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ByBy

Dr. Sadi A. Assaf,Dr. Sadi A. Assaf, Dr. Abdul Mohsin Al- Dr. Abdul Mohsin Al-Hammad,Hammad,

Dr. M. Osama Jannadi, Dr. M. Osama Jannadi, Mr. Mr. Sami Abu SaadSami Abu Saad

ByBy

Dr. Sadi A. Assaf,Dr. Sadi A. Assaf, Dr. Abdul Mohsin Al- Dr. Abdul Mohsin Al-Hammad,Hammad,

Dr. M. Osama Jannadi, Dr. M. Osama Jannadi, Mr. Mr. Sami Abu SaadSami Abu Saad

Assessment of the Problems of Application of Life Cycle

Costing in Construction Projects in Saudi Arabia

Assessment of the Problems of Application of Life Cycle

Costing in Construction Projects in Saudi Arabia

College of Environmental Design, College of Environmental Design, King Fahd University of Petroleum & Minerals, King Fahd University of Petroleum & Minerals,

DhahranDhahran, Saudi Arabia, Saudi Arabia

College of Environmental Design, College of Environmental Design, King Fahd University of Petroleum & Minerals, King Fahd University of Petroleum & Minerals,

DhahranDhahran, Saudi Arabia, Saudi Arabia

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• IntroductionIntroduction• Objectives of the StudyObjectives of the Study• MethodologyMethodology• Problems of ApplicationsProblems of Applications• Results of the StudyResults of the Study• Other ProblemsOther Problems• ConclusionsConclusions

• IntroductionIntroduction• Objectives of the StudyObjectives of the Study• MethodologyMethodology• Problems of ApplicationsProblems of Applications• Results of the StudyResults of the Study• Other ProblemsOther Problems• ConclusionsConclusions

CONTENTSCONTENTS

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  Life Cycle Costing Concept

O In the past, economic assessment of alternative designs, construction, or other investment has been based on initial

(first cost which ignores the total cost incurred for theinvestment throughout its lifetime.

O The concept of life cycle costing provides an economictool which takes into account total costs for an invest-ment during its life span.

  Life Cycle Costing Concept

O In the past, economic assessment of alternative designs, construction, or other investment has been based on initial

(first cost which ignores the total cost incurred for theinvestment throughout its lifetime.

O The concept of life cycle costing provides an economictool which takes into account total costs for an invest-ment during its life span.

1. INTRODUCTION

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O The life cycle costing can be defined as follows: an economic assessment of alternatives designs,construction, or other investment considering allsignificant costs of initial costs and ownership costsover economic life of each alternative, expressed inequivalent economic units.

O The life cycle costing analysis can not be carried outwithout considering the following:

A - total costsB - concept of the time value of money

O The life cycle costing can be defined as follows: an economic assessment of alternatives designs,construction, or other investment considering allsignificant costs of initial costs and ownership costsover economic life of each alternative, expressed inequivalent economic units.

O The life cycle costing analysis can not be carried outwithout considering the following:

A - total costsB - concept of the time value of money

1. INTRODUCTION (Continued)

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A - Total Costs

O initial costsO ownership costs

O Initial costs. They include the followings:- initial construction costs- design costs- land costs- finance costs

O Owner costs. They include the followings:- operating costs

o maintenance costso utility billso staffing fee

A - Total Costs

O initial costsO ownership costs

O Initial costs. They include the followings:- initial construction costs- design costs- land costs- finance costs

O Owner costs. They include the followings:- operating costs

o maintenance costso utility billso staffing fee

1. INTRODUCTION (Continued)

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B - The concept of the time value of money

o The value of money today is not equal to thesame amount of money in the past or in thefuture.

o The concept of the time value of moneyconsidered the following:- initial costs (P) (present value)- discount or interest rate (i%)- life time of an investment (n)

B - The concept of the time value of money

o The value of money today is not equal to thesame amount of money in the past or in thefuture.

o The concept of the time value of moneyconsidered the following:- initial costs (P) (present value)- discount or interest rate (i%)- life time of an investment (n)

1. INTRODUCTION (Continued)

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o To make an equivalent value of money foran assessment along its economic life, manymethods can be used such as:

1. Present worth method

2. Uniform annual method

o To make an equivalent value of money foran assessment along its economic life, manymethods can be used such as:

