ESTIMATING

BENEFITS

AND COSTS

OF BUILDING

REGULATIONS

U.S. Department of Commerce

National Bureau of Standards

Washington, DC 20234
SV
NBSIR 81-2223

AT10HAL BUmSAU

OF FTANDABI)! LIBRARY JUL 2 0 1981 r

' i-

:/

ESTIMATING BENEFITS AND COSTS OF BUILDING REGULATIONS

A STEP-BY-STEP GUIDE

U.S. Department of Commerce

National Bureau of Standards

Center for Building Technology

Preface

This publication provides techniques for measuring cost effectiveness of

alternative code requirements. A 1978 NBS report, An Economic Analysis of

Building Code Impacts: A Suggested Approach , by John McConnaughey , provided

impetus for the research underlying this handbook. A report by Carol Rawie,

Estimating Economic Impacts of Building Codes , to be published by the NBS

Building Economics and Regulatory Technology Division, provides a more comprehensive treatment of the topics discussed here. Preparation of this handbook

was funded through the NBS Design and Construction Technology Applications

Program (DACTAP)

.

The author wishes to thank DACTAP manager Porter Driscoll for his encouragement

of this work and constructive suggestions concerning it. Appreciation is

extended to Alan Gomberg, Harold Marshall, James Pielert, and Stephen Weber of

NBS for their valuable comments on various drafts. The author is also indebted

to other NBS staff members and to members of the building community who provided helpful comments on the report, and to Michael Usle, who assisted in

several aspects of the study. Special credit is due Forrest Wilson for his

skillful and imaginative graphics.

Mi
To the Reader

THE AIM OF THIS GUIDE is to help those involved in building codes use economic

analysis to make decisions about code changes. Consider for a moment the

following building code decisions:

* Should all houses be required to have smoke detectors?

* Should the National Electric Code requirement for ground fault circuit

interrupters be adopted?

* Should reduced-sized venting be permitted in plumbing systems?

* Which of several versions of an energy conservation requirement

should be adopted?

* Which code requirements should be applied to rehabilitation or historic preservation projects?

These decisions can not only affect the safety and performance of the building,

but they also can affect construction and operating costs. Ilany building code

changes have major economic effects that should be considered carefully before

decisions are made.

This handbook explains how to apply economic analysis — in particular,

benefit-cost analysis — to building code decisions. It is a how-to guide for

building officials, elected officials, builders, architects, engineers, trade

association members, and others involved in code change decisions who need to

determine the cost effectiveness of such changes.

iv
Contents PAGE

Reasons to Use Economic Analysis 1

Steps In the Analysis 2 Before You Begin 3

1. Define the Problem 5

2. Estimate Impacts on Building Costs 11

3. Estimate Impacts on Safety and Performance 25

4. Compute Net Monetary Benefits 39

5. Estimate Aggregate Impacts 43

6. Perform a Sensitivity Analysis 47

7. Write Up the Results 53

Appendices

A Tables of Discount Factors 55

B Glossary of Economic Terms 61

C Additional Reading 63

Index 66

Blank Worksheets

WHERE TO FIND SAMPLE WORKSHEETS

1.1 Proposed Code Change 6

1.2 Representative Cases 9

2. 1 Impact on Unit Initial Costs 12

2.2 Impact on Unit Operation and Maintenance Costs 18

2.3 O&M Costs Rising at the Rate of Inflation 19

2.4 O&M Costs Rising at a Rate Different from Inflation 20

2.5 Impact on Government Costs per Unit 22

3.1 Impact on Expected Property Losses per Unit 28

3.2 Impact on Expected Life Safety per Unit 30

3.3 Impacts per Unit of a Change In Space 34

3.4 Impacts on Unit Residual Value 36

4.1 Adjusting O&M Costs, for Differential Cost Changes 40

4.2 Present Value of Net Monetary Benefits per Unit 42

5.1 Aggregate Impacts (filled out for Net Monetary Benefits) 45

5. 1 Aggregate Impacts (filled out for Lives Saved) 46

6.1 Values to Alter In a Sensitivity Analysis 49

6.2 Sensitivity Analysis 50

3.3 Impacts per Unit of a Change In Space (Sensitivity Analysis) 51

7. 1 Results of the Benefit-Cost Analysis 54

V
Reasons To Use Economic Analysis

In Setting Building Code Requirements

REASONS TO USE ECONOMIC ANALYSIS IN SETTING BUILDING CODE REQUIREMENTS

Economic analysis is valuable because it:

* Brings out the facts * Economic analysis helps assure that all important effects are considered. For example, it focuses attention on

the price that must be paid for additional safety and performance.

It shows which information is essential to the code change decision

and provides a framework for acquiring and organizing the needed

information.

* Assists in making choices . Economic analysis provides a common denominator — dollar value — which makes it possible to consolidate many

of the diverse impacts of a code change into a single figure which

can be weighed against nonmonetary impacts.

* Is useful even when information is not readily available . Even if

there is considerable doubt about the benefits or costs of a code

change, economic analysis may point to the correct code decision or

it may show what other data are needed to make the right decision.

But this does not mean a formal economic analysis is needed for all code

change decisions. Rather, an economic analysis is most useful when:

* The proposed change is important , with potentially high impacts.

* The proposed change is controversial .

* The magnitude of economic effects is uncertain without an economic

analysis .

* Data are available on the most important impacts of the code change.

In 1980, the U. S. House of Representatives published a report, Cost-Benefit

Analysis: Wonder Tool or Mirage? We mention it because the limitations of

cost-benefit analysis pointed out in that report may also apply in analyzing

building regulations. For example, there are often problems obtaining adequate data on building hazards. As another example, there may be important

impacts not easily included in a simple analysis, such as long-run effects

of code changes on construction innovation or income distribution.

Because of such difficulties, economic analysis is most useful as one of

several inputs to the decisionmaking process. In this role it can provide

valuable and sometimes surprising insight into the effects of code changes.

1
Steps in the Analysis

This handbook describes a step-by-step process of analyzing a proposed code

change to determine whether it is cost effective. Sample worksheets filled

out for a hypothetical code change are provided to illustrate the process.

There are also blank worksheets in appendix D which can be removed and duplicated for future use. A glossary of economic terms begins on page 61.

References for additional information are listed at the end of each chapter.

There are seven steps in analyzing economic Impacts of proposed code changes;

1

DEFINE THE PROBLEM

* Record key information about the code change

* Select representative cases to analyze (typical design,

construction year, location, building analysis period)

Page

5

2

3

ESTIMATE IMPACTS ON BUILDING COSTS 11

* Estimate changes in construction, operation and maintenance costs

* Estimate effects on government costs

ESTIMATE IMPACTS ON SAFETY AND PERFORMANCE 25

* Determine how the code revision changes the likelihood of accidents

* Estimate the change in fatalities, injuries, and property losses

* Estimate effects on other aspects of building performance

M COMPUTE NET MONETARY BENEFITS. . 39

* Adjust figures to reflect future construction dates

* Calculate present value of Net Monetary Benefits

ESTIMATE AGGREGATE IMPACTS . 43

* Sum Impacts on all affected buildings in the code jurisdiction

PERFORM A SENSITIVITY ANALYSIS 47

* Identify uncertainties in the variables

* Recalculate costs and benefits using altered values of variables

WRITE UP THE RESULTS 53

* State key assumptions and areas of uncertainty

* Describe important quantitative effects

* Describe important qualitative effects
^aDDOOOOOODODODOOO

WORKSHEETS how they work
Before beginning the analysis, there are a few points to keep in mind

concerning the scope of this handbook and the method of analysis.

First , while it is desirable to estimate important effects in terms of dollars

or some other numerical measure, for some effects there may not be sufficient

Information to do this. These other effects should be described verbally so that those making code change decisions can take them into consideration.

Second , the method in this guide can be used in deciding whether to delete,

add, or modify a code requirement. It can be used to compare several versions of a code change to see which produces the greatest net benefits. Also,

it can be used to compare several proposed code changes which have similar

benefits in order to find the least costly way to obtain these benefits.

Third, this guide explains how to estimate all important impacts of a code

change, regardless of whether they affect builders, building owners, tenants,

taxpayers, or others. However, the method also can be used if you wish to

calculate effects only on particular groups.

Fourth , this guide is concerned with building codes . Although economic

analysis is useful in making decisions related to zoning, subdivision, or environmental regulations, the particular methods and worksheets in this handbook were devised specifically for building codes and may not always be

suitable for analyzing these other types of regulation. The same is true

for product safety regulations applied to building furnishings.

Finally , all the steps in this guide are not needed for each code change

analyzed. You will only need to complete the steps and fill out the worksheets that are appropriate for the code change you are studying. In some

cases you may need to devise new worksheets for situations not covered in

this guide.

4
Define the Problem

The steps in this guide and the use of the worksheets are illustrated with

a sample problem involving a fictitious Fire Safety Feature (FSF). All of

the examples in this guide are hypothetical. In cases where the same worksheet would have to be filled out several times in order to complete the

analysis, we present only one version of the worksheet, omitting other computations in order to save space.

In the first step you will decide on the scope of the analysis, select a unit

of analysis, describe the exact code change to be analyzed, select representative cases for the analysis, and choose a code analysis period. You will use worksheets 1.1 and 1.2.

Scope . The first step is to decide on the scope of the analysis. For example,

will you analyze effects on the local jurisdiction, the state, the region, or even the nation as a whole? Also, you will need to decide whether to

analyze code changes from the viewpoint of a specific interest group, such

as builders or owners, or from the viewpoint of the community as a whole.

For the most part, the discussion in this guide assumes you are analyzing

effects of a code change on everyone in the code jurisdiction.

Describe the code change . Next, determine which parts of the code section

will be altered and record pertinent information for easy reference later on. Worksheet 1.1 is provided for this purpose. Its use is illustrated for the

example below, which involves a code change for a fictitious jurisdiction.

Unit of analysis . Third, choose a unit of analysis. If possible, this

should be a unit which is closely related to the code change impacts and for

which there are data on the number of units constructed. For example, the

effects of a plumbing code change might be analyzed per bathroom. An attic

insulation requirement might be analyzed per square foot of attic space. In

the example. Fire Safety Feature impacts are calculated per dwelling unit.

Example: IDENTIFYING WHAT IS REQUIRED BY A PROPOSED CODE CHANGE

Problem : A hypothetical proposed provision of the Springfield County building

code reads as follows: Except for sprinklered buildings , all new buildings

in residential use groups R-2 , R-3, and R-4 of two stories or more in height must have at least one Fire Safety Feature of design A or B installed in the kitchen of each dwelling unit.

Use groups R-2, R-3, and R-4 are defined in the Springfield County code as including single-family houses and multifamily dwellings except hotels and motels. The current code provision, which would be deleted if the revision

is approved, requires a Fire Safety Feature of design C.

What are the key changes required under the proposed provision?

Solution : Pertinent information that should be presented for this proposed

code change is shown in worksheet 1.1.

5
Worksheet 1.1 hypothetical example

PROPOSED CODE CHANGE

Title or number of code change Fire Safety Feature (FSF) Recjuirement

Occupancy or Use

Group Affected

New buildings in use groups R-2, R-3 , and

R-4; single and multifamily dwellings except

hotels and motels.

Construction

Type Affected

All types of construction two stories or more in height.

Building Part or System

Affected

Kitchen,

Conditions or Exceptions

Does not apply to sprinklered buildings.

Original

Requirement

FSF/design C required.

Proposed

Changes

One FSF/design A or B required for each

dwelling unit; design C no longer required.

6
SELECT REPRESENTATIVE CASES

Often the effects of a code change vary from building to building. As a practical matter, it is impossible to analyze the impacts of a code change

for all types of buildings. Therefore, you should choose a few representative

cases for analysis and use the resulting case studies as a basis for calculating

the total effect.

Choosing a representative case involves selecting a reference building, identifying construction practices with and without the code change, and selecting

certain other characteristics such as location and construction year. The

exact characteristics to select depend on the code change being analyzed.

Reference buildings should reflect the various types of buildings that will

be constructed during the code analysis period and would be affected by the

code change. It may be convenient to select actual buildings as the reference

buildings. But if you cannot find an actual building which is sufficiently

typical, you may wish to use a hypothetical design. Publications which may

help in choosing reference designs are listed at the end of this chapter.

There are several questions to keep in mind when selecting a reference design;

* Which building features will determine the impact of the code change? For

example, the type of heating system is relevant in analyzing cost-effectiveness of an energy conservation provision, but may not be relevant in analyzing

a fire safety provision.

* What kinds of buildings will be prevalent in the code jurisdiction? Although

predicting construction trends is difficult, in some cases it may be important

to select representative buildings that represent likely future practices.

Failure to anticipate building trends will result in an incorrect basis for

deciding whether to make the code change.

* Which types of building construction will be affected by the code change

after taking into account exceptions and expected waivers?

* Are major rehabilitation or historic preservation projects common in the

jurisdiction? If so, to what extent would the code change apply to them?

Usually it is helpful to choose several reference designs. How many you choose

depends on the code change, the diversity of the affected building population,

and the time and money available for the analysis.

Worksheet 1.2 is provided to record characteristics of representative cases.

Its use is illustrated on page 9 for the example on the facing page.

7
example: select representative cases for analysis

Problem: The code change described in the example on page 5, requiring a Fire

Safety Feature in residential buildings, is proposed for adoption in 1981. The code jurisdiction is made up of two towns, Poker Flat and Springfield,

for which the following number of new dwelling units will be constructed

between 1981 and 1990:

Springfield Poker F lat

Single-family houses 2000

Multifamily low-rise units 580

Residential high-rise units AOO

500

20

0

Fifty percent of the single-family houses in Springfield are expected to be one-story and 75 percent of the residential high-rises are expected to be sprinklered. All other buildings will not have sprinkler systems and will be

at least two stories. With the code requirement, almost all single-family

houses are expected to use design A of the FSF, and all multifamily low-rise

and high-rise buildings are expected to use design B.

What representative cases should be selected as a basis for analyzing costs

and benefits of the code change?

Solution : Representative cases are selected as follow: Case 1 , a singlefamily house constructed in Springfield in 1985; builder Installs a FSF/

design A in lieu of Installing design C; Case 11 , a single-family house

constructed in Poker Flat in 1985; builder installs a FSF/design A in lieu

of installing design C; Case 111 , an apartment in a multifamily low-rise

building constructed in Springfield in 1985; builder installs FSF/design B in lieu of installing design C; and Case IV , an apartment in a residential

high-rise constructed in Springfield in 1985; builder installs FSF/design B in lieu of installing design C.

These four cases are described in worksheet 1.2.

Code analysis period . While selecting representative cases, you should also

select a code analysis period and enter it on worksheet 1.2. Impacts of the

code change will be estimated for buildings constructed within this period.

For example, you may select the period over which the requirement is likely

to be in effect before it is carefully reviewed for possible revision. The

code analysis period should be the same for all representative cases. The

period used in the example on the next page is 1981 to 1990, ten years.

Other items on worksheet 1.2 are discussed following the worksheet.
Worksheet 1.2 hypothetical example

REPRESENTATIVE CASES

Code analysis period 1981 - 1990 Unit of analysis Dwelling unit

Representative Case

Characteristics I II III IV

Location Springfield Poker Flat Springfield Poker Flat

Date Constructed 1985 1985 1985 1985

Type of Building

Singl e-fam il y

house

Single-family

house

Multifamily

low-rise

Residential

high-rise

Practice Without

the Code Change

Design C Design C Design C Design C

Practice With

the Code Change

Design A Design A Design B Design B

Building Analysis

Period (Years)

25 25 25 25

Other Factors

Location . The building location affects construction costs and determines

climate and other factors which may be relevant in analyzing the code impacts.

