Resource Management Guide No. 503
Whole-of-Life Costing for Australian Government
Property Management
JULY 2014
© Commonwealth of Australia 2014
ISBN: 978-1-922096-66-1 (Online)
With the exception of the Commonwealth Coat of Arms and where otherwise noted, all material
presented in this document is provided under a Creative Commons Attribution 3.0 Australia
(http://creativecommons.org/licenses/by/3.0/au) licence.
The details of the relevant licence conditions are available on the Creative Commons website
(accessible using the links provided) as is the full legal code for the CC BY 3 AU licence.
Use of the Coat of Arms
The terms under which the Coat of Arms can be used are detailed on the following website:
www.itsanhonour.gov.au/coat-arms.
Contact us
Questions or comments about this guide should be directed to:
Public Management Reform Agenda
Department of Finance
John Gorton Building
King Edward Terrace
Parkes ACT 2600
Email: pmra@finance.gov.au
Internet: www.pmra.finance.gov.au
This guide contains material that has been prepared to assist Commonwealth entities and
companies to apply the principles and requirements of the Public Governance, Performance and
Accountability Act 2013 and associated rules, and any applicable policies. In this guide the:
mandatory principles or requirements are set out as things entities and officials ‘must’ do; and
actions, or practices, that entities and officials are expected to take into account to give effect to
those and principles and/or requirements are set out as things entities and officials ‘should
consider’ doing.
Property Management Guidance
This publication is one of a series designed to assist Australian Government entities in their
management of property and form part of the Resource Management Guide series1:
No. 500
Overview of the Commonwealth Property Management Framework
No. 501
Property Management Planning Guidance
No. 502
Guidance for the Two Stage Capital Works Approval Process
for Australian Government Construction Projects
No. 503
Whole-of-life Costing for Australian Government Property Management
No. 504
Commonwealth Property Management Framework
Lease Endorsement Process
No. 505
Funding Arrangements for Commonwealth Property
1 Full series available at www.finance.gov.au.
Resource Management Guide 503
Whole-of-Life Costing for Australian
Government Property Management | 1
Contents
PROPERTY MANAGEMENT GUIDANCE .......................................................................................................................... 1
AUDIENCE .............................................................................................................................................................. 3
RESOURCES ............................................................................................................................................................ 3
INTRODUCTION ....................................................................................................................................................... 3
PURPOSE ............................................................................................................................................................... 4
WHEN TO UNDERTAKE A WHOLE-OF-LIFE COSTING ....................................................................................................... 5
WHOLE-OF-LIFE COSTING FOR THE PURPOSE OF COST-BENEFIT ANALYSIS AND THE TWO STAGE CAPITAL WORKS APPROVAL
PROCESS ................................................................................................................................................................ 5
Determine the Objectives and Project Scope .................................................................................................. 6
Identify Feasible Options ................................................................................................................................ 6
Estimate the Whole-of-Life Cost ..................................................................................................................... 6
GLOSSARY ............................................................................................................................................................ 16
APPENDIX A - SCHEDULE OF TYPICAL COSTS IN AN INITIAL ESTIMATE ............................................................................... 17
Resource Management Guide 503
Whole-of-Life Costing for Australian
Government Property Management | 2
Audience
This Guide applies to all Non-Corporate Commonwealth entities (Non-Corporate entities)
subject to the Public Governance, Performance and Accountability Act 2013 (PGPA Act) and
Commonwealth Property Management Framework (Property Framework).
Resources
This guide is available on the Department of Finance website at www.finance.gov.au.
Additional guidance is available from the Commonwealth Property Management Framework
webpage at http://www.finance.gov.au/property/property/property-managementframework.html or by contacting propertyframework@finance.gov.au
Introduction
1. When planning the acquisition or lease of assets, the initial capital outlay is often the main
element being considered. There are, however, ongoing costs that will be incurred over the
life of the asset that are less visible but no less essential to the operation of the asset.2 These
costs need to be taken into account as part of any cost-benefit analysis (CBA) of a capital
works proposal. This process of estimating these costs from the initial acquisition or
construction of an asset through the operational phase with ongoing maintenance and to
final disposal is known as Whole-of-Life Costing (WLC).3
2. WLC is a key strategic asset management tool that contributes to the achievement of the
entity’s financial and non-financial objectives. The WLC does this through:
a. Informed decision-making: WLC provides a systematic method for comparing project
alternatives and identifies the option that represents best value for money;
b. Long term asset planning: Entities are better placed to understand future resource
requirements for the public works under their control;
c. Consistent costing approach across options: Options that are costed on the same
basis allow for a more robust analysis and can be more appropriately compared; and
d. Transparency and accountability: Visibility of the WLC associated with a proposed
investment allows for closer scrutiny of the project and ensures that decision-makers
are able to prioritise the use of public resources. WLC provides a baseline for
considering how best to manage resources and costs over the useful life of the asset.