1. Present worth method

2. Uniform annual method

1. INTRODUCTION (Continued)

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1. INTRODUCTION (Continued)

First Cost

Annual Maintenance Cost

Annual Labor Cost

Extra Income Taxes

Salvage Value

Life, Years

$26,000,000$26,000,000

$800,000$800,000

$11,000,000$11,000,000

------

$2,000,000$2,000,000

66

Project AProject A

$36,000,000$36,000,000

$300,000$300,000

$7,000,000$7,000,000

$2,600,000$2,600,000

$3,000,000$3,000,000

1010

Project BProject B

An Illustrated Example:An Illustrated Example:

If the minimum required rate of return is 15% , which project should be If the minimum required rate of return is 15% , which project should be selected ?selected ?

Using Uniform Annual Worth MethodUsing Uniform Annual Worth Method

EUAC EUAC AA = $18,442,000 = $18,442,000

EUAC EUAC BB = $16,925,000 = $16,925,000

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o To identify the problems of application of life cycle costing in Saudi Arabia.

o To assist the relative severity of those problems from point of views of the government and the private sectors.

o To identify the problems of application of life cycle costing in Saudi Arabia.

o To assist the relative severity of those problems from point of views of the government and the private sectors.

2. OBJECTIVES OF THE STUDY

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This investigation was undertaken into two phases. This investigation was undertaken into two phases.

• The first phase include a literature search and interviews. * The identification of five groups of main problems

and a total of 26 specific problems

• The first phase include a literature search and interviews. * The identification of five groups of main problems

and a total of 26 specific problems

• In the second phase * A survey was conducted to assess the relative

severity of these causes. * The survey was filled buy 11 government agencies

and 12 consulting offices that apply life cycle costing.

• In the second phase * A survey was conducted to assess the relative

severity of these causes. * The survey was filled buy 11 government agencies

and 12 consulting offices that apply life cycle costing.

3. RESEARCH METHODOLOGY

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There are five main categories of problems of life cycle costing: 

First: Knowledge Problems

Second: Data Problems

Third: Procedures Problems

Fourth: Management Problems

Fifth: Cost Problems

There are five main categories of problems of life cycle costing: 

First: Knowledge Problems

Second: Data Problems

Third: Procedures Problems

Fourth: Management Problems

Fifth: Cost Problems

4. PROBLEMS OF APPLICATION

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First: Knowledge Problems:

1. Unfamiliarity with design-to-cost concept2. Lack of knowledge of the concept 3. Unknown relation between initial cost and future cost4. Unavailability of enough references

First: Knowledge Problems:

1. Unfamiliarity with design-to-cost concept2. Lack of knowledge of the concept 3. Unknown relation between initial cost and future cost4. Unavailability of enough references

4. PROBLEMS OF APPLICATION (Continued)

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Second: Data Problems

5. Unavailability of capital cost data:

6. Unavailability of maintenance data: 

7. Unavailability of operation data:

8. Unavailability of discount or interest rate data

9. Unavailability of time life data

10. Large volume of data needed

11. Unavailability of standard method for collecting &

recording of data 

12. Unavailability of data base management system

Second: Data Problems

5. Unavailability of capital cost data:

6. Unavailability of maintenance data: 

7. Unavailability of operation data:

8. Unavailability of discount or interest rate data

9. Unavailability of time life data

10. Large volume of data needed

11. Unavailability of standard method for collecting &

recording of data 

12. Unavailability of data base management system

4. PROBLEMS OF APPLICATION (Continued)

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Third: Procedures Problems:

 

13. Unreliability of decision taken

14. Lack of Integrity of forecast

15. Majority of LCC calculations involve uncertainty

16. Unavailability of qualified staff

17. Unavailability of qualified consultants 

Third: Procedures Problems:

 

13. Unreliability of decision taken

14. Lack of Integrity of forecast

15. Majority of LCC calculations involve uncertainty

16. Unavailability of qualified staff

17. Unavailability of qualified consultants 

4. PROBLEMS OF APPLICATION (Continued)

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Fourth: Management Problems:

 

18. Unacceptance of the concept

19. Government non-enforcement

20. Management (client) pressure to meet budget limit

21. Management (client) pressure to meet time deadline on

design:

22. Unclear benefits of LCC to management (client)

23. Improper planning and control of management

tasks at different LCC stages

Fourth: Management Problems:

 

