Users Manual for Version 4.0 of the Cost-Effectiveness

Tool for Capital Asset Protection

Robert E. Chapman and Amy S. Rushing

U.S. Department of Commerce

National Institute of Standards and Technology

Office of Applied Economics

Building and Fire Research Laboratory

Gaithersburg, MD 20899

NISTIR 7524
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2

Users Manual for Version 4.0 of the Cost-Effectiveness

Tool for Capital Asset Protection

Robert E. Chapman and Amy S. Rushing

Sponsored by:

National Institute of Standards and Technology

Building and Fire Research Laboratory

September 2008

U.S. DEPARTMENT OF COMMERCE

Carlos M. Gutierrez, Secretary

NATIONAL INSTITUTE OF STANDARDS AND TECHNOLOGY

Patrick D. Gallagher, Deputy Director

U.S. Department of Commerce

National Institute of Standards and Technology

Office of Applied Economics

Building and Fire Research Laboratory

Gaithersburg, MD 20899

NISTIR 7524
3
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Abstract

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

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

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

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

methods, and software for implementing the evaluation methods. This document focuses

on Version 4.0 of the Cost-Effectiveness Tool (CET 4.0); it describes: the input data

requirements for the software, the hierarchy of software screens, the evaluation methods

employed and their associated standards, the strategy for analyzing complex decision

problems, the types of reports produced, and on-line help features. Decision makers

typically experience uncertainty about the correct values to use in establishing basic

assumptions and in estimating future costs. When projects are evaluated without regard

to uncertainty of inputs to the analysis, decision makers may have insufficient

information to measure and evaluate the financial risk associated with the alternative

combinations of mitigation strategies. CET 4.0 addresses uncertainty and financial risk

in a structured, three-part manner. First, best-guess estimates are used to establish a

baseline analysis. Second, a sensitivity analysis is performed in which selected inputs are

varied about their baseline values. Third, a Monte Carlo simulation is performed to

obtain an explicit measure of financial risk associated with the alternative combinations

of mitigation strategies. Guidance is also given on how to choose the most cost-effective

risk mitigation plan from a set of alternative combinations of mitigation strategies. Keywords

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

analysis; risk mitigation; software
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Preface

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

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

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

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

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

concerned with evaluating how to efficiently allocate scarce financial resources among

security-related investment alternatives.

Disclaimer

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

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

identification imply recommendation or endorsement by the National Institute of

Standards and Technology, nor does it imply that the products are necessarily the best

available for the purpose.

Cover Photographs Credits

Microsoft Clip Gallery Images used in compliance with Microsoft Corporationís non- commercial use policy.
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Acknowledgements

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

suggestions for this report. They include Dr. William Grosshandler, Deputy Director of

the Building and Fire Research Laboratory (BFRL) at the National Institute of Standards

and Technology (NIST), for his technical guidance, suggestions, and support. Special

appreciation is extended to Dr. Harold E. Marshall and Mr. Douglas Thomas of BFRLís

Office of Applied Economics (OAE) for their thorough reviews and many insights and to

Ms. Carmen Pardo for her assistance in preparing the manuscript for review and

publication. Special thanks are due to Dr. David Butry, Ms. Priya Lavappa, Ms. Jennifer

Helgeson, Dr. Allison Huang, and Mr. Douglas Thomas who conducted performance

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

comments provided by Mr. Stephen A. Cauffman of BFRLís Materials and Construction

Research Division and Mr. Steven Emmerich of BFRLís Building Environment Division.
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Contents

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

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

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

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

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

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

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

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

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

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

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

2.2 Types of Economics Decisions..........................................................................6

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

2.3.1 Life-Cycle Cost Method .......................................................................8

2.3.2 Present Value of Net Savings ...............................................................9

2.3.3 Savings-to-Investment Ratio.................................................................9

2.3.4 Adjusting Internal Rate of Return.........................................................9

2.3.5 Appropriate Application of the Evaluation Methods..........................10

2.4 Analysis Strategy .............................................................................................11

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

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

2.4.3 Monte Carlo Simulation......................................................................12

2.5 Cost-Accounting Framework...........................................................................12

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

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

2.6.2 Alternatives.........................................................................................15

2.6.3 Assumptions and Cost Data................................................................16

3. Basic Features: Constructing the Baseline Analysis.................................................19

3.1 Getting Started .................................................................................................19

3.1.1 Opening/Creating a Project File..........................................................19

3.1.2 Cost Summary Window and Main Menu ...........................................20

3.2 Entering Data ...................................................................................................21

3.2.1 Project Information .............................................................................21

3.2.1.1 Input Cost............................................................................25

3.2.1.2 Event-Related Costs............................................................28

3.2.2 Output Window...................................................................................32

3.2.3 Alternative-Specific Features..............................................................33

3.3 Use and Interpretation of the Data and Results Report....................................34

3.3.1 Data Report .........................................................................................34

3.3.2 Results Report.....................................................................................37

3.4 Project Notebook .............................................................................................42
x

3.5 Online Help......................................................................................................43

4. Treatment of Uncertainty and Risk............................................................................45

4.1 Perform Sensitivity Analysis ..........................................................................45

4.1.1 Change in a Single Factor Tab...........................................................46

4.1.2 Most Significant Factors Tab.............................................................48

4.1.3 Change in Multiple Factors Tab ........................................................49

4.2 Perform Monte Carlo Simulation.....................................................................52

4.2.1 Setting up the Simulation and Saving the Results.............................53

4.2.2 How to Create Customized Charts and Tables..................................56

4.3 Use and Interpretation of the Uncertainty Report............................................59

5. Analyze Results and Recommend a Cost-Effective Risk Mitigation Plan................65

5.1 Employ a Structured Process to Generate a Recommendation........................65

5.2 Prepare Report with Documentation Supporting Recommended Risk

Mitigation Plan.................................................................................................65

5.2.1 Suggested Format for Summarizing Results .....................................66

5.2.2 Creating the Executive Summary Report .........................................69

6. Next Step...................................................................................................................71

Appendix A Technical Considerations..........................................................................73

A.1 Life-Cycle Cost Method Formulas ................................................................75

A.2 Present Value of Net Savings Formula ..........................................................76

A.3 Savings-to-Investment Ratio Formula ...........................................................77

A.4 Adjusted Internal Rate of Return Formula.....................................................78

Appendix B Glossary Terms..........................................................................................79

References........................................................................................................................105

List of Tables

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

For Each Decision Type................................................................................11

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

Five Factors....................................................................................................59

List of Figures

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

Types.............................................................................................................13

Figure 3-1 Cost-Effectiveness Tool Prompt Window ....................................................19
xi

Figure 3-2 Open Project Window...................................................................................20

Figure 3-3 Cost Summary Window When Starting a New Project ................................21

Figure 3-4 Project Description Window for the Data Center Case Study ......................22

Figure 3-5 Project Alternatives Window for the Data Center Case Study .....................23

Figure 3-6 How to Copy the Completed Data Center Base Case into Alternative 1......24

Figure 3-7 Edit Cost/Events Window for the Data Center Case Study: Input Cost

for the Base Case ..........................................................................................26

Figure 3-8 Capital Investment Cost Information Window for the Data Center

Case Study: Basic Renovation.....................................................................26

Figure 3-9 O&M Cost Information Window for the Data Center Case Study: Site

Security .........................................................................................................27

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

Change in Traffic Pattern..............................................................................27

Figure 3-11 Event Information Window for the Data Center Case Study:

Description of the Cyber Attach Scenario for the Base Case ......................28

Figure 3-12 Edit Outcomes/Outcome Cost Window for the Data Center Case Study:

Base Case Cyber Attack Outcomes .............................................................30

Figure 3-13 Outcome Information Window for the Data Center Case Study:

Probability Information for the Base Case Cyber Attack Scenario .............31

Figure 3-14 Event/Outcome Cost Information Window for the Data Center Case

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

Scenario........................................................................................................32

Figure 3-15 Cost Summary Window for the Data Center Case Study ............................33

Figure 3-16 Cover Page of the Data Report for the Case Study......................................35

Figure 3-17 Input Cost Data Summary Page of the Data Report for the Base Case .......36

Figure 3-18 Event/Outcome Cost Data Summary Page of the Data Report for the

Base Case .....................................................................................................36

Figure 3-19 Summary of Economic Measures of Performance Page of the Results

Report for the Case Study............................................................................37
xii

Figure 3-20 Summary of Life-Cycle Cost Page of the Results Report for the Case

Study ............................................................................................................38

Figure 3-21 Summary of Life-Cycle Costs: Inputs and Event-Related Page of the

Results Report for the Case Study ...............................................................39

Figure 3-22 Summary of Costs by Alternative Page of the Results Report for the

Base Case .....................................................................................................39

Figure 3-23 Summary of Annual Costs by Alternative Page of Results Report for

the Data Center Case Study .........................................................................41

Figure 3-24 Summary of Annual and Cumulative Net Savings by Alternative Page

of the Results Report for the Data Center Case Study.................................42

Figure 3-25 Cost-Effectiveness Tool Help Window, Help Tree, and Software Tips......44

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

Tab to Evaluate the Impact of the Discount Rate of Life-Cycle Costs........47

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

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

Life-Cycle Costs for the Base Case .............................................................48

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

to Evaluate the Impact of +/-10 % Changes of Each Factor on

Life-Cycle Costs for the Case Study............................................................49

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

Tab to Evaluate the Impact of Combinations of Factors on Life-Cycle

Costs for the Case Study..............................................................................50

Figure 4-5 Sensitivity Analysis Window: Tree Structure Showing Combinations

of Factors Including in the Sensitivity Analysis..........................................51

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

Window to Evaluate the Impact of Combinations of Factors on

Life-Cycle Costs for the Case Study............................................................54

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

Combinations of Factors Including the Monte Carlo Simulation................55

Figure 4-8 Life-Cycle Costs for the Base Case and the Proposed Alternatives in

Thousands of Dollars Due to Change in Eleven Factors.............................57
xiii

Figure 4-9 Present Value Net Savings in Thousands of Dollars for the Proposed

Alternatives, Enhanced Security and Enhanced Bio Protection, Due to

Changes in Eleven Factors...........................................................................58

Figure 4-10 Saved Sensitivity Analysis Page of the Uncertainty Report for the

+/-10 % Change in the Discount Rate .........................................................60

Figure 4-11 Most Significant Factors Page of the Uncertainty Report for the Case

Study ............................................................................................................61

Figure 4-12 Summary of Life-Cycle Costs and Factor Values of a Saved Change in

Multiple Factors Page of the Uncertainty Report for the Case Study..........62

Figure 4-13 Summary of Life-Cycle Costs, Probability Distributions, and Factor

Values of a Saved Monte Carlo Simulation Page of the Uncertainty

Report for the Case Study............................................................................63

Figure 5-1 Summary of the Data Center Case Study.....................................................67

Figure 5-2 Dialog Box for Creating the Executive Summary Report ...........................69
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1 Introduction

1.1 Background

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

agency within the U.S. Department of Commerce. NIST develops and promotes

measurement, standards, and technology to enhance productivity, facilitate trade, and

improve quality of life. In the aftermath of the attacks of September 11, 2001, NIST has

taken a key role in enhancing the nationís homeland security. NISTís Building and Fire Research Laboratory (BFRL) has as its mission to meet the