Date constructed . Because costs change, the effect of a code requirement

may depend on the construction date. For example, prices of innovative fire

safety devices may decline over time in real terms as wider use allows mass

production. Rapidly rising energy prices may mean that energy conservation

requirements have a greater effect on structures built in 1990 than in 1985.

Type of building . The construction type, height, area, or other physical

characteristics of a building may be listed on worksheet 1.2 as part of a representative case. You may also wish to list the use group, the number,

age, and type of occupants, and any other information about the design and

use of the building that seems pertinent to the proposed code change.

9
Practice without the code change . This item in worksheet 1.2 refers to the

practice the builder would use in the absence of a code change when con- structing the feature affected by the code change. If construction practices

are changing rapidly, then in specifying a baseline practice you should

consider not only current building practices but also likely trends. For

example, even without a code change requiring smoke detectors, is there a trend toward their use?

Practice with the code change . This item describes how builders will respond

to the code change. If the code allows some flexibility, you may wish to

consider several alternative ways of meeting requirements, perhaps including

innovative practices. (If it is not possible to define innovative practices

well enough to include them in a representative case, you may wish to list

possible innovative methods of compliance later on when you present the

results of your analysis. This information may be useful in choosing between

more flexible and less flexible versions of a code requirement.)

Building analysis period . This period usually reflects the expected lifetime

of the building. Thus, it may differ for each reference building. If there

is great uncertainty about actual building lifetimes, it may be necessary to

simply assume an expected lifetime, such as 25 years. If good estimates

concerning code change impacts are available only for a shorter period, the

assumed building analysis period may be shorter than the expected life.

Other characteristics . Other characteristics may also be assumed, depending

on the code change. For example, in jurisdictions where there is extensive

rehabilitation under way which is covered by the code for new buildings, you

may wish to select a rehabilitation project as a representative case.

For further information on construction data and reference designs

Annual Housing Survey; 1977, United States and Regions , U. S. Bureau of the

Census, Series H-150-77, U.S. Government Printing Office, Washington, D.C.

20402, 1979.

Characteristics of Apartments Completed; 1978 , U.S. Bureau of the Census,

Series H-131A, U.S. Government Printing Office, Washington, D.C. 20402.

Economic Aspects of Fire Safety in Health Care Facilities; Guidelines for

Cost-Effective Retrofits , R. E. Chapman, P.T. Chen and W. G. Hall, NBSIR

79-1902, National Bureau of Standards, 1979, pp. 52-61. Available from

National Technical Information Service (NTIS), 5285 Port Royal Road, Springfield, VA. 22161. (Prototypical hospital.)

New One-Family Houses Sold and for Sale , U.S. Bureau of the Census, Series

C25, U.S. Bureau of the Census, Washington, D.C. 20233. (Monthly.)

Three Proposed Typical House Designs for Energy Conservation Research , S.R. Hastings, NBSIR 77-1309, National Bureau of Standards, Washington,

D.C., 1977. Available from NTIS, 5285 Port Royal Road, Springfield, VA.22161.

10
Estimate Impacts On Building Costs

This section explains how to estimate the economic effects of a code change

on building-related costs. In it, you will use worksheets 2.1 through 2.5.

A code change may affect building costs only, or it may also affect the costs

of government services such as fire protection, police protection, or code

administration. Both kinds of costs are discussed in this section.

There are three points to keep in mind in analyzing cost items:

First, in estimating cost impacts, the existing code requirement can be used

as a baseline. For example, if the original provision Imposes a cost of $100

per building, and the proposed provision imposes a cost of $105 per building,

the relevant impact is the difference between the two requirements, or $5.

Second, the discussion in this chapter and the next assumes that the building

in question is constructed in the present year. Later, chapter 4 explains

how to apply the estimates to buildings constructed in future years.

Third, costs should be estimated before tax deductions, since full costs are relevant in examining codes from the social perspective. For example, the

cost of meeting an energy conservation requirement should be estimated without

considering cost-savings due to tax credits. For further discussion of tax

effects, see the discussion on pages 13 and 14 and the references listed at

the end of this chapter.

Construction costs

Worksheet 2.1 is provided to list effects on materials, labor, equipment,

overhead and profits, and other construction costs. You should take into

account costs associated with plan-checking delays, construction modifications

needed to obtain approval, certification requirements, and record-keeping

requirements. However, fees paid by builders to the code jurisdiction

should not be counted here since the code administration costs covered by

the fees will be counted in government costs, discussed later.

You should also consider longer run, indirect effects on costs. For

example, variations in code requirements from jurisdiction to jurisdiction may

decrease the efficiency of builders who operate in several jurisdictions.

Even if you cannot estimate dollar amounts for such Indirect effects, if they

are important they should be described in non-dollar terms so that they will

not be overlooked in the code change decision.

Worksheet 2.1 summarizes the effects of code changes on construction costs for

the hypothetical case involving a Fire Safety Feature which was introduced

earlier. The data in this and other worksheets are for Representative Case I described in worksheet 1.2. Because of limited space, computations for other

representative cases are not shown in this guide. However, in your analysis

you should fill out the worksheets for each representative case. A blank

worksheet is provided at the back of this guide for summarizing costs.

Sources of construction cost data are listed at the end of this chapter.

n
Worksheet 2.1 hypothetical example

IMPACT ON UNIT INITIAL COSTS®

Representative case I (from worksheet 1.2)

2

^ Costs may be calculated per building, per dwelling unit, per square

foot, or for some other basic unit of analysis.

Type Cost

Proposed

Requirement

Original

Requirement Change

Materials and

Components $ 100 $ 50 $

^

Wages and

Salaries $ 40 $ 20 $ 20

Construction

Equipment $ 0 $_ 0 $ 0

Builder's overhead

(general & admin.) $ 60 $ 30 $ 30

Other costs

TOTAL

$ 0

$ 200

$ 0

$ 100

$ 0

$ 100

Construction delays . Adding a code requirement may increase the time it

takes to get plans and site work approved. If possible, the costs of these

delays should be counted in analyzing code change impacts. For example,

there might be higher construction costs if personnel and equipment are

idled because of delays. Even if it is not possible to reflect costs of

delays in worksheet 2. 1, the extent and nature of added delays should still

be described in presenting the results of your analysis so that this effect

can be considered by those making code change decisions.

In estimating costs of delays, you should count only differential cost

increases, i.e., increases which reflect a rise in construction costs in

excess of the general rate of inflation. You should not count cost increases

which merely reflect inflation in general. A method of computing differential

cost changes is described on page 16.

If occupancy is delayed due to a code change, the lost value of the space

should be counted in estimating impacts on building performance. (Methods

of estimating effects on performance are treated later in this guide.)

12
OPERATION AND MAINTENANCE

Code requirements may affect costs of operating and maintaining buildings

(O&M costs) over a period of years. To compare effects that occur at different times, it is necessary to find their present value through a process

called discounting. The next section describes methods of discounting.

Discounting . A one-dollar cost or benefit of a code change is worth less if

it occurs in the future than if it occurs in the present, even in the absence

of inflation. This is because money received now can be invested at a profit

which is lost if the money is not received until later. Therefore, future

dollar effects must be discounted to their present value. This is done by

means of a discount factor , a number (such as ".3855") which can be computed

from a formula or looked up in a table.

To determine the discount factor, first it is necessary to select a discount

rate , a percent which reflects the investment returns foregone by deferring

income to the future, or the returns gained by deferring costs. The discount

rate used should reflect the rates of return that could be earned by the

people who will be affected by the code change.

Rates of return may be stated in two ways. Market or nominal rates are the

actual rates observed in the market. They include percentage points to com- pensate for inflation. Real rates , on the other hand, cannot be directly

observed and must be computed (or assumed). In inflationary times, they are lower than market rates because they show the real rate of return on an

investment after subtracting out the effects of inflation.

If code change impacts are stated in constant dollars, as they are in this

guide, then the discount rate should be based on real rates of return. If

the code impacts are stated in current dollars, then the discount rate should

be based on market rates.

Some market rates that may be useful in determining discount rates include

the business prime rate of interest, before-tax returns to business investment, construction loan rates, savings account rates of interest, mortgage

and auto loan rates, municipal and corporate bond rates, and treasury bill

rates. The following formula can be used to find the real rates corresponding

to these market rates:

r = 1 + _ 1

1 + i

where "r" is the real rate of interest, "r* " is the market rate, and "i is

the rate of inflation. Thus, with a 10 percent rate of inflation, an investment that returns 20 percent nominally would return only [ (1+. 2 )/(!+. 1 ) ] - 1 = .091, or 9.1 percent, in real terms.

Various building studies have used real discount rates ranging from 1 percent

to 10 percent or higher. Ten percent is the rate specified by the Federal

Office of Management and Budget for evaluating most Federal investments.

13
2

This guide uses a before-tax rate of return. The before-tax rate of return

should be used in analyzing a code change from the national perspective,

because while taxes paid are lost to the taxpayer, they still represent gains

to the nation as a whole. However, in analyzing a code change strictly from

the viewpoint of the local community, you may wish to consider the rate of

return on investment after Federal and State taxes, since such taxes are lost

to the local community.

After selecting the discount rate , the next step is to decide what kind of

discount factor to use. Three kinds of discount factors are described on the

next two pages in the box and in the text. Tables of discount factors are included in appendix A.

14
2 SINGLE PRESENT WORTH FACTOR ISPWI

Single Present Worth factor (SPW) . A Single Present Worth factor is useful

for discounting effects that occur only once, such as a $100 cost incurred

in ten years. The present value (P) of the one-time future cost or benefit

(F) is calculated from the formula, P = F X SPW. The SPW can be selected

from table I in appendix A for the assumed discount rate and the year of

the impact, or it can be calculated using the formula in table I.

This factor is particularly useful for discounting non-recurring (or irregularly recurring) repair and replacement costs.

SUMMARY OF DISCOUNT FACTORS

TYPE

FACTOR

Single Present Worth (SPW)Uniform Present

Worth (UPW)

Modified Uniform

Present Worth (UPW*)

(table I, appendix A)

(table 11,

appendix A)

(tables III-IV,

appendix A)

USE

P? F

Find present value

of single future amount

.

P? A + A + ...

Find present value

of annually

recurring amount.

P? + A + A + . .

.

Find present value

of annual amount

with differential

cost Increase.

FORMULA P = (SPW) X (F) P - (UPW) X (A) P - (UPl^*) X (A)

SAJ-IPLE PROBLEM

Find present value

of cost equal to $100 In constant

dollars, Incurred

In 10th year, If discount rate Is

10%.

Find present value

of $100 cost (constant dollars)

Incurred each year

for 20 years, with

10% discount rate.

Find present value

of $100 cost at present prices.

Incurred each year

for 20 years, with

differential price

rise of 5%/year and

10% discount rate.

SOLUTION P « .3855 ($100) P - 8.51A ($100) P - 12.7178 ($100)

- $38.55 - $851.40 = $1271.78

15
UNIFORM PRESENT WORTH FACTOR lUPWI 2

Uniform Present Worth factor (UPW) . The Uniform Present Worth factor

Is used for costs and benefits that recur annually and are expected to be

the same each year. For example, it might be used to discount a cost equal

to $ 100/year (in constant dollars) that will occur throughout a 20-year

building life. The present value (P) of the annually-recurring cost or benefit (A) is determined by the formula P = A X UPW. The UPW can be found

in table II in appendix A for the assumed discount rate and the period over

which impacts occurs, or it can be calculated using the formula in table II.

This factor is useful for analyzing uniformly recurring effects such as annual inspection costs and routine maintenance.

Modified Uniform Present Worth factor (UPW*) . The Modified Uniform Present

Worth factor is used for discounting costs and other impacts whose real

value (value in constant dollars) rises at a constant percentage rate. It

is particularly useful when underlying prices rise faster or slower than the

general rate of inflation. For example, this factor would be useful for discounting energy-related operating costs in cases where there is a continual

increase in the price of energy relative to other prices.

The example below shows how to compute real (differential) rates of cost,

increase. The formula in the example can also be used for computing differential cost decreases.

Example: FINDING THE DIFFERENTIAL COST INCREASE

Problem; Find the differential ("real") rate of increase in a cost item if the overall rate of inflation is 10 percent and the nominal (observed) rate

of cost increase is 15 percent.

Solution ; e = ^ + e* - 1

1 + 1

e “ real rate of cost increase

e' = nominal rate of cost increase for the item

1 “ overall rate of inflation

e » ^ _ 1 - 4,5%

1 + .10

The present value (P) of future costs or benefits (A) whose real value is

rising at a fixed percentage rate can be calculated from the formula

P = A X UPW*. The UPW* can be selected from tables III through V in appendix

A for the differential rate of increase in costs, discount rate, and period

over which costs occur, or calculated using the formula in table III.

16
Record O&M data and discount factors . Now you are ready to calculate the

discounted value of the change in O&M costs resulting from a code change.

First , enter the amount of the cost change and its timing on worksheet 2.2.

O&M costs that might be affected include regularly recurring costs such as energy, water use, security, cleaning, and routine maintenance. (Do not

include insurance costs here since this type of cost is covered in the sec- tion of this guide on building safety and performance.) Affected costs may

also include irregularly recurring costs of repair, replacement, and fire

safety training. In the example on the facing page, repair costs for the

FSF are assumed to be zero under the original code requirement and $25

after ten years for the proposed requirement.

Second , identify the appropriate factor for discounting each cost change.

For example, in part A of worksheet 2.2, the $25 one-time impact on repair

costs will be discounted with a Single Present Worth factor. The factor,

.3855, was selected from table I in appendix A for a 10 percent discount

rate and ten years. A SPW factor was also selected for discounting replacement costs listed in part A.

A Uniform Present Worth factor was selected for discounting routine maintenance costs since these are equal annual costs. The factor, 9.077, was

selected from table II in appendix A for 10 percent and a period of 25 years

(the building analysis period).

In part B of the worksheet, energy prices were expected to rise more rapidly

than prices in general. Therefore, a Modified Uniform Present Worth factor,

9.8919, was selected from table IV in appendix A for the assumed differential

price rise of 1 percent and a period of 25 years.

In part B also, replacement costs under the proposed code requirement were

expected to decline relative to prices in general at a differential rate of

five percent per year, due to a growing market and larger scale production of

the FSF/design C. Because replacement is a one-time cost, it is treated differently from regularly recurring costs subject to differential price changes.

In particular, the five percent differential price decline will be taken

into account on worksheet 2.4 (see page 20) and so need not be considered in

selecting the SPW. The SPW discounting factor, .1486, was selected from

table I in appendix A for 20 years and 10 percent.

Third , after selecting discount factors, the data in worksheet 2.2 should be

transferred to either worksheet 2.3 (for costs rising at the same rate as inflation) or to worksheet 2.4 (for costs changing at a different rate than

inflation). By carrying out the calculations Indicated in the worksheets,

you can determine the impacts of the code .change on operation and maintenance

costs over the building analysis period, discounted to the construction year.

Sources of information related to operation and maintenance costs are listed

at the end of this chapter.

