NR Life Cycle Cost Analysis (LCCA)

What is Life Cycle Cost Analysis (LCCA)?

Life Cycle Cost Analysis (LCCA) is a form of economic evaluation that compares the costs and savings of alternative building designs and systems over the life cycle of a building. Green building features generally have higher initial costs compared to conventional features but offer operational savings over time through decreased resource use (e.g., energy, water), maintenance and disposal fees.^[1] LCCA takes into account the overall costs of purchasing, operating, maintaining, and disposing of a building or building system, which the initial purchase price does not reflect. Comparing the life cycle costs of various options helps determine the most cost-effective choice for a comparable building design or system in terms of function and performance by translating this data into dollar amounts and providing information about how long it takes an investment to pay for itself (e.g., internal rate of return, savings-to-investment ratio, payback period).

While LCCA’s take into account the life-cycle costs of building designs and systems, a Life-Cycle Assessment (LCA) evaluates the environmental impacts of products, services, and systems (see Life-Cycle Assessment (LCA)).^[2] Together, LCCA’s and LCA’s provide the essential components of a comprehensive cost-benefit analysis.

How to Perform a Life Cycle Cost Analysis (LCCA)

Perform the LCCA early in the project and as part of an integrated design process to allow sufficient time and resources to refine the design and ensure the highest quality product for the lowest cost (see Integrated Design Process). Depending on project team expertise, hire a consulting service or conduct the LCCA in-house.

The first task of an LCCA involves determining the costs and benefits of alternative project options. Cost inputs for an LCCA are often broken down into the following categories:^[3]

• Initial Costs—Purchase, Acquisition, Construction Costs
• Fuel Costs
• Operation, Maintenance, and Repair Costs
• Replacement Costs
• Residual Values—Resale or Salvage Values or Disposal Costs
• Finance Charges—Loan Interest Payments
• Non-Monetary Benefits or Costs

Next, project teams can conduct several sensitivity analyses that include variations in the discount rate, study period or building lifespan, and energy escalation rates.

The discount rate is a measure that decreases the value of dollars spent or received in the future, so future costs and returns are worth progressively less in terms of today’s dollars. The interest rate used for discounting is a rate that reflects an investor’s opportunity cost of money over time. The LCCA method converts cash flows to present values by discounting them to a common point in time, usually the base date.

The US Department of Energy (US DOE) suggests a real discount rate of 3.0%, based on a 12-month average of long-term Treasury bond rates.^[4]

Study period or building lifespan refers to the length of time the LCCA covers.

Energy escalation rates refer to projected average annual energy price increases obtained either from the supplier or from energy price escalation rates published annually on April 1 by US DOE in Energy Price Indices and Discount Factors for Life-Cycle Cost Analysis, Annual Supplement to NIST Handbook 135.^[5]

There are several online tools for performing an LCCA and links to more information in the Resources section below.

Example

New Jersey Association of Realtors (NJAR): Green Building Cost-Benefit Analysis

The Rutgers Center for Green Building in partnership with the New Jersey Association of Realtors completed a detailed analysis of the upfront costs, operating savings, payback period, and appraisal and valuation benefits of several residential green building features, including energy-efficient windows, appliances, heating  and cooling systems, ventilation systems, and use of sustainable and healthy materials. The research looked at the costs and benefits of purchasing a green home on a life-cycle basis, from upfront costs through expected resale value. The research aims to help the real estate industry understand the net economic benefits of green home building.

Benefits

LCCA’s can offer environmental and monetary benefits for new residential construction projects by revealing the most environmentally-friendly and cost-effective solutions for the long run that purchase price alone cannot quantify. Potential benefits include reduced energy, water, and fuel consumption and cost savings on utility bills, maintenance, replacement, and end-of-life disposal costs. While an LCCA cannot remove all uncertainty surrounding a building project, the results equip the design team with the means to identify the optimal balance between green design and economic efficiency.

Costs

The costs for performing an LCCA depend on the scope and complexity of the building project and on whether in-house expertise or an independent consulting service completes the analysis. Several free online tools and resources are available to help owners and developers perform an initial LCCA (see Resources). Costs for performing an LCCA typically include labor costs for data collection, energy modeling (if necessary), LCCA calculations, and the interpretation and reporting of results.

Resiliency

An LCCA can identify and evaluate the costs and benefits of green building strategies that enhance building resiliency. While LCCAs and energy modeling typically use historical weather data, specific, regional, and forward-looking climate data can be used in energy models to inform resilient building design.^[6]

LCCA’s can take into account resiliency objectives. These may include specific design inputs to address increasing heat, more intense precipitation, or rising sea levels, including cooling and shading buildings, improving the efficiency of building envelopes, utilizing green roofs and landscape elements, planning for increased failure or reduced efficiency of electrical or mechanical systems, and providing passive solar cooling and ventilation features.^[7] LCCA’s focused on resilient design can also consider the avoided costs or resiliency benefits of avoided power outages, such as reduced health and safety hazards, food spoilage, and inconvenience from schedule disruptions and the ability to shelter in place.^[8]

^[1] Whole Building Design Guide (WBDG). 2016. Building Life-Cycle Cost (BLLC). http://www.wbdg.org/additional-resources/tools/building-life-cycle-cost-blcc (accessed January 30, 2019).

^[2] National Renewable Energy Laboratory (NREL). Life Cycle Assessments – U.S. Life Cycle Inventory Database. https://www.nrel.gov/lci/assessments.html(accessed January 30, 2019).

^[3] Whole Building Design Guide (WBDG). 2016. Life-Cycle Cost Analysis (LCCA). https://www.wbdg.org/resources/life-cycle-cost-analysis-lcca (accessed January 27, 2019).

^[4] This rate for life-cycle cost analyses is valid through March 31, 2019, according to US DOE. Current Discount Rates (accessed January 27, 2019).

^[5] The National Institute of Standards and Technology (NIST). 2018. Energy Price Indices and Discount Factors for Life-Cycle Cost Analysis – 2018: Annual Supplement to NIST Handbook 135. https://www.energy.gov/eere/femp/building-life-cycle-cost-programs (accessed January 27, 2019).

^[6] NYC Mayor’s Office of Recovery and Resiliency. April 2018. Climate Resiliency Design Guidelines. Version 2.0. Page 4. http://www1.nyc.gov/assets/orr/pdf/NYC_Climate_Resiliency_Design_Guidelines_v2-0.pdf (accessed June 11, 2018).

^[7] NYC Mayor’s Office of Recovery and Resiliency. April 2018. Climate Resiliency Design Guidelines. Version 2.0. Page 9-19. http://www1.nyc.gov/assets/orr/pdf/NYC_Climate_Resiliency_Design_Guidelines_v2-0.pdf (accessed June 11, 2018).

^[8] DOE. “Smart Grid Investments Improve Grid Reliability, Resilience, and Storm Responses.” https://www.smartgrid.gov/files/B2-Master-File-with-edits_120114.pdf (accessed May 1, 2018).