3. The purpose of undertaking a WLC is to provide a consistent and transparent approach to
government decision-making relating to capital assets, and to enable a comparative
evaluation of the alternative options. Figure 1 provides an indicative example of the WLC
over a typical asset’s life-cycle.
2
The economic life of the asset in the case of a capital works proposal, or the duration of the lease.
3
WLC could be and often is larger than the initial outlay.
Resource Management Guide 503
Whole-of-Life Costing for Australian
Government Property Management | 3
Figure 1: Costs over the asset life-cycle4
COST
Acqu isition costs
Operation
Disposal
Main ten ance
Developmen t
Start up
Disposal
LIFE CYCLE (YEARS)
Purpose
4. The purpose of this guidance for Whole-of-Life Costing for Australian Government Property
Management (the guidance) is to assist Non-Corporate entities subject to the PGPA Act to
prepare WLCs for Australian Government capital works proposals. WLCs are an element of
the cost-benefit analysis required as part of the Two Stage Capital Works Approval Process5,
in accordance with the Property Framework6 or as required when preparing submissions to
the Parliamentary Standing Committee on Public Works (PWC)7.
5. Australian Government property management and capital works take place in a devolved
environment, with individual entities taking the lead role for capital works as appropriate.
Accordingly, entities are required to follow this guidance when preparing proposals for
consideration by the Government, to provide consistency across the Australian Government.
The guidance provides:
a. key concepts and terms for use as appropriate by entities in undertaking WLCs for
making fully informed property decisions;
b. assistance with the calculation of the Net Present Value (NPV) and treatment of
separate allowances such as risk provision and cost escalation; and
c. directions to the other relevant policies and information to assist in property
management decisions.
6. This guidance is primarily intended for use by Non-Corporate entities. Corporate
Commonwealth Entities (Corporate entities) can use the guidance as a tool (or as part of a
suite of tools) when developing WLC estimates for their capital works projects or leasing
transactions.
7. The guidance has been written purposely with a domestic capital works focus. Those
overseas projects that will need to undertake a WLC assessment can seek specific advice
from the Overseas Property Office within the Department of Foreign Affairs and Trade.
4
Source: Life-Cycle Costing - Better Practice guide, ANAO, 2001. Please note this diagram is indicative only.
5
Guidance for the Two Stage Capital Works Approval Process for Australian Government Construction Projects is available at
www.finance.gov.au .
6
The Overview of the Commonwealth Property Management Framework is available at www.finance.gov.au.
7
The PWC manual requires WLC estimates to be included in submission to the PWC. Please see the PWC Procedure Manual which is
available at www.aph.gov.au for further information.
Resource Management Guide 503
Whole-of-Life Costing for Australian
Government Property Management | 4
8. Corporate entities will need to consider additional factors when undertaking a WLC
assessment (including the impact of financing considerations such as interest repayments on
borrowings from the private sector and dividend payments to the Commonwealth).
9. This guidance may also assist tenderers and professionals such as architects, quantity
surveyors, property managers, property service providers and engineering consultancies
that maybe preparing an estimate on behalf of, or in conjunction with, entities by providing
an indication of the degree of rigour that the Australian Government requires.
When to Undertake a Whole-of-Life Costing
10. The maximum benefits from WLCs are achieved by undertaking the analysis as early as
possible in the initial project development phase, before the detailed design phase or the
acquisition phase. This allows refinements to be made during the design stage. The WLC can
be revisited and refined during Stage Two of the Two Stage Capital Works Approval Process,
when information on the options becomes more accurate.
11. WLCs can continue to be a useful tool to monitor and control costs throughout the project
life. WLCs can also assist entities when assessing the feasibility of enhancing current assets
and planning and budgeting for their future asset requirements.
12. The robustness and confidence levels associated with undertaking a WLC during the initial
project development phase will obviously be lower than the accuracy achieved at a project’s
detailed design stage. As a result, the underlying assumptions associated with the WLC
estimates should be appropriately documented and refined as the project matures (see
‘Document the Decision’ section of this guidance).
