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IMBSIR 82-2558

NAT'L INST. OF STAND & TECH

AlllDt. ESTMll ;e-Cycle Cost Analysis

Methodology for Fire Protection

Systems in New Health Care

Facilities

U.S. DEPARTMENT OF COMMERCE

National Bureau of Standards

National Engineering Laboratory

Center for Fire Research

Washington, DC 20234

July 1982

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100

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o2-2558

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u s DEPARTMENT OF COMMERCE

NATIONAL BUREAU OF STANDARDS

NBSIR 82-2558

A LIFE-CYCLE COST ANALYSIS

METHODOLOGY FOR FIRE PROTECTION

SYSTEMS IN NEW HEALTH CARE

FACILITIES

2 W32

Louis P. Clark

U S. DEPARTMENT OF COMMERCE

National Bureau of Standards

National Engineering Laboratory

Center for Fire Research

Washington, DC 20234

July 1982

U.S. DEPARTMENT OF COMMERCE, Malcolm Baldrige, Secretary

NATIONAL BUREAU OF STANDARDS, Ernest Ambler, Director
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TABLE OF CONTENTS

Page

PREFACE iv

LIST OF TABLES v

Abstract 1

1. INTRODUCTION 2

1.1 Purpose and Scope 2 1.2 Background 3

1.3 Approach 5

2. LIFE-CYCLE COST ANALYSIS METHODS 6

2.1 General Requirements 6

2.2 Discounting Procedures 10

3. APPLICATION OF METHODS TO FIRE SAFETY SYSTEMS 14

3.1 Physical Description of Alternatives 14

3.2 Life-Cycle Cost Analysis of Alternatives. 18

4. CONCLUSIONS 29

5. ACKNOWLEDGMENTS 30

6. REFERENCES 31

Appendix A. Glossary 32

Appendix B. Discounting Tables... 34

- 111-
PREFACE

This report was prepared solely to demonstrate a methodology for

comparing alternative provisions for code compliance in new health care facilities using life-cycle cost analysis. The examples presented herein are

illustrative only, and cannot be applied to health care facilities other than

the sample facility used in this report, or to health care facilities in

general. To apply the methodology illustrated here, calculations must be done

for the specific facility under consideration, using the information relevant

to that specific facility.

-iv-
LIST OF TABLES

Page

Table 2.1 Estimated useful life of land improvements, buildings,

and fixed equipment.

7

Table 3.1 Construction requirements - New health care facilities

(NFPA 220-1975).

15

Table 3.2 Characteristics of corridor walls in new health care facilities (NFPA Life Safety Code-1976).16

Table 3.3 Characteristics of safety features in health care facilities

(NFPA Life Safety Code-1976).

17

Table 3.4 Insurance rates for new health care facilities (annual)

.

20

Table 3.5 Example #1. 21

Table 3.6 Example #2. 23

Table 3.7 Example #3. 24

Table 3.8 Example //4. 25

Table 3.9 Example #5. 27

Table B-1 Single present worth (SPW) factor for discount rates (d) of

5%, 10%, and 15%.

34

Table B-2 Modified uniform present worth factors for inflation rates

from 0% to 10% (discount rate d = 10%)

.

35

Table B-3 Modified uniform present worth factors for inflation rates

from 0% to 10% (discount rate d = 15%).

36

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A LIFE-CYCLE COST ANALYSIS METHODOLOGY FOR FIRE

PROTECTION SYSTEMS IN NEW HEALTH CARE FACILITIES

Louis P. Clark

Abstract

An analytical procedure is presented for conducting

life-cycle cost (LCC) analyses of fire safety systems in

new health care facilities. Comparative LCC evaluations

of alternative fire safety systems can be obtained based

on their initial costs, useful life times, operation and

maintenance costs, salvage values, and corresponding fire

Insurance costs for the building and its contents.

The case study used to demonstrate the procedure

compares the life-cycle costs of two fire safety systems

in compliance with the NFPA Life Safety Code in a

particular hospital:

(1) fire resistive construction with no sprinklers,

and

(2) protected noncombustible construction fully

equipped with automatic sprinklers.

Five different examples are provided with varying

assumptions regarding initial construction costs, the

choice of a discount rate, the tax status of the

facility, and the life expectancy of the sprinkler

equipment
1 . INTRODUCTION

1.1 Purpose and Scope

Compliance vd.th the National Fire Protection Association (NFPA) Life

Safety Code (1973) [1]^ is now a requirement for the certification of a health

2 care facility for participation in Federal Medicare and Medicaid programs .

Many jurisdictions require compliance with later editions of the Code, such as

the 1976 edition [2]. Modifying existing health care facilities to attain

full compliance with the Life Safety Code can be very expensive [3,4].

However, in new health care facilities, full compliance can usually be

achieved at considerably less cost than in existing facilities. Not only can

fire safety provisions be incorporated into the new building design at less

cost than in retrofit, but certain design substitutions are permitted by the

Code which are not practical in a retrofit situation.

The designer, faced with a number of system alternatives for fire safety,

as permitted by the Life Safety Code, must be able to determine which adds the

least cost to the new health care facility. This determination is better made

on a life-cycle cost (LCC) basis than a first cost basis, because the LCC

concept includes all costs incurred or avoided over the life of the building

attributable to the fire safety system. These costs include not only the

additional first cost of the system, but changes in building operating,

maintenance and repair costs; insurance costs; resale value; and possibly

property taxes as well, all evaluated on a time-equivalent basis.

^ Numbers in brackets refer to the literature references listed at the end

of this report.

2 Federal regulations published by the Health Care Finance Administration.

-2-
The primary purpose of this report is to provide a methodology for

computing and comparing the LCC of alternative fire safety systems for new

health care facilities that comply with the Life Safety Code. Its scope is

limited in that differences in fire safety performance attributable to these

alternative systems are not directly considered. However, some measure of

those differences may be indirectly considered in the LCC analysis through the

inclusion of reductions (or increases) in fire insurance costs over the life

of the building.