17
Worksheet 2.2 hypothetical example

IMPACT ON UNIT OPERATION AND MAINTENANCE COSTS^

Representative case j Discount rate 10 %

Building analysis period (from worksheet 1.2) 25 years

A. COSTS RISING AT THE RATE OF INFLATION

Cost Type

Proposed Requirement

Amount^ Timing^ SPW<1 UPW^

Original Requirement

Amount^ Timing^ SPW^ UPW^

Repair

once at

$ 25 10 yrsm ,3855 $ 0

Replacement $

once at

$ 50 20 yrs, ,1486

Routine

maintenance $ 15 annual 9,077 $ 5 annual 9,077

B. COSTS RISING AT A RATE DIFFERENT FIlOM INFLATION

Cost Type

Differ

entialPrice

Change

Proposed Requirement

Amount^ Timing^ SPW*^ UPW*^*

Original Requirement

Amount^ Timing^ SIW^ UPW*^

Energy 1%

annually

for 25

$ 20 years 9,8919

annually

for 25

$ 10 years 9,8919

Replacement -5%

once at

$ 100 20 yrs, ,1486 $

^The unit of analysis should be the one listed on worksheet 1.2.

^At present prices.

<^How often and when (years after construction year).

^From discount factor tables I through V in appendix A for assumed discount

rate, timing of impact, and (for UPW*) the rate of differential price change.

18
Worksheet 2.3 hypothetical example

O&M COSTS RISING AT THE RATE OF INFLATION

Representative case J

^From worksheet 2.2, part A.

19
Worksheet 2.4 hypothetical example

O&M COSTS RISING AT A RATE DIFFERENT FROM INFLATION

Representative case J

FUTURE ONE-TIME

C0STSa»b Amount X (l+e)t X SPW _ Discounted Value

$ 100 X ,3585 X ,1486 = $ 5,33

Proposed

Requirement $ X X sz $

Original - $ X X $

Requirement

- $ X X $

RECURRING

ANNUAL COSTSa

Amount at Present Prices

(Proposed - Original) X UPW* Discounted Value

($ 20 $ 10 ) X 9,8919 = $ 98,92

($ $ ) X $

^Amount , SPW , and UPW* are from worksheet 2.2, part B.

b(l + e)t = (1 + .-,05)^^ - ,3585, where the rate of differential price

rise "e" and time period "t" are from worksheet 2.2, part B.

20
GOVERNMENT COSTS

This section explains how to calculate the impacts of a code change on government costs for building code enforcement, fire protection, police

protection, or other building-related services.

To estimate the effects on code enforcement and other fire department or department costs, it is necessary to make an assumption about the effectiveness of enforcement and the use of waivers. Then you would estimate the

budget needed to achieve the target compliance rate and to handle the

expected number of waivers.

To determine the effects of a code change on enforcement costs, you might ask

yourself the following questions: Will a new concept or technology (such as solar energy systems) require training building officials or hiring additional staff? Is a new building aspect regulated that may require new enforcement procedures? Is a performance requirement involved that will

require extensive effort to determine compliance? Will periodic inspection

be required to assure continued compliance?

Impacts on government costs should be discounted using one of the discount

factors described earlier in this section. They should be calculated per

building or other unit of analysis, such as the dwelling unit, so that they can be added to other impacts calculated on a similar basis. Worksheet 2.5

illustrates how to estimate government costs for the hypothetical FSF

requirement in terms of costs per dwelling unit.

Effects on particular groups

This guide focuses primarily on the effect of a code change on the community

as a whole. However, often it is helpful to know how a code change will

affect a specific group such as building owners, tenants representing various

Income levels, designers, builders, materials and other product suppliers,

taxpayers, insurance companies, or insurance customers. No worksheets are specifically provided for these estimates, but worksheets in this guide may

be adapted for this purpose.

There are two questions to answer in estimating effects on particular groups:

F irst , you should determine who is most directly affected by the code change . For example, construction cost changes directly affect the builder or building owner, construction workers, and materials suppliers. Operating

and maintenance costs are paid by the building owner and/or user. These can

be estimated from worksheets 2.1, 2.3 and 2.4, possibly with adjustments for

tax effects. You can estimate effects on suppliers of various construction

products by breaking down construction costs into their components — e.g.,

estimating the change in the required amount of lumber, cement, or electrician's labor. Fire department and other costs paid for from government

funds can be estimated from worksheet 2.5.

Second , you should determine how costs or benefits are shifted in the form of

price or quality changes. This is necessary in order to determine accurately

who ultimately gains or loses from a code change.

21
Worksheet 2.5 hypothetical example

IMRACTS ON GOVERNMENT COSTS PER UNIT

Representative cas e I Discount rate 10 % Building analysis period 25 gears

Assumptions 100% compliance; no waivers

Government Discounted

Function Timing^ Amount^ X SPWC = Value Total

ONE-TIME

COST^ Plan check f Construeinspection, tion

Proposed training year $ 30 X 1 = $ 30 \

Require- I ment $ X = $ /

Plan check, Constr, 1 $10

Original inspection year -$ 20 X 1 = - $ 20 i

Require-

\ ment -$ X = - $ 1

Amount^

Government Discounted

Function Timing^ (Proposed - Original) X UPW® = Value Total

EQUAL ($ - $ ) X = $

ANNUAL

COSTS ($ - $ ) X = $

TOTAL CHANGE IN GOVERNMENT COSTS $ 10

^Years after construction year. ^Cost per building or other unit of analysis.

^From table I in appendix A for assumed discount rate and timing of cost.

^The cost occurs only one time for a particular building although it is an ongoing

cost for the building department.

®From table II, appendix A, for assumed discount rate and building analysis period.

22
2

Ideally, estimates of effects on particular groups should take into account

factors such as the extent to which builders pass on construction cost changes

to building purchasers, landlords pass through energy costs to tenants,

businesses shift costs to customers, hospitals raise prices, ox; the government

alters fees and taxes to reflect changed enforcement or fire protection costs.

In practice it may be difficult to trace this shifting of costs in the market.

If it cannot be estimated in dollar terms, any important shifting of costs and

benefits should be described in qualitative terns. This will help decisionmakers understand who ultimately pays for, and gains from, code changes.

To accurately estimate effects on particular groups, it may be necessary to

consider tax effects. References dealing with impacts on particular groups,

including tax effects on building owners, are listed with other information

sources below.

For more information on construction costs

Building Construction Cost Data , Robert Snow Means Co., Inc., Duxbury, MA.

(Published annually; construction costs.)

Building Cost File , Van Nostrand Reinhold Co., New York. (Published annually;

construction costs.)

Dodge Manual for Building Construction Pricing and Scheduling , McGraw-Hill

Information Systems Company, New York. (Published annually; construction

costs, including remodeling/renovation costs.)

State and local builders associations, trade associations, materials and

equipment suppliers, and contractors are sources of data on construction

costs, materials, component, and system prices, and overhead and profits.

For more information on operation and maintenance costs

Dollars and Cents of Shopping Centers , Urban Land Institute, 12 00 18th St.,

N.W., Washington, D.C. 20036, 1978. (Shopping center O&M data, e.g., maintenance and utilities, by size of shopping center.)

HAS Six-Month National Data , American Hospital Association, Hospital Administrative Services Division, 840 Lake Shore Dr., Chicago, IL. 60611. (Hospital

operations data.)

Income/Expense Analysis; Apartments, Condominiums and Cooperatives , Institute

of Real Estate Management, 430 N. Michigan Ave., Chicago, IL. 60611.

(Apartment building O&M data: by building location, age, and type of ownership.

IREM is also a source of information on office building income and costs.)

Office Building Experience Exchange Report , Building Owners and Managers

Association International, 1221 Massachusetts Ave., N.W., Washington, D.C.

20005. (Office building O&M data by age, height, size and location.)

23
2

Residential Alterations and Repairs , Series C50, U. S. Bureau of the Census,

Washington, D.C. 20233. (Quarterly publication; alteration and maintenance

expenditures .)

For more information on energy costs

Department of Energy, Energy Information Administration, 45 Federal Register

5620, January 23, 1980. (Energy price forecasts.)

Life-Cycle Cost Manual for the Federal Energy Management Program, Rosalie

Ruegg, National Bureau of Standards Handbook 135, U.S. Government Printing

Office, Washington, D.C. 20402, December 1980. (Methods for analyzing energy

conservation and renewable energy features In Federal buildings.)

State Energy Data Report, Statistical Tables and Technical Documentation,

1960 through 1978, Department of Energy, Energy Information Administration,

Washington, D.C. 20461, April 1980. (Energy consumption annually for 1960

through 1978, by State, fuel type, and major end-use sector.)

Economic Analysis; Energy Performance Standards for New Buildings , U.S.

Department of Energy, Office of Conservation and Solar Energy, Office of

Building and Community Systems, Washington, D.C. 20585, November 1979.

Energy Conservation In Buildings; An Economics Guidebook for Investment Decisions , H. E. Marshall and R. T. Ruegg, NBS Handbook 132, U.S. Government

Printing Office, Washington, D.C. 20402, May 1980. (Tax effects, pp. 37-38

and 43-50.)

Energy Conservation In New Building Design; An Impact Assessment of ASHRAE

Standard 90-75 , Arthur D. Little, Inc., U.S. Department of Energy, Washington,

D.C. , March 1976.

24
3.

This section explains how to determine the effects of a code change on building safety and performance. In this unit you will use worksheets 3.1 through

3.3.

Building codes can affect property damages, lives lost, and injuries due to

building accidents. Some types of property losses are listed in the box on

the facing page. A code requirement can also affect the performance or usefulness of a building. These effects should be measured against the ( existing code requirement as a baseline. For instance, if ten lives would \ be lost under the existing requirement and nine lives would be lost under

the proposed requirement, the "safety impact" of the code change would be one life saved.

Building safety j One of the most difficult problems in deciding whether to approve code

changes is determining the effects of a code change on safety. Frequently,

the cause-and-ef feet relationship between a particular feature of a building

and an accident is poorly understood. If it is not possible to determine

what the physical effect of a code change will be, then clearly one cannot

place an accurate dollar value on it. However, even when the data are poor,

economic analysis can still be helpful by identifying the information that

is essential to the analysis. This is accomplished by performing a sensitivity analysis, which is discussed in chapter 6.

For property losses , where possible you should use dollars to measure the

effects of the code revision. However, for life safety effects , there are

two possible approaches.

The approach recommended here is to report life safety effects in terms of j the number of lives saved or injuries avoided . This approach does not avoid

the need to balance dollars against life safety. Instead, it shifts this f difficult and sometimes controversial task to those who make code change | decisions. The analyst can assist decisionmakers by providing information on . the number of lives saved and injuries prevented, the timing of safety { effects, and net monetary effects of the code change. [

\ Another approach would be to actually estimate dollar values for lives saved ) and injuries prevented as a result of the code change. This approach has ' the advantage that it measures all safety effects in units — dollars — | which can be readily compared with other effects and which can be discounted

to put them on a common time basis. However, following this approach

requires the analyst to assign a dollar value to lives saved and injuries

prevented. This raises a number of difficult practical, theoretical, and

• philosophical questions. If you wish to pursue this approach, several references which deal with the issue of assigning dollar values to life safety are listed at the end of this chapter.

Estimate Impacts On Safety and Performance

25
TYPES OF PROPERTY LOSSES

i * Damage to the building, including demolition and cleanup.

* Damage to building contents.

* Loss of company profits and benefits to customers due to disruption of

business

* Costs of temporary shelter for residents or for commercial enterprises.

* Moving costs (residents or businesses).

* Costs of insurance administration. Legal fees and administrative

costs should be counted, but not claims pa)nnents, which are already

counted in estimating damages.

* Miscellaneous costs such as costs of child care, lost wages for residents

as they deal with the aftermath of an accident, and extra meal costs

for displaced residents.

* Property losses to neighboring buildings.

* Losses which are difficult to quantify in dollars, such as loss of

family mementos, psychological effects of property damages, and

loss of family pets.

* Any savings in operating expenses because a damaged building is not

being used should be deducted from the costs of the accident.

26
STEPS TO FOLLOW

This guide takes a simplified approach to estimating the economic impacts of

code changes on building safety. The analysis should be done for each of

the representative cases which you identified in worksheet 1.2. The method

consists of eight steps which you can carry out using worksheets 3.1 and 3.2.

1 . Determine what types of building accidents or resulting outcomes might be

affected by the code change . For example, the hypothetical fire safety code

change described earlier might affect the frequency of three types of fires:

(1) those which are confined to the source of the fire such as, for example,

a stove; (2) room fires; and (3) building fires. A code change concerning

wiring might affect the frequency of ignitions. A code change related to

stairs might affect the frequency of falls leading to injury. If possible,

try to select categories of events which are directly related to the code

change and/or for which frequency and loss data are available. Fill in this

information on worksheets 3.1 and 3.2.

2. Estimate how the proposed code revision would change the probability

of each of these events occurring in the reference building in a single

year . In the example, the change is given per. dwelling unit. Fill in the

Information on worksheets 3.1 and 3.2.

In the example, the annual probability per dwelling unit of a room fire

occurring declines by .001 (.1%, or one chance in a thousand) as a result of

the code change. Only the change in probability is recorded on worksheet

3.1, but you may wish to estimate the "before" and "after" probabilities in

order to determine the amount of change. For example, a change of .001

might represent a change from .006 to .005 (from 0.6% to 0.5%).

If there is no change in ignitions, a decrease in room and building fires means that the number of fires confined to the source must increase, since

fewer small fires grow to be large fires. Therefore, worksheets 3.1 and 3.2

show an increase of .002 in confined fires.

Estimating effects on probabilities of accidents may be the most difficult

task in the entire analysis. One approach is to determine how often relevant

types of events are likely to occur without the code change and then to

estimate the percent of these that would be prevented by the code change.

Later in this chapter, several examples are given of how researchers have

attempted to estimate the safety effects of code changes.

Sources of accident and loss information include published data bases, technical reports, insurance company figures, the opinions of experts, and so

on. However, since information is often sparse about the safety effects of

building features, estimates may have to be based on "informed judgment" or on admittedly arbitrary assumptions. At the end of this chapter we have

listed a few sources of Information about building accidents and losses;

other sources of Information — especially from agencies within your own jurisdiction — should also be tapped.

27
I 3

3. Determine the dollar value of property losses from each type of event.

Property losses include not only the actual damage to the building and its

contents, but also many less obvious costs. An example is costs due to

disruption of a company's business. The box on page 26 lists some costs to

consider in estimating effects of a code change. Fill in this information

on worksheet 3.1.

4. Multiply the dollar loss per event by the change in the probability that

the particular event will occur . Do this for each type of event and add

these figures to get the annual expected dollar loss. Fill in this information on worksheet 3.1.

5. Multiply the annual dollar loss by a Uniform Present Worth (UPW) discounting factor . This will give the discounted expected value of property

losses. The UPW is found in table II in appendix A. Fill in this information on worksheet 3.1.

6. Estimate the number of fatalities and/or injuries resulting from each

type of accident or other event . Sources of loss infoirmation are included

with the references listed at the end of this chapter. A report by Helzer,

Buchbinder, and Offensend described later in this chapter shows how one group of researchers estimated the losses associated with various types of

fires. Fill in this information on worksheet 3.2.

7. Multiply the value which you estimated in Step 6 by the change in probability estimated in Step 2 that the particular type of event will occur . Add these products for fatalities and for each type of injury. This shows

the change in the expected annual number of fatalities and various types of

injuries due to the code change. Fill in this information on worksheet 3.2.