13. The WLC can also provide a robust test of the value of the asset when comparing it with the
opportunity cost of capital. This test allows decision-makers to assess the different
priorities, policy outcomes and environment and social factors with the WLC of the capital
investment.
Whole-of-Life Costing for the Purpose of Cost-Benefit Analysis and the Two
Stage Capital Works Approval Process
14. For those proposals subject to the Two Stage Capital Works Approval Process, and which
have been through the initial CBA process, the WLC will need to be further refined as part of
the Second Stage of the approval process.
15. The key steps in conducting a WLC are illustrated in Figure 2 below and discussed later in
this guide. Not all of these steps are relevant to the initial CBA which primarily relates to the
requirements of the first three steps of process outlined in Figure 2.
Resource Management Guide 503
Whole-of-Life Costing for Australian
Government Property Management | 5
Figure 2: Key steps in the Whole-of-Life costing process
Initial
Cost-Benefit
Analysis
Determine
Objectives and
Scope
Estimate
Wholeof-Life
Costs
Identify
Feasible
Options
Consider
Alternate
Funding
Calculate
NPV and
Sensitivity
Analysis
Document
Decision
Review
Whole-ofLife
Costing
Risk Analysis
(incorporating risk into the
estimate)
Determine the Objectives and Project Scope
Determine
Objectives and
Scope
Estimate
Wholeof-Life
Costs
Identify
Feasible
Options
Consider
Alternate
Funding
Calculate
NPV and
Sensitivity
Analysis
Document
Decision
Review
Whole-ofLife
Costing
16. The usefulness of the final WLC relies on the accuracy and relevance of the project scope.
Relevant project stakeholders should be identified and consulted as early as practicable
regarding the functional and performance objectives of the proposal. Determining the
specific objectives and project scope of the proposal provides the criteria by which feasible
options can be assessed.
Identify Feasible Options
Determine
Objectives and
Scope
Identify
Feasible
Options
Estimate
Wholeof-Life
Costs
Consider
Alternate
Funding
Calculate
NPV and
Sensitivity
Analysis
Document
Decision
Review
Wholeof-Life
Costing
17. A range of suitable project options should be considered and assessed against the status quo
at the outset. The strengths and weaknesses, upfront and ongoing costs, and risks can vary
significantly between alternative property options8.
18. As part of the process of identifying options, any constraints on the project should be
identified. These include functional, performance, budgetary, environmental or heritage
constraints. Furthermore, if considering alternative lease types, the costs and
responsibilities associated with the different lease arrangements should be identified and
scrutinised as part of the process. This will save time and effort on analysing alternatives
that are not feasible or are inconsistent with government guidance and strategic priorities.
Estimate the Whole-of-Life Cost
Determine
Objectives and
Scope
8
Identify
Feasible
Options
Estimate
Wholeof-Life
Costs
Consider
Alternate
Funding
Calculate
NPV and
Sensitivity
Analysis
Document
Decision
Review
Wholeof-Life
Costing
Finance can assist entities to undertake a cost-benefit analysis. The Handbook of Cost-Benefit Analysis is also available at
www.finance.gov.au.
Resource Management Guide 503
Whole-of-Life Costing for Australian
Government Property Management | 6
Step 1 - Define the cost elements
19. In this stage, all costs associated with a capital works proposal should be investigated and
documented including provisions for cost escalation. These costs should be clearly defined,
be independent of one another (as far as possible), and include an estimated dollar value and
the years in which the costs are forecast to occur. Any assumptions associated with forming
these estimates should also be documented, along with the risks and confidence levels
attached to each estimate.
20. Information on the relevant costs should be based on the best data available at the time.
Information can be collected through analysing various historical records, usage data and
consultation with industry and cost estimating experts. While correctly identifying costs is
important in establishing accurate WLC, the amount of time and resources invested in
estimating those costs should be commensurate with the size, risk and complexity of the
proposed capital work (noting that these will be refined as the proposal matures).
21. Some broad categories of relevant costs to consider include:9
a. Acquisition costs – the estimated costs associated with acquiring the capital asset.
These will include the design, planning, consultancy services, seeking approvals,
environmental, the purchase price or the construction costs, including associated plant
and equipment;
b. Operating costs – the estimated costs (excluding maintenance) of operating or leasing
the capital asset. These costs include utilities, labour, rental costs, interest paid, taxes,
contract costs and other overhead costs. When considering rental payments, it is
important to include assumptions for rent reviews and escalation, including costs
associated with lease options and incentives;
c. Maintenance costs – the estimated costs incurred in maintaining the capital asset over
its useful life. These costs are to include any performance management, consumables,
repairs and associated labour costs; and
d. Disposal costs – the estimated costs associated with selling and/or safely disposing of
the capital asset at the end of its useful life. This may include remediation costs and any
due diligence, (if required).
