No matter how interested an owner or developer is in green building and sustainability, the bottom line remains, what does “green” cost?; typical translation: does it cost more? This then raises the question: more than what? For example, is the question more than what the building would have cost without the sustainable design features than that of comparable buildings, or is the question, more than available funds? The answers to these questions have until recently been largely elusive due to the lack of hard data. Over recent years, however, we have seen various organizations conduct considerable research into green building and sustainability costs, etc. We now have a substantial databank on building costs that allows us to compare the costs of green buildings and traditional nonsustainable buildings with comparable characteristics.

To adequately assess sustainable design and how it relates to construction costs, it is imperative to analyze the costs and benefits using a holistic approach. This basically means including evaluation of operations and maintenance costs, user productivity and health, design and documentation fees, among other financial measurements. This is largely because empirical experience continues to demonstrate that it is the construction cost implications that have the greatest impact to fundamentally determine decisions about sustainable design. By helping teams to really understand the actual construction costs of real projects that are achieving green, and by providing a methodology that allows teams to viably manage these construction costs can go a long way to facilitate a team’s ability to get past the question of whether or not green is the answer. Green construction is helped by the fact that the cost of green design has dropped significantly in the last few years as the number of green buildings has increased. The trend of declining costs associated with increased experience in green building construction has manifested itself in a number of states throughout the country. From such an analysis, it can be concluded that many projects are able to achieve sustainable design within the initial budget, or with minimal supplemental funding. This suggests that developers continue to find ways to incorporate project goals and values, regardless of budget, by making choices. However, every building project is unique and should be considered as such as there is no one-size-fits-all answer and benchmarking with other comparable projects can be valuable and informative, but not predictive. Any estimate of cost relating to sustainable design for a specific building must be made with reference to that building, its objectives, and particular circumstances and attributes.

In a recent study by Greg Kats of Capital E Analysis (Table 10.1), we see a summary of some of the financial benefits from going green. The report concludes that financial benefits for building green are estimated to be between $50 and $70 per square foot in a LEED-certified building; this represents more than 10 times the additional cost associated with building green. These financial benefits come in the form of lower energy costs, waste and water costs, lower environmental and emissions costs, and lower operational and maintenance costs, lower absenteeism, increased productivity and health, greater retail sales, and easier reconfiguration of space resulting in less downtime and lower costs. Cost estimates which are based on a sample of 33 office and school buildings suggested only 0.6% greater costs for LEED certification, 1.9% for silver, 2.2% for gold, and 6.8% for platinum certification. Although these estimates are direct costs, they, nevertheless, closely reflect those provided by the USGBC. What is perhaps surprising is that other than LEED, not many studies have been undertaking with regard to other rating systems such as Green Globes.

The principal motivators that can impact the Long-term Value of Green Building appear to be:

The absence of adequate clear credible data pertaining to development, construction costs, and time required to recoup costs are the most obvious challenges and obstacles accounting for the industry’s sometimes lethargic acceptance of green construction, which is why education has become the most important tool in promoting green construction strategies. The main obstacles measured in the Kats study include:

Most building owners and developers have one main objective, to build a project and then sell it, in the sense that they construct or revamp an office building, lease its space, and with the hope or calculation of selling the asset within a 3 to 5-year time frame to repay debts and ensure a profit. The speed with which the process is completed impacts the amount of profit generated upon execution of the sale of the building. Uninformed developers that are under the false perception that green construction costs more can trigger fears since they are already concerned about the cost of short-term debt and conventional building materials. According to Davis Langdon, typical benefits for building owners and tenants alike include:

Finally, it is important to fully comprehend the economic impact that Green Building and sustainability has already had on the U.S. economy. As David Erne, a Senior Associate at Booz Allen said, “Our research shows that green building has created millions of jobs and contributed hundreds of billions of dollars to the US economy, with the construction of LEED-certified buildings accounting for about 40% of green construction’s overall contribution to GDP in 2015,” “This industry is certainly on the rise, and aggressive growth in the green building sector is anticipated over the next four years.”

