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A Decision Perspective of Sustainable Life Cycle Costing In Whose Book of Account?

Mok, Ken Loong Park, Heedae Han, Seung Heon

1. Introduction

Most Life Cycle Costing (LCC) studies had focused on one single item and attempted to put sustainable development into practice. However, the basal methodology of many LCC models did not fully reflects the real standard of judgment made by investor, especially when involving a project with high complexity (Kirkham, 2005; Lopes and Flavell, 1998; Kenneth, 2000; Gerald and David, 2003). So far, the LCC studies had focus essentially on factual costs with known degree of certainty (John and Kirsty, 2009). Factual costs shall not be the only criteria driving investors decision making, especially in the building and construction sector that require sustainable development. Although LCC principally aims to realize maximum benefits at lowest cost, the real practice may be rendered ineffective by restriction of a criterion other than long term economy, such as initial project cost limitation, equal benefits consideration among alternatives as long as minimum functional and technical requirements were fulfilled, and other short term interest-investment (Stephen and Alphonse, 1995). The underlying trade-offs between benefits and costs considered in LCC differ among decision makers, owners, users, non-users and the society as a whole. When the construction industry touched on LCC, it is difficult in knowing whose book of account the LCC is referring to. The question of whose LCC costs one is accounting for is caused by the existence of value-added and margins (Gerald and David, 2003). A case study has been conducted based on a highway project in Malaysia (PLUS). The project life cycle cost categories have been identified to the interest of different parties and presented in a table form. The purpose of this study is to establish a systematic structure of decision making in consideration of life cycle costing through different parties multi-criteria analysis (MCA). In this study, we seek to examine the context of LCC in the account of different parties by listing out the cost components corresponding to them. The table enabled further discussions and pictured a clearer idea pertaining to sustainability in LCC correspond to its various account holders which previously has not been clarify by other researchers or if done so, was simply assigned as a universal account of no conflicting-interests.
Master student, Dept. of Civil & Environmental Eng., Yonsei Univ., Seoul, Korea. Email: mokkenloong@yonsei.ac.kr Ph.D. Student, Dept. of Civil & Environmental Eng., Yonsei Univ., Seoul, Korea. Email: parkheedae@yonsei.ac.kr Professor, Dept. of Civil & Environmental Eng., Yonsei Univ., Seoul, Korea. Email: shh6018@yonsei.ac.kr

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2. Cost components to be included in life cycle costing

2.1 cost 2.1 Factual cost or financial cost The parameters involved in calculating financial cost are capital, acquisition, construction, financing, operation & maintenance, replacement, depreciation, disposal, interest rates, inflation, depreciation, tax rates, discount rates, and operation life span.

2.2 Non2.2 Non-financial cost Apart from factual cost, other non-financial aspects that influence decision making are social, environmental and political. The underlying non-financial factors have been listed out by various researches (INFRAS, 2004; Lopes and Flavell, 1998; Sigurd et al., 1998 cited from PETS, 1997). Often, policy was made based on the point of view of a policy maker who tends to compromise between different political objectives. In many cases, they neglected the interest of other important stakeholders especially when dealing with the trade-offs between the environmental and economic policy (Enzensberger et al., 2002). Psychologists note that there is a natural human preference to receive a benefit immediately rather than at some point in the future (Corotis, 2006). Figure 1 shows the process of modeling the investment decisions throughout project life cycle. It helps the reader to understand the flow of general decision making.

Figure 1. The Process of modeling the investment decisions throughout project life cycle

3. Case Study: PLUS Highway, Malaysia

PLUS highway is Malaysias transportation project that links all major cities at the west coast of Peninsular Malaysia between Thailand and Singapore. Since its construction in 1988, the project has

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benefited expressway users through the reduction of congestion and travelling time. PLUS has set aside RM10 million (3.1 million USD) from 2008 to 2010 for community and social welfare program. A survey by University of Malaya showed that the PLUS highway development saves drivers RM 2.7 billion (850 million USD) per year in extra efficiencies, greater transport savings and speed of travelling (PLUS, 2008). 73% of the entrepreneurs being interviewed stated that their business was benefited from the existence of the expressway. In 2008, water consumption along the expressway was 2.4 million m . The total scope to CO2 emission in 2008 was amounted to 37.5 thousand metric tons (PLUS, 2008). Therefore, we identified the concerns of the owner onto the non-financial aspects and its costs. The tolled highway in Malaysia including PLUS highway has been recognized as one of the important role player in the countrys socio-economic and socio-political context (Ervina Alfan, 2007). On top of the toll collection, PLUS group also received compensation from the government of Malaysia for not raising the toll fee under supplementary concession agreements. Hence, we know that there exist trade-off between socio-economic & political factors at the account of one government and its society. Malaysia government also has indirect interest from PLUS highway through the governments main investment arm, Khazanah National Berhad (PLUS Annual Report 2009). It is important to note that the government of Malaysia has strictly implemented its policy of protection towards Bumiputera (indigenous people) by requiring at least 30% equity participation by Bumiputera entrepreneurs. This indicated that as a partial owner of PLUS highway, the government of Malaysia will not only considered factual costs, but also placed utmost importance onto social-political aspects through its policy although this invites less open, cronyism, and non-competitive bidding practice. Figure 2 shows the conceptual framework of LCC identification for different accounts in the case study. Table 1 shows the project life cycle costing at the account of different interest parties in the case study of PLUS highway, Malaysia. The parties in interest are categorized as the society, government, private owner, users and non-users.
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Figure 2. The Conceptual Framework of LCC Identification for Different Accounts in the Case Study

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parties Table 2. Project life cycle costing at the account of multiple parties in the case study

We know that the users and non-users of PLUS highway also have their own account when one mentioning LCC of the highway. Table 1 shows that the users account are mostly comprises of transportation costs and other social costs. Compared to the users, the non-users account are debited and credited with more non-financial costs ranging from social to environmental and political aspects. The costs are party sensitive. Some of the party will consider full cost on one aspect and partial to zero cost on the other. The cost components in Table 1 is not conclusion but projected a clearer idea on every partys account when dealing with LCC.

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4. Conclusion

The objective of this study is to establish a systematic structure of decision making involving LCC and MCA analysis so as to help decision makers to tailor their total cost for long term. Case study of PLUS highway has showed the underlying benefits and costs considered in LCC along with the tradeoffs concerned by different interest-seeking parties, ranging from owners, decision makers, users, nonusers and the society as a whole. In this study, we have examined the context of LCC in the account of different parties. This study helps to project a better picture of total costs involve in a project life cycle at different accounts for more understanding of LCC context. The results enabled further discussions and pictured a clearer idea pertaining to sustainability in LCC correspond to its various account holders who might be sharing conflicting-interests. The model also improves awareness and senses towards the overall LCC for sustainable development potentially affecting other parties. The interest-seeking by one party at the account of another will be clearly outlined in this model. This is especially important for projects of public interest. Future LCC studies shall be encouraged to clearly define its own account and interest standing especially those conflicting with other parties.

Acknowledgement

This research was supported by the Basic Science Research Program through the National Research Foundation of Korea (NRF), a grant funded by the Ministry of Education, Science and Technology (2009-0081326).

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