22. These costs determine the total cost over the life of the capital asset which underpin capital
asset proposals and it is therefore important that time is taken to ensure that all relevant
costs are considered. Each delivery option will yield different costs as a consequence of the
differences between risk profiles, contractor involvement, performance parameters and
administrative overheads. For further assistance, Appendix A contains a typical example of a
cost schedule.
23. Different financing models could also affect the WLC. This aspect should be considered when
defining the cost elements. Depending on the financing model, the contractual arrangement
may reduce the initial investment in exchange for a higher fee for service or higher rental
payments (compared to market rates). This is particularly relevant for proposals to lease an
asset or those proposals financed through Public Private Partnerships (PPPs), Private
Financing Initiatives, Build Own Operate and Transfer models. 10
24. Entities should also be cognisant of any broader or site-specific environmental or social
factors. All acquisitions, operations and disposal of assets can have direct and indirect
9
For further information see AS/NZ 4536: Life Cycle Costing – An application guide 1999.
10
For further information please refer to the National PPP guidelines available at www.infrastructure.gov.au.
Resource Management Guide 503
Whole-of-Life Costing for Australian
Government Property Management | 7
environmental impacts and this may attract additional costs and benefits. These are not
covered in detail in this guide but should nevertheless be included as part of an assessment
of a specific proposal including any Environment Protection and Biodiversity Conservation Act
1999 (EPBC Act) considerations.
Step 2 - Estimate the Costs
25. Once the cost elements have been defined, the WLC of an asset can be estimated. This is
done by calculating the sum of the capital and acquisition costs, operational and
maintenance costs and disposal costs (less the residual value). Figure 3 provides an
overview of the elements to consider.
26. The total capital cost component includes an estimate of all costs to acquire or lease the
project. Entities should take a conservative approach when calculating capital costs as
underestimation of the initial cost forecast is likely to result in the need to seek additional
funding which may cause further delays and potentially, the need to reduce the project
scope and compromise the final outcome.
Figure 3: Elements of a Whole-of-Life Costing for Public Works11
Operational and
Maintenance Costs
Initial estimate
• Approvals and
planning
• Design and estimate
• Land acquisition
• Construction
Running Costs
• Utilities and waste
• Building
administration
• Lease costs
• Levies
Site/Asset
Preparation
• Resale costs
• Probity costs
• Marketing costs
• Legal fees
Provision for risk
Staff costs to manage
the asset operations
Remediation and
decommissioning
costs
Operating cost risk
Owner cost risk
Less residual value
Provision for cost
escalation
11
Disposal Costs
Less Residual
Value
Capital and
Acquistion Costs
Please note The Goods and Services Tax should be included within all cost elements of the estimate (along with an indication of what
portion is recoverable/non-recoverable, if appropriate).
Resource Management Guide 503
Whole-of-Life Costing for Australian
Government Property Management | 8
Figure 4: Calculating the Capital Cost
Figure 4 below illustrates how the capital cost estimate is constructed and the following sections
describe the relevant elements within this process.
Initial estimate
(parametric
analysis)
Risk estimation
(probabilistic
simulation)
Contingency
Estimated
Cost
Apply optimism bias &
expenditure/schedule
profile adjustments
Risk Cost $
Escalation
Total
capital cost
$
Confidence
Level
Initial Estimate (First Stage)
27. For First Stage consideration by Cabinet, the base estimate can be developed internally by
entities using the preferred approach for Entities is to use parametric (statistical) costing
techniques12 for the development of cost elements until actual cost data is available. The
building area is identified from initial scoping documents. Alternatively, if the capital works
proposal is complicated, entities can engage a qualified quantity surveyor, in conjunction
with other cost estimate specialists to produce the base estimate.
28. At this stage the base estimate is premised on only an indicative understanding of the scope
of the works and a rudimentary understanding of the project risks. As a result of this
understanding, a probabilistic approach to the cost estimate will factor in a considerable
amount of the known risks likely to occur.
29. Entities should detail the limitations of the estimate as part of the WLC. This involves
consideration and explanation within the estimate of elements such as adjustments for
major changes in technology, new construction techniques, alternative procurement
strategies or the business case. Entities should also identify aspects of the program which
need to be subjected to sensitivity analysis and identify these in the project assumptions.