Direct Capital Costs are costs associated with the original design and construction of the building and generally include interest during construction (IDC). There is a general misperception of some building stakeholders that the capital costs of constructing green buildings are significantly higher than those of conventional buildings, whereas many others within the green building field believe that green buildings actually cost less or no more than conventional buildings. Empirical evidence shows that savings are achieved by the downsizing of systems through better design and the elimination of unnecessary systems which will offset any increased costs caused by implementing more advanced systems. Capital and operational costs are normally relatively easy to measure, because the required data are readily available and quantifiable. Productivity effects on the other hand are difficult to quantify, yet are, nevertheless, important to consider due to their potential impact. There are other indirect and external effects that can be wide reaching, and which quantifying may prove difficult.

Direct Operating Costs include all applicable expenditures required to operate and maintain a building over its full life. Included are the total costs related to building operation, such as energy use, water use, insurance, maintenance, waste, property taxes, etc. over the entire building life. The primary costs are those associated with heating and cooling and maintenance activities such as painting, roof repairs, and replacement. Included in this cost category are less obvious items such as churn (the costs of reconfiguring space and services to accommodate occupant moves). All costs relating to major renovations, cyclical renewal, and residual value or demolitions costs are excluded from this category.

Insurance is essentially a direct operating cost (is discussed in greater detail in Chapter 16), and green buildings have many tangible benefits that reduce or mitigate a variety of risks, and which should be reflected in the insurance rates for the building. Likewise, the fact that green buildings generally provide healthier environment for occupants should be reflected in health insurance premiums. Indeed, the general attributes of green buildings (e.g., the incorporation of natural light, off grid electricity, and commissioning) should reduce a broad range of liabilities, and the general site locations also potentially reduce risks of property loss due to natural disasters. Furthermore, a fully integrated design of a building will typically reduce the risk of inappropriate systems or materials being employed, which could have a positive impact on other insurable risks. Insurance companies sometimes offer premium reductions for certain green features, such as commissioning or reduced reliance on fossil fuel–based heating systems. The list of premium reductions will undoubtedly increase with further education and awareness and as the broad range of benefits are more fully recognized and understood. In any case, prior to taking out a policy, it would be advisable to consult an insurance agent or attorney.

Churn rate reflects the frequency with which building occupants are moved, either internally or externally, including occupants who move but remain within a company, and those who leave a company and are replaced. It has been found that because of increased occupant comfort and satisfaction, green buildings typically have lower churn rates than conventional buildings.

Lawrence Berkeley National Laboratory recently conducted a study to highlight the potential ramifications of building green and concluded that improvements to indoor environments such as commonly found in green buildings can help reduce health care costs and work losses as follows:

Hannah Carmalt, a Project Analyst with Energy Market Innovations, notes that, “The most intuitive explanation is that productivity increases due to better occupant health and therefore decreased absenteeism. When workers are less stressed, less congested, or do not have headaches, they are more likely to perform better.” High-performance buildings have many potential benefits including increased market value, lower operating and maintenance costs, improved occupancy for commercial buildings, and increased employee satisfaction and productivity for owner-occupied buildings.

A study by William Fisk concluded that green buildings added $20 to $160 billion in increased worker productivity annually. This is due to the fact that LEED-certified buildings were found to yield significant productivity and health benefits, such as heightened employee productivity and satisfaction, fewer sick days, and fewer turnovers. Moreover, other independent studies have shown that better climate control and improved air quality can increase employee productivity by an average of 11–15% annually. Still, it is necessary to define the particular elements of green buildings that are directly related to productivity. Sound control, for example, while recognized as increasing productivity, is often excluded from green-related studies, mainly because it is not considered to be particularly a green building feature. Likewise, the presences of biological pollutants, such as molds are also associated with decreased productivity; yet these are also excluded because typical green buildings do not automatically eliminate the presence of such pollutants even though their presence is reduced because of improved ventilation in green buildings. However, it should be noted that in commercial and institutional buildings, payroll costs generally significantly overshadow all other costs, including those involved in a building’s design, construction, and operation costs.