18. Unacceptance of the concept

19. Government non-enforcement

20. Management (client) pressure to meet budget limit

21. Management (client) pressure to meet time deadline on

design:

22. Unclear benefits of LCC to management (client)

23. Improper planning and control of management

tasks at different LCC stages

4. PROBLEMS OF APPLICATION (Continued)

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Fifth: Cost Problems: 24. Cost to be paid for designer to conduct LCC:25. Cost to be paid for collection of data:26. Difficulties in defining cost elements:

Fifth: Cost Problems: 24. Cost to be paid for designer to conduct LCC:25. Cost to be paid for collection of data:26. Difficulties in defining cost elements:

4. PROBLEMS OF APPLICATION (Continued)

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Based on a survey of the responses, a severity index was calculated to reflect the severity of each individual problem and problem groups. 

The severity indexes were grouped to reflect the respondents' ratings as follows: * Strongly severe 87.5 < I 100* Severe 62.5 < I 87.5 * Somewhat severe 37.5 < I 62.5* Somewhat not severe 12.5 < I 37.5* Not severe 0 < I 12.5

Based on a survey of the responses, a severity index was calculated to reflect the severity of each individual problem and problem groups. 

The severity indexes were grouped to reflect the respondents' ratings as follows: * Strongly severe 87.5 < I 100* Severe 62.5 < I 87.5 * Somewhat severe 37.5 < I 62.5* Somewhat not severe 12.5 < I 37.5* Not severe 0 < I 12.5

5. RESULTS OF THE SURVEY

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Table 1 shows the severity index for individual problems in government agencies.

Table 2 shows the severity index for individual problems in consulting offices. In the same manner.

Table 3 shows the severity index for problem groups in government.

Table 4 shows the severity index for problem groups in consulting offices.

Table 1 shows the severity index for individual problems in government agencies.

Table 2 shows the severity index for individual problems in consulting offices. In the same manner.

Table 3 shows the severity index for problem groups in government.

Table 4 shows the severity index for problem groups in consulting offices.

5. RESULTS OF THE SURVEY (continued)

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Table 1 - Results of Government Agencies' Survey of Problems

Problem DefinitionProblem Definition

[1][1]

StronglyStronglySevereSevere

[2][2]

SevereSevere

[3][3]

SomewhatSomewhatSevereSevere

[4][4]

SomewhatSomewhatNot SevereNot Severe

[5][5]

NotNotSevereSevere

[6][6]

SeveritySeverityIndexIndex

[7][7]

Uniformilization of design-to-cost concept

Lack of knowledge of the concept

Unknown relation between initial and running cost

Unavailability of satisfactoryreferences

44

55

22

55

22

33

33

22

44

22

55

33

11

00

00

11

6868

7777

6464

7373

00

11

11

00

((a)a) Knowledge ProblemsKnowledge Problems

5. RESULTS OF THE SURVEY (continued)

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Problem DefinitionProblem Definition

[1][1]

StronglyStronglySevereSevere

[2][2]

SevereSevere

[3][3]

SomewhatSomewhatSevereSevere

[4][4]

SomewhatSomewhatNot SevereNot Severe

[5][5]

NotNotSevereSevere

[6][6]

SeveritySeverityIndexIndex

[7][7]

Uniformilization of design-to-cost concept

Lack of knowledge of the concept

Unknown relation between initial and running cost

Unavailability of satisfactoryreferences

33

00

00

11

22

55

44

22

44

44

33

77

22

11

44

22

5656

5252

4040

5050

11

22

11

00

((a)a) Knowledge ProblemsKnowledge Problems

Table 2 - Results of Consulting Offices’ Survey of Problems

5. RESULTS OF THE SURVEY (continued)

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Table 3 - Severity Index of Problem Groups in GovernmentTable 3 - Severity Index of Problem Groups in Government

Knowledge ProblemsData ProblemsProcedure ProblemsManagement ProblemsCost Problems

Group DescriptionGroup Description

AABBCCDDEE

GroupGroup

70706969747473736161

Average Sev. Average Sev. IndexIndex

5. RESULTS OF THE SURVEY (continued)

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Table 4 - Severity Index of Problem Groups in FirmsTable 4 - Severity Index of Problem Groups in Firms

Knowledge ProblemsData ProblemsProcedure ProblemsManagement ProblemsCost Problems

Group DescriptionGroup Description

AABBCCDDEE

GroupGroup

49496060565657575555

Average Sev. Average Sev. IndexIndex

5. RESULTS OF THE SURVEY (continued)

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 * Individual problems:

Twenty-four individual problems rated "severe" and two individual problems rated "somewhat severe".

