This presentation was used in a webinar on life cycle analysis conducted for the Construction Management Association of America (CMAA). In it four learning objectives were addressed:
1. Understand what life cycle analysis is and how it is different than life cycle costing
2. Understand why the differences from life cycle costing is increasingly important.
3. Understand relationship with capital asset strategies and the growing importance of capital efficiency as a project driver
4. Some applications of life cycle analysis in the capital asset industry will be touched upon.
The presentation and webinar are further amplified by Application of Life Cycle Analysis in the Capital Assets Industry; Construction Management Association of America (CMAA); June 2013; ISBN 978-1-938014-06-2 (eBook); ISBN 978-1-938014-07-9 (Print)
Theory of Management of Large Complex Projects - Chapter 7
Application of life cycle analysis in the capital 07 17 14
1. Application of Life Cycle
Analysis in the Capital
Assets Industry
Bob Prieto
CMAA Webinar
July 17, 2014
2. Application of Life Cycle Analysis in the
Capital Assets Industry
About the Book
What is Life Cycle Analysis?
Relationship to Capital Asset Strategies
The Big Ideas
The Answer
The Life Cycle
More Math
Useful Tools
Application of Life Cycle Analysis in the Capital Assets
Industry
3. About the Book
Title - Application of Life
Cycle Analysis in the
Capital Assets Industry
Publisher - Construction
Management Association
of America (CMAA)
Date - June 2013
ISBN 978-1-938014-06-2
(eBook)
ISBN 978-1-938014-07-9
(Print)
5. What is Life Cycle Analysis
Life Cycle Analysis is a comprehensive cradle to grave
evaluation of capital asset performance (benefits and
impacts) that incorporates risk and uncertainty and
considers all three of the bottom lines of the Triple
Bottom Line.
6. Life Cycle Analysis
Relationship to Capital Asset Strategies
Facility or mitigation evaluations as part of permitting
activities – allows consideration of uncertainty, risk,
scenarios and all three bottom lines
Project selection or prioritization – linked to confidence
levels; include uncertainty, risk, scenarios; incorporate
resiliency; all three bottom lines allow balanced process
Support project acceleration business cases more
robustly
Improve estimate and schedule confidence
Inform RFP requirements for PPP and other
performance based contracts as it relates to
environmental and social bottom lines
7. Life Cycle Analysis
Relationship to Capital Asset Strategies
Enable asset valuation for PPP solicitations and test
impact of performance requirements on life cycle value
Facilitate ownership transitions of assets
Evaluate full (life cycle) cost of design alternatives and
O&M strategies to enhance Capital Efficiency
Strengthen asset management decision making and
processes
Support portfolio management decision making
Assess impacts of actions and alternatives on resiliency
8. Potential Owner Challenges
Budget processes are not sensitive to life cycle analysis
Capital and operating requirements and needs may
enter budget process from disparate groups
Costs of indirect support elements viewed as
competing for direct project resources
– Support “codes” not recognized as project enablers
Support function leadership may have “mission”
backgrounds without a broader “business” context
9. The Big Ideas
Life Cycle Analysis vs.
– Life Cycle Costing
– Whole Life Costing
– Uncertainty
7DSM Optioneering
10. Life Cycle Analysis (LCA) vs
Life Cycle Costing (LCC)
LCA differs from Life Cycle Costing through its inclusion
of:
– Revenue and benefits (Capital Efficiency Drivers)
– Broad inclusion of indirect asset costs and externalities
• Consistent cost and scope definition is an industry issue in
LCC which is not encountered in LCA
– Asset financial structure considerations
– Comprehensive inclusion of risks, uncertainties and
multiple possible futures (scenarios)
– Holistic consideration of the Triple Bottom Line
• LCA cares about these benefits in ways that do not
traditionally reflect themselves in a LCC analysis and thus
provides greater focus and impetus to sustainability efforts.
11. Life Cycle Analysis (LCA) vs
Whole Life Costing
LCA builds on Whole Life Costing expanding
consideration to more fully include:
– Risk and uncertainty
– Financial structure
– Environmental and social benefits and impacts on more
than just a financial basis
LCA is an essential element of a well founded PPP
program (more on this later)
LCA is essential to comprehensively address Capital
Efficiency
12. A Word on Uncertainty (1/2)
All benefit and impact elements have uncertainty
Key is inclusion of uncertainty and understanding
confidence levels
– Essential for Capital and Schedule Certainty
In EPC phases uncertainty considered (in part) as
comparable to handling of uncertainties and risks utilizing
techniques such as Monte Carlo
During operating phase time durations make uncertainties
even more significant
Through asset development process we seek to narrow
ranges of uncertainties and where possible eliminate them
through physical or financial hedges.