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

element of that mission is BFRLís commitment to homeland security. Specifically, the

goal of BFRLís homeland security effort is to develop and implement the standards, technology, and practices needed for cost-effective improvements to the safety and

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

procedures, and threat mitigation. The September 11, 2001 attacks on the World Trade Center and the Pentagon, and the

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

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

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

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

have prompted the owners and managers of constructed facilitiesóbuildings, industrial

facilities, and other physical infrastructureóto address natural and man-made hazards

and protect the occupants, property, and functions of their facilities. These events have led to changes in the way key decision makers respond to natural and

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

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

range of responses available to decision makers is extensive, as is the potential expense. Parallel to the reality of the risks posed by natural and man-made hazards is the reality of

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

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

financially responsible manner. The two objectivesósafeguarding personnel and

physical assets and satisfying financial constraintsómust be balanced through a cost- effective risk mitigation plan. Emerging from this new focus on planning is the realization that it makes sense to

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

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

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

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

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

holistic approach to planning protection against multiple hazards.
2

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

by the Office of Applied Economics (OAE) under BFRLís homeland security effort. OAEís research focuses on developing economic tools to aid facility owners and

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

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

methods. OAEís research has produced a three-step protocol for developing a risk

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

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

potential mitigation strategies, and economic evaluation. Risk assessment is used to identify the risks confronting a facility. It includes

development of possible damage scenarios, probability assessments for these scenarios, and identification of the facilityís vulnerabilities and critical areas. Identification of

mitigation strategiesóEngineering Alternatives, Management Practices, and Financial

Mechanismsóprovides performance and cost data for the possible combinations of risk

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

candidate set of alternatives for in-depth economic evaluation. The third component, economic evaluation, enables facility owners and managers to evaluate each alternative

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

their implementation. 1.2 Purpose and Scope

The purpose of this report is to provide documentation for Version 4.0 of the Cost- Effectiveness Tool (CET 4.0). The report serves two functions. First, as a printed copy, it is designed as a stand-alone resource for users of CET 4.0. The authors recommend

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

tool. Second, this report is designed as an integral part of the software itself. Specifically, this report is integrated into the online Help feature of CET 4.0. This ìHelp

featureî allows users to open this document while working within the software tool, enabling them to explore software-related features/capabilities, which should make the

use of the software tool more transparent. The scope of the document is limited to CET 4.0. Four earlier versions of the Cost

Effectiveness Tool have been released by NIST. These earlier versionsóCET 1.0, CET

1.1, CET 2.0, and CET 3.0óhad different analysis and reporting capabilities. The

current versionóCET 4.0órepresents a major upgrade in analysis and reporting

capabilities. Thus, users of previous versions will experience some changes in the way

they construct and analyze project files. However, the developers of CET 4.0 have

designed it so that any project files saved in previous versions can be opened and saved in

Version 4.0. Please note that once you save a project file in Version 4.0, it cannot be

opened with an earlier version of the software.

 1 Chapman, Robert E., Leng, Chi J. Cost-Ef ective Responses to Terrorist Risks in Constructed Facilities. NISTIR 7073 (Gaithersburg, MD: National Institute of Standards and Technology, 2004).
3

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

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

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

to NIST Special Publication 1082.2

1.3 Organization of this Manual

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

designed to walk you through the features of CET 4.0 in a step-by-step fashion. Background material is first presented to insure you have a firm grounding in the

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

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

teach you how to use CET 4.0 to gain a deeper understanding of OAEís structured

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

natural and man-made hazards. Chapter 2 covers the key concepts underlying the CET 4.0 software tool. Topics covered

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

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

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

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

using CET 4.0 to produce a cost-effective risk mitigation plan. The cost-accounting

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

stakeholders in different ways, and promotes a detailed, consistent breakdown of costs. The chapter concludes with a discussion of the role of case studies and a fairly detailed

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

illustrate various software features/capabilities. Chapter 3 lays out the process by which the baseline analysis is constructed. The

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

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

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

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

ìguided tourî of the software toolís basic features. These features include entering data, editing data, and viewing preliminary results. Special emphasis is placed on how to use

two key reports to verify data inputs and interpret the results of the baseline analysis. Emphasis is also placed on the Project Notebook software feature. The Project Notebook

is an important resource for documenting the sources of key data elements. Chapter 4 covers the treatment of uncertainty and risk. The concept of financial riskó

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

is desired or expectedóplays an important role throughout Chapter 4. The importance of

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

 2 Thomas, Douglas S., and Chapman, Robert E. A Guide to Printed and Electronic Resources for Developing a Cost-Ef ective Risk Mitigation Plan for New and Existing Constructed Facilities. NIST

Special Publication 1082 (Gaithersburg, MD: National Institute of Standards and Technology, 2008).
4

on how CET 4.0 provides a framework for analyzing both the impacts of single factors

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

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

methodsósensitivity analysis and Monte Carlo simulationóinclude discussions of how

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

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

uncertainty impacts the choice of the most cost-effective risk mitigation plan. Chapter 5 summarizes why choosing among alternatives designed to reduce the impacts

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

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

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

remain unquantified) and the level of effort that will promote a better-informed decision. The chapter describes two methods for summarizing results for presentation to senior

management and other decision makers. First, a generic format for summarizing results

is presented; the generic format is based on ASTM Standard E 2204.3 Second, the CET

Executive Summary Report is describedóboth how to create it and how to use it to

communicate results. Results from the data center case study are used to highlight key

features of each method. Chapter 6 concludes with a discussion of suggested next steps for making more effective

use of the CET 4.0 software tool. Appendix A outlines the life-cycle cost methodology and provides formulas for each of

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

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

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

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

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

topics covered in the data center case study.

 3 ASTM International. ìStandard Guide for Summarizing the Economic Impacts of Building-Related

Projects,î E 2204, Annual Book of ASTM Standards: 2006. Vol. 04.12. West Conshohocken, PA: ASTM

International.
5

2 Key Concepts

2.1 Overview of the Three-Step Protocol

Protecting constructed facilities from extreme eventsófires, floods, earthquakes, and

other natural and man-made hazardsóis a constant challenge for facility owners and

managers. Choosing among alternative protection strategies is complicated by the fact

that such strategies frequently have significant up-front investment costs, result in

operations and maintenance costs that are spread over many years, and impact key

stakeholders in different ways. A methodology is needed to insure that all relevant costs

are captured and analyzed via well-defined metrics. To address this need, NIST developed a three-step protocol that establishes a

methodology for dealing with extreme events. The methodology is documented in

ASTM Standard Guide E 2506.4

CET 4.0 is designed as an integral part of the economic evaluationóstep three of the

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

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

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

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

rigorous economic evaluation of risk mitigation strategies for dealing with natural and

man-made hazards.

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

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

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

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

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

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

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

of methods, is used. Although there is a great deal of high-quality information available

on risk assessment and risk management, natural and man-made hazards, and economic

tools, there is no central source of data and tools to which the owners and managers of

constructed facilities and other key decision makers can turn for help in developing a

cost-effective risk mitigation plan. NIST Special Publication 1082 serves as such a

central source.5

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

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

 4 ASTM International. ìStandard Guide for Developing a Cost-Effective Risk Mitigation Plan for New and

Existing Constructed Facilities,î E 2506, Annual Book of ASTM Standards: 2006. Vol. 04.12. West

Conshohocken, PA: ASTM International. 5 Thomas, Douglas S. and Chapman, Robert E. A Guide to Printed and Electronic Resources for Developing a Cost-Ef ective Risk Mitigation Plan for New and Existing Constructed Facilities. NIST

Special Publication 1082 (Gaithersburg, MD: National Institute of Standards and Technology, 2008).
6

decision-makerís objectives, the facilities to be protected, the natural and man-made

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

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

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

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

facilityís assets and the consequences of an event occurring are also produced as part of

the risk assessment. The second step of the protocol focuses on identification of risk mitigation strategies. This step uses information from the risk assessment (e.g., estimates of the value of the

facilityís assets and the consequences of an event occurring) to identify engineering, management and financial strategies to mitigate those consequences. The costs of

implementing the alternative risk mitigation strategies and the associated reductions in

consequences are also produced as part of this step in the protocol. The third step in the protocol, economic evaluation, is the means through which

competing alternatives are analyzed and a cost-effective risk mitigation plan is identified. The two previous steps, concerned with risk assessment and risk mitigation, formulate the

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

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

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

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

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

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

uncertainty and risk on the selection of a cost-effective risk mitigation plan. CET 4.0 promotes a rigorous economic evaluation in three interrelated ways. First, its

economic evaluation methods are based on standardized practices promulgated by ASTM

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

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

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

drivers, a structured approach to the treatment of uncertainty, and an Executive Summary

Report for use in presenting results to senior management and other decision makers. 2.2 Types of Economic Decisions

Investment decisions associated with alternative building designs or systems are

frequently project-related, where a project could be the construction of a new building, the renovation of an existing constructed facility (e.g., a bridge), or the modernization of

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

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

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

project is to upgrade a buildingís HVAC system and to address a number of generic

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

functional requirements specified by the buildingís owner/manager or some other
7

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

investment decisions often involve collections of projects. There are four basic types of investment decisions for which an economic analysis is

appropriate:

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

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

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

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

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

cannot fund them all. Each type of investment decision is important. First and foremost, decision makers need

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

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

third type of decision builds on the second and introduces an important concept, interdependence. Consequently, for a given set of candidate projects and implied

interdependencies, the problem becomes how to choose the best combination of projects. The fourth type of decision introduces a budget constraint. The aim is how to get the

most impact for the given budget. 2.3 Economic Evaluation Methods

Numerous methods are available for measuring the economic performance of investments

in buildings and building systems. Use ASTM Standard Guide E 1185

6

to identify types

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

the technically appropriate economic methods with the decisions. Four economic evaluation methods addressed in ASTM Standard Guide E 1185 apply to

the development of a cost-effective risk mitigation plan for dealing with natural and man- made hazards: (1) life-cycle costs (ASTM Standard Practice E 917

7

); (2) present value

net savings (ASTM Standard Practice E 1074

8

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

 6 ASTM International. ìStandard Guide for Selecting Economic Methods for Evaluating Investments in

Buildings and Building Systems,î E 1185, Annual Book of ASTM Standards: 2006. Vol. 04.11. West

Conshohocken, PA: ASTM International. 7 For a detailed description of the ASTM life-cycle cost standard, see ASTM International. ìStandard

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

ASTM Standards: 2006. Vol. 04.11. West Conshohocken, PA: ASTM International. 8 For a detailed description of the ASTM present value of net savings standard, see ASTM International. ìStandard Practice for Measuring Net Benefits and Net Savings for Investments in Buildings and Building

Systems,î E 1074, Annual Book of ASTM Standards: 2006. Vol. 04.11. West Conshohocken, PA: ASTM

International.
8

Standard Practice E 964

9

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

Practice E 1057

10

). Readers interested in mathematical derivations of the economic

evaluation methods are referred to Appendix A. More than one method can be technically appropriate for many design and system

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

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

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

rate of return) to assess economic performance. 2.3.1 Life-Cycle Cost Method

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

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

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

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

that decision, including future as well as present costs. Applied to constructed facilities, the LCC method encompasses all relevant costs over a designated study period, including

the costs of designing, purchasing/leasing, constructing/installing, operating, maintaining, repairing, replacing, and disposing of a particular design or system. Should any pure

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

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

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

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

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

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

is not needed to show that the former is economically preferable. Denote the alternative with the lowest initial investment cost (i.e., first cost) as the base

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

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

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

satisfying that requirement over a specified study period. With respect to the base case, an alternative is economically preferred if, and only if, it results in lower life-cycle costs.