In today’s world, occupant control has become one of the most significant elements of green buildings that affect productivity and thermal comfort; control is required over temperature, ventilation, and lighting. Green buildings usually try to incorporate this feature because it can noticeably decrease energy use by ensuring areas are not heated, cooled, or lit more than is necessary. These measures are decisive to maintaining energy efficiency and occupant satisfaction within a building. Increased productivity has often been associated with increased emotional well being as various studies have clearly shown. A study conducted by the Heschong Mahone Group (HMG) found that higher test scores in daylight classrooms were achieved due to students being happier. HMG also found that when teachers were able to control the amount of daylighting in classrooms, students appeared to progress 19 to 20% faster than students in classrooms who lacked controllability. Similar studies performed in office settings clearly showed that there was a significant rise in productivity when there was individual control over temperature, lighting, and ventilation.

A view to the outdoors is another common feature of green buildings that is associated with productivity in office space. The office study conducted by HMG mentioned previously, confirmed correlations between productivity and access to outdoor views: test scores were generally 10–15% higher and calling performance increased by 7–12%. This reinforces HMG’s earlier 1999 study findings of schools where children in classrooms of the Capistrano School District progressed 15% faster in math and 23% faster in reading when they were located in the classrooms with the largest windows.

Ventilation can be of paramount importance because it facilitates the introduction of fresh air to cycle through the building and removing stale or pollutant air from the interior. Germs, molds, and various VOCs, such as those emitted by paints, carpets, and adhesives, can be often be found within buildings lacking adequate ventilation, causing SBS. Typical symptoms include inflammation, asthma, and allergic reaction. Ventilation can also play a critical role in worker productivity, as evidenced by the extensive research that has been conducted to address these issues. This is also why it is imperative to minimize the use of toxic materials inside the building. Many of the products used in conventional office buildings, such as carpets, and copying machines contain toxic materials and minimizing them decreases the potential hazards associated with them and their disposal. Furthermore, because these materials are known to leak pollutants into the indoor air, proper ventilation is required to avoid an adverse impact on worker productivity. But from the above, it becomes evident that productivity can be impacted by many factors, all of which can influence the bottom line. Moreover, it has been shown that there is less staff turnover when employees are satisfied which in turn helps improves the overall productivity of a firm. Less time spent on job training allows more time to be spent on being productive. Staff retention is one of the decisive factors why many firms take the decision to green their office buildings in today’s competitive world.

Committing to a market value for occupant productivity gains and have them accurately reflected in the business case at the decision-making point is not easy in the case of speculative or leased facilities. In any case, there is now adequate data and evidence quantifying the effects to support taking them into account on some basis. And while an owner of a leased facility may not financially benefit directly from increased user productivity, there could be indirect benefits in the form of increased rental fees and occupancy rates. For the majority of commercial buildings, the use of a conservative estimate for the potential reduction in salary costs and productivity gains will loom large in any calculation.

Most architects and property developers and owners are well aware that superior air quality is one of the principal attributes of green buildings which normally include other features such as abundant natural light, access to views, and effective noise control. Each of these qualities is for the benefit of building occupants, making these building better places to work and live. Building occupants are increasingly seeking many green building features, such as superior air quality, control of air temperatures, and views. The Urban Land Institute (ULI) and the Building Owners and Managers Association (BOMA) conducted a survey which found that occupants rated air temperature (95%) and air quality (94%) most crucial in terms of tenant comfort. The study also determined that 75% of buildings did not have the option or capability to adjust features and that many individuals were willing to pay higher rents to obtain such features. These features were the only ones that were considered “most important” and on the list with which tenants were least satisfied. This study also determined that the principal reasons why tenants move out include heating or cooling problems.

Natural light, clean air, and thermal comfort are required elements to stay healthy and productive, in addition to providing an enjoyable living and work environment (Fig. 10.3). The number of credible studies demonstrating an intrinsic connection between green building strategies and occupant health and well-being is endless. William Fisk in a 2002 study “How IEQ Affects Health, Productivity” estimates that 16–37 million cases of colds and flu could be avoided by improving indoor environmental quality. This translates into a $6-$14 billion annual savings in the United States while at the same time reducing SBS symptoms (a condition whereby occupants become temporarily ill), by 20–50%, resulting in annual savings of $10- $30 billion.