– None the less, uncertainties remain and must be
incorporated.
13. A Word on Uncertainty (2/2)
“Optioneering” models uncertainties to compare life
cycle options
– We may assume that the total for each impact (cost) or
benefit (revenue/income) element is normally distributed
and independent.
– We can calculate total uncertainty in the form of a
standard deviation such that:
• σT = √∑σe
2
where:
- σT = total standard deviation
- σe = standard deviation for benefit or impact element e
(benefit and impact elements should be separately grouped)
- Caution: Coupled Constraints
14. LCA is Integral to 7DSM Optioneering
7DSM Optioneering expands current “dimensions” used
in industry:
– Spatial (3D) – uncertainty; assemblies
– Time (4D) – cradle to grave
– First delivery attributes (5D)
• All benefits and impacts – complete attribute set
• Triple bottom line considerations
• Expanded risks
– Life cycle attributes (6D)
• O&M and End-of-Life benefits and impacts
• Triple bottom line considerations
• Scenario based
– System performance attributes (7D) – resiliency as an
“inherent property”
• Linked to externalities inferred by scenarios
15. 7DSM Optioneering Supports Sound Asset
Management
Sound asset management systems exhibit several
characteristics:
– Clearly defined and well communicated strategic business
objectives similar to what we see in all well managed
programs.
– Executive recognition of the value asset management
brings and a commitment to making it successful
– Focus on addressing the strategic level impediments that
may exist
– Clarity in identifying and removing the tactical level
impediments that such programs face.
– Recognition of what success looks like.
16. The Answer
LCAPROG, NPV(Confidence) =
AllΣ PROJ=1 LCA NPV(Confidence), PROJ (Configx,
Globals,Systemicr) – Intra-program transfers
In LCA, this is extended to include all three bottom
lines, identifying a Pareto optimal front with the desired
confidence level at a program level
…but more on this later….
18. The Life Cycle – Holistic View
Triple Bottom Line focus highlights
common drivers, systemic risks, wild cards
and constraints
19. Life Cycle Stages
Revenue
Indirect asset costs
Externalities
Life Cycle Cost
– Planning and
permitting
– Design
– Procurement &
Construction
– Operations
– Maintenance
– End of life
20. Revenue
First Revenue Date
Plant Availability Factor and Ramp-Up
Period and Rate
Asset Life (Duration from First
Revenue during analysis period)
Scheduled Shutdowns (Regulatory,
Seasonal, Maintenance)
Supply/Demand Balance Normalized
Price(Market Size; Competitor
Actions)
Capacity or Throughput
Byproduct Value Captured
Tax Credits Realized
Inflation Adjustments to Normalized
Pricing (Inflation; Currency Exchange
Rates)
This consideration is key in
determination of Capital
Efficiency and in PPP
21. Indirect Asset Costs
Land use
Tax Regime
– Taxable
– Tax Credit
– Tax Exempt
Financing structures
Common factors
– Financial factors – hyper inflation,
deflation, uninsured portion of
disasters (natural, manmade, or
Natech)
– Environmental factors – climate
change
– Social factors – change in user
behavior, change in surrounding
community behavior with respect
to the facility
– Correlated risks
Financing Structures impact Capital
Efficiency and are driven
by PPP “form”
22. Land Use
Land use impacts include:
– Land use (the plant site)
• Emissions to air
• Emissions to water
• Emissions to soils.
– Land use change
• Mineral and fossil fuel use
• Land transformation
• Land occupation
• Soil erosion, compaction and sealing
– Often ignored in LCA but taking
on increasing importance.
ISO 14040 – 14043, largely
developed from industrial perspective
and do not mention land use as an
impact category
Land use considers following factors:
– Concurrent availability –site is
available on some basis for use by
other facilities. Important when
evaluating large program or asset
portfolio design. May be either:
• Constrained or limited
• Unconstrained or unlimited
(except with respect to limiting
attributes of the site
independent of the facility’s
presence at the site)
– Concurrent unavailability – the site
is not available for other current
use due to the facility’s presence
at the site.
