Users Manual for Version 2.0 of the Cost-Effectiveness 

Tool for Capital Asset Protection 

Robert E. Chapman and Amy S. Rushing 

Office of Applied Economics

Building and Fire Research Laboratory 

Gaithersburg, MD 20899 

NISTIR 7349 

U.S. Department of Commerce 

Technology Administration 

National Institute of Standards and Technology
1
Users Manual for Version 2.0 of the Cost-Effectiveness 

Tool for Capital Asset Protection 

Robert E. Chapman and Amy S. Rushing 

Office of Applied Economics

Building and Fire Research Laboratory 

Gaithersburg, MD 20899 

NISTIR 7349 

U.S. Department of Commerce 

Technology Administration 

National Institute of Standards and Technology

Sponsored by: 

National Institute of Standards and Technology 

Building and Fire Research Laboratory 

September 2006 

U.S. DEPARTMENT OF COMMERCE 

Carlos M. Gutierrez, Secretary 

TECHNOLOGY ADMINISTRATION 

Robert C. Cresanti, Under Secretary for Technology 

NATIONAL INSTITUTE OF STANDARDS AND TECHNOLOGY

William A. Jeffrey, Director 

2
3
Abstract 

Economic tools are needed to help the owners and managers of buildings, industrial 

facilities, and other critical infrastructure to select cost-effective combinations of 

mitigation strategies that respond to natural and man-made hazards. Economic tools 

include evaluation methods, standards that support and guide the application of those 

methods, and software for implementing the evaluation methods. Detailed descriptions 

of the evaluation methods and associated standards are presented in NISTIR 7073. This 

document focuses on Version 2.0 of the Cost-Effectiveness Tool (CET 2.0); it describes: 

the input data requirements for the software, the hierarchy of software screens, the 

strategy for analyzing complex decision problems, the types of reports produced, and online help features. Decision makers typically experience uncertainty about the correct 

values to use in establishing basic assumptions and in estimating future costs. When

projects are evaluated without regard to uncertainty of inputs to the analysis, decision 

makers may have insufficient information to measure and evaluate the financial risk 

associated with the alternative combinations of mitigation strategies. CET 2.0 addresses 

uncertainty and financial risk in a structured, three-part manner. First, best-guess 

estimates are used to establish a baseline analysis. Second, a sensitivity analysis is 

performed in which selected inputs are varied about their baseline values. Third, a Monte 

Carlo simulation is performed to obtain an explicit measure of financial risk associated

with the alternative combinations of mitigation strategies. Guidance is also given on how 

to choose the most cost-effective risk mitigation plan from a set of alternative 

combinations of mitigation strategies. 

Keywords

Building economics; construction; economic analysis; homeland security; life-cycle cost 

analysis; risk mitigation; software 

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Preface 

This study was conducted by the Office of Applied Economics in the Building and Fire 

Research Laboratory at the National Institute of Standards and Technology. The study 

develops a software tool for evaluating security-related investments and expenditures in 

constructed facilities. The intended audience is the National Institute of Standards and 

Technology as well as other government and private sector organizations that are 

concerned with evaluating how to efficiently allocate scarce financial resources among 

security-related investment alternatives. 

Disclaimer 

Certain trade names and company products are mentioned in the text in order to adequately

specify the technical procedures and equipment used. In no case does such identification imply 

recommendation or endorsement by the National Institute of Standards and Technology, nor does 

it imply that the products are necessarily the best available for the purpose. 

Cover Photographs Credits

Microsoft Clip Gallery Images used in compliance with Microsoft Corporation’s noncommercial use policy.

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Acknowledgements 

The authors wish to thank all those who contributed so many excellent ideas and 

suggestions for this report. They include Dr. William Grosshandler of the Fire Research 

Division in the Building and Fire Research Laboratory (BFRL) at the National Institute 

of Standards and Technology (NIST), manager of BFRL’s Research and Development 

for the Safety of Threatened Buildings Program, for his technical guidance, suggestions, 

and support. Special appreciation is extended to Dr. Harold E. Marshall and Mr. Douglas 

Thomas of BFRL’s Office of Applied Economics (OAE) for their thorough reviews and 

many insights and to Ms. Tessa Beavers for her assistance in preparing the manuscript for 

review and publication. Special thanks are due to each of the OAE Technical Working 

Group members—Ms. Janet S. Baum, Health, Education + Research Associates, Inc.; Dr. 

Saul I. Gass and Dr. Howard K. Hung of NIST’s Information Technology Laboratory; 

Mr. Robert N. Harvey, Washington Group Infrastructure Corporation; Mr. David Henry, 

U.S. Department of Commerce; Mr. Muthiah Kasi, Alfred Benesch & Company; Ms. 

Milagros Kennett, Federal Emergency Management Agency, U.S. Department of 

Homeland Security; Mr. Douglas N. Mitten, Project Management Services, Inc.; and Dr. 

Stephen R. Thomas, Construction Industry Institute—for their guidance throughout the 

development and production of Version 2.0 of the Cost-Effectiveness Tool. Special 

thanks are also due to Ms. Jennifer Helgeson of BFRL’s Office of Applied Economics for 

her assistance in testing the various software features and for her many comments and 

helpful insights on earlier drafts of this report. Special thanks are also due to Dr. David 

Butry, Ms. Priya Lavappa, Mr. Douglas Thomas, and Ms. Julie Wean who conducted 

performance testing of the software. The report has also benefited from the review and 

technical comments provided by Mr. Stephen A. Cauffman and Ms Geraldine S. Cheok 

of BFRL's Materials and Construction Research Division. 

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Contents 

Abstract..............................................................................................iii 

Preface................................................................................................v 

Acknowledgements................................................................................vii 

List of Tables........................................................................................x 

List of Figures.......................................................................................x 

1. Introduction...................................................................................1 

1.1 Background..........................................................................1 

1.2 Purpose and Scope..................................................................2 

1.3 Organization of this Manual......................................................3 

2. Key Concepts.................................................................................5 

2.1 Overview of the Three-Step Protocol............................................5 

2.2 Types of Economic Decisions....................................................6 

2.3 Economic Evaluation Methods...................................................7 

2.3.1 Life-Cycle Cost Method..................................................7 

2.3.2 Present Value of Net Savings............................................8 

2.3.3 Savings-to-Investment Ratio.............................................8 

2.3.4 Adjusted Internal Rate of Return........................................9 

2.3.5 Appropriate Application of the Evaluation Methods..................9 

2.4 Analysis Strategy..................................................................10 

2.4.1 Baseline Analysis.........................................................11 

2.4.2 Sensitivity Analysis......................................................11 

2.4.3 Monte Carlo Simulation.................................................11 

2.5 Cost-Accounting Framework....................................................11 

2.6 Use of Case Studies...............................................................14 

2.6.1 Overview of the Data Center Case Study.............................14 

2.6.2 Alternatives...............................................................14 

2.6.3 Assumptions and Cost Data.............................................15 

3. Basic Features: Constructing the Baseline Analysis...................................17 

3.1 Getting Started.....................................................................17 

3.1.1 Opening/Creating a Project File........................................17 

3.1.2 Cost Summary Window and Main Menu.............................18 

3.2 Entering Data......................................................................19 

3.2.1 Project Information......................................................19 

3.2.1.1 Input Costs.......................................................21 

3.2.1.2 Event-Related Costs.............................................24 

3.2.2 Output Window...........................................................28 

3.2.3 Alternative-Specific Feature............................................29 

3.3 Use and Interpretation of the Data and Results Reports.....................30 

3.3.1 Data Report...............................................................30 

3.3.2 Results Report............................................................32 

3.4 Online Help........................................................................37 

ix
4. Treatment of Uncertainty and Risk......................................................39 

4.1 Perform Sensitivity Analysis....................................................39 

4.1.1 Change in a Single Factor Tab..........................................40 

4.1.2 Most Significant Factors Tab...........................................42 

4.1.3 Change in Multiple Factors Tab.......................................43 

4.2 Perform Monte Carlo Simulation................................................46 

4.3 Use and Interpretation of the Uncertainty Report.............................50 

5. Analyze Results and Recommend a Cost-Effective Risk Mitigation Plan.........59 

5.1 Employ a Structured Process to Generate a Recommendation.............59 

5.2 Prepare Report with Documentation Supporting Recommended Risk 

Mitigation Plan....................................................................59 

6. Next Steps...................................................................................63 

Appendix A Technical Considerations.........................................................65 

A.1 Life-Cycle Cost Formulas........................................................67 

A.2 Present Value Net Savings Formula............................................68 

A.3 Savings-to-Investment Ratio Formulas.........................................69 

A.4 Adjusted Internal Rate of Return Formula.....................................70 

Appendix B Glossary of Terms.................................................................71 

References............................................................................................97 

List of Tables 

Table 2-1 Summary of Appropriateness of Each Standardized Evaluation Method 

for Each Decision Type..........................................................10 

Table 4-1 Summary Statistics for the Proposed Alternative Due to Changes in 

Five Factors........................................................................57 

List of Figures 

Figure 2-1 Overview of the Cost-Accounting Framework: Dimensions & Cost 

Types................................................................................12 

Figure 3-1 Cost-Effectiveness Tool Prompt Window.....................................17 

Figure 3-2 Open Project Window............................................................18 

Figure 3-3 Cost Summary Window When Starting a New Project......................19 

x
Figure 3-4 Project Description Window for the Data Center Case Study...............20 

Figure 3-5 Project Alternatives Window for the Data Center Case Study..............21 

Figure 3-6 Edit Cost/Events Window for the Data Center Case Study: Input 

Costs for the Base Case...........................................................22 

Figure 3-7 Capital Investment Cost Information Window for the Data Center 

Case Study: Basic Renovation..................................................23 

Figure 3-8 O&M Cost Information Window for the Data Center Case Study: 

Site Security........................................................................23 

Figure 3-9 Other Cost Information Window for the Data Center Case Study: 

Change in Traffic Pattern for the Proposed Alternatives.....................24 

Figure 3-10 Event Information Window for the Data Center Case Study: 

Description of the Cyber Attack Scenario for the Base Case...............25 

Figure 3-11 Edit Outcomes/Outcome Costs Window for the Data Center Case 

Study: Base Case Cyber Attack Outcomes...................................26 

Figure 3-12 Outcome Information Window for the Data Center Case Study: 

Probability Information for the Base Case Cyber Attack Scenario.........27 

Figure 3-13 Events/Outcomes Cost Information Window for the Data Center 

Case Study: Identity Theft Cost Item for the Base Case Cyber 

Attack Scenario....................................................................28 

Figure 3-14 Cost Summary Window for the Data Center Case Study....................29 

Figure 3-15 Cover Page of the Data Report for the Case Study...........................31 

Figure 3-16 Input Cost Data Summary Page of the Data Report for the Base 

Case.................................................................................32 

Figure 3-17 Event/Outcome Cost Data Summary Page of the Data Report for 

the Base Case......................................................................33 

Figure 3-18 Summary of Economic Measures of Performance Page of the 

Results Report for the Case Study..............................................34 

Figure 3-19 Summary of Life-Cycle Cost Page of the Results Report for the 

Case Study.........................................................................34 

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Figure 3-20 Summary of Costs by Alternative Page of the Results Report for the 

Base Case...........................................................................35 

Figure 3-21 Summary of Annual Costs by Alternative Page of the Results Report 

for the Data Center Case Study..................................................36 

Figure 3-22 Summary of Annual and Cumulative Net Savings by Alternative 

Page of the Results Report for the Data Center Case Study.................37 

Figure 3-23 Cost-Effectiveness Tool Help Window, Help Tree, and Software 

Tips.................................................................................38 

Figure 4-1 Sensitivity Analysis Window: Using the Change in a Single Factor 

Tab to Evaluate the Impact of the Discount Rate on Life-Cycle 

Costs.................................................................................41 

Figure 4-2 Sensitivity Analysis Window: Using the Change in a Single Factor 

Tab to Evaluate the Impact of the Unit Cost of Site Security on 

Life-Cycle Costs for the Base Case.............................................42 

Figure 4-3 Sensitivity Analysis Window: Using the Most significant Factors 

Tab to Evaluate the Impact of +/- 10% Change of Each Factor 

on Life-Cycle Costs for the Case Study........................................43 

Figure 4-4 Sensitivity Analysis Window: Using the Change in Multiple 

Factors Tab to Evaluate the Impact of Combinations of Factors 

on Life-Cycle Costs for the Case Study........................................44 

Figure 4-5 Sensitivity Analysis Window: Tree Structure Showing 

Combinations of Factors Included in the Sensitivity Analysis..............45 

Figure 4-6 Monte Carlo Simulation Window: Using the Monte Carlo 

Simulation Window to Evaluate the Impact of Combinations 

of Factors on Life-Cycle Costs for the Case Study...........................48 

Figure 4-7 Monte Carlo Simulation Window: Tree Structure Showing 

Combinations of Factors Included in the Monte Carlo Simulation.........49 

Figure 4-8 Saved Sensitivity Analysis Page of the Uncertainty Report for a 

Plus or Minus 10% Chance in the Discount Rate.............................51 

Figure 4-9 Most Significant Factors Page of the Uncertainty Report for the 

Case Study.........................................................................52 

Figure 4-10 Summary of Life-Cycle Costs and Factor Values of a Saved Change 

in Multiple Factors Page of the Uncertainty Report for the Case Study...53 

xii
Figure 4-11 Summary of Life-Cycle Costs, Probability Distributions, and Factor 

Values of a Saved Monte Carlo Simulation Page of the Uncertainty 

Report for the Case Study........................................................54 

Figure 4-12 Life-Cycle Costs for the Base Case and the Proposed Alternative 

in Thousands of Dollars Due to Changes in Five Factors...................55 

Figure 4-13 Present Value Net Savings in Thousands of Dollars for the Proposed 

Alternative Due to Changes in Five Factors...................................56 

Figure 5-1 Summary of the Data Center Case Study .....................................61 

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1 Introduction 

1.1 Background 

The National Institute of Standards and Technology (NIST) is a non-regulatory federal 

agency within the U.S. Commerce Department’s Technology Administration. NIST

develops and promotes measurement, standards, and technology to enhance productivity, 

facilitate trade, and improve quality of life. In the aftermath of the attacks of September 

11, 2001, NIST has taken a key role in enhancing the nation’s homeland security. 

NIST’s Building and Fire Research Laboratory (BFRL) has as its mission to meet the 

measurement and standards needs of the building and fire safety communities. A key 

element of that mission is BFRL’s commitment to homeland security. Specifically, the 

goal of BFRL’s homeland security effort is to develop and implement the standards, 

technology, and practices needed for cost-effective improvements to the safety and 

security of buildings and building occupants, including evacuation, emergency response 

procedures, and threat mitigation. 

The September 11, 2001 attacks on the World Trade Center and the Pentagon, and the 

subsequent dispersion of anthrax through the postal system, changed the way many in the 

United States approach security and safety. The devastation to the Gulf Coast caused by 

Hurricanes Katrina and Rita, and their impact on the national economy, underscored the 

need to plan for natural and man-made disasters as well as terrorist threats. These events 

have prompted the owners and managers of constructed facilities—buildings, industrial 

facilities, and other physical infrastructure—to address natural and man-made hazards 

and protect the occupants, property, and functions of their facilities. 

These events have led to changes in the way key decision makers respond to natural and 

man-made hazards. Among these changes are the way owners and managers think about 

the design, location, construction, operation, and renovation of constructed facilities. The 

range of responses available to decision makers is extensive, as is the potential expense. 

Parallel to the reality of the risks posed by natural and man-made hazards is the reality of

budget constraints. Owners and managers of constructed facilities are confronted with 

the challenge of planning for and responding to natural and man-made hazards in a 

financially responsible manner. The two objectives—safeguarding personnel and 

physical assets and satisfying financial constraints—must be balanced through a costeffective risk mitigation plan. 

Emerging from this new focus on planning is the realization that it makes sense to 

evaluate all kinds of natural and man-made hazards as a group. Costs for protection 

against multiple hazards can be shared among the hazards protected against, thereby 

reducing the cost of any single form of protection. Or, looked at in another way, a given 

cost of protection can yield extra benefits when considering multiple hazards. This 

spillover of benefits from one kind of protection to another highlights the need for a 

holistic approach to planning protection against multiple hazards. 

1
The Cost-Effectiveness Tool (CET) incorporates and integrates research being conducted 

by the Office of Applied Economics (OAE) under BFRL’s homeland security effort. 

OAE’s research focuses on developing economic tools to aid facility owners and 

managers in the selection of cost-effective strategies that respond to natural and manmade hazards. Economic tools include evaluation methods, standards that support and 

guide the application of those methods, and software for implementing the evaluation 

methods. OAE’s research has produced a three-step protocol for developing a risk 

mitigation plan for cost-effective protection of constructed facilities.1

 The three-step 

protocol has the following essential components: risk assessment, identification of 

potential mitigation strategies, and economic evaluation. 

Risk assessment is used to identify the risks confronting a facility. It includes 

development of possible damage scenarios, probability assessments for these scenarios, 

and identification of the facility’s vulnerabilities and critical areas. Identification of 

mitigation strategies—Engineering Alternatives, Management Practices, and Financial 

Mechanisms—provides performance and cost data for the possible combinations of risk 

mitigation strategies. Combinations of risk mitigation strategies are used to create a 

candidate set of alternatives for in-depth economic evaluation. The third component, 

economic evaluation, enables facility owners and managers to evaluate each alternative 

combination of risk mitigation strategies and the sequence of cash flows associated with 

their implementation. 

1.2 Purpose and Scope 

The purpose of this report is to provide documentation for Version 2.0 of the CostEffectiveness Tool (CET 2.0). The report serves two functions. First, as a printed copy, 

it is designed as a stand-alone resource for users of CET 2.0. The authors recommend 

users first browse through the printed copy to gain a basic understanding of the software 

tool. Second, this report is designed as an integral part of the software itself. 

Specifically, this report is integrated into the online Help feature of CET 2.0. This “Help 

feature” allows users to open this document while working within the software tool, 

enabling them to explore software-related features/capabilities, which should make the 

use of the software tool more transparent. 

The scope of the document is limited to CET 2.0. Two earlier versions of the Cost 

Effectiveness Tool have been released by NIST. These earlier versions—CET 1.0 and 

CET 1.1—had different analysis capabilities. The current version—CET 2.0—represents 

a major upgrade in analysis capabilities. Thus, users of previous versions will experience 

some changes in the way they construct and analyze project files. However, the 

developers of CET 2.0 have designed it so that any project files saved in previous 

versions can be opened and saved in Version 2.0. Please note that once you save a 

project file in Version 2.0, it cannot be opened with an earlier version of the software. 

 

1

 Chapman, Robert E., Leng, Chi J. Cost-Effective Responses to Terrorist Risks in Constructed Facilities. 

NISTIR 7073 (Gaithersburg, MD: National Institute of Standards and Technology, 2004). 

2
Similarly, a detailed discussion of the three-step protocol is beyond the scope of this 

document. Readers interested in learning more about the three-step protocol, including 

references to risk assessment and risk management documents and software, are referred 

to the forthcoming NIST technical report.2

1.3 Organization of this Manual 

This report contains five chapters and two appendices in addition to the Introduction; it is 

designed to walk you through the features of CET 2.0 in a step-by-step fashion. 

Background material is first presented to insure you have a firm grounding in the 

concepts that underlie the software tool. Specialized analysis features are then introduced 

that build on and reinforce each other. Throughout this Users Manual our objective is to 

teach you how to use CET 2.0 to gain a deeper understanding of OAE’s structured 

approach to the selection of cost-effective risk mitigation strategies for dealing with 

natural and man-made hazards. 

Chapter 2 covers the key concepts underlying the CET 2.0 software tool. Topics covered 

include an overview of the three-step protocol and the types of economic decisions and 

economic evaluation methods available to decision makers. Chapter 2 shows that more 

than one evaluation method may be appropriate for a given type of decision. The 

recommended analysis strategy is then outlined. This strategy lays the groundwork for 

using CET 2.0 to produce a cost-effective risk mitigation plan. The cost-accounting 

framework is then introduced. It provides a methodology for tracking how costs affect 

stakeholders in different ways, and promotes a detailed, consistent breakdown of costs. 

The chapter concludes with a discussion of the role of case studies and a fairly detailed

introduction to the data center case study, which is used throughout this report to 

illustrate various software features/capabilities. 