The sensitivity of projected costs must be examined at this stage. Entities may wish to
consider the use of statistical analysis to describe sensitivity to critical assumptions.
Detailed Estimate (Second Stage)
30. For Second Stage consideration by Cabinet, the initial estimate is determined from the
concept design and the functional design brief. This section is also normally completed by a
qualified quantity surveyor in conjunction with other cost estimating specialists. At this
stage, the base estimate is premised on a more detailed understanding of the project scope
of works and an enhanced understanding of the project risks. As a result of development of
the Detailed Business Case and supporting documentation, project risks are realised, refined
or retired.
12
The Parametric Cost is the estimate of capital costs based on historical data of similar construction projects, generally based on
desired square metres of floor area multiplied by a typical cost per square metre for a comparable building. Rates are available in cost
estimating industry handbooks and reports, or can be provided by Finance.
Resource Management Guide 503
Whole-of-Life Costing for Australian
Government Property Management | 9
31. Typically, it is possible to achieve greater cost estimate certainty by advancing the design
from the concept stage to the schematic stage or by putting the schematic design out to
tender. Entities should further refine the reporting of risk for the Second Stage. As part of
their cost estimate, entities should include a probabilistic assessment of the types of risks
likely to occur, and an estimate of the cost and time required to mitigate the risk.
32. The PWC requires that, at a minimum, entities submitting works to the PWC include a cost
estimate of risks, expressed as a dollar figure and percentage of the cost estimate, and
provide a risk register listing the key temporal, financial, physical, environmental, social and
legal risks attached to the project. Appropriate management strategies are to be provided in
the risk register13.
33. It should be noted that the level of certainty achieved at the concept design stage is generally
sufficient to allow the Second Stage consideration by Government. This means that entities
do not incur unnecessary costs associated with detailed designs in the event that the
Government decides the project should not proceed.
Cost Escalation
34. The long lead times and the duration of many capital works projects mean that there is often
a difference in the price of the building goods and services at the start and end of the project.
A specific provision should be established for cost escalation to offset the expected rise in
the construction inputs over the period of the project.
35. Quantity surveyors can be engaged to undertake this process. The entity should ensure that
the cost escalation provision is separately identified and appropriate for the specific project.
Proper regard should be given to relevant indices including the Consumer Price Index and
construction-specific indices. Escalation provisions should be calculated and documented in
four sub-elements: escalation up until commencement of construction; escalation during
construction; escalation delay allowance based on the identified risk profile; and a provision
for risk.
36. When considering risk, entities should identify the types of risk inherent in the delivery of
the project, the proposed financial model to fund the project and the contracting
arrangements of the capital project over the whole of its economic life.
37. As detailed in both the First Stage and Second Stage Initial Estimate section, the base
estimate at both stages of approval should include an estimate of the risks associated with
delivering the project. Entities should consider the risk management process during
determination of the project budget.
38. The risk provision is required due to the uncertainty associated with the base estimate along
with other contingent risks:
a. Risks inherent within the initial estimate: Risks contained within the components of
the base estimate that are very likely to occur (between 80 to 95 per cent probability or
similar) in some form. For example, fluctuating costs attributed to the cost of labour
during the construction phase; and
b. Contingent risk: Risks attached to items outside the initial estimate that have less than
80 per cent likelihood of occurrence depending on particular events. For example,
adverse weather events or contamination removal requirements.
13
For further information please refer to the PWC Procedure Manual available at www.aph.gov.au.
Resource Management Guide 503
Whole-of-Life Costing for Australian
Government Property Management | 10
39. Entities may wish to consider their risk provision based on the sub-categories below:
a. Design development contingency (inherent): a set percentage of the project cost
allocated for cost growth as the scope and performance of the project become more
defined;
b. Construction contingency (inherent): a set percentage of the construction contract
amount budgeted for unforeseen emergencies or design shortfalls identified after a
construction project commences; and
c. Unidentified risk contingency (contingent): an estimated percentage of the total
project cost for these events where it cannot be classified as design development
contingency or construction contingency.
40. The provision for risk should be based on an analysis of the identified risks and the
probability of the risks occurring. Proper risk identification and assessment processes
enable the project team to address the likelihood of risks occurring and to develop risk
mitigation strategies.14 The risk provision should be expressed in dollar terms, with a
corresponding probability of occurrence.