 9 For a detailed description of the ASTM savings-to-investment ratio standard, see ASTM International. ìStandard Practice for Measuring Benefit-to-Cost and Savings-to-Investment Ratios for Investments in

Buildings and Building Systems,î E 964, Annual Book of ASTM Standards: 2006. Vol. 04.11. West

Conshohocken, PA: ASTM International. 10 For a detailed description of the ASTM adjusted internal rate of return standard, see ASTM International. ìStandard Practice for Measuring Internal Rate of Return and Adjusted Internal Rate of Return for

Investments in Buildings and Building Systems,î E 1057, Annual Book of ASTM Standards: 2006. Vol. 04.11. West Conshohocken, PA: ASTM International.
9

In the context of CET 4.0, the alternative (i.e., a given combination of risk mitigation

strategies) that results in the lowest life-cycle cost is designated as the most cost- effective risk mitigation plan. 2.3.2 Present Value of Net Savings

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

applicable for finding the economically efficient choice among investment alternatives. It measures the net savings from investing in a given alternative instead of investing in

the foregone opportunity (e.g., some other alternative or the base case). The PVNS for a given alternative, vis-‡-vis the base case, equals their difference in life- cycle costs. Any pure benefits that result (e.g., increased rental income due to

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

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

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

investment is uneconomical. In the context of CET 4.0, any alternative that results in a PVNS greater than zero is

designated as cost effective. 2.3.3 Savings-to-Investment Ratio

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

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

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

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

calculated vis-‡-vis the base case. The numerator equals the difference in the present value of non-investment costs between

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

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

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

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

costs; and a ratio greater than 1.0 indicates an economic project. In the context of CET 4.0, any alternative that results in an SIR greater than 1.0 is

designated as cost effective. 2.3.4 Adjusted Internal Rate of Return

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

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

reinvestment rate in the AIRR calculation is equal to the minimum acceptable rate of
10

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

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

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

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

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

amount of money put into the investment (i.e., the time equivalent initial outlay). The AIRR is defined as the interest rate applied to the terminal value, which equates (i.e., discounts) it to the time equivalent value of the initial outlay of investment costs. It is

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

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

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

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

the discount rate, the investment is uneconomical. In the context of CET 4.0, any alternative that results in an AIRR greater than the

discount rate is designated as cost effective. 2.3.5 Appropriate Application of the Evaluation Methods

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

evaluating the economic performance of homeland security-related investments in

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

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

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

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

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

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

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

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

the aggregate measure of performance.

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

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

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

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

attentionóas often occurs in conjunction with budget reviewsóthe LCC and PVNS

methods emerge as the principle means for evaluating a projectís or programís merits.11

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

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

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

packaging decisions.
11

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

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

selecting projects for funding. Table 2-1 Summary of Appropriateness of Each Standardized Evaluation

Method for Each Decision Type

Decision Type

LCC PVNS SIR AIRR

Accept/Reject Yes Yes Yes Yes

Design/Size Yes Yes No No

Combination (Interdependent) Yes Yes No No

Priority/Ranking (Independent) No No Yes Yes

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

Building Systems.î E1185. ASTM International, 2005.

2.4 Analysis Strategy

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

distinct levels of analysis. This ìanalysis strategyî systematically adds increased detail to

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

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

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

levelsósensitivity analysis and Monte Carlo simulationówhich systematically vary

selected sets of data elements to measure their economic impacts on project outcomes, such as the life-cycle costs of competing alternatives. 2.4.1 Baseline Analysis

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

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

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

considered uncertain and their values are based on some measure of central tendency, such as the mean or the median, or input from subject matter experts. Baseline data

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

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

all respects but one; it does not address the effects of uncertainty. 2.4.2 Sensitivity Analysis

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

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

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

value of net savings). Therefore, a sensitivity analysis complements the baseline analysis
12

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

vary about their baseline values. The key advantage of sensitivity analyses is that they are easily constructed and

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

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

probability that the savings-to-investment ratio is less than 1.0). 2.4.3 Monte Carlo Simulation

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

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

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

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

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

project outcome values. CET 4.0 includes a means for automatically running Monte

Carlo Simulations and displaying the results. 2.5 Cost-Accounting Framework

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

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

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

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

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

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

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

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

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

that a clear picture emerges of the cost differences between competing alternatives. Costs are classified along four dimensions within the cost-accounting framework: (1)

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

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

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

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

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

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

types are given at the end of each of the four ìcost dimensionî paragraphs. Each

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

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

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

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

beneath each box.
13

Bearer of

Costs

Owner/Manager Occupant/User Third Party

Budget

Category

Capital

Investment

O&M

Other

Building/

Facility

Component

Building/Facility

Elements Building/Facility

Site Work

Non-Elemental

Mitigation Strategy

Engineering

Alternatives Management

Practices Financial

Mechanisms

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

Types

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

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

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

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

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

costs incurred by the projectís owner or agent. These costs include but are not limited to

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

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

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

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

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

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

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

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

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

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

water, land, or atmosphere. The second dimension, Budget Category, has three cost types based on which category of

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

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

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

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

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

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

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

construction, are investment-related costs and fall under the Capital Investment cost type.
14

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

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

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

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

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

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

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

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

damage to the environment stemming from the project. The third dimension, Building/Facility Component, has three cost types. These cost

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

UNIFORMAT II.12 Elements are an integral part of any construction project; they are

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

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

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

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

is the purchase of a right-of-way, or easement. The fourth dimension, Mitigation Strategy, has three cost types. The three cost types

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

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

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

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

site security. 2.6 Use of Case Studies

The software includes a case study file, Data Center Case Study.lcc. The case study file

provides a convenient frame of reference through which you can learn about the

capabilities of the software and experiment with the various means of editing, creating, and deleting data elements. The case study file is designed to illustrate a wide variety of

software features through a simplified, yet fairly realistic building-related example. 2.6.1 Overview of the Data Center Case Study

The case study describes a renovation project for the data center of a financial institution. The renovation is to upgrade the data centerís heating, ventilation and air-conditioning

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

functions. Note that the cost estimates are for purposes of illustration onlyóactual

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

 12 ASTM International. ìStandard Classification for Building Elements and Related Site Workó

UNIFORMAT II,î E 1557, Annual Book of ASTM Standards: 2006. Vol. 04.11. West Conshohocken, PA:

ASTM International.
15

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

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

2

(40 000 ft2). The replacement

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

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

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

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

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

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

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

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

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

neighborhoods and does not traverse the data centerís site. The new street will be

available for use within two years of the renovation. 2.6.2 Alternatives

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

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

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

of the alternatives recognize that in the post-9/11 environment the data center faces

heightened risks in two areas. These risks are associated with the vulnerability of

information technology resources and the potential for damage to the facility and its

contents from chemical, biological, radiological, and explosive (CBRE) hazards. Two

scenariosóthe potential for a cyber attack and the potential for a CBRE attackóare used

to highlight these risks. The first alternative, referred to as the Base Case, employs upgrades that meet the

minimum building performance and security requirements; it is the alternative with the

lowest initial investment cost (i.e., lowest first cost). The second alternative, referred to

as Enhanced Security, results in enhanced security as well as selected improvements in

building performance; it also provides a low level of particle filtration capability against

biological agents but no gaseous capability against chemical agents. The third

alternative, referred to as Enhanced Bio Protection, provides a high level of protection

against particles but no gaseous protection. The fourth alternative, referred to as

Enhanced Chem/Bio Protection, provides a high level of protection against particles and

gaseous agents. The three non-Base Case alternatives are referred to throughout the remainder of this

report as the Proposed Alternatives. Each of the three Proposed Alternatives augments

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

to the data center site, improving the buildingís HVAC, telecommunications and data

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

telecommunications network. The main difference in the three Proposed Alternatives is

their treatment of biological and chemical agents. The Enhanced Security alternative
16

augments the Base Case by replacing existing Minimum Efficiency Reporting Value

(MERV) 6 filters with MERV 11 high capacity filters and modifying the electrical

feeders to accommodate higher motor horsepower. The Enhanced Bio Protection

alternative augments the Enhanced Security alternative by sealing the exterior windows

to make the building more airtight, replacing the MERV 11 filters with a three-stage filter

consisting of a MERV 8 pre-filter, an 85 % efficient MERV 13 intermediate filter, and a

99.97 % High Efficiency Particulate Air (HEPA) filter, and modifying the electrical

feeders to accommodate higher motor horsepower. The Enhanced Chem/Bio Protection

alternative augments the Enhanced Security alternative by sealing the exterior windows

to make the building more airtight, replacing the MERV 11 filters with a five-stage filter

consisting of a MERV 8 pre-filter, an 85 % efficient MERV 13 intermediate filter, a

99.97 % HEPA filter, a 99.9 % gas phase filter, and a MERV 11 post filter, and

modifying the electrical feeders to accommodate higher motor horsepower. 2.6.3 Assumptions and Cost Data

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

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

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

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

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

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

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

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

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

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

additional costs of the Proposed Alternatives result not only in expected reductions in

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

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

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

in commuting costs for local residents until a new road is opened in two years. Event-related costs are based on annual outcomes, each of which has a specified

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

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

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

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

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

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

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

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

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

similar types of outcome costs. Should a cyber attack occur, it results in damage to
17

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

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

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

corporate customers during recovery.
18
19

3 Basic Features: Constructing the Baseline Analysis

This section gives you a guided tour of the basic features of Version 4.0 of the Cost- Effectiveness Tool (CET 4.0). The guided tour takes you through all of the steps

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

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

for you to work systematically through the hierarchy of screens used to input, analyze, and display project-related data. 3.1 Getting Started

3.1.1 Opening/Creating a Project File

Launch the software by clicking on the CET 4.0 icon found on your desktop or by

clicking CET 4.0 in the Start menu in Programs/Cost-Effectiveness Tool. The first

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

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

comes with an example file, the Data Center Case Study.lcc file. Thus, even when you

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

may choose to open. If you select the Open an Existing Project or Open an Example

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

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

Figure 3-1 Cost-Effectiveness Tool Prompt Window
20

As a first step, open the Data Center Case Study.lcc file and use the File Save As feature

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

test02.lcc. Use the test files to gain familiarity with the software. This way, if you

inadvertently change or delete a data element, or create a new data element, you can go

back to the Data Center Case Study.lcc file for the reference solution. When you use the

File Save As feature with the case study file, the new file (e.g., test01.lcc) will be saved in

the ìexamplesî directory unless you specify otherwise. If you exit the software and later

wish to open a user-created ìtestî file, you will need to select Open an Example Project

from the Prompt window. Figure 3-2 is a sample Open Project window showing the files in the ìexamplesî directory. Note that in addition to the Data Center Case Study.lcc file there are two user- created ìtestî files: test01.lcc and test02.lcc. Highlighting the desired file and clicking

the Open button, opens that file. Double clicking on the highlighted file opens the file as

well. The Open Project window includes a Cancel button. If you click on the Cancel

button, you will return to the Prompt window.