8. Multiply the fatalities or injuries prevented annually by the number

of years . You should use the number of years in the building analysis period

or the life of the required feature, whichever is less. This will show

the expected life safety impacts over time. Write this information on worksheet 3. 2.

28
Worksheet 3.1 hypothetical example

IMPACT ON EXPECTED PROPERTY LOSSES PER UNIT

Representative case I Discount rate 10 %

Building analysis period 25 years

Change in Annual Average Cost Change in Annual

Accident Probability per Accident Expected

Type of Accident^ X (Constant $) = Property Loss

Confined fire +.002 X $ 500 s= $ 1.00

Room fire -.001 X $ 2,000 _

$ -2.00

Building fire -.001 X $ 10,000 $ -10.00

TOTAL CHANGE IN ANNUAL EXPECTED LOSS $ -11.00

upyb X 9.077

TOTAL CHANGE IN DISCOUNTED EXPECTED LOSS OVER TIME $ -99.85

^Probability of accident after code change minus probability of accident

before code change, based on available information and engineering judgment.

^From table II, appendix A, for assumed discount rate and building analysis

period or life of required feature.

29
Worksheet 3.2 hypothetical example

IMRftCT ON EXPECTED LIFE SAFETY PER UNIT

Representative case

J

Accident

Type

Change in Annual No.

Probability anc of Accident^ X per

of Deaths

Injuries

Accident =

Expected Change

Major

Deaths Injuries

in:

Minor

• Injuries

,005 (deaths) = +,00001

Confined

fire +,002 X ,05 (major inj. = +,0001

,5 (minor inj.) = +,001

,02 (deaths) = -,00002

Room fire -,001 X ,1 (major inj.) = -,0001

1,0 (minor inj.) = -,001

,1 (deaths) = -,0001

Building

fire -,001 X ,5 (major inj.) = -,0005

2,0 (minor inj.) = -,002

TOTAL CHANGE IN ANNUAL EXPECTED LOSS -,00011 -,0005 -,002

Building analysis period or life X 25 25 25

of required feature

TOTAL CHANGE OVER TIME -,00275 -,0125 -,05

^From worksheet 3.1.

30
This section gives examples, dravm from three studies, of how researchers

have estimated safety effects of code changes. The reports and many of the

data sources mentioned in them are listed with other references at the end

of this chapter.

Ground Fault Circuit Interrupters . In a 1978 report, John McConnaughey

assessed effects of a code requirement for Ground Fault Circuit Interrupters

(GFCI's), which protect against electric shocks. McConnaughey calculated

impacts for the housing stock as a whole. However, to help the reader relate

McConnaughey' s approach to the method in this guide, we divide by the number

of buildings to find the per-building impact.

The first step was to determine the number of electric shock deaths without

the code change. For 1963-1974, there was an average of 290 deaths per year

due to electric shock in the home. Data for this estimate came from the

Department of Health and Human Services' National Center for Health Statistics, including its publication. Vital Statistics of the United States .

Since the code change affected only new homes, McConnaughey was concerned

with estimating the number of electric shock deaths in the 2.4 percent of

the housing stock that is new homes. If hazards were similar in old and

new homes, this number would be 290 x 2.4 percent. However, new residences

are likely to have fewer electric shock deaths because receptacles are grounded. McConnaughey estimated that grounding would prevent 50 percent of

the potential deaths in new homes, based on a newspaper clipping study and an NBS study of GFCI usage.

Thus, the number of electric shock deaths occurring in new buildings annually

would be 290 x 2. 4 percent x 50 percent = 3.48. Dividing by the number of new

buildings (1,736 million) gives an annual probability of .000002 that there

will be an electric shock death in a single building of (3.48/1,736,000).

To determine the percent of accidents prevented by the code change, McConnaughey estimated the percent of fatalities occurring outdoors or in bathrooms — the areas potentially protected by GFCI's. This number, 45.5

percent, was also based on the newspaper clipping study. Next, he estimated

the effectiveness of the GFCI in preventing these deaths, taking into account

homeowner practices and causes of deaths, to be 77 percent.

Multiplying these figures together (.000002 x .455 x .77) shows the impact of

the code change on the annually expected number of deaths per building,

.0000007. This is the figure that would be entered on worksheet 3.2 under

the "Total Change in Annual Expected Loss."

Mobile home wind safety . In a study for the Department of Housing and Urban

Development, Jeffrey Walters analyzed effects of potential regulations on mobile home wind safety.

31
The first step was to find existing frequency and cost of wind damages to

mobile homes. Using insurance company data, Walters estimated the average

frequency without the potential regulations. However, since the primary

concern was structural failure, the frequency figures were adjusted downward

to reflect only accidents involving structural failure. These adjustments

were based on the expert opinions of leading mobile home insurers. Walters

estimated fatalities and injuries based on mortality statistics from the

National Weather Service's publication. Storm Data . These data were adjusted

to allow for underreporting. The change in frequency of accidents due to

the regulation was estimated based on the definitions of wind zones and on

NBS technical research. An insurance company also provided data on property

losses due to wind damage to mobile homes. These data were adjusted, based

on engineering judgment, to find costs due to structural failure only.

The report concluded that the potential code revision would be cost effective

in 70 m.p.h. wind zones. In 105 m.p.h. wind zones, it would not be cost

effective, and in 90 m.p.h. wind zones, it may be cost effective depending

on the type mobile home and the weight given to Intangible benefits.

Fire safety . In a third study, Helzer and Buchbinder of the NBS Center for

Fire Research and Offsensend of SRI Inc. estimated the effect of potential

standards on the likelihood of upholstered furniture fires. They identified

12 situations defined by three factors: whether someone is home, when the

fire is discovered, and the extent of flame damage.

In estimating probabilities of various types of fires, the researchers drew

on U.S. Fire Administration fire incidents data. In estimating loss of life

and property for the 12 situations, they drew on U.S. Fire Administration

statistics which related losses to the extent of flame damage. However,

because of the lack of detailed data, they used expert judgment to estimate

fire probabilities and how certain factors — such as whether someone was home — would affect the losses.

The changes in likelihood of various situations were estimated based on engineering judgment and assumptions concerning the extent of compliance.

The report concluded that, under certain assumptions, the. cost-plus-loss for

the nation of a "no action" policy would be $6.33 billion. For a smoke

detector requirement, the cost-plus- loss would be $5.95 billion, and for an

upholstered furniture flammability standard, it would be $5.96 billion.

Varying the underlying assumptions in a sensitivity analysis affected the

cost-plus-loss figures, sometimes significantly.

BONJE OF CONTENTION
3 BUILDING PERFORMANCE

At the beginning of this section, we noted that code changes affect the

performance or usefulness of a building in many ways. A few of these impacts

are discussed here and ways are presented to estimate the costs resulting

from such changes.

Amount of usable space . Building code requirements may reduce the space

available for the building's primary functions. One measure of the value of

the lost space is rentals foregone. If the change in space is small relative

to the size of the market for that type of space, the change will not affect

rental rates, and current rentals can be used to value the space. Worksheet

3.3 illustrates a method of calculating the costs of space foregone because

of a code change. Effects are calculated for the building analysis period

and discounted to the construction year.

Fire safety requirements that apply only to buildings which exceed certain

floor area and height limits might lead to construction of a smaller building

in order to avoid those requirements, or a building may not be constructed at

all if code requirements make it excessively expensive. In such cases, the

owner sacrifices rentals or other benefits of the lost space, but also avoids

some construction and operating costs. Worksheet 3.3 can also be used to

calculate these impacts.

How space is used . Building codes may also affect how all or part of a building is used. For example, a basement may not be finished for use as a "habitable room" if doing so would trigger code requirements for minimum

ceiling height. The code could even affect the type of occupancy for an,

entire building; it might inhibit the use of buildings for occupancies with

more stringent construction requirements. For example, fire safety requirements might inhibit use of buildings as nursing homes. There would be a loss equal to the foregone benefits of the displaced use as compared with

the actual use. This effect may be difficult to quantify; but if it cannot

be quantified, it should at least be described qualitatively so that decisionmakers can weigh it in considering code revisions.

33
VVorkSh0Ot 3-3 hypothetical example

IMPACTS PER UNIT OF A CHANGE IN SPACE

Representative case I Discount rate 10 % Building analysis period 25 years

Change in Changes in

Change in Annual Rent Annual Discounted

Usable Space X per Sq. Ft.^ = Revenues X UPW^ = Revenues (A)

-2 sq. ft. X $ 7.00 $ -14.00 X 9.077 = $ -127.08

Change in

Change in Construction Construction

Built Space X Cost per Sq. Ft. Costs (B)

0 sq. ft. X $ _

$

Net Discounted

Value (A - B)

$ -127.08

^Rental excluding any owner-paid operating costs.

^From table II, appendix A, for assumed discount rate and building analysis period.

34
Rehabilitation . If a rehabilitation project would be subject to new building

requirements, a code change may forestall rehabilitation by making it econo- mically impractical. If this occurs, the net benefits of the foregone rehabilitation (increased value of the space minus the rehabilitation costs) are

lost and represent a cost of the code change.

Delays in occupancy . A code change may lead to delays in occupancy because of

the time needed to obtain approvals, resulting in a loss of rentals or other

benefits of that space during the delay.

Efficiency and amenities . Codes may also affect a building's durability,

efficiency, comfort, privacy, convenience, and attractiveness. For example,

a code change permitting surface-mounted flat conductor cable wiring makes

it more convenient and efficient to change wiring layouts.

One measure of these lost benefits may be the effect on the value of rental

or purchased space of the foregone feature. Or, you may be able to estimate

the lost value in other ways. For example, lost benefits might be measured

by the resulting reduction in a firm's profits, or by how much a tenant or owner spends to compensate for an inconvenient or unappealing design.

If there is no way to estimate the dollar impacts of a change in efficiency

or amenities, you should still describe them qualitatively so that they will

not be completely overlooked in making code change decisions.

Residual value . The feature required by a code change may have some residual

value after the building analysis period. For example, a sprinkler system

may still provide protection or have salvage value beyond a 25-year building

analysis period. Estimating residual values may be difficult, but errors

in making such estimates may not be serious because impacts that occur in

the distant future are heavily discounted. For example, with a 10 percent

discount rate, a $1,000 impact occurring after 25 years has a present value

of only $92. In some cases, residual value can be neglected altogether.

Use worksheet 3.4 to calculate the impacts on discounted residual value.

Effects on particular groups

If you wish to estimate effects of changes in building performance and safety

on particular groups, it may be useful to review the discussion on page 21.

Building safety and performance impacts will directly affect the building

owner and/or user, but their monetary effects may be shifted to other groups.

For example, businesses may adjust prices to reflect changes in building

efficiency or property losses. Code restrictions which interfere with a building's performance may decrease land values and, therefore, the tax base,

with an ultimate effect on taxpayers and/or recipients of tax-supported

services. The same is true for code restrictions which interfere with

rehabilitation. If you are not able to estimate the ultimate impacts on various groups in dollar terms, it may still be useful to describe how

effects are likely to be shifted. This will help decisionmakers understand

the true effects of a code change.

35
Worksheet 3.4 hypothetical example

IMPACTS ON UNIT RESIDUAL VALUE

Representative case j Discount rate 10 X

Building analysis period 25 years

Change in Residual Value^ X SPWb

Change in Discounted

Residual Value

$ 20 X 0923 $ 1,85

^At end of building analysis period. The change will be positive for an

increase in the building’s residual value.

^From table I, appendix A for assumed discount rate and building analysis period.

36
3

For more information on building accidents

An Economic Analysis of Building Code Impacts; A Suggested Approach , J. S.

McConnaughey , NBSIR 78-1528, National Bureau of Standards, 1978. Available

from National Technical Information Service (NTIS), 5285 Port Royal Road,

Springfield, VA. 22161. (Method of estimating risks.)

NEISS Data Highlights , U.S. Consumer Product Safety Commission, Washington,

D.C. 20207. (Published quarterly; data on consumer product injuries.)

Vital Statistics of the United States , Vol. II, Mortality Part A, U.S.

Department of Health, Education, and Welfare, National Center for Health

Statistics. (Data on causes of death)

For more information on fire hazards

Assessment of the Potential Impact of Fire Protection Systems on Actual

Fire Incidents , Applied Physics Lab, Johns Hopkins University, Laurel, MD.

,

October 1978. (Detectors, alarms, and automatic suppression systems.)

Decision Analysis of Strategies for Reducing Upholstered Furniture Fire

Losses , S. G. Helzer, F. L. Offensend, and B. Buchbinder, National Bureau of

Standards Technical Note 1101. U.S. Government Printing Office, Washington,

D.C., 20402, 1979. (Method of estimating risk.)

"Fire and Fire Losses Classified," Fire Journal , National Fire Protection

Association, 470 Atlantic Ave., Boston, MA. 02210. (Published annually; fire

deaths, incidents, dollar losses; by cause and occupancy.)

Fire Deaths in the United States; Review of Data Sources and Range of Estiimates , Geraldine Fristrom, National Fire Data Center, U.S. Fire Administration, Washington, D.C. 20472, 1977. (Summaries of data on fire deaths

from various sources; descriptions of sources of data on fire incidents,

deaths, and property losses.)

Fire in the United States; Deaths, Injuries, Dollar Loss, and Incidents at

the National, State and Local Levels , U.S. Fire Administration, Washington,

D.C. 20472, December 1978.

Fire Incident Data Organization (FIDO), National Fire Protection Association,

470 Atlantic Ave., Boston, MA. 02210. (Computerized reports on major fires.)

Fire Protection Handbook , National Fire Protection Association, 470 Atlantic

Ave., Boston, MA. 02210. (Published every six or seven years; cumulative

fire experience; fatalities, age, time of day, other factors.)

"Highlights of the National Household Survey," U.S. Fire Administration,

Washington, D.C. 20472, 1976. (Fire frequency, including unreported fires.)

"Indirect Costs of Residential Fires," M. J. Munson and J. C. Ohls , F ire

Journal, January 1979, pp. 42-48. ^

37
3

"Methodology for Estimating Costs of Burn Injuries and Property Losses," G.

S. Stacey and K. S. Smith, Fire Technology , August 1979, pp. 195-209.

National Fire Incident Reporting System, U.S. Fire Administration, Washington, D.C. 20472. (Computerized system.)

"Pittsburgh Burn Study," J. I. Barancik and M. A. Shapiro, Graduate School

of Public Health, University of Pittsburgh, May 1972. (Fire injury costs.)

A System for Fire Safety Evaluation of Health Care Facilities , H. E. Nelson

and A. J. Shibe, NBSIR 78-1555, National Bureau of Standards, Washington,

D.C., 1978.

For more information on other types of hazards

Crime in the United States; Unified Crime Reports , Federal Bureau of Investigation, U.S. Department of Justice, Washington, D.C. 20535. (Annual.)

Defensible Space: Crime Prevention through Urban Design , Oscar Newmann, Macmillan, New York, 1972. (Effect of housing project design on crime.)

Economic Benefit-Cost and Risk Analysis of Results of Mobile Home Safety

Research: Wind Safety Analysis , J. L. Walters U.S. Department of Housing

and Urban Development, Washington, D.C. 20410, 1979.

Natural Disasters: Some Empirical and Economic Considerations , G. T. Sav,

NBSIR 74-473, National Bureau of Standards, Washington, D.C. 20234, February

1974. (Losses from hurricanes, floods, earthquakes, and tornadoes.)