Statistical data and other evidence leaves no doubt that high-performance green buildings can increase a company’s ability to recruit and retain employees due to many factors such as good air quality, abundant amounts of natural light, and better circulated heat and air conditioning, all of which help provide a more pleasant, healthier, and more productive places to work in. With this in mind, it is surprising that willingness to join and remain with an organization is an aspect often overlooked when considering how green buildings affect employees. The economics of employee retention is important to seriously consider as one estimate puts the cost of losing a single good employee is roughly between $50,000 and $150,000, and many organizations experience a 10 to 20% annual turnover, some of it from persons they would have really liked to retain. In a workforce of say 100 people, turnover at this level implies 10–20 people leaving per year. In some cases people decide to leave due to poor physical and working environments. Fig. 10.4 compares the difference in occupancy rates between Energy Star and non-Energy Star buildings.

However, LEED-certified buildings with lower operating costs and better indoor environmental quality are known to be more attractive to a growing group of corporate, public, and individual buyers. High-performing building features are increasingly entering into tenants’ decisions about leasing space and into buyers’ decisions about purchasing properties and homes. For example, recent studies confirm that, as of January 2015, the market for houses with green certifications is 10–14% more than for comparable homes without them (Alan J. Heavens, “‘Green’ home certifications are bringing more greenbacks,” The Philadelphia Inquirer). Other industry research has noted that improved health and productivity benefits are playing an increasing role in encouraging companies to invest in green building today than they have said, a decade ago. Also regarding commercial buildings, the Deloitte Center for Financial Services in their 2015 Commercial Real Estate Outlook confirm that the value of a green building increases when compared with a traditional building. The Center states, “Sustainability initiatives have a significant bearing on CRE (commercial real estate) operations, which manifest themselves in various forms—environment, portfolio performance, top and bottom line, asset values, stakeholder engagement and brand perception. Among other things, buildings with relatively better sustainability credentials tend to enjoy increased market-ability to both tenants and investors.”

Jerry Yudelson, a well-known green scholar maintains that increased annual energy savings have been found to promote higher building values, and cites as an example, a 75,000-sq-ft. building that saves $37,500 per year in energy costs versus a comparable building built to code (This savings might result from saving of 50 cents per square foot per year). At capitalization rates of 6%, typical today in commercial real estate, green-building standards would add $625,000 ($8.33 per square foot) to the value of the building. This means that for a small up-front investment, an owner can reap benefits that typically offer a rate of return exceeding 20% with a payback of 3 years or less. The fact that high-performance buildings can offer building owners many important benefits ranging from higher market value to more satisfied and productive employee occupants is not always apparent. The primary reason for this is that majority of the benefits accrue to tenants, and tenants usually need proof before they are willing to participate in the cost of investments that are perceived will help them be more productive or save money. It is only very recently due mainly to increased awareness, that tenants have started to fully appreciate the benefits of cleaner air, more natural lighting and flexible spaces that can be modified as and when required.

All the available evidence points to the fact that green buildings, particularly with good quality natural lighting, can have a dramatic effect on property value and sales with respect to commercial buildings. Furthermore, without exception, several American studies report that there is a sound economic basis for green buildings, but only when operational costs are included into the equation. More specifically, whole building studies conclude that the net present values (NET) for pursuing green buildings as opposed to conventional buildings ranges from $50 to $400 per square foot ($540 to $4300 per square meter). The NET depends on a building’s length of time analyzed (e.g., 20–60 years) and the degree to which the buildings implement green strategies. One of the main conclusions from these studies is that generally, that the NET increases as the greenness of the building increases. A CoStar study found that with regard to rental sales, LEED buildings can command rent premiums of about $11.24 per square foot versus their conventional peers in addition to a 3.8% increase in occupancy rate. The study also found that rental rates in ENERGY STAR buildings can boast a $2.38 per square foot premium versus comparable non-ENERGY STAR buildings in addition to a 3.6% greater occupancy rate. However, what is perhaps more remarkable and what may prove to be a trend that could signal greater attention from institutional investors, is that LEED buildings are commanding a surprising $171 more per square foot than their conventional counterparts, and ENERGY STAR buildings are commanding an average of $61 per square foot more. This is quite extraordinary since most leasing arrangements, particularly in the office/commercial sectors, provide little incentive to undertake changes that might be construed as being beneficial to the environment. For example, leases often have fixed rates with no regard to energy or water consumption, even though the lessees have control over most energy and water consuming devices.

“Green” has become a common buzzword and journalists everywhere are writing about a “green economy,” “green technology,” and even “green” jobs. Many manufacturers are now clinging to the green bandwagon and increasingly claiming to be “green” while many others try to measure the effect of “green” technology on the job market. “Green” encourages job creation, partly because green building attributes are often labor intensive, rather than material or technology intensive. For example, there are significant environmental impacts associated with the transportation of materials for the construction industry. And by promoting the use of local and regional materials, local and regional job creation is encouraged and promoted. Buildings can be singled out to have the largest indirect environmental impact on human health. Other perhaps less critical impacts, such as damage to ecosystems, crops, structures/monuments, and resource depletion should also be considered even though they do not have a large associated indirect cost relative to human health. Infrastructure costs such as water use and disposal are typically provided by governments and are rarely cost effective or even cost neutral, and in many instances, governments are required to heavily subsidize water use and treatment. On the other hand, external environmental costs consist mainly of pollutants in the form of emissions to air, water, and land and the general degradation of the ambient environment.

Furthermore, green building can also have economic ramifications and export opportunities on a much broader scale as a result of increased international recognition and related export sales. The 2005 Environmental Sustainability Index prepared by Yale and Columbia Universities benchmarked the ability of nations to protect the environment by integrating data sets including natural resource endowments, pollution levels, and environmental management efforts into a smaller set of indicators of environmental sustainability. The United States unexpectedly ranked only 45th of countries in the index in this particular study.

The assumed increase in first cost is the most cited reason for not incorporating green elements into a building design strategy. Some aspects of design have little or no first cost including site orientation and window and overhang placement. Other sustainable systems that incorporate additional costs in the design phase, such as an insulated shell, can be offset, for example, by the reduced cost of a smaller mechanical system. Material costs can be reduced during the construction phase of a project by the use of dimensional planning and other material efficiency strategies. Such strategies can reduce the amount of building materials needed and cut construction costs but they require forethought on the part of designers to ensure a building that creates less construction waste solely on its dimensions and structural design. An example of dimensional planning is designing rooms of 4-foot multiples, since wallboard and plywood sheets come in 4- and 8-foot lengths. Moreover, one dimension of a room can be designed in 6- or 12-foot multiples to correspond with the length of carpet and linoleum rolls which can help reduce costs.

Sieglinde Fuller of the National Institute of Standards and Technology (NIST) says, “LCCA is especially useful when project alternatives that fulfill the same performance requirements, but differ with respect to initial costs and operating costs, have to be compared in order to select the one that maximizes net savings. For example, LCCA will help determine whether the incorporation of a high-performance HVAC or glazing system, which may increase initial cost but result in dramatically reduced operating and maintenance costs, is cost-effective or not.” But when it comes to budget allocation using LCCA is not beneficial.

While the general consensus on the valid basis for adopting a life cycle approach, nevertheless, most building stakeholders prefer to focus on minimizing direct costs or, at best, applying short time frame payback periods. Many developers, building owners, and other stakeholders hold the view that basing opinions on anything other than a reduced direct cost approach is fiscally irresponsible, when in reality the opposite is often the case. This lack of adoption is largely due to the typical corporate structure that dissociates direct and operating costs and with most constructers often lacking the mandate to reduce operating costs, although they are mandated to reduce construction cost. This unfortunate reality is also evidenced by owner/developers, who oversee construction of buildings for their own use.

The LCCA’s primary objective is to calculate the overall costs of project alternatives and to select the design that safeguards the ability of the facility to provide the lowest overall cost of ownership in line with its quality and function. The LCCA should be performed early in the design process to allow any needed design refinements or modifications to take place before finalization to optimize the LCC. Likewise, it is important to ensure that the design complies with the new IgCCs that have come into effect. Another very important and challenging task of an LCCA (or any economic evaluation method for that matter) is to evaluate and determine the economic effects of alternative designs of buildings and building systems and to be able to quantify these effects and depict them in dollar amounts. LCCA is especially suited to the evaluation of design alternatives that satisfy a required performance level, but that may have differing investment, operating, maintenance, or repair costs; and possibly different life spans.

Although lowest LCC provides a straightforward and easy-to-interpret measure of economic evaluation, there are other commonly used methods such as Net Savings (or Net Benefits), Savings-to-Investment Ratio (or Savings Benefit-to-Cost Ratio), Internal Rate of Return, and Payback Period. Fuller sees them as being consistent with the lowest LCC measure of evaluation if they use the same parameters and length of study period. Almost identical approaches can be made to making cost-effective choices for building-related projects irrespective of whether it is called cost estimating, value engineering, or EA. And after identifying all costs by year and amount and discounting them to present value, they are added to arrive at total LCCs for each alternative. These include:

Appropriate adjustments should be placed on all dollar values expended or received over time on a comparable basis as this is necessary for the valid assessment of a project’s LCCs and benefits. Time adjustment is required because a dollar today will not have an equivalent value to a dollar in the future. Supplementary measures, however, are considered to be relative measures, i.e., they are computed for an alternative relative to a base case. Sieglinde Fuller says, “Supplementary measures of economic evaluation are Net Savings (NS), Savings-to-Investment Ratio (SIR), Adjusted Internal Rate of Return (AIRR), and Simple Payback (SPB) or Discounted Payback (DPB). They are sometimes needed to meet specific regulatory requirements. For example, the FEMP LCC rules (10 CFR 436A) require the use of either the SIR or AIRR for ranking independent projects competing for limited funding. Some federal programs require a Payback Period to be computed as a screening measure in project evaluation. NS, SIR, and AIRR are consistent with the lowest LCC of an alternative if computed and applied correctly, with the same time-adjusted input values and assumptions. Payback measures, either SPB or DPB, are only consistent with LCCA if they are calculated over the entire study period, not only for the years of the payback period.”

Employing a holistic or integrated approach through active, deliberate, and full collaboration among all the players is the most likely method to achieving successful green buildings. Building-related investments typically involve a great deal of uncertainty relating to their costs and potential savings. The performing of an LCCA greatly increases the ability and likelihood of deciding on a project that can save money in the long run. Yet, this does not alleviate some of the potential uncertainty associated with the LCC results, mainly because LCCAs are typically conducted early in the design process when only estimates of costs and savings are available, rather than specific dollar amounts. This uncertainty in input values means that actual results may differ from estimated outcomes. The LCCA can be applied to any capital investment decision and is particularly relevant when high initial costs are traded for reduced future cost obligations.

A 2007 study by Davis Langdon updating an earlier study, states, “It is clear from the substantial weight of evidence in the marketplace that reasonable levels of sustainable design can be incorporated into most building types at little or no additional cost. In addition, sustainable materials and systems are becoming more affordable, sustainable design elements are becoming widely accepted in the mainstream of project design, and building owners and tenants are beginning to demand and value those features.” Likewise, Ashley Katz a communications coordinator for the USGBC says, “Costs associated with building commissioning, energy modeling and additional professional services typically turn out to be a risk mitigation strategy for owners. While these aspects might add on to the project budget, they will end up saving projects money in the long run, and are also best practices for building design and construction.”

Accurate forecasts or predictions of energy costs during the preliminary design phase of a project are rarely simple. Assumptions have to be made regarding use profiles, occupancy rates, and schedules, all of which can have a dramatic impact on energy consumption. There are several suitable computer programs currently on the market like Energy-10 and eQuest that can provide the required information regarding assumptions on the amount of energy consumption for a facility. Alternatively the information and data can come from the engineering analysis. Other software packages, such ENERGY PLUS (DOE), DOE-2.1E, and BLAST are also excellent programs but which require a more detailed input not normally available until later in the design process when the design concept is more fully developed. It is also important to determine prior to program selection whether annual, monthly, or hourly energy consumption estimates are required and whether the program is capable of adequately tracking savings in energy consumption even when design changes take place or when different efficiency levels are simulated. Fig. 10.6 provides an example of the typical costs incurred by an HVAC System over its expected useful life which is 30 years.

Estimates reflecting energy use in conventional and green buildings will vary, but the consensus is that green buildings on average use 30% less energy than conventional buildings, which is why energy is a substantial and widely recognized cost of building operations that can be reduced through energy efficiency and related measures that form part of green building design. A detailed survey of 60 LEED rated buildings, demonstrates that green buildings, when compared to conventional buildings reaffirms these conclusions which are:

Energy savings in sustainable buildings come primarily from reduced electricity purchases and secondarily from reduced peak energy demand. On average, green buildings are estimated to be 28% more efficient than conventional buildings and on average generate 2% of their power on-site from photovoltaics (PV). The financial benefits that accrue from a 30% reduced consumption at an electricity price of $0.08/kWh comes to about $0.30 per square foot annually with a 20-year Net Present Value (NPV) of over $5 per square foot, equal to or more than the average additional cost associated with building green.

Jerry Yudelson, author of The Green Building Revolution, says that “Many green buildings are designed to use 25- to 40-percent less energy than current codes require; some buildings achieve even higher efficiency levels. Translated to an operating cost of $1.60 to $2.50 per square foot for electricity (the most common energy source for building), this energy savings could reduce utility operating costs by 40 cents to $1 per square foot per year. Often, these savings are achieved for an added investment of just $1 to $3 per square foot. With building costs reaching $150 to $300 per square foot, many developers and building owners are seeing that it is a wise business decision to invest 1 to 2 percent of capital cost to secure long-term savings, particularly with a payback of less than three years. In an 80,000-sq-ft. building, the owner’s savings translates into $32,000 to $80,000 per year, year after year, at today’s prices.” Environmental and health costs associated with air pollution caused by nonrenewable electric power generation and on-site fossil fuel use are generally excluded when making investment decisions. Table 10.2 highlights the reduced energy used in green buildings as compared with conventional buildings.

Typically, a green building can recoup any added costs within the first year or two of the life cycle of the building once it becomes operational. Studies show that green buildings typically use 30 to 50% less energy and 40% less water usage than its conventional counterpart, yielding significant savings in operational costs. The New Buildings Institute (NBI) recently released a new research study indicating that new buildings certified under the USGBC’s LEED certification program are, on average, performing 25 to 30% better than buildings that are not LEED certified in terms of energy use. The study also suggests that buildings achieving Gold and Platinum LEED categories have average energy savings approaching 50%.

The number and timing of capital replacements of building systems are based to a large extent on the estimated life of the system and the length of the study period. It is expected that the same sources providing the cost estimates for the initial investments will be used to obtain estimates of replacement costs and expected useful lives. Likewise a good starting point for estimating future replacement costs is to use their cost as of the base date. The LCCA method is designed to escalate base-year amounts to their future time of occurrence. The term residual value of a system or component is sometimes mentioned; this basically represents the value it will have after being depreciated, i.e., its remaining value at the end of the study period, or at the time it is replaced during the study period. According to Sieglinde Fuller, residual values can be based on value in place, resale value, salvage value, or scrap value, net of any selling, conversion, or disposal costs. By using simple rule of thumb calculations, the residual value of a system with remaining useful life in place can be determined by linearly prorating its initial costs.

