Operating Costs of Real Estate

Models and Cost Indicators for a Holistic Cost Planning

Benjamin Lasshof

• Publisher: De Gruyter Oldenbourg
• Year: 2018
• Print ISBN: 9783110595147
• eBook ISBN: 9783110596168
• Edition: 1
• Topic: Business
• Subtopic: Professional Practice in Architecture
• Index: Business

The accurate determination of operating costs and the knowledge of significant influential factors on these costs are crucial foundations for a holistic assessment of planning alternatives during the life cycle of real estate. The quantitative approach of the research study is based on empirical data of operated buildings in Germany. The study is dedicated to the development, validation, and evaluation of statistical models for an investigation of causal interrelationships between operating costs and a variety of potential influential factors on these costs. The main objective is the provision of essential information, models, and adequate cost indicators for an accurate determination of operating costs for an application in the field of cost planning of real estate. The practical application of the results is demonstrated in detailed implementation examples. The results of the study are directed towards architects, planners, and the real estate management and can serve as the basis for decision making and budgeting.

1Introduction

1.1Background and problem statement

The term life cycle costing for the determination of the total costs incurred during the service life of a system was initially introduced in 1965 by the US Logistics Management Institute in order to assess military systems economically as for example described by Dhillon (2009). The first guideline for the assessment of construction projects was published by the US Department of Commerce in 1978 (Ruegg et al.). Within the context of the first global energy crisis, the guideline describes the determination and evaluation of life cycle costs for alternatives of energy saving measures for public building projects. In general, the life cycle costing approach in the field of construction includes not only the initial investment costs but takes likewise consequential costs into account. As illustrated in various studies and publications, the costs incurred during the operation and occupancy of real estate cause a significant amount of the total financial expenditures over the entire life cycle. Consequently, a considerable potential of cost savings for property owners and leaseholders is provided by the expenditures for the operation of real estate.

Cost planning is to a large extent still limited to the determination of the initial construction costs, even though the financial relevance of operating costs and the respective potential of cost savings is illustrated in various studies and publications. The determination of operating costs at an early stage of the planning process is therefore an essential task in order to ensure the economic viability of construction projects. As a substantial element of cost planning, alternatives of construction, renovation, or modernisation measures can be assessed holistically by respective cost-benefit analyses under consideration of operating costs. Likewise, the iterative processes of cost control and cost management can be conducted on the basis of a holistic determination of costs. The general scope of cost planning according to the standard DIN 18960:2008-02 is illustrated in Figure 1.1.

Figure 1.1. Scope of cost planning according to DIN 18960:2008-02

Cost planning comprises the iterative processes of cost determination, cost control, and cost management. The process of cost determination can be distinguished into five levels, whereby the first projection, the preliminary estimation, the approximate estimation, and the final estimation intend to predict future expenditures and the final statement intends to assess the costs incurred during the operation phase. The various levels of cost determination can by be carried out for construction, renovation, or modernisation measures. In contrast, the process of cost control is applied in order to compare incurred costs to earlier cost determinations or requirement specifications. The intervention in the processes of planning, execution, occupancy, and operation is accomplished by the cost management as outlined in the standard DIN 18960:2008-02. The scope of cost management includes optimisations in the operation or in the planning that are carried out in order to meet the initial requirement specifications. Throughout all these iterative processes of cost planning, the involved architects, planners, and the real estate management face the challenge to provide an accurate determination of operating costs. Likewise, there is a lack of knowledge on significant influential factors for a holistic assessment of measures. Against this background, the operating cost planning is currently subject to the following problems:

–What are significant influential factors on operating costs and how do they affect these costs?

–What are appropriate methods for an accurate determination of operating costs for a holistic cost planning?

1.2Scope and objective

In the illustrated context of cost planning, the current research study is dedicated to the provision of relevant essentials for the determination, control, and management of expenditures for the operation of real estate. Therefore, a quantitative approach is employed in order to analyse empirical data of operated facilities and explain operating costs systematically. The current study intends to reveal and describe the causal interrelationships between operating costs and a variety of variables with potential influence on these costs. Furthermore, the study aims to introduce and evaluate appropriate tools for an accurate determination of operating costs. The main objective is the provision of an essential basis of information for the practical application in the field of life cycle cost planning of real estate. The results aim to provide the foundation for a holistic assessment of planning alternatives of construction, renovation, or modernisation measures and have the objective to support decision making and budgeting under consideration of operating costs. The research study is directed towards architects, planners, and the real estate management.

An extensive review of relevant research studies and publications in the fields of operating cost estimation and cost modelling provides the foundation for the definition of relevant key variables and for the selection of multiple statistical methods for the analysis. In the course of the statistical analysis, significant interrelationships between the costs and adequate reference quantities are identified and respective operating cost indicators are introduced. Based on the cost indicators, further statistical models are developed and presented in detail. The statistical models intend to identify significant influential variables and give an accurate estimation of operating costs. The most significant influential variables are employed in order to present categorised cost indicators. Finally, the most accurate operating cost estimation method is determined by a comparison and evaluation of the developed statistical models and categorised cost indicators. In conclusion, the main objectives of the current research on operating cost planning can be summarised as follows:

