Delivering Value Through Cost Analysis
Many building owners mistakenly plan and implement new HVAC projects in the same manner as they would manage a large maintenance expense. But HVAC upgrades likely will remain in place for 20 years or more, and as such, deserve a more strategic, long-term focus and evaluation. This gives contractors the opportunity to differentiate themselves in the market, and deliver important business value by educating building owners on the potential cost savings offered through life-cycle cost analysis.
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.
The life-cycle cost of an asset is the total discounted dollar cost of owning, operating, maintaining, and disposing of a building or a building system over a period of time, according to The National Institute of Standards and Technology (NIST) Handbook. A life-cycle cost analysis examines a capital project’s total ownership cost by comparing initial, maintenance, repair, and operating costs over the system’s life.
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.
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 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.
Publication Date: 09/15/2008
CHANGING THE PARADIGM
Traditionally, 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.
Life-cycle costs include purchasing, installation, and operational expenditures over the life of an HVAC application. Calculating life-cycle costs allows a customer to accurately analyze their cost of ownership. In general, those systems with lower life-cycle costs will create more value for the owner over time. (Photo courtesy of Trane.)
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.
Working with an experienced equipment supplier with a history of reliable, cost-efficient equipment installations can and should add value to a customer’s life-cycle cost. (Photo courtesy of Trane.)
PROJECTING COST
Contractors 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 VARIABLE
The 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 CUSTOMERS
Contractors 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
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