The Economics of Capital Projects: A Sustainability Perspective

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The Economics of Capital Projects A
Sustainability Perspective

• Dr. Annie R. Pearce
• Sustainable Facilities Infrastructure Program
• Georgia Tech Research Institute

2
Holistic Cost Management

• Considers the following from the very beginning
  of the project
• What will be the impacts of design/construction
  decisions on life cycle costs?
• What opportunities exist to offset increases in
  first cost for design improvements?
• What externalities should be considered that
  could result in a better decision about costs?

3
Classic Cost/Influence Curve (CII)
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Expectations about Sustainable Projects
The idealist says...
The pessimist says
The realist says...

• Learning curve

• Economies of scale

• Resource scarcity

• Stricter legislation

Unarguable regions...
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How do we normally think about project costs?

• First costs
• Site acquisition
• Design costs
• Project management costs
• Construction costs, including...

• ...Labor
• Materials
• Equipment
• Contingencies
• Financing other costs of money
• Commissioning/ Turnover costs

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How do we normally think about project costs?

• Operations Mtce
• Energy
• Materials
• Labor
• Equipment

• Repair/Remodels
• Labor
• Materials
• Equipment
• Design/Mgt. costs
• Commissioning/ Turnover costs

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Potentially hidden costs(often covered as
overhead and not allocated appropriately)

• Up-front environmental costs
• Siting
• Design of environmentally preferable alternatives
• Qualification of suppliers

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Potentially hidden costs(often covered as
overhead and not allocated appropriately)

• Regulatory and voluntary environmental costs
• Reporting record-keeping
• Monitoring/testing
• Spill response readiness
• Recycling/waste management

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Other potentially hidden costs

• End of Service Life Costs
• Decommissioning, deconstruction, demolition, or
  disposal costs, including...

• ...Labor
• Materials
• Equipment
• Contingencies/Risks
• Disposal Fees

All part of the great unknown...
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Contingent costs(may or may not occur)

• Future compliance costs
• Future liability/damage costs
• Remediation costs
• Responses to future releases or presently unknown
  hazards

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Difficult to quantify costs(soft and fuzzy)

• Value of environmental image
• Costs borne by society, e.g.,
• Global warming
• Ozone depletion
• Deforestation
• Resource degradation
• Ecosystem and species loss

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Why traditional economics doesnt always work...

• Assumptions
• Complete and perfect information
• No spatial constraints
• Natural capital has no value in reserve
• All resources have effective substitutes
• Nature consists of limitless sources and sinks
• Social costs do not need to be counted
• All risks are monetarily compensable

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Revised Whole Project Cost Model
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Achieving Economically Sustainable Projects

• The whole system should be optimized
• All measurable benefits should be counted
• The right steps should be taken at the right time
  and in the right sequence

(Source Hawken et al. 1999)
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Opportunities to Offset First Costs

• Example High-performance windows
• Windows cost more
• Cooling load reduced gt HVAC system smaller
• Smaller ducts, fans, motors, and pumps
• Smaller plenum gt smaller floor to floor height
• Reduced building height gt reduced exterior
  enclosure size gt reduced material and labor

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Lovins Discontinuity Effect
(Source Hawken et al. 1999)
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Implications of Integrated Design

• Considered in isolation, high-performance windows
  increase the cost of the building (and might be
  value-engineered out)
• From a whole building standpoint, the cost of
  high-performance windows can be offset by savings
  in other systems
• Savings in life cycle energy costs is significant
• Lets consider an example...

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Durant Middle School, Raleigh, NC

• Building characteristics
• 1 story building, 150,000 sq. ft.
• Construction cost 82.50/sq. ft. (12.3 million
  total)
• Constructed in 1995

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Durant Middle School, Raleigh, NC

• Energy-saving features
• East-west solar orientation, south north facing
  roof monitor glazing for daylighting (30
  increase)
• Radiant barrier in roof
• Low-e glazing throughout (reduces heat gain)
• High-efficiency lighting equipment controls
• Energy management system

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Durant Middle School, Raleigh, NC

• First cost comparison
• Added cost of efficiency features 230,000
• Savings from downsizing HVAC 115,000
• Annual energy cost savings
• Estimated savings 165,000
• Payback for efficiency investments lt 1 year

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Suppose thats still not good enough for the bean
counters...
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Revised Whole Project Cost Model
First Cost
Life Cycle Cost
Qualitative costs
Nontraditional quantifiable costs
Traditionally considered quantifiable costs
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What nontraditional costs should be considered in
cost-based decisions?