This same LCC methodology can also be applied to alternative fire safety

systems in existing health care facilities. However, since the greatest

opportunities for savings are in the design of new facilities, the example

used here, that of a sprinklered vs. non-sprinklered system approach, focuses

on code compliance in a new facility. The LCC methodology used in this report

can be applied to government-owned, non-profit, and privately-owned health

care facilities, although the choice of an appropriate discount rate and tax

calculation procedures will vary in each case.

1.2 Background

One of the basic requirements of the 1976 edition of the NFPA Life Safety

Code is adherence to the total concept that:

"All health care facilities shall be designed, constructed, maintained, and operated in such a manner as to minimize the possibility

of a fire emergency requiring the evacuation of occupants. Because

the safety of occupants of health care facilities cannot be assured

adequately by dependence on evacuation of the building, their

protection from fire shall be provided by appropriate arrangement of

facilities, adequate staffing, and careful development of operating

and maintenance procedures composed of the following:

- 3-
(a) Proper design, construction, and compartmentation;

(b) provision for detection, alarm, and extinguishment; and

(c) fire prevention and the planning, training and drilling in

programs for the isolation of fire, transfer of occupants to areas of refuge or evacuation of the building,”

Chapter 10-2 of the 1976 Life Safety Code presents details of the

principal life safety requirements in new health care facilities. The

construction code requirements for new health care facilities, together with

the requisite fire safety components, comprise a basic fire safety system for

health care occupancies. Chapter 10-2 also delineates certain "exceptions" in

the code requirements which allow alternative fire safety systems to be

substituted for the basic building-fire safety system.

For example, the basic fire safety system described by the Life Safety

Code for a new hospital has fire resistive construction features throughout,

but no sprinkler equipment. An acceptable alternative in the Life Safety Code

is the use of protected, noncombustible construction materials (which offer

less resistance to a fire when used alone) along with automatic sprinkler

equipment throughout the building . Since the cost of protected,

noncombustible construction is usually less than that of fire-resistive

construction, its use might offset some of the first cost of sprinkler

equipment in a new facility. Lower fire insurance premiums might also reduce

the effective cost of the sprinkler alternative.

3 Characteristics of fire resistive construction and protected non- combustible construction are detailed in section 3.1.

-4-
These two alternative fire safety systems are used in this report to

demonstrate the LCC approach to design decision making in a new health care

facility. Other acceptable alternatives for health care facilities that might

be considered in future studies include a smoke detector system, an engineered

smoke control system, and an automatic door closer system.

1.3 Approach

A methodology for conducting LCC analyses of alternative building fire

safety systems in a health care facility is outlined in section 2, This

outline includes the elements of a LCC analysis, the discounting procedures

needed to adjust costs occurring in different time periods to a common point

in time, the selection of a time horizon and discount rate, and the distinction between constant dollar and current dollar analyses.

In section 3 performance requirements for the fire resistive construction

and the protected noncombustible construction alternatives are provided. Five

examples of a comparative LCC analysis of the two alternatives in a specific

hospital building are worked out. These examples vary with regard to first

cost, discount rate, life expectancy of the sprinkler equipment, and tax

status of the facility. A summary and some conclusions are presented in

section 4, A glossary of terminology frequently used in LCC studies is

provided in Appendix A. Appendix B includes single present worth factors and

modified uniform present worth factors for selected discount rates and years.

- 5 -
2. LIFE-CYCLE COST ANALYSIS METHODS

2.1 General Requirements

The comparison of two (or more) competing fire safety systems, based on

their life-cycle cost, requires that only those cost elements that change from

one system to the other be directly considered. However, all cost elements

must each be evaluated over the same study period (i.e., lifetime or investors

time horizon), and all costs must be discounted to a common point in time. If

any of the components of either system have a different expected life than the

study period used in the LCC analysis, replacement costs and/or salvage (or

resale) value factors must be used to adjust the life of each component to the

study period used. Discounting procedures, used to reflect the time-value of

money in its best alternative use, are detailed in section 2.2 below.

Selection of the appropriate study period for a LCC study depends both on

the nature of the investment and the requirements of the investor. New health

care facilities are generally designed for a long physical life and may be

expected to be in operation for many years. P.A, Stone [5] suggests that most

building structures have a physical life of 50 to 100 years if they are

properly constructed and maintained. The physical life of the building

structure is generally much longer than the useful lives of many of the

building elements or components which have more discrete and predictable

lives, and are therefore subject to periodic replacement or renewal. Typical

estimated useful lives of some health care building components were obtained

from reference [6] and are shown in table 2.1,

- 6 -
Table 2.1 Estimated useful life of land improvements,

buildings, and fixed equipment

From Reference (6)

LAND IMPROVEMENTS Building Services Equipment (continued)

Years Years

Fencing

Brick or stone 25

Chain link 15

Wire . - 5 Wood 8

Flagpole 20

Paving (including roadways, walks

and parking)

Asphalt 15

Concrete 20

Gravel 5

Retaining wall 20

Shrubs, lawns, and trees .... 10

Sign 12

Turf, artificial 5

Undergrovind sewer and water lines 30

Yard lighting 15

BUILDINGS

Boiler house 25

Garage

Masonry 25

Wood frame 15

Masonry, reinforced concrete frame 40

Masonry, steel frame, fireproofed 40

Masonry, steel frame, not fireproofed 30

Masonry, wood frame 25

Multilevel parking structure,

masonry 25

Residence

Masonry 25

Wood frame 25

Storage building 20

FIXED EQUIPMENT

Building Services Equipment

Electric lighting and power feed

wiring 20

Conduit and wiring 20

Fixtures 10

Transformer 20

Switch gear 20

Elevator

Dumbwaiter 20

Freight 20

Passenger, high-speed automatic 20

Passenger, other 20

Central television antenna system 15

Central clock system 20

Heating, ventilating, and air

conditioning system 20

Air conditioning system, all

equipment and units

Large—over 20 tons 15

Medium—5 to 15 tons 10

Small—under 5 tons 8

Boiler 20

Compressor, air 15

Condensate tank 20

Condenser 15

Controls 20

Cooler and dehumidifier 10

Cooling tower

Wood 15

Metal 15

Duct work 20

Fan, air handling and ventilating ... 15

Filter 15

Furnace, domestic type ........ 15

Incinerator, indoor 20

Oil storage tank 20

Piping 25

Precipitator 15

Pump 15

Radiator, cast iron 30

Radiator, finned tube 20

Unit heater 10

Nurse call system 15

Oxygen, gas, air piping 25

Paging system 15

Plumbing, composite 25

Fixtures 20

Piping 25

Pump 15

Water heater, commercial 15

Water storage tank 20

Sprinkler and fire protection system . . 25

Fire alarm system 20

Fire pump 20

Sprinkler system 25

Tank and tower 25

Sewerage, composite 30

Piping 25

Sump pump and sewerage ejector .... 10

Telephone system 20

Vacuum cleaning system 15

Other Fixed Equipment

Built-in bench, bin, cabinet, counter.