Storm Data , National Oceanographic and Atmospheric Administration, National

Weather Service, National Climatic Center, Ashville, SC. (Monthly.)

For more information on estimating the dollar value of life safety

A Survey of Methods for Estimating the Cost Value of a Human Life , M. Cornell

^ , U.S. Coast Guard, Washington, D.C. 1976.

The Value of Life: An Economic Analysis , M. W. Jones-Lee, University of

Chicago Press, Chicago, 1976.

1975 Societal Costs of Motor Vehicle Accidents , B. M. Faigin, National

Highway Traffic Safety Administration, Department of Transportation, Washington, D.C., 1976.

Economics of Protection Against Progressive Collapse , R. E. Chapman and P. F.

Colwell, NBSIR 74-542, National Bureau of Standards, Washington, D.C. 20234.

38
Compute Net Monetary Benefits

Benefits are the desirable effects of a code change; costs are the undesirable

effects. For example, if adding a requirement increases property protection,

this would be a benefit. If deleting a requirement decreases property protection, this would be a cost. This chapter explains how to compute the

present value of net monetary benefits per unit.

Earlier, in worksheets 2.3 through 3.1, we calculated code change impacts

based on the assumption that the reference buildings were constructed in the

current year. To analyze a building constructed in future years, two further

adjustments are needed to find the accurate present value of code change

impacts

.

Adjust for differential price changes . Chapter 2 described how to discount

when the cost of an item is rising at a rate different from overall inflation,

using a UPW* factor. However, that procedure accounted only for real cost

changes that occur after the building is constructed. A further adjustment

is needed to account for real cost changes that occur between the present

year and the construction year. In the hypothetical example, the present

year is taken to be 1980. Thus, for a building constructed in 1985, it is

necessary to account for the fact that energy prices will rise relative to

other prices between 1980 and 1985 as well as after 1985.

To account for real cost changes before the construction year, transfer data

from worksheets 2.2, 2.3, and 2.4 to worksheet 4.1. Then, multiply the

change in O&M cost subject to differential cost changes by a "cost change

factor" of (1 + e)^, computed using the annual rate of differential cost

change "e" and years before construction "t." Next, sum the various O&M

costs to find total O&M costs adjusted for differential cost change. The

result is a value which fully reflects the change in relative prices. This

is illustrated in worksheet 4.1 for the hypothetical code change.

Discount to present value . At this point, all monetary impacts have been

discounted to the future construction year. For example, in the illustration, impacts occuring from 1985 through 2005 were discounted to 1985. Now

it is necessary to further discount to find the present values. The method

for doing this is described below.
Worksheet 4.1 hypothetical example

ADJUSTING O&M COSTS FOR DIFFERENTIAL COST CHANGES

Representative case J Years before building constructed 5 years^

Rate of Differential

Cost Change

(Worksheet 2.2)

Change in

O&M Costs

(Worksheet 2.4) X

Cost

Change

Factor^

Ad justed

O&M

= Costs

1 %/yr. $ 98.92 X 1.051 = $ 103.96

-5 %/yr. $ 5.33 X .774 = $ 4.13

+ O&M costs from worksheet 2.3 + $ 92.98

TOTAL O&M COSTS ADJUSTED

COST CHANGES, DISCOUNTED

FOR DIFFERENTIAL

TO CONSTRUCTION YEAR

$ 201.07

^Based on construction date in worksheet 1.2.

^The cost change factor is (1 + e)*- where "e” is the. rate of differential

cost change listed above and in worksheet 2.2, and ”t" is the number of

years before the building is constructed:

First line: (1 + e)^ = (1 + ,01 = 1,051 .

Second line; (1 + e)^ = (1 + ,05 )_5 = . 774
First , enter the values of changes in building performance on worksheet 4.2.

Where building performance improves, use a positive number. Otherwise, use

a negative number. These values are taken from worksheets 3.3, 3.4, and

other worksheets you may have devised to estimate changes in performance.

Second , enter the changes in building costs and property losses on worksheet

4.2. Use positive numbers for cost or loss increases and negative numbers

for cost or loss reductions. The cost changes are taken from worksheets 2.1,

2.5, and 4.1. Property loss changes are from worksheet 3.1.

Third , select a Single Present Worth factor from table 1 in appendix A for

the assumed discount rate and the number of years before the building is

constructed, and enter it on worksheet 4.2.

F ourth , multiply the SPW factor by the values discounted to the construction

year to find the present value of each impact. Sum the first group of values

to find the total effect on building performance, and sum the second group

to find the total effect on building cost plus property loss. In the

example, each cost and benefit item was separately multiplied by the SPW

factor to show the present value of individual items.

The final step is to subtract the change in cost-plus-loss from the change

in building performance. This shows Net Monetary Benefits discounted to present value. In the hypothetical example. Net Monetary Benefits are negative, -$209. At first it might seem that the code change is not cost effective for this particular case. However, worksheet 4.2 shows only monetary

effects; there are also life safety impacts not shown in worksheet 4.2.

Therefore, we cannot determine just by looking at worksheet 4.2 whether the

code change would be cost effective for Representative Case I.

The Net Monetary Benefits on worksheet 4.2 are given only for a single unit,

such as a dwelling unit or building, and they refer only to one representative case. Worksheet 4.2 should be calculated for each representative case. Also, since the example analyzes the code change from the perspective of

the community as a whole, the Net Monetary Benefits figure includes all

monetary effects, without distinguishing whether they accrue to builders,

building owners, tenants, taxpayers, or other groups in the economy.

For further information on benefit-cost analysis

Efficient Allocation of Research Funds; Economic Evaluation Methods with

Case Studies in Building Technology, H. E. Marshall and R. T. Ruegg, National

Bureau of Standards Special Publication 558, U.S. Government Printing Office,

Washington, D.C. 20402, 1979. (pp. 11-18)

Energy Conservation in Buildings; an Economics Guidebook for Investment Deci- sions , H. E. Marshall and R. T. Ruegg, National Bureau of Standards Handbook

132, U.S. Government- Printing Office, Washington, D.C. 20402, 1980. ( pp. 13-21)

Principles of Engineering Economy , E. L. Grant and W. G. Ireson, 5th Edition,

Ronald Press, New York, 1970.

41
Worksheet 4.2 hypothetical example

PRESENT VALUE OF NET MONETARY BENEFITS PER UNIT

Representative case I Discount rate 10 %

Years before building constructed 5 years Unit of analysis Dwelling unit

Worksheet Change in Building

SPW*>

Present

Number Type hnpact Performance^ X * Value

3.3 Building Space^ -127.05 X .6209 $ -78.90

3.4 Residual Valued $ 1.85 X .6209 —

$ 1.15

(Other Impact)*^ $ X

—

$

TOTAL EFFECT ON PERFORMANCE $ -125i23 X .6209 $ -77.75

•

Worksheet Change in

spwt>

Present

Number Type Impact Building Cost^ X = Value

2.1 Initial Costs^ $ 100.00 X .6209 S3 $ 62.09

2.5 Government Cost^ $ 10.00 X .6209 s $ 6.21

4.1 O&M Costs^ $ 201.07 X .6209 3B $ 124.84

3.1 Property Loss** $ - 99.85 X .6209 as $ -62.00

TOTAL EFFECT ON COST-PLUS-LOSS $ 211.22 .X .6209 $ 131.14

Total Effect Total Effect on on Performance - Cost-Plus-Loss = Net Monetary Benefits

$ -77.75 - $ 131.14 = $ -208.89

^Value discounted to construction year.

^From table 1, appendix A, for assumed discount rate and number of years

before building is constructed.

^Use a positive number for Increases in value .

‘^Use a positive number for Increases in cost and loss.

42
Up to now, we have focused on calculating the per unit effects of a code

change for individual buildings. But these calculations do not show the

overall impact of a code change. To find the overall impact, it is necessary

to add up or "aggregate" the effects on many buildings into one number.

This section describes how to do this using worksheet 5.1. But first, let

us look briefly at when it is worth calculating aggregate impacts.

Aggregating may be necessary in situations where the code change has differing effects on different buildings, and where it is not feasible to apply

the requirement only to buildings where it is cost effective. In such

cases, it is necessary to aggregate to find out whether the code change is

cost effective overall.

For e'xample, suppose a proposed fire safety requirement would result in

expected net benefits of $200 for each house occupied by someone who smokes,

but would have an expected net cost of $100 for all other houses. The code

change would only be cost effective in communities with a large number of

smokers. In such cases, aggregating would be helpful to show whether the

code change is cost effective for the community as a whole.

Aggregating may not be essential if a code change is cost effective for all

buildings, or if the code change is not cost effective for any type of

building. In such cases, it may be possible to accept or reject on the

basis of effects on individual buildings.

Also, if a code change has Net Benefits for some occupancies or construction

types, and net costs for others, it may be possible to modify the proposed

code change so that it applies only to types of buildings for which it is

cost effective. In such cases, aggregating might not be essential to make

the code change decision.

Even in such cases, however, aggregating may be useful when presenting life

safety effects. By aggregating, effects can be presented in terms of the

number of lives statistically expected to be saved for the entire jurisdiction. This figure, rounded to a whole number such' as "six," may be more

meaningful to those using the analysis than the probability of saving a life

in one building or dwelling unit, which is likely to be a small fraction

such as ".00275."

43
Worksheet 5.1 illustrates the procedure for calculating aggregate impacts

of a code change.

First , estimate how many buildings or other units will be affected by the

code change during the code analysis period, for each representative case. Affected buildings which were not included in the original representative

cases may be assigned to a representative case for the purpose of aggregating. For example, duplexes might be grouped with single-family houses, or buildings constructed in 1983 might be grouped with buildings constructed in

1985.

For a model code or voluntary state code, you will need to determine which

jurisdictions follow the code. It may be necessary to reduce the estimate

of the number of affected buildings to allow for delays in adopting the

model or state code. Do not count buildings that will not be affected by

the code change because of exceptions, waivers, non-compliance, or because

the builder would have adopted the code-mandated design in any case.

In the example on worksheet 5.1, the number of dwelling units for each case

was determined from the information on page 8 and entered onto worksheet

5.1. For example, 50 percent of the 2000 single-family houses in Springfield

are one story. Since the code change does not apply to one-story buildings,

the number of buildings in Case I is the remaining 1000.

Second , multiply the number of buildings (or other units) by the per-unit

impacts calculated for that representative case. Do this for each representative case, as is illustrated in worksheet 5.1, and sum the products. You

will need separate worksheets for aggregating monetary effects, lives,

major injuries, and minor Injuries. You may also calculate aggregates for

construction cost changes, energy cost changes, and any other effect of

interest to decisionmakers. This guide shows only calculations for Net

Monetary Benefits and lives saved.

For further information on aggregating

Arthur D. Little, Inc., Energy Conservation in New Building Design; An Impact

Assessment of ASHRAE Standard 90-75, U.S. Department of Energy, Washington,

D.C., 1976. (Example of aggregating.)

44
Worksheet 5.1 hypothetical example

AGGREGATE IMPACTS^

Type impact(s) Net Monetary Benefits* Unit of analysis Dwelling unit

Number of

Representative Case Affected Units^

I SFH/Springfield/1985 1,000

X

X

Impact per

Unite

$ -208,89

Impacts for

= All Units

= $ -208,890

II SFH/Poker Flat/1985 500 X - 91,50 = - 45,750

III Low-rise/Spring! , /1985 600 X - 95,72 = - 57,432

IV High-rise/Springf ,/1985 100 X -203,61 = - 20,361

TOTAL FOR ALL UNITS $ -332,433

^This worksheet should be filled out separately for each impact of interest.

^May include buildings similar to buildings specified in representative cases.

% ^From worksheets 3.2 (life safety) or 4.2 (monetary impacts).

* Underlying calculations for Case I are shown in worksheets 1,1 through 4,2

in this guide. The underlying calculations for Cases II, III, and IV,

using similar worksheets , are not shown due to limited space.

45
Worksheet 5.1 hypothetical example

AGGREGATE IMPACTS^

Type impact(s) Lives Saved Unit of analysis Dwelling unit

Number of

Representative Case Affected Units^

I SFH/Springfield/1985 1,000

X

X

Impact per

Unite

.00275

Impacts for

= All Units

= 2.750

II SFH/Poker Flat/1985 500 X .00275 = 1.375

III Low-rise/Spring! . /1985 600 X .003 = 1.800

IV High-rise/Springf ,/1985 100 X .0001 = .01

TOTAL FOR ALL UNITS 5.935

^This worksheet should be filled out separately for each impact of interest.

'^May include buildings similar to buildings specified in representative cases.

^From worksheets 3.2 (life safety) or 4.2 (monetary impacts).

46
Perform A Sensitivity Analysis

Sensitivity analysis is a way of finding out how changes in data or assumptions will affect the final results. For example, how would doubling the

assumed code analysis period affect the calculated net benefits? The box on

this page lists some factors that may be altered as part of a sensitivity

analysis.

One reason for performing a sensitivity analysis is to decide which estimates

should be further refined. If the code change decision would be affected by

a relatively small error in estimating a factor, then it may be desirable to

spend more effort improving that estimate.

Another reason for doing a sensitivity analysis is to aid decisionmakers who

will be using the results of the benefit-cost analysis. It shows whether

disagreeing with assumptions or underlying data is sufficient reason to

reject the results of the analysis. For example, suppose the basic analysis

uses a discount rate of 10 percent, but a code official believes the rate

should be 8 percent and a builder believes it should be 15 percent. A sen- sitivity analysis would show whether changing the rate from 10 percent to 8

percent or to 15 percent would significantly alter the estimated Net

Benefits. If it does not, then both parties might still accept the general

conclusions of the analysis.

What to alter in a sensitivity analysis

Current levels of accidents

Effect of code change on accidents

Cost per accident

Discount rate

Building analysis period

Code analysis period

Method and cost of compliance by builders

Use of waivers and extent of non-compliance

Durability of code-mandated feature

Owner/ tenant behavior with respect to

maintenance and replacement

Rate of energy price escalation

Any Important and controversial assumption

Any important piece of data about which nnnni there is substantial uncertainty

47
This section describes how to do sensitivity analysis. . The method is illustrated on worksheet 3.3 on page 51, and on worksheets 6.1 and 6.2, for the

hypothetical Fire Safety Feature requirement. These worksheets are for

Representative Case I. A sensitivity analysis is needed for each representative case in order to determine the sensitivity of the aggregate figures.

There are seven steps in the sensitivity analysis:

1. Identify ''sensitive” variables . Start by listing the important variables

on worksheet 6.1, along with the value used in the original analysis. Since

it is time-consuming to alter variables in a sensitivity analysis, you

will need to decide which variables to alter. Variables should be altered

if they may be subject to significant errors or controversy. If a potential

change in a variable might change the results of the analysis enough to

affect the code change decision, this variable is a good candidate for the

sensitivity analysis.

In the hypothetical example, the size of the safety impact is critical to

the code change decision. There is much uncertainty about the effect of the

FSF on the number of fires and, therefore, on safety. Thus, the effect of

the code change on various types of fires should be varied in the sensitivity

analysis.

2. Determine your approach . One method of testing for sensitivity is to

change values one at a time. For example, you might recompute Net Benefits,

changing only the discount rate, and then recompute Net Benefits changing

only the code analysis period. A second approach is to change a number of

variables at once. For example, you may recompute Net Benefits for an

"optimistic case" and "pessimistic case," varying a number of factors each

time. In the example, a number of factors are varied at once.