41. Because of the common occurrence of optimism bias in estimating, entities should pay
particular attention to the detail in the risk provision, with a view to ensuring that the risk is
not being understated and the impact of the risk on the project cost is not undervalued.
Optimism Bias
42. ‘Optimism bias’ or ‘appraisal optimism’ refers to the demonstrated systematic tendency to
be overly optimistic about the outcome(s) of a project. In other words, this is when
favourable estimates and conditions are assumed to be the most likely occurrence. This may
be prevalent amongst cost planners when costing major projects, and can lead to
underestimating future costs and/or project managers overestimating benefits or
underestimating scheduling requirements.
43. Entities should note that optimism bias is almost unavoidable when costing projects, and
failure to account for this can lead to cost and time blowouts over the life of a project. In
order to redress this, it is recommended that adjustments be made to the base costing, either
via a sensitivity analysis, by adjusting the discount rates, or by applying an established
optimism bias uplift to some or all of the cost elements. This will result in a more reliable
costing, thereby outweighing the natural tendency towards optimism bias.
44. Engaging a cost planner and project manager with experience in projects with similar scopes
may assist entities in mitigating the risks involved in optimism bias. Alternatively, third
party objective viewpoints can be of assistance in this process, as can the use of personnel
with experience in similar projects. A more detailed explanation of optimism bias can be
found in the Handbook of Cost-Benefit Analysis15.
Operational and Maintenance Costs
45. The operational and maintenance costs identified earlier in this section also need to be
estimated and added to the capital and acquisition costs.
14
See AS/NZS 4360:1999 Risk Management; and HB143:1999 guidelines for managing risk in the Australian and New Zealand public
sector and ISO 31000:2009 Risk Management Principles and guidelines.
15
Available at www.finance.gov.au.
Resource Management Guide 503
Whole-of-Life Costing for Australian
Government Property Management | 11
46. Typically, these operating costs are developed by cost estimating experts using cost models
drawn from existing buildings and facilities. Operating costs could include the rental costs,
taxes (and what proportion is recoverable/non-recoverable) and interest paid (if
applicable).
47. When considering the operating costs such as rental payments it is important to include
assumptions for rent reviews and escalation (if applicable). It is also important to
incorporate the costs associated with lease options or incentives. This will provide an
appropriate basis to make value for money assessments.
Disposal Costs
48. The costs of disposing, decommissioning and in some cases remediation of an asset once at
the end of its useful life must also be accounted for and added to the capital, acquisition,
operational and maintenance costs (less the residual value). Disposal costs may include16:
a. due diligence assessments;
b. resale costs;
c. legal fees;
d. marketing fees;
e. procurement costs;
f. probity costs;
g. remediation and decommissioning costs; and
h. any ongoing liabilities.
49. As with determining operational and maintenance costs, disposal costs can be identified
through analysing records of similar disposals and the use of estimating experts and
industry consultants.
Consider Alternate Funding
Determine
Objectives and
Scope
Identify
Feasible
Options
Estimate
Wholeof-Life
Costs
Consider
Alternate
Funding
Calculate
NPV and
Sensitivity
Analysis
Document
Decision
Review
Wholeof-Life
Costing
50. While most of these property decisions will be funded directly through budget
appropriations, entities are also encouraged to consider the applicability of alternative
funding options such as:
a. entering into a lease commitment with a private developer to fund construction of
office accommodation; and
b. sharing funding and project risks with the private sector by leveraging private sector
investment in infrastructure assets through its balance sheet by way of government
guarantee or equity investment.
16
This list is not exhaustive and depends on the property.
Resource Management Guide 503
Whole-of-Life Costing for Australian
Government Property Management | 12
51. The appropriate use of alternative funding options must be considered in the light of the
total cost to government inclusive of risk throughout the life of the arrangement and the
economic life of the asset.
Calculate the Net Present Value and Sensitivity Analysis
Determine
Objectives and
Scope
Identify
Feasible
Options
Estimate
Wholeof-Life
Costs
Consider
Alternate
Funding
Calculate
NPV and
Sensitivity
Analysis
Document
Decision
Review
Wholeof-Life
Costing
52. The Net Present Value (NPV) of the project is the discounted value of the expected benefits
of the project less the discounted value of the expected costs. As part of the determination of
NPV entities should undertake a sensitivity analysis. This is a technique which involves
altering the parameters of a project evaluation to see how they affect the outcome. This
technique allows entities to appropriately gauge the NPV estimates.
