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Lifetime Costs of Real Capital Ownership

A major responsibility of a school board is management of the district’s real capital budget. Paul A. Samuelson, in his classic textbook Economics, defines real capital as “equipment, buildings, and inventories.” Any item of real capital has both a first and a life-cycle cost. The car you drive has a life-cycle cost, and the local school building has a life-cycle cost. As the school will probably last a lot longer than your car, its life-cycle cost will continue accruing for decades.

For example, I own a 1995 Nissan Maxima that is probably the best made car I’ve ever owned. Since it now has 260,000 miles on it, the car came quickly to mind when I was looking for a simple, concrete example of life-

1995 Nissan Maxima

1995 Nissan Maxima

cycle costing to illustrate in this article. I paid $25,460 for this car, and that was only the beginning. I also paid nearly $3,000 in sales tax and for an extended warranty plan.

In the 11 years I’ve owned this wonderful car, I’ve paid more than $1,900 in taxes (registrations, inspections, and personal property taxes). Insurance on the car has totaled about $9,000. I estimate that my energy costs have been nearly $20,000, so far. Repairs and maintenance totaled more than $17,000. Had I financed the car over a period of three years at, say 10% per year, the interest cost would have been $3,000. The life-cycle cost of ownership of my Maxima has been $79,206.00, or 3.11 times the initial cost.

As with my Maxima, life-cycle cost of a real capital item is usually considerably greater than the initial cost. So it is with school construction. In the late 1950s and early 1960s my father was president of a suburban school board in New York. The accomplishment of which he was most proud was the planning and construction of a new high school – the first in this district. Unlike cars, schools have a long life span.
Most school construction in the late 1950s and 1960s was built to house the baby boomer generation. The mantra for school boards at the time was “get it built fast and cheap.” Typical buildings, such as the school my father helped to realize, had long, double-loaded corridors with interior and exterior bearing walls, large, single pane windows, flat roofs and no air conditioning. Heating and ventilation was accomplished by means of unit ventilators with either steam, hot water or electric heating coils. Through the decades these schools have not weathered nearly as well as the stouter construction prevalent in the 1930s. In 1995 the General Accounting Office estimated that the cost of renovating these baby boomer schools totaled over $112 billion.

In the early 1990s typical renovations to these schools involved closing up some window openings and replacing the single pane glass with insulating glass to reduce energy costs, replacing the unit ventilators with fan-coil units that provided both heating and air conditioning, and replacing leaky roofs. Often these renovations followed the same mantra of “get it done fast and cheap” with no thought given to an analysis of the life-cycle costs of these decisions. Science labs built with long, fixed benches and no “classroom” area often could not be renovated to the new National Science Education Standards because the narrow 22-24 foot clearance between exterior interior bearing walls was insufficient for a modern, flexible lab/classroom. New space was required.

The Missouri school building in the photograph was built in 1959, and is a single-story, double-loaded classroom structure. At the time of construction, most schools were not air conditioned and the heating and ventilation system consisted of unit ventilators on the outside walls, fed by

School with Rooftop HVAC Units

School with Rooftop HVAC Units

hot water generated in a central boiler. When this school was air-conditioned in 2000, the fastest and cheapest way to accomplish this goal was to replace the unit ventilators in each room with a roof-top unit which generated heat through a gas-fired furnace module and cooled the air through a direct expansion coil. Like a residential furnace and air-conditioning system, tempered (heated or cooled) air is circulated within the classroom below.
Such a solution certainly gets the job done, assuming that the job is to provide a relatively inexpensive system to heat and cool the classrooms below. However, the life-cycle cost of such a system will be significantly higher than some other possible solutions. One reason for this has to do with the large number of individual units involved: many motors offer many more opportunities for breakdowns and require lots of maintenance. Since each classroom now has a compressor and a fan, more electrical energy will be used to run these individual units than might have been used had a central system with one or two compressors and one or two large fans or pumps been selected. Other possible enhancements might have included a water-cooled system that could have cut the air conditioning costs by as much as 50% and heat recovery that uses the existing heat in the recirculating air to reduce the cost of heating and cooling code-required outdoor air.