• Nontraditional quantifiable costs
• Reduced teacher absenteeism
• Improved productivity
• Reduced vandalism
• Qualitative costs
• Improved achievement test performance
• Increased morale
• Increased occupant health (and growth)

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Daylighting Studies

• Students in daylit middle schools performed
  between 5-14 better on their reading, language,
  and math skills as measured by the California
  Achievement Test
• Durant Middle School has the best attendance
  record in the county (gt100 schools)
• A similar Canadian study found correlation
  between full spectrum lighting and increased
  student growth/improved dental records

Source http//www.essential.org/orgs/GPP/GPP.html
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Other Considerations

• Several studies have found correlation between
  building condition and student achievement and
  behavior
• Indoor air quality was found to significantly
  influence students ability to concentrate
• Building conditions were correlated to teachers
  effectiveness, morale, job satisfaction,
  enthusiasm, and absence rate

Source http//www.ed.gov/inits/construction/impac
t2.html
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Buildings as Teaching Tools

• Ohio Foundation for Environmental Education
• 200 photovoltaic systems are being installed to
  offset energy loads
• Web-based tools allow students to analyze power
  generation and consumption
• Other curricula connections in math and science
• PV systems are being paid for by utility
  companies!

Source http//www.solarschools.org
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Buildings as Teaching Tools

• Other examples
• On-site rainwater harvesting for toilet flushing
  and ecological wastewater treatment supports
  learning in biology and other disciplines
  (Ostratornskolan, Sweden)
• Preserved wetlands, environmental science yard,
  and experimental garden support learning in
  ecology and biology (Tavernier, FL)
• Building energy management system, HVAC, and
  lighting systems support learning in science
  (Brunswick, ME)

Source http//solstice.crest.org
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Other Externalities

• Sick building syndrome cost 60 billion/year in
  1996 (Zeiher 1996)
• Asthma attacks among school children have
  increased fourfold in the last ten years (Bayer
  2000)
• Lost work time for parents
• Medical treatment expenses
• Quality of life decreases

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How important is it who bears the costs of
construction, and when?

• First cost vs. life cycle costs
• Color of money can be a barrier
• How a building is constructed determines its
  legacy of life cycle costs
• Tangible costs vs. intangible costs
• Externalities are not factored in!
• How a building is constructed affects the kinds
  of externalities its constituency will have to
  bear (or the benefits they can realize)

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What are the costs and benefits of sustainability
to project stakeholders?

• Costs
• New way of thinking about capital projects
• Shift in standard procedures takes time and money
• Economies of scale are not yet apparent
• Some products are not widely available or are
  proprietary
• Working with new technologies requires research
• Education is an important component!

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What are the costs and benefits of sustainability
to project stakeholders?

• Benefits
• Reduced costs of consumption, waste disposal, and
  noncompliance
• Reduced liability and environmental risk
• Improved use of assets, particularly human assets
• Reduced operational and disposal costs
• May be able to reuse facilities that otherwise
  would be disposed
• Preparedness for future regulations and
  requirements

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Holistic Cost Management

• If the facility design process seeks
  opportunities for integrated systems improvement,
  increases in first cost can be significantly
  offset by savings in other downsized systems
• Many opportunities become feasible if life cycle
  costs are considered
• When intangible costs are considered, more
  sustainable design and construction is nearly
  always economically preferable

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Conclusions from the Whole Project Cost Model

• There are regions of the cost model in which no
  one will argue with sustainability enhancements
• Other regions can be made more attractive by
  considering nontraditional costs...

Whole Cost
Externalities
Non-traditional
Traditional
lt
gt
Same
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Questions?