Chapter 3 lays out the process by which the baseline analysis is constructed. The 

baseline analysis is the starting point for conducting an economic evaluation. In the 

baseline analysis, all data elements entering into the calculations are fixed. The term

baseline analysis is used to denote a complete analysis in all respects but one; it does not 

address the effects of uncertainty. Constructing the baseline analysis is illustrated via a 

“guided tour” of the software tool’s basic features. These features include entering data, 

editing data, and viewing preliminary results. Special emphasis is placed on how to use 

two key reports to verify data inputs and interpret the results of the baseline analysis. An 

overview of the online Help features is then given. 

Chapter 4 covers the treatment of uncertainty and risk. The concept of financial risk—

the probability of investing in a project whose economic outcome is different from what 

is desired or expected—plays an important role throughout Chapter 4. The importance of 

conducting a structured sensitivity analysis is first discussed. Special emphasis is placed 

on how CET 2.0 provides a framework for analyzing both the impacts of single factors 

 

2

 Chapman, Robert E., and Thomas, Douglas S. A Guide to Printed and Electronic Resources for

Developing a Cost-Effective Risk Mitigation Plan in Constructed Facilities. NISTIR in preparation 

(Gaithersburg, MD: National Institute of Standards and Technology). 

3
and combinations of factors on project costs. Monte Carlo simulation is then discussed 

with particular emphasis on how it leads to quantitative measures of financial risk. Both 

methods—sensitivity analysis and Monte Carlo simulation—include discussions of how 

to input the required data and save calculated results. The chapter concludes with a 

discussion of the Uncertainty Report, a key resource document for analyzing how 

uncertainty impacts the choice of the most cost-effective risk mitigation plan. 

Chapter 5 summarizes why choosing among alternatives designed to reduce the impacts 

of natural and man-made hazards is more complicated than most building investment 

decisions. The focus of Chapter 5 is on providing guidance to help identify key 

characteristics (e.g., dollar-denominated impacts as well as any significant effects that 

remain unquantified) and the level of effort that will promote a better-informed decision. 

Chapter 6 concludes with a discussion of suggested next steps for making more effective 

use of the CET 2.0 software tool. 

Appendix A outlines the life-cycle cost methodology and provides formulas for each of

the key measures of economic performance. 

Appendix B is a glossary of terms. Appendix B includes definitions of all of the key 

terms used throughout this Users Manual. It also includes a Notes section linking the 

term to software inputs and outputs as well as links to specific sections of this Users 

Manual. The links are designed as part of the online Help feature. Where appropriate, an 

Examples section is also provided. The Examples section is used to refer you to specific 

topics covered in the data center case study. 

4
2 Key Concepts 

2.1 Overview of the Three-Step Protocol 

CET 2.0 is designed as an integral part of the economic evaluation—step three of the 

three-step protocol. As such, it is dependent upon the data and information produced in 

the first two steps of the protocol. It is important to point out that the quality of the 

economic analysis is only as good as the data and assumptions going into it. Thus, a brief 

overview of the three-step protocol is useful in establishing the foundations for a rigorous 

economic analysis of risk mitigation strategies for dealing with natural and man-made 

hazards. 

Implementing the three-step protocol requires both guidance and data. Guidance is 

needed to help owners and managers to assess the risks facing their facility. Data about 

the frequency and consequences of natural and man-made hazards are needed when 

assessing the risks that a particular facility faces from these hazards. Estimates of the 

costs of protection are needed to insure that safeguarding personnel and physical assets 

and satisfying financial constraints are kept in balance. Finally, guidance on the use of 

economic evaluation methods is needed to insure that the correct method, or combination 

of methods, is used. 

The first step in creating a cost-effective risk mitigation plan is a risk assessment for the 

facility or group of facilities to be protected. This step includes specification of the 

decision-maker’s objectives, the facilities to be protected, the natural and man-made 

hazards to be considered, the composition of the risk assessment team, and 

documentation procedures. The risk assessment involves data collection to establish the 

likelihood of natural and man-made hazards as well as the on-site collection and 

documentation of facility vulnerabilities to those hazards. Estimates of the value of the 

facility’s assets and the consequences of an event occurring are also produced as part of 

the risk assessment. 

The second step of the protocol focuses on identification of risk mitigation strategies. 

This step uses information from the risk assessment (e.g., estimates of the value of the 

facility’s assets and the consequences of an event occurring) to identify engineering, 

management and financial strategies to mitigate those consequences. The costs of

implementing the alternative risk mitigation strategies and the associated reductions in 

consequences are also produced as part of this step in the protocol. 

The third step in the protocol, economic evaluation, is the means through which 

competing alternatives are analyzed and a cost-effective risk mitigation plan is identified. 

The two previous steps, concerned with risk assessment and risk mitigation, formulate the 

alternative risk mitigation strategies and provide the associated cost and hazard data 

needed to compare the competing alternatives. The economic evaluation step includes 

the selection of the appropriate measures of economic performance, a rigorous analysis of 

the alternative risk mitigation strategies, the identification of the cost-effective risk 

mitigation plan, and the documentation necessary to support the recommendation of that 

5
plan. The economic evaluation step places special emphasis on the treatment of 

uncertainty and risk on the selection of a cost-effective risk mitigation plan. 

CET 2.0 promotes a rigorous economic evaluation in three interrelated ways. First, its 

economic evaluation methods are based on standardized practices promulgated by ASTM 

International. Second, the graphical user interface facilitates the entry and editing of data 

required to support a rigorous economic evaluation. Finally, three specialized reports are 

available that enable verification of input data, an iterative approach to analyzing key cost 

drivers, and a structured approach to the treatment of uncertainty. 

2.2 Types of Economic Decisions 

Investment decisions associated with alternative building designs or systems are 

frequently project-related, where a project could be the construction of a new building, 

the renovation of an existing constructed facility (e.g., a bridge), or the modernization of 

an existing system (e.g., a heating, ventilation, air-conditioning system (HVAC) 

upgrade). For a given project, the decision maker has to choose among a number of 

competing alternatives, all of which satisfy the same functional requirements. If the 

project is to upgrade a building’s HVAC system and to address a number of generic 

security concerns, then each of the alternatives being considered will satisfy the 

functional requirements specified by the building’s owner/manager or some other 

designated decision maker. At a higher level of aggregation, construction-related 

investment decisions often involve collections of projects. 

There are four basic types of investment decisions for which an economic analysis is 

appropriate: 

(1) Deciding whether to accept or reject a given alternative/project; 

(2) Identifying the most efficient alternative/project size/level, system, or design; 

(3) Identifying the optimal combination of interdependent projects (i.e., the right mix of 

sizes/levels, systems, and designs for a group of interdependent projects); and 

(4) Deciding how to prioritize or rank independent projects when the available budget 

cannot fund them all. 

Each type of investment decision is important. First and foremost, decision makers need 

to know whether or not a particular alternative/project or program should be undertaken 

in the first place. Second, how should a particular project/program be configured? The 

third type of decision builds on the second and introduces an important concept, 

interdependence. Consequently, for a given set of candidate projects and implied 

interdependencies, the problem becomes how to choose the best combination of projects. 

The fourth type of decision introduces a budget constraint. The aim is how to get the 

most impact for the given budget. 

6
2.3 Economic Evaluation Methods 

Numerous methods are available for measuring the economic performance of investments 

in buildings and building systems. Use ASTM Standard Guide E 11853

 to identify types 

of building design and system decisions that require economic evaluation and to match 

the technically appropriate economic methods with the decisions. 

Four economic evaluation methods addressed in ASTM Standard Guide E 1185 apply to 

the development of a cost-effective risk mitigation plan for dealing with natural and manmade hazards: (1) life-cycle costs (ASTM Standard Practice E 9174

); (2) present value 

net savings (ASTM Standard Practice E 10745

); (3) savings-to-investment ratio (ASTM 

Standard Practice E 9646

); and (4) adjusted internal rate of return (ASTM Standard 

Practice E 10577

). Readers interested in mathematical derivations of the economic 

evaluation methods are referred to Appendix A. 

More than one method can be technically appropriate for many design and system

decisions. If more than one method is technically appropriate, use all that apply, since 

many decision makers need information on measures of magnitude (life-cycle costs and 

present value net savings) and of return (savings-to-investment ratio and adjusted internal 

rate of return) to assess economic performance. 

2.3.1 Life-Cycle Cost Method 

The life-cycle cost (LCC) method measures, in present-value or annual-value terms, the 

sum of all relevant costs associated with owning and operating a constructed facility over 

a specified period of time. The basic premise of the LCC method is that to an investor or 

decision maker all costs arising from that investment decision are potentially important to 

that decision, including future as well as present costs. Applied to constructed facilities, 

the LCC method encompasses all relevant costs over a designated study period, including 

the costs of designing, purchasing/leasing, constructing/installing, operating, maintaining, 

 

3

 ASTM International. “Standard Guide for Selecting Economic Methods for Evaluating Investments in

Buildings and Building Systems,” E 1185, Annual Book of ASTM Standards: 2005. Vol. 04.11. West 

Conshohocken, PA: ASTM International. 4

 For a detailed description of the ASTM life-cycle cost standard, see ASTM International. “Standard 

Practice for Measuring Life-Cycle Costs of Buildings and Building Systems,” E 917, Annual Book of

ASTM Standards: 2005. Vol. 04.11. West Conshohocken, PA: ASTM International. 5

 For a detailed description of the ASTM present value of net savings standard, see ASTM International. 

“Standard Practice for Measuring Net Benefits and Net Savings for Investments in Buildings and Building

Systems,” E 1074, Annual Book of ASTM Standards: 2005. Vol. 04.11. West Conshohocken, PA: ASTM 

International. 6

 For a detailed description of the ASTM savings-to-investment ratio standard, see ASTM International.

“Standard Practice for Measuring Benefit-to-Cost and Savings-to-Investment Ratios for Investments in

Buildings and Building Systems,” E 964, Annual Book of ASTM Standards: 2005. Vol. 04.11. West 

Conshohocken, PA: ASTM International. 7

 For a detailed description of the ASTM adjusted internal rate of return standard, see ASTM International. 

“Standard Practice for Measuring Internal Rate of Return and Adjusted Internal Rate of Return for 

Investments in Buildings and Building Systems,” E 1057, Annual Book of ASTM Standards: 2005. Vol. 

04.11. West Conshohocken, PA: ASTM International.

7
repairing, replacing, and disposing of a particular design or system. Should any pure 

benefits result (e.g., increased rental income due to improvements), include them in the 

calculation of LCC. 

The LCC method is particularly suitable for determining whether the higher initial cost of 

a constructed facility or system specification is economically justified by lower future 

costs (e.g., losses due to natural or manmade hazards) when compared to an alternative 

with a lower initial cost but higher future costs. If a design or system specification has 

both a lower initial cost and lower future costs relative to an alternative, an LCC analysis 

is not needed to show that the former is economically preferable. 

Denote the alternative with the lowest initial investment cost (i.e., first cost) as the base 

case. The LCC method compares alternative, mutually exclusive, designs or system

specifications that satisfy a given functional requirement on the basis of their life-cycle

costs to determine which is the least-cost means (i.e., minimizes life-cycle cost) of 

satisfying that requirement over a specified study period. With respect to the base case, 

an alternative is economically preferred if, and only if, it results in lower life-cycle costs. 

In the context of CET 2.0, the alternative (i.e., a given combination of risk mitigation 

strategies) that results in the lowest life-cycle cost is designated as the most costeffective risk mitigation plan. 

2.3.2 Present Value of Net Savings 

The present value of net savings (PVNS) method is reliable, straightforward, and widely 

applicable for finding the economically efficient choice among investment alternatives. 

It measures the net savings from investing in a given alternative instead of investing in 

the foregone opportunity (e.g., some other alternative or the base case). 

The PVNS for a given alternative, vis-à-vis the base case, equals their difference in lifecycle costs. Any pure benefits that result (e.g., increased rental income due to 

improvements) are included in the calculation of PVNS, since they are included in the 

LCC calculation. 

With respect to the base case, if PVNS is positive for a given alternative the investment is 

economic; if it is zero, the investment is as good as the base case; if it is negative, the 

investment is uneconomical. 

In the context of CET 2.0, any alternative that results in a PVNS greater than zero is 

designated as cost effective.

2.3.3 Savings-to-Investment Ratio 

The savings-to-investment ratio (SIR) is a numerical ratio whose value indicates the 

economic performance of a given alternative instead of investing in the foregone 

opportunity. The SIR is savings divided by investment costs. The LCC method provides 

8
all of the necessary information to calculate the SIR. The SIR for a given alternative is 

calculated vis-à-vis the base case. 

The numerator equals the difference in the present value of non-investment costs between 

the base case and the given alternative. The denominator equals the difference in the 

present value of investment costs for the given alternative and the base case. A ratio less 

than 1.0 indicates that the given alternative is an uneconomic investment relative to the 

base case; a ratio of 1.0 indicates an investment whose benefits or savings just equal its 

costs; and a ratio greater than 1.0 indicates an economic project. 

In the context of CET 2.0, any alternative that results in an SIR greater than 1.0 is 

designated as cost effective.

2.3.4 Adjusted Internal Rate of Return 

The adjusted internal rate of return (AIRR) is the average annual yield from a project 

over the study period, taking into account reinvestment of interim receipts. The 

reinvestment rate in the AIRR calculation is equal to the minimum acceptable rate of 

return (MARR), which is assumed to equal the discount rate. When the reinvestment rate 

is made explicit, all investment costs are easily expressible as a time equivalent initial 

outlay (i.e., a value at the beginning of the study period) and all non-investment cash 

flows as a time equivalent terminal amount. This allows a straightforward comparison of 

the amount of money that comes out of the investment (i.e., the terminal value) with the 

amount of money put into the investment (i.e., the time equivalent initial outlay). 

The AIRR is defined as the interest rate applied to the terminal value, which equates (i.e., 

discounts) it to the time equivalent value of the initial outlay of investment costs. It is 

important to note that all investment costs are discounted to a time equivalent initial 

outlay using the discount rate. 

With regard to the base case, if the AIRR is greater than the discount rate (also referred to 

as the hurdle rate), then investment in the given alternative is economic; if the AIRR 

equals the discount rate, the investment is as good as the base case; if AIRR is less than 

the discount rate, the investment is uneconomical. 

In the context of CET 2.0, any alternative that results in an AIRR greater than the 

discount rate is designated as cost effective.

2.3.5 Appropriate Application of the Evaluation Methods 

The four evaluation methods presented in the previous sections provide the basis for 

evaluating the economic performance of homeland security-related investments in 

constructed facilities. The equations underlying the methods presented in Appendix A 

are all consistent with ASTM standard practices. All of the methods are appropriate for 

evaluating accept or reject type decisions. But among the methods are several 

9
distinctions that relate to the type of investment decision that the decision maker is 

facing. 

Table 2-1 provides a summary of when it is appropriate to use each of the evaluation 

methods described earlier. Note that the LCC and PVNS methods are appropriate in 

three of the four cases. Only in the presence of a budget constraint is the use of either 

LCC or PVNS inappropriate and even in that case it plays an important role in computing 

the aggregate measure of performance. 

In summary, no single evaluation method works for every decision type. First and 

foremost, managers want to know if a particular project is economic. Reference to Table 

2-1 shows that all of the evaluation methods address this type of decision. Second, as 

issues of design, sizing, and packaging combinations of projects become the focus of 

attention—as often occurs in conjunction with budget reviews—the LCC and PVNS 

methods emerge as the principle means for evaluating a project’s or program’s merits.8

 

Finally, the tightening budget picture involves setting priorities. Consequently, decision 

makers need both measures of magnitude, provided by LCC and PVNS, and of return, 

provided by either the SIR or the AIRR, to assess economic performance. Multiple 

measures, when used appropriately, ensure consistency in both setting priorities and 

selecting projects for funding. 

Table 2-1 Summary of Appropriateness of Each Standardized Evaluation 

Method for Each Decision Type 

Decision Type 

LCC PVNS SIR AIRR

Accept/Reject Yes Yes Yes Yes

Design/Size Yes Yes No No

Combination (Interdependent) Yes Yes No No

Priority/Ranking (Independent) No No Yes Yes

Source: “Standard Guide for Selecting Economic Methods for Evaluating Investments in Buildings and 

Building Systems.” E1185. ASTM International, 2005. 

2.4 Analysis Strategy 

Developing a cost-effective risk mitigation plan is a complicated process, entailing three 

distinct levels of analysis. This “analysis strategy” systematically adds increased detail to 

the decision-making process. The first level is referred to as the baseline analysis. Here 

we are working with our best-guess estimates. The baseline analysis provides a frame of 

reference for the treatment of uncertainty, which is the focus of the second and third 

levels—sensitivity analysis and Monte Carlo simulation—which systematically vary 

 

8

 If incremental values of the SIR or AIRR are computed, they can be used to make design/size and

packaging decisions. 

10
selected sets of data elements to measure their economic impacts on project outcomes, 

such as the life-cycle costs of competing alternatives. 

2.4.1 Baseline Analysis 

The starting point for conducting an economic evaluation is to do a baseline analysis. In 

the baseline analysis, all data elements entering into the calculations are fixed. For some

data, the input values are considered to be known with certainty. Other data are 

considered uncertain and their values are based on some measure of central tendency, 

such as the mean or the median, or input from subject matter experts. Baseline data 

represent a fixed state of analysis. For this reason, the analysis results are referred to as 

the baseline analysis. The term baseline analysis is used to denote a complete analysis in 

all respects but one; it does not address the effects of uncertainty. 

2.4.2 Sensitivity Analysis 

Sensitivity analysis measures the impact on project outcomes of changing the values of

one or more key data elements about which there is uncertainty. Sensitivity analysis can 

be performed for any measure of economic performance (e.g., life-cycle cost or present 

value of net savings). Therefore, a sensitivity analysis complements the baseline analysis 

by evaluating the changes in output measures when selected data inputs are allowed to 

vary about their baseline values. 

The key advantage of sensitivity analyses is that they are easily constructed and 

computed and the results are easy to explain and understand. Their disadvantage is that 

they do not produce results that can be tied to probabilistic levels of significance (e.g., the 

probability that the savings-to-investment ratio is less than 1.0). 

2.4.3 Monte Carlo Simulation 

Monte Carlo simulation varies a small set of key parameters either singly or in 

combination according to an experimental design. Associated with each key parameter is 

a probability distribution function from which values are randomly sampled. The major 

advantage of the Monte Carlo simulation technique is that it permits the effects of 

uncertainty to be rigorously analyzed through reference to a derived distribution of 

project outcome values. CET 2.0 includes a means for automatically running Monte 

Carlo Simulations and displaying the results. 

2.5 Cost-Accounting Framework 

The flexibility of the life-cycle cost method enables us to classify and analyze costs in a 

variety of ways. The result is a more focused representation of costs, referred to as the 

cost-accounting framework. The objective of producing this framework is to promote 

better decision making by identifying unambiguously who bears which costs, how costs 

are allocated among several widely-accepted budget categories, how costs are allocated 

among key building components, and how costs are allocated among the three mitigation 

11
strategies. A cost-accounting framework is needed because costs affect stakeholders in 

different ways. Thus, knowing who bears which costs leads to a better understanding of 

stakeholder perspectives and helps create mutually beneficial solutions. Finally, the costaccounting framework promotes a detailed, consistent breakdown of life-cycle costs so 

that a clear picture emerges of the cost differences between competing alternatives. 

Costs are classified along four dimensions within the cost-accounting framework: (1) 

Bearer of Costs; (2) Budget Category; (3) Building/Facility Component; and (4) 

Mitigation Strategy. To differentiate these costs, they are referred to as cost types and 

cost items. Each dimension contains a collection of cost types. The cost types are used 

as placeholders for summarizing and reporting aggregated cost information. Each cost 

type is a collection of cost items. Each cost item has a unique set of identifiers that 

places it within the cost-accounting framework. Examples linking cost items and cost

types are given at the end of each of the four “cost dimension” paragraphs. Each 

dimension captures the full spectrum of costs (i.e., all costs summed across each 

dimension add up to the same total). A schematic representation of the cost-accounting 

framework is given in Figure 2-1. Within Figure 2-1, each of the four dimensions of 

costs is listed within a box. The cost types associated with that cost dimension are listed 

beneath each box. 