Figure 3-2 Open Project Window

3.1.2 Cost Summary Window and Main Menu

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

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

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

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

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

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

software. If you wish to close the window, it can be reopened at any time.
21

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

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

included in the economic evaluation. These ìchoicesî are represented in Figure 3-3 by

the ìcost typeî check boxes under each dimension of the cost-accounting framework and

the ìalternativeî check boxes in the Select Alternatives group box located in the lower

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

software. The tree contains three top-level nodes: Project, Uncertainty, and Reports. Recall that software features discussed in this section are highlighted through the use of

italics font.

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

3.2 Entering Data

3.2.1 Project Information

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

alternatives, and manage cost-related information. Clicking the Description option on the Main Menu opens the Project Description

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

description of the project, the base year selected for all present value calculations, the
22

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

performed, and the discount rate. Note that when a constant dollar analysis is selected, you must use a real discount rate. This is because constant dollars have uniform

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

selected, you must use a nominal discount rate. Within CET 4.0, the nominal discount

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

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

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

multiple projects competing for limited investment funds. The Project Description window contains a Notebook icon in the bottom right-hand

corner. Clicking the Notebook icon opens a text box, where you can enter pertinent

information about the project. The material entered in the text box is designed to help

you document the sources of key data elements; it becomes part of the Project Notebook

Report (see Section 3.4). Notebook material suitable for inclusion under the Project

Description window, includes general information associated with the risk assessment

and formulation of risk mitigation strategies (i.e., steps one and two of the three-step

protocol).

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

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

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

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

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

one alternative to another. The text box in the middle of the window allows you to enter
23

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

differentiate one alternative from another. The Project Alternatives window also contains

a Notebook icon in the bottom right-hand corner. Notebook material suitable for

inclusion under the Project Alternatives window, includes information on how the results

of the risk assessment were used to formulate the risk mitigation strategies for the given

alternative.

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

The Project Alternatives window includes a feature that allows you to copy an existing

alternative to another alternative (e.g., to copy (i.e., ìduplicateî) the Base Case to

Alternative 1). This is a powerful feature which allows you to build a rigorous Baseline

Analysis of the Base Case vis-‡-vis Alternatives 1, 2, and 3, using a ìstepwiseî approach. Use this feature with caution, however, as it is possible to ìoverwriteî an existing
24

alternative. The recommended approach for using this feature is to first build a complete

Base Case (i.e., a complete set of descriptive material, input costs, events, outcomes, and

event/outcome costs). Once the Base Case is complete, save it, and then copy it to

Alternative 1. This is done by selecting the Alternative 1 tab and then selecting the Base

Case from the Alternative to Copy drop down menu in the Copy Existing Alternative

group box (see Figure 3-6). Then edit the Alternative Name, Alternative Description, and

any input costs, events, outcomes, and event/outcome costs for Alternative 1 to reflect its

performance characteristics (i.e., ways in which it differs from the Base Case). If desired, once Alternative 1 is complete, save it, then copy it to Alternative 2 and repeat the

process. A careful study of the Data Center Case Study reveals that such a ìstepwiseî approach can speed up the data entry process described in Section 3.2.

Figure 3-6 How to Copy the Completed Data Center Base Case into Alternative 1
25

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

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

option on the Main Menu. 3.2.1.1 Input Costs

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

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

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

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

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

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

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

displays all cost items associated with that alternative. Figure 3-7 is an example of the

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

alphabetical order according to their Budget CategoryóInvestment, O&M, and Other. If

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

viewed by scrolling down the list. In this example, no costs are hidden. Highlighting and clicking the selected cost item opens the appropriate Cost Information

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

recorded information for the cost item of interest. Figure 3-8 is an example of the Capital

Investment Cost Information window for the data center case study. Figure 3-8 displays

information on the Basic Renovation cost item, which is associated with the Base Case. Figure 3-9 is an example of the O&M Cost Information window for the Site Security cost

item for the Base Case. Figure 3-10 is an example of the Other Cost Information window

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

Figures 3-8, 3-9, and 3-10 include a Classification Information group box which specifies

how each cost item fits into the cost-accounting framework. The Edit Costs/Events window is the means through which new cost items are created. The creation of a new cost item is accomplished by selecting the appropriate Budget

Category cost type buttonóAdd Investment Cost, Add O&M Cost, or Add Other Costó

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

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

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

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

add information to the Project Notebook (see Figures 3-8, 3-9, and 3-10).
26

Figure 3-7 Edit Costs/Events Window for the Data Center Case Study: Input

Costs for the Base Case

Figure 3-8 Capital Investment Cost Information Window for the Data Center

Case Study: Basic Renovation
27

Figure 3-9 O&M Cost Information Window for the Data Center Case Study: Site

Security

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

Change in Traffic Pattern

The Cost Information window includes an entry ìfieldî for the Unit Cost of the cost item. In previous versions of CET, users have occasionally experienced difficulty in editing or

first entering numbers in the Unit Cost field. Therefore, in order to avoid any problems

editing numbers in the Unit Cost field for an existing cost item, place the cursor to the left

of the first number being changed and simply type in the new number without deleting

the old number. When first entering numbers in the Unit Cost field for a newly-created

cost item, place the cursor to the right of the dollar ($) sign and type in your entry. You

may enter a decimal point as part of your data entry, but the field will not accept a
28

comma as part of your data entry. When you exit the Unit Cost field (e.g., by clicking on

another field in the Cost Information window), comma separators will be recorded

automatically. If an extra ìunwantedî digit is recorded, place the cursor to the left of the

unwanted digit and use the delete key to remove it. 3.2.1.2 Event-Related Costs

As noted earlier, clicking the Costs/Events option opens the Edit Costs/Events window. This screen manages the creation, deletion, and editing of input costs and event-related

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

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

window are active for the selected alternative. Since our focus is on event-related costs, however, we will address only the event-related costs portion of the window here. Once

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

Figure 3-11 Event Information Window for the Data Center Case Study:

Description of the Cyber Attack Scenario for the Base Case

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

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

for the event of interest. The Edit Costs/Events window is the means through which new
29

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

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

Information window. The Event Information window allows you to name the event, provide a brief description of the event, enter the dates of first and last occurrence, and

edit event-related outcomes. Figure 3-11 is an example of the Event Information

window for the Cyber Attack scenario for the Base Case. Reference to Figure 3-11

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

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

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

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

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

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

clicking the Edit Outcomes option in the Event Information window (see Figure 3-11). Figure 3-12 is an example of the Edit Outcomes/Outcome Costs window for the first

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

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

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

Outcomes/Outcome Costs window is initially grayed out, indicating that it is inactive. However, once an outcome is selected, the costs associated with that outcome become

active. In Figure 3-12, the Attack outcome has been selected. Consequently, the

outcome costs O&M: Record Reconstruction and Other: Identity Theft are active. Highlighting and clicking the selected outcome opens the appropriate Outcome

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

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

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

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

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

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

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

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

outcome probabilities for the event of interest, and edit outcome-related cost items. Figure 3-13 is an example of the Outcome Information window; it provides a brief

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

for the Base Case.
30

Figure 3-12 Edit Outcomes/Outcome Costs Window for the Data Center Case

Study: Base Case Cyber Attack Outcomes

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

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

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

example, ceasing operations, staff and/or third party fatalities, and other extreme effects, are not easily valued in monetary units. The Non-Monetary group box provides the

means for indicating which, if any, of these effects are associated with a given outcome. If one or more of these effects is important, check the items for which you can not

estimate a dollar value. Once an item is checked, the Enter Narrative button is activated. Clicking the Enter Narrative button opens a text box, where you can enter pertinent

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

box, whether a narrative is entered or not, are included in the Data Report.
31

Figure 3-13 Outcome Information Window for the Data Center Case Study:

Probability Information for the Base Case Cyber Attack Scenario

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

Information window (see Figure 3-13), which opens the Edit Outcomes/Outcome Costs

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

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

associated with the outcome of interest. Highlighting and clicking the selected event-related cost item opens the appropriate

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

desired, modify any previously recorded information for the event-related cost item of

interest. The Edit Outcomes/Outcome Costs window is the means through which new

event-related cost items are created. The creation of a new event-related cost item is
32

accomplished by selecting the appropriate Budget Category cost type buttonóAdd

Investment Cost, Add O&M Cost, or Add Other Costófrom the list on the right of the

Event/Outcome Cost box. The software then opens the Event/Outcome Cost Information

window. The Event/Outcome Cost Information window allows you to name the eventrelated cost item, generate a cost estimate via separate entries for quantity and unit cost, specify any escalation rates that need to be applied, and add information to the Project

Notebook. Figure 3-14 is an example of the Event/Outcome Cost Information window

for the Base Case. Figure 3-14 records information on the Identity Theft cost item for the

first Cyber Attack scenario. Note that Figure 3-14 includes a Classification Information

group box which specifies how each event-related cost item fits into the cost-accounting

framework.

Figure 3-14 Event/Outcome Cost Information Window for the Data Center Case

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

Scenario

3.2.2 Output Window

Once all data have been input, the Cost Summary window displays the life-cycle costs for

each alternative. Costs are reported for each of the four dimensions of the cost- accounting framework and for each cost type. Figure 3-15 reproduces the Cost Summary

window for the completed baseline analysis for the data center case study. The Cost Summary window provides the option for you to view calculated values for

measures of economic performance other than life-cycle costs. The drop down menu in

the Evaluation Method box lets you select the PVNS (present value net savings), SIR
33

(savings-to-investment ratio), or AIRR (adjusted internal rate of return) as an alternative

measure of economic performance. The PVNS, SIR, and AIRR values reported on the

Cost Summary window are calculated vis-‡-vis the Base Case. PVNS measures net

savings of investing in the given alternative instead of investing in the Base Case. The

SIR equals the difference in non-investment costsóthe savings stemming from investing

in the given alternative rather than the Base Caseódivided by the increased capital cost

for the given alternative. The AIRR measures the annual return on the additional capital

investment associated with the given alternative. Thus when the PVNS, SIR, or AIRR

method is selected, the only meaningful values are the ones listed under the column

headings Alt. 1, Alt. 2, and Alt. 3.

Figure 3-15 Cost Summary Window for the Data Center Case Study

3.2.3 Alternative-Specific Feature

The software also enables you to access the Edit Costs/Events window by clicking one of

the alternative labeled edit buttons at the top of the Cost Summary window. In Figure 3- 15 all four alternativesóBase Case, Alt. 1, Alt. 2, and Alt. 3óhave data entries. Consequently, their edit buttons are active. Since each alternative has a specific edit

button, when that button is active and it is clicked the Edit Costs/Events window opens

with a display of all costs and all events associated with the alternative in the selected

column. This feature helps you edit cost and event information very efficiently when

your focus is on a single alternative.
34

3.3 Use and Interpretation of the Data and Results Reports

The Cost-Effectiveness Tool produces five types of reports. Although the reports share a

number of similarities in terms of their content, their functions are very different. Each

report is accessed via the Reports node on the main menu. Clicking the Data, Notebook, Uncertainty, Results, or Executive Summary option under the Reports node takes you to

the selected report. The Data Report is intended as a means for checking the accuracy of the information that

you entered into the Cost-Effectiveness Tool. The Project Notebook Report is an

important resource for documenting the sources of key data elements; it is described in

Section 3.4. The Uncertainty Report contains information associated with the sensitivity

analysis and the Monte Carlo simulation; it is described in Section 4.3. The Results

Report is designed to help you ìdrill downî on how individual cost items are distributed

across Bearer, Budget Category, Building Component, and Mitigation Strategy. This

approach gives you a snapshot of all of the costs entering the analysis, expressed in

present value terms, which ìroll upî into the life-cycle costs recorded in the Cost

Summary window. The Executive Summary Report is intended for submission to senior

management as part of the documentation supporting the specific project being

considered for funding; it is described in Section 5.2. The Results Report and the

Executive Summary Report are sufficiently detailed to provide a concise snapshot of the

underlying data, including the candidate set of alternatives evaluated, the types of

analyses performed, and the results of those analyses.

