Macau Matters | The importance of lifecycle costing

Richard Whitfield

My last article talked about problems in the construction industry, globally and in Macau, and identified some ways for governments to improve the situation. Now I want to address one crucial issue that was not considered last time, and which I believe must be understood if we want to improve construction industry productivity and quality.

I am convinced that there is a very important and fundamental misalignment of interests between the owners of newly developed buildings and the companies that design and build them. Building owners aim to minimize cost of ownership over the whole lifecycle – from initial design, through construction to ongoing operation and maintenance to the eventual demolition or sale of the structure. By contrast, architects and construction companies aim to minimize the costs and risks of completing the initial building construction and have no subsequent involvement in its ongoing operations.

Buildings have long lifespans so that, generally, in the overall cost equation, operating costs are often as important as initial construction costs. To give a simple example, consider the orientation of a building on its site and the envelope or “skin” of the building. These have a major impact on the amount of heat a building absorbs during the year, which in turn has a major impact on air-conditioning costs – a poorly designed and oriented building may need double the air-conditioning of a well designed and oriented building. This can all be readily predicted by proper thermal modeling, but if the architect and construction company do this modeling it increases their workload and can delay construction and thus reduce their profits.

All of my construction industry friends happily tell me that they will never consider using new, unproven technologies when constructing buildings. The downside risk of something not working or going wrong (leading to a cost blowout or construction delays) is just too high. Moreover, the building owner gets all the the upside benefit if the new innovation works and the architect/construction company get nothing from it.

In many industries such lifecycle costing and innovation issues dominate the selling process. Airlines always look at operating cost per passenger mile when choosing new commercial aircraft to buy. Similarly, taxi companies (and most private users) closely compare vehicle technology, mileage, insurance and maintenance costs before buying new cars. And when buying phones, computers and other equipment, technology and cost of ownership issues are often as important as the buying price. But in construction, technology and lifecycle issues are rarely considered – construction cost and the time needed to complete the building is nearly always the main (and often only) focus.

If I was building myself a new home, I would very happily pay a 10%-20% premium in the construction if it halved my utility and maintenance bills for the next 30 years. Also, in principle, there is little difficulty in estimating these potential costs and savings as long as materials and product suppliers have done the necessary research (which most have already done). A 5-10 year payback period for investments to improve the operating efficiency of a building with a 50-year operating life is a “no brainer” in my book.

There are several things that governments can do to encourage the construction industry to focus on lifecycle costing, e.g. mandate the adoption of green building standards for new buildings as they do in Hong Kong and elsewhere. Similarly, banks and insurance companies could be required to consider these issues when writing mortgage and insurance contracts. This is yet another area, where Macau has an opportunity to take the lead in the region, improve quality of life here and develop expertise that can be exported to diversify the local economy. Like always, what is holding us back?