Changing the Paradigm

The upfront cost of HVAC components often represents only 5% of their total cost of ownership over 20 or more years. Yet many organizations purchase HVAC upgrades on a first-cost basis, issuing requests for proposals (RFPs) that seek the lowest possible pricing for the initial equipment purchase.

Since a major HVAC project is a significant, long-term capital asset, well-managed healthcare facilities instead are maximizing efficiency and saving money by evaluating HVAC projects via their life cycle cost.

According to the NIST Handbook from the U.S. National Institute of Standards and Technology, life cycle cost (LCC) is “the total discounted dollar cost of owning, operating, maintaining, and disposing of a building or a building system” over a given period. A full life cycle cost analysis (LCCA) compares initial, maintenance, repair, and operating costs over the life of an HVAC system. The LCCA particularly examines such critical variables as equipment materials behavior, intended facility use, environmental conditions, and projected energy costs.

A comprehensive LCCA can pinpoint bad bargains such as supposedly “low-price” systems that turn out to feature unacceptably short lifespans or excessively large lifetime operational costs.

Initial Planning and Variables

Each RFP should include an LCCA, conducted as early as possible. The goal is to create a system that can operate at peak efficiency throughout its lifetime, making use of noncorrosive materials in harsh environments and eliminating system shutdowns.

The LCCA equation contains three vital variables: 1) the costs of ownership, 2) the period of time over which costs are incurred, and 3) the discount rate applied to future costs to equate them with present-day expenses.

Cost Variable — Initial Expenses

Costs incurred prior to system installation include capital costs for the system and its controls. Since flexible controls are the most important factor in maintaining a high-performance HVAC system at your hospital, emphasize issues such as centralized command & control; precise temperature & humidity control; ease of changing settings; control of core functions such as laundry, pharmacy, and security; and ease and efficiency of testing & balancing equipment.

Estimate initial construction costs by referencing historical data from similar facilities, and by consulting government and commercial cost estimating guides and databases.

Cost Variable — Future Expenses

Future costs are incurred after the system is in place. They include energy, water, and other utility costs, non-fuel operating costs, and maintenance and repair (OM&R) costs.

Energy and utility modeling software can help analyze a building’s projected use, occupancy rates, schedules, and more. A thorough LCCA factors in an energy price projection as well as rate type, rate structure, seasonal differentials, block rates, and demand charges.

Since operating schedules and standards of maintenance vary widely from building to building, so do OM&R costs. HVAC systems usually remain in place for several decades. If a low-cost system comes with exorbitant upgrade costs, your preparer should consider alternative options that may bear a higher initial price tag but are more cost-effective to upgrade over the system’s lifetime.

Cost Variable — Non-Monetary Benefits

You may choose an HVAC system to optimize environmental advantages, including indoor air quality (IAQ), filtration, pressurization, airflow, and acoustics. Example: the non-monetary benefits derived from a particularly quiet system.

Time Variable

Typically, the LCCA study period for evaluating ownership and operations expense ranges from 20 to 40 years — generally less than the intended life of the facility. The NIST suggests dividing the study into planning/construction and service periods.

Discount Rate Variable

The discount rate is the rate applied to future costs to equate them to present-day expenses. It’s the number that would make you indifferent whether you received a smaller payment now or a larger one later. Your preparer may consult the U.S. Department of Energy, whose discount rate is updated annually.

Constant-dollar analyses exclude the rate of general inflation; current-dollar analyses include the rate of general inflation in all dollar amounts, plus discount rates and price escalation rates. Both types of calculation result in identical present-value life cycle costs.

Conclusion

An LCC analysis is a valuable assessment to help hospitals build and maintain their facilities as assets, not commodities. Partnering with an innovative, knowledgeable HVAC provider is the first step toward optimal hospital performance and efficiency.