shelving 20

Conveying system 15

Generator set 20

Hood, fume 20

Sink and drainboard 20

Sterilizer, built-in 20
However, the study period selected as appropriate by an individual

Investor may be considerably shorter than the physical life of the building or

its longer-lived components. In general, a longer study period, approaching

the physical life of the facility, is more appropriate from a societal

standpoint and is therefore more likely to be used for public sector facilities. For example, the General Services Administration uses a 40 year life

for public service buildings [7]. From the individual investor's standpoint,

especially one in the private sector, a considerably shorter study period is

usually selected, based on the intended holding period, the financing period,

depreciation period, or specific company guidelines [8].

The shorter the study period used in evaluating the LCC of a building

system, the more important it is to assess the remaining value of that system

at the end of the study period, especially if the building and the system will

in fact continue in use. Simple proratlon factors can be used to determine

this remaining value. However, a more accurate measure of remaining value,

and one more acceptable to investors in the private sector, is the increase in

selling price that the building could command that can be attributed to the

system at the end of the study period. (This premium should be adjusted

downwards by any potential increase in capital gains and/or depreciation

recapture tax liabilities at that same time.)

The present value, life-cycle cost (LCC) for a given building system can

be computed directly as follows:

LCC = I+R+A+M+T-S-X, ( 2- 1 )

-8 -
where I = Initial investment cost,

R = capital replacement costs,

A = annually recurring costs (including operating, maintenance,

energy, security, and insurance costs),

M = non-annually recurring costs,

T = property taxes (where applicable),

S = resale value at the end of the study period, and

X = tax savings and tax credits (where applicable),

all in present value terms, summed over the study period selected for the

analysis.

If the system costs are to be financed in part (or in whole) rather than

paid for immediately, the initial investment cost (I) can be adjusted to

reflect the present value consequences of principal and interest payments over

time. In such a case:

T = D + F - X' , (2-2)

where D = down payment,

F = present value principal and interest payments, and

X' = additional present value tax savings (if any) from interest payments.

In the following section, discounting procedures will be provided which

can be used to adjust all future costs to present value.

- 9 -
2.2 Discounting Procedures

"Discounting" is the procedure by which costs (or savings) incurred in

different time periods are adjusted to a common point in time (the "base

time"), in order to reflect the time value of money. The discount rate used

for this adjustment should be based on the best alternative risk-free investment opportunity (ies) available to the investor over the study period. (If

capital must be borrowed for the additional investment, then the interest rate

should be used for the discount rate during the life of the loan if the

interest rate is higher than the opportunity rate.) The discount rate can be

adjusted upward to account for risk if a risk adjustment is not incorportated

into the costs (or savings) themselves.

If tax savings are included in the LCC analysis, then an "after-tax"

discount race should be used, based on the best alternative after-tax rate of

return (or on the after-tax cost of borrowing). If tax savings are not included, then a "before-tax" discount rate should be used. Because of the

different nature of taxable and non-taxable Investments and the many different

ways that costs are treated in determining tax liabilities, it is impossible

to formulate a general relationship between a before-tax and after-tax rate of

return, except that the latter is generally smaller than the former for the

same investor.

If the LCC analysis is performed in current dollars, the discount rate

must be specified in nominal terms, i.e., including inflation. If the LCC

analysis is performed in constant dollars, the discount rate must be specified

in constant dollar terms, based on the best alternative real rate of return

- 10-
(or real cost of borrowing) i.e. , net of inflation. The real discount rate

(d') in any given year is equivalent to

d' = - 1 (2-3)

where d = the nominal discount rate, and

E = the general rate of inflation.

Generally, all future costs related to a new building and its systems are

discounted to the date of initial occupancy. All initial investment costs are

assumed to be incurred on that day, so that no discounting of these costs is

required. However, if the planning, design and construction process is

lengthy and the investor must put up substantial sums of money prior to

occupancy, these payments should be discounted forward to the occupancy

date, (Alternatively, all initial and future costs can be discounted back to

the beginning of the construction period or any other common point in time.

This will not change the comparative outcome of the analysis if all costs are

discounted by the same factor over the same time period,)

In this report, the date of building occupancy is used as the base time

for discounting purposes, and all initial investment costs are assumed to be

incurred at that time, A uniform discount rate and general inflation rate are

used over the entire study period. Actual discounting procedures used are as

follows

:

- 11 -
(1) Single Present Value (SPV) Formula

This single present value formula is used to discount a single cost

in year n to present value:

P Fn

1 (l+d)""]*

where P = the present value of the future cost

F^ = the future cost in year n, and

d = the discount rate.

(2-4)

Table B-1 in Appendix B provides single present value factors for

discount rates of 5, 10, and 15 percent over 50 years.

(2) Uniform Present Value (UPV) Formula

When equal costs are incurred each year over n years, the present

value of those costs can be found as:

P A

” (1+d)^ - 1

_ d(l+d)"

where A = the uniform annual cost

(2-5)

In tables B-2 and B-3 , UPV factors for discount rates of 10 and 15

percent, respectively, can be found in the first column (inflation

rate = 0%)

.

- 12-
(3) Modified Uniform Present Value (UPV*) Formula

When a LCC analysis is conducted in current dollars and an annually

recurring cost increases at some constant rate each year over n

years, the present value of those costs can be found as

where = the initial annual cost, and

p = the annual rate of price or cost increase.