It is important to note that CET 4.0 will generate reports only if the computer you are

using has a default printer installed. It is not necessary for the computer to be connected

to the printer. 3.3.1 Data Report

Clicking on the Data option under the Reports node opens the Data Report. The Data

Report consists of these five sections: (1) a Cover Sheet; (2) Background Information on

the project (e.g., Project Name, Project Description, Study Period, and Analysis

Information); (3) Alternative Information ñ Descriptive Summary (e.g., Alternative

Name, Alternative Description, Event Name, Event Description, Outcome Name, Outcome Description, and Key Parameters, Non-Monetary Items); (4) Alternative

Information ñ Input Cost Data Summary (e.g., Cost Item, First Year, Last Year, Occurs

Every, Bearer, Category, Component, Strategy, Escalation Rate, and Dollar Amount);

and (5) Alternative Information ñ Event/Outcome Cost Data Summary (e.g., Event, Outcome, Event/Outcome Cost Item, First Year, Last Year, Bearer, Escalation Rate, Dollar Amount). Verifying the accuracy of input data is essential to insure that the results of the economic

evaluation are consistent with the underlying data. The Data Report is specifically

designed to verify the accuracy of the input data. Figure 3-16 reproduces the Cover Page
35

of the Data Report for the case study. The cover page includes the report titleóData

Report, the project name ñ Data Center Renovation, and the date printed.

Figure 3-16 Cover Page of the Data Report for the Case Study

Figures 3-17 and 3-18 provide information on the input costs and event-related costs for

the Base Case. In both figures the columns record the name of the cost item, the first and

last years that cost occurs, classification information (i.e., each dimension and cost type

of the cost-accounting framework), the escalation rate, and the dollar amount. Note that

the dollar amount is equal to the product of the unit cost and the quantity (i.e., the number

of units). Figure 3-17, which presents input cost information, includes an additional

column that shows for O&M and Other costs the replacement cycle. Figure 3-18

includes additional information describing the event and the outcome to which the cost

items are attached
36

Figure 3-17 Input Cost Data Summary Page of the Data Report for the Base Case

Figure 3-18 Event/Outcome Cost Data Summary Page of the Data Report for the

Base Case
37

3.3.2 Results Report

Clicking on the Results option under the Reports node opens the Results Report. The

Results Report consists of these eight sections: (1) a Cover Sheet; (2) Summary of

Economic Measures of Performance; (3) Summary of Life-Cycle Costs; (4) Summary of

Life-Cycle Costs: Input and Event-Related; (5) Summary of Costs by Alternative sorted

by Budget Category (e.g., Cost Item, Bearer, Component, Strategy, and Present Value

Dollar Amount); (6) Summary of Annual Costs by Alternative and Budget Category

(e.g., Present Value Dollar Amounts for each Year for Capital Investment, O&M, Other, and in Total); (7) Summary of Annual Costs by Alternative (e.g., Present Value Dollar

Amounts for each Year for each Alternative); and (8) Summary of Annual and

Cumulative Net Savings by Alternative. Figure 3-19 reproduces the Summary of Economic Measures of Performance page for the

case study. This page is included as a convenient summary of all four measures of

economic performanceóLCC, PVNS, SIR, and AIRR. The measures of economic

performance correspond to the drop down menu on the Cost Summary window. It is

important to note that if you use the ìCopy Alternativeî feature (see Section 3.2) to copy

the Base Case to another alternative and do not make any changes to input costs and

event-related costs, the SIR and AIRR are not defined and hence will not be reported.

Figure 3-19 Summary of Economic Measures of Performance Page of the Results

Report for the Case Study

Figure 3-20 reproduces the Summary of Life-Cycle Costs Page of the Results Report for

the case study. All costs are expressed in present dollar amounts. When you examine

Figure 3-20, you will note that it is a reproduction of the Cost Summary window for the

baseline analysis. Figure 3-20 includes the check boxes to indicate clearly whether any

data elements have been excluded from the life-cycle cost totals. The table in Figure 3- 20 is the starting point for the ìdrill downî analysis of the computed values for life-cycle

costs.
38

Figure 3-20 Summary of Life-Cycle Costs Page of the Results Report for the Case

Study

Figure 3-21 is the first page of the three-page Summary of Life-Cycle Costs: Input and

Event-Related portion of the Results Report. All costs are expressed in present dollar

amounts and are organized around the Cost summary window with subheadings for Input

and Event-Related costs. Reference to Figure 3-21 shows how event-related costs

decline going from the Base Case (i.e., minimum acceptable level of performance) to

Alternative 3 (i.e., Enhanced Chem/Bio Protection). Reference to Figure 3-21 shows

clearly that event-related costs have to be balanced against input costs. For example, the

present value input costs for Alternatives 1 and 2 are approximately 5 % greater than the

present value of input costs for the Base Case, whereas their event-related costs are about

one fourth of the Base Case. Figure 3-22 is the first page of the two-page Summary of Costs by Alternative portion of

the Results Report. Figure 3-22 covers the Base Case. All costs are expressed in present

value dollar amounts and include designations for Bearer, Component, and Strategy. The

designations map individual cost items into the cost-accounting framework. If you wish

to examine how a particular cost item contributes to the amounts shown on the Summary

of Life-Cycle Costs page, choose the cost item, see where it fits in the cost-accounting

framework, and then trace it back to the Summary of Life-Cycle Costs page. For

example, two cost itemsóElectricity and Site Securityóaccount for three quarters of

O&M life-cycle costs. Site Security accounts for all of Management Practices life-cycle

costs and slightly more than two thirds of Non-Elemental life-cycle costs.
39

Figure 3-21 Summary of Life-Cycle Costs: Inputs and Event-Related Page of the

Results Report for the Case Study

Figure 3-22 Summary of Costs by Alternative Page of the Results Report for the

Base Case
40

In developing a cost-effective risk mitigation plan, it is useful to see how costs are

distributed over time. The Results Report provides two separate means for examining

and assessing annual costs. The Summary of Annual Costs by Alternative and Budget

Category provides a detailed disaggregated synopsis of annual costs. Thus, if you want

to examine how major equipment replacements affect annual costs, examine the entries

under the Capital Investment heading and look for years in which significant increases in

costs occur. The Summary of Annual Costs by Alternative provides aggregated side-by- side comparisons of the alternatives being evaluated. Figure 3-23 reproduces the

Summary of Annual Costs by Alternative page for the data center case study. These side- by-side comparisons are useful in determining when a particular alternative has a ìbulgeî

in costsósay at the beginning of the study period or associated with a major

replacementóor when one alternativeís annual costs begin to escalate at a significantly

higher rate. Both pieces of information are useful in understanding the pros and cons of

each alternative being evaluated. It is important to recognize that the goal of the analysis

is to gain insights into the decision-making process.

In addition to seeing how costs are distributed over time, it is useful to see how net

savings accumulate over time. The Summary of Annual and Cumulative Net Savings by

Alternative provides net savings computations vis-‡-vis the Base Case for each

Alternative analyzed. Figure 3-24 reproduces the Summary of Annual and Cumulative

Net Savings by Alternative page for the Enhanced Security alternative for the data center

case study. This set of calculations provides a measure of how long it takes an alternative

to generate enough net savings to break even vis-‡-vis the Base Case.
41

Figure 3-23 Summary of Annual Costs by Alternative Page of the Results Report

for the Data Center Case Study
42

Figure 3-24 Summary of Annual and Cumulative Net Savings by Alternative Page

of the Results Report for the Data Center Case Study

3.4 Project Notebook

Clicking the Notebook option under the Reports node opens the Project Notebook Report. The Project Notebook Report consists of these five sections: (1) a Cover Sheet; (2)

Project-Related Notes; (3) Alternative-Related Notes; (4) Input Cost-Related Notes; and

(5) Event/Outcome Cost-Related Notes.
43

The purpose of the Project Notebook Report is to provide a means for documenting the

sources of key data elements. The sections of the Project Notebook Report are designed

promote documentation in-depth. At the highest level it provides project-related notes. These notes are entered via the Notebook Icon in the Project Description window. Clicking the Notebook Icon opens a dialog box that allows you to enter text, numerical

data, or other reference material. The type of material appearing in the Project-Related

Notes section includes but is not limited to information on how the risk assessment was

performed, key assets

13

requiring protection, vulnerabilities

14 documented, key contact

persons involved in the risk assessment, the title of the risk assessment document, and

how to obtain a printed or electronic copy of the document. Material contained in the Alternative-Related Notes section describes how information

from the risk assessment was used to formulate the alternative. This includes how the

combinations of mitigation strategiesóengineering, management, and financialówere

packaged and how that combination addresses vulnerabilities identified in the risk

assessment. Material contained in the Input Cost-Related Notes section describes for each cost item

the sources of cost estimates. Material contained in this section on Capital Cost items

covers the timing of their occurrence and whether or not they will require replacement

and, if so, at what frequency. Material contained in this section on O&M and Other cost

items covers the timing and frequency of their occurrence. Material contained in the Event/Outcome Cost-Related Notes section describes for an

event/outcome cost item how the consequence

15 of it occurring was estimated. The

consequence of an event-outcome combination on an asset is generally estimated as the

amount of loss or damage that can be expected from that combination. 3.5 Online Help

The Cost-Effectiveness Tool contains two on-line help features: (1) a Software Tips

screen that highlights important software attributes and (2) an on-line version of this

Users Manual. Open the Help window by clicking CET Help from the Help menu or by

pressing the F1 function key. Figure 3-25 shows the basic Help tree and the Software Tips screen. The Help tree

appears on the left-hand side of the figure. It contains three nodesóWelcome, Software

Tips and Users Manual. Only the Users Manual node contains lower-level nodes. These

 13 An asset is any constructed facility, its contents (physical systems, information, and personnel), or

activities (functions) that have positive value to an owner or society as a whole. 14 A vulnerability is any weakness in an assetís design, implementation, or operation that can result in

damage to the asset. Such weaknesses can occur in facility characteristics, equipment properties, personnel

behavior, locations of people and equipment, or operational and personnel practices. 15 A consequence is the immediate, short-, and long-term effects of an event-outcome combination. Some

examples of relevant consequences include: public or asset personnel (e.g., occupants, users, or third

parties) fatalities or injuries, property damage or loss, disruption of public or private operations, environmental damage, and loss of critical data.
44

lower-level nodes correspond to the section and subsection headings of this report. The

right-hand side of Figure 3-25 lists six important software tips. The Software Tips screen

is designed as a handy reference for first-time users. It highlights material contained in

this report as well as several basic concepts for navigating within the software and for

saving results.