* Problem Groups:Four groups fall in the "severe" category and one

group falls in the "somewhat severe".

For government agencies: * Individual problems:

Twenty-four individual problems rated "severe" and two individual problems rated "somewhat severe".

* Problem Groups:Four groups fall in the "severe" category and one

group falls in the "somewhat severe".

5. RESULTS OF THE SURVEY (continued)

Based on the foregoing results shown in Tables 1, 2, 3 & 4, the following could be indicated:

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For consulting firms:  Individual Problems:

Six individual problems rated as "severe" and twenty problems rated "somewhat severe".

Problem Groups:All groups fall in the "somewhat severe" category.

 

For consulting firms:  Individual Problems:

Six individual problems rated as "severe" and twenty problems rated "somewhat severe".

Problem Groups:All groups fall in the "somewhat severe" category.

 

5. RESULTS OF THE SURVEY (continued)

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For government agencies: * Individual Problems:

Unavailability of qualified consultants, management pressures to meet budget and design limits are the most severe hurdles in the application of LCC, with severity indexes of 82%, 77% and 77% respectively.

* Problem Groups:Procedure problems, management problems and

knowledge problems are the most severe hurdles in the application of LCC with severity indexes of 74%, 73% and 70% respectively.

For government agencies: * Individual Problems:

Unavailability of qualified consultants, management pressures to meet budget and design limits are the most severe hurdles in the application of LCC, with severity indexes of 82%, 77% and 77% respectively.

* Problem Groups:Procedure problems, management problems and

knowledge problems are the most severe hurdles in the application of LCC with severity indexes of 74%, 73% and 70% respectively.

5. RESULTS OF THE SURVEY (continued)

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For consulting firms:

* Individual Problems:Unavailability of data base management systems

and unavailability of interest rate and life time data are the most severe hurdles in the application of LCC with severity indexes of 67%, 67% and 65% respectively.

* Problem Groups:Data problems, management problems, and

procedure problems are the most severe hurdles in the application of LCC with severity indexes of 60%, 57% and 56% respectively.

For consulting firms:

* Individual Problems:Unavailability of data base management systems

and unavailability of interest rate and life time data are the most severe hurdles in the application of LCC with severity indexes of 67%, 67% and 65% respectively.

* Problem Groups:Data problems, management problems, and

procedure problems are the most severe hurdles in the application of LCC with severity indexes of 60%, 57% and 56% respectively.

5. RESULTS OF THE SURVEY (continued)

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In government agencies:In government agencies:Contradiction of LCC concept to Contradiction of LCC concept to

government policy which government policy which is based on is based on initial cost in selecting alternatives and in initial cost in selecting alternatives and in

bidding.bidding.

In consulting offices:In consulting offices:Resistance of management to introduction Resistance of management to introduction

of new concepts.of new concepts.

Unclear concepts to clients.Unclear concepts to clients.

Time and cost Time and cost incurred to update the in-house incurred to update the in-house data base data base management system.management system.

In government agencies:In government agencies:Contradiction of LCC concept to Contradiction of LCC concept to

government policy which government policy which is based on is based on initial cost in selecting alternatives and in initial cost in selecting alternatives and in

bidding.bidding.

In consulting offices:In consulting offices:Resistance of management to introduction Resistance of management to introduction

of new concepts.of new concepts.

Unclear concepts to clients.Unclear concepts to clients.

Time and cost Time and cost incurred to update the in-house incurred to update the in-house data base data base management system.management system.

6. OTHER PROBLEMS ADDED BY RESPONDENTS

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It can be concluded that government agencies and consulting firms, due to the differences of responsibilities and work interest, generally differ in their ranking of the problems that affect LCC application.

However, both parties agreed that the chief cause for not applying LCC in government agencies or the public sectors are:

It can be concluded that government agencies and consulting firms, due to the differences of responsibilities and work interest, generally differ in their ranking of the problems that affect LCC application.

However, both parties agreed that the chief cause for not applying LCC in government agencies or the public sectors are:

7. CONCLUSION

• client or management pressure to meet deadlines for design approval.

• lack of human resources (qualified consultants and staff) and material resources (sufficient data and data quality)

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YOU

THANK

YOU