The hot water system that originally heated these classrooms was a pretty efficient heating system when it was installed, since the residual heat in the finned pipes remained, even when the ventilation fans were not operating. Selecting a central system might have cost a little more in the design phase and, possibly, significantly more in the initial construction phase due to the need to run new piping and ductwork throughout the school, but these added costs could well have been recouped within five to eight years by energy savings alone. Rooftop units tend to have a useful life of 12-15 years, while central systems, especially with indoor equipment, tend to last 25-30 years and require significantly less maintenance. Thus, additional savings would accrue from reduced maintenance costs and longer system life.

Mike Swim, PE, a mechanical engineer, recently designed a ground source heat pump system for a project. Such a system replaces the normal furnace and cooling coils with a system of pipes either driven vertically into the ground or laid horizontally in a trench. Fluid circulates within these pipes and the constant temperature of the earth provides tempered water to the heat pumps for either heating or cooling. The buried pipe system cost significantly more than other systems to install, but, after conducting a life-cycle cost analysis which included the cost of energy and maintenance as well as the time value of money, the “free” energy and lower maintenance costs of the ground source heat pump system would recoup the added cost in 10 years (a 10% per year return on investment). And even better, the energy and cost savings keep accruing for the remainder of the useful life of the equipment.

Life-cycle costs of a school building begin when the initial planning and budgeting for the building begin. Logically, this is the best time to analyze these costs and the factors that influence them, and plan well so as to minimize them. Much like my Maxima, the initial construction cost of a school building is only a minor part of the lifetime ownership costs. In fact, with a building, the life-cycle costs (which also include energy costs, operations and maintenance, renovations, replacement of furnishings and equipment one or more times, and interest on construction funds) can exceed the construction cost by four to five times (see diagram).

Life-Cycle Costs of a Typical School BuildingThorough planning and design will cost slightly more than limited planning and off-the-shelf design, but can it save significantly in life-cycle costs. For example, a well-planned and designed school can save energy costs while increasing the efficiency of employees and reducing absenteeism (a hidden cost rarely included in discussions of school facilities costs). A flexible structural system can make future modifications to layout easier and less expensive.
Terrazzo floors will last 50 to 100 years, requiring significantly less maintenance than resilient flooring.

An increasing number of school districts have been selecting architectural design teams on the basis of low fees. Most school projects are unique, in spite of the fact that they have many similarities. Researching and studying the best and most cost-effective solution for a school design takes time and effort. Since the design team is selling only the time and expertise of its employees, cutting fees reduces the amount of time that the team can spend on the project. Appropriate research and “thinking time” will not be given to a project with reduced fees, so the resulting design will likely not be the most imaginative nor the least expensive over the life of the building.
On the other hand, spending a little more on the design fees in the beginning could result in a much more efficient and flexible building. For example, daylighting and other sustainable design features might be incorporated, improving the health and performance of its occupants while reducing energy costs and helping sustain our environment. For a school building with an initial cost of, say, $10 million, the life-cycle cost could total as much as $50 million. If more thought in the design process could reduce this by 15 percent, the life-cycle cost savings could be $7.5 million. From the diagram accompanying this article, one can see how minuscule the design fees are in the big picture of life-cycle costs – often less than one percent of the total. This makes the additional up-front expenditure of $50-75,000, to get a more efficient and maintenance-free design, look like a pretty good investment.

The life-cycle cost of my Maxima could have been significantly higher had Nissan decided to “build it fast and cheap.” Few cars can boast of engines that still run well after 260,000 miles. Similarly, the school board that opts for paying a little more in initial costs will likely save themselves and the other taxpayers in the district hundreds of thousands, if not millions of dollars in life-cycle cost. As stewards of the public’s investment, that would seem to be the appropriate thing to do and will reap rewards for decades.