12 June 2019
It always amazes me that companies rarely seek to extract the most optimal value in project evaluation considerations.
Considerations of asset cost in the early stages of the project definition must go beyond just comparison on the capital outlay. Organizations that ignore other critical evaluation criteria could be acquiescing significant value accretions over the asset life that can have serious impact on a project’s overall viability.
Elements of Whole of Life Value basis
There are many necessary considerations that a decision maker can use to reasonably assess viability in the early concept and pre-feasibility stages of project preparation. These include technical, environmental, legal, social impacts and funding/lenders requirements. A feasibility study will also always include an assessment of operating costs (OPEX). However, on many occasions, Whole of Life Value Analysis (WLVA) is missing from the mix, and it can be the most crucial element for the decision maker. Without it, a decision can cause significant value destruction due to poor asset design and procurement considerations. So, for the end game, a greater focus on all-inclusive WLVA is critical.
All-inclusive WLVA is a technique for examining and determining all the costs in money terms this includes both direct and indirect) of:
- Building and facility management (operating, maintenance, support, and replacement)
- Revenue and risk (technical as well as financial) of a construction throughout its entire life, including the disposal cost.
Why projects tend to ignore WLVA and provide a basic OPEX build up is baffling, since it provides extra benefits, including reduced risk that the end product on the project is not fit for business expectations on profitability. So why is this?
Generally, it is mostly excluded due to:
- Ignorance of its benefit to the decision-making process
- Misinformed belief that WLVA will add complexity and expense to the completed project
- Lack of consistent, historically collected relevant data, together with standard techniques for modifying rule-of-thumb data to specific projects
- Reliance on non-contractually binding supplier performance data covering future reliability and consumption ratios that provide uncertainties in the outputs
- Misalignment with the typical OpEx (Operational Expenditure) and CapEx (Capital Expenditure) split in most companies since WLVA analyses do not separate capital and running costs in the final adjudication
Yet, all of these perceived issues can be overcome with a thorough WLVA process. A whole life cost model can be extremely effective, and a significantly influential component of the evaluation process. This does not have to be exhaustive. Keeping it simple is better than not considering it at all.