Figure 3-25 Cost-Effectiveness Tool Help Window, Help Tree, and Software Tips

Clicking the lower-level Software Glossary node opens a glossary of terms. The glossary

of terms corresponds to Appendix B of this report. The terms are arranged in

alphabetical order. The glossary contains over 80 terms. Each term is listed in bold

followed by its definition. Associated with most terms are a Notes section and an

Example section. The Notes section lists the output windows, input windows, and reports

which contain that term. The Notes section also includes a link to key sections and

subsections of this report, where additional information on the term of interest is given. Whenever appropriate, an example is given. The purpose of the Example section is to

link the term to the data center case study contained in the Data Center Case Study.lcc

file.
45

4 Treatment of Uncertainty and Risk

Decision makers typically experience uncertainty about the correct values to use in

establishing basic assumptions and in estimating future costs. Investments in long-lived

projects, such as the erection of new constructed facilities or additions and alterations to

existing constructed facilities, are characterized by uncertainties regarding project life, operation and maintenance costs, revenues, and other factors that affect project

economics. Since future values of these variable factors are generally unknown, it is

difficult to make reliable economic evaluations. The traditional approach to uncertainty in project investment analysis is to apply

economic methods of project evaluation to best-guess estimates of project input variables, as if they were certain estimates, and then to present results in a single-value, deterministic fashion. When projects are evaluated without regard to uncertainty of

inputs to the analysis, decision makers may have insufficient information to measure and

evaluate the financial risk of investing in a project having a different outcome from what

is expected. ASTM Standard Guide E 1369 surveys six widely used techniques for

treating uncertainty and financial risk in the economic evaluation of constructed

facilities.16 A subset of these techniques is implemented within CET 4.0. CET 4.0 addresses uncertainty and financial risk in a structured, three-part manner. First, best-guess estimates are used to establish a baseline analysis. The baseline analysis uses

fixed parameter values to calculate economic measures of performance. The results of

the baseline analysis allow the alternative combinations of risk mitigation strategies to be

ranked according to their economic measures of performance. The ranking of the

alternatives and the calculated measures of performance provide a frame of reference for

the treatment of uncertainty and financial risk. Second, a sensitivity analysis is

performed in which selected inputs are varied about their baseline values. The sensitivity

analysis is especially helpful in identifying shifts in the rank ordering of alternatives. The

sensitivity analysis, although it addresses uncertainty in input values, produces only a

crude measure of financial risk. Third, a Monte Carlo simulation is performed to obtain

an explicit measure of financial risk associated with the competing alternatives. Monte

Carlo simulation is especially useful in identifying shifts in the rank ordering of

alternatives and documenting the factors and circumstances associated with those shifts. This section extends the guided tour by laying out a systematic approach to the treatment

of uncertainty and risk. 4.1 Perform Sensitivity Analysis

Recall that in the baseline analysis all data elements entering into the calculations are

fixed. The baseline analysis includes both input costs and event-related costs. Thus, the

baseline analysis is a complete analysis in all respects but one; it does not address the

effects of uncertainty. For example, although the baseline analysis includes event-related

 16 ASTM International. ìStandard Guide for Selecting Techniques for Treating Uncertainty and Risk in the

Economic Evaluation of Buildings and Building Systems,î E 1369, Annual Book of ASTM Standards: 2006. Vol. 04.11. West Conshohocken, PA: ASTM International.
46

information, the probabilities and costs of any event-related outcomes are fixed. Whereas

these probabilities and costs are estimated based on the best available data, there is

uncertainty associated with them. Sensitivity analysis, as implemented in Version 4.0, addresses uncertainty by letting you

evaluate how changes in: (1) a single variable impacts the calculated values of life-cycle

costs and (2) multiple variables impact the calculated values of life-cycle costs. Depending on the variable (variables) selected, it (they) may impact a single alternative

or it (they) may impact all alternatives. The Sensitivity Analysis window is entered by clicking the Sensitivity option under the

Uncertainty node. The window, as configured in Version 4.0, has three tabs: (1) Change

in a Single Factor; (2) Most Significant Factors; and (3) Change in Multiple Factors. 4.1.1 Change in a Single Factor Tab

The left-hand side of the Change in a Single Factor tab lists the hierarchy of factors

available for evaluation. Each factor is associated with a node in the hierarchy. Upon

entering the tab, the Project and Alternatives nodes appear at the left. All alternatives

evaluated in the baseline analysis are listed immediately below the Alternatives node. The squares immediately to the left of each node in the hierarchy are marked with a +

(plus sign) or a ñ (minus sign). A plus sign means that additional nodes and/or factors

reside beneath that node. A minus sign means that a node has been opened. Since each

project has alternatives associated with it, upon entering the Change in a Single Factor

tab, you will note that the Alternatives node has a minus sign in its square on the left. Nodes can be opened or closed. For example clicking the square by the Project node

opens the node and the single factor Discount Rate (7.00 %) appears beneath it. Note that

there is no square to the left of Discount Rate. This means that Discount Rate is a factor

which can be selected for evaluation. Note that the factor line in the hierarchy includes

both the factor name (Discount Rate) and its value (7.00 %). Highlighting the factor

Discount Rate (7.00 %) selects that factor. The right-hand side of the screen includes the

Results group box, a drop down menu for percent changes about the baseline value of the

selected factor, and a Compute button. Clicking on the Compute button causes three sets

of life-cycle cost values to be computed. Figure 4-1 shows the results of a 10 %

deviation about the baseline value of the discount rate. Note that the name of the factor

appears at the upper left-hand corner of the Results group box. Since the discount rate is

the same for each alternative, results for both the Base Case and the Proposed

Alternatives are reported. Note that the Minimum, Baseline, and Maximum values for

the factor, Discount Rate, are displayed. Reference to Figure 4-1 shows that the discount

rate has a fairly strong impact on the computed value of life-cycle costs for both the Base

Case and the Proposed Alternatives. While the range of values was fairly wide, in each

case Alternative 1 emerged as the cost-effective risk mitigation plan.
47

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

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

Figure 4-2 uses the Base Case to illustrate how to open up the hierarchy within a given

alternative. The nodes immediately beneath the BC: Basic Renovation node are labeled

Costs and Events. Additional nodes are listed beneath the Costs and Events nodes. Opening the Costs node, we see that 10 nodes are listed beneath it. These nodes

correspond to the cost items entered via the Capital Investment, O&M, and Other Cost

Information windows. Note that each of the 10 nodes indicates the budget category it

falls under. One of the 10 nodes has been openedóO&M: Site Securityóto reveal its

factors. The factor selected for analysis is the Unit Cost of Site Security. Under the

Range drop down menu, we have selected a 10 % deviation about the baseline value of

the annually recurring Unit Cost of $125 000. Clicking the Compute button causes three

sets of values to be computed. Because this factor only affects the Base Case, only

values for the Base Case are displayed. Reference to the Results group box reveals that

this factor has a strong impact on life-cycle costs. Event-related costs are evaluated by opening the Events node for the alternative of

interest. The nodes listed beneath the Events node are the individual events defined and

used in the case study: CBRE Attack, Cyber Attack (Years 1-10), and Cyber Attack

(Years 11-25). Beneath each event node are the outcomes. If an outcome had costs

associated with it, then the event/outcome cost items are listed as nodes beneath it. The

factorsóunit cost and escalation rateóappear beneath each event/outcome cost item.
48

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

to Evaluate the Impact of the Unit Cost of Site Security on Life-Cycle

Costs for the Base Case

The bottom right-hand portion of the window contains the Save Results for Reports

group box. As its name suggests, the Save Results buttons may be used to save up to

three sets of computed results. For example, both the discount rate and the annually

recurring costs for site security have a strong impact on life-cycle costs. Thus, saving

these results might be useful in supporting a recommendation for Alternative 1

(Enhanced Security) or Alternative 2 (Enhanced Bio Protection). Any results that you

choose to save will appear in the Uncertainty Report. 4.1.2 Most Significant Factors Tab

The Most Significant Factors tab allows you to identify those factors which have the

greatest impact on life-cycle costs. Clicking the Compute button causes the discount rate, each unit cost, and each escalation rate to be varied by +10 % and ñ10 %, while holding

all other input variables at their baseline values. A table is then generated listing each

factor and the associated change in life-cycle cost. The factor having the greatest impact

on life-cycle cost is listed first. All other factors are listed in descending order of their

impact on life-cycle cost. Figure 4-3 illustrates the output from the Most Significant

Factors tab. It is important to note that a 10 % decrease in a factor may result in an

increase in life-cycle costs and a 10 % increase in a factor may result in a decrease in

life-cycle costs.
49

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

to Evaluate the Impact of +/-10 % Changes of Each Factor on Life- Cycle Costs for the Case Study

4.1.3 Change in Multiple Factors Tab

The Change in Multiple Factors tab allows you to evaluate how combinations of factors

impact the calculated values of life-cycle costs. The Change in Multiple Factors tab is

designed to be used in conjunction with the Most Significant Factors tab. Use the Most

Significant Factors tab to identify candidates for inclusion in the Change in Multiple

Factors portion of the sensitivity analysis. For example, you might want to focus on

those factors that have the greatest impact on life-cycle costs. The Change in Multiple

Factors tab is designed to set ranges on how the combinations of factors affect life-cycle

costs by using a ìbest caseî and ìworst caseî setting for each factor selected. The best

case and worst case settings are drawn from the minus signs (best case) and plus signs

(worst case) that appear in the Most Significant Factors tab. Recall that values appearing

on the Most Significant Factors tab are based on a 10 % deviation about the baseline

value. The Change in Multiple Factors tab allows users to specify a range of deviations

about the baseline value for the factor of interest. Thus, although a 10 % deviation is

permissible, other values for the deviation are also permissible. The left-hand side of the Change in Multiple Factors tab lists the hierarchy of factors that

can be included in this portion of the sensitivity analysis. Each factor is associated with a

node in the hierarchy. Upon entering the tab, the Project and Alternatives nodes appear

at the left. All alternatives evaluated in the baseline analysis are listed immediately
50

below the Alternatives node. The squares immediately to the left of each node in the

hierarchy are marked with a + (plus sign) or a ñ (minus sign). A plus sign means that

additional nodes and/or factors reside beneath that node. A minus sign means that a node

has been opened. Since each project has alternatives associated with it, upon entering the

Change in Multiple Factors tab, you will note that the Alternatives node has a minus sign

in its square on the left. Nodes can be opened or closed. Figure 4-4 illustrates how to open up the hierarchy and select factors for analysis. The

discount rate node has been opened and a range of +/- 25 % about the baseline value has

been selected. The Discount Rate will be included in the analysis, since the Include

Factor box has been checked. The nodes immediately beneath the BC: Basic Renovation

node are labeled Costs and Events have also been opened. These nodes correspond to the

cost items entered via the Capital Investment, O&M, and Other Cost Information

windows. Note that each of the 10 nodes indicates the budget category it falls under. One of the 10 nodes has been openedóO&M: Site Securityóto reveal factors. The

factor to be selected for inclusion in the analysis is the Unit Cost of Site Security. Nine

other factors were also selected for inclusion in the analysis: (1) the Unit Cost of the

Basic Renovation; (2-4) the Unit Cost of the Enhanced Renovation for Alternatives 1, 2, and 3; (5-7) the Unit Cost of Site Security for Alternatives 1, 2, and 3; and (8-9) the Unit

Cost of Improved Productivity (IAQ) for Alternatives 2 and 3.