3.

Determine values to use in the sensitivity analysis . You should select

values which might occur under some plausible set of circumstances. Record

these values on the top half of worksheet 6.2.

4. Recompute worksheets 2.1 through 4.2 . You will need to repeat the calculations on most worksheets using the altered values. For the . hypothetical

example, it was necessary to recalculate worksheets 2.2 through 5.1. However, only the recalculation of worksheet 3.3 is shown in this guide.

5. Record the results on worksheet 6.2 . This should show the results of a sensitivity analysis for one representative case, before aggregating. It

shows which variables were altered, how they were altered, and results using

the original and altered values.

In the example, worksheet 6.2 was calculated for Case I for the original set

of values and for a set of altered values. Using a lower discount rate, a reduced safety impact, and the assumption that the FSF is never replaced.

Net Monetary Benefits fell from -$209 to -$291. Life safety benefits also

declined

.

48
Worksheet 6.1 hypothetical example

VALUES TO ALTER IN A SENSITIVITY ANALYSIS^

Representative case J

Variable Value in Base Case^

Include in Sensitivity Analysis?^

FSF/design A price $100 no

FSF/design A life 1 0 years no

Replacement patterns

Replaced

after 20 years yes

Electricity cost

$10 and $20/year

in base year prices no

Residual value $20 no

Discount rate 10% yes

Number of affected bldgs 1,000 no

Change in probabilities:

of confined fire +,002

of room file -,001

of building fire -,001

^This should be filled out for each representative case in worksheet 1.2.

^Values in the basic analysis are from worksheets 2.1 through 3.4, and 5.1.

^The factor should be included in the sensitivity analysis if its value is

very uncertain and if a change may affect the code decision.

yes

yes

yes

49
Worksheet 6.2 hypothetical example

SENSITIVITY ANALYSIS*

Representative case I

Variable Original Values

(Basic Analysis)

Altered Values

(Sensitivity

Analysis)

Replacement patterns 20 years never

Discount rate 10% 8%

Change in probabilitu of:

confined fire +.002 +.001

room fire -.001 -.0005

building fire -.001 -.0005

Impact

Calculated Using

Original Values

Calculated Using

Altered Values

Met Monetary Benefits^

$ -209 $ -291

Fatalities Prevented^

.00275 .0011

Major Injuries Prevented^

.0125 .005

Minor Injuries Prevented^

.05 .02

^This and previous worksheets should be recalculated for each representative case listed in worksheet 1.2.

^From worksheet 4.2 calculated using original and altered values.

^From worksheet 3.2 calculated using original and altered values.

50
Worksheet 3.3 hypothetical example

IMPACTS PER UNIT OF A CHANGE IN SPACE

Representative case I Discount rate 8 % Building analysis period 25 years

Change

Usable

‘ in

Space X

Annual Rent

per Sq. Ft.^ =

Change in

Annual

Revenues X UPW^ =

Changes in

Discounted

Revenues (A)

-2 sq. ft. X $ 7.00 $ -14.00 X 10.675 = $ -149.45

Change

Built

in

Space X

Construction

Cost per Sq. Ft. =

Change in

Construction

Costs (B)

0 sq. ft. X $ $

Net Discounted

Value (A - B)

$ -149.45

^Rental excluding any owner-paid operating costs.

^From table II, appendix A, for assumed discount rate and building analysis period.

51
6

6. Repeat steps one through five for each representative case . Assumptions

and data may be varied differently for each representative case.

7. Compute new aggregate values . Worksheet 5.1 should be recomputed using the

new values.

The analyst should present results of the sensitivity analysis with other

findings so that decisionmakers can determine whether a change in underlying

variables might affect the code change decision.

In some cases, changes in underlying variables may not significantly affect

the results of the economic analysis. If so, decisionmakers could base their

decision about a code change on the analysis, even if they disagree somewhat

with underlying data or assumptions. In other cases, however, the uncertainty

about underlying data may be so great that the economic analysis is not a reliable guide to making decisions. If so, decisionmakers should be cautious

in using the results; more research may be needed to refine estimates of

certain factors before making a code change.

For example, in the hypothetical example used in this guide, changing to more

pessimistic assumptions reduced the projected aggregate number of lives saved

from six to three. Some decisionmakers seeing this result might conclude that

more research is needed before going ahead with the code change. Further

sensitivity analysis could help pinpoint needs for more research.

Breakeven analysis . Another useful tool is breakeven analysis. However, it can only be used when all impacts are given in dollar terms. At the "breakeven value" of a factor, benefits just equal costs; Net Benefits are zero.

For example, in calculating impacts of a code requirement for double-glazed

windows, the breakeven price of fuel is the price for which costs of double

glazing are just offset by benefits from energy savings. If the breakeven

price were $2. 00/gallon, then the code change would be cost effective for any

price greater than $2.00. For any lower price, it would not be cost effective. —

The references listed below contain examples of sensitivity analysis.

WWW

For further information on sensitiviti) analysis

Decision Analysis of Strategies for Reducing Upholstered Furniture Fire

Losses , S. G. Helzer, F. D. Offensend, and B. Buchbinder, National Bureau of

Standards Technical Note 1101, U.S. Government Printing Office, Washington,

D.C., 20402, 1977. (pp. 113-129)

An Economic Analysis of Building Code Impacts; A Suggested Approach , J. S.

McConnaughey , NBSIR 78-1528, National Bureau of Standards, 1978. Available

from National Technical Information Service, 5285 Port Royal Road, Springfield, VA. 22161. (pp. 50-53)

Engineering Economic Analysis , Donald G. Newnan, Engineering Press, San Jose,

CA., 1977.

52
Write Up the Results

The results of the analysis should be presented in a table which describes

all important impacts. The table should highlight the most important

effects of the code change — even if you were not able to quantify these

effects. This will assure that important qualitative effects are not oyer^

looked by the people making code change decisions. The summary table should

Include the following information:

Assumptions . State the key assumptions used in the analysis. For example,

what was the unit of analysis? What discount rate was used? What other important, possibly controversial, assumptions were made?

Quantitative impacts . List useful quantitative information, such as Net

Monetary Benefits and the number of deaths and injuries prevented.

Qualitative impacts . Describe the impacts which cannot be quantified. For

example, impacts on innovation, historic preservation, or national security

might be difficult to quantify, but could be important in a some situations.

The shifting of code impacts from one group to another might be described.

Uncertainty . State the areas of uncertainty in your results. Present results

of the sensitivity analysis and/or verbally qualify the results.

Worksheet 7.1 is provided to help organize the results of the analysis. Its use is illustrated for the hypothetical Fire Safety Feature code change

that has been used as an example throughout this guide.

Getting the most from your building dollars

Today, every community faces a dilemma: How can it obtain adequate building

protection for its businesses and residents without an excessive rise in

construction costs? One solution to this problem is to approve more costeffective code revisions.

If all effects of a code change can be quantified in dollar terms, then the

code change should be cost effective if Net Monetary Benefits are greater

than zero. If there are several proposed versions of a code requirement,

the version with the highest Net Benefits should be the most cost effective.

For most proposed code changes, however, some impacts are difficult or impossible to assess in monetary terms. Thus, usually the decisionmaker

must weigh Net Monetary Benefits against Impacts stated in nonmonetary terms

in order to determine whether, on the whole, the code change is desirable.

If the tools of economic analysis are properly used, they provide a systematic method for estimating the cost of obtaining improved buildings and

for comparing these costs with expected benefits. Results of an analysis,

concisely presented in a table such as the one on worksheet 7.1, can help

those who approve code changes make reasonable tradeoffs among competing

demands for increased building safety, increased building performance, and

reduced building cost. The result will be the construction of more costeffective buildings throughout the code jurisdiction.

53
Worksheet 7.1 hypothetical example

RESULTS OF THE BENEFIT-COST ANALYSIS

Code change Fire Safety Feature requirement

SELECTED ASSUMPTIONS

Value Used in Range of Values Used in

Subject Basic Analysis Sensitivity Analysis

Unit of analysis Dwelling unit Dwelling unit

Discount rate 10% 8 - 10%

Building analysis period 25 years 25 years

Code anal ysis period 1981-1990 1981-1990

Replacement patterns After effective life Never

COSTS AND BENEFITS

Type Impact Base Case^ Sensitivity Analysis^ Comment

Net Monetary

Benefits

$ -332,000 $ -500,000

Fatalities

Prevented

6 3 Safety effects

occur over a

Major Injuries

Prevented

35 10

25-year period

and are very

uncertain.

Minor Injuries

Prevented

100 40

^From worksheet 5.1. ,^From worksheet 5.1 recomputed for sensitivity analysis.

54
aAppendix

APPENDIX A: TABLES OF DISCOUNT FACTORS

I. Single Present Worth Factors (SPW)

II. Uniform Present Worth Factors (UPW)

III. Modified Uniform Present Worth Factors

for Discount Rate of 8 percent (UPW*)

IV. Modified Uniform Present Worth Factors

for Discount Rate of 10 percent (UPW*)

V. Modified Uniform Present Worth Factors

for Discount Rate of 12 percent (UPW*)

^ Other tables of discount factors can be found in many building economics

texts, such as Harold Marshall and Rosalie Ruegg, Energy Conservation in

Buildings: An Economics Guidebook for Investment Decisions , National Bureau

of Standards Handbook 132, U.S. Government Printing Office, Washington, D.C.,

1980; or in investment analysis texts.

55
TABLE I A

SINGLE PRESENT WORTH FACTORS^

ISPWI

P? F

Present Value Future Amount

P = (SPW) X (F)

Year

8%

Discount Rate

10% 12%

0 1.0000 1.0000 1.0000

1 0.9259 0.9091 0.8929

2 .8573 .8264 .7972

3 .7938 .7513 .7118

4 .7350 .6830 .6355

5 .6806 .6209 .5674

6 .6302 .5645 .5066

7 .5835 .5132 .4523

8 .5403 .4665 .4039

9 .5002 .4241 . 3606

10 .4632 .3855 .3220

11 .4289 .3505 .2875

12 .3971 .3186 .2567

13 .3677 .2897 .2292

14 .3405 .2633 .2046

15 .3152 .2394 .1827

16 .2919 .2176 .1631

17 .2703 .1978 .1456

18 .2502 .1799 .13 00

19 .2317 .1635 .1161

20 .214 5 .1486 .1037

Year Discount Rate

8% 10% 12%

21 .1987 .1351 .0926

22 .1839 .1228 .0826

23 .1703 .1117 .0738

24 .1577 .1015 .0659

25 .14 60 .0923 .0588

26 .1352 .0839 .0525

27 .12 52 .0763 .0469

28 .1159 .0693 .0419

29 .1073 .0630 .0374

30 .0994 .0573 .0334

31 .0920 .0521 .0298

32 .0852 .0474 .0266

33 .0789 .0431 .0238

34 .0730 .0391 .0212

35 .0676 .0356 .0189

40 .0460 .0221 .0107

45 .0313 .013 7 .0061

50 .0213 .0085 .0035

where "P" is a present sum of money, "F" is a future sum, "r" is the discount

rate, and "t" is the number of years.

56
TABLE II DDaQanaDnDDaDaDaDaaaDGDaaaoaoQoaDaaDDOoODODaaaQooaoaDDaDDDaaaaoa

UNIFORM PRESENT WORTH FACTORS^

lUPWl

P?^ A + A + A+ ... P = (UPW) X (A)

Present Value Annually Recurring

Future Amounts

Year Real Discount Rate Year Real Discount Rate

8% 10% 12% 8%- 10% 12%

1 0. 926 0. 909 0.893 26 10.810 9.161 7.896

2 1.783 1.736 1.690 27 10.935 9.237 7.943

3 2.577 2.487 2.402 28 11.051 9.307 7.984

4 3.312 3.170 3.037 29 11.158 9.370 8.022

5 3.993 3.791 3.605 30 11.258 9.427 8.055

6 4.623 4.355 4.111 31 11.350 9.479 8.085

7 5.206 4.868 4.564 32 11.435 9.526 8.112

8 5.747 5.335 4.968 33 11.514 9.569 8.135

9 6.247 5.759 5.328 34 11.587 9.609 8.157

10 6.710 6.144 5.650 35 11.655 9. 644 8.176

11 7.139 6.495 5.938 40 11.925 9.779 8.244

12 7.536 6.814 6.194 45 12.108 9.863 8.283

13 7.904 7.103 6.424 50 12.233 9.915 8.305

14 8.244 7.367 6.628 55 12 . 319 9.947

15 8.559 7.606 6.811 60 12.377 9.967

16 8.851 7.824 6.974 65 12.416 9.980

17 9.122 8.022 7.120 70 12.443 9.987

18 9.372 8.201 7.250 75 12 . 461 9.992

19 9.604 8.365 7.366 80 12.474 9.995

20 9.818 8.514 7.469 85 12 . 482 9.997

21 10.017 8.649 7.562 90 12.488 9.998

22 10.201 8.772 7.645 95 12.492 9.999

23 10.371 8.883 7.718 100 12.494 9.999

24 10.529 8.985 7.784

25 10.675 9.077 7.843

p _ ^

(1+r)^ - 1 where "P" is a present sum of money, "A" is an annually

r ( 1+r)^ recurring sum, "r" is the discount rate, and "t” is the

number of years.

57
TABLE III DaDODPDnDDnaDDDnaDnDDDaaDDDDDDaaaDDDaaODDaaQGOaQQOQOOQoaoQOQDD

MODIFIED UNIFORM PRESENT WORTH FACTORS

FOR DISCOUNT RATE AT 8%® IUPW1

P? A + A + A + ...

Present Annually Recurring

Value Future Amounts Valued

at Present Prices

P = (UPW*) X (A)

Rate of Differential Cost Change

Year 1% 2% 3% 4% 5%

1 0. 9352 0.9444 0.9537 0. 9630 0.9722

2 1.8093 1.8364 1.8633 1.8903 1.9174

3 2.6276 2.6788 2.7307 2.7832 2.8364

4 3.3925 3.4745 3.5580 3.6431 3.7298

5 4.1078 4.2259 4.3470 4.4711 4.5985

6 4.7768 4.9356 5.0994 5.2685 5.4429

7 5.4023 5.6058 5.8170 6.0363 6.2640

8 5.9874 6.2388 6. 5014 6.7757 7.0622

9 6.5345 6.8367 7.1541 7.4877 7.8382

10 7.0461 7.4013 7. 7766 8.1734 8.5923

11 7.5246 7.9346 8.3703 8.8336 9.3263

12 7. 9726 8.4382 8.9365 9.4694 10.0394

13 8.3906 8.9138 9.4765 10.0817 10.7328

14 8. 7819 9.3631 9. 9915 10.6712 11.4069

15 9.1479 9.7873 10.4826 11.2390 12.0622

16 9.4902 10.1880 10.9510 11.7857 12.6994

17 9.8103 10.5665 11.3977 12.3121 13.3189

18 10.1096 10.9239 11.8237 12.8191 13.9211

19 10.3895 11.2615 12.2300 13.3073 14.5066

2.0 10.6513 11.5803 12.6175 13.7774 15.0759

21 10.8961 11.8814 12.9871 14.2301 15.6293

22 11.1251 12.1657 13.3395 14.6660 16.1674

23 11.3992 12.4343 13.6757 15.0858 16.6905

24 11.5894 12.6880 13.9963 15.4900 17.1991

25 11.7287 12.9275 14.3020 15.8792 17.6936

a

P = A

(

1 + e\ |i /I +

I where "P" is a present sum of money, "A"

r - ej I VI + ry I is an annually recurring sum which is rising

at rate *'e", "r" is the discount rate, and "t"

is the number of years.