–Identification of adequate reference quantities

–Identification of significant influential variables

–Introduction of categorised cost indicators

–Introduction, comparison, and evaluation of cost estimation methods

1.3State of the art

The calculation and determination of costs in the field of construction has a relatively long tradition as summarised in an extensive review of literature on cost modelling published by Newton (1991). The first approaches of cost modelling are initially based on the techniques of regression analysis and simulation and were introduced in the 1970s as described by Ashworth and Perera (2015). Based on the availability of computers as a common tool in the construction industry, a more reliable and accurate estimation of construction costs was expected by the employment of the new techniques. Simultaneously, the evaluation of different designs and planning alternatives under consideration of the initial construction costs has become an important matter in construction economics. The first regression models as tools for the estimation of construction costs are presented in the studies of Kouskoulas and Koehn (1974), Mc-Caffer (1975), and Bowen and Edwards (1985). With the life cycle costing approach in the 1980s and in particular with the whole life costing approach at the beginning of the 2000s, the consideration of costs incurred during the operation and occupancy of real estate has become significantly more important. With the shift away from the focus on the initial construction costs, the whole life cycle of real estate is considered for the calculation and determination of costs in a long-term perspective (cf. Ashworth and Perera, 2015).

A selection of relevant studies and publications in the context of operating cost determination is presented in Table 1.1. The list of studies and publications includes a description of the type of conducted investigation, the employed data sample, the scope of analysed costs, and a summary of the main results. The focus of the review of literature lies both on literature providing tools for an estimation of operating costs and on literature analysing the causal interrelationships between the costs and influential factor groups. The first investigation addressing the consequential costs of real estate in Germany is published by Siegel and Wonneberg (1977). The empirical analysis employs the data of 110 office facilities and presents an extensive documentation of management and operating costs under consideration of building characteristics as an influential factor group. A further investigation of the data basis of Siegel and Wonneberg is conducted by Kalusche (1991) in an analysis of capital, object management, operating, and maintenance costs.

In 1998, the study of Al-Hajj and Horner provides an approach to model operating and maintenance costs by application of the Pareto principle in order to identify the most significant components of these cost types. The first approach to employ a relatively large data basis of approximately 14,000 residential facilities in the United States in a statistical analysis is presented by the Graduate School of Design of the Harvard University GSD (2003). Focussing on internal factors, building characteristics, and the location as influential factors, the variance of management and operating costs is analysed utilising regression models. Based on 116 office facilities located in Switzerland, Stoy (2005) provides regression models and cost indicators for capital, management, and maintenance costs. The statistical analysis determines strategies and building characteristics as the main factors influencing these cost types. Further statistical models for the identification of significant variables with influence on the energy consumption and operating costs of school facilities are introduced by Beusker (2012). The research study is based on 130 observations and identifies the utilisation, functional and technical characteristics, and strategies as significant factor groups with impact on costs. Likewise, Hawlik (2015) conducts a statistical analysis of 125 child day care facilities and determines the utilisation, building characteristics, and technical characteristics as relevant factor groups.

Besides the approaches to analyse the operating costs of real estate statistically, various studies offer cost indicators based on empirical data for the estimation of consequential costs. For example, the Building Cost Information Service of the Royal Institution of Chartered Surveyors provides a compilation of occupancy cost indicators from various sources for the British market since 1999 (BCIS, 2007a,b). The scope of costs includes the management, utilities, cleaning, and maintenance with a categorisation according to multiple utilisations, locations, building characteristics, and technical characteristics. On an international level, further data is published by the International Facility Management Association including categorised management, operating, and maintenance cost indicators based on the data of more than 1,400 facilities (IFMA, 2009). The cost indicators are differentiated by the utilisation, characteristics, the location, and the management strategy. For the Swiss market, pom+ (2016) publishes categorised management, operating, and maintenance cost indicators employing a data basis of currently more than 15,000 facilities. The utilisation, building characteristics, and the location are employed for a categorisation of the indicators presented in the publication.

Table 1.1. Relevant studies and publications

On the German market, various facility management companies aim to provide operating cost data since the 1990s. For example, an annual report published by Jones Lang LaSalle offers data of service charges of office facilities for the purpose of benchmarking with a categorisation according to various factors since 1996. The current report (JLL, 2016) is based on the data of 337 operated office buildings and categorises cost indicators according to various characteristics and the location. Likewise, Rotermund (2016) provides management, operating, and repair cost indicators based on the data of about 3,000 facilities as benchmarks. Specific consumption and cost indicators directed towards the real estate management of public facilities are published by the FMBW (2004) with a categorisation by the type of facility and based on a data sample of approximately 2,000 observations. Furthermore, the Cost Information Centre of the German Chamber of Architects BKI offers operating and repair costs of operated real estate since 2010 (e.g. Stoy et al., 2015, 2017). Providing both detailed documentations of individual facilities and statistical cost indicators, the publication series is directed towards architects and planners and aims to provide the basis for an accurate cost estimation.

Further studies and publications intend to provide calculation methods and are partly based on empirical data. The research study of Naber (2002) introduces calculation methods for capital, management, operating, and maintenance costs and is based on the utilisation of respective cost indicators. A software tool including calculation methods for management, operating, and repair costs is provided by Riegel (2004). The calculation methods are validated on the basis of 6 office buildin...

Table of contents

• Cover
• Title Page
• Copyright
• Table of Contents
• List of Abbreviations
• List of Figures
• List of Tables
• Abstract
• Zusammenfassung
• 1 Introduction
• 2 Methodology
• 3 Data sample
• 4 Analysis results
• 5 Results summary
• 6 Implementation
• 7 Conclusion
• References
• Appendix: Data sample