Strategies to Renew Federal Facilities (2023) / Chapter Skim
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4 Improving Estimates of Renewal Costs
4 Improving Estimates of Renewal Costs
Pages 59-73
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From page 59... ...
Accurately estimating renewal costs is the first step of justifying adequate funding, and the federal government depends on such estimates to guide its spending of billions of dollars annually for its facilities. For an individual structure, renewal costs are an essential input required for project development and economic analyses.
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From page 60... ...
noted that most performance metrics were financial; most commonly used to characterize facility condition was the facility cost index, the ratio of the cost of necessary repairs over the cost of replacement. TABLE 4-1 Scope of Sustainment and Restoration and Modernization Department of Defense Model Cost Category Facility sustainment Preventive Maintenance, Minor Repair Unscheduled Maintenance Major Repair, Replacement Facility Restoration and Replacement due to Obsolescence Modernization Change in Use Modifications Policy-Mandated Retrofits Acts of War & Nature Repairs from Neglect Long-lived Components SOURCE: Sourced from data in Whitestone Research, 2003, Development of a Restoration & Modernization Requirements Process: Final Report, Washington, DC.
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From page 61... ...
Having summarized comments on facility cost modeling in earlier National Academies' publications, the remainder of this chapter provides a typology of cost models and then reviews two specific models that might be used for estimating renewal requirements. The last section describes the pressing need for revised service-life5 and depreciation rates, particularly for nonresidential structures.
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From page 62... ...
• Benchmark survey -- A benchmark survey provides a rate or collection of rates defined by a survey of end users. Cost estimates based on survey results have the authority of experience, but sample size and the self selecting nature of responses limit accuracy.
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From page 63... ...
Unlike benchmark surveys, DoD based estimates from the FSM on published life cycles of individual components and represented "what should be spent" rather than summaries of actual expenditures. • Simulation models -- More of an exploratory environment than a single purpose tool, a simulation model can provide detailed estimates of repair and replacement costs (individual building, components, labor, trade, etc.)
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From page 64... ...
TWO APPROACHES TO ESTIMATING RENEWAL COSTS Facility renewal is defined in Chapter 1 as extending an asset's functionality beyond its expected service life through significant renovation, replacement, or repurposing. This view is consistent with the DoD definition of recapitalization, as it "extends the service life of facilities or restores lost service life.
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From page 65... ...
A measure of overall building condition is based on the weighted combination of component condition. The future condition of each component is predicted by a degradation curve that represents the relationship of the condition index and component age (see Figure 4-1)
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From page 66... ...
• Most critically, the scope of Builder inspections does not match the scope of renewal activities. Builder developers have stated explicitly that resto ration and modernization data are not collected.11 The Independent Value of Component Inventory Data To provide an estimate of building and component condition, Builder requires detailed component inventory data.
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From page 67... ...
The data could also be used by other models capable of estimating renewal and other facility costs. ESTIMATING RENEWAL COSTS WITH AN ECONOMIC DEPRECIATION MODEL The structure value and productivity of a building diminishes with age (unlike land value, which tends not to depreciate and can vary with local economic conditions)
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From page 68... ...
. They found a geometric pattern of depreciation, wherein the asset depreciates by a fixed percentage of its value over a given period, resulting in a final remaining productive capacity above zero, which represented well the decline of structure efficiency over time and estimated a set of depreciation rates that are still widely cited in practice.16 Estimates of renewal requirements using the straight-line depreciation pattern are much higher than those assuming geometric depreciation17 with a 0.91 15 See Gravelle (1999)
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From page 69... ...
The difference is reflected in the estimated renewal cost, meaning the annual renewal costs for government nonresidential industrial structures would be lowest with a geometric 0.91 declining balance rate and highest with a geometric 2.0 declining balance rate before age 26. In the example provided the net result is 27 percent of the asset's productive capability, which equates to a range of capital investment required to renew the FIGURE 4-2 Alternative depreciation patterns for office buildings.
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From page 70... ...
. In 2005, the DoD model converted to the geometric depreciation rates favored by the BEA and expressed annual restoration and modernization costs as cost factors by the same facility categories as the Facility Sustainment Model (Lufkin et al.
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From page 71... ...
Regulated utilities report asset service lives at rate hearings and compile service-life data into an industrywide summary, although it is confidential.21 There are at least two international financial surveys (Japan and Canada) that report average asset service lives for tax purposes.22 And at least three commercial publishers provide service-life estimates based on expert opinions and secondary sources.
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From page 72... ...
Replacement experience data are a growing resource with the ubiquity of maintenance management systems and extrapolation from condition-inspection tools for specific systems, such as Roofer and Paver, which have proven successful. Finally, simulations such as LLNL's risk calculation model can estimate the cost impacts of a range of component-level service-life assumptions.24 Depreciation Rates Capital depreciation rates are primary inputs in estimating restoration and modernization rates using the economic depreciation model and, more broadly, for estimating the net value of national capital assets.
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From page 73... ...
Except for minor adjustments, the depreciation rates for government residential and nonresidential structures, and their service-life assumptions, have not been revised since their initial publication. Finding 4-5: Capital depreciation rates are primary inputs for estimating restoration and modernization rates using the geometric depreciation model, and more broadly for estimating the net value of national capital assets.
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