58
aTABLE IV

MODIFIED UNIFORM PRESENT WORTH FACTORS

FOR DISCOUNT RATE AT 10%^ lUPWl

P?-*- A + A+ A + ... P = (UPW*) X (A)

Present Annually Recurring

Value Future Amounts Valued

at Present Prices

Rate of Differential Cost Change

Year 1% 2% 3% 4% 5%

1 0.9182 0.9273 0.9364 0.9455 0.9546

2 1.7612 1.7871 1.8131 1.8393 1.9657

3 2.5353 2.5844 2.6340 2.6844 2.7354

4 3.2460 3.4027 3.4027 3.4834 3.5656

5 3.8986 4.0092 4.1225 4.2388 4.3581

6 4.4978 4.6449 4.7966 4.9531 5.1146

7 5.0480 5.2344 5.4278 5.6284 5.8367

8 5. 5521 5.7810 6.0188 6.2669 6.5260

9 6.0159 6.2878 6.5722 6.8705 7.1839

10 6.4417 6. 7577 7.0903 7.4411 7.8118

11 6.8328 7.1935 7.5755 7.9807 8.4113

12 7.1919 7. 5977 8.0299 8.4909 8.9837

13 7.5216 7.9725 8.4553 8.9733 9.5300

14 7.8243 8.3199 8.8536 9.4293 10.0513

15 8.1022 8.6421 9.2266 9.8604 10.5490

16 8. 3574 8. 9408 9.5758 10.2680 11.0240

17 8.5918 9.2179 9.9029 10.6535 11.4776

18 8.8069 9.4747 10.2090 11.0177 11.9103

19 9.0044 9.7129 10.4957 11.3622 12.3235

20 9.1857 9.9337 10.7641 11.6878 12.7178

21 9.3512 10.1385 11.0154 11.9957 13.0942

22 9. 5042 10.3285 11.2509 12.2870 13.4537

23 9.6446 10.5046 11.4714 12.5623 13.7968

24 9. 7735 10.6679 11.6777 12.8225 14.12 41

25 9.8919 10.8193 11.8710 13.0686 14.4367

^See footnote to table III for formula for P.

59
TABLE V

( MODIFIED UNIFORM PRESENT WORTH FACTORS

FOR DISCOUNT RATE AT 12%^ lUPWl

P? A + A + A + ... P = (UPW*) X (A)

Present Annually Recurring

Value Future Amounts Valued

at Present Prices

Rate of Differential Cost Change

Year 1% 2% 3% 4% 5%

1 0. 9018 0.9107 0.9196 0. 9286 0. 9375

2 1.7150 1.7401 1.7654 1.7908 1.8164

3 2.4484 2.4955 2.5432 2.5915 2.6404

4 3.1097 3.1834 3.2585 3.3349 3.412 9

5 3.7061 3.8099 3.9163 4.0253 4.1371

6 4.2438 4.3804 4.5212 4.6664 4.8160

7

' 4.7288 4.9000 5.0775 5.2616 5.4525

8 5.1662 5.3732 5.8292 5.8144 6.0492

9 5.5606 5.8042 6.0597 6.3276 6.6086

10 5.9162 6.1967 6.4924 6. 8042 7.1331

11 6.2370 6.5541 6.8903 7.2468 7.6248

12 6.5262 6.8796 7.2563 7.6577 8.0857

13 6.7870 7.1761 7.5928 8.0393 8.5179

14 7.0222 7.4461 7.9023 8.3936 8.9230

15 7.2343 7.6920 8.1870 8.7227 9.3028

16 7.4256 7.915 9 8.4487 9.0282 9.6589

17 7.5981 8.1198 8.6895 9.3119 9.9927

18 7. 7536 8.3056 8.9108 9.5753 10.3057

19 7.8939 8.4747 9.1144 9.8200 10.5991

20 8.0204 8.6288 9.3017 10.0471 10.8741

21 8.1345 8.7691 9.4739 10.2580 11.1320

22 8. 2373 8.8968 9.6322 10.4539 11.3737

23 8.3301 9.0132 9.7778 10. 6357 11.6004

24 8. 413 7 9.1191 9.9118 10.8046 11.812 9

25 8.4892 9.2156 10.0349 10. 9614 12.0121

^See footnote to table III for formula for P.

60
APPENDIX B: GLjOSSARY OF ECONOMIC TERMS

AGGREGATE IMPACTS - Impacts on all affected buildings in a single code

jurisdiction or other geographical area*

ANNUALLY RECURRING COSTS - Cost incurred each year in an equal amount or in

an amount that is increasing at a constant rate throughout the study period*

BASELINE PRACTICE - The construction practice that would be used in absence

of a code change*

BENEFIT-COST ANALYSIS - A means of evaluating alternatives by comparing the

discounted value of total expected benefits with the discounted value- of

total expected costs for each alternative*

BREAKEVEN ANALYSIS - A method of finding that value of a variable for which

costs and benefits of a code change are equal*

BUILDING ANALYSIS PERIOD - The period (often building life) for which effects

are analyzed for a particular building*

CODE ANALYSIS PERIOD - The period for which effects are analyzed for a particular code change*

CONSTANT DOLLARS - Values expressed in terms of the general purchasing power

of the dollar in a base year* Constant dollars do not reflect price inflation*

CURRENT DOLLARS - Values expressed in terms of the actual prices of each year*

Current dollars reflect inflation*

DIFFERENTIAL RATE OF COST CHANGE - The expected rate of cost change for a given

item over and above the general rate of inflation*

DISCOUNT FACTOR - A multiplicative number used to convert costs and benefits

occurring at different times to a common basis*

DISCOUNT RATE - The rate of interest reflecting the time value of money that

is used to convert benefits and costs occurring at different times to

equivalent values at a common time*

DISCOUNTING - A technique for converting cash flows that occur over time to

equivalent amounts at a common point in time*

MARKET INTEREST RATES - Interest rates actually paid by borrowers* Market

rates generally include a premium to compensate for inflation*

MODIFIED UNIFORM PRESENT WORTH FACTOR - A factor used to convert a series of

annually recurring costs which are escalating at a constant rate to their

present value.

NET BENEFITS - The difference between benefits and costs evaluated in present

value dollars*

61
B

NET MONETARY BENEFITS - The difference between benefits and costs, evaluated

in present value dollars, where benefits and costs can be assigned dollar

values without undue difficulty. Monetary benefits and costs include such

impacts as building costs and cost-savings, and property losses.

NONMONETARY IMPACTS - Impacts, such as change in life safety, to which it

is difficult to assign dollar values.

PRESENT VALUE - Past and future cash flows expressed in time- equivalent

amounts as of the present time, adjusted for inflation and the time value of

money.

REAL DISCOUNT RATE - The discount rate expressed in constant dollars.

REAL PRICE RISE - A rise in price of a particular component relative to the

overall rate of inflation.

REAL RATE OF INTEREST - A rate of interest expressed in constant dollars. The

real rate of interest shows the true return on an investment after allowing

for effects of inflation.

RESIDUAL VALUE - The net value of an asset at the end of its economic life, at

the end of the study period, or when it is no longer to be used.

SENSITIVITY ANALYSIS - Testing the outcome of an evaluation by altering the

values of key factors about which there is uncertainty.

SINGLE PRESENT WORTH FACTOR (SPW) - A discount factor used to convert a future

sum to its present value.

UNIFORM PRESENT WORTH FACTOR (UPW) - A discount factor used to convert a series

of recurring sums to their present value.

I

62
0 APPENDIX c: ADDITIONAL READING

Title Subject

BENEFIT-COST ANALYSIS

Anderson, Lee G, and Settle, Russel F. Benefit-Cost

Analysis; A Practical Guide . Lexington, MA.;

Lexington Books, 1978.

Arrow, Kenneth. "The Rate of Discount for Long-Term

Public Investment," in Energy and the Environment; A RiskBenefit Approach , edited by H. Ashley, R. L. Rudman and

C. Whipple. New York; Pergammon Press, 1976, pp. 113-140.

Brown, David B. "Cost/Benefit of Safety Investments Using

Fault Tree Analysis." Journal of Safety Research, Vol. 5,

No. 2 (June 1973), pp. 78-81.

Grant, Eugene L. and Ireson, W. Grant. Principles of

Engineering Economy, 5th Edition. New York; Ronald Press,

1970.

Mishan, E.J. Cost-Benefit Analysis; New and Expanded

Edition . New York; Praeger Publishers, Inc., 1976.

Smith, Gerald W. Engineering Economy; Analysis of Capital

Expenditures , 2nd Edition. Ames, Iowa; The Iowa State

University Press, 1973.

U.S. House of Blepresentatives, Subcomm. on Oversight and

Investigations. Cost-Benefit Analysis; Wonder Tool or Mirage ? 96th Congress, 2nd Session, Washington, D.C.,

December 1980.

BUILDING ECONOMICS IN GENERAL

The American Institute of Architects. Life-Cycle Cost

Analysis; A Guide for Architects. Washington, D.C.

1977.

Haviland, David S. Life-Cycle Cost Analysis 2; Using

It in Practice . Washington, D.C.; The American Institute

of Architects, 1978.

McConnaughey , John S. An Economic Analysis of Building

Code Impacts; A Suggested Approach , NBSIR 78-1528.

Washington, D.C.; National Bureau of Standards, 1978.

Available through NTIS.

Benefit- cost

analysis

Discounting

Risk analysis

Investment

analysis

Benefit-cost

analysis

Investment

analysis

Co St- benefit

analysis

in regulatory

decisionmaking

Life-cycle

costs

Life-cycle

costs

Building codes,

including ground

fault circuit

interrupter case study

63
c

Title

Rawie, Carol Chapman. Estimating Economic Impacts of

Building Code Changes . Washington, D.C.: National

Bureau of Standards (forthcoming).

Stone, P. A. Building Economy . New York: Pergammon

Press, 1976 (second ed.)

FIRE SAFETY

Chapman, Robert E. "Cost-Effective Methods for Achieving

Compliance to Fire Safety Codes," Fire Journal , Vol. 73,

No. 5, September 1979, pp. 30-39, 12 3.

Dardis, Rachel, and Thompson, Ruth. "Analyzing the Effectiveness of Alternative Fire Protection Strategies," Fire

Journal , September 1979, pp. 27-30.

Helzer, Susan Godby, Offensend, Fred L. , and Buchbinder,

Benjamin. Decision Analysis of Strategies for Reducing

Upholstered Furniture Fire Losses , Technical Note 1101.

Washington, D.C.: U.S. Government Printing office.

National Bureau of Standards, 1979.

Munson, Michael J. and Ohls, James C. "Indirect Costs of

Residential Fires," Fire Journal, January 1979, pp. 42-48.

Subject

Building codes

Building economics

Fire safety in

hospitals

Upholstered

furniture standard

smoke detectors

Upholstered

furniture fires;

smoke detectors

Fire costs

Potter, J. J. , Smith, M. L. , and Panwalk, S. S. "Cost Fire detector

Effectiveness of Residential Fire Detection Systems." cost effectiveness

Texas Technology University, Lubbock, Texas, 1976.

Stacey, G. S. and Smith, K. S. "Methodology for Estimating Fire losses

Costs for Burn Injuries and Property Losses," Fire Technology , Vol. 15, No. 3, August 1979, pp. 195-209.

Waterman, T. E., Mniszewski, K. R. , and Spadoni, D. J. Fire detectors

Cost/Benefit Analysis of Fire Detectors . IIT Research

Institute, Chicago, II., Sept. 1978. (Report prepared for

the U.S. Fire Administration, Washington, D.C.)

ENERGY

Arthur D. Little, Inc. An Energy and Economic Impact

Assessment of HUD*s Minimum Property Standards , FEA/D-76/495.

Washington, D.C.: U.S. Government Printing Office, 1976.

HUD Minimum

Property

Standards

Arthur D. Little, Inc. Energy Conservation in New Building ASHRAE 90-75

Design: An Impact Assessment of ASHRAE Standard, 90-75 . Washington, D.C.: U.S. Department of Energy, March 1976.

64
c

Title Subject

Marshall, Harold E. and Ruegg, Rosalie T. Energy Solar energy;

Conservation in Buildings; An Economics Guidebook for windows

Investment Decisions . National Bureau of Standards

Handbook 132. Washington, D.C.: U.S. Government

Printing Office, May 1980.

Marshall, Harold E. and Ruegg, Rosalie T. "Life-Cycle Energy conservation

Costing Guide for Energy Conservation in Buildings."

Energy Conservation through Building Design, McGraw-Hill

Architectural Record Books, 1979.

Marshall, Harold E., Ruegg, Rosalie T., and Wilson, Forrest. Energy conservation

Simplified Energy Design Economics; Principles of Economics

Applied to Energy Conservation Investments in Buildings . National Bureau of Standards Special Publication 544.

Washington, D.C.: U.S. Government Printing Office, 1980.

Petersen, Stephen R. Economic Analysis of Insulation in Insulation

Selected Masonry and Wood-Frame Walls . NBSIR 79-1789.

Washington, D.C.: National Bureau of Standards, 1979.

Available through NTIS.

Petersen, Stephen R. The Role of Economic Analysis in the Energy conservation

Development of Energy Standards for New Buildings . NBSIR

78-1471, Washington, D.C.: National Bureau of Standards,

July 1978. Available through NTIS.

Ruegg, Rosalie T. and Chapman, Robert E. Economic Evaluation Windows

of Windows in Buildings; Methodology . National Bureau of

Standards Building Science Series 119, Washington, D.C.:

U.S. Government Printing Office, April 1979.

Ruegg, Rosalie, T. Life-Cycle Costing Manual for the

Federal Energy Management Program . National Bureau of

Standards Handbook 135, Washington, D.C.: U.S. Government

Printing Office, December 1980.

Energy conservation

and renewable energy

projects

U. S. Department of Energy. Economic Analysis; Energy

Performance Standards for New Buildings . U. S. Department

of Energy, Office of Conservation and Solar Energy, Office

of Buildings and Community Systems, Washington, D.C.

20585, November 1979.

OTHER TOPICS

Marshall, Harold E., and Ruegg, Rosalie T. Efficient

Allocation of Research Funds; Economic Evaluation Methods

with Case Studies in Building Technology , National Bureau

of Standards Special Publication 558. Washington, D.C.:

U. S. Government Printing Office, 1979.

Proposed energy

performance standards for new

buildings

Reduced-sized

venting for

plumbing; roofing

shingles

65
Index

bDDaDDDDDaaDDDDaDDDDDDaciDoaDDaaDDDaaaDDaadoDoaaaaoDDDaaCJODaDDDDOQ.

