cost basis. However, the paradigm has changed with efforts to maximize efficiency and save money long-term via life-cycle cost analysis for HVAC systems and solutions in commercial buildings.
In this era of ever-tightening budgets, a low initial cost for an HVAC system appeals to most building owners. However, contractors can help building owners remember the low cost today could result in excessive lifetime operational costs or a short lifespan - both of which can be avoided with an improved long-term HVAC solution.
In order to make the most of their investment, building owners must weigh upfront versus long-term costs. Contractors can use a life-cycle cost analysis to provide insight on all the factors that impact the cost, performance, and return on investment of an HVAC solution’s lifetime.
A life-cycle cost analysis considers a variety of factors, including behavior of the equipment’s materials, facility use, environmental conditions, and energy costs.
Early in the design or bidding process is the best time to recommend conducting a life-cycle cost analysis. Bid processes incorporating these help owners determine the best investment among alternatives. The goal is to select and install a system that will operate at peak efficiency throughout its lifetime, while delivering high reliability and the lowest possible operation and maintenance cost.
PROJECTING COSTContractors should consider three variables when breaking down the life-cycle cost analysis equation: ownership cost; time period in which costs are incurred; and discount rates applied to future costs.
Break the ownership cost variable into two categories:
1. Initial costs, i.e., those incurred prior to the HVAC system installation, and
2. Future costs, i.e., those incurred after the system is in place. Utility, operating, maintenance, and repair costs should be included.
While future costs, like energy prices, are difficult to predict, a good life-cycle cost analysis factors in projections. For example, for price projections for energy or water use, look at the rate type and structure, summer and winter differentials, and demand charges to get as close as possible.
In addition to cost, a life-cycle cost analysis must factor in time. The study period for a cost analysis is the length of time over which the preparer will evaluate ownership and operational expenses. Typically, a study period ranges from 20 to 40 years, depending on the intended overall life of the facility. Please note, however, the study period generally is shorter than the intended life of the facility.
THE DISCOUNT RATE VARIABLEThe third and final piece of a life-cycle cost analysis equation is called a “discount rate.” The discount rate of a life-cycle cost analysis determines the present value of a future cost by considering market factors that influence the HVAC industry. The higher the discount rate, the lower the present worth of a future cost, and vice versa.
The discount rate influences how a building owner may want to balance current spending in relation to a potential future return on that investment. As the economies change, so does the discount rate. Organizations like the U.S. Department of Energy set a discount rate and update it annually.
ADDING VALUE TO YOUR CUSTOMERSContractors can use life-cycle cost analysis to help building owners maximize return on HVAC investment. For best results, contractors should work with an experienced equipment supplier with knowledge and expertise to conduct life-cycle cost analyses for HVAC projects and a proven track record of providing reliable, cost-efficient equipment installations.
Publication Date: 09/15/2008