Bearer of

Costs 

Owner/Manager

Occupant/User

Third Party

Budget

Category

Capital 

Investment

O&M

Other

Building/

Facility

Component

Building/Facility

Elements

Building/Facility 

Site Work

Non-Elemental

Mitigation 

Strategy

Engineering 

Alternatives 

Management 

Practices

Financial 

Mechanisms

Figure 2-1 Overview of the Cost-Accounting Framework: Dimensions and Cost 

Types 

The first dimension, Bearer of Costs, covers all stakeholder groups. A stakeholder group 

is defined as any collection of organizations or individuals directly affected by the project 

(e.g., by construction or risk mitigation activities or by disaster-related losses). The first 

dimension has three cost types based on who bears the costs. The three cost types are: (1) 

Owner/Manager; (2) Occupant/User; and (3) Third Party. Owner/Manager costs are all 

costs incurred by the project’s owner or agent. These costs include but are not limited to 

design costs, capital investment costs, and selected types of repairs to the constructed 

12
facility. Occupant/User costs accrue to the direct users of the project. Occupant/User 

costs frequently include operations and maintenance costs and selected types of repairs 

not covered by the project’s owner or agent. Occupant/User costs can also include delay 

costs and business interruption costs due to temporary closures for repair and 

reconstruction activities. Third-Party costs are all costs incurred by entities who are 

neither the project’s owner or agent nor direct users of the project. One example of a 

Third-Party cost is the lost sales for a business establishment whose customer access has 

been impeded (e.g., due to a road closure during construction/reconstruction). Another 

example is damage to the environment from a construction process that pollutes the 

water, land, or atmosphere. 

The second dimension, Budget Category, has three cost types based on which category of 

the budget the funds come from. These cost types are: (1) Capital Investment; (2) O&M 

(Operations and Maintenance); and (3) Other. These cost types correspond to widely 

used budget categories for private and public sector cost accounting. It is important to 

note that the dollar amounts accruing to all three cost types are inclusive of any expected 

losses. In the context of the previous section, Capital Investment costs accrue to the 

investment cost category and O&M and Other costs accrue to the non-investment cost 

category. All acquisition costs, including costs related to planning, design, purchase, and 

construction, are investment-related costs and fall under the Capital Investment cost type. 

Residual values (resale, salvage, or disposal costs) and capital replacement costs are also 

investment-related costs. Capital replacement costs are usually incurred when replacing 

major systems or components and are paid from capital funds. Cost items falling under 

the O&M cost type include energy and water costs, maintenance and repair costs, minor 

replacements related to maintenance and repair, and insurance premiums paid by owners 

and/or occupants to reduce their risk exposure. O&M costs are usually paid from an 

annual operating budget, not from capital funds. Other costs are non-capital costs that 

cannot be attributed to the O&M cost type. An example of an Other/Third-Party cost is 

damage to the environment stemming from the project. 

The third dimension, Building/Facility Component, has three cost types. These cost 

types are: (1) Building/Facility Elements; (2) Building/Facility Site work; and (3) NonElemental. The first two cost types are associated with the elemental classification 

UNIFORMAT II.9

 Elements are an integral part of any construction project; they are 

often referred to as component systems or assemblies. Each element performs a given 

function regardless of the materials used, design specified, or method of construction 

employed. Non-Elemental costs are all costs that cannot be attributed to specific 

functional elements of the project. An example of a Non-Elemental/Capital/Owner cost 

is the purchase of a right-of-way, or easement. 

The fourth dimension, Mitigation Strategy, has three cost types. The three cost types 

correspond to the three risk mitigation strategies; they are: (1) Engineering Alternatives; 

(2) Management Practices; and (3) Financial Mechanisms. An example of an 

 

9

 ASTM International. “Standard Classification for Building Elements and Related Site Work—

UNIFORMAT II,” E 1557, Annual Book of ASTM Standards: 2005. Vol. 04.11. West Conshohocken, PA:

ASTM International. 

13
Engineering Alternatives/Elemental/Capital/Owner cost is tightening the building 

envelope. An example of a Management Practice/Non-Elemental/O&M/Owner cost is 

site security.

2.6 Use of Case Studies 

The software includes a case study file, case study.lcc. The case study file provides a 

convenient frame of reference through which you can learn about the capabilities of the 

software and experiment with the various means of editing, creating, and deleting data 

elements. The case study file is designed to illustrate a wide variety of software features 

through a simplified, yet fairly realistic building-related example. 

2.6.1 Overview of the Data Center Case Study 

The case study describes a renovation project for the data center of a financial institution. 

The renovation is to upgrade the data center’s heating, ventilation and air-conditioning 

(HVAC); telecommunications and data processing systems; and several security-related 

functions. Note that the cost estimates are for purposes of illustration only—actual 

renovations of different building types will face different costs and different risk profiles. 

The data center undergoing renovation is a single-story structure located in a suburban 

community. The floor area of the data center is 3 716 m2

 (40 000 ft2). The replacement 

value of the data center is $20 million for the structure plus its contents. The data center 

corresponds to the type of structure that would be used by a major bank, credit card 

company, or insurance company as its primary data repository. It contains financial 

records that are in constant use by the firm and its customers. Thus, any interruption of

service will result in both lost revenues to the firm and potential financial hardship for the 

firm’s customers. 

The site upon which the data center is located is traversed by a thoroughfare that has been 

used by local residents since the data center was constructed. Alternative routes are 

available and convenient to local residents, subject to a short detour. Plans have been 

made by the community to put in a new street which better links the affected 

neighborhoods and does not traverse the data center’s site. The new street will be 

available for use within two years of the renovation. 

2.6.2 Alternatives 

The building owners wish to employ the most cost-effective risk mitigation plan (i.e., the 

plan that results in the lowest life-cycle cost) that will meet their objectives. Two 

alternative combinations of mitigation strategies are available to the building owners. 

The first, referred to as the Base Case, employs upgrades that meet the minimum building 

performance and security requirements. The second, referred to as the Proposed 

Alternative, results in enhanced security as well as selected improvements in building

performance. Both alternatives recognize that in the post-9/11 environment the data 

center faces heightened risks in two areas. These risks are associated with the 

14
vulnerability of information technology resources and the potential for damage to the 

facility and its contents from chemical, biological, radiological, and explosive (CBRE) 

hazards. Two scenarios—the potential for a cyber attack and the potential for a CBRE 

attack—are used to highlight these risks. The Proposed Alternative augments the Base 

Case by strengthening portions of the exterior envelope, limiting vehicle access to the 

data center site, improving the building’s HVAC, telecommunications and data 

processing systems, and providing better linkage of security personnel to the 

telecommunications network. 

2.6.3 Assumptions and Cost Data 

The case study covers a 25-year period beginning in 2006. Life-cycle costs are 

calculated using a 7 % real discount rate for the baseline analysis. Information on cost 

items is needed in order to calculate life-cycle costs. Cost items are classified under two 

broad headings: (1) input costs and (2) event-related costs. 

Input costs represent all costs tied to the building or facility under analysis that are not 

associated with an event. Input costs include the initial capital investment outlays for 

facilities and site work, future costs for electricity for lighting and space heating and 

cooling, future renovations, and any salvage value for plant and equipment remaining at 

the end of the study period. Input costs are classified as either investment costs or noninvestment costs. 

Input costs serve to differentiate the Base Case and the Proposed Alternative. The 

additional costs of the “enhanced” renovation result not only in expected reductions in 

event-related costs, they also reduce the annual costs for telecommunications and 

electricity and increase staff productivity due to improved indoor air quality. Finally, the 

change in the traffic pattern resulting from the enhanced renovation generates an increase 

in commuting costs for local residents until a new road is opened in two years. 

Event-related costs are based on annual outcomes, each of which has a specified 

probability of occurrence. Each outcome has a non-negative number of cost items 

associated with it (i.e., an outcome may have no cost items associated with it if it results 

in zero costs). The data center case study models the risks associated with cyber attacks 

and CBRE attacks exclusively. The event modeling methodology, however, can also be 

used to model multiple hazards, such as those associated with earthquakes, high winds, or 

an accident resulting in widespread damage due to fire or chemical spills. Annual 

probabilities for the outcomes associated with each attack scenario are postulated along 

with associated outcome costs. The annual probabilities and outcome costs differ by 

renovation strategy. However, both the Base Case and the Proposed Alternative have 

similar types of outcome costs. Should a cyber attack occur, it results in damage to 

financial records and identity theft for a small set of corporate customers. Should a 

CBRE attack occur, it results in several non-fatal injuries, physical damage to the data 

center, interruption of business services at the data center, and denial of service to 

corporate customers during recovery. 

15
16
3 Basic Features: Constructing the Baseline Analysis 

This section gives you a guided tour of the basic features of Version 2.0 of the CostEffectiveness Tool (CET 2.0). The guided tour takes you through all of the steps 

required to construct the baseline analysis. Software features associated with the 

treatment of uncertainty and risk are covered in Chapter 4. The goal of the guided tour is 

for you to work systematically through the hierarchy of screens used to input, analyze, 

and display project-related data. 

3.1 Getting Started 

3.1.1 Opening/Creating a Project File 

Launch the software by clicking on the CET 2.0 icon found on your desktop or by 

clicking CET 2.0 in the Start menu in Programs/Cost-Effectiveness Tool. The first 

screen to appear prompts you to create a new project file or open an existing or example 

project file. Figure 3-1 is a reproduction of the Prompt window. Recall that the software 

comes with an example file, the case study.lcc file. Thus, even when you launch the 

software for the first time, there is already an example project file, which you may choose 

to open. If you select the Open an Existing Project or Open an Example Project button, 

then you will be taken to the Open Project window. (Throughout this section, software 

features (e.g., buttons) are highlighted through the use of italics font.) 

Figure 3-1 Cost-Effectiveness Tool Prompt Window

17
As a first step, open the case study.lcc file and use the File Save As feature to make 

additional copies with lcc extensions. Suggested file names are test01.lcc and test02.lcc. 

Use the test files to gain familiarity with the software. This way, if you inadvertently

change or delete a data element, or create a new data element, you can go back to the 

case study.lcc file for the reference solution. When you use the File Save As feature with 

the case study file, the new file (e.g., test01.lcc) will be saved in the “examples” directory 

unless you specify otherwise. If you exit the software and later wish to open a usercreated “test” file, you will need to select Open an Example Project from the Prompt 

window. 

Figure 3-2 is a sample Open Project window showing the files in the “examples” 

directory. Note that in addition to the case study.lcc file there are two user-created “test” 

files: test01.lcc and test02.lcc. Highlighting the desired file and clicking the Open button, 

opens that file. Double clicking on the highlighted file opens the file as well. The Open 

Project window includes a Cancel button. If you click on the Cancel button, you will 

return to the Prompt window. 

Figure 3-2 Open Project Window 

3.1.2 Cost Summary Window and Main Menu 

The Cost Summary window is displayed whenever a new project is created or an existing 

or example project file is opened. When a project is created, the Cost Summary window 

is blank. Figure 3-3 is an example of the Cost Summary window display when starting a 

new project. As you enter data into the software, the Cost Summary window displays the 

current value of life-cycle costs for each cost type and alternative being analyzed. It is 

recommended that you keep the Cost Summary window open while working in the 

software. If you wish to close the window, it can be reopened at any time. 

18
The software is designed to analyze up to four alternatives (see Figure 3-3). The Cost 

Summary window allows you to select both the cost types and the alternatives to be 

included in the economic evaluation. These “choices” are represented in Figure 3-3 by 

the “cost type” check boxes under each dimension of the cost-accounting framework and 

the “alternative” check boxes in the Select Alternatives group box located in the lower 

left-hand corner. 

A tree on the left-hand side of the Cost Summary window serves as the Main Menu to the 

software. The tree contains three top-level nodes: Project, Uncertainty, and Reports. 

Recall that software features discussed in this section are highlighted through the use of 

italics font. 

Figure 3-3 Cost Summary Window When Starting a New Project 

3.2 Entering Data 

3.2.1 Project Information 

The options listed under the Project node allow you to enter project information, define 

alternatives, and manage cost-related information. 

Clicking the Description option on the Main Menu opens the Project Description 

window. Here you can enter project information such as the project’s name, a brief 

description of the project, the base year selected for all present value calculations, the 

19
length of the study period, whether a constant dollar or current dollar analysis is to be 

performed, and the discount rate. Note that when a constant dollar analysis is selected,

you must use a real discount rate. This is because constant dollars have uniform

purchasing power exclusive of general inflation. When a current dollar analysis is 

selected, you must use a nominal discount rate. Within CET 2.0, the nominal discount 

rate and the real discount rate are linked via a formula that includes a term for general 

inflation. Figure 3-4 displays the Project Description window for the data center case 

study. The descriptive material is designed to help decision makers differentiate among 

multiple projects competing for limited investment funds. 

Figure 3-4 Project Description Window for the Data Center Case Study 

Clicking the Alternatives option opens the Project Alternatives window, which allows 

you to add and delete project alternatives as well as enter information about the 

alternatives. Figure 3-5 displays the Project Alternatives window for the data center case 

study. The Base Case tab is selected. The window is constructed so you can switch from

one alternative to another. The text box in the middle of the window allows you to enter 

a brief description of the alternative. The brief descriptions of each alternative serve to 

differentiate one alternative from another. 

20
Figure 3-5 Project Alternatives Window for the Data Center Case Study 

Cost-related input screens for the software product are of two basic types: (1) input costs 

and (2) event-related costs. You access these screens by selecting the Costs/Events

option on the Main Menu. 

3.2.1.1 Input Costs 

Clicking the Costs/Events option opens the Edit Costs/Events window. This screen 

manages the creation, deletion, and editing of input costs and event-related costs. Upon 

entering the Edit Costs/Events window, you must select the alternative for which 

information is to be reviewed or input. Both the costs and events portions of the window 

are active for the selected alternative. Since our focus is on input costs, however, we will 

address only the cost portion of the window here. The following subsection deals with 

event-related costs. Once the alternative is selected, the Edit Costs/Events window 

displays all cost items associated with that alternative. Figure 3-6 is an example of the 

Edit Costs/Events window for the Base Case. Notice that the input costs are listed in 

alphabetical order according to their Budget Category—Investment, O&M, and Other. If 

21
a large number of cost items have been entered, some costs will be hidden, but can be 

viewed by scrolling down the list. In this example, no costs are hidden. 

Figure 3-6 Edit Costs/Events Window for the Data Center Case Study: Input 

Costs for the Base Case 

Highlighting and clicking the selected cost item opens the appropriate Cost Information 

window. This “edit” feature allows you to review and, if desired, modify any previously 

recorded information for the cost item of interest. Figure 3-7 is an example of the Capital 

Investment Cost Information window for the data center case study. Figure 3-7 displays 

information on the Basic Renovation cost item, which is associated with the Base Case. 

Figure 3-8 is an example of the O&M Cost Information window for the Site Security cost 

item for the Base Case. Figure 3-9 is an example of the Other Cost Information window 

for the Change in Traffic Pattern cost item for the Proposed Alternative. Note that 

Figures 3-7, 3-8, and 3-9 include a Classification Information group box which specifies 

how each cost item fits into the cost-accounting framework. 

The Edit Costs/Events window is the means through which new cost items are created. 

The creation of a new cost item is accomplished by selecting the appropriate Budget 

Category cost type button—Add Investment Cost, Add O&M Cost, or Add Other Cost—

22
from the list on the right of the Costs box. The software then opens the Cost Information 

window associated with the selected cost type. The Cost Information windows allow you 

to name the cost item, generate a cost estimate via separate entries for quantity and unit 

cost, and specify the timing of cash flows and any escalation rates that need to be applied 

(see Figures 3-7, 3-8, and 3-9). 

Figure 3-7 Capital Investment Cost Information Window for the Data Center 

Case Study: Basic Renovation 

Figure 3-8 O&M Cost Information Window for the Data Center Case Study: Site 

Security 

23
Figure 3-9 Other Cost Information Window for the Data Center Case Study: 

Change in Traffic Pattern for the Proposed Alternative 

3.2.1.2 Event-Related Costs 

As noted earlier, clicking the Costs/Events option opens the Edit Costs/Events window. 

This screen manages the creation, deletion, and editing of input costs and event-related 

costs. Upon entering the Edit Costs/Events window, you must select the alternative for 

which information is to be reviewed or input. Both the costs and events portions of the 

window are active for the selected alternative. Since our focus is on event-related costs, 

however, we will address only the event-related costs portion of the window here. Once 

the alternative is selected, the screen displays all events associated with that alternative. 

Highlighting and clicking the selected event opens the Event Information window. This 

feature allows you to review and, if desired, modify any previously recorded information 

for the event of interest. The Edit Costs/Events window is the means through which new 

events are created. The creation of a new event is accomplished by selecting Add Event

from the list on the right if the Events box. The software then opens the Event 

Information window. The Event Information window allows you to name the event, 

provide a brief description of the event, enter the dates of first and last occurrence, and 

edit event-related outcomes. Figure 3-10 is an example of the Event Information 

window for the Cyber Attack scenario for the Base Case. Reference to Figure 3-10 

shows that this Cyber Attack scenario covers the first 10 years of the study period. A 

second Cyber Attack scenario covers years 11 through 25. Two time periods are used 

because cyber crime is on the rise and although new countermeasures are being produced 

regularly, hackers are becoming more adept at finding and exploiting weaknesses in 

countermeasures software. 

24
Figure 3-10 Event Information Window for the Data Center Case Study: 

Description of the Cyber Attack Scenario for the Base Case 

Associated with each event is a set of outcomes. Information on event-related outcomes 

is accessed via the Edit Outcomes/Outcome Costs window. This screen is reached by

clicking the Edit Outcomes option in the Event Information window (see Figure 3-10). 

Figure 3-11 is an example of the Edit Outcomes/Outcome Costs window for the first 

Cyber Attack scenario for the Base Case. This screen manages the creation, deletion, and 

editing of outcomes. The Edit Outcomes/Outcome Costs window displays all outcomes 

associated with the event of interest. The event/outcome costs portion of the Edit 

Outcomes/Outcome Costs window is initially grayed out, indicating that it is inactive. 

However, once an outcome is selected, the costs associated with that outcome become

active. In Figure 3-11, the Attack outcome has been selected. Consequently, the 

outcome costs O&M: Record Reconstruction and Other: Identity Theft are active. 

Highlighting and clicking the selected outcome opens the appropriate Outcome 

Information window. This feature allows you to review and, if desired, modify any 

previously recorded information for the outcome of interest. The Edit Outcomes/ 

Outcome Costs window is the means through which new outcomes are created. The 

creation of a new outcome is accomplished by selecting Add Outcome from the list on the 

right of the Event Outcomes box. The software then opens the Outcome Information 

window. The Outcome Information window allows you to name the outcome, provide a 

25
brief description of the outcome, assign a probability of occurrence for the outcome

(outcome probabilities are a byproduct of the risk assessment), update the sum of all 

outcome probabilities for the event of interest, and edit outcome-related cost items. 

Figure 3-12 is an example of the Outcome Information window; it provides a brief 

description of the outcome and an outcome probability for the first Cyber Attack scenario 

for the Base Case. 

Figure 3-11 Edit Outcomes/Outcome Costs window for the Data Center Case 

Study: Base Case Cyber Attack Outcomes 

The Outcome Information window is also the means through which non-monetary 

information is input. Under certain circumstances, the effects of outcomes associated 

with natural and/or man-made hazards can not be expressed in monetary terms. For 

example, ceasing operations, staff and/or third party fatalities, and other extreme effects, 

are not easily valued in monetary units. The Non-Monetary group box provides the 

means for indicating which, if any, of these effects are associated with a given outcome. 

If one or more of these effects is important, check the items for which you can not 

estimate a dollar value. Once an item is checked, the Enter Narrative button is activated. 

26
Clicking the Enter Narrative button opens a text box, where you can enter pertinent 

information on that non-monetary effect. All items checked in the Non-Monetary group 

box, whether a narrative is entered or not, are included in the Data and Results Reports. 

Figure 3-12 Outcome Information Window for the Data Center Case Study: 

Probability Information for the Base Case Cyber Attack Scenario 

Associated with each outcome is a set of event-related cost items. Information on eventrelated cost items is accessed by clicking the Edit Outcome Costs option of the Outcome 

Information window (see Figure 3-12), which opens the Edit Outcomes/Outcome Costs 

window. This screen manages the creation, deletion, and editing of event-related cost 

items. The Edit Outcomes/Outcome Costs window displays all event-related cost items 

associated with the outcome of interest. 