When the LCC analysis is conducted in constant dollars, annually

recurring costs which increase at the general rate of inflation can be

evaluated using eq. (2-5) and a real discount rate. However, some annually

recurring costs may increase at a rate significantly different than the

general rate of inflation. In this case, eq. (2-6) should be used with a

differential inflation rate p', instead of p, where

1+E ’ (2-7)

and where E = the general rate of inflation.

Table B-2 and B-3 provide UPV* factors for inflation rates of 0 to 10%

and for discount rates of 10 and 15%, respectively, over 30 years. If a real

discount rate is used, the inflation rates in tables B-2 and B-3 are differential inflation rates; if a nominal discount rate is used, these are actual

inflation rates.

- 13-
3. APPLICATION OF METHODS TO FIRE SAFETY SYSTEMS

3.1 Physical Description of Alternatives

In order to demonstrate the application of the LCC methods outlined in

section 2, two potentially competing fire safety systems that are in compliance with the 1976 Life Safety Code are examined in a new health care

facility. The base system is one of fire resistive construction with no

sprinkler equipment requirements. The alternative system is designed of

protected noncombustible construction and has automatic sprinkler equipment

throughout the facility.

Table 3.1 shows the construction requirements for new health care

facilities based on the fire resistance ratings of structural members. These

fire resistance ratings are shown in hours. The ratings were obtained from

reference [9] and are shown for fire resistive construction and protected

noncorabustible construction, with the fire resistive construction being

further subdivided into a 3 hour classification and a 4 hour classification.

Table 3.2 shows the characteristics of corridor walls in new health care

facilities as obtained from reference [2]. The table presents a comparison of

principal characteristics for health care facilities of fire resistive

construction and protected noncombustible construction. Table 3.3 shows the

characteristics of safety features in new health care facilities of the two

construction types as obtained from reference [2].

- 14-
Table 3.1 Construction requirements - New health care facilities

(NFPA 220-1975)

Fire Resistance Ratings of Structural Members in Hours

Building Component 4-hour

Fire Resistive Construction

classification 3-hour classification

Protected

Noncombustible

Bearing walls 4 3 2

Non-bearing walls NC * NC* NC*

Principal support members

(for 1 floor or roof only)

3 2 1

Principal support members

(for more than 1 floor or roof)

4 3 1

Secondary floor supporting

members 3 2 1

Secondary roof supporting

members 2 1-1/2 1

Interior partitions enclosing

stairways and other openings

through floors 2 2 1

* NC = noncombustible
i Table 3.2 Characteristics of corridor walls in new health care facilities

(NFPA Life Safety Code - 1976)

Fire Resistive Construction

Corridor Wall Requirements

Fire resistance rating ^ 1 hour

Partitions shall be continuous

from the floor slab to the underside

of roof or floor slab above

Doors to corridors should have at

least 20 minutes fire protection

rating

Protected Noncombustible Construction

with Sprinklers

Corridor Wall Requirements

Non-fire rated partitions are permissible

Partitions may be terminated

at suspended ceilings

Doors and frames to corridors

are not required to have a fire

protection rating, but shall be

constructed to resist the passage

o f smoke

- 16 -
Table 3.3 Characteristics of safety features in health care facilities

(NFPA Life Safety Code - 1976)

Protected Noncombustible

Parameters

Protection of vertical openings

Interior finish - corridors

and exits

Interior finish - rooms

Capacity of means of egress

Maximum travel distance

to exit

Hazardous areas

Not severe

Severe

Doors to corridors

Wired glass vision panels

Fire Resistive Construction

2 hour rating

Class "A"

Class "B"

Stairs—22 per exit unit

Horizontal—30 per exit unit

Room door to exit ^ 100 ft

Any point in room to exit

< 150 ft

1 hour fire resistant

construction

1 hour fire resistant

construction and sprinklers ^ 20 minute fire protection

rating

Panels ^ 1,296 sq. in. mounted

in steel frames

Construction with Sprinklers

1 hour rating

Class "B"

Class "C"

Stairs—35 per exit unit

Horizontal—45 per exit unit

Room door to exit 150 ft

Any point in room to exit

< 200 ft

Non-rated partitions

and sprinklers

1 hour fire resistant

construction and sprinkler

Non-rated doors and frames

with sprinklers

Doors to resist passage

of smoke

No restriction in area

of vision panels

Vision panels do not

need to be wired glass

- 17 -
The particular health care facility used as an example is the new Mary

Immaculate Hospital in Newport News, Virginia. This is a three-story hospital

with a gross area of 117,050 square feet, having 120 beds and 25 bassinets.

It was built of fire resistive construction, without a sprinkler system, at a

base cost of $6,917,900 in 1980 dollars.

3.2 Life Cycle Cost Analysis of Alternatives

A demonstration of the LCC method of comparing fire safety system costs

requires specific cost data and estimated life expectancies for the major

components of each system, along with a common study period and discount

rate. Five examples of the LCC method applied to the basic fire safety system

and the sprinkler alternative are provided in this section. These examples

are based on the particular hospital facility described in section 3.1,

although the study period and discount rates used here were selected for

demonstration purposes only and do not necessarily represent the actual

financial analysis assumptions used in that project. These comparisons are

not intended to provide a definitive assessment of sprinkler systems in health

care facilities, nor is it possible to do so except on a case by case basis.

The initial cost of the base case hospital building of fire resistive

constrxict ion was approximately $6,918,000 in 1980 dollars. In the first

example, it is assumed that the reduction in the initial cost due to the

- 18 -
substitution of protected noncombustible construction for fire resistive

construction is five percent, or approximately $346,000. In this same

example, the installed cost of an automatic sprinkler system is assumed to be

approximately $2.00 per square foot, or $234,000 for the entire facility^.

