DEVELOPMENT OF A WHOLE-LIFE COST IMPLEMENTATION FRAMEWORK FOR THE NIGERIAN CONSTRUCTION INDUSTRY

ABSTRACT

Whole Life Cost (WLC) decision-making technique offers immense benefit to building investors as it captures not just the initial cost but also the maintenance, running and terminal costs of proposed buildings. Its application however is constrained by the absence of a standard implementation framework. This research effort was geared towards the development of an implementation framework that addresses; the legal requirement for WLC within the Nigerian construction industry; the limitations of existing frameworks; and major implementation challenges. First the legal requirement for WLC was articulated; the strength and weaknesses of existing frameworks was then assed based on some identified criteria; solutions to some of the critical implementation challenges were then identified through a mixture of theoretical survey, and structured interviews. The entire solution frame was then organised, integrated and harmonised into a framework structure. The framework was then improved by transforming it into programme flowcharts and interfaces to facilitate computer implementation. Result shows that substantial legislations, regulations and guidelines that facilitate the use of WLC are well established. Besides, none of the existing frameworks fully satisfy problem-solving, project life-cycle, and feedback requirement. A profiling of WLC

Implementation challenges indicates that client‟s lack of demand/ understanding, data scarcity, process complexity, and high level of risk and uncertainty are the most severe. In an attempt to mitigate these limitations, a conceptual framework was proposed. The framework utilises a relational database, a model selection framework and two mathematical models: Modified traditional model which enables the identification of the best alternative based on payback period, net present/net future values, and breakeven point and; an Options appraisal model which facilitates the evaluation of embedded WLC opportunities. The present value options appraisal model enables the determination of the optimum investment time thereby improving the decision horizon from two-way to five-way. It also provides estimate of benefit to cost ratios, profitability index on both the net present values and option value. Test result indicates that the database is effective in terms of: storage and retrieval of multiple data types, preservation of data integrity, and ensuring user-friendliness. Furthermore, the test result confirms the efficacy and robustness of: the transformation and integration algorithms in converting one data type to another, and the modified WLC and the options appraisal models. It was recommended that building professionals and consultants be aware of the existence of legal provisions for WLC and also get prepared to take on the challenge placed upon them. They must understand that traditional procurement on the basis of initial cost alone is no more tenable and redirect their attention to the use of WLC as it gives the public better value for money and as such becomes imperative at especially the present times in which the country is experiencing recession. It is anticipated that the framework would improve the usability of WLC in the industry by providing both private and public sector with a robust analysis tool that would facilitate long term property investment decision making.

Table of Content

Cover page…………………………………………………………………………..…. i

Fly leaf…………………………………………………………………………………. ii

Title page ……………………………………………………………………………… iii

Declaration………………………………………………………………………………………………………. iii

Certification…………………………………………………………………………………………………….. iv

Acknowledgement…………………………………………………………………………………………….. v

Dedication……………………………………………………………………………………………………….. vi

Synopsis…………………………………………………………………………………………………………. vii

Table of content……………………………………………………………………………………………… viii

List of tables…………………………………………………………………………………………………….. xi

List of figures…………………………………………………………………………………………………. xiii

Abstract………………………………………………………………………………………………………….. xx

1.0  INTRODUCTION ……………………………………………………………………………………….. 1

1.1 Background Of The Study ………………………………………………………………………… 1

1.2 Statement of Research Problem ………………………………………………………………… 2

1.3  Justification for the study …………………………………………………………………………. 3

1.4 Aim and Objectives …………………………………………………………………………………. 5

1.4.1   Aim ………………………………………………………………………………………………… 5

1.4.2   Objectives ……………………………………………………………………………………….. 5

1.5 Scope of the Research ……………………………………………………………………………… 6

1.6 Limitations …………………………………………………………………………………………….. 6

2.0  LITERATURE REVIEW ……………………………………………………………………………… 7

2.1 History of Whole Life Costing. …………………………………………………………………. 7

2.2 Definitions of Cost-In-Use, LCC, WLC and WLA ……………………………………. 10

2.3 Benefits and Uses of WLC. …………………………………………………………………….. 13

2.4 The Legal requirement for WLC. …………………………………………………………….. 15

2.4.1 Public Procurement Act 2007. …………………………………………………………. 15 2.4.2              Infrastructure Concession Regulatory Commission Act (2005) ………… 20 2.4.3             Standards Organisation of Nigeria Act. …………………………………………. 27 2.4.4          Public Enterprises (Privatisation and Commercialisation) Act. …………. 31