– Loss of optionality – site use, post
facility closure, is limited because
of the prior presence of the facility
– Permanent unavailability – use of
the site, post closure, is not
reasonably possible
23. Financing Structures (1/2)
Financing structures considered in a life cycle analysis influenced by many factors
including:
– asset characterization
– governing financial metrics (ROE, ROI, IRR, ROA)
– asset lifetimes before refurbishment or replacement
– refinance periods
– construction and operations cash flows
– residual value of asset
25. Externalities
Intangibles such as brand value
Complexity
Assumption migration associated with
longer time frames (dynamic risks)
Stakeholder trust
Susceptibility to “Black Swan” type
risks
“Strategic speed”
– capture greater market share
through quick response or first
mover advantages
– “Time to market” is especially
important in IP driven facility
needs where patent expiration
effectively defines the most
valuable portion of the life-cycle.
Regulatory taxes and subsidies
Potential “Black Swan” factors to be
considered in life cycle analysis
include:
– Financial factors – hyper inflation,
deflation, uninsured portion of
disasters (natural, manmade, or
Natech)
– Environmental factors – climate
change
– Social factors – change in user
behavior, change in surrounding
community behavior with respect
to the facility
– Correlated risks
26. Dynamic Risks
Today, we average risk across the
entire duration of a project, but in long
lived construction programs,
sometimes approaching 20 or more
years, this may not be appropriate.
Risk parameters with defined means
and variances today can change
significantly over the life of a program,
creating different risk hierarchies and
consequentially different risk
management strategies and
emphasis.
Even more significant as we consider
the extended operations and
maintenance phase which we must
consider in lifecycle analysis
Intra-Organizational
– Changed funding availability /cost
– Changes to assumptions
– Modified review/approval processes
– Disruptive economic factors
Inter-Organizational
– Emergence of new risk drivers
– Increase in constraint coupling
– Cumulative impact of changes
Extra-Organizational
– Litigation
– Change of law/regulation
– New labor or material constraints
– Political actions
– Social actions
Phasing
– Unanticipated step changes as
program moves phase to phase
27. Planning and Permitting
Impact of Permitting on Life Cycle Analysis:
– Reduced revenue
– Higher risk weighted cost of capital –investors may seek higher returns as they wait
patiently and with a higher degree of uncertainty for the facility to obtain necessary
approvals. Similarly debt costs may be higher especially in instances where project funding
is utilized.
– Higher permitting costs
– Higher environmental mitigation or enhancement costs
– Increased project escalation costs
29. Design
Factors Typically Considered in
a Capital Asset Life Cycle
Analysis
– Labor Costs -professional
services
– Benefits from standardization
/design reuse
– Premium costs incurred
because of schedule
– Cost of Time (design
duration/phasing)
– Value of Risk (technology or
other first of a kind risks; labor
availability risk)
– Design estimate uncertainties
(estimating based;
management model driven;
rework based on late inputs or
owner driven changes)
– Consideration given to
procurement and supply chain
strategies (relates to potential
for design rework or impacts
on procurement)
– Degree constructability
considerations have been
incorporated into design
activities (influences design
and construction management
costs with the prospect of
reduced construction
durations and costs)
– Life cycle and sustainability
focus and provision in cost
and schedule for more
aggressive engagement of
O&M managers, staff and key
suppliers
35. Operations – Environmental & Social
Bottom Lines
Social Metrics
Diversity Existence of equal opportunity policies or
programs
Percentage of senior executives who are
women
Percentage of staff who are members of
visible minorities
Percentage of staff with disabilities
Industrial
Relations
Percentage of employees represented by
independent trade union organizations or
other bona fide employee representatives
Percentage of employees covered by
collective bargaining agreements
Number of grievances from employees
Child Labor Whether contractors are screened (or
percentage screened) for use of child labor
Community Earnings donated to the community
Use of local contractors and suppliers
Involvement in projects with value to the
greater community
36. Maintenance
Value creation in the maintenance
phase begins with a well developed
maintenance strategy that
incorporates a focus on:
– Dedicated effort of preventative
and predictive maintenance
– Reliability centered maintenance
– Overall equipment effectiveness
Top performing facilities are
characterized by:
– Reliability
– Controlled maintenance costs
– Sustained profitability
Maintenance practices at such
facilities are characterized by:
– Performance based contracting
that engages the supply chain
financially in success.