A 30 year study period is used in all of the examples. Except as noted,

both the building and the sprinkler equipment are assumed to have 50 year

lives, so that no capital replacement costs are anticipated. In order to

simplify the analyses, the property tax assessment (if any) and resale value

of the building at the end of 30 years are assumed to be the same for both

alternatives. In addition, all other future costs (e.g., energy, general

building maintenance, and building security) are assumed to be the same in

both cases except for the sprinkler equipment maintenance and fire insurance

costs.

Sprinkler equipment maintenance is assumed to cost $500 per year in base

time dollars, and to increase each year in proportion to the general rate of

inflation. Fire insurance rates vary from one state to another, for different

types of buildings, for different types of building constructions, and for the

type of coverage provided. Typical insurance rates for health care facilities

are shown in table 3.4 and will be used in all of the following examples.

This square foot cost is based on a 1976 Congressional Report [10]

,

updated

to 1980 dollars. The actual cost per square foot can vary significantly

depending on the type of equipment, whether piping is concealed or exposed,

and requirements for sprinkler head placement.

- 19 -
Table 3.4 Insurance rates for new health care facilities (annual)*

Building

Construction Type

Building

Insurance Rate

Contents

Insurance Rate

Fire Resistive 12 cents/hundred 20 cents/hundred

Building Construction

Protected Noncombustible 6 cents/hundred 15 cents/hundred

Building Construction

(sprinklered)

* Based on rate information from Industrial Risk Insurance and the

Insurance Services Office of Maryland,

The initial amount of insurance coverage for the hospital building itself

is based on its construction cost, including the sprinkler equipment. In

addition, insurance on its contents is initially based on a value of

$2,000,000, It is assumed that the insurance rates themselves will remain

stable over time, but that the total amount of coverage required will increase

by five percent per year over and above the general inflation rate.

The comparative analysis of life-cycle costs for the base case and the

sprinkler alternative is worked out in table 3.5 for the first example, a taxexempt facility. The analysis is conducted in constant dollars using a real

discount rate of 10 percent. Since only the difference in life-cycle costs is

sought, only those cost elements which change from one alternative to the

other are considered. Columns (1) and (2) display intermediate calculations

needed to arrive at the difference; however, neither of these columns provides

a meaningful LCC analysis of the individual alternatives. Column (3) displays

the actual difference in life cycle costs between the two systems. The

negative cost difference here means that the sprinklered alternative costs

less than the fire resistive construction alternative. In the first example,

the sprinklered alternative has a clear first cost and future cost advantage

relative to the base system.

-20-
Table 3.5 Example #1

Non-profit Hospital

Constant Dollar Analysis

Real Discount Rate: 10%

Time Horizon: 30 years

PNC Cost: ~95% of FRC Cost

Sprinkler Equipment Cost: $2. 00/ft

Building Value Differential at End of Time Horizon: 0

(1) (2) (3)

Fire Resistive Protected

Construction Noncomb. Const.

(No Sprinklers) (With Sprinklers) (2) - (1)

Initial Costs

Building

Sprinklers

$6 ,918,000

0

$6 ,572,000

234,000

-$346,000

234,000

TOTAL INITIAL COSTS $6 ,918,000 $6 ,806,000 -$112,000

Future Costs

Sprinkler Maintenance

(UPW = 9.43)

$ 0 $ 4,715 $ 4,715

Insurance Cost

(UPW* = 15.80)

Building

Contents

$ 131,165

63,200

$ 64,521

47,400

-$ 66,644

- 15,800

TOTAL INSURANCE COST $ 194,365 $ 111,921 -$ 82,444

TOTAL FUTURE COST $ 194,365 $ 116,636 -$ 77,729

TOTAL LIFE-CYCLE COST $7 ,112,365 $6 ,922,636 -$189,729

- 21-
In the second example, shown in table 3.6, the reduction in the construction cost attributable to the use of protected noncombustible construction is

assumed to be only 2,5 percent rather than 5 percent. As a result, the

initial cost of the alternative building fire safety system increases the

total initial building cost, including sprinkler equipment, by $61,000

relative to the base case. However, because of the substantial reduction in

insurance costs, the sprinkler alternative has a LCC advantage of $15,089. In

this second example, the LCC method of comparison results in a choice opposite

that made using first cost considerations alone.

The third example, shown in table 3.7, is identical to the second, except

for the use of a real discount rate of 15 percent, in order to show the

potential sensitivity of the results to the discount rate. In this example,

the LCC advantage of the sprinkler alternative is lost because the present

value of the future reductions in insurance costs is significantly reduced.

Thus the selection of the discount rate can be critical to the outcome when

investment costs are increased and future costs reduced as the result of a

given design change.

The fourth example, shown in table 3.8, is similar to the second in terms

of actual costs. However, the fourth example is based on a for-profit (i.e,,

tax paying) facility rather than a non-profit facility. As a result, a

nominal, after-tax discount rate (10 percent) is used and the study is

conducted in current, rather than constant dollars, A general inflation rate

of 5 percent per year is also assumed.

-22-
Table 3.6 Example #2

Non-profit Hospital

Constant Dollar Analysis

Real Discount Rate: 10%

Time Horizon: 30 years

PNC Cost: -97.5% of FRC Cost

Sprinkler Equipment Cost: $2. 00/ft

Building Value Differential at End of Time Horizon: 0

(1) (2) (3)

Fire Resistive Protected

Construction Noncomb. Const.

(No Sprinklers) (With Sprinklers) (2) - (1)

Initial Costs

Building $6 ,918,000 $6 ,745,000 -$173,000

Sprinklers 0 234,000 234,000

TOTAL INITIAL COSTS $6 ,918,000 $6 ,979,000 $ 61,000

Future Costs

Sprinkler Maintenance $ 0 $ 4,715 $ 4,715

(UPW = 9.43)

Insurance Cost

(UPW* = 15.80)

Building $ 131,165 $ 66,161 -$ 65,004

Contents 63,200 47,400 - 15,800

TOTAL INSURANCE COST $ 194,365 $ 113,561 -$ 80,804

TOTAL FUTURE COST $ 194,365 $ 118,276 -$ 76,089

TOTAL LIFE-CYCLE COST $7 ,112,365 $7 ,097,276 -$ 15,089

- 23-
Table 3.7 Example //3

Non-profit Hospital

Constant Dollar Analysis

Real Discount Rate: 15%

Time Horizon: 30 years

PNC Cost: ~97.5% of FRC Cost

Sprinkler Equipment Cost: $2. 00/ft

Building Value Differential at End of Time Horizon: 0

(1) (2) (3)

Fire Resistive Protected

Construction Noncomb. Const.