53. For information on how to determine the NPV, including how to determine the discount rate,
undertake a sensitivity analysis and account for optimism bias, entities should refer to
Finance’s Handbook of Cost-Benefit Analysis and Introduction to Cost-Benefit Analysis and
Alternative Evaluation Methodologies.
54. The Australian National Audit Office (ANAO) also provides guidance on calculating the NPV
of a project, recommending the following formula.17
Present Value = FV/(1+r)^n
Where FV = the amount to be spent or received at a point in the future;
n = the number of intervals between the present and the future transaction;
r = the discount rate applicable to the chosen intervals; and
^ = raised to the power nominated.
For example, an expense of $100 in three years’ time with a discount rate of 10% would have a
present value (PV) of:
PV = 100/(1+0.1)^3
= 100/1.331
= $75.10
55. In supporting WLC costing, sensitivity analysis is used to assess the levels of uncertainty
associated in forecasting variables such as operating and maintenance costs and key
assumptions such as the economic life of the asset
Document the Decision
Determine
Objectives and
Scope
17
Identify
Feasible
Options
Estimate
Wholeof-Life
Costs
Consider
Alternate
Funding
Calculate
NPV and
Sensitivity
Analysis
Document
Decision
Review
Wholeof-Life
Costing
Life-Cycle Costing - Better Practice guide, ANAO 2001.
Resource Management Guide 503
Whole-of-Life Costing for Australian
Government Property Management | 13
56. Documentation is a critical element to provide robust accountability and transparency.
Where appropriate it can be as simple as a table of expected annual costs. Complex projects
may include modelling which details various future scenarios and cost drivers.
Documentation on WLC should, at the very least, reflect the rationale for the decision
particularly where a higher capital cost is offset by lower long-term ownership costs.
Entities should balance the level of detail in the documentation against the size, risk and
complexity of the project.
57. A well planned and executed WLC evaluation that is supported by appropriate
documentation is more likely to withstand external scrutiny. It also allows for the result to
be understood and verified by others. Documentation for WLC can include the discounted
cash flow analysis and related information (including all assumptions and supporting
reasoning), Work Breakdown Structure reports and procurement reports.
58. At the First Stage approval, the Initial Business Case should provide detail on the following
information and the relation to the WLC estimates:
a. the assumptions on which the options depend;
b. the details of the different delivery options and their effects on the cost estimates;
c. the strengths and weaknesses of the different delivery options;
d. the initial cost estimates – quantified and recorded;
e. the timing of the different delivery options and the timing of critical milestones;
f. the underlying assessment of probable risks (see Appendix B for more detail); and
g. the sensitivity analysis undertaken.
59. When the Second Stage Approval submission is prepared, the Detailed Business Case should
incorporate several supporting documents in relation to the cost estimates. At this point of
the project’s development, documents such as cost plans, risk management plans,
stakeholder management plans and project schedules will provide more detail regarding the
WLC estimates.
60. The PWC also requires the provision of WLC estimates in relation to major capital works
submissions to the PWC and this should be taken into account where relevant. Entities
should refer to the PWC Procedure Manual18 for guidance on the full requirements of PWC
submissions.
Review Whole-of-Life Costing
Determine
Objectives and
Scope
Identify
Feasible
Options
Estimate
Wholeof-Life
Costs
Consider
Alternate
Funding
Calculate
NPV and
Sensitivity
Analysis
Document
Decision
Review
Wholeof-Life
Costing
61. Updating the WLC, documentation as major changes occur will make it simpler to monitor
the assets cost against the initial estimate and to update relevant stakeholders in a timely
manner19.
18
Available at www.aph.gov.au.
19
In relation to major public works that have been referred to the PWC, entities should have regard to the requirements to update the
PWC Committee. Additional information is available from the PWC Procedure Manual available www.aph.gov.au.
Resource Management Guide 503
Whole-of-Life Costing for Australian
Government Property Management | 14
62. In the operational phase, the WLC can also assist in:
a. proactive asset management and planning;
b. provision of feedback for future cost planning; and
c. the identification of cost savings.
63. As more information becomes available, it is important to update the WLC estimates
accordingly.
Resource Management Guide 503
Whole-of-Life Costing for Australian
Government Property Management | 15
Glossary
Build Own Operate
Transfer (BOOT)
Financing arrangement in which a developer designs and builds a complete project
or facility at little or no cost to the Government or a joint venture partner; owns and
operates the facility as a business for a specified period (usually 10 to 30 years)
after which transfers it to the government or partner at a previously agreed or market
price.