– Profit centered maintenance in
which maintenance and reliability
is viewed as integral to financial
success.
– Systematic failure elimination
– Mindset, process, and culture are
the most critical elements in
systematically eliminating failures.
37. Maintenance – Environmental & Social
Bottom Lines
How do various emissions or
discharges to the environment change
based on different maintenance
regimes (with different cost and
performance profiles)?
– Does more frequent changing of
filters reduce dust and particulate
emissions?
– What are the right performance
levels (effectiveness) for
secondary water treatment
systems before chemical recharge
of cleaning or replacement of filter
media?
How often should “white roofs”, solar
panels and windows be washed to
improve their energy performance
characteristics? Alternately, would
application of a photocatalytic extend
the time between cleanings?
How can periodic maintenance
“campaigns” be leveraged to create
broader community benefits?
– Can hazardous material collection
efforts on-site include receiving
such materials from the
community (used motor oils,
chemicals, batteries, and
electronics)?
Can maintenance training programs
or facilities be “opened” up to train a
broader cadre locally, enabling local
community skills and employability,
while creating a broader future labor
pool for the lifecycle of the modeled
capital asset?
39. More Math
…but it’s the ideas that are important….
LCA NPV(Confidence)=
P
Σ t=1 [(All
Σ n=1 C(n(σ, PDF), t, q, ScenarioN, Configx, D# (t, ScenarioN), Limit# (t, D,
ScenarioN)) *q ) - (All
Σ n=1 R(n(σ, PDF), t, q, ScenarioN, Configx, D# (t, ScenarioN),
Limit# (t, D, ScenarioN)) *q )]
40. Complexity of Cost
C = Cost or benefit associated with:
– A given cost factor, n, that is a function of σ and PDF, where:
• σ describes the uncertainty (standard deviation or minimum and maximum)
of Cn , and a
• Probability distribution function, PDF, related to σ and described by a
distribution type (normal, triangular, lognormal, etc.)
– in the time period, t
– with associated discount factor, q
– where CConfidence is indicative of the associated confidence level (CConfidence50,
CConfidence80, CConfidence90).
C(t) = CBase Period Value * Cumulative EF(t)
– Cumulative EF(t) = 1*(1+EF(1))*(1+EF(2))*(1+EF(3))………*(1+EF(t)), where:
• EF(t) is the escalation associated with the cost factor in time period, t
LCA NPV(Confidence)= PΣ t=1 (All Σ n=1 C(n(σ, PDF), t, q) *q )
– Where q is the discount factor
• Different cost factors may be associated with different discount rates when multiple funding sources
are used
– full lifecycle to end of life (t = P)
41. Segregate Revenues and Benefits
This summation is undertaken for all revenue (R) and cost (C) elements, where:
Revenue (R) and Cost (C) are segregated to ensure each is comprehensively
covered. Revenue or more generally, benefits, may be treated as negative costs in
the general form for determining LCA.
Each Revenue (R) and Cost (C) element is individually characterized such that:
– Rn, where the various revenue elements may be written as R1, R2, R3 …,the
characterization of each revenue element may differ
– Cn, where the various cost elements may be written as C1, C2, C3 …,the
characterization of each cost element may differ
42. Drivers and Scenarios Matter
Revenue (R) and Cost (C) properties include σ, PDF, q, EF and also:
– Linkage to common drivers, D, of the general form D# such as D1,D2, D3
• May influence behavior of multiple Revenue (R) and Cost (C) elements in a
correlated way
• Drivers may be a function of time and will vary by Scenario, which is
described later in this section. Drivers could then be written as D#(t,
ScenarioN)
– Linkage to defined constraints (Limit) that may vary over time and be influenced
by the value of one or more common Drivers, D, as well as the Scenario being
considered. Limits would take the general form of Limit#(t, D, ScenarioN)
– Scenario, where sets of Drivers and Constraints maybe associated with a given
capital asset narrative associated with the Base Case for determination of the
asset’s LCA.
43. Stress Test for Resilience
LCA optimization across all three bottom lines can then be stress tested
against alternative scenarios, outside the range of Drivers, Constraints
and Uncertainties otherwise considered.
– Stress testing will help determine the resilience of the capital asset program’s
performance.