2.4.5       Fiscal Responsibilities Act, 2007. …………………………………………………. 31

2.5 Impediments to the application of WLC …………………………………………………… 32

2.5.1   WLC Implementation cost and scarcity of historical data. …………………… 32

2.5.2  Lack of awareness ………………………………………………………………………….. 38

2.5.3   Complexity of the process ……………………………………………………………….. 43

2.5.4    Limitations of existing WLC implementation Methodologies ……………… 44

2.6 Existing WLC Analysis Tools …………………………………………………………………. 61

2.7 Economic Evaluation Techniques ……………………………………………………………. 67

2.7.1   Simple Payback (SPB) ……………………………………………………………………. 67

2.7.2   Discounted Payback Period (DPB) …………………………………………………… 69

2.7.3 Accounting Rate of Return (ARR) ……………………………………………………. 69 2.7.4 Return on Capital Employed ……………………………………………………………. 70 2.7.5 Net Present Value (NPV) ………………………………………………………………… 71

2.7.6   Internal Rate of Return (IRR) …………………………………………………………… 73

2.7.7   Adjusted Internal Rate of Return (AIRR) ………………………………………….. 77

2.7.8    Benefit to Cost Ratio (BCR) ……………………………………………………………. 78

2.7.9   Savings to Investment Ratio (SIR) ……………………………………………………. 80

2.8 Work/Cost Breakdown Structures ……………………………………………………………. 81

2.9 The Royal Institute of British Architects (RIBA) Plan of work……………………. 87

2.10 Whole Life Cost Analysis, Management and Planning ………………………………. 89

2.10.1     Life cycle cost analysis (LCCA) …………………………………………………… 89

2.10.2 Whole Life Cost Management (WLCM) ……………………………………………. 90

2.10.3     Whole Life cycle cost planning (WLCP) ……………………………………….. 91

2.11 Risk Analysis in Whole Life Costing ……………………………………………………….. 93

2.11.1     Risk Matrix ………………………………………………………………………………… 94

2.11.2 Sensitivity Analysis (SA) …………………………………………………………………. 95

2.11.3 Monte Carlo Method (MCM) ……………………………………………………………. 96

2.11.4 Risk Adjusted Discount Rate (RADR) ……………………………………………….. 97

2.11.5 Fuzzy Set Theory (FST) …………………………………………………………………… 97

2.11.6 Decision Tree Analysis (DTA) …………………………………………………………. 99

2.12 The Black & Scholes Options Pricing Model ……………………………………………… 101

3.0 RESEARCH METHODOLOGY ………………………………………………………………… 106

3.1 Introduction ………………………………………………………………………………………… 106

3.2 Research Philosophy ……………………………………………………………………………. 106

3.2.1 Metaphysical stance ………………………………………………………………………… 107

3.2.2 Epistemological stance …………………………………………………………………….. 108

3.3 Research perspective ……………………………………………………………………………. 108

3.4 Research Approach ……………………………………………………………………………… 109

3.5 Research design …………………………………………………………………………………… 112

3.6 Research Method …………………………………………………………………………………. 113

3.6.1 Literature Survey …………………………………………………………………………….. 113

3.6.2 Framework design …………………………………………………………………………… 115

3.6.3 Implementation and Testing….……………………….…………………..118

4.0   DATA ANALYSIS AND FRAMEWORK DESIGN …………………………………… 118

4.1 Introduction ………………………………………………………………………………………… 118

4.2 Legal requirement for WLC ………………………………………………………………….. 118

4.2.1 Result of interview with BPP ……………………………………………………………. 118 4.2.2 Result of interview with ICRC ………………………………………………………….. 119

4.2.3 Result of interview with SON …………………………………………………………… 120

4.3 Limitations of existing WLC methodologies …………………………………………….. 122

4.4 Impediments to WLC Application and their Solutions ……………………………….. 124

4.4.1 Lack of demand and understanding by the client …………………………………. 126 4.4.2 Data Scarcity and Implementation Cost ……………………………………………… 135

4.4.3 Separation of capital from running cost ……………………………………………… 139 4.4.4 Complexity of the process ………………………………………………………………… 139 4.4.5 High level of risk and uncertainty ……………………………………………………… 139

4.4.6 Lack of knowledge by professionals ………………………………………………….. 139

4.5 The Conceptual Framework ……………………………………………………………………. 140

4.6 Process flow diagrams ……………………………………………………………………………. 142

4.6.1 Algorithm for data analysis, and storage ………………………………………….. 142 4.6.2 Algorithm for data preparation. ………………………………………………………. 153