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

Tab to Evaluate the Impact of Combinations of Factors on Life-Cycle

Costs for the Case Study
51

Because the Change in Multiple Factors tab allows combinations of factors to be

analyzed, an Included Multiple Factors window was developed. Figure 4-5 lists the

eleven factors included in the analysis and their range of values, expressed as a +/- %

deviation from the baseline value.

Figure 4-5 Sensitivity Analysis Window: Tree Structure Showing Combinations

of Factors Included in the Sensitivity Analysis

Returning to Figure 4-4, we see that clicking the Compute button causes three sets of

values to be computed. The calculated values for life-cycle costs correspond to each

factor being set at its best-case value, baseline value, and worst-case value. Reference to
52

Figure 4-4 shows that this combination of factors has a strong impact on the computed

values of life-cycle costs for both the Base Case and the Proposed Alternatives. While

the range of values was fairly wide, in each case Alternative 2, Enhanced Bio Protection, emerged as the cost-effective risk mitigation plan. The bottom right-hand portion of the window contains the Save Results for Reports

group box. As its name suggests, the Save Results buttons may be used to save up to

three sets of computed results. Any results that you choose to save will appear in the

Uncertainty Report. 4.2 Perform Monte Carlo Simulation

Monte Carlo simulation, as implemented in Version 4.0, allows you to evaluate how

changes in a single variable or a combination of variables impact the calculated values of

life-cycle cost. The Monte Carlo simulation feature is designed to address two analysis

needs. First, it provides an explicit measure of financial riskóthe probability of

investing in a project whose economic outcome is different from what is desired or

expected. Second, it is useful in identifying shifts in the rank ordering of alternatives and

documenting the factors and circumstances associated with these shifts. The Monte

Carlo Simulation window is entered by clicking the Monte Carlo option under the

Uncertainty node. Setting up the Monte Carlo simulation involves the specification of an experimental

design. Use information provided in the Most Significant Factors tab and the Change in

Multiple Factors tab to help you formulate the experimental design. Those tabs help you

choose which variables you wish to select for in-depth analysis. Those tabs are useful

because specification of the experimental design is a two-step process: (1) defining which

variables are to be simulated and (2) selecting the number of simulations. Within

Version 4.0, the number of simulations is set at 1 000 to ensure that values in the tails of

the distribution for each variable of interest would be selected for inclusion in the

analysis.

In reality, the exact nature of the parent probability distribution for each variable is

unknown. Estimates of the parameters (e.g., mean and variance) of the parent probability

distribution can be made and uncertainty can be reduced by investigation and research. However, uncertainty can never be eliminated completely. Therefore, in order to

implement the procedure without undue attention to the characterization of the parent

probability distribution, it was decided to focus on only two probability distributions: (1)

the triangular and (2) the uniform. One reason for using these probability distributions is

that they are both defined over a finite interval. They are also used frequently in cost-risk

analyses.17 Furthermore, the specification of each probability distribution is

accomplished with as few as two data points. The triangular distribution is widely used

in simulation modeling; its specification requires three data points, the minimum value, the most likely value, and the maximum value. The triangular distribution is used

 17 ASTM International. ìStandard Practice for Measuring Cost Risk of Buildings and Building Systems.î E

1946. Annual Book of ASTM Standards: 2006. Vol. 04.12. West Conshohocken, PA: ASTM International.
53

whenever the range of input values is continuous and a clustering about some central

value is expected. The uniform distribution is also widely used in simulation modeling;

its specification requires only two data points, the minimum value and the maximum

value. In addition, all values between the minimum and maximum are equally likely. The uniform distribution is used whenever the range of input values is continuous but no

a priori reason can be given for expecting clustering about some central value. 4.2.1 Setting up the Simulation and Saving the Results

The Monte Carlo Simulation window is designed to be used in conjunction with the Most

Significant Factors tab and the Change in Multiple Factors tab. Use the Most Significant

Factors tab to identify candidates for inclusion in the Change in Multiple Factors portion

of the sensitivity analysis. Use the Change in Multiple Factors tab to establish likely

values for the range of life-cycle cost for a combination of input variables. Once you

have established the range (e.g., ìbest caseî and ìworst caseî values for the

combination), the Monte Carlo Simulation window allows you to ìfill inî the

intermediate values and identify any cases where rank reversals occur. The left-hand side of the Monte Carlo Simulation window lists the hierarchy of factors

that can be included in this portion of the sensitivity analysis. Each factor is associated

with a node in the hierarchy. Upon entering the Monte Carlo Simulation window, the

Project and Alternatives nodes appear at the left. All alternatives evaluated in the

baseline analysis are listed immediately below the Alternatives node. The squares

immediately to the left of each node in the hierarchy are marked with a + (plus sign) or a ñ (minus sign). A plus sign means that additional nodes and/or factors reside beneath that

node. A minus sign means that a node has been opened. Since each project has

alternatives associated with it, upon entering the Monte Carlo Simulation window, you

will note that the Alternatives node has a minus sign in its square on the left. Nodes can

be opened or closed. Because baseline values have already been entered for each factor, the specification of

the uniform distribution only requires one data point, while the specification of the

triangular distribution requires two data points. Specification of the uniform distribution

only requires one data point because it is symmetric about the baseline value. Thus, if a

lower bound of 4 % is entered (i.e., the baseline value minus 3 %), the upper bound is

calculated automatically as 10 % (i.e., the baseline value plus 3 %). The triangular

distribution requires two data pointsóthe lower bound and the upper boundóbecause

the baseline value is used as the most likely value. Note that CET 4.0 imposes two

constraints in specifying the triangular distribution (1) the lower bound must be less than

the baseline value and (2) the upper bound must be greater than the baseline value. Figure 4-6 illustrates how to open up the hierarchy and select factors for analysis. The

discount rate node has been opened and a probability distribution and a range of values

about the baseline value have been selected. In this case the uniform distribution has

been selected and a minimum value of 4.00 % has been entered. The maximum value of

10.00 % is calculated automatically based on the symmetric nature of the uniform
54

distribution. The Discount Rate will be included in the analysis, since the Include Factor

box has been checked. Ten other factors are included in the Monte Carlo simulation. Two are specific to the

Base Case (1) the Unit Cost of the Basic Renovation and (2) the Unit Cost of Site

Security; two are specific to Alternative 1 (1) the Unit Cost of the Enhanced Renovation

and (2) the Unit Cost of Site Security; three are specific to Alternative 2 (1) the Unit Cost

of the Enhanced Renovation, (2) the Unit Cost of Site Security, and (3) the Unit Cost of

Improved Productivity (IAQ); and three are specific to Alternative 3 (1) the Unit Cost of

the Enhanced Renovation, (2) the Unit Cost of Site Security, and (3) the Unit Cost of

Improved Productivity (IAQ). Variations in the values of all ten factors are modeled

using a triangular distribution. In each case, the distribution is positively skewed, indicating that the upper tail is longer than the lower tail. This formulation is common in

construction and O&M cost estimating, reflecting the potential that cost can increase

rapidly. For example, the baseline value for the Unit Cost of Site Security for the Base

Case is $125 000 per year. In the Monte Carlo simulation, we have set the lower bound

at $110 000 (i.e., the baseline value minus $10 000) and the upper bound at $145 000

(i.e., the baseline value plus $20 000).

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

Window to Evaluate the Impact of Combinations of Factors on Life- Cycle Costs for the Case Study

Because the Monte Carlo Simulation window allows combinations of factors to be

analyzed, an Included Monte Carlo Factors window was developed. Figure 4-7 lists the
55

eleven factors included in the analysis. For each factor, the window records the

associated probability distribution.

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

Combinations of Factors Included in the Monte Carlo Simulation

Returning to Figure 4-6, we see that clicking the Compute button causes three sets of

values to be computed. The calculated values for life-cycle costs correspond to

Minimum, Average, and Maximum values of life-cycle costs observed in the Monte

Carlo simulation. Reference to Figure 4-6 shows that this combination of factors has a

strong impact on the computed values of life-cycle costs for both the Base Case and the
56

Proposed Alternatives. While the range of values was fairly wide, in each case

Alternative 2, Enhanced Bio Protection, emerged as the cost-effective risk mitigation

plan. The bottom right-hand portion of the window contains the Save Results to Uncertainty

Report and Raw Data to External Files group box. As its name suggests, the Save Results

buttons may be used to save up to three sets of computed results. Any results that you

choose to save will appear in the Uncertainty Report. The bottom right-hand portion of

the window also contains an option to Save Raw Data to an external file. This option

allows you to save up to three sets of raw data. If this option is selected, a file for each

alternative analyzed (e.g., Base Case, Alternative 1, Alternative 2, and Alternative 3) is

saved in the Simulation Data directory under the CET 4.0 directory. Each file is saved in

a spreadsheet format. Each file has a csv extension. These files are designed so that

users can calculate a wide variety of summary statistics and sort and plot the cumulative

distribution function of life-cycle cost for each alternative analyzed. 4.2.2 How to Create Customized Charts and Tables

Should you choose to access the files created via the Save Raw Data to an external file

option, we recommend that you first create an Excel file to retrieve the saved raw data. We recommend that you have at least four worksheets in addition to a worksheet for each

alternative analyzed. The additional worksheets are useful in setting up the calculations, summary statistics, and charts for each measure of economic performance (i.e., LCC, PVNS, SIR, and AIRR). All of the information needed to calculate each measure of

economic performance is contained in the raw data files. For example, if you wish to

create a cumulative distribution function for life-cycle costs, you will need to paste the

life-cycle cost values for each alternative into a worksheet, sort each set of values, and set

up a placeholder for cumulative probability (i.e., 0.001, 0.002, Ö, 0.999, 1.000). Graphing features of Excel can then be used to create a multi-trace plot of the

alternativesí life-cycle costs. If other measures of economic performance are desired, use

the formulas given in Appendix A to calculate the measure. For example, if summary

statistics and charts for the present value of net savings are desired, start with the sorted

life-cycle values and subtract from the Base Case value the value for each Alternative

(see Equation A.11). Once you have completed the initial set of calculations, you can

either generate summary statistics directly or sort the PVNS values from smallest to

largest and set up a place holder for cumulative probability in order to plot them. The Save Raw Data to an external file option provides an opportunity to produce

customized charts and tables that complement the Monte Carlo simulation material

presented in the Uncertainty Report. Figures 4-8 and 4-9 and Table 4-1 are based on the

raw data; they record the graphical and tabular results when all eleven factors are varied

in combination. The two figures were constructed by first sorting the values of each

economic measure from smallest to largest. The resultant cumulative distribution was

then plotted. In each figure, the vertical axis records the probability that the economic

measure is less than or equal to a specified value. The values recorded on the horizontal

axis cover the range of values encountered during the Monte Carlo simulation.
57

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

3000 3500 4000 4500 5000 5500 6000 6500 7000

Life-Cycle Cost in Thousands of Dollars

Cumulativ

e

Pro

bability

BC

Alt 1

Alt 2

Alt 3

Figure 4-8 Life-Cycle Costs for the Base Case and the Proposed Alternative in

Thousands of Dollars Due to Changes in Five Factors

Figure 4-8 shows how the life-cycle costs of the Base Case compare to those of the

Proposed Alternatives when all eleven factors are varied in combination. In Figure 4-8, life-cycle costs are expressed in thousands of dollars ($K). In analyzing Figure 4-8, it is

useful to keep in mind that the values of life-cycle costs for the Base Case and the

Proposed Alternatives from the baseline analysis were $4 643K, $4 359K, $4 254K, and

$4 859K, respectively. Comparisons between Figure 4-8 and saved results tabulated in

the Uncertainty Report (see Figure 4-13) are also helpful in interpreting the results of the

Monte Carlo simulation. First, notice that the life-cycle cost trace of Alternatives 1 and 2

in Figure 4-8 always remains to the left of the life-cycle cost trace for the Base Case. Thus, for any given probability (e.g., 0.50, as measured by the 50

th

percentile recorded in

the Uncertainty Report (see Figure 4-13)), the life-cycle cost of the Alternative 2

($4 396K) is less than the life-cycle cost of the Base Case ($4 687K). Similarly, for any

given life-cycle cost (e.g., $4 500K), the probability of being less than or equal to that

cost is higher for Alternative 2 (0.59) than for the Base Case (0.42). Second, the

horizontal distance between the Alternative 2 and the Base Case gets larger as the

cumulative probability moves from 0.00 to 1.00. This translates into a wider range of

life-cycle costs for the Base Case (i.e., maximum minus minimum); it is reflected in the

higher standard deviation for the Base Case recorded in the last column of the statistical

measure section of the Uncertainty Report (see Figure 4-13). Figure 4-8 demonstrates
58

that Alternative 2 is the most cost-effective risk mitigation plan. However, it is

instructive to examine how the use of other economic measures sheds light on other

aspects of its cost-effectiveness.