– Scenarios may be enumerated in the general form:
• ScenarioN, where N is the scenario enumeration number. Variations around a given
scenario for the purposes of stress (S) testing would be of the form
ScenarioN
S1, ScenarioN
S2, ScenarioN
S3…
44. Program Configurations Matter
In a multi-project program, various configurations may be tested.
– Configurations may be enumerated in the general form:
• ConfigX, where x is the configuration enumeration number
• Variations around a given configuration would be of the form Configx
1,
Configx
2, Configx
3
LCA NPV(Confidence)=
P
Σ t=1 [(All
Σ n=1 C(n(σ, PDF), t, q, ScenarioN, Configx, D# (t, ScenarioN), Limit# (t, D,
ScenarioN)) *q ) - (All
Σ n=1 R(n(σ, PDF), t, q, ScenarioN, Configx, D# (t, ScenarioN),
Limit# (t, D, ScenarioN)) *q )]
45. Program Level LCA
LCA NPV(Confidence)=
– PΣ t=1 [(All Σ n=1 C(n(σ, PDF), t, q, ScenarioN, Configx, D#(t, ScenarioN), Limit#(t, D, ScenarioN)) *q ) - (All
Σ n=1 R(n(σ, PDF), t, q, ScenarioN, Configx, D#(t, ScenarioN), Limit#(t, D, ScenarioN)) *q )]
We may write this as:
– LCA NPV(Confidence), PROJ (Configx, Globals,Systemicr)
Where:
– Configx defines a project, PROJ, as being included in a specific program or portfolio configuration, x,
together with a set of associated characteristics that may act upon project specific values, uncertainties,
Scenarios, drivers and Constraints)
– Globals defines a Global Scenario set, s, consisting of global drivers and constraints that in turn may act
upon, or limit, project specific values, uncertainties, Scenarios, drivers and Constraints across all projects
comprising the portfolio or program
– Systemicr defines a program wide Systemic Risk set, r, including both internal and external risks,
considered in determining the LCA value for a specific project in the portfolio
Then on a programmatic basis (along one of the three bottom lines and at a given confidence
level), the program LCA or LCAPROG may be seen as the sum across all projects within the
program less intra-program transfers to avoid double counting of benefits or impacts.
LCAPROG, NPV(Confidence) =
– AllΣ PROJ=1 LCA NPV(Confidence), PROJ (Configx, Globals,Systemicr) – Intra-program transfers
In a triple bottom line approach to LCA, this approach is extended to include all three bottom
lines, identifying a Pareto optimal front with the desired confidence level at a program level.
46. Useful Tools
Appendix 1 - Candidate Strategies for Risk Reduction
to Consider in Conjunction with LCA Option Selection
Appendix 2 - Candidate Areas for Social Bottom Line
Metrics
Appendix 4 - Opportunity Checklist
Appendix 5 - Impediments for Implementing a Sound
Asset Management System
47. Application of Life Cycle Analysis in the
Capital Assets Industry
Life Cycle Analysis brings a broadened perspective to
traditional life cycle costing methodologies:
– Revenue and its timing are incorporated
– Risk and uncertainty are specifically addressed in modeling and
subsequent optimization
– Benefits, unertainties and impacts are considered not only from
an economic bottom line perspective but similarly from an
environmental and social bottom line perspective
The developed analysis framework provides a basis for
periodic reconfirmation of adopted strategies or
reconfiguration guidance if changed future states so díctate
It is intended not just as an up-front option assessment or
validation tool but a dynamic life cycle based management
tool essential in managing today’s capital asset portfolios.
48. Life Cycle Analysis
Enables Capital Asset Strategies
Facility or mitigation evaluations as part of permitting
activities – allows consideration of uncertainty, risk,
scenarios and all three bottom lines
Project selection or prioritization – linked to confidence
levels; include uncertainty, risk, scenarios; incorporate
resiliency; all three bottom lines allow balanced process
Support project acceleration business cases more
robustly
Improve estimate and schedule confidence
Inform RFP requirements for PPP and other
performance based contracts as it relates to
environmental and social bottom lines
49. Life Cycle Analysis
Enables Capital Asset Strategies
Enable asset valuation for PPP solicitations and test
impact of performance requirements on life cycle value
Facilitate ownership transitions of assets
Evaluate full (life cycle) cost of design alternatives and
O&M strategies to enhance Capital Efficiency
Strengthen asset management decision making and
processes
Support portfolio management decision making
Assess impacts of actions and alternatives on resiliency