4.6.3   Algorithm for Whole Life Appraisal ……………………………………………….. 156

4.6.4    Algorithm for Risk analysis. ………………………………………………………….. 176

4.7 User interfaces, flowcharts and database …………………………………………………180

4.7.1    Main interface ……………………………………………………………………………… 180

4.7.2    Data analysis ……………………………………………………………………………….. 180

4.7.3   Database design ……………………………………………………………………………. 202

4.8 Data preparation ………………………………………………………………………………….. 212

4.9 WLC Appraisal …………………………………………………………………………………… 235

4.9.1 Budgeting ………………………………………………………………………………………. 235

4.9.2 Benchmarking ………………………………………………………………………………… 240

4.9.3 Options evaluation …………………………………………………………………………… 241

5.0   FRAMEWORK IMPLEMENTATON AND TESTING ………………………………. 248

5.1 Introduction ………………………………………………………………………………………… 248

5.2 Implementation and testing of database storage and retrieval system……….248

5.3 Implementation and testing of transformation algorithms …………………………. 251

5.3.1 Non-construction cost: Land …………………………………………………………….. 251

5.3.2 Non-construction cost: Finance …………………………………………………………. 251

5.3.3 Income …………………………………………………………………………………………… 252

5.2.4 Building …………………………………………………………………………………………. 253

5.2.5 External Works ……………………………………………………………………………….. 255

5.3.6 Preliminaries …………………………………………………………………………………… 258

5.3.7 Design fees …………………………………………………………………………………….. 259

5.3.8 Operations cost ……………………………………………………………………………….. 261

5.3.9 Maintenance …………………………………………………………………………………… 264

5.3.10 End-of-life ……………………………………………………………………………………. 265

5.3.11 Summary of the Data adjustment, Transformation and Integration process

……………………………………………………………………………………………………………… 267

5.4Model Testing ……………………………………………………………………………………….. 269

5.4.1 Testing of modified traditional model ………………………………………………… 269

5.4.2 Testing of Options appraisal model …………………………………………………… 275

6.0  SUMMARY, CONCLUSION AND RECOMMENDATION ……………………….. 279

6.1 SUMMARY …………………………………………………………………………………………… 279

6.2 Conclusion ………………………………………………………………………………………….. 284 6.3 Recommendation …………………………………………………………………………………. 286

6.4 Contribution to knowledge ……………………………………………………………………… 287

REFERENCES ………………………………………………………………………………………………. 288

CHAPTERONE

1.0INTRODUCTION

1.1       Background of the Study

The economic evaluation of construction projects has been predominantly based on the initial capital cost. Cuellar-Franca and Azapagic (2013) discovered that, the initial cost of the UK housing stock constitute only about 35% of their cradle-to-grave cost. The remaining 65% is accounted for by the occupancy and disposal costs. This signifies that, by basing evaluation of building investments on initial cost only, the potential for cost savings at the operating stage is neglected thereby depriving clients Value For Money (VFM).

According to Owen and Merna (1997), the persistent need for infrastructural facilities, coupled with limited financial resources invoked the proliferation of new procurement methods in the form of Public Private Partnership (PPP). Some varieties of PPP scheme like Private Finance Initiative (PFI) and Build Operate and Transfer Options (BOT) require proposed projects to pass the VFM test. In conducting the VFM test the use of Whole Life Cost (WLC) cannot be avoided as forecast of both cost and income of an asset over its operating life are required.

Another essential development is the quest for sustainable building development.

Economic sustainability requires that proposed construction ensures “fitness for purpose”, and efficient allocation of resources (elimination of under/over investment). Ellingham and Fawcett (2006) identified the provision of economic options as a key requirement of sustainability. These requirements are best evaluated using WLC appraisal. Dell‟Isola and Kirk (2003) postulated that, the need for facilities to accommodate changes so as to guard against premature obsolescence, remain operationally effective, and maintain total quality management requirement also strengthen WLC agenda.

It is in line with the aforementioned necessities that most developed nations have mandated the use of WLC in the economic evaluation of proposed projects. Legislations mandating the use of WLC have been passed in the USA since mid-1970‟s (Dell‟Isola and Kirk, 1981). In the UK, WLC became officially recognised in 1992 under BS 3845(1992). In contrast, WLC is rarely used in the developing countries like Nigeria due to a number of challenges, except in internationally financed projects like the World Bank assisted projects (Flanagan and Jewell, 2005). The challenges, like cost of implementation, process complexity etc. need to be overcome for a proper uptake of the service in the developing countries.