Cost Escalation
The increase in the cost of a good or service over a defined period of time.
Discounted Cash
Flow
The current value of all the future cash to be generated by a development project.
Disposal cost
The cost of removing an asset after its usefulness has ended.
Entities
Non-Corporate Commonwealth Entities under the PGPA Act and those Corporate
Commonwealth Entities who may wish to refer to the Guidance as a tool.
Major Public Works
Capital works that are estimated to cost in excess of $15 million dollars. See the
Public Works Committee Act 1969 (PWC Act) for additional information.
Maintenance costs
Costs associated with maintaining the efficiency and dependability of the asset.
Net Present Value
The discounted value of the expected benefits of a project, less the discounted value
of the expected costs.
Optimism Bias
The demonstrated systematic tendency to be overly optimistic about the outcome(s)
of a project, whether by underestimating cost, underestimating schedules or
overestimating outcomes.
Private Financing
Initiatives
A method of providing funds for major capital investments where private firms are
contracted to complete and manage the projects. These contracts are typically given
to construction firms and last a long time, sometimes up to 30 years. The public
services are leased to the public and the government authority makes annual
payments to the private company.
Public Private
Partnership
A partnership between a government and an organisation in the public sector for the
delivery of infrastructure and associated services traditionally provided by the
government, such as railways, freeways, etc.
Public Works
Architectural or engineering work, most typically relating to the construction,
refurbishment or repair of buildings or other structures. See the Public Works
Committee Act 1969 for a full definition.
Residual Value
The price at which an asset is expected to be sold at the end of its useful/required
life.
Risk Management
The system application of management policies, procedures and practices to the
tasks of identifying, analysing, assessing, treating and monitoring risk.
Risk Provision
A financial allowance to offset the uncertainty associated with the base estimate and
other contingent risk.
Risk Weighted
Estimate
A cost estimate incorporating the effect of likely risk occurrences and the cost of
mitigating the risk. The effects can take the form of additional cost, schedule
slippage or reduction in asset performance.
Sensitivity Analysis
A technique involving changes to the parameters of a project/programme evaluation
to see how they affect the outcome; a straight forward and rapid technique to gauge
the robustness of net present value estimates.
Work Breakdown
Structure
In project management, a work breakdown structure (WBS) is an exhaustive,
hierarchical (from general to specific) tree structure of deliverables and tasks that
need to be performed to complete a project.
Resource Management Guide 503
Whole-of-Life Costing for Australian
Government Property Management | 16
Appendix A - Schedule of Typical Costs in an Initial Estimate20
Land






Due diligence
Approvals
Land acquisition
Site clearance and preparation
Government duties, taxes and fees
Legal fees
Design and estimation



Design fees
Project management fees
Staff costs (including travel)
Construction
Main structure













Site works including prep and remediation
Substructure/foundation
Frame
Columns
Roof
Upper floors
Stairs
External walls/doors
Interior walls/doors
Windows
Lift and conveyor installations
Plumbing
Special equipment
Services









Water installations
Gas installation
Electric light and power
Storm water and sewerage services
Heating
Ventilation
Air conditioning
Fire protection
Security systems
Exterior finishes


20
Landscaping
Drainage
This schedule is designed as an example only. The supporting breakdown of costs categories (e.g. staff costs) should also be
documented.
Resource Management Guide 503
Whole-of-Life Costing for Australian
Government Property Management | 17


Car park
Roads, footpaths and paved areas
Support costs




Project management fees
Supervision fees
Staff costs (incl. procurement activity)
Legal fees
Operating costs













21
Rental costs
Revenues (if applicable)
Repair and maintenance costs (as required)
Mid-life fit-out costs (as required)
Utilities
Depreciation and amortisation
Taxes
Interest paid
Refurbishment and associated lifecycle costs
Plant and equipment costs
Remediation of hazardous or toxic materials on site (if applicable)
Decommissioning and make good costs (if applicable)
Rental Incentives21 (if applicable)
Rental Incentives can offered by the landlord in the form of rental holidays, provision of a new fit-out or cost of refurbishment for the
life of the lease arrangement. These should be calculated in the form of revenue to the entity as a result of the arrangement.
Resource Management Guide 503
Whole-of-Life Costing for Australian
Government Property Management | 18