What are the building lifecycle costs of a new building?

A question that we’re frequently asked is: how much budget should be allocated towards operating and maintaining a new building?

This is a great question: after all, buildings can be maintained to perpetuity – in other words, buildings can last forever. But should they be maintained forever? So long as they are well built, have purpose, and provide community value, then it makes sense to plan for their longer-term maintenance.

But there can be variances in how the Finance Department and Asset Management Team budget for building lifecycle costs, including operational and maintenance costs. The approach suggested in this article draws on our years of experience of working with organisations across all sectors on these challenges, and will help bridge that gap in thinking or perspectives.

The whole of life costs for buildings include the initial capital, operations, maintenance, renewals, upgrades and disposals. In many cases, the initial capital cost is less than half the long-term lifecycle cost. Especially if the building is part of a community’s social infrastructure including schools, hospitals, heritage buildings, and recreational buildings.

The building’s hierarchy of care – and how much budget to allocate for the lifecycle costing category

As a rule of thumb, here’s how much we typically allocate to a building’s hierarchy of care or long-term budgeting for building lifecycle costs. Note that these percentages are based on our experience that covers nearly two decades of experience with over 500,000 properties in our database:

• Operating (0.5%): Includes power, water, waste disposal, insurance, rates, and property/lease management charges.
  
  
• Maintaining safety (0.3%): Complying with building codes through regular inspections, and servicing of essential plant and equipment.
  
  
• Maintaining a healthy environment (0.2%): Cleaning, pest control, and security.
  
  
• Tenant expectations (0.5%): Reactive or responsive works and maintenance. This increases as the building ages. The level of reactive expenditure is largely driven by the asset management policies and procedures that the governing body commits to.
  
  
• Extending the life (0.3%): Planned preventative maintenance, including gutter cleaning, wash downs, replacing air conditioning filters, and general scheduled maintenance work that’s often determined by the Facility Management Team or the FM service provider.
  
  
• Sustainability (1.5%): Component renewals and replacement, and room/building refurbishments. Budgeting 1.5% is at the higher end for a building that may demand a higher level of service standard, including heritage buildings. Consider this as a ‘sinking fund’, and associated financial policies will determine how this is accounted for and managed.
  
  
• Adapting to its environment and legislation: As service delivery models and legislation change, so might the overall design and layout of the building. Whether retrofitting accessible entrances or modernising the foyer, or extending the floor area – these are considered separate to the other categories of care. These projects are normally capitalised and justified through separate business cases, while still being part of the Asset Management Plan (AMP) or Strategic AMP.

By applying the ‘rules of thumb’ above, over 3% per annum (to the Capital Replacement Cost) could be needed to care for the building as a long term annual average – or budget for building lifecycle costs. Note that the proportions will vary with different types of buildings, i.e. single storey buildings with minimal plant and equipment could be closer 2%, whereas larger, more complex buildings could be over 4%, and larger heritage buildings could be over 5% depending on the renewal and replacement costs of heritage classed components.

Building life cycle cost analysis example

To demonstrate how this approach works in practice, a new build costing $20m could have the following amounts budgeted as building lifecycle costs ramping up over say three to five years:

In our experience, these on-going building lifecycle costs are often forgotten about at the time of designing both new buildings and extensions.

In future years, the percentages would be based on the updated capital replacement cost of a building, rather than the initial build cost.

To keep the example straightforward, depreciation hasn’t been factored into the above calculations.

How to manage renewals, replacements and refurbishments

The largest part of this on-going building lifecycle cost is the renewals, replacements and refurbishments (i.e. the Sustainability category). This is where the building needs to be broken down into its replaceable and renewable components – and often the focus of a condition assessment that identifies, describes and assesses these components. The NAMS Property guidance material produced by IPWEA refers to the value of these assessed components (Gross Replacement Cost) and the resulting ‘residual structure value’ when compared to the Capital Replacement Cost (CRC). The GRC/CRC ratio also varies between different building types – for example, hospitals could be 0.3 whereas community housing could be 0.5.

This approach recognises that the assessed components tend to have useful or physical lives of between five to 25 years. Whereas, the residual structure value could have a life of 100 years and greater. The question each organisation needs to consider is whether to apply the 1.5% factor to the CRC or to the assessed components only.

Summary

• The hierarchy of care helps to determine how much should be budgeted annually on different aspects of the on-going lifecycle costs of a new building. This rule-of-thumb guide should be adapted to suit each individual building in your portfolio.
  
  
• Be sure to consider these lifecycle costs at the design stage of your new building or extension.
  • See how the Mangere Refugee Resettlement Centre achieved this here.
    
    
• Always continue to assess whether it’s worth continuing to maintain a building. If the cost of maintaining outweighs the value to the community, or if the cost to operate outweighs the value, it’s time to reconsider your approach. So, which buildings in your portfolio could – and should – last forever?
  • For more on this topic view this Prezi.

Customer Tip

Create future data models of new buildings within the SPM Assets software using the ‘future assets’ function available within Advanced Lifecycle – this will then add the future lifecycle costs from buildings that have yet to be built and ensures your AMP budgets recognise these early.

If you’re not yet an SPM Assets customer, contact us to request a free demo to see how this could work for you.