1.2       Statement of the Research Problem

The economic evaluation of proposed building projects in the Nigerian construction industry is traditionally based on initial capital cost instead of Whole Life Cost (WLC) which aggregates the initial, maintenance operating and terminal cost of proposed projects. This approach has the disadvantage of ignoring the operating, maintenance and disposal cost of proposed projects thereby placing significant financial burden on clients and users at a later stage of asset life. Recent developments like the quest for sustainable built environment, Public Private Partnering (PPP) and Build Operate and Transfer (BOT) options require proposed building projects to satisfy the Value for Money (VFM) test over their operating life (Dell‟Isola and Kirk, 2003). This requirement clearly indicates the need for a shift from traditional to WLC evaluation methods. On recognising this, the Nigerian legislative arm of the government passed the Infrastructure Concession Regulatory Commission and the Public Procurement

ACTs in 2005 and 2007 respectively. Both ACTs clearly require the application of Value-For-Money (VFM) standards and principles in the procurement of public assets.

Furthermore, the Federal Executive Council in April, 2009 approved a national policy on Private Finance Initiative which requires public office holders to assess VFM in public procurement on the basis of WLC. This requirement is a challenge to professionals considering the difficulties associated with WLC exercise. These difficulties which includes; lack of awareness, cost of implementation, scarcity of reliable historical data, diverse methodologies, and limitations of existing frameworks greatly limits the application of WLC in especially the developing countries like

Nigeria (Flanagan and Jewell, 2005; Kishk, Al-Hajj, Pollock, Aoud, Bakis, and Sun, 2003a; Dermot and Jason, 2017). This research effort hopes to overcome the aforementioned problems through the development of an Implementation framework for WLC costing in the Nigerian building industry.

1.3       Justification for the Study

The reason for the slow uptake of WLC in especially the developing countries has been attributed to so many factors. These factors include: dispersed legal requirement; data scarcity; cost of implementation; multiplicity of data formats/models; complexity of the process; and lack of demand/awareness by the client amongst others (Ashworth, 1993; Seeley, 1996; Flanagan and Jewell, 2005; Olubodun, Kangwa, Oladapo, and Thompson, 2010; Opoku, 2013; Higham, Fortune, and James, 2015; Dermot and Jason, 2017). Solution to these problems has been the concern of many researchers since the early 1990s. Surprisingly, these problems keep on reverberating to the present as reported by Opoku (2013) and more recently by Dermot and Jason (2017). If these problems are successfully mitigated, WLC technique will offer great benefit to building Clients. Besides, the solution frame to these problems would then serve as a basis for the development of an implementation framework.

The development of an implementation framework for WLC would facilitate the identification, characterization and integration of the requirements for WLC analysis within the Nigerian construction industry. Such a framework would assist in identifying and integrating; the legal requirement for the application of WLC; the activities involved in WLC analysis; the sequence of WLC operations; WLC data collection, analysis and presentation format, and risk analysis framework.

It is anticipated that, the availability of the framework would encourage the use of WLC within the industry thereby: assist in cutting down maintenance and operating costs of proposed projects thus freeing resources for other investments; push forward the sustainability agenda in the built environment by minimizing over/under design through sound WLC practice; assist both the public and private sector clients in the preparation of technical/financial plans on maintenance and renovations of building assets; help to ensure that buildings do not get obsolescent prematurely through the evaluation of their physical, economic, functional and legal life; encourage innovation in the design, construction and management of building assets as professionals are forced to consider the performance of proposed projects over their operating life; providing a basis for the development of an industry based WLC standard method of cost analysis; and forming the basis for the development of an industry based WLC data analysis tools.

1.4        Aim and Objectives

1.4.1    Aim

The aim of this research work is to develop a WLC implementation framework for the Nigerian construction industry with the view to improving the usability of WLC in economic evaluation of building projects.

1.4.2    Objectives

The objectives of this research are:

1. To articulate the legal requirements for the application of WLC.
2. To evaluate the limitations of existing WLC implementation frameworks
3. To determine the most significant implementation challenges for WLC
4. To proffer logical solutions to the implementation challenges. .
5. To integrate the solutions into a framework structure by observing the legal requirements for WLC.
6. To transform the framework structure into a programme flowchart and interfaces for subsequent implementation on a computer system.

.

1.5       Scope of the Research

This study focused on the public sector of the Nigerian building industry, thus the developed framework relates principally to public investments. Moreover, the implementation and testing was limited only to database and mathematical models using data for residential buildings only.

1.6       Limitations

The underlying assumption of Black-Scholes model which considers income to be lognormally distributed over time may not perfectly fit the Nigerian property market, thus there may be the need to further assess the validity of the assumption. More so, producing the best design requires concerted effort in research, testing and improvement over time. While logical arguments were drawn based on which decisions were taken at every milestone, there is no doubt that better designs could be achieved through continuous evaluation and research effort.

DEVELOPMENT OF A WHOLE-LIFE COST IMPLEMENTATION FRAMEWORK FOR THE NIGERIAN CONSTRUCTION INDUSTRY