Many construction projects today for laboratory research, healthcare, and academic facilities seek to achieve highly complex outcomes. They seek to balance costs and needs at the facility, organizational, and global levels. The cost of design and construction is only a very small part of the total financial impact of such projects, yet we often make our budget decisions based almost exclusively on this cost of acquisition. (See Figure 1)
Figure 1. Complex Outcomes Require New Approach
Until recently, there were only limited financial metrics available about these complex outcomes in the early phases of pre-design when developing the budget. Yet, often it is these highly complex outcomes at the organizational and global levels that will create the maximum value and productivity within the proposed facility.
Estimating their value during the early phases of a project is crucial to making an informed decision on the project construction budget.
Instinctively, we often know that there are important reasons why first cost alone is not an adequate indicator of project value and outcome to the organization. Yet, how exactly do we turn this instinctive knowledge into financial data to guide our budgeting process?
Optimizing project outcomes in pre-design using life-cycle analysis allows us to develop a balanced consideration of these multi-level needs. It can inform the decision on project budget so that an overly narrow focus on construction cost does not prevent inclusion of highly productive outcomes within project scope.
Such an analysis should include:
Researching and developing these metrics and applying them to project decisions involves significant expertise. Yet the results of this type of effort are extremely valuable.
Why? It's about Alignment:
What are the steps involved? How are the metrics developed? How is the life-cycle analysis performed?
An expert in life-cycle is included in the pre-programming team. He assumes responsibility for interacting with the design team and the various owners/stakeholders, performing the research and data-mining, finding applicable financial metrics, and developing a comprehensive financial analysis based on the time value of money.
The design charette process flows in a relatively normal path at this stage of the process, developing several alternatives for consideration. Each alternative is quantified as to scope, estimated budget, timeline, and construction period impact on the client. Parallel to this, the stakeholders are asked to help develop not only the typical needs assessment, but also an opportunities assessment of possible outcomes. This is very similar to a strengths / weaknesses / opportunities / threats (SWOT) for their organization's future direction. SWOT is the first step in developing alignment between the client organization's mission and vision and the specific construction project goals. SWOT is created to reflect the several different layers of organizational impact: locally at the facility/department level, mid-level for the program/institution/firm as a whole (internal outcome), and globally for the outcomes achievable by the program/institution/firm (external outcome).
Each of the important points brought out in the needs and opportunities assessments developed in Step 2 is researched using data-mining to develop key performance indicators (KPI) that are closely related. During this phase, the architect will optimally be researching other recently built projects that compare favorably to the alternatives being considered for this project. These same recently completed projects are then researched in relation to the KPIs previously developed. By considering the existing client's facilities and these recently completed projects as the "baseline," it is then possible to develop financial impact assessments for all project alternatives relative to each KPI. In addition to these sources of information, evidence-based design data from other similar projects and studies is also considered and inputted into the financial analysis. Thus, each KPI is correlated with a financial metric.
Using net present value, a financial analysis is then developed that considers each cost element of the design, construction, operation, and maintenance of the facility throughout the life-cycle study period. In addition to these more traditional elements, productivity and risk costs/benefits for each KPI are calculated as well. The summary financial analysis will bring together the results from perhaps as many as 100 spreadsheet pages, each detailing individual cost elements or KPIs. This summary analysis is broken down into sections related to each stakeholder's view of the required outcome for the project (i.e. local outcome, internal organizational outcome, and external organizational outcome).
Once this preliminary financial analysis is prepared, the design team and stakeholders review it with the life-cycle expert. Many of the financial metrics related to the KPIs considered are often somewhat "soft," meaning they do not allow definition to pin down the financial impact of a KPI to a specific dollar value, but only to a range of value or a relative value. Three different methods are used to resolve this and "harden" these values:
If important KPI metrics need to be studied, or project alternatives have overlapping outcomes, Monte Carlo Analysis is utilized to model the risk and variance.