-aaggregate impacts, 43-46, 52, 61

-bbenefit-cost analysis, 41, 54, 61,

63

breakeven analysis, 52, 61

building,

analysis period, 10, 17, 29, 35,

47, 61

cost, 11, 41, 53

performance, 25, 35, 41, 53

building department costs, see government costs

-ccode

,

administration, see government

costs

analysis period, 8, 44, 47-48,

61

uniformity, 11

constant dollars, 13, 16

construction,

costs, 11-12, 21, 23, 44

date, 7, 9, 11, 17, 39, 41

types, 43

crime losses, 38

current dollars, 13

-ddelays, 12, 35

differential cost increase, 15, 16,

17, 39-40, 61

discount

,

factor, 13-15, 17, 28, 55, 60-61

rate, 13-14, 17, 41, 47-48, 53,

61

discounting, 13-15, 35, 39, 61

-eelectric shock, 31

energy, 9, 16, 17, 23-24, 39, 44, 47

52, 64

enforcement, see government costs

-ffire,

protection, see government costs

safety, 27, 32-33, 37, 64

_g_

government costs, 11, 21-22

ground fault circuit interrupters,

31

-hhistoric preservation, 7, 53

-iincome distribution effects, 5, 14,

21, 23, 35, 41

inflation, 12-13, 16, 39

innovation, 1, 9-10, 21

insurance, 17, 26

-1-

life safety, 25, 28, 30-32, 38, 41,

43, 46, 53

-mmaintenance, see operation and

maintenance costs

market rates, 13

mobile homes, 31-32

modified uniform present worth

factor, 16-17, 58-61

66
I

pODOODnDDDai^rn-mnnnnnnnnnnnnnnnnnDnaDDDDDDDODDDDDDDODODDDOODDDOn

•n- -tnet monetary benefits, 25, 39,

41-42, 44-45, 48

nominal rate, 13, 16

-ooperation and maintenance costs,

13, 15-16, 17, 18, 19-20

-pperformance, see building

performance

performance requirement, 21

police protection, see government

costs

present value, 13, 15-16, 35, 39,

41, 55-60, 62

property loss, 25, 26-28, 32, 35,

41, 47

taxes, 11, 13, 14, 21, 23

-u~

unit of analysis, 5, 12,

21, 41, 53-

-Vwaivers, 7, 21, 44, 47

real discount rate, 13, 62

reference building, 7, 10, 27

rehabilitation, 7, 10, 35

repair costs, see operation and

maintenance costs

replacement costs, see operation

and maintenance costs

representative cases, 7-10, 27,

41, 44, 48, 52

residual value, 35, 36, 62

-ssafety, 25-26, 35, 37-38, 48, 53

sensitivity analysis, 25, 32,

47-50, 52-53, 62

single present worth factor, 15,

17, 41, 62

space, 33-34, 51

67
Worksheets
Worksheet

PROPOSED CODE CHANGE

Title or number of code change

Occupancy or Use

Group Affected

Construction

Type Affected

Building Part or System

Affected

Conditions or Exceptions

Original

Requirement

Proposed

Changes
Worksheet

REPRESENTATIVE CASES

Code analysis period Unit of analysis

Characteristics I

Representi

II

itive Case

III IV

Location

Date Constructed

Type of Building

Practice Without

the Code Change

Practice With

the Code Change

Building Analysis

Period (Years)

Other Factors

•
Worksheet 2.1

IMPACT ON UNIT INITIAL COSTS^

Representative case (from worksheet 1.2)

Type Cost

Proposed

Requirement

Original

- Requirement . Change

Materials and

Components $ - $ $

Wages and

Salaries $ - $ $

Construction

Equipment $ - $ $

Builder's overhead

(general & admin.) $ “ $ $

Other costs $ - $ $

TOTAL $ - $

__ $

^ Costs may be calculated per building, per dwelling unit, per square foot, or for some other basic unit of analysis.
Worksheet 2.2

IMPACT ON UNIT OPERATION AND MAINTENANCE COSTS^

Representative case Discount rate %

Building analysis period (from worksheet 1.2) years

A. COSTS RISING AT THE RATE OF INFLATION

Proposed Requirement Original Requirement

Cost Type Amount^ Timing^ SPW^ UPW^ Amount b Timing^ SPW^ UPW^

$ $

$ $

$ $

B. COSTS RISING AT A RATE DIFFERENT FROM INFLATION

Cost Type

Differ

ential- Proposed Requirement

Price

Change Amount^ Timing^ SPW*^ UPW*^

Original Requirement

Amount^ Timing^ SPW^ UPW*^

$ $

$ $

^The unit of analysis should be the one listed on worksheet 1.2.

^At present prices.

^How often and when (years after construction year).

^From discount factor tables 1 through V in appendix A for assumed discount

rate, timing of impact, and (for UPW* ) the rate of differential price change.
Worksheet 2.3

O&M COSTS RISING AT THE RATE OF INFLATION

Representative case

FUTURE ONE-TIME

COSTS Amount^ X SPW^ = Discounted Value Total

Proposed $ X = $ \

Requirement

$ X $ 1

Original - $ X

II 1 </>

<r>

Requirement

- $ X = - $ 1

EQUAL ANNUAL Amount^

COSTS

(Proposed - Original) X UPW^ = Discounted Value Total

($ - $ ) X = $

($ - $ ) X $

TOTAL DISCOUNTED TO CONSTRUCTION YEAR

^From worksheet 2.2, part A
Worksheet 24

O&M COSTS RISING AT A RATE DIFFERENT FROM INFLATION

Representative case

FUTURE ONE-TIME

COSTS^»b Amount X (l+e)t X SPW a Discounted Value

$ X X . $

Proposed

Requirement $ X X a $

Original - $ X X a $

Requirement

- $ X X 5a $

RECURRING

ANNUAL COSTSa

Amount at Present Prices

(Proposed - Original) X UPW* Discounted Value

($ $ ) X a $

($ $ ) X

^Amount, SPW, and UPW* are from worksheet 2. 2, part B.

b(l + e)t = ( + )— = , where the rate of differential price

rise "e" and time period "t" are from worksheet 2. 2, part B.
Worksheet 2.5

IMPACTS ON GOVERNMENT COSTS PER UNIT

Representative case Discount rate % Building analysis period years

Assumptions

ONE-TIME

COST^

Government

Function Timing^ Amount'^ X

Discounted

SPWC = Value Total

Proposed $ X

Requirement $ X

1 Original -$ X

Requirement -$ X

Government

Function Timing^ (Proposed

Amount^

- Original) X UPWe

Discounted

= Value Total

EQUAL ($ - $ ) X = $ - ] ANNUAL

COSTS ($ - $ ) X - r

]

TOTAL CHANGE IN GOVERNMENT COSTS $

^Years after construction year. ^Cost per building or other unit of analysis.

^From table I in appendix A for assumed discount rate and timing of cost.

^The cost occurs only one time for a particular building although it is an ongoing

cost for the building department.

®From table II, appendix A, for assumed discount rate and building analysis period.
Worksheet

IMPACT ON EXPECTED PROPERTY LOSSES PER UNIT

Representative case ^Discount rate % Building analysis perio d years

Change in Annual Average Cost Change in Annual

Accident Probability per Accident Expected

Type of Accident^ X (Constant $) = Property Loss

X $ = $

X $ —

$

X $ —

$

TOTAL CHANGE IN ANNUAL EXPECTED LOSS $

UPWb X

TOTAL CHANGE IN DISCOUNTED EXPECTED LOSS OVER TIME $

^Probability of accident after code change minus probability of accident

before code change, based on available information and engineering judgment.

^From table II, appendix A, for assumed discount rate and building analysis

period or life of required feature.
Worksheet a2

IMRACT ON EXPECTED UFE SAFETY PER UNIT

Representative case

Change in Annual No. of Deaths

Accident Probability and Injuries

Type of Accident^ X per Accident

Expected Change in;

Major Minor

= Deaths Injuries Injuries

(deaths)

X (major inj. =

(minor inj.) =

(deaths) =

X (major inj.) =

(minor inj.) =

(deaths) =

X (major inj.) =

(minor inj.) =

TOTAL CHANGE IN ANNUAL EXPECTED LOSS

Building analysis period or life X

of required feature

TOTAL CHANGE OVER TIME

^From worksheet 3.

1
Worksheet as

I

f

I IMPACTS PER UNIT OF A CHANGE IN Sf^CE

Representative case ^ Discount rate % Building analysis period years

Change

Usable

in

Space X

Annual Rent

per Sq. Ft.^ =

Change in

Annual

Revenues X UPWb =

Changes in

Discounted

Revenues (A)

sq. ft. X $ $ X $

Change

Built

in

Space X

Construction

Cost per Sq. Ft. =

Change in

Construction

Costs (B)

sq . ft. X $ s $

Net Discounted

Value (A - B)

$

^Rental excluding any owner-paid operating costs,

b From table II, appendix A, for assumed discount rate and building analysis period
Worksheet

IMPACTS ON UNIT RESIDUAL VALUE

Representative case Discount rate %

Building analysis period years

^At end of building analysis period. The change will be positive for an increase in the building's residual value.

^From table I, appendix A for assumed discount rate and building analysis

period

.
Worksheet 4.1

ADJUSTING O&M COSTS FOR DIFFERENTIAL COST CHANGES

Representative case Years before building constructed years ^

Rate of Differential

Cost Change

(Worksheet 2.2)

%/yr.

Change in

O&M Costs

(Worksheet 2.4) X

$ X

Cost

Change

Factor^

Ad justed

O&M

= Costs

= $

%/yr. $ X = $

+ O&M costs from worksheet 2.3

TOTAL O&M COSTS ADJUSTED FOR DIFFERENTIAL

COST CHANGE, DISCOUNTED TO CONSTRUCTION YEAR

+ $

$

^Based on construction date in worksheet 1.2.

^The cost change factor is (1 + e)^ where "e" is the rate of differential

cost change listed above and in worksheet 2.2, and "t" is the number of

years before the building is constructed:

First line: (1 + e)^ = (1 + )_ = •

Second line: (1 + e)^ = (1 + )_ = •
Worksheet 4.2

PRESENT VALUE OF NET MONETARY BENEFITS PER UNIT

Representative case Discount rate %

Years before building constructed years Unit of analysis

Worksheet Change in Building Present

Number Type Impact Performance^ X SPWb = Value

3.3 Building Space^ $ X = $

3.4 Residual Value^ $ X

—

$

(Other Impact)^ $ X

_

$

TOTAL EFFECT ON PERFORMANCE $ X $

Worksheet Change in Building Present

Number Type Impact Cost^ X SPWb = Value

2.

Initial Costs^^ $ X = $

2.5 Government Cost‘d $ X = $

4.

O&M Costs^^ $ X ss $

3.

Property Loss‘S $ X

—

$

(Other Impact) $ X = $

TOTAL EFFECT ON COST-PLUS -LOSS $ X = $

Total Effect Total Effect on on Performance - Cost-Plus--Loss = Net Monetary Benefits

$ - $ = $

^Value discounted to construction year.

^Frora table I, appendix A, for assumed discount rate and number of years

before building is constructed.

‘"Use a positive number for increases in value

‘^Use a positive number for increases in cost and loss.
Worksheet

........nn..nnnn.nn

AGGREGATE IMPACTS^

Type impact(s) Unit of analysis

Representative Case

Number of

Affected Units^ X

X

Impact per

Unite

Impacts for

= All Units

X

X

—

X

TOTAL FOR ALL UNITS

^This worksheet should be filled out separately for each impact of interest.

^May include buildings similar to buildings specified in representative cases.

^From worksheets 3.2 (life safety) or 4.2 (monetary impacts).
Worksheet 6.1

VALUES TO ALTER IN A SENSITIVITY ANALYSIS^

Representative case

Include in SensiVariable Value in Base Case^ tivity Analysis?.^

^This should be filled out for each representative case in worksheet 1.2.

^Values in the basic analysis are from worksheets 2.1 through 3.4, and 5.1.

‘^The factor should be included in the sensitivity analysis if its value is

very uncertain and if*a change may affect the code decision.
Worksheet

SENSITIVITY ANALYSIS

Representative case

Original Values Altered Values

Variable (Basic Analysis) (Sensitivity Analysis)

Calculated Using Calculated Using

Impact Original Values Altered Values

Met Monetary Benefits^ $ $

Fatalities Prevented^

Major Injuries Prevented^

Minor Injuries Prevented^

^This and previous worksheets should be recalculated for each representative

case listed in worksheet 1.2.

^From worksheet 4.2 calculated using original and altered values.

^From worksheet 3.2 calculated using original and altered values.
Worksheet 7.1

Code change

RESULTS OF THE BENEFIT-COST ANALYSIS

SELECTED ASSUMPTIONS

Value Used in Range of Values Used in

Subject Basic Analysis Sensitivity Analysis .

COSTS AND BENEFITS

Type Impact Base Case^ Sensitivity Analysis^ Comment

Net Monetary

Benefits $ $

Fatalities

Prevented

Major Injuries

Prevented

Minor Injuries

Prevented

^From worksheet 5.1. ^From worksheet 5.1 recomputed for sensitivity analysis
Acknowledgments

The author wishes to thank Porter Driscoll, A1 Gomberg, Harold Marshall, Jim

Plelert, and Stephen Weber of the National Bureau of Standards for their

very valuable comments on various drafts. The author Is also Indebted to

other NBS staff members and to members of the building community who provided helpful comments on the draft report and to Mike Usle, who assisted In

several aspects of the study. Finally, It should be noted that much of the

groundwork for this guide was laid by other economists In NBS's Applied

Economics Group who have conducted research on energy conservation, solar

energy, fire and other building hazards, water conservation, and other

building-related topics.
NBS>114A (REV. 2-BC) U.S. DEPT. OF COMM. 1. PUBLICATION OR 2. Performing Organ. Report No, 3. Publication Date BIBLIOGRAPHIC DATA

REPORT NO.

SHEET (See instructions)

4. TITLE AND SUBTITLE

ESTIMATING BENEFITS AND COSTS OF BUILDING REGULATIONS; A STEP BY STEP GUIDE

5. AUTHOR(S) '

' Carol Chapman Rawie . < ; i.,

6. PERFORMING ORGANIZATION (If joint or other than NBS, see instructions)

national bureau of STANDARDS

DEPARTMENT OF COMMERCE

WASHINGTON, D.C. 20234

7. Contract/Grant No.

8. Type of Report & Period Covered

Final

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

National Bureau of Standards

Department of Commerce

Washington, D.C. 20234

10.

SUPPLEMENTARY NOTES

I I Document describes a computer program; S F-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) / This is a how-to guide intended to help building officials^ elected officials,

builders, architects, engineers, and others determine the benefits and costs of

proposed building code changes. The guide describes seven steps in the benefitcost analysis. They are: (1) define the problem, including selecting prototype

buildings to analyze; (2) estimate impacts on building-related costs, including

government costs; (3) estimate impacts on building safety and performance; (4) select

a method of relating benefits and costs (the recommended measure is Net Monetary

Benefits together with information on physical life safety impacts); (5) estimate

aggregate impacts on the code jurisdiction as a whole; (6) perform a sensitivity

analysis; and (7) write up the results, being careful to present Information on non-monetary as well as monetary effects. Worksheets are provided to assist in the

analysis.

12.

KEY WORDS (Six to twelve entries; alphabetical order; capitalize only proper names; and separate key words by semicolons)

Benefit-cost analysis; building economics; building regulation; codes; construction

regulation; economics; energy conservation codes; fire safety codes; regulation.

13.

AVAILABILITY

r^^ Unl imited

I I For Official Distribution. Do Not Release to NTIS

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

20402.

Q31 From National Technical Information Service (NTIS), Springfield, VA, 22161

14. NO. OF

PRINTED PAGES

15. Price

USCOMM-DC e043-P80