27
Highlighting and clicking the selected event-related cost item opens the appropriate 

Event/Outcome Cost Information window. This feature allows you to review and, if 

desired, modify any previously recorded information for the event-related cost item of 

interest. The Edit Outcomes/Outcome Costs window is the means through which new 

event-related cost items are created. The creation of a new event-related cost item is 

accomplished by selecting the appropriate Budget Category cost type button—Add 

Investment Cost, Add O&M Cost, or Add Other Cost—from the list on the right of the 

Event/Outcome Cost box. The software then opens the Event/Outcome Cost Information 

window. The Event/Outcome Cost Information window allows you to name the eventrelated cost item, generate a cost estimate via separate entries for quantity and unit cost, 

and specify any escalation rates that need to be applied. Figure 3-13 is an example of the 

Event/Outcome Cost Information window for the Base Case. Figure 3-13 records 

information on the Identity Theft cost item for the first Cyber Attack scenario. Note that 

Figure 3-13 includes a Classification Information group box which specifies how each 

event-related cost item fits into the cost-accounting framework. 

Figure 3-13 Event/Outcome Cost Information Window for the Data Center Case 

Study: Identity Theft Cost Item for the Base Case Cyber Attack 

Scenario 

3.2.2 Output Window

Once all data have been input, the Cost Summary window displays the life-cycle costs for 

each alternative. Costs are reported for each of the four dimensions of the costaccounting framework and for each cost type. Figure 3-14 reproduces the Cost Summary 

window for the completed baseline analysis for the data center case study. 

28
The Cost Summary window provides the option for you to view calculated values for 

measures of economic performance other than life-cycle costs. The drop down menu in 

the Evaluation Method box lets you select the PVNS (present value net savings), SIR 

(savings-to-investment ratio), or AIRR (adjusted internal rate of return) as an alternative 

measure of economic performance. The PVNS, SIR, and AIRR values reported on the 

Cost Summary window are calculated vis-à-vis the Base Case. PVNS measures net 

savings of investing in the given alternative instead of investing in the Base Case. The 

SIR equals the difference in non-investment costs—the savings stemming from investing 

in the given alternative rather than the Base Case—divided by the increased capital cost 

for the given alternative. The AIRR measures the annual return on the additional capital 

investment associated with the given alternative. Thus when the PVNS, SIR, or AIRR 

method is selected, the only meaningful values are the ones listed under the column

headings Alt. 1, Alt. 2, and Alt. 3. 

Figure 3-14 Cost Summary Window for the Data Center Case Study 

3.2.3 Alternative-Specific Feature 

The software also enables you to access the Edit Costs/Events window by clicking one of 

the alternative labeled edit buttons at the top of the Cost Summary window. In Figure 3-

14 two alternatives—Base Case and Alt. 1—have data entries. Consequently, their edit 

buttons are active. Since each alternative has a specific edit button, when that button is 

active and it is clicked the Edit Costs/Events window opens with a display of all costs and 

29
all events associated with the alternative in the selected column. This feature helps you 

edit cost and event information very efficiently when your focus is on a single alternative. 

3.3 Use and Interpretation of the Data and Results Reports 

The Cost-Effectiveness Tool produces three types of reports. Although the reports share 

a number of similarities in terms of their content, their functions are very different. Each 

report is accessed via the Reports node on the main menu. Clicking the Data, 

Uncertainty, or Results option under the Reports node takes you to the selected report. 

The Data Report is intended as a means for checking the accuracy of the information that 

you entered into the Cost-Effectiveness Tool. The Uncertainty Report contains 

information associated with the sensitivity analysis and the Monte Carlo simulation; it is 

described in Section 4.3. The Results Report is designed to help you “drill down” on 

how individual cost items are distributed across Bearer, Budget Category, Building 

Component, and Mitigation Strategy. This approach gives you a snapshot of all of the 

costs entering the analysis, expressed in present value terms, which “roll up” into the lifecycle costs recorded in the Cost Summary window. The Results Report is intended for 

submission to senior management as part of the documentation supporting the specific 

project being considered for funding. The Results Report is sufficiently detailed to 

provide a concise snapshot of the underlying data, including the candidate set of 

alternatives evaluated, the types of analyses performed, and the results of those analyses. 

It is important to note that CET 2.0 will generate reports only if the computer you are 

using has a default printer installed. It is not necessary for the computer to be connected 

to the printer. 

3.3.1 Data Report 

Clicking on the Data option under the Reports node opens the Data Report. The Data 

Report consists of these five sections: (1) a Cover Sheet; (2) Background Information on 

the project (e.g., Project Name, Project Description, Study Period, and Analysis 

Information); (3) Alternative Information – Descriptive Summary (e.g., Alternative 

Name, Alternative Description, Event Name, Event Description, Outcome Name, 

Outcome Description, and Key Parameters, Non-Monetary Items); (4) Alternative 

Information – Input Cost Data Summary (e.g., Cost Item, First Year, Last Year, Occurs 

Every, Bearer, Category, Component, Strategy, Escalation Rate, and Dollar Amount); 

and (5) Alternative Information – Event/Outcome Cost Data Summary (e.g., Event, 

Outcome, Event/Outcome Cost Item, First Year, Last Year, Bearer, Escalation Rate, 

Dollar Amount). Figure 3-15 reproduces the Cover Page of the Data Report for the case 

study. 

Verifying the accuracy of input data is essential to insure that the results of the economic 

evaluation are consistent with the underlying data. The Data Report is specifically 

30
designed to verify the accuracy of the input data. Figures 3-16 and 3-17 provide 

information on the input costs and event-related costs for the Base Case. 

Figure 3-15 Cover Page of the Data Report for the Case Study 

31
Figure 3-16 Input Cost Data Summary Page of the Data Report for the Base Case 

3.3.2 Results Report 

Clicking on the Results option under the Reports node opens the Results Report. The 

Results Report consists of these nine sections: (1) a Cover Sheet; (2) Background 

Information on the project (e.g., Project Name, Project Description, Study Period, and 

Analysis Information); (3) Alternative Information – Descriptive Summary (e.g., 

Alternative Name, Alternative Description, Event Name, Event Description, Outcome 

Name, Outcome Description, and Key Parameters, Non-Monetary Items); (4) Summary 

of Economic Measures of Performance; (5) Summary of Life-Cycle Costs; (6) Summary 

of Costs by Alternative sorted by Budget Category (e.g., Cost Item, Bearer, Component, 

Strategy, and Present Value Dollar Amount); (7) Summary of Annual Costs by 

Alternative and Budget Category (e.g., Present Value Dollar Amounts for each Year for 

Capital Investment, O&M, Other, and in Total); (8) Summary of Annual Costs by 

Alternative (e.g., Present Value Dollar Amounts for each Year for each Alternative); and 

(9) Summary of Annual and Cumulative Net Savings by Alternative. 

Figure 3-18 reproduces the Summary of Economic Measures of Performance page for the 

case study. This page is included as a convenient summary of all four measures of 

economic performance—LCC, PVNS, SIR, and AIRR. The measures of economic 

performance correspond to the drop down menu on the Cost Summary window. 

32
Figure 3-17 Event/Outcome Cost Data Summary Page of the Data Report for the 

Base Case 

Figure 3-19 reproduces the Summary of Life-Cycle Costs Page of the Results Report for 

the case study. When you examine Figure 3-19, you will note that it is a reproduction of 

the Cost Summary window for the baseline analysis. Figure 3-19 includes the check 

boxes to indicate clearly whether any data elements have been excluded from the lifecycle cost totals. The table in Figure 3-19 is the starting point for the “drill down” 

analysis of the computed values for life-cycle costs. 

Figure 3-20 is the first page of the two-page Summary of Costs by Alternative portion of

the Results Report. Figure 3-20 covers the Base Case. All costs are expressed in present 

value dollar amounts and include designations for Bearer, Component, and Strategy. The 

designations map individual cost items into the cost-accounting framework. If you wish 

to examine how a particular cost item contributes to the amounts shown on the Summary 

of Life-Cycle Costs page, choose the cost item, see where it fits in the cost-accounting 

framework, and then trace it back to the Summary of Life-Cycle Costs page. For 

example, two cost items—Electricity and Site Security—account for three quarters of

O&M life-cycle costs. Site Security accounts for all of Management Practices life-cycle 

costs and slightly more than two thirds of Non-Elemental life-cycle costs.

33
Figure 3-18 Summary of Economic Measures of Performance Page of the Results 

Report for the Case Study

Figure 3-19 Summary of Life-Cycle Costs Page of the Results Report for the Case 

Study

34
Figure 3-20 Summary of Costs by Alternative Page of the Results Report for the 

Base Case 

In developing a cost-effective risk mitigation plan, it is useful to see how costs are 

distributed over time. The Results Report provides two separate means for examining 

and assessing annual costs. The Summary of Annual Costs by Alternative and Budget 

Category provides a detailed disaggregated synopsis of annual costs. Thus, if you want 

to examine how major equipment replacements affect annual costs, examine the entries 

under the Capital Investment heading and look for years in which significant increases in 

costs occur. The Summary of Annual Costs by Alternative provides aggregated side-byside comparisons of the alternatives being evaluated. Figure 3-21 reproduces the 

Summary of Annual Costs by Alternative page for the data center case study. These sideby-side comparisons are useful in determining when a particular alternative has a “bulge” 

in costs—say at the beginning of the study period or associated with a major 

replacement—or when one alternative’s annual costs begin to escalate at a significantly 

higher rate. Both pieces of information are useful in understanding the pros and cons of 

each alternative being evaluated. It is important to recognize that the goal of the analysis 

is to gain insights into the decision-making process. 

35
Figure 3-21 Summary of Annual Costs by Alternative Page of the Results Report 

for the Data Center Case Study 

In addition to seeing how costs are distributed over time, it is useful to see how net 

savings accumulate over time. The Summary of Annual and Cumulative Net Savings by 

Alternative provides net savings computations vis-à-vis the Base Case for each 

Alternative analyzed. Figure 3-22 reproduces the Summary of Annual and Cumulative 

Net Savings by Alternative page for the Proposed Alternative for the data center case 

study. This set of calculations provides a measure of how long it takes an alternative to 

generate enough net savings to break even vis-à-vis the Base Case. 

36
Figure 3-22 Summary of Annual and Cumulative Net Savings by Alternative Page 

of the Results Report for the Data Center Case Study 

3.4 Online Help 

The Cost-Effectiveness Tool contains two on-line help features: (1) a Software Tips 

screen that highlights important software attributes and (2) an on-line version of this 

Users Manual. Open the Help window by clicking CET Help from the Help menu or by 

pressing the F1 function key. 

Figure 3-23 shows the basic Help tree and the Software Tips screen. The Help tree 

appears on the left-hand side of the figure. It contains three nodes—Welcome, Software 

Tips and Users Manual. Only the Users Manual node contains lower-level nodes. These 

lower-level nodes correspond to the section and subsection headings of this report. The 

right-hand side of Figure 3-23 lists six important software tips. The Software Tips screen 

is designed as a handy reference for first-time users. It highlights material contained in 

37
this report as well as several basic concepts for navigating within the software and for 

saving results. 

Figure 3-23 Cost-Effectiveness Tool Help Window, Help Tree, and Software Tips 

Clicking the lower-level Software Glossary node opens a glossary of terms. The glossary 

of terms corresponds to Appendix B of this report. The terms are arranged in 

alphabetical order. The glossary contains over 80 terms. Each term is listed in bold 

followed by its definition. Associated with most terms are a Notes section and an 

Example section. The Notes section lists the output windows, input windows, and reports 

which contain that term. The Notes section also includes a link to key sections and 

subsections of this report, where additional information on the term of interest is given. 

Whenever appropriate, an example is given. The purpose of the Example section is to 

link the term to the data center case study contained in the case study.lcc file. 

38
4 Treatment of Uncertainty and Risk

Decision makers typically experience uncertainty about the correct values to use in 

establishing basic assumptions and in estimating future costs. Investments in long-lived 

projects, such as the erection of new constructed facilities or additions and alterations to 

existing constructed facilities, are characterized by uncertainties regarding project life, 

operation and maintenance costs, revenues, and other factors that affect project 

economics. Since future values of these variable factors are generally unknown, it is 

difficult to make reliable economic evaluations. 

The traditional approach to uncertainty in project investment analysis is to apply 

economic methods of project evaluation to best-guess estimates of project input variables, 

as if they were certain estimates, and then to present results in a single-value, 

deterministic fashion. When projects are evaluated without regard to uncertainty of 

inputs to the analysis, decision makers may have insufficient information to measure and 

evaluate the financial risk of investing in a project having a different outcome from what 

is expected. ASTM Standard Guide E 1369 surveys six widely used techniques for 

treating uncertainty and financial risk in the economic evaluation of constructed 

facilities.10 A subset of these techniques is implemented within CET 2.0. 

CET 2.0 addresses uncertainty and financial risk in a structured, three-part manner. First, 

best-guess estimates are used to establish a baseline analysis. The baseline analysis uses 

fixed parameter values to calculate economic measures of performance. The results of 

the baseline analysis allow the alternative combinations of risk mitigation strategies to be 

ranked according to their economic measures of performance. The ranking of the 

alternatives and the calculated measures of performance provide a frame of reference for 

the treatment of uncertainty and financial risk. Second, a sensitivity analysis is 

performed in which selected inputs are varied about their baseline values. The sensitivity 

analysis is especially helpful in identifying shifts in the rank ordering of alternatives. The 

sensitivity analysis, although it addresses uncertainty in input values, produces only a 

crude measure of financial risk. Third, a Monte Carlo simulation is performed to obtain 

an explicit measure of financial risk associated with the competing alternatives. Monte 

Carlo simulation is especially useful in identifying shifts in the rank ordering of 

alternatives and documenting the factors and circumstances associated with those shifts. 

This section extends the guided tour by laying out a systematic approach to the treatment 

of uncertainty and risk. 

4.1 Perform Sensitivity Analysis 

Recall that in the baseline analysis all data elements entering into the calculations are 

fixed. The baseline analysis includes both input costs and event-related costs. Thus, the 

baseline analysis is a complete analysis in all respects but one; it does not address the 

effects of uncertainty. For example, although the baseline analysis includes event-related 

 

10 ASTM International. “Standard Guide for Selecting Techniques for Treating Uncertainty and Risk in the 

Economic Evaluation of Buildings and Building Systems,” E 1369, Annual Book of ASTM Standards:

2005. Vol. 04.11. West Conshohocken, PA: ASTM International. 

39
information, the probabilities and costs of any event-related outcomes are fixed. Whereas 

these probabilities and costs are estimated based on the best available data, there is 

uncertainty associated with them. 

Sensitivity analysis, as implemented in Version 2.0, addresses uncertainty by letting you 

evaluate how changes in: (1) a single variable impact the calculated values of life-cycle 

costs and (2) multiple variables impact the calculated values of life-cycle costs. 

Depending on the variable (variables) selected, it (they) may impact a single alternative 

or it (they) may impact all alternatives. 

The Sensitivity Analysis window is entered by clicking the Sensitivity option under the 

Uncertainty node. The window, as configured in Version 2.0, has three tabs: (1) Change 

in a Single Factor; (2) Most Significant Factors; and (3) Change in Multiple Factors. 

4.1.1 Change in a Single Factor Tab 

The left-hand side of the Change in a Single Factor tab lists the hierarchy of factors 

available for evaluation. Each factor is associated with a node in the hierarchy. Upon 

entering the tab, the Project and Alternatives nodes appear at the left. All alternatives 

evaluated in the baseline analysis are listed immediately below the Alternatives node. 

The squares immediately to the left of each node in the hierarchy are marked with a + 

(plus sign) or a – (minus sign). A plus sign means that additional nodes and/or factors 

reside beneath that node. A minus sign means that a node has been opened. Since each 

project has alternatives associated with it, upon entering the Change in a Single Factor 

tab, you will note that the Alternatives node has a minus sign in its square on the left. 

Nodes can be opened or closed. For example clicking the square by the Project node 

opens the node and the single factor Discount Rate (7.00 %) appears beneath it. Note that 

there is no square to the left of Discount Rate. This means that Discount Rate is a factor 

which can be selected for evaluation. Note that the factor line in the hierarchy includes 

both the factor name (Discount Rate) and its value (7.00 %). Highlighting the factor 

Discount Rate (7.00 %) selects that factor. The right-hand side of the screen includes the 

Results group box, a drop down menu for percent changes about the baseline value of the 

selected factor, and a Compute button. Clicking on the Compute button causes three sets 

of life-cycle cost values to be computed. Figure 4-1 shows the results of a 10 % 

deviation about the baseline value of the discount rate. Note that the name of the factor 

appears at the upper left-hand corner of the Results group box. Since the discount rate is 

the same for each alternative, results for both the Base Case and Alternative 1 are 

reported. Note that the Minimum, Baseline, and Maximum values for the factor, 

Discount Rate, are displayed. Reference to Figure 4-1 shows that the discount rate has a 

fairly strong impact on the computed value of life-cycle costs for both the Base Case and 

Alternative 1. While the range of values was fairly wide, in each case Alternative 1 

emerged as the cost-effective risk mitigation plan. 

40
Figure 4-1 Sensitivity Analysis Window: Using the Change in a Single Factor 

Tab to Evaluate the Impact of the Discount Rate on Life-Cycle Costs 

Figure 4-2 uses the Base Case to illustrate how to open up the hierarchy within a given 

alternative. The nodes immediately beneath the BC: Basic Renovation node are labeled 

Costs and Events. Additional nodes are listed beneath the Costs and Events nodes. 

Opening the Costs node, we see that 10 nodes are listed beneath it. These nodes 

correspond to the cost items entered via the Capital Investment, O&M, and Other Cost 

Information windows. Note that each of the 10 nodes indicates the budget category it 

falls under. One of the 10 nodes has been opened—O&M: Site Security—to reveal its 

factors. The factor selected for analysis is the Unit Cost of Site Security. Under the 

Range drop down menu, we have selected a 10 % deviation about the baseline value of 

the annually recurring Unit Cost of $125 000. Clicking the Compute button causes three 

sets of values to be computed. Because this factor only affects the Base Case, only 

values for the Base Case are displayed. Reference to the Results group box reveals that 

this factor has a strong impact on life-cycle costs. 

Event-related costs are evaluated by opening the Events node for the alternative of 

interest. The nodes listed beneath the Events node are the individual events defined and 

used in the case study: CBRE Attack, Cyber Attack (Years 1-10), and Cyber Attack 

(Years 11-25). Beneath each event node are the outcomes. If an outcome had costs 

associated with it, then the event/outcome cost items are listed as nodes beneath it. The 

factors—unit cost and escalation rate—appear beneath each event/outcome cost item.

41
Figure 4-2 Sensitivity Analysis Window: Using the Change in a Single Factor Tab 

to Evaluate the Impact of the Unit Cost of Site Security on Life-Cycle 

Costs for the Base Case 

The bottom right-hand portion of the window contains the Save Results for Reports 

group box. As its name suggests, the Save Results buttons may be used to save up to 

three sets of computed results. For example, both the discount rate and the annually 

recurring costs for site security have a strong impact on life-cycle costs. Thus, saving 

these results might be useful in supporting a recommendation for Alternative 1 as the 

most cost-effective risk mitigation plan. Any results that you choose to save will appear 

in the Uncertainty Report. 

4.1.2 Most Significant Factors Tab 

The Most Significant Factors tab allows you to identify those factors which have the 

greatest impact on life-cycle costs. Clicking the Compute button causes the discount rate, 

each unit cost, and each escalation rate to be varied by +10 % and –10 %, while holding

all other input variables at their baseline values. A table is then generated listing each 

factor and the associated change in life-cycle cost. The factor having the greatest impact 

on life-cycle cost is listed first. All other factors are listed in descending order of their 

impact on life-cycle cost. Figure 4-3 illustrates the output from the Most Significant 

Factors tab. It is important to note that a 10 % decrease in a factor may result in an 

increase in life-cycle costs and a 10 % increase in a factor may result in a decrease in 

life-cycle costs. 

42
Figure 4-3 Sensitivity Analysis Window: Using the Most Significant Factors Tab 

to Evaluate the Impact of +/-10 % Changes of Each Factor on LifeCycle Costs for the Case Study 

4.1.3 Change in Multiple Factors Tab 

The Change in Multiple Factors tab allows you to evaluate how combinations of factors 

impact the calculated values of life-cycle costs. The Change in Multiple Factors tab is 

designed to be used in conjunction with the Most Significant Factors tab. Use the Most 

Significant Factors tab to identify candidates for inclusion in the Change in Multiple 

Factors portion of the sensitivity analysis. For example, you might want to focus on 

those factors that have the greatest impact on life-cycle costs. The Change in Multiple 

Factors tab is designed to set ranges on how the combinations of factors affect life-cycle 

costs by using a “best case” and “worst case” setting for each factor selected. The best 

case and worst case settings are drawn from the minus signs (best case) and plus signs 

(worst case) that appear in the Most Significant Factors tab. Recall that values appearing 

on the Most Significant Factors tab are based on a 10 % deviation about the baseline 

value. The Change in Multiple Factors tab allows users to specify a range of deviations 

about the baseline value for the factor of interest. Thus, although a 10 % deviation is 

permissible, other values for the deviation are also permissible. 

The left-hand side of the Change in Multiple Factors tab lists the hierarchy of factors that 

can be included in this portion of the sensitivity analysis. Each factor is associated with a 

node in the hierarchy. Upon entering the tab, the Project and Alternatives nodes appear 

at the left. All alternatives evaluated in the baseline analysis are listed immediately 

43
below the Alternatives node. The squares immediately to the left of each node in the 

hierarchy are marked with a + (plus sign) or a – (minus sign). A plus sign means that 

additional nodes and/or factors reside beneath that node. A minus sign means that a node 

has been opened. Since each project has alternatives associated with it, upon entering the 

Change in Multiple Factors tab, you will note that the Alternatives node has a minus sign 

in its square on the left. Nodes can be opened or closed. 

Figure 4-4 illustrates how to open up the hierarchy and select factors for analysis. The 

discount rate node has been opened and a range of +/- 25 % about the baseline value has 

been selected. The Discount Rate will be included in the analysis, since the Include 

Factor box has been checked. The nodes immediately beneath the BC: Basic Renovation 

node are labeled Costs and Events have also been opened. These nodes correspond to the 

cost items entered via the Capital Investment, O&M, and Other Cost Information 

windows. Note that each of the 10 nodes indicates the budget category it falls under. 

One of the 10 nodes has been opened—O&M: Site Security—to reveal factors. The 

factor to be selected for inclusion in the analysis is the Unit Cost of Site Security. Three 

other factors were also selected for inclusion in the analysis: (1) the Unit Cost of the 

Basic Renovation; (2) the Unit Cost of the Enhanced Renovation; and (3) the Unit Cost 

of Site Security for Alternative 1. 

Figure 4-4 Sensitivity Analysis Window: Using the Change in Multiple Factors 

Tab to Evaluate the Impact of Combinations of Factors on Life-Cycle 

Costs for the Case Study 

44
Because the Change in Multiple Factors tab allows combinations of factors to be

analyzed, an Included Multiple Factors window was developed. Figure 4-5 lists the five 

factors included in the analysis and their range of values, expressed as a +/- % deviation 

from the baseline value. 

Figure 4-5 Sensitivity Analysis Window: Tree Structure Showing Combinations 

of Factors Included in the Sensitivity Analysis 

Returning to Figure 4-4, we see that clicking the Compute button causes three sets of 

values to be computed. The calculated values for life-cycle costs correspond to each 

factor being set at its best-case value, baseline value, and worst-case value. Reference to 

45
Figure 4-4 shows that this combination of factors has a strong impact on the computed 

values of life-cycle costs for both the Base Case and Alternative 1. While the range of 

values was fairly wide, in each case Alternative 1 emerged as the cost-effective risk 

mitigation plan. 

The bottom right-hand portion of the window contains the Save Results for Reports 

group box. As its name suggests, the Save Results buttons may be used to save up to 

three sets of computed results. Any results that you choose to save will appear in the 

Uncertainty Report. 

4.2 Perform Monte Carlo Simulation 

Monte Carlo simulation, as implemented in Version 2.0, allows you to evaluate how 

changes in a single variable or a combination of variables impact the calculated values of 

life-cycle cost. The Monte Carlo simulation feature is designed to address two analysis 

needs. First, it provides an explicit measure of financial risk—the probability of 

investing in a project whose economic outcome is different from what is desired or 

expected. Second, it is useful in identifying shifts in the rank ordering of alternatives and 

documenting the factors and circumstances associated with these shifts. The Monte 

Carlo Simulation window is entered by clicking the Monte Carlo option under the 

Uncertainty node. 

Specification of the experimental design involves defining which variables are to be 

simulated and the number of simulations. Within Version 2.0, the number of simulations 

is set at 1 000 to ensure that values in the tails of the distribution for each variable of 

interest would be selected for inclusion in the analysis. 

In reality, the exact nature of the parent probability distribution for each variable is 

unknown. Estimates of the parameters (e.g., mean and variance) of the parent probability 

distribution can be made and uncertainty can be reduced by investigation and research. 

However, uncertainty can never be eliminated completely. Therefore, in order to 

implement the procedure without undue attention to the characterization of the parent 

probability distribution, it was decided to focus on only two probability distributions: (1) 

the triangular and (2) the uniform. One reason for using these probability distributions is 

that they are both defined over a finite interval. They are also used frequently in cost-risk 

analyses.11 Furthermore, the specification of each probability distribution is 

accomplished with as few as two data points. The triangular distribution is widely used 

in simulation modeling; its specification requires three data points, the minimum value, 

the most likely value, and the maximum value. The triangular distribution is used 

whenever the range of input values is continuous and a clustering about some central 

value is expected. The uniform distribution is also widely used in simulation modeling; 

its specification requires only two data points, the minimum value and the maximum 

value. In addition, all values between the minimum and maximum are equally likely. 

 

11 ASTM International. “Standard Practice for Measuring Cost Risk of Buildings and Building Systems.” E 

1946. Annual Book of ASTM Standards: 2005. Vol. 04.12. West Conshohocken, PA: ASTM International. 

46
The uniform distribution is used whenever the range of input values is continuous but no 

a priori reason can be given for expecting clustering about some central value. 

The Monte Carlo Simulation window is designed to be used in conjunction with the Most 

Significant Factors tab and the Change in Multiple Factors tab. Use the Most Significant 

Factors tab to identify candidates for inclusion in the Change in Multiple Factors portion 

of the sensitivity analysis. Use the Change in Multiple Factors tab to establish likely 

values for the range of life-cycle cost for a combination of input variables. Once you 

have established the range (e.g., “best case” and “worst case” values for the 

combination), the Monte Carlo Simulation window allows you to “fill in” the 

intermediate values and identify any cases where rank reversals occur. 

The left-hand side of the Monte Carlo Simulation window lists the hierarchy of factors 

that can be included in this portion of the sensitivity analysis. Each factor is associated

with a node in the hierarchy. Upon entering the Monte Carlo Simulation window, the 

Project and Alternatives nodes appear at the left. All alternatives evaluated in the 

baseline analysis are listed immediately below the Alternatives node. The squares 

immediately to the left of each node in the hierarchy are marked with a “+” (plus sign) or 

a “–“ (minus sign). A plus sign means that additional nodes and/or factors reside beneath 

that node. A minus sign means that a node has been opened. Since each project has 

alternatives associated with it, upon entering the Monte Carlo Simulation window, you 

will note that the Alternatives node has a minus sign in its square on the left. Nodes can 

be opened or closed. 

Because baseline values have already been entered for each factor, the specification of 

the uniform distribution only requires one data point, while the specification of the 

triangular distribution requires two data points. Specification of the uniform distribution 

only requires one data point because it is symmetric about the baseline value. Thus, if a 

lower bound of 4 % is entered (i.e., the baseline value minus 3 %), the upper bound is 

calculated automatically as 10 % (i.e., the baseline value plus 3 %). The triangular 

distribution requires two data points—the lower bound and the upper bound—because 

the baseline value is used as the most likely value. Note that CET 2.0 imposes two 

constraints in specifying the triangular distribution (1) the lower bound must be less than 

the baseline value and (2) the upper bound must be greater than the baseline value. 

Figure 4-6 illustrates how to open up the hierarchy and select factors for analysis. The 

discount rate node has been opened and a probability distribution and a range of values 

about the baseline value have been selected. In this case the uniform distribution has 

been selected and a minimum value of 4.00 % has been entered. The maximum value of 

10.00 % is calculated automatically based on the symmetric nature of the uniform

distribution. The Discount Rate will be included in the analysis, since the Include Factor

box has been checked. 

Four other factors are included in the Monte Carlo simulation. Two are specific to the 

Base Case (1) the Unit Cost of the Basic Renovation and (2) the Unit Cost of Site 

Security; and two are specific to Alternative 1 (1) the Unit Cost of the Enhanced 

47
Renovation and (2) the Unit Cost of Site Security. Variations in the values of all four 

factors are modeled using a triangular distribution. In each case, the distribution is 

positively skewed, indicating that the upper tail is longer (i.e., a greater proportion of 

high costs) than the lower tail (i.e., low costs). This formulation is common in 

construction and O&M cost estimating, reflecting the potential that cost can increase 

rapidly. For example, the baseline value for the Unit Cost of Site Security for the Base 

Case is $125 000 per year. In the Monte Carlo simulation, we have set the lower bound 

at $110 000 (i.e., the baseline value minus $10 000) and the upper bound at $145 000 

(i.e., the baseline value plus $20 000). 

Figure 4-6 Monte Carlo Simulation Window: Using the Monte Carlo Simulation

Window to Evaluate the Impact of Combinations of Factors on LifeCycle Costs for the Case Study 

Because the Monte Carlo Simulation window allows combinations of factors to be 

analyzed, an Included Monte Carlo Factors window was developed. Figure 4-7 lists the 

five factors included in the analysis. For each factor, the window records the associated 

probability distribution.

48
Figure 4-7 Monte Carlo Simulation Window: Tree Structure Showing 

Combinations of Factors Included in the Monte Carlo Simulation

Returning to Figure 4-6, we see that clicking the Compute button causes three sets of 

values to be computed. The calculated values for life-cycle costs correspond to 

Minimum, Average, and Maximum values of life-cycle costs observed in the Monte 

Carlo simulation. Reference to Figure 4-6 shows that this combination of factors has a 

strong impact on the computed values of life-cycle costs for both the Base Case and 

Alternative 1. While the range of values was fairly wide, in each case Alternative 1 

emerged as the cost-effective risk mitigation plan. 

49
The bottom right-hand portion of the window contains the Save Results to Uncertainty 

Report and Raw Data to External Files group box. As its name suggests, the Save Results

buttons may be used to save up to three sets of computed results. Any results that you 

choose to save will appear in the Uncertainty Report. The bottom right-hand portion of 

the window also contains an option to Save Raw Data to an external file. This option 

allows you to save up to three sets of raw data. If this option is selected, a file for each 

alternative analyzed (e.g., Base Case and Alternative 1) is saved in the Simulation Data 

directory under the CET 2.0 directory. Each file is saved in a spreadsheet format. Each 

file has a csv extension. These files are designed so that users can calculate a wide 

variety of summary statistics and sort and plot the cumulative distribution function of 

life-cycle cost for each alternative analyzed. 

Should you choose to access the files created via the Save Raw Data to an external file 

option, we recommend that you first create an Excel file to retrieve the saved raw data. 

We recommend that you have at least four worksheets in addition to a worksheet for each 

alternative analyzed. The additional worksheets are useful in setting up the calculations, 

summary statistics, and charts for each measure of economic performance (i.e., LCC, 

PVNS, SIR, and AIRR). All of the information needed to calculate each measure of 

economic performance is contained in the raw data files. For example, if you wish to 

create a cumulative distribution function for life-cycle costs, you will need to paste the 

life-cycle cost values for each alternative into a worksheet, sort each set of values, and set 

up a placeholder for cumulative probability (i.e., 0.001, 0.002, ..., 0.999, 1.000). 

Graphing features of Excel can then be used to create a multi-trace plot of the 

alternatives’ life-cycle costs. If other measures of economic performance are desired, use 

the formulas given in Appendix A to calculate the measure. For example, if summary 

statistics and charts for the present value of net savings are desired, start with the sorted 

life-cycle values and subtract from the Base Case value the value for each Alternative 

(see Equation A.11). Once you have completed the initial set of calculations, you can 

either generate summary statistics directly or sort the PVNS values from smallest to 

largest and set up a place holder for cumulative probability in order to plot them. 

4.3 Use and Interpretation of the Uncertainty Report 

Clicking on the Uncertainty option under the Reports node opens the Uncertainty Report. 

The Uncertainty Report consists of these five sections: (1) a Cover Sheet; (2) any 

sensitivity analyses saved under the Change in a Single Factor tab; (3) if computed, the 

rank-ordered factors and their associated values from the Most Significant Factors tab;

(4) any sensitivity analyses saved under the Change in Multiple Factors tab; and (5) any 

Monte Carlo simulations saved. 

Figure 4-8 presents a saved sensitivity analysis from the Change in a Single Factor tab for 

a plus or minus 10 % change in the discount rate. Figure 4-8 largely reproduces the 

Results section from the Change in a Single Factor tab (see Figure 4-1). Figure 4-8 

records the factor name in the upper left-hand corner along with the range for which lifecycle costs are calculated (i.e., the Minimum, Baseline, and Maximum values of that 

factor). Note that more than one range can be used and saved for a single factor. For 

50
example, if you wanted to see how lowering the discount rate to 5.25 % or raising it to 

8.75 % would affect the calculated values for life-cycle costs, you would use the +/-25 % 

change from the drop down Range box in the Change in a Single Factor tab to Compute

the values and Save Results for the Uncertainty Report. 

Figure 4-8 Saved Sensitivity Analysis Page of the Uncertainty Report for a ± 

10 % Change in the Discount Rate 

Figure 4-9 presents the first page of the rank-ordered factors and their associated values 

from the Most Significant Factors tab. Note that reductions in the discount rate for both 

the Base Case and Alt. 1 result in increases in life-cycle costs. The rank ordering of the 

factors provides a convenient means for identifying those factors which merit closer 

examination via either the Change in a Single Factor tab or the Change in Multiple 

Factors tab. Although all factors are varied by plus or minus 10 % in the Most 

Significant Factors tab, you can use the Change in a Single Factor tab or the Change in 

Multiple Factors tab to measure how changes greater than 10 % affect the computed 

values of life-cycle costs. 

51
Figure 4-9 Most Significant Factors Page of the Uncertainty Report for the Case

Study 

Figure 4-10 presents a saved sensitivity analysis from the Change in Multiple Factors tab 

for simultaneous changes in the baseline value of five factors. The upper portion of 

Figure 4-10 largely reproduces the Results section from the Change in Multiple Factors 

tab (see Figure 4-4). The lower portion of Figure 4-10 records the factor names along 

with the range for which life-cycle costs are calculated and the corresponding Best Case, 

Baseline, and Worst Case values of that factor. When all factors are set at their Best Case 

or Worst Case values, they result in the life-cycle cost values recorded in the upper 

portion of Figure 4-10. 

52
Figure 4-10 Summary of Life-Cycle Costs and Factor Values of a Saved Change in 

Multiple Factors Page of the Uncertainty Report for the Case Study 

Figure 4-11 presents a saved Monte Carlo simulation. The upper portion of Figure 4-11 

largely reproduces the Results section from the Monte Carlo Simulation window (see 

Figure 4-6). The lower portion of Figure 4-11 records the five factor names along with 

the probability distribution and the corresponding Minimum, Baseline, and Maximum 

values of that factor. 

53
Figure 4-11 Summary of Life-Cycle Costs, Probability Distributions, and Factor 

Values of a Saved Monte Carlo Simulation Page of the Uncertainty 

Report for the Case Study 

The Save Raw Data to an external file option provides an opportunity to produce 

customized charts and tables that complement the Monte Carlo simulation material 

presented in the Uncertainty Report. Figures 4-12 and 4-13 and Table 4-1 are based on 

the raw data; they record the graphical and tabular results when all five factors are varied 

in combination. The two figures were constructed by first sorting the values of each 

economic measure from smallest to largest. The resultant cumulative distribution was 

then plotted. In each figure, the vertical axis records the probability that the economic 

measure is less than or equal to a specified value. The values recorded on the horizontal 

axis cover the range of values encountered during the Monte Carlo simulation. 

54
0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

3,000 3,500 4,000 4,500 5,000 5,500 6,000 6,500

Life-Cycle Costs in Thousands of Dollars

Cumulative Probability

Base Case

Alternative

Figure 4-12 Life-Cycle Costs for the Base Case and the Proposed Alternative in 

Thousands of Dollars Due to Changes in Five Factors 

Figure 4-12 shows how the life-cycle costs of the Base Case compare to those of the 

Proposed Alternative when all five factors are varied in combination. In Figure 4-12, 

life-cycle costs are expressed in thousands of dollars. In analyzing Figure 4-12, it is 

useful to keep in mind that the values of life-cycle costs for the Base Case and the 

Proposed Alternative from the baseline analysis were $4 643K and $4 359K, 

respectively. Comparisons between Figure 4-12 and Figure 4-11 are also helpful in 

interpreting the results of the Monte Carlo simulation. First, notice that the life-cycle cost 

trace of the Proposed Alternative in Figure 4-12 always remains to the left of the lifecycle cost trace for the Base Case. Thus, for any given probability (e.g., 0.50, as 

measured by the 50th percentile recorded in Figure 4-11), the life-cycle cost of the 

Proposed Alternative ($4 450K) is less than the life-cycle cost of the Base Case 

($4 687K). Similarly, for any given life-cycle cost (e.g., $4 500K), the probability of 

being less than or equal to that cost is higher for the Proposed Alternative (0.55) than for 

the Base Case (0.42). Second, the horizontal distance between the Proposed Alternative 

and the Base Case gets larger as the cumulative probability moves from 0.00 to 1.00. 

This translates into a wider range of life-cycle costs for the Base Case (i.e., maximum 

minus minimum); it is reflected in the higher standard deviation for the Base Case 

recorded in the last column of the statistical measure section of Figure 4-11. Figure 4-12 

clearly demonstrates that the Proposed Alternative is the most cost-effective risk 

55
mitigation plan. However, it is instructive to examine how the use of other economic 

measures sheds light on other aspects of its cost-effectiveness. 

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

0 100 200 300 400 500 600 700

Present Value Net Savings in Thousands of Dollars

Cumulative Pro

bability

Figure 4-13 Present Value Net Savings in Thousands of Dollars for the Proposed 

Alternative Due to Changes in Five Factors 

Figure 4-13 shows how present value net savings (PVNS) due to the Proposed 

Alternative varies when all five factors are varied in combination. In analyzing Figure 4-

13, it is useful to keep in mind that the value of PVNS resulting from the baseline 

analysis was $284K. Turning now to Figure 4-13, we see that a value of PVNS equal to 

$200K occurs at 0.45 on the cumulative distribution function. Stated another way, there 

is a probability of 0.55 that PVNS will exceed $200K. Reference to Figure 4-13 reveals 

that for approximately 25 % of the observations resulting from the Monte Carlo 

simulation PVNS exceeds $400K. 

Table 4-1 summarizes the results of the Monte Carlo simulation for the Proposed 

Alternative. Four economic measures are reported. The values of life-cycle costs (LCC) 

and present value net savings (PVNS) are reported in thousands of dollars. This 

facilitates comparisons between the values in the table and the information plotted in 

Tables 4-12 and 4-13. A PVNS greater than zero indicates a cost-effective risk 

mitigation plan. The savings-to-investment ratio (SIR) is a dimensionless number. An 

SIR greater than 1.0 indicates a cost-effective risk mitigation plan. The adjusted internal 

56
rate of return (AIRR) is expressed as an annual percentage rate. An AIRR greater than 

the baseline value for the discount rate of 7 % indicates a cost-effective risk mitigation 

plan. Reference to Table 4-1 reveals that the minimum values for PVNS, SIR, and AIRR 

indicate marginal performance of the Proposed Alternative vis-à-vis the Base Case. An 

examination of the raw data, however, reveals that marginal performance is associated 

with a single observation. Values in the inter-quartile range (i.e., the middle 50 % of the 

observations) all indicate that the Proposed Alternative is the most cost-effective risk 

mitigation plan. 

Table 4-1 Summary Statistics for the Proposed Alternative Due to Changes in 

Five Factors 

Statistical Measure

Economic 

Measure

Minimum 25% 50% 75% Maximum Mean

Standard 

Deviation 

 LCC 3549 4136 4450 4833 5600 4492 447

 PVNS -5 109 240 398 587 264 160

 SIR 0.991 1.171 1.360 1.598 2.774 1.414 0.278

 AIRR 0.060 0.077 0.084 0.093 0.107 0.085 0.010

57
58
5 Analyze Results and Recommend a Cost-Effective Risk Mitigation 

Plan 

Choosing among alternatives designed to reduce the impacts of natural and man-made 

hazards is more complicated than most building investment decisions. Consequently, 

guidance is provided to help identify key characteristics and the level of effort that will 

promote a better-informed decision. 

5.1 Employ a Structured Process to Generate a Recommendation 

Review the calculated values of each alternative’s measures of performance. Include the 

outcomes computed for each of the three types of analysis: (1) fixed parameter values; (2) 

sensitivity analyses; and (3) Monte Carlo simulations. 

Use the performance criterion from each selected evaluation method to rank order 

alternatives for each type of analysis (fixed parameter values, sensitivity analyses, and 

Monte Carlo simulations). Document differences in alternative rankings among the three 

types of analysis. Focus on circumstances under which the most cost-effective risk 

mitigation plan identified in the fixed parameter values analysis is replaced by another

alternative (other alternatives) when the effects of uncertainty are considered. Use the 

results of the Monte Carlo simulations to identify the characteristics associated with 

ranking changes for those alternatives under consideration. 

Recommend an alternative as the most cost-effective risk mitigation plan. Provide a 

rationale for the recommendation. Include as part of the rationale, findings from each of 

the three types of analysis. Include a discussion of circumstances under which the 

recommended alternative did not have the best measure of economic performance. 

Describe any significant effects that remain unquantified. Explain how these effects 

impact the recommended alternative. Refer to ASTM Standard Practice E 1765 and its 

adjunct for guidance on how to present unquantified effects along with the computed 

values of the measures of economic performance.12

5.2 Prepare Report with Documentation Supporting Recommended Risk 

Mitigation Plan 

In a report of an economic evaluation, state the objective, the constraints, the alternatives 

considered, the key assumptions and data, and the computed value for each outcome

(measure of economic performance) of each alternative. Make explicit the discount rate; 

the study period; the main categories of cost data, including initial costs, recurring and 

nonrecurring costs, and resale values; and grants and incentives if integral to the decisionmaking process. State the method of treating inflation. Specify the assumptions or costs 

that have a high degree of uncertainty and are likely to have a significant impact on the 

 

12 ASTM International. “Standard Practice for Applying the Analytical Hierarchy Process (AHP) to 

Multiattribute Decision Analysis of Investments Related to Buildings and Building Systems,” E 1765, 

Annual Book of ASTM Standards: 2005. Vol. 04.12. West Conshohocken, PA: ASTM International. 

59
results of the evaluation. Document the sensitivity of the results to these assumptions or 

data. Describe any significant effects that remain unquantified in the report. 

Use the generic format for reporting the results of an economic evaluation described in 

ASTM Standard Guide E 2204.13 It provides technical persons, analysts, and researchers 

a tool for communicating results in a condensed format to management and non-technical 

persons. The generic format calls for a description of the significance of the project, the 

analysis strategy, a listing of data and assumptions, and a presentation of the computed 

values of any measures of economic performance. Figure 5-1 uses ASTM Standard 

Guide E 2204 to produce a concise and comprehensive summary of the alternative risk 

mitigation strategies for the data center case study. 

To complete the report, include as supporting documentation information compiled from

the risk assessment and a description of the process by which combinations of risk 

mitigation strategies were assembled. 

 

13 ASTM International. “Standard Guide for Summarizing the Economic Impacts of Building-Related 

Projects,” E 2204, Annual Book of ASTM Standards: 2005. Vol. 04.12. West Conshohocken, PA: ASTM 

International. 

60
Figure 5-1 Summary of the Data Center Case Study 

1.a Significance of the Project:

The data center undergoing renovation is a single-story

structure located in a suburban community. The floor area of the 

data center is 3 716 m2 (40 000 ft2

). The replacement value of the 

data center is $20 million for the structure plus its contents. The 

data center contains financial records that are in constant use by

the firm and its customers. Thus, any interruption of service will 

result in both lost revenues to the firm and potential financial 

hardship for the firm’s customers. 

The building owners employ two different renovation 

strategies. The first, referred to as the Base Case, employs 

upgrades that meet the minimum building performance and

security requirements. The second, referred to as the Proposed 

Alternative, results in enhanced security as well as selected

improvements in building performance. Both alternatives 

recognize that in the post-9/11 environment the data center faces 

heightened risks in two areas. These risks are associated with the

vulnerability of information technology resources and the potential 

for damage to the facility and its contents from chemical, 

biological, radiological, and explosive (CBRE) hazards. Two

scenarios—the potential for a cyber attack and the potential for a 

CBRE attack—are used to capture these risks. 

1.b Key Points:

1. The objective of the renovation project is 

to provide cost-effective operations and 

security protection for the data center. 

2. The renovation is to upgrade the data 

center’s HVAC, telecommunications and 

data processing systems and several 

security-related functions. 

3. Two upgrade alternatives are proposed:

 - Base Case (Basic Renovation) and 

 - Proposed Alternative (Enhanced 

Renovation), which augments the Base

Case by strengthening portions of the 

exterior envelope, limiting vehicle 

access to the data center site, 

significantly improving the building’s

HVAC, data processing and 

telecommunications systems, and 

providing better linkage of security 

personnel to the telecommunications 

network. 

2. Analysis Strategy: How Key Measures are Estimated 

The following economic measures are calculated as present-value (PV) amounts:

(1) Life-Cycle Costs (LCC) for the Base Case (Basic Renovation) and for the Proposed Alternative (Enhanced

Renovation), including all costs of acquiring and operating the data center over the length of the study period. 

The selection criterion is lowest LCC. 

(2) Present Value Net Savings (PVNS) that will result from selecting the lowest-LCC alternative. PVNS > 0 

indicates an economically worthwhile project. 

Additional measures: 

(1) Savings-to-Investment Ratio (SIR), the ratio of savings from the lowest-LCC to the extra investment required 

to implement it. A ratio of SIR >1 indicates an economically worthwhile project. 

(2) Adjusted Internal Rate of Return (AIRR), the annual return on investment over the study period. An AIRR > 

discount or hurdle rate indicates an economically worthwhile project. 

Data and Assumptions: 

- The Base Date is 2006. 

- The alternative with the lower first cost (Basic Renovation) is designated the Base Case. 

- The study period is 25 years and ends in 2030. 

- The discount or hurdle rate is 7.0 % real. 

- The minimum acceptable rate of return is 7.0 % real. 

- Annual probabilities for the outcomes for each attack scenario are given along with outcome costs. 

- Annual probabilities and outcome costs differ by renovation strategy. 

61
Figure 5-1 Summary of the Data Center Case Study (Cont.) 

3.b Key Results: 

 LCC 

Base Case $4 643K

 Proposed Alt. $4 358K 

 PVNS from Alt. $285K 

 SIR 1.46 

 AIRR 8.6 %

3.a Calculation of Savings, Costs, and Additional Measures 

Savings and Costs in Thousands of Dollars ($K) 

 PV of Investment Costs Base Case Proposed Alt.

 Capital Investment $1 150K $1 765K 

 Increased Total PV Investment for Proposed Alt. $615K 

PV of Non-Investment Costs Base Case Proposed Alt.

 O&M Costs 3 000K 2 369K 

 Other Costs 493K 224K

 $3 493K $2 593K 

 PV of Non-Investment Savings for Proposed Alt. $900K

LCC Base Case Proposed Alt.

 PV of Investment Costs 1 150K 1 765K 

 PV of Non-Investment Costs 3 493K 2 593K

 $4 643K $4 358K 

PVNS from Proposed Alternative $285K 

Savings-to-Investment Ratio (SIR) 

PV of Non-Investment Savings $900K 

Divided by PV of Incr. Investment 615K

 SIR = 1.46 

Adjusted Internal Rate of Return (AIRR)

(1+0.07) 1.461/25 – 1 = 0.086 

 AIRR = 8.6 % 

which exceeds the minimum acceptable rate of return of 7.0 % 

3.c Traceability: 

Life-cycle costs and supplementary 

measures were calculated according to

ASTM standards E 917, E 964, E 1057, 

and E 1074. 

62
6 Next Steps 

Now that you have completed the guided tour, use the test files that you created to gain 

familiarity with the software. Experiment with the various means for editing, creating, 

and deleting data elements. Create simple applications using your own data to master the 

full capabilities of the Cost-Effectiveness Tool. Build more complex applications and 

use the sensitivity analysis and Monte Carlo simulation features to evaluate how 

changing the values of key inputs affect economic performance. Use the Results Report 

to learn how to drill down on key cost drivers and use that information to help guide you 

in conducting and saving additional sensitivity analyses and Monte Carlo simulations. 

Have as a goal to use the software as a decision support tool; it is largely self 

documenting, it lays out the information going into the analysis, and provides guidance in 

choosing a cost-effective risk mitigation plan. 

Visit the OAE website to learn about future updates and pending software releases. 

63
64
Appendix A Technical Considerations 

An economic evaluation may be divided into four stages: (1) identification; (2) 

classification; (3) quantification; and (4) presentation. The identification stage identifies 

the investment alternatives to be evaluated. The identification stage involves identifying 

and listing all of the “effects” of the alternatives being analyzed. In principle, this set of

effects produces a checklist of all items that should be taken into consideration. The 

second stage entails classifying these effects into investment and non-investment cost 

categories. The third stage produces year-by-year estimates of the values of each of the 

cost categories. The final stage is the presentation and analysis of the measures of 

economic performance in a form that clearly details the important assumptions 

underlying the economic evaluation and the implications of these assumptions for the 

study’s conclusions. 

Once all costs have been identified and classified, it becomes necessary to develop yearby-year estimates for each of the cost categories for each alternative under analysis. We 

denote the alternatives as Aj (where the index for j ranges from 0,..., N, for a total of N+1

alternatives).

Each alternative under consideration meets certain feasibility requirements. First, it must 

satisfy all of the specified functional requirements. Second, it must not exceed any stated 

budget constraints. The first requirement insures that all technical criteria (e.g., thermal 

performance and indoor air quality) and all regulatory constraints (e.g., building codes 

and standards) are met. The second requirement excludes any proposals which cannot be 

implemented due to insufficient funds. 

The material presented in this appendix assumes that all alternatives are feasible in that

they meet the functional requirements and have been screened vis-à-vis any stated budget 

constraints. Thus, there is no requirement that alternatives be optimally configured, 

although the evaluation methods presented in this chapter are all applicable to choosing 

among a set of optimally configured alternatives. 

Associated with each alternative are investment cost categories k (where the index k

ranges from 1,..., Kj) and non-investment cost categories m (where the index m ranges 

from 1,..., Mj). The potential for future terrorist attacks, as well as other natural and manmade hazards, are measured by the expected value of annual losses. Associated with 

each alternative are expected loss categories p (where the index p ranges from 1,..., Pj). 

Some of the expected loss categories accrue to investment costs and some accrue to noninvestment costs. Expected losses are modeled separately from investment costs and 

non-investment costs to better characterize the nature of low-probability, highconsequence events.14 

It is important to note that some costs entering the analysis may be negative. For 

example, the salvage and sale of equipment and components at the end of the study 

 

14 The information needed to perform the expected loss calculations is a byproduct of the risk assessment

and the identification of potential mitigation strategies. 

65
period result in a salvage value whose present value equivalent is subtracted from other 

investment costs. Similarly, improvements to indoor air quality may result in 

productivity improvements which favorably impact occupants; these “savings” are 

subtracted from non-investment costs. Any pure benefits which result (e.g., increased 

rental income due to improvements) are subtracted from non-investment costs (i.e., 

benefits are treated as negative costs). 

At the heart of the economic evaluation methodology is an economic concept referred to 

as the time value of money. This concept relates to the changing purchasing power of 

money as a result of inflation or deflation, along with consideration of the real earning 

potential of alternative investments over time. The discount rate reflects the decision 

maker’s time value of money. The discount rate is used to convert, via a process known 

as discounting, costs which occur at different times to a base time. Throughout this 

report, the term “present value” will be used to denote the value of a cost found by 

discounting cash flows (present and future) to the base time. The base time is the date 

(base year) to which costs are converted to time equivalent values. 

In order to describe each of the four standardized methods of economic performance—

life-cycle cost, present value of net savings, savings-to-investment ratio, and adjusted 

internal rate of return—we define a series of terms. 

t = a unit of time;15

T = the length of the study period in years; 

d = the discount rate expressed as a decimal. 

The prefix, PV, is used to designate dollar denominated quantities in present value terms. 

The present value is derived by discounting (i.e., using the discount rate) to adjust all 

costs—present and future—to the base year (i.e., t=0). The present value terms are: the 

present value of investment costs (PVI), the present value of non-investment costs (PVC), 

and the present value of expected losses (PVE(L)). Because PVE(L) includes some loss 

categories which accrue to investment costs and some which accrue to non-investment 

costs, we denote the present value of investment costs inclusive of losses as PVI' and the 

present value of non-investment costs inclusive of losses as PVC'. 

The cost terms that make up the mathematical formulations for the four standardized 

methods are given in Equations (A.1) through (A.6). While there may be many different 

ways of classifying costs (i.e., classification schemes), their explicit treatment in both the 

mathematical formulation and the standardized methods ensures that a close coupling 

results between the mathematical formulation and each standardized method. 

The investment costs for alternative Aj in year t are expressed as: 

 

15 Denote the beginning of the study period as the base year (i.e., t=0) and end of the study period as T. 

Thus, the length of the study period in years is T.

66
1

K j

jt kjt

k

I I

=

= ∑ (A.1)

where Ikjt = the estimated cost accruing to the k

th investment cost category for alternative 

Aj in year t. 

The non-investment costs for alternative Aj in year t are expressed as: 

1

M j

jt mjt

m

C C

=

= ∑ (A.2)

where Cmjt = the estimated cost accruing to the m

th non-investment cost category for 

alternative Aj in year t. 

The expected losses for alternative Aj in year t may now be expressed as: 

( ) (

1

Pj

jt pjt

p

E L E L

=

= ∑ )

+

+

+

(A.3)

where Lpjt = the expected loss accruing to the p

th loss category for alternative Aj in year t. 

The present value of investment costs for alternative Aj are expressed as: 

0 1

/(1 )

T K j

t

j kjt

t k

PVI I d

= =

⎛ ⎞ = ⎜ ⎟ ⎜ ⎟ ⎝ ⎠

∑ ∑ (A.4)

The present value of non-investment costs for alternative Aj are expressed as: 

0 1

/(1 )

T M j

t

j mjt

t m

PVC C d

= =

⎛ ⎞ = ⎜ ⎟ ⎜ ⎟ ⎝ ⎠ ∑ ∑ (A.5)

The present value of expected losses for alternative Aj are expressed as: 

( ) ( )

0 1

/(1 )

T Pj

t

j pjt

t p

PVE L E L d

= =

⎛ ⎞ = ⎜ ⎟ ⎜ ⎟ ⎝ ⎠

∑ ∑ (A.6)

A.1 Life-Cycle Cost Method Formulas 

The life-cycle cost (LCC) method measures, in present-value or annual-value terms, the 

sum of all relevant costs associated with owning and operating a constructed facility over 

a specified period of time. The basic premise of the LCC method is that to an investor or 

67
decision maker all costs arising from that investment decision are potentially important to 

that decision, including future as well as present costs. Applied to constructed facilities, 

the LCC method encompasses all relevant costs over a designated study period, including 

the costs of designing, purchasing/leasing, constructing/installing, operating, maintaining, 

repairing, replacing, and disposing of a particular design or system. Should any pure 

benefits result (e.g., increased rental income due to improvements), include them in the 

calculation of LCC. 

The LCC method is particularly suitable for determining whether the higher initial cost of 

a constructed facility or system specification is economically justified by lower future 

costs (e.g., losses due to natural or manmade hazards) when compared to an alternative 

with a lower initial cost but higher future costs. If a design or system specification has 

both a lower initial cost and lower future costs relative to an alternative, an LCC analysis 

is not needed to show that the former is economically preferable. 

The LCC for alternative Aj may now be expressed as: 

( )

0 1 1 1

/(1 )

T K M j j Pj

t

j kjt mjt pjt

t k m p

LCC I C E L d

= = = =

⎛ ⎞

= + ⎜ + ⎜

⎝ ⎠

∑ ∑ ∑ ∑ ⎟ + ⎟ (A.7)

The LCC for alternative Aj may also be expressed in present value terms as: 

LCCj = PVIj + PVCj + PVE (Lj) (A.8)

or, by explicitly including losses in investment costs and non-investment costs, as: 

LCCj = PVI'j

 + PVC'j (A.9)

Denote the alternative with the lowest initial investment cost (i.e., first cost) as A0; it is 

referred to as the base case. Then: 

00 j0 I < I for j = 1,..., N (A.10)

The LCC method compares alternative, mutually exclusive, designs or system

specifications that satisfy a given functional requirement on the basis of their life-cycle

costs to determine which is the least-cost means (i.e., minimizes life-cycle cost) of 

satisfying that requirement over a specified study period. With respect to the base case, 

alternative Aj is economically preferred if, and only if, LCCj < LCC0. 

A.2 Present Value of Net Savings Formula 

The present value of net savings (PVNS) method is reliable, straightforward, and widely 

applicable for finding the economically efficient choice among investment alternatives. 

68
It measures the net savings from investing in a given alternative instead of investing in 

the foregone opportunity (e.g., some other alternative or the base case). 

The PVNS for a given alternative, Aj, vis-à-vis the base case, A0, may be expressed as: 

PVNSj:0 = LCC0 - LCCj (A.11)

Any pure benefits that result (e.g., increased rental income due to improvements) are 

included in the calculation of PVNS, since they are included in the LCC calculation. 

With respect to the base case, if PVNS j:0 is positive, alternative Aj is economic; if it is 

zero, the investment is as good as the base case; if it is negative, the investment is 

uneconomical. 

A.3 Savings-to-Investment Ratio Formulas 

The savings-to-investment ratio (SIR) is a numerical ratio whose size indicates the 

economic performance of a given alternative instead of investing in the foregone 

opportunity. The SIR is savings divided by investment costs. The LCC method provides 

all of the necessary information to calculate the SIR. The SIR for a given alternative, Aj, 

is calculated vis-à-vis the base case. The numerator and denominator of the SIR are 

derived through reference to Equation (A.9). 

The numerator equals the difference in the present value of non-investment costs 

inclusive of losses between the base case and the given alternative, Aj. The resultant 

expression, denoted as present value of savings, is given by. 

PVSj:0 = PVC'0 - PVC'j (A.12)

The denominator equals the difference in the present value of investment costs inclusive 

of losses for the given alternative, Aj, and the base case.16 The resultant expression, 

denoted as present value of increased investment costs, is given by: 

PVIIj:0 = PVI'j - PVI'0 (A.13)

The SIR for a given alternative, Aj, vis-à-vis the base case may be expressed as: 

:0

:0

:0

j

j

j

PVS

SIR

PVII = (A.14)

 

16 Do not use the savings-to-investment ratio as a decision criterion if PVI'j ≤ PVI'0. See Appendix C of

Chapman and Leng for a discussion of this and other topics associated with the calculation of the savingsto-investment ratio. Chapman, Robert E., and Leng, Chi J. Cost-Effective Responses to Terrorist Risks in 

Constructed Facilities. NISTIR 7073 (Gaithersburg, MD: National Institute of Standards and Technology, 

2004). 

69
A ratio less than 1.0 indicates that Aj is an uneconomic investment relative to the base 

case; a ratio of 1.0 indicates an investment whose benefits or savings just equal its costs; 

and a ratio greater than 1.0 indicates an economic project. Readers interested in a 

mathematical derivation of the SIR calculation and how to interpret the calculated value 

of the SIR for three special cases are referred to Appendix C of Chapman and Leng. 

A.4 Adjusted Internal Rate of Return Formula 

The adjusted internal rate of return (AIRR) is the average annual yield from a project 

over the study period, taking into account reinvestment of interim receipts. Because the 

AIRR calculation explicitly includes the reinvestment of all net cash flows, it is 

instructive to introduce a new term, terminal value (TV). The terminal value of an 

investment, Aj, is the future value (i.e., the value at the end of the study period) of 

reinvested net cash flows excluding all investment costs. The terminal value for an 

investment, Aj, is denoted as TVj. 

The reinvestment rate in the AIRR calculation is equal to the minimum acceptable rate of 

return (MARR), which is assumed to equal the discount rate, d, a constant. When the 

reinvestment rate is made explicit, all investment costs are easily expressible as a time 

equivalent initial outlay (i.e., a value at the beginning of the study period) and all noninvestment cash flows as a time equivalent terminal amount. This allows a 

straightforward comparison of the amount of money that comes out of the investment 

(i.e., the terminal value) with the amount of money put into the investment (i.e., the time

equivalent initial outlay). 

The AIRR is defined as the interest rate, rj, applied to the terminal value, TVj, which 

equates (i.e., discounts) it to the time equivalent value of the initial outlay of investment 

costs. It is important to note that all investment costs are discounted to a time equivalent 

initial outlay using the discount rate, d. 

Several procedures exist for calculating the AIRR. These procedures are derived and 

described in detail in the report by Chapman and Fuller.17 The most convenient 

procedure for calculating the AIRR is based on its relationship to the SIR. This 

procedure results in a closed-form solution for a given alternative, Aj, vis-à-vis the base 

case, rj:0. The AIRR is that value of rj:0 for which: 

1

:0 :0 (1 )( ) 1 T

j j r d = + SIR − (A.15)

With regard to the base case, if rj:0 is greater than the discount rate (also referred to as the 

hurdle rate), alternative Aj is economic; if rj:0 equals the discount rate, the investment is as 

good as the base case; if rj:0 is less than the discount rate, the investment is uneconomical. 

 

17 Chapman, Robert E. and Fuller, Sieglinde K. Benefits and Costs of Research: Two Case Studies in

Building Technology. NISTIR 5840 (Gaithersburg, MD: National Institute of Standards and Technology, 

1996). 

70
Appendix B Glossary of Terms 

Adjusted Internal Rate of Return (AIRR): The average annual yield from a project 

over the study period, taking into account reinvestment of interim receipts. The 

reinvestment rate in the AIRR calculation is equal to the discount rate. 

Notes: 

(1) See Section 2.3.4 and Appendix A.4. 

(2) Output window – cost summary 

(3) Input windows – cost summary (pull-down menu) 

Example: 

In the provided case study, the proposed alternative has an AIRR of 8.6 %. 

AIRR: See Adjusted Internal Rate of Return. 

Alternatives: Means by which costs and events/outcomes sequences for various risk 

mitigation plans are differentiated. Once owners and managers assess the risk of natural 

and manmade hazards to the constructed facility, they must identify potential strategies to 

mitigate this risk. The identification includes potential risk mitigation measures and 

predictions of the effectiveness and costs of these measures. The final step in the 

protocol for creating a risk mitigation plan is economic evaluation of the risk mitigation 

alternatives.

Notes: 

(1) See Section 2.2. 

(2) Output window – cost summary 

(3) Input windows – alternatives, capital investment cost information, O&M 

cost information, other cost information, event information 

(4) Reports – data (alternative information – descriptive summary), 

uncertainty (change in a single factor, most significant factors), results 

(alternative information – descriptive summary)

Example: 

The case study compares the base case (basic renovation) alternative with the 

proposed (enhanced renovation) alternative. 

Amount: Attribute of cost, which is calculated as the quantity of a cost item (capital 

investment, O&M, or other cost) multiplied by its unit cost. 

71
Notes: 

(1) Reports – data (alternative information – input cost data summary, 

event/outcome cost data summary) 

Example: 

An O&M filter replacement cost item of quantity 75 with a unit cost of $100 will 

yield an amount of $7 500. 

Annual Value: A uniform annual amount equivalent to the project costs or benefits 

taking into account the time value of money throughout the study period. Life-cycle 

costs may be expressed in either annual value terms or present value terms. 

Annually Recurring: Means of classifying/allocating costs that occur every year within 

the frequency of occurrence choices of the CET software for O&M or other cost items. 

The three occurrence frequency choices are annually recurring, periodic (other than 

annual), and aperiodic. 

Notes: 

(1) See Section 3.2.1.1; see also Figure 3-8. 

(2) Input windows – O&M cost information, other cost information 

Example: 

In the provided case study, site security is an O&M cost that is annually recurring

throughout the study period. 

Aperiodic: Means of classifying/allocating costs that follow an irregular schedule (not 

strictly periodic) within the frequency of occurrence choices of the CET software for 

O&M or other cost items. The three occurrence frequency choices are annually 

recurring, periodic (other than annual), and aperiodic. 

Notes: 

(1) See Section 3.2.1.1; see also Figure 3-8. 

(2) Input windows – O&M cost information, other cost information 

Example: 

In the provided case study, duct cleaning is an aperiodic O&M cost item incurred 

in year 17. 

Baseline Analysis: The starting point for conducting an economic evaluation. In the 

baseline analysis, all data elements entering into the calculations are fixed. The term

baseline analysis is used to denote a complete analysis in all respects but one; it does not 

address the effects of uncertainty. 

72
Notes: 

(1) See Section 2.4.1 and Chapter 3. 

(2) Output window – cost summary 

(3) Reports – data, uncertainty, results 

Example: 

In the case study.lcc file, the data elements displayed on the various software 

screens are the baseline values. 

Base Year (Time): The date to which all future and past benefits/costs are converted 

when a present or annual value method is used. 

Notes: 

(1) See Appendix A. 

(2) Input windows – project description 

(3) Reports – data (background information), results (background 

information) 

Example: 

2006 is the assigned base year in the case study. All cash flows are discounted to 

a 2006 dollar value. 

Bearer of Costs: One of the four dimensions by which costs are classified in the detailed 

cost-accounting framework (bearer of costs; budget category; building/facility 

component; mitigation strategy). Means by which cost items are assigned to the group

that is responsible for shouldering the cost burden. There are three bearer categories:

owner/manager, occupant/user, third party. 

Notes: 

(1) See Section 2.5; see also Figure 2-1. 

(2) Output window – cost summary 

(3) Input windows – capital investment cost information, O&M cost 

information, other cost information, event/outcome cost information 

(4) Reports – data (alternative information – input cost data summary, 

event/outcome cost data summary), results (summary of life-cycle costs, 

summary of costs by alternative) 

Example: 

The case study cost item, basic renovation is a capital investment assigned to the 

owner/manager as the cost bearer. 

73
Budget Category: One of the four dimensions by which costs are classified in the 

detailed cost-accounting framework (bearer of costs; budget category; building/facility 

component; mitigation strategy). Budget category is defined as one of three cost types:

capital investment, O&M (operations and maintenance), other. 

Notes: 

(1) See Section 2.5; see also Figure 2-1. 

(2) Output window – cost summary 

(3) Input windows – edit costs/events 

(4) Reports – data (alternative information – input cost data summary, 

event/outcome cost data summary), results (summary of life-cycle costs, 

summary of costs by alternative) 

Example: 

In the provided case study, enhanced renovation is a cost item assigned to the 

capital investment budget category. 

Building Decision: A decision regarding the design, financing, engineering, 

construction, management, or operation of a building. 

Building/Facility Component: One of the four dimensions by which costs are classified 

in the detailed cost-accounting framework (bearer of costs; budget category; 

building/facility component; mitigation strategy). Building/facility component is defined 

as one of three cost types: building/facility elements; building/facility site work; nonelemental. The first two cost types are associated with the elemental classification 

UNIFORMAT II. 

Notes: 

(1) See Section 2.5; see also Figure 2-1. 

(2) Output window – cost summary 

(3) Input windows – capital investment cost information, O&M cost 

information, other cost information, event/outcome cost information 

(4) Reports – data (alternative information – input cost data summary, 

event/outcome cost data summary), results (summary of life-cycle costs, 

summary of costs by alternative) 

Example: 

In the provided case study, site security is a non-elemental building/facility 

component cost item. 

Building/Facility Elements: One of the three cost types that define the building/facility 

component of the detailed cost-accounting framework: building/facility elements; 

74
building/facility site work; non-elemental. The building/facility elements cost type is 

associated with the elemental classification UNIFORMAT II. 

Notes: 

(1) See Section 2.5; see also Figure 2-1. 

(2) Output window – cost summary 

(3) Input windows – capital investment cost information, O&M cost 

information, other cost information, event/outcome cost information 

(4) Reports – data (alternative information – input cost data summary, 

event/outcome cost data summary), results (summary of life-cycle costs, 

summary of costs by alternative) 

Example: 

In the provided case study, HVAC upgrade is a cost item assigned to the 

building/facility elements cost type. 

Building/Facility Site Work: One of the three cost types that define the building/facility 

component of the detailed cost-accounting framework: building/facility elements; 

building/facility site work; non-elemental. The building/facility site work cost type is 

associated with the elemental classification UNIFORMAT II. 

Notes: 

(1) See Section 2.5; see also Figure 2-1. 

(2) Output window – cost summary 

(3) Input windows – capital investment cost information, O&M cost 

information, other cost information, event/outcome cost information 

(4) Reports – data (alternative information – input cost data summary, 

event/outcome cost data summary), results (summary of life-cycle costs, 

summary of costs by alternative) 

Example: 

In the provided case study, site lighting is a cost item assigned to the 

building/facility site work cost type. 

Capital Investment: One of the three cost types that define the budget category 

classification: capital investment, O&M (operations and maintenance), other. The cost of 

acquiring, substantially improving, expanding, changing the functional use of, or 

replacing a building or building system. Capital investment costs accrue to the 

investment cost category, while O&M and other costs accrue to the non-investment cost 

category. 

Notes: 

(1) See Section 2.5; see also Figure 2-1. 

(2) Output window – cost summary 

75
(3) Input windows – edit costs/events 

(4) Reports – data (alternative information – input cost data summary, 

event/outcome cost data summary), results (summary of life-cycle costs, 

summary of costs by alternative, summary of annual costs by alternative 

and budget category) 

Example: 

In the provided case study, basic renovation is a cost item assigned to the capital 

investment budget category. 

Cash Flow: The stream of monetary (dollar) values – benefits and costs – resulting from 

a project investment. 

Notes: 

(1) See Appendix A. 

(2) Reports – data (alternative information – input cost data summary, 

event/outcome cost data summary), results (summary of annual costs by 

alternative and budget category, summary of annual costs by alternative) 

Classification Information: The group of associated attributes for a given cost, 

including: bearer, budget category, component, and mitigation strategy. 

Notes: 

(1) See Section 3.2.1.1 and Section 3.2.1.2. 

(2) Input windows – capital investment cost information, O&M cost 

information, other cost information, event/outcome cost information 

(3) Reports – data (alternative information – input cost data summary, 

event/outcome cost data summary), results (summary of life-cycle costs, 

summary of costs by alternative) 

Example: 

In the provided case study, basic renovation is a cost item with the following 

classification information: bearer – owner/manager, budget category – capital 

investment, mitigation strategy – engineering alternatives, component – 

building/facility elements. 

Constant Dollar Analysis: Dollars of uniform purchasing power exclusive of general 

inflation or deflation; based on the value of a dollar in a specified base year. 

Notes: 

(1) See Section 3.2.1. 

(2) Output window – cost summary 

(3) Input windows – project description 

76
(4) Reports – data (background information), results (background 

information) 

Example: 

In the provided case study, the costs are estimated and analyzed based on the 

value of a dollar in the assigned base year of 2006. 

Constructed Facilities: Permanent structures, including infrastructure, buildings, and 

industrial facilities. 

Copy Cost: Command that allows an existing cost to be copied. The copy is accessible 

for editing and use only within the alternative to which the original cost item was 

assigned. 

Notes: 

(1) Input windows – edit costs/events 

Example: 

Repairs to air handling units may share many of the same attributes as the HVAC 

repairs that have been defined within the case study. Thus, copy cost allows the 

user to make a copy of HVAC repairs that can later be revised/edited to reflect 

specifics of repairing air handling units. 

Copy Event: Command that allows an existing event to be copied. The copy is 

accessible for editing and use only within the alternative to which the original event was 

assigned. 

Notes: 

(1) Input windows – edit costs/events 

Example: 

In the case study, cyber attack (years 11-25) shares all attributes with cyber attack 

(years 1-10) except for the assigned years. Thus, the copy event command could 

be used to make a copy of cyber attack (years 1-10) and edited slightly to yield 

the event cyber attack (years 11-25).

Cost-Accounting Framework: Methodology for tracking how costs affect stakeholders 

in different ways. The cost-accounting framework promotes a detailed, consistent 

breakdown of life-cycle costs. 

Notes: 

(1) See Section 2.5; see also Figure 2-1. 

77
(2) Output window – cost summary 

(3) Reports – data (alternative information – input cost data summary, 

event/outcome cost data summary), results (summary of life-cycle costs, 

summary of costs by alternative) 

Cost Effective: The condition whereby the present value benefits (savings) of an 

investment exceeds its present value costs. 

Notes: 

(1) See Section 2.3.1; see also Sections 2.3.2, 2.3.3, and 2.3.4. 

(2) Reports – results (summary of life-cycle costs, summary of annual costs 

by alternative) 

Example: 

In the provided case study, the proposed alternative is the cost-effective 

investment choice because it has the lowest life-cycle cost. 

Cost Item: Name/description assigned to a cost associated with a given alternative and a 

specific bearer, budget category, component, and mitigation strategy. Information on 

cost items is needed in order to calculate life-cycle costs. Cost items are classified under 

two broad headings: input costs and event-related costs. 

Notes: 

(1) See Section 2.5; see also Figure 3-7 and Figure 3-13. 

(2) Input windows – capital investment cost information, O&M cost 

information, other cost information, event/outcome cost information 

(3) Reports – data (alternative information – input cost data summary, 

event/outcome cost data summary), uncertainty (change in a single factor, 

most significant factors), results (summary of costs by alternative) 

Example: 

In the case study, basic renovation is a cost item associated with the base case 

alternative that embodies the following attributes: bearer – owner/manager, 

budget category – capital investment, component – building/facility elements, 

mitigation strategy – engineering alternatives. 

Cost Summary Window: Main screen in the CET program that provides a snapshot of 

the costs associated with each alternative in regards to cost classification information. 

Notes: 

(1) Output window – cost summary 

(2) Input windows – capital investment cost information, O&M cost 

information, other cost information, event/outcome cost information 

78
Current Dollar Analysis: Analysis of the costs incurred in dollars of purchasing power 

in which actual prices are stated (not corrected for inflation or deflation). 

Notes: 

(1) See Section 3.2.1. 

(2) Output window – cost summary 

(3) Input windows – project description 

(4) Reports – data (background information), results (background 

information) 

Data Report: Report that organizes all user inputted data for each project alternative. 

Useful method of checking that all values were inputted correctly previous to conducting 

further analyses. 

Notes: 

(1) Data report includes: background information; alternative information – 

descriptive summary, input cost data summary, event/outcome cost data 

summary 

Delete All Costs: Command that allows all existing costs associated with a specific 

alternative to be deleted.

Notes: 

(1) Input windows – edit costs/events 

Delete All Events: Command that allows all existing events associated with a specific 

alternative to be deleted.

Notes: 

(1) Input windows – edit costs/events 

Delete Cost: Command that allows an existing cost to be deleted from the associated 

alternative. 

Notes: 

(1) Input windows – edit costs/events 

Delete Event: Command that allows an existing event to be deleted from the associated 

alternative. 

79
Notes: 

(1) Input windows – edit costs/events 

Descriptive Summary: Section appearing in both the data and results reports which 

provides a summary of each project alternative and the associated outcomes. 

Notes: 

(1) Reports – data (alternative information – descriptive summary), results 

(alternative information – descriptive summary)

Disaster Mitigation: Measures, procedures, and strategies designed to reduce either the 

likelihood or consequences of a disaster. 

Notes: 

(1) See Section 3.2.1.1. 

(2) Output window – cost summary 

(3) Input windows – project description, alternatives 

(4) Reports – data (background information), results (background 

information) 

Discount Rate: The rate of interest reflecting the investor’s time value of money, used 

to determine discount factors for converting benefits and costs occurring at different 

times to a base year. The discount rate may be expressed as nominal or real. 

Notes: 

(1) See Appendix A. 

(2) Input windows – project description 

(3) Reports – data (background information), results (background 

information) 

Example: 

In the provided case study, a real discount rate is used; it is assigned a value of 

7.0 %. This value is used to adjust costs incurred in different years to the value of 

a dollar in the base year, 2006. 

Edit Costs/Events: Command that allows the user to edit attributes of an existing cost or 

event (including create new, copy, or delete). 

Notes: 

(1) Output window – cost summary 

(2) Input windows – edit costs/events 

80
Edit Outcomes: Command that allows the user to edit attributes of an existing outcome 

(including create new, copy, or delete). 

Notes: 

(1) Input windows – event information, edit outcomes/outcome costs 

Engineering Alternatives: One of the three mitigation strategy classifications 

(engineering alternatives; management practices; financial mechanisms). Technical 

options in the construction or renovation of constructed facilities, their systems, or their 

subsystems to reduce the likelihood or consequences of disasters; types of engineering 

alternatives include designs, materials, components. 

Notes: 

(1) See Section 2.5; see also Figure 2-1. 

(2) Output window – cost summary 

(3) Input windows – capital investment cost information, O&M cost 

information, other cost information, event/outcome cost information 

(4) Reports – data (alternative information – input cost data summary, 

event/outcome cost data summary), results (summary of life-cycle costs, 

summary of costs by alternative) 

Example: 

In the case study, the HVAC upgrade is a capital investment that employs an 

engineering alternatives mitigation strategy. 

Escalation Rate: The rate of change in price for a particular good or service (as 

contrasted with the inflation rate, which is for all goods and services). 

Notes: 

(1) See Section 3.2.1.1 and Section 3.2.1.2. 

(2) Input windows – capital investment cost information, O&M cost 

information, other cost information, event/outcome cost information 

(3) Reports – data (alternative information – input cost data summary, 

event/outcome cost data summary) 

(4) If the value of the escalation rate entered was 0.0 % and a sensitivity 

analysis is requested for that factor, then a notice appears indicating that 

the percentage range will be tied to the inflation rate. 

Example: 

In the provided case study, the escalation rate associated with the O&M cost item

site lighting is –0.10 %. This indicates that the value of the cost incurred will be 

81
adjusted by this percentage before being factored into the life-cycle cost of the 

project. 

Event Description: Section that allows the user to enter more specific information about 

the circumstances/details of a specified event. 

Notes: 

(1) Input windows – event information 

(2) Reports – data (alternative information – descriptive summary), results 

(alternative information – descriptive summary)

Example: 

The event description for the event Cyber attack specifies the parameters that 

qualify as a cyber attack. 

Event Information: Window that allows the user to input/alter data defining an event 

associated with a specific alternative (includes description and occurrence years). 

Notes: 

(1) Input windows – event information 

Example: 

The event information screen allows the user to input pertinent information that 

differentiates cyber attack (years 11-25) from cyber attack (years 1-10). 

Externality: The discrepancy between private and social costs or private and social 

benefits. 

Financial Mechanisms: One of the three mitigation strategy classifications (engineering 

alternatives; management practices; financial mechanisms). A set of devices relating to 

finances that facility owners and managers can utilize to reduce their exposure to natural 

and man-made hazards. These devices include purchase of insurance policies and 

responding to external financial incentives to engage in engineering-based or 

management-based risk mitigation. 

Notes: 

(1) See Section 2.5; see also Figure 2-1. 

(2) Output window – cost summary window 

(3) Input windows – capital investment cost information, O&M cost 

information, other cost information, event/outcome cost information 

82
(4) Reports – data (alternative information – input cost data summary, 

event/outcome cost data summary), results (summary of life-cycle costs, 

summary of costs by alternative) 

Example: 

Financial mechanisms that serve as incentives include government subsidies for 

investments to harden a facility and rental premiums paid by tenants who value 

the facility’s added safety features. 

First (Initial) Costs: Attribute of a capital investment. Costs incurred in placing a 

building or building subsystem into service, including, but not limited to, costs of 

planning, design, engineering, site acquisition and preparation, construction, purchase, 

installation, property taxes and interest during the construction period, and constructionrelated fees.

Notes: 

(1) See Section 2.3.1; see also Section 3.2.1.1 and Figure 3-7. 

(2) Input windows – capital investment cost information 

(3) Reports – data (input costs data summary) 

Example: 

In the provided case study, basic renovation is a first cost cost item because it is 

incurred in order to place the building into use. 

Inflation: A rise in the general price level over time, usually expressed as a percentage 

rate. 

Notes: 

(1) See Section 3.2.1. 

Investment Cost: First cost and later expenditures which have substantial and enduring 

value (generally more than one year) for upgrading, expanding, or changing the 

functional use of a building or building system. 

Notes: 

(1) See Section 2.5. 

Example: 

In the provided case study, HVAC upgrade is classified as an investment cost

because, as a modernization of an existing system, it is a long-term investment. 

83
Key Parameters: Grouping of attributes related to a specific event outcome (probability 

of outcome, first year, and last year). 

Notes: 

(1) Input windows – event information, outcome information 

(2) Reports – data (alternative information – descriptive summary), results 

(alternative information – descriptive summary). 

Example: 

In the provided case study, the minor damage outcome linked to the CBRE attack 

for the basic renovation alternative is defined by the following key parameters: 

probability of occurrence, 0.5 %; first year, 2006; last year, 2030 

LCC: See Life-Cycle Cost. 

Life-Cycle Cost (LCC): A technique of economic evaluation that sums over a given 

study period the costs of initial investment (less resale value), replacements, operation 

(including energy use) and maintenance of an investment decision. Life-cycle costs may 

be expressed in either present value terms or annual value terms. 

Notes: 

(1) See Section 2.3.1 and Appendix A.1. 

(2) Output window – cost summary 

(3) Input windows – cost summary (pull-down menu) 

(4) Reports – results (summary of life-cycle costs, summary of costs by 

alternatives, summary of annual costs by alternative and budget category, 

summary of annual costs by alternative) 

Example: 

The base case alternative in the case study has a life-cycle cost of $4 642 554, 

taking into account the present value costs/benefits of all cash flows throughout 

the study period. 

Management Practices: One of the three mitigation strategy classifications 

(engineering alternatives; management practices; financial mechanisms). Practices 

employed by building owners and managers to reduce the risks associated with natural 

and man-made hazards. These practices can be procedural or technical and related to 

security, training, communications, site location, and systems access, among others. 

Some management practices complement engineering alternatives, while others 

substitute for them. 

Notes: 

(1) See Section 2.5; see also Figure 2-1. 

84
(2) Output window – cost summary 

(3) Input windows – capital investment cost information, O&M cost 

information, other cost information, event/outcome cost information 

(4) Reports – data (alternative information – input cost data summary, 

event/outcome cost data summary), results (summary of life-cycle costs, 

summary of costs by alternative) 

Example: 

In the case study, site security is an O&M cost that employs a management 

practice mitigation strategy. 

Mitigation Strategy: One of the four core components of the cost-accounting 

framework (bearer of costs; budget category; building/facility component; mitigation 

strategy). Means of classifying/allocating costs within the CET software in regards to 

risk management. The three mitigation strategy classifications include engineering 

alternatives; management practices; financial mechanisms. 

Notes: 

(1) See Section 2.5; see also Figure 2-1. 

(2) Output window – cost summary 

(3) Input windows – capital investment cost information, O&M cost 

information, other cost information, event/outcome cost information 

(4) Reports – data (alternative information – input cost data summary, 

event/outcome cost data summary), results (summary of life-cycle costs, 

summary of costs by alternative) 

Example: 

In the provided case study, the HVAC upgrade is a capital investment that 

employs an engineering alternatives mitigation strategy. 

Monte Carlo Simulation: A means for addressing the effects of uncertainty. Monte 

Carlo simulation varies a small set of data inputs according to an experimental design. 

Associated with each data input is a probability distribution function from which values 

are randomly sampled. A Monte Carlo simulation complements the baseline analysis by 

evaluating the changes in output measures when selected data inputs are allowed to vary 

about their baseline values. 

 Notes: 

(1) See Section 2.4.3 and Section 4.2. 

(2) Input window – Monte Carlo (Include Factors). 

(3) Output window – Monte Carlo (Results). 

(4) Reports – uncertainty (saved Monte Carlo simulations). 

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Nominal Discount Rate: The rate of interest reflecting the time value of money 

stemming both from inflation and the real earning power of money over time. This is the 

discount rate used in discount formulas or in selecting discount factors when future 

benefits and costs are expressed in current dollars. 

Notes: 

(1) Input windows – project description 

(2) Reports – data (background information), results (background 

information) 

Non-Elemental: One of the three cost types that define the building/facility component 

of the detailed cost-accounting framework: building/facility elements; building/facility 

site work; non-elemental. Non-elemental costs are all costs that cannot be attributed to 

specific functional elements of the project. 

Notes: 

(1) See Section 2.5; see also Figure 2-1. 

(2) Output window – cost summary 

(3) Input windows – capital investment cost information, O&M cost 

information, other cost information, event/outcome cost information 

(4) Reports – data (alternative information – input cost data summary, 

event/outcome cost data summary), results (summary of life-cycle costs, 

summary of costs by alternative) 

Example: 

An example of a non-elemental/capital/owner cost item is the purchase of a rightof-way, or easement. 

O&M (Operations and Maintenance): One of the three cost types that define the 

budget category classification: capital investment, O&M (operations and maintenance),

other. Cost items falling under the O&M cost type include energy and water costs, 

maintenance and repair costs, minor replacements related to maintenance and repair, and 

insurance premiums paid by owners and/or occupants to reduce their risk exposure. 

O&M costs are usually paid from an annual operating budget, not from capital funds, and 

accrue to the non-investment cost category. 

Notes: 

(1) See Section 2.5; see also Figure 2-1. 

(2) Output window – cost summary 

(3) Input windows – edit costs/events 

(4) Reports – data (alternative information – input cost data summary, 

event/outcome cost data summary), results (summary of life-cycle costs, 

summary of costs by alternative, summary of annual costs by alternative 

and budget category) 

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Example: 

In the provided case study, HVAC repairs is a cost item attributed to the O&M 

budget category. 

Occupant/User: One of three bearer categories: owner/manager, occupant/user, third 

party. Specifically, the burden of the associated cost falls on the facility user or occupant. 

Occupant/User costs frequently include operations and maintenance costs and selected 

types of repairs not covered by the project’s owner or agent. Occupant/User costs can

also include delay costs and business interruption costs due to temporary closures for 

repair and reconstruction activities. 

Notes: 

(1) See Section 2.5; see also Figure 2-1. 

(2) Output window – cost summary 

(3) Input windows – capital investment cost information, O&M cost 

information, other cost information, event/outcome cost information 

(4) Reports – data (alternative information – input cost data summary, 

event/outcome cost data summary), results (summary of life-cycle costs, 

summary of costs by alternative) 

Example: 

The case study the cost item, HVAC repairs is an O&M cost assigned to the 

occupant/user as the cost bearer. 

Operating Cost: The expenses incurred during the normal operation of a building or a 

building system or component, including labor, materials, utilities, and other related 

costs. 

Other Costs: One of the three cost types that define the budget category classification: 

capital investment, O&M (operations and maintenance), other. Other costs are noncapital costs that cannot be attributed to the O&M cost type. 

Notes: 

(1) See Section 2.5; see also Figure 2-1. 

(2) Output window – cost summary 

(3) Input windows – edit costs/events 

(4) Reports – data (alternative information – input cost data summary, 

event/outcome cost data summary), results (summary of life-cycle costs, 

summary of costs by alternative, summary of annual costs by alternative 

and budget category) 

Example: 

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In the provided case study, change in traffic pattern is a cost item attributed to the 

other budget category. 

Outcome Description: Section that allows the user to enter more specific information 

about the circumstances/details/probability of a specified event outcome. 

Notes: 

(1) Input windows – outcome information 

(2) Reports – data (alternative information – descriptive summary), results 

(alternative information – descriptive summary)

Example: 

The outcome description for the minor damages Cyber attack outcome specifies 

the parameters that qualify a cyber attack as minor as opposed to major damages. 

Owner/Manager: One of three bearer categories: owner/manager, occupant/user, third 

party. Specifically, the burden of the associated cost falls on the facility owner or 

manager. Owner/Manager costs are all costs incurred by the project’s owner or agent. 

These costs include but are not limited to design costs, capital investment costs, and 

selected types of repairs to the constructed facility. 

Notes: 

(1) See Section 2.5; see also Figure 2-1. 

(2) Output window – cost summary 

(3) Input windows – capital investment cost information, O&M cost 

information, other cost information, event/outcome cost information 

(4) Reports – data (alternative information – input cost data summary, 

event/outcome cost data summary), results (summary of life-cycle costs, 

summary of costs by alternative) 

Example: 

The case study cost item, site protection, is a capital investment cost assigned to 

the owner/manager as the cost bearer. 

Periodic (other than annual): Means of classifying/allocating O&M and other costs 

that occur on a scheduled timeframe other than on an annual basis. The three occurrence 

frequency choices are annually recurring, periodic (other than annual), and aperiodic. 

Notes: 

(1) See Section 3.2.1.1; see also Figure 3-9. 

(2) Input windows – O&M cost information, other cost information 

Example: 

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The case study cost item, HVAC repairs, is an O&M cost incurred every 6 years 

in the proposed alternative. 

Present Value: The value of a benefit or cost found by discounting future cash flows to 

the base year. Life-cycle costs may be expressed in either present value terms or annual 

value terms. 

Notes: 

(1) See Appendix A. 

(2) Output window – cost summary 

Example: 

The base case alternative in the case study has a life-cycle cost of $4 642 554, 

taking into account the present value costs/benefits of all cash flows throughout 

the study period. 

Present Value Net Savings (PVNS): A method for finding the economically efficient 

choice among investment alternatives. It measures the net savings from investing in a 

given alternative instead of investing in the foregone opportunity (e.g., some other 

alternative or the base case). The PVNS for a given alternative, Aj, vis-à-vis the base 

case, A0, may be expressed as: PVNSj:0 = LCC0 - LCCj. 

Notes: 

(1) See Section 2.3.2 and Appendix A.2. 

(2) Output window – cost summary 

(3) Input windows – cost summary (pull-down menu) 

Example: 

In the provided case study, the proposed alternative results in a PVNS of 

$283 642. 

Probability of Occurrence: Provides the chance that a there will be a specific outcome

associated with a given event. The sum of all outcome probabilities for a single event 

must be equal to 1. Listed as one of the three key parameters for a given outcome: 

probability of occurrence, first year, last year. 

Notes: 

(1) See Section 3.2.1.2. 

(2) Input windows – outcome information 

(3) Reports – data (alternative information – descriptive summary), results 

(alternative information – descriptive summary)

Example: 

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In the provided case study, the major damage outcome for the CBRE attack event 

is assigned a probability of 0.05 %. 

Project: Resources and activities used to achieve a specific set of objectives within a

specified time schedule. 

Notes: 

(1) See Section 2.2; see also Section 2.6. 

(2) Input windows – project description 

(3) Output window – cost summary 

(4) Reports – data, uncertainty, results 

PVNS: See Present Value Net Savings. 

Quantity: Attribute of cost items that specifies the number of units that require 

installation or replacement. The amount displayed for a cost is the multiplicative product 

of quantity and unit cost. 

Notes: 

(1) See Section 3.2.1.1 and Section 3.2.1.2. 

(2) Input windows – capital investment cost information, O&M cost 

information, other cost information, event/outcome cost information 

Example: 

In the case study, the salvage and sale of equipment and components is assigned a 

quantity of 1. 

Real Discount Rate: The rate of interest reflecting that portion of the time value of

money related to the real earning power of money over time. This is the discount rate 

used in discount formulas or in selecting discount factors when future benefits and costs 

are expressed in constant dollars. 

Notes: 

(1) See Section 3.2.1; see also Section 2.6.3. 

(2) Input windows – project description 

(3) Reports – data (background information), results (background 

information) 

Example: 

In the provided case study, the real discount rate is assigned a value of 7.0 %, 

which is used to calculate life-cycle costs. This value is used to adjust costs 

incurred in different years to the value of a dollar in the base year, 2006. 

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Replacement Costs: Building component replacement and related costs, included in the 

capital budget, that are expected to be incurred during the study period. 

Notes: 

(1) See Section 2.5. 

Example: 

In the provided case study, the HVAC upgrade for the proposed alternative is a 

$30 000 replacement cost incurred in year 17. 

Resale Value: The monetary sum expected from the disposal of an asset at the end of its 

economic life, its useful life, or at the end of the study period. 

Notes: 

(1) See Section 2.5. 

Results Report: Report that summarizes the results of the economic evaluation. The 

report summarizes key user inputted data for each project alternative and provides a 

series of measures of project performance. The report provides a summary of life-cycle 

costs using the cost-accounting framework as well as detailed present value tabulations

on all cost items. The report provides annual cash flows (expressed in base year present 

value dollars) for each budget category and overall for each alternative. 

Notes: 

(1) Results report includes: background information; alternative information – 

descriptive summary; summary of life-cycle costs; summary of costs by 

alternative; summary of annual costs by alternative and budget category; 

summary of annual costs by alternative; summary of annual and 

cumulative net savings by alternative 

Retrofit: The modification of an existing building or facility to include new systems or 

components. 

Notes: 

(1) See Section 2.6.1 and Section 2.6.2. 

Example: 

In the provided case study, both the basic renovation and the enhanced renovation 

are considered a retrofit of the existing facility. 

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Risk Analysis: The body of theory and practice that has evolved to help decision makers 

assess their risk exposures and risk attitudes so that the investment that is “best for them” 

is selected. 

Risk Mitigation: The actions or decisions designed to reduce the financial and 

nonpecuniary risk from uncertain events. 

Notes: 

(1) See Section 2.5; see also Figure 2-1. 

Salvage Value: The value of an asset, assigned for tax computation purposes, that is 

expected to remain at the end of the depreciation period (represented as a negative cost

value). One of three time classification attributes of a capital investment: initial, future, 

salvage. 

Notes: 

(1) See Section 2.5; see also Section 3.2.1 and Figure 3-7. 

(2) Input windows – capital investment cost information 

Example: 

In the provided case study, the salvage value for the HVAC upgrade in the 

proposed alternative is -$12 500.00; it occurs in year 25, the final year of the 

study period. 

Savings-to-Investment Ratio (SIR): Either the ratio of present value savings to present 

value investment costs, or the ratio of annual value savings to annual value investment 

costs. 

Notes: 

(1) See Section 2.3.3 and Appendix A.3. 

(2) Output window – cost summary 

(3) Input window – cost summary (pull-down menu) 

Example: 

In the provided case study, the proposed alternative has an SIR of 1.46. 

Sensitivity Analysis: A means for addressing the effects of uncertainty. A test of the 

outcome of an analysis by altering one or more parameters (key data elements or input 

variables) from (an) initially assumed value(s). A sensitivity analysis complements the 

baseline analysis by evaluating the changes in output measures when selected data inputs 

are allowed to vary about their baseline values. 

92
Notes: 

(1) See Section 2.4.2 and Section 4.1. 

(2) Input window – sensitivity analysis, change in single factor tab (range), 

most significant factors tab (compute), change in multiple factors tab 

(range) 

(3) Output window – sensitivity analysis, change in single factor tab (results), 

most significant factors tab, change in multiple factors tab (results) 

(4) Reports – uncertainty (saved sensitivity analyses, most significant factors) 

SIR: See Savings-to-Investment Ratio. 

Study Period: The length of time over which an investment is analyzed. 

Notes: 

(1) See Appendix A. 

(2) Input windows – project description 

(3) Reports – data (background information), results (background 

information) 

Example: 

The provided case analyzes the life-cycle costs of alternative data center 

renovation strategies over a 25 year study period, from 2006 to 2030. 

Third Party: One of three bearer categories: owner/manager, occupant/user, third party. 

Specifically, the burden of the associated cost falls on a party other than the facility 

owner or user. Natural hazards, industrial accidents, and terrorist acts that occur 

infrequently, but whose consequences are devastating, highlight the importance of 

including the Third Party cost type in the private sector’s life-cycle cost calculus. 

Notes: 

(1) See Section 2.5; see also Figure 2-1. 

(2) Output windows – cost summary 

(3) Input windows – capital investment cost information, O&M cost 

information, other cost information, event/outcome cost information 

(4) Reports – data (alternative information – input cost data summary, 

event/outcome cost data summary), results (summary of life-cycle costs, 

summary of costs by alternative) 

Example: 

An example of a third party cost is the lost sales for a business establishment 

whose customer access has been impeded (e.g., due to a road closure during 

construction/reconstruction). 

93
Triangular Distribution: A probability distribution often used in a Monte Carlo 

simulation. Specification of the triangular distribution requires three data points, the 

minimum value, the most likely value, and the maximum value. In CET 2.0, the most

likely value is set equal to the baseline value. The triangular distribution is recommended 

whenever the range of input value is finite and continuous and a clustering about some 

central value is expected. 

 Notes: 

 (1) See Section 4.2. 

(2) Input window – Monte Carlo (Include Factors). 

(3) Output window – Monte Carlo (Results). 

(4) Reports – uncertainty (saved Monte Carlo simulations). 

Uncertainty Report: Report containing saved results from the Change in a Single 

Factor tab, the Most Significant Factors tab, Change in Multiple Factors tab, and Monte 

Carlo Simulation tab. Useful in supporting a recommendation of an alternative as the 

most cost-effective risk mitigation plan. 

Notes: 

(1) Uncertainty report includes: saved sensitivity analyses; most significant

factors; and saved Monte Carlo simulations. 

Uniform Distribution: A probability distribution often used in a Monte Carlo 

simulation. Specification of the uniform distribution requires two data points, the 

minimum value and the maximum value. All values between the minimum and 

maximum are equally likely. The uniform distribution is recommended whenever the 

range of input values is finite and continuous but no clustering about a central value is 

expected. 

 Notes: 

(1) See Section 4.2. 

(2) Input window – Monte Carlo (Include Factors). 

(3) Output window – Monte Carlo (Results). 

(4) Reports – uncertainty (saved Monte Carlo simulations). 

 

UNIFORMAT II: An elemental format based on major components common to most 

buildings. It serves as a consistent reference for analysis, evaluation, and monitoring of 

buildings during the planning, feasibility, and design stages. It also enhances reporting at 

all stages in construction. The two cost types, building/facility elements and 

building/facility site work, under the building/facility component cost classification are 

associated with the elemental classification UNIFORMAT II. Subcategories under 

94
UNIFORMAT II include: substructure, shell, interiors, services, equipment & furnishings, 

special construction/demolition. 

Notes: 

(1) See Section 2.5. 

(2) See ASTM International. “Standard Classification for Building Elements 

and Related Site Work—UNIFORMAT II,” E 1557, Annual Book of 

ASTM Standards: 2005. Vol. 04.11. West Conshohocken, PA: ASTM 

International. 

(3) Input windows – capital investment cost information, O&M cost 

information, other cost information, event/outcome cost information 

Unit Cost: Attribute of cost items that specifies a cost per unit that require installation or 

replacement. The amount displayed for a cost is the multiplicative product of quantity

and unit cost. 

Notes: 

(1) See Section 3.2.1.1 and Section 3.2.1.2. 

(2) Input windows – capital investment cost information, O&M cost 

information, other cost information, event/outcome cost information 

Example: 

In the case study, the cost of HVAC repairs under the basic renovation alternative 

is assigned a unit cost of $5 000. 

Year Cost Incurred (Timing): Attribute of cost items that specifies when a cost is 

incurred. 

Notes: 

(1) See Section 3.2.1.1 and Section 3.2.1.2. 

(2) Input windows – capital investment cost information, O&M cost 

information, other cost information, event information 

Example: 

In the case study, the HVAC upgrade is a capital investment specified under the 

enhanced renovation alternative that is assigned a cost incurred year of 17, which 

corresponds to the year 2022. 

95
96
References 

ASTM International. “Standard Classification for Building Elements and Related Site 

Work—UNIFORMAT II,” E 1557, Annual Book of ASTM Standards: 2005. Vol. 

04.11. West Conshohocken, PA: ASTM International. 

ASTM International. “Standard Guide for Selecting Economic Methods for Evaluating 

Investments in Buildings and Building Systems,” E 1185, Annual Book of ASTM 

Standards: 2005. Vol. 04.11. West Conshohocken, PA: ASTM International. 

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and Risk in the Economic Evaluation of Buildings and Building Systems,” E 

1369, Annual Book of ASTM Standards: 2005. Vol. 04.11. West Conshohocken, 

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Chapman, Robert E., and Leng, Chi J. Cost-Effective Responses to Terrorist Risks in 

Constructed Facilities. NISTIR 7073 (Gaithersburg, MD: National Institute of 

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