Briefly, Monte Carlo Analysis allows us to test the output of our calculations over a range of possible input values for each of a number of variables. Further, we can use different data probabilities for each input as we run each simulation (i.e. bell-shaped, equal probability, sloped, etc.). By running 500 or more simulations with different values for each input, we are able to develop a reasonable certainty of the probable outcome, even with soft inputs.
Traditionally, business plan development has looked only at the "best-case/mid-case/worst-case" values for each of several alternatives. This is a static approach and breaks down quickly when we are confronted with a number of variables that differ in their impact on the project. Monte Carlo Simulation does not have these limits; it is a relational process instead of a static one.
The final report developed from this process includes a typical project report, with executive summary and spreadsheet back-up. It is usually completed in less than 90 days (including stakeholder review). The timely nature of this report allows it to be utilized for business plan validation during early funding of projects.
Further, the spreadsheet template and model, once developed, is available for further refinement and tuning throughout the project. As an example, it can even be used during actual construction for assessing and validating the impact of change-orders.
This powerful new tool is demonstrated in a case study of its actual use at Cornell University in the design of a new Agricultural Laboratory Sciences facility to replace the aging Stocking Hall, built in 1910.
Five construction options were considered:
Several different stakeholders with significantly different goals were identified early on:
Each stakeholder group was most concerned about what directly impacted them, yet was also concerned about the total picture. Utilizing life-cycle analysis in pre-design allowed the opportunity to show each of them exactly what they wanted to see. Each stakeholder group's financial picture, as well as the total bottom line, was able to be summarized. (See Figure 2)
Figure 2. Pro Forma by Option and Outcome Level.
The results of the study showed that while the cost of the replacement facility was only marginally greater than the minimal replacement option over the 30 year life-cycle period, the potential productivity benefits of an outcome-based design were almost 300 percent greater! (See Figure 3)
Figure 3. Life-Cycle Cost and Benefit by Option.
Optimizing project outcomes in pre-design using life-cycle analysis allowed
Cornell University to develop a balanced consideration of these multi-level
needs. Most importantly, it informed the decision on project budget early
while change was still possible. Thus, an overly narrow focus on construction
cost did not prevent inclusion of highly productive outcomes within project
scope as it so often has in the past.
Results indicate that this is a very useful process for identifying early the economic benefit of possible project outcomes and using this information to inform initial budget decisions. Thus, multi-level project outcomes can be optimized with minimal impact on the cost of acquisition (i.e., first cost).
Further, this process works well in coordination with other innovative approaches to improved outcome, such as evidence-based design, integrated project delivery, optimized transition to occupancy, and post-occupancy study/evaluation. (See Figure 4)
Figure 4. Synergy Benefits of Life-Cycle Analysis in Pre-Design.
It also closely couples organization mission and vision with the construction
process. The result is the creation of a strong synergy between business
goals and the structure that physically supports and houses them. No longer
is the building simply a house for the program. In this new paradigm,
the building is an integral part of the program.
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Robert Blakey is the founding principal of Strategic Equity Associates, and is an expert in the field of life-cycle studies. Robert graduated from California Coast University with both a Bachelors of Science Degree in Management and a Masters of Science Degree in Engineering Management. Robert has over 15 years experience in management with much of it in the area of facilities management and project management. Areas of specialized training include life cycle cost engineering analysis, technological forecasting, systems engineering, property management and facility management. Robert is a licensed engineer in the U.S. Merchant Marine. He holds a Chief Engineers license for Steam, Motor, or Gas Turbine Vessels of Any Horsepower (unlimited), and has over 20 years experience in various disciplines of mechanical and electrical engineering.
Robert Pulito's specialties include planning, programming, design and management of significant science and technology projects for both academic and corporate clients. He holds Bachelor of Architecture and Bachelor of Science degrees from Syracuse University. Robert has worked on numerous specialized laboratory projects for Pfizer Inc., including the innovative Clinical Research Unit adjacent to Yale Medical School; Capital Community College; University of Connecticut South Campus; MIT Chemical Engineering Program and Feasibility Study; Emory University Pediatrics Research Facility; and Cornell University's Stocking Hall.