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

0 100 200 300 400 500 600 700

Present Value Net Savings in Thousands of Dollars

Cumulativ

e

Pro

bability

Alt 1

Alt 2

Figure 4-9 Present Value Net Savings in Thousands of Dollars for the Proposed

Alternative Due to Changes in Five Factors

Figure 4-9 shows how present value net savings (PVNS) of Alternatives 1 and 2 vary

when all eleven factors are varied in combination. In analyzing Figure 4-9, it is useful to

keep in mind that the value of PVNS resulting from the baseline analysis was $388K for

Alternative 2 and $284K for Alternative 1. Turning now to Figure 4-9, we see that a

value of PVNS equal to $200K occurs at 0.37 on the cumulative distribution function for

Alternative 2. Stated another way, there is a probability of 0.63 that PVNS of Alternative

2 will exceed $200K. Reference to Figure 4-9 reveals that PVNS of Alternative 2

exceeds $400K for approximately 40 % of the observations resulting from the Monte

Carlo simulation. Table 4-1 summarizes the results of the Monte Carlo simulation for the Proposed

Alternatives. Four economic measures are reported. The values of life-cycle costs

(LCC) and present value net savings (PVNS) are reported in thousands of dollars ($K). This facilitates comparisons between the values in the table and the information plotted in

Figures 4-8 and 4-9. A PVNS greater than zero indicates a cost-effective risk mitigation

plan. The savings-to-investment ratio (SIR) is a dimensionless number. An SIR greater
59

than 1.0 indicates a cost-effective risk mitigation plan. The adjusted internal rate of

return (AIRR) is expressed as an annual percentage rate. An AIRR greater than the

baseline value for the discount rate of 7 % indicates a cost-effective risk mitigation plan. Reference to Table 4-1 reveals the superior performance 0f Alternative 2 ñ Enhanced Bio

Protection. Reference to Table 4-1 reveals that the minimum values for PVNS, SIR, and

AIRR indicate marginal performance of Alternative 1 vis-‡-vis the Base Case. An

examination of the raw data, however, reveals that marginal performance is associated

with a single observation. Values in the inter-quartile range (i.e., the middle 50 % of the

observations) support Alternative 2 as the most cost-effective risk mitigation plan. Table 4-1 Summary Statistics for the Proposed Alternative Due to Changes in

Five Factors

Statistical Measure Economic

Measure

Minimum 25% 50% 75% Maximum Mean

Standard

Deviation

LCCBC 3614 4240 4687 5226 6171 4755 605

LCCAlt 1 3549 4136 4447 4832 5600 4492 447

PVNSAlt 1 -5 108 239 394 587 264 160

SIRAlt 1 0.991 1.170 1.358 1.596 2.774 1.414 0.278

AIRRAlt 1 0.060 0.077 0.084 0.093 0.107 0.085 0.010

LCCAlt 2 3385 4069 4396 4720 5759 4415 430

PVNSAlt 2 77 168 291 498 662 340 182

SIRAlt 2 1.092 1.206 1.355 1.594 2.671 1.417 0.238

AIRRAlt 2 0.054 0.075 0.083 0.093 0.111 0.084 0.012

LCCAlt 3 3922 4635 5019 5430 6430 5049 506

PVNSAlt 3 -434 -390 -332 -206 -77 -293 108

SIR Alt 3 0.284 0.624 0.699 0.815 0.945 0.713 0.122

AIRRAlt 3 0.008 0.042 0.051 0.064 0.086 0.053 0.014

4.3 Use and Interpretation of the Uncertainty Report

Clicking on the Uncertainty option under the Reports node opens the Uncertainty Report. The Uncertainty Report consists of these five sections: (1) a Cover Sheet; (2) any

sensitivity analyses saved under the Change in a Single Factor tab; (3) if computed, the

rank-ordered factors and their associated values from the Most Significant Factors tab;

(4) any sensitivity analyses saved under the Change in Multiple Factors tab; and (5) any

Monte Carlo simulations saved.
60

Figure 4-10 presents a saved sensitivity analysis from the Change in a Single Factor tab

for a plus or minus 10 % change in the discount rate. Figure 4-10 largely reproduces the

Results section from the Change in a Single Factor tab (see Figure 4-1). Figure 4-10

records the factor name in the upper left-hand corner along with the range for which life- cycle costs are calculated (i.e., the Minimum, Baseline, and Maximum values of that

factor). Note that more than one range can be used and saved for a single factor. For

example, if you wanted to see how lowering the discount rate to 5.25 % or raising it to

8.75 % would affect the calculated values for life-cycle costs, you would use the +/-25 %

change from the drop down Range box in the Change in a Single Factor tab to Compute

the values and Save Results for the Uncertainty Report.

Figure 4-10 Saved Sensitivity Analysis Page of the Uncertainty Report for a

+/-10 % Change in the Discount Rate

Figure 4-11 presents the first page of the rank-ordered factors and their associated values

from the Most Significant Factors tab. Note that reductions in the discount rate for both

the Base Case and the Proposed Alternatives result in increases in life-cycle costs. The

rank ordering of the factors provides a convenient means for identifying those factors

which merit closer examination via either the Change in a Single Factor tab or the

Change in Multiple Factors tab. Although all factors are varied by plus or minus 10 % in

the Most Significant Factors tab, you can use the Change in a Single Factor tab or the

Change in Multiple Factors tab to measure how changes greater than 10 % affect the

computed values of life-cycle costs. Figure 4-12 presents a saved sensitivity analysis from the Change in Multiple Factors tab

for simultaneous changes in the baseline value of eleven factors. The upper portion of

Figure 4-12 largely reproduces the Results section from the Change in Multiple Factors

tab (see Figure 4-4). The lower portion of Figure 4-12 records the factor names along

with the range for which life-cycle costs are calculated and the corresponding Best Case, Baseline, and Worst Case values of that factor. When all factors are set at their Best Case

or Worst Case values, they result in the life-cycle cost values recorded in the upper

portion of Figure 4-12. Figure 4-13 presents a saved Monte Carlo simulation. The upper portion of Figure 4-13

largely reproduces the Results section from the Monte Carlo Simulation window (see
61

Figure 4-6). The lower portion of Figure 4-13 records the eleven factor names along with

the probability distribution and the corresponding Minimum, Baseline, and Maximum

values of that factor.

Figure 4-11 Most Significant Factors Page of the Uncertainty Report for the Case

Study
62

Figure 4-12 Summary of Life-Cycle Costs and Factor Values of a Saved Change in

Multiple Factors Page of the Uncertainty Report for the Case Study
63

Figure 4-13 Summary of Life-Cycle Costs, Probability Distributions, and Factor

Values of a Saved Monte Carlo Simulation Page of the Uncertainty

Report for the Case Study
64
65

5 Analyze Results and Recommend a Cost-Effective Risk Mitigation

Plan

Choosing among alternatives designed to reduce the impacts of natural and man-made

hazards is more complicated than most building investment decisions. Consequently, guidance is provided to help identify key characteristics and the level of effort that will

promote a better-informed decision. 5.1 Employ a Structured Process to Generate a Recommendation

Review the calculated values of each alternativeís measures of performance. Include the

outcomes computed for each of the three types of analysis: (1) baseline analysis (i.e., fixed parameter values); (2) sensitivity analyses; and (3) Monte Carlo simulations. Use the performance criterion from each selected evaluation method to rank order

alternatives for each type of analysis (baseline analysis, sensitivity analyses, and Monte

Carlo simulations). Document differences in alternative rankings among the three types

of analysis. Focus on circumstances under which the most cost-effective risk mitigation

plan identified in the baseline analysis is replaced by another alternative (other

alternatives) when the effects of uncertainty are considered. Use the results of the Monte

Carlo simulations to identify the characteristics associated with ranking changes for those

alternatives under consideration. Recommend an alternative as the most cost-effective risk mitigation plan. Provide a

rationale for the recommendation. Include as part of the rationale, findings from each of

the three types of analysis. Include a discussion of circumstances under which the

recommended alternative did not have the best measure of economic performance. Describe any significant effects that remain unquantified. Explain how these effects

impact the recommended alternative. Refer to ASTM Standard Practice E 1765 and its

adjunct for guidance on how to present unquantified effects along with the computed

values of the measures of economic performance.18

5.2 Prepare Report with Documentation Supporting Recommended Risk

Mitigation Plan

In a report of an economic evaluation, state the objective, the constraints, the alternatives

considered, the key assumptions and data, and the computed value for each outcome

(measure of economic performance) of each alternative. Make explicit the discount rate;

the study period; the main categories of cost data, including initial costs, recurring and

nonrecurring costs, and resale values; and grants and incentives if integral to the decision- making process. State the method of treating inflation. Specify the assumptions or costs

that have a high degree of uncertainty and are likely to have a significant impact on the

 18 ASTM International. ìStandard Practice for Applying the Analytical Hierarchy Process (AHP) to

Multiattribute Decision Analysis of Investments Related to Buildings and Building Systems,î E 1765, Annual Book of ASTM Standards: 2006. Vol. 04.12. West Conshohocken, PA: ASTM International.
66

results of the evaluation. Document the sensitivity of the results to these assumptions or

data. Describe any significant effects that remain unquantified in the report. 5.2.1 Suggested Format for Summarizing Results

Use the generic format for reporting the results of an economic evaluation described in

ASTM Standard Guide E 2204.19It provides technical persons, analysts, and researchers

a tool for communicating results in a condensed format to management and non-technical

persons. The generic format calls for a description of the significance of the project, the

analysis strategy, a listing of data and assumptions, and a presentation of the computed

values of any measures of economic performance. Figure 5-1 uses ASTM Standard

Guide E 2204 to produce a concise and comprehensive summary of the alternative risk

mitigation strategies for the data center case study. Figure 5-1 contains three sections. Section 1 sets the stage for summarizing the results

that follow; it has two headings. The information called for under these headings

discusses the objective of the project. Section 2, