Life-cycle assessments of products

This is an encore of an article Michael Chusid wrote 20 years ago. To a limited extent, increased attention to environmental sustainability have increased focus on life cycle performance of buildings. LEED, for example, requires buildings to be commissioned to ascertain that mechanical systems perform as required. Also, the "cradle-to-cradle" concept encourages examination of the flow of materials from extraction to re-purposing.

Operational costs typically,  exceed construction costs.

Tools that can help architects make life-cycle assessments of products

The architectural community too often disregards the life-cycle costs and operation of buildings. This attitude is not expressed overtly but nonetheless permeates architectural practice:

• We grovel before a project's bid price and all but disregard a building's cash flow, the streams of operational and maintenance expenses, financing, revenue and tax consequences, which spell economic success or failure to a building owner. 
• When designing an addition or renovation, we too often fail to involve the building's maintenance staff in a serious discussion about their resources, schedules, and experience with the building's existing materials and systems.
• We rarely retain qualified building maintenance consultants on our design teams.
• And frequently, we pass along a hodgepodge of submittals and call it an Operation and Maintenance Manual without considering whether the accumulation really communicates.

Over the economic life of a building, operation and maintenance costs will typically equal or exceed first costs. And when we consider how a maintenance program can affect a building's resale or salvage value, the importance of building maintainability becomes even more apparent.

Building Economics
Building design and product selection decisions should be made with benefit of life-cycle cost analysis. Recently issued ASTM standards provide the building industry with clear guidelines for performing an economic analysis of building designs and components. In a life-cycle cost study, each future cash flow must be adjusted for anticipated inflation and escalation and then discounted to a present value. When performed manually, these time-consuming calculations limit the use of life-cycle cost analysis. New computer-based programs, however, make it much easier to conduct life-cycle installations.

Even though calculations have been simplified, a building life-cycle cost investigation still remains difficult because reliable data on product longevity, maintenance schedules, and operation and maintenance expenses are difficult to obtain. How soon will a roof really be repaired or replaced? How frequently will various types of door operators require servicing? How will the selection of a sealant or weatherstripping affect energy use? Such information is not contained in the typical references found in an architectural office, but a new family of facility management publications and references is beginning to fill this gap. For example, Means Facilities Maintenance Standards [now out of date] discusses the mechanisms that contribute to building deterioration, and building maintenance scheduling and management.

Architects must also take more initiative to discuss maintenance issues with their clients and consultants and to collect and analyze the maintenance history of their buildings. This information must then be transmitted to the drafters and specifiers who actually make product decisions.

Product Data
Although building product manufacturers and trade associations are a primary source of product information, few offer well documented data on their product's life-cycle performance, offering only inconclusive laboratory testing or anecdotal case studies to document their claims. They claim they are unable to predict a product's life-cycle because of conditions beyond a manufacturer's control, such as environmental conditions or maintenance procedures. Yet these variables can be quantified and applied to a sampling of historic product performance data. The resulting analysis could be used as a valid basis for predicting product performance and comparing product alternatives.

Some manufacturers have responded to the need for better information about product life-cycle costs. USG Interiors, Inc., for example, offers a computerized comparison of relocatable partitions and drywall partitions. called DesignAid for Walls, the program enables a designer to consider the economic impact of partition relocation, financing alternatives, tax benefits and accelerated depreciation, and the escalation of waste disposal costs associated with drywall partition remodeling. A similar USG DesignAid program compares several floor construction and wire distribution systems to determine life-cycle costs vis-a-vis workstation relocation. [Chusid Associates wrote both DesignAid programs.]

Building productivity is also a life cycle factor.

Operational Assurance
Since many architects assume "building maintenance" means "janitorial services" or occasional redecorating, it would be useful to introduce a new term into our professional patois. "Operational assurance" is a concept more familiar to industrial engineers who must assure that manufacturing equipment is kept at optimum operating capacity. An operational assurance approach to buildings must consider the building operational goals and specify systems and products in view of their longevity and the ease and cost of their maintenance, repair, and replacement. Operational assurance can be applied not just to mechanical and electrical systems, but to the building envelope, finishes, and other architectural components as well.

Capability in operational assurance planning would enable an architectural or engineering firm to differentiate itself from its competitors and position itself for growth in industrial, commercial, or institutional markets. Maintenance programming, value engineering, training of the building staff, and post-occupancy evaluation also could be lucrative extended services and could lead to a continuing relationship with a client.

Have a question you'd like us to answer?
Send an email to michaelchusid@chusid.com 

By Michael Chusid, Originally published in Progressive Architecture, ©1991.

Use long-term cost benefits to your advantage

This is an encore presentation of an article Michael Chusid wrote about 20 years ago. It's message is still current.
 
I often encounter price resistance when selling my company’s top-of-the-line building products. Even though I explain that the product lasts longer and has lower operating costs, many customers can’t see past the initial costs. How can I overcome this sticker shock?—D. N. S. , sales manager

Developers and building owners think of their projects as an investment. In addition to construction costs, they analyze operating costs, potential income, and resale value. To overcome price resistance, present your product as an investment instead of an expense.

In some cases, this can be done by focusing on how your product adds value to a building. Developers recognize this principle when they spend extra on building finishes or fashionable interiors. Their investment is repaid by making it easier to sell the property or attract higher rental income.

Other products can be positioned as expenses necessary to protect a property’s income potential. A major hotel chain, for example, invests in backup air-conditioning equipment because they realize their inventory of rooms is worthless if they can’t guarantee comfort.

Tout up-front savings
Another approach is to emphasize the “first cost” of your product. In addition to purchase price, this includes the design, construction, and financing costs necessary to put your product into service. You can sell the first-cost benefits of your product if, for example, it costs less to install or enables faster completion of a project.

A still broader view of costs is a lifecycle cost analysis, which considers the cost of owning a product, not just purchasing it. This is significant because the total of a building’s maintenance, energy, insurance, tax, interest, and other ownership expenses usually exceed construction costs.

Life-cycle affordability is key
Life-cycle cost analysis has long been used by mechanical engineers; it is fairly simple to compare the cost of additional insulation or more-efficient equipment to projected energy savings. But in recent years, life-cycle affordability has become increasingly important. Environmental concerns, for example, have shifted attention from construction costs to issues such as energy consumption and building materials disposal. Institutions like the Army Corps of Engineers have begun to require life-cycle cost analyses of proposed projects. A recent publication from the American Society for Testing and Materials, ASTM Standards on Building Economics, establishes procedures for investigating the life-cycle costs of building materials. And computer programs have simplified the extensive number crunching required for life-cycle cost calculations.

Many manufacturers claim life-cycle benefits in their advertising, using bar charts to show how their products’ costs compare to competitors. Such claims have more impact if your customers can examine the supporting data. You can use computerized presentations to show them results for a specific product.

USG Interiors is one company that uses computerized life-cycle cost analyses to position its relocatable office partitions against lower priced conventional drywall partitions. The program considers such variables as the client’s tax bracket, material and labor costs, project size and complexity, mortgage terms, and the accelerated depreciation allowed to relocatable partitions. It also asks the customer how often remodeling will occur. The program then compares the life-cycle benefit of USG’s reusable partitions with the demolition costs of removing drywall partitions. This gives USG a powerful sales tool to use with financially oriented customers who may not perceive the product’s technical or aesthetic benefits. In addition, getting the customer to say yes to all the input data increases his acceptance of the program’s conclusions.

From a life-cycle cost analysis prepared by Chusid Associates.

Are your products priced right?
Conducting a life-cycle cost analysis for your product can be a fruitful marketing exercise. For example, do you know what factors most affect the affordability of your product and your competitors’ products? Can you substantiate product durability or quantify maintenance costs? Would your products be more affordable if there were more demand for salvaged or recycled components?

A life-cycle cost investigation I once conducted for a water-conserving plumbing system helped the manufacturer establish a competitive price for its product. Another time I compared the life-cycle costs of 12 roofing systems. Even though my client’s roofing system had outstanding durability, the study showed its high initial cost was not offset by low life-cycle maintenance costs. This insight helped clarify the manufacturer’s marketing alternatives.

While life-cycle costs can be an important sales tool, you must still tailor your presentation to each individual customer. Many price objections are simple requests for more information or reassurances. Other objections may be based on unquantifiable concerns about performance, appearance, or reliability. Bringing out a technical looking spreadsheet could confuse some customers or miss their main concerns.

For some customers, delivering a job for the lowest initial cost will always outweigh life-cycle considerations. But in other cases, a life-cycle cost argument may be just what is needed to close a sale. It can help customers justify to themselves or to their clients the decision to use a more expensive product. Or it can be a subtle way of pointing out a competitor’s shortcomings. Most importantly, it can change the focus of a sales presentation from the cost of your product to the value of your product.


Have a question you'd like us to answer?
Send an email to michaelchusid@chusid.com 

By Michael Chusid. Originally published in Construction Marketing Today, Copyright © 1994

Tax Benefits for Designers

Tax benefits can be a powerful tool for promoting certain building products. Chusid Associates, for example, has worked with producers of demountable partitions and access flooring systems to explain how the accelerated depreciation of these products can create bottom line benefits for a building owner.

The following article, reposted from the Xella (producers of Hebel autoclaved aerated concrete) website, explains a little know tax benefit that can accrue to design professionals:

The Federal tax laws provide a significant tax benefit for designers of energy-efficient commercial buildings for public entities, such as government buildings and public schools. A designer such as an architect, engineer, contractor, environmental consultant or energy services provider who creates the technical specifications can deduct the cost to the public entity of “energy-efficient commercial building property expenditures” up to a cap of $1.80 per square foot of the energy-efficient commercial building property expenditures that are made.[1]

The deduction is allowed in the year in which the property is placed in service and is in lieu of depreciating the amounts qualifying for the deduction over 39 years.[2] .The tax laws define energy-efficient commercial building expenditures as property:

1. Installed on or in any building located in the United States that is within the scope of Standard 90.1-2001 of the American Society of Heating, Refrigerating, and Air Conditioning Engineers and the Illuminating Engineering Society of North America,
2. Installed as part of (i) the interior lighting systems, (ii) the heating, cooling, ventilation, and hot water systems, or (iii) the building envelope, and
3. Certified as being installed as part of a plan designed to reduce the total annual energy and power costs with respect to the interior lighting systems, heating, cooling, ventilation, and hot water systems of the building by 50 percent or more in comparison to a reference building which meets the minimum requirements of Standard 90.1-2001 (as in effect on April 2, 2003).[1]

This deduction generally is available to owners of buildings. However, because the owners public buildings, such as schools and government offices do not generally pay taxes, the tax laws provide a special rule allowing the owners to pass the benefit through to the designer. If there is more than one designer, the governmental owner of the building can allocate the full deduction to one designer that is primarily responsible for the design or, at the owner's discretion, allocate the deduction among several designers. The governmental owner of the public building is not required to include any amount in income on account of the deduction allocated to the designer, but is required to reduce the basis of the property by the amount of the deduction allocated. Note that a person who installs, repairs, or maintains the property is not a designer.[3]

Hebel AAC’s energy-efficient properties help meet their requirement for this tax-deduction credit level. Its unique closed cellular structure and thermal mass contribute to a high R-value and air-tightness, which reduce heating and cooling costs and improve indoor air quality. Buildings using Hebel Autoclaved Aerated Concrete have seen up to a 35 percent decrease in cooling costs.

In the case of a building that does not meet the overall building requirement of a 50-percent energy saving, a partial deduction is allowed with respect to each separate building system: (1) the interior lighting system, (2) the heating, cooling, ventilation and hot water systems, and (3) the building envelope. The maximum allowable deduction is $0.60 per square foot for each separate system.

Case in Point 1: 50% Energy Savings A school spends $200,000 in qualifying costs on a new 100,000 square feet, energy-efficient building using Hebel AAC. 100,000 sq. ft. X $1.80 = $180,000 Tax Deduction to the Designer

Case in Point 2: <50%> Same school as above, yet only the Hebel AAC building envelope qualifies. 100,000 sq. ft. X $.060= $60,000 Tax Deduction to the Designer

Certain certification requirements must be met in order to qualify for the deduction. The IRS has published guidance concerning how to meet these requirements.[4] In general, these calculations must be performed using energy simulation models found in computer software approved in the guidance and not by measuring actual electricity usage. Under this guidance, calculations are made by comparison to a reference building that is based on a building that is located in the same climate zone as the taxpayer's building and is otherwise comparable to the taxpayer's building except that its interior lighting systems, heating, cooling, ventilation, and hot water systems, and building envelope meet the minimum requirements of Standard 90.1-2001. Calculations must be certified by a licensed professional engineer or contractor that is not related to the taxpayer and meets certain other tests.

In determining energy and power cost savings for purposes of partial deduction described above for an energy efficient building envelope, the proposed building is a building that contains the building envelope that has been incorporated, or that the taxpayer plans to incorporate, into the taxpayer's building but that is otherwise identical to the reference building.

The deduction is effective for property placed in service after December 31, 2005 and prior to December 31, 2013.[5]

It may be possible to meet the energy efficiency standards set forth above using Hebel AAC.

Please consult your own tax advisor to determine whether your project can qualify for this significant tax benefit. IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice that may be contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction(s) or tax-related matter(s) that may be addressed herein.

Notice 2006-52 can be found: http://www.irs.gov/pub/irs-drop/n-06-52.pdf
Notice 2008-40 can be found: http://www.irs.gov/irb/2008-14_IRB/ar12.html
--------------------------
[1] Code section 179D(d)(4); Notice 2008-40, 2008-14 I.R.B. 725.
[2] Code section 179D.
[3] Notice 2008-40, section 3.
[4] Notice 2006-52, 2006-26 I.R.B. 1175, clarified and amplified, Notice 2008-40.
[5] Code section 179D(h).COMMENT

The specification of a single building product does not, by itself, qualify a project for this tax credit. The credit requires the design of energy efficiency into an overall building project. Still, building product manufacturers can gain from understanding and explaining how their product contributes to the overall result.

Contact Chusid Associates to explore whether this law can benefit your company and to discuss the best way to incorporate it into your marketing program.

Federal Assistance for Building Product Export

Several of our clients are getting through the rough economy by expanding sales overseas, China and the Gulf States included. These programs can be helpful to novice exporters:

The Ex-Im Bank has three financing products geared especially to small and medium-sized businesses:

Working Capital Guarantees: covers 90 percent of the principal and interest on commercial lenders' working capital loans for pre-export costs.

Export Credit Insurance: protects mostly small-business exporters and their lenders against the commercial and political risks of a foreign buyer defaulting on payment.

Loan Guarantees: enables American firms to offer foreign buyers competitive credit to win a sale of equipment and services.

The Office of International Trade at the SBA has two programs to enhance the ability of small businesses to compete in the global marketplace:

Export Working Capital Loan Program (EWCP): provides short term, transaction based financing up to $2 million to assist experienced U.S. exporters to fulfill specific export contracts purchase orders, or letters of credit from overseas buyers.

Export Express: provides loans up to $250,000 to assist with working capital funds for international marketing & promotion activities and long-term financing to support an exporter's acquisition of fixed assets.

For more information, visit the Ex-Im Bank's web site at www.exim.gov or the SBA's website at www.sba.gov/oit .

The Six Construction Industries

"The construction industry is like a great big gray glob. Just when you think you have your arms around it, it squeezes out somewhere else."

My mentor, Harold Simpson, PE, was fond of saying this. His point was that every building product marketing strategy has to begin by segmenting the industry so you know where to aim.

For example, John Eberhard says what we typically call the building "industry" should really be thought of as the building "industries," and describes six different industries or segments:

1. HOUSING INDUSTRY: Converts raw land, usually purchased on a speculative basis, into dwelling units that can be sold or rented.

2. MANUFACTURED BUILDING INDUSTRY: Manufactures off-site units that can be anywhere from whole units to sub-assemblies which can be transported to the site.

3. COMMERCIAL DEVELOPERS: Buys raw land and converts it into buildings other than housing, without having a client in advance.

4. "THE BUILDING INDUSTRY": All the institutions and actors that builds a building for a specific client. The client determines the requirements, usually purchases the land, then selects the designers and builders through bidding or another process.

5. THE REMODELING INDUSTRY: Characterized, in many cases, as work done with short-term financing. While Eberhard does not go into detail on this sector, remodeling can be further subdivided into residential and non-residential, DIY, and maintenance services.

6. HEAVY CONSTRUCTION: Highways, dams, railroads, utilities, etc.

Eberhard was Executive Director of Advisory Board on the Built Environment at the National Academy of Sciences. He describes these industries in Chapter 11 of Technology and the Future of the US Construction Industry, Congress of the United States Office of Technology Assessment, 1986.  I highly recommend this short essay. It is available on Google Books and as a PDF download.