Nonmonetary benefits or costs relate to project-related issues for which there is no meaningful way of assigning a dollar value, and despite efforts to develop quantitative measures of benefits, there are situations that simply do not lend themselves to such an analysis. For example, projects may provide certain benefits such as improved quality of the working environment, preservation of cultural and historical resources, or other similar qualitative advantages. By their nature, these benefits are external to the LCCA and difficult to assess, but if these benefits are considered significant, they should be taken into account in the final investment decision and included in an LCC analysis (LCCA) and also portrayed in the project documentation. To formalize the inclusion of nonmonetary costs or benefits in the decision-making process, the analytical hierarchy process (AHP) which is one of a set of multiattribute decision analysis (MADA) methods that can be used when considering qualitative and quantitative nonmonetary attributes in addition to common economic evaluation measures when evaluating project alternatives. The ASTM E 1765 Standard Practice for Applying Analytical Hierarchy Process (AHP) to Multi-attribute Decision Analysis of Investments Related to Buildings and Building Systems that is published by ASTM International presents a general procedure for calculating and interpreting AHP scores of a project’s total overall desirability when making building-related capital investment decisions. An excellent source of information for estimating productivity costs is the WBDG Productive Branch.

Based on the above information, the total NPV over the lifetime of the project would come to $9280.22.

The value of discounting is that it adjusts costs and benefits to a common point in time. Thus, to be able to add and compare cash flows that are incurred at different times during the life cycle of a building, they need to be made time-equivalent. To make cash flows time equivalent, the LCC method converts them to present values by discounting them to a common point in time, which is usually the base date. To some extent, the selection of the discount rate is dependent on the use to which it will be put. The interest rate used for discounting essentially represents the investor’s minimum acceptable rate of return.

The Federal Discount Rate FY 2012 Principles and Guidelines states: “Discounting is to be used to convert future monetary values to present values. Calculate present values using the discount rate established annually for the formulation and economic evaluation of plans for water and related land resources.” The discount rate for federal energy and water conservation projects is determined annually by the DOE’s Federal Energy Management Program (FEMP); for other federal projects, those not primarily concerned with energy or water conservation, the discount rate is determined by the Office of Management and Budget (OMB). These discount rates, however, do not include the general rate of inflation but rather represent real discount rates. In OMB and FEMP studies, annually recurring cash flows such as operational costs are normally discounted from the end of the year in which they are incurred. In MILCON studies, they are typically discounted from the middle of the year. All single amounts such as replacement costs and residual values are discounted from their dates of occurrence.

The length of study period begins with the base date which is the date to which all cash flows are discounted. The study period includes any planning, construction, and implementation periods as well as the service or occupancy period. The study period remains unchanged for all of the considered alternatives. The service period, however, essentially begins when the completed building is occupied or when a system is taken into service. This is the period over which operational costs and benefits are evaluated. In FEMP analyses, the service period cannot exceed 25 years. The contract period in ESPC and UESC projects lies within the study period, starting when the project is formally accepted, energy savings begin to accrue, and contract payments begin to be due. The contract period generally ends with the loan being paid off.

Sieglinde Fuller maintains that, “It is particularly suitable for the evaluation of building design alternatives that satisfy a required level of building performance but may have different initial investment costs, different operating and maintenance and repair costs, and possibly different lives.” But, LCCA can be applied to any capital investment decision in which relatively higher initial costs are traded for reduced future cost obligations. Also according to Fuller, LCCA is an approach that provides a much better assessment of the long-term cost-effectiveness of a project than alternative economic methods that mainly focus on first costs or on operating related costs in the short run. Furthermore, Fuller says that LCCA can be performed at various levels of complexity, but its scope could vary from a “back-of-the envelope” study to a detailed analysis with thoroughly researched input data, supplementary measures of economic evaluation, complex uncertainty assessment, and extensive documentation.

An important attribute of LCCA is that it can be performed in either constant dollars or current dollars. Both methods of calculation produce identical present-value LCCs. However, a constant-dollar analysis does not include the general rate of inflation, which means it has the advantage of not requiring an estimate of the rate of inflation for the years in the study period. A current-dollar analysis on the other hand, does include the rate of general inflation in all dollar amounts, discount rates, and price escalation rates. Constant-dollar analysis is generally recommended for federal projects, except for projects financed by the private sector such as through the Energy Savings Performance Contracting (ESPC) and the Utility Energy Services Contract (UESC). There are several alternative financing studies available and that are usually performed in current dollars if the analyst wants to compare contract payments with actual year to year operational or energy cost savings.