(No Sprinklers) (With Sprinklers) (2) - (1)

Initial Costs

Building

Sprinklers

$6 ,918,000

0

$6,745,000

234,000

-$173,000

234,000

TOTAL INITIAL COSTS $6 ,918,000 $6,979,000 $ 61,000

Future Costs

Sprinkler Maintenance

(UPW = 6.57)

$ 0 $ 3,285 $ 3,285

Insurance Cost

(UPW* = 9.81)

Building

Contents

TOTAL INSURANCE COST

$

$

81,438

39,240

120,678

$ 41,078

29,430

$ 70,508

-$ 40,360

- 9,810

-$ 50,170

TOTAL FUTURE COST $ 120,678 $ 73,793 -$ 46,885

TOTAL LIFE-CYCLE COST $7 ,038,678 $7,052,793 $ 14,115

- 24-
Table 3.8 Example #4

Tax-Paying Hospital (50% Combined Income Tax Rate)

Current Dollar Analysis; Inflation Rate = 5%

Nominal Discount Rate: 10% (after tax)

Time Horizon: 30 years

PNC Cost: ~97.5% of FRC Cost

Sprinkler Equipment Cost: $2. 00/ft

Building Value Differential at End of Time Horizon; 0

( 1 ) Fire Resistive

Construction

(No Sprinklers)

( 2 ) Protected

Noncomb . Cons t

.

(With Sprinklers)

(3)

(2) - (1)

Initial Costs

Building

Sprinklers

TOTAL INITIAL COSTS

$6,918,000

0

$6,918,000

$6,745,000 -$173,000

234,000 234,000

$6,979,000 $ 61,000

Future Costs

Sprinkler Maintenance $ 0

(UPW* = 15.80)

Insurance Cost

(UPW* = 31.08)^

Building

Contents

TOTAL INSURANCE COST

$

$

258,014

124,320

382,334

Tax Savings from Depreciation -$2,174,558

(UPW = 9.43)

Tax Savings from Maintenance

and Insurance Costs -$ 191,167

TOTAL LIFE-CYCLE COST $4,934,609

$ 7,900 $ 7,900

$ 130,144

93,240

$ 223,384

$2,193,732

$ 111,692

$4,904,860

-$127,870

- 31,080

-$158,950

-$ 19,174

-$ 79,475

-$ 29,749

Insurance cost assumed to rise 5% faster than 5% inflation rate. This yields a compound rate of increase of (1.05) (1.05) = 1.1025.

-25-
In this for-profit example, initial costs are subject to recovery through

depreciation over a specified number of years, while all operating-relating

costs can be recovered in the year they are incurred. The Economic Recovery

Tax Act of 1981 now permits full depreciation of new buildings in 15 years

with no salvage consideration and no separate depreciation schedules for major

building components. Straight-line depreciation is used in the fourth example

to compute the annual depreciation allowance.

The present value of the cumulative depreciation taken over the 15 years

is considerably less than the initial cost upon which it is based. Present

value tax savings from depreciation are computed by multiplying the combined

federal and state Income tax rate^ by the present value of the cumulative

depreciation. Similarly, present value tax savings from maintenance and

insurance costs are computed by multiplying the combined tax rate by the

present value of those two cost elements. In this example, the sprinkler

alternative has a lower LCC than the base system. Increasing the discount

rate will reduce the present value of these tax saving items, eventually

making the base system the more cost effective of the two,

A fifth and final example of the LCC method is shown in table 3.9, This

example is identical to the second except that the sprinkler equipment must be

replaced after 25 years rather than having a 50 year expected life. The

^ The combined federal and state income tax rate (CTR) is computed as:

CTR = FTR + STR (1 - FTR)

where FTR = Federal Income Tax Rate, and

STR = State Income Tax Rate,

because state income taxes are deductible from income in computing

federal tax liabilities.

-26-
Table 3.9 Example //5

Non-profit Hospital

Constant Dollar Analysis

Real Discount Rate: 10%

Time Horizon: 30 years

PNC Cost: ~97.5% of FRC Cost

Sprinkler Equipment Cost: $2. 00/ft _ Sprinkler Replacement Cost in Year 25: $3.00/ft

Building Value Differential at End of Time Horizon: 50% of sprinkler

replacement cost.

( 1 ) Fire Resistive

( 2 ) Protected

(3)

Construction Noncomb. Const.

(No Sprinklers) (With Sprinklers) (2) - (1)

Initial Costs

Building $6,918,000 $6,745,000 -$173,000

Sprinklers 0 234,000 234,000

TOTAL INITIAL COSTS $6,918,000 $6,979,000 $ 61,000

Future Costs (Present Value)

Sprinkler Replacement $ 0 $ 32,292 $ 32,292

(SPW = 0.092)

Sprinkler Maintenance $ 0 $ 4,715 $ 4,715

(UPW = 9.43)

Insurance Cost

(UPW* = 15.80)

Building $ 131,165 $ 66,161 -$ 65,004

Contents

TOTAL INSURANCE COST $

63,200

194,365 $

47,400

113,561 -$

15,800

80,804

Resale Value 0 - 10,004 - 10,004

(SPW = 0.057)

TOTAL FUTURE COST $ 194,365 $ 140,564 -$ 53,801

TOTAL LIFE-CYCLE COST $7 ,112,365 $7 ,119,564 $ 7,199

-27-
sprinkler replacement cost is assumed to be 50 percent more than the original

equipment cost ($3.00 per square foot or $351,000 in 1980 dollars) because of

the need to work in finished spaces. In addition, it is assumed that at the

end of the 30 year study period the new equipment will retain approximately 50

percent of its value if the building were to be resold ($175,500 in 1980

dollars). Using equation 2.4, and a real discount rate of 10%, the

replacement cost after 25 years has a present value of $32,292 (SPW = 0.092 x

$351,000). Similarly, the present value of the pro-rated resale value at the

end of 30 years is $10,004 (SPW = 0.057 x $175,500). Because the sprinkler

equipment must be replaced before the end of the study period, the sprinkler

alternative has a higher LCC than the base system. However, the effect of

discounting this future cost over 25 years, along with its anticipated resale

value, greatly reduces the impact of the replacement on present-value costs.

It is important to note that these LCC comparisons are based on a variety

of assumptions as to the present value cost impact of protected noncombustible

construction with sprinklers relative to fire resistive construction without

sprinklers, and in no way can be extrapolated to other health care facilities. Detailed analysis is required to determine the actual design changes

and their related costs in any new facility. Appropriate financial analysis

criteria, including the time horizon, discount rate, insurance costs, tax

analysis, and assumptions about inflation should be determined by those

actually responsible for the financial analysis of the overall facility and

cannot be generalized. Other alternatives permitted by the Life Safety Code

should also be considered in order to determine which results in the lowest

overall cost of compliance.

-28 -
4. SUMMARY AND CONCLUSIONS

This report provides a methodology for determining which of several

alternative building fire safety systems in compliance with the Life Safety

Code for new health care facilities has the lowest life-cycle cost in a

particular application. It is suggested that the LCC criteria is a more valid

means of comparing alternatives than initial costs alone because the LCC

concept includes all costs incurred or avoided over the life of the building

(or the time horizon of the investor) attributable to the design changes. The

elements of the LCC equation are spelled out, and the discounting procedures

needed to adjust future costs to their present values are shown.

The LCC methodology is applied to two alternative building fire safety

systems in a new hospital: (1) fire resistive construction with no

sprinklers, and (2) protected noncombustible construction with automatic

sprinkler equipment. Five examples of a LCC comparison are presented, each

with a somewhat different assumption about the initial cost of the sprinkler

alternative, the discount rate, tax savings assumptions, or the life of the

sprinkler system. The alternative with the lower life-cycle cost varies from

example to example as these basic assumptions are changed. The results,

however, are not meant to provide a definitive answer to the question of least

cost, but rather to stand only as a demonstration of the methodology. They,

therefore, should not be extrapolated to health care facilities (or other

buildings) in general.

-29 -
Life-cycle cost analysis can be a valuable decision-making tool at the

design stage of a new health care facility when selecting among alternative

technologies that satisfy the same design criteria (e.g., the Life Safety

Code). However, the usefulness of LCC analysis can be expanded if the

difference in benefits from the alternative technologies could be better

measured and quantified in economic terms. While some quantification of this

difference may be found in fire insurance rates for buildings, more information is needed by building designers in order to detennine the most costeffective fire safety systems overall for new health care facilities.

5 . ACKNOWLEDGMENTS

Extensive editorial assistance in preparing this report was provided by

Stephen R. Petersen of the Operations Research Division, Center for Applied

Mathematics. The considerable time and effort put forth by Mr. Petersen, and

his contributions to this report, are gratefully acknowledged.

-30-
6. REFERENCES

[1] National Fire Protection Association, Code for Safety to Life From Fire

in Buildings and Structures , NFPA 101-1973, Boston, MA.

[2] National Fire Protection Association, Code for Safety to Life From Fire

in Buildings and Structures , NFPA 101-1976, Boston, MA, 1976.

[3] American Hosptial Association, "Social Security Administration

Validation of JCAH Survey", American Hospital Association, Chicago, IL,

1975.

[4] Ridgway, G.M. , "Can the Hospital Afford Safety?", AHA Institute on Health Facility Safety: Codes and Standards, October 11-13, 1976,

Louisville, KY.

[5] Stone, P.A., Building Economy; Design Production and Organization: A

Synoptic View , New York, N.Y. , Pergamon Press, 1976, p. 293.

[6] Naramore, Bain, Brady, and Johanson, "Management and Planning Services,

Health Care Life-Cycle Costing", Seattle, WA, 1977.

[7] General Services Administration, Life-Cycle Costing in the Public

Buildings Service , Volume II, Washington, D.C., July 1977.

[8] Ruegg, R.T. , Petersen, S.R. , and Marshall, H.E., "Recommended Practice

for Measuring Life-Cycle Costs of Buildings and Building Systems",

NBSIR 80-2040, U.S, Dept, of Commerce, National Bureau of Standards,

Washington, D.C., June 1980.

[9] National Fire Protection Association, Standard on Types of Building

Construction, NFPA 220-1975, Boston, MA, 1975.

[10]

U.S. House of Representatives, Subcommittee on Health and Long Term Care

of the Select Committee on Aging, 94th Congress-Second Session, "The

Tragedy of Multiple Death Nursing Home Fires; The Need for a National

Commitment to Safety", Washington, D.C., September 1976.

-31-
Appendix A - Glossary of Economic Terras in Life Cycle Cost Studies 1

Alternatives - The different approaches or methods by which objectives may be

attained.

Base Time - The date to which all future and past benefits or costs are converted when a present value method is used.

Constant Dollars ~ Values expressed in terras of the purchasing power of the

dollar in the baseline year. Constant dollars have not been adjusted for the

effects of future Inflation or deflation.

Current Dollars - Values expressed in terms of actual prices for each year.

Differential Cost - The difference in cost of two alternatives.

Differential Inflation Rate - The expected percent difference between the rate

of increase assumed for a given item of cost (such as energy) and the general

rate of inflation.

Discount Factor - A multiplicative number for converting costs and benefits

occurring at different times to a common time.

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 common time.

Discounting - The technique for converting costs and benefits occurring over

time to equivalent amounts at a common point in time.

Future Costs - Any costs during the study period which occur after the base

time, or the initial occupancy date. Future costs may be of recurring or nonrecurring types.

Initial Cost (First Cost) - The sum of costs associated with the planning,

design, and construction of a facility.

Life Cycle - The period of time between the base time and the end of the study

period over which the future costs relating to the alternative under study

will be incurred.

