DEVELOPMENT OF A WHOLE-LIFE COST IMPLEMENTATION FRAMEWORK FOR THE NIGERIAN CONSTRUCTION INDUSTRY
CHAPTERONE
1.0INTRODUCTION
1.1 Background of the Study
The economic evaluation of construction projects has been predominantly based on the initial capital cost. Cuellar-Franca and Azapagic (2013) discovered that, the initial cost of the UK housing stock constitute only about 35% of their cradle-to-grave cost. The remaining 65% is accounted for by the occupancy and disposal costs. This signifies that, by basing evaluation of building investments on initial cost only, the potential for cost savings at the operating stage is neglected thereby depriving clients Value For Money (VFM).
According to Owen and Merna (1997), the persistent need for infrastructural facilities, coupled with limited financial resources invoked the proliferation of new procurement methods in the form of Public Private Partnership (PPP). Some varieties of PPP scheme like Private Finance Initiative (PFI) and Build Operate and Transfer Options (BOT) require proposed projects to pass the VFM test. In conducting the VFM test the use of Whole Life Cost (WLC) cannot be avoided as forecast of both cost and income of an asset over its operating life are required.
Another essential development is the quest for sustainable building development. Economic sustainability requires that proposed construction ensures “fitness for purpose”, and efficient allocation of resources (elimination of under/over investment). Ellingham and Fawcett (2006) identified the provision of economic options as a key requirement of sustainability. These requirements are best evaluated using WLC appraisal. Dell‟Isola and Kirk (2003) postulated that, the need for facilities to accommodate changes so as to guard against premature obsolescence, remain operationally effective, and maintain total quality management requirement also strengthen WLC agenda.
It is in line with the aforementioned necessities that most developed nations have mandated the use of WLC in the economic evaluation of proposed projects. Legislations mandating the use of WLC have been passed in the USA since mid-1970‟s (Dell‟Isola and Kirk, 1981). In the UK, WLC became officially recognised in 1992 under BS 3845(1992). In contrast, WLC is rarely used in the developing countries like Nigeria due to a number of challenges, except in internationally financed projects like the World Bank assisted projects (Flanagan and Jewell, 2005). The challenges, like cost of implementation, process complexity etc. need to be overcome for a proper uptake of the service in the developing countries.
1.2 Statement of the Research Problem
The economic evaluation of proposed building projects in the Nigerian construction industry is traditionally based on initial capital cost instead of Whole Life Cost (WLC) which aggregates the initial, maintenance operating and terminal cost of proposed projects. This approach has the disadvantage of ignoring the operating, maintenance and disposal cost of proposed projects thereby placing significant financial burden on clients and users at a later stage of asset life. Recent developments like the quest for sustainable built environment, Public Private Partnering (PPP) and Build Operate and Transfer (BOT) options require proposed building projects to satisfy the Value for Money (VFM) test over their operating life (Dell‟Isola and Kirk, 2003). This requirement clearly indicates the need for a shift from traditional to WLC evaluation methods. On recognising this, the Nigerian legislative arm of the government passed the Infrastructure Concession Regulatory Commission and the Public Procurement ACTs in 2005 and 2007 respectively. Both ACTs clearly require the application of Value-For-Money (VFM) standards and principles in the procurement of public assets. Furthermore, the Federal Executive Council in April, 2009 approved a national policy on Private Finance Initiative which requires public office holders to assess VFM in public procurement on the basis of WLC. This requirement is a challenge to professionals considering the difficulties associated with WLC exercise. These difficulties which includes; lack of awareness, cost of implementation, scarcity of reliable historical data, diverse methodologies, and limitations of existing frameworks greatly limits the application of WLC in especially the developing countries like Nigeria (Flanagan and Jewell, 2005; Kishk, Al-Hajj, Pollock, Aoud, Bakis, and Sun, 2003a; Dermot and Jason, 2017). This research effort hopes to overcome the aforementioned problems through the development of an Implementation framework for WLC costing in the Nigerian building industry.
1.3 Justification for the Study
The reason for the slow uptake of WLC in especially the developing countries has been attributed to so many factors. These factors include: dispersed legal requirement; data scarcity; cost of implementation; multiplicity of data formats/models; complexity of the process; and lack of demand/awareness by the client amongst others (Ashworth, 1993; Seeley, 1996; Flanagan and Jewell, 2005; Olubodun, Kangwa, Oladapo, and Thompson, 2010; Opoku, 2013; Higham, Fortune, and James, 2015; Dermot and Jason, 2017). Solution to these problems has been the concern of many researchers since the early 1990s. Surprisingly, these problems keep on reverberating to the present as reported by Opoku (2013) and more recently by Dermot and Jason (2017). If these problems are successfully mitigated, WLC technique will offer great benefit to building Clients. Besides, the solution frame to these problems would then serve as a basis for the development of an implementation framework.
The development of an implementation framework for WLC would facilitate the identification, characterization and integration of the requirements for WLC analysis within the Nigerian construction industry. Such a framework would assist in identifying and integrating; the legal requirement for the application of WLC; the activities involved in WLC analysis; the sequence of WLC operations; WLC data collection, analysis and presentation format, and risk analysis framework.
It is anticipated that, the availability of the framework would encourage the use of WLC within the industry thereby: assist in cutting down maintenance and operating costs of proposed projects thus freeing resources for other investments; push forward the sustainability agenda in the built environment by minimizing over/under design through sound WLC practice; assist both the public and private sector clients in the preparation of technical/financial plans on maintenance and renovations of building assets; help to ensure that buildings do not get obsolescent prematurely through the evaluation of their physical, economic, functional and legal life; encourage innovation in the design, construction and management of building assets as professionals are forced to consider the performance of proposed projects over their operating life; providing a basis for the development of an industry based WLC standard method of cost analysis; and forming the basis for the development of an industry based WLC data analysis tools.
1.4 Aim and Objectives
1.4.1 Aim
The aim of this research work is to develop a WLC implementation framework for the Nigerian construction industry with the view to improving the usability of WLC in economic evaluation of building projects.
1.4.2 Objectives
The objectives of this research are:
To articulate the legal requirements for the application of WLC.To evaluate the limitations of existing WLC implementation frameworksTo determine the most significant implementation challenges for WLCTo proffer logical solutions to the implementation challenges. .To integrate the solutions into a framework structure by observing the legal requirements for WLC.To transform the framework structure into a programme flowchart and interfaces for subsequent implementation on a computer system.
1.5 Scope of the Research
This study focused on the public sector of the Nigerian building industry, thus the developed framework relates principally to public investments. Moreover, the implementation and testing was limited only to database and mathematical models using data for residential buildings only.
1.6 Limitations
The underlying assumption of Black-Scholes model which considers income to be log-normally distributed over time may not perfectly fit the Nigerian property market, thus there may be the need to further assess the validity of the assumption. More so, producing the best design requires concerted effort in research, testing and improvement over time. While logical arguments were drawn based on which decisions were taken at every milestone, there is no doubt that better designs could be achieved through continuous evaluation and research effort.
DEVELOPMENT OF A WHOLE-LIFE COST IMPLEMENTATION FRAMEWORK FOR THE NIGERIAN CONSTRUCTION INDUSTRY
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