Life Cycle Cost Analysis - A generic method of economic evaluation that

considers all relevant costs associated with a project investment during its

study period.

These definitions are consistent with the "Standard Definitions of Terms

Relative to Building Economics" E883-81, in the Annual Book of ASTM

Standards , American Society for Testing and Materials, 1982, when such a definition is provided.

-32-
Modified Uniform Present Worth Factor - A discount factor used to convert a series of annual costs or benefits, increasing in value at a uniform rate, to

their present value, given a discount rate and a length of time.

Non-Recurring Cost - Cost which occurs, or is expected to occur, at any one

time during the building life cycle.

Operation and Maintenance Costs - Costs incurred in the operation and

maintenance of a building or a building system, component, or equipment.

Opportunity Rate of Return - The rate of return available in the next best

available investment of comparable risk.

Present Value - The value of a benefit or cost found by discounting future

cash flows to the base time.

Present Value Factor - The number by which a future value may be multiplied to

find its value at the base time.

Recurring Costs - Costs which occur as regularly repeating single payments

over two or more years of the analysis life cycle. They are uniform (or

uniformly increasing or decreasing) amounts.

Repair and Replacement Costs - Costs associated with restoring a facility, or

a component element, to approximately its original performance. Repair costs

can be expensed for income tax purposes in the year they are incurred, while

replacement costs are considered to be capital expenditures to be depreciated

over time.

Resale Value - See Salvage Value.

Salvage Value - The residual costs or values of assets, or the net sum to be

realized from disposal of an asset at the end of the study period, or whenever

it is no longer to be used. Also Resale Value.

Sensitivity Analysis - A test of the outcome of an analysis by altering one or

more system parameters from an initially assumed value(s).

Single Present Value Factor - A discount factor used to convert a future sum

of money to its present value, given a discount rate and a length of time.

Study Period - The length of time over which an investment is analyzed (syn.

life cycle, time horizon).

Uniform Present Worth Factor - A discount factor used to convert a series of

uniform annual costs or benefits to their present value, given a discount rate

and a length of time.

-33-
Table B-1. Single present worth (SPW) factor for

discount rates (d) of 5%, 10%, and 15%

Discount Pates

Year (n) 5% 10% 15%

1 .9524 .9091 .8696

2 .9070 .8264 .7561

3 .8638 .7513 .6575

4 .8227 .6830 .5718

5 .7835 .6209 .4972

6 .7462 .5645 .4323

7 .7107 .5132 .3759

8 .6768 .4665 .3269

9 . 6446 .4241 .2843

10 .6139 .3855 .2472

11 .5847 .3505 .2149

12 .5568 .3186 .1869

13 .5303 .2897 .1625

14 .5051 .2633 .1413

15 .4810 .2394 .1229

16 .4581 .2176 .1069

17 .4363 .1978 .0929

18 .4155 .1799 .0808

19 .3957 .1635 .0703

20 .3769 .1486 .0611

21 .3590 .1351 .0531

22 .3419 .1228 .0462

23 .3256 .1117 .0402

24 .3101 .1015 .0349

25 .2953 .0923 .0304

26 .2812 .0839 .0264

27 .2678 .0763 .0230

28 .2551 .0693 .0200

29 .2429 .0630 .0174

30 .2314 .0573 .0151

35 .1813 .0356 .0075

40 .1420 .0221 .0037

45 .1113 .0137 .0019

50 .0872 .0085 .0009

^ Single Present Value (SPV) factor is given by:

SPV = — , (l+d)""

where d = discount rate, and

n = number of interest periods (years).

- 34-
Table

B-2

Modified

uniform

present

worth

factors

for

inflation

rates

from

0%

to

10%

(discount

rate

d

=

10%)

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NBS-114A (REV. 2.eo) U.S. DEPT. OF COMM.

BIBLIOGRAPHIC DATA

1. PUBLICATION OR

REPORT NO.

2. Performing Organ. Report No. 3. Publication Date

SHEET (See instructions) NBSIR 82-2558 July 1982

4. TITLE AND SUBTITLE

A Life-Cycle Cost Analysis Methodology for Fire Protection Systems

in New Health Care Facilities

5. AUTHOR(S)

Louis P. Clark

6. PERFORMING ORGANIZATION (If joint or other than NBS, see instructions) 7. Contract/Grant No. national bureau of standards

DEPARTMENT OF COMMERCE 8. Type of Report & Period Covered

WASHINGTON. D.C. 20234

9. SPONSORING ORGANIZATION NAME AND COMPLETE ADDRESS (Street. City. State. ZIP)

10. SUPPLEMENTARY NOTES

Q2] Document describes a computer program; SF-185, FIPS Software Summary, is attached.

11. ABSTRACT (A 200-word or less factual summary of most significant information. If document Includes a significant

bibliography or literature survey, mention it here)

An analytical procedure is presented for conducting life-cycle cost (LCC)

analyses of fire safety in new health care facilities. Comparative LCC evaluations of alternative fire safety systems can be obtained based on their initial

costs, useful life times, operation and maintenance costs, salvage values, and

corresponding fire insurance costs for the building and its contents.

The case study used to demonstrate the procedure compares the life-cycle

costs of two fire safety systems in compliance with the NFPA Life Safety Code

in a particular hospital:

(1) fire resistive construction with no sprinklers, and

(2) protected noncombustible construction fully equipped with automatic

sprinklers.

Five different examples are provided with varying assumptions regarding initial

construction costs, the choice of a discount rate, the tax status of the facility,

and the life expectancy of the sprinkler equipment.

12. KEY WORDS (S/x to twelve entries; alphabetical order; capitalize only proper names; and separate key words by semicolon s) automatic sprinklers; building codes; building construction; health care facilities; life cycle cost; Life Safety Code

13. AVAILABILITY 14. NO. OF

PRINTED PAGES

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( 1 For Official Distribution. Do Not Release to NTIS 41

1 1 Order From Superintendent of Documents, U.S. Government Printing Office, Washington, D.C.

20402. 15. Price

[3^ Order From National Technical Information Service (NTIS), Springfield, VA. 22161 $7.50

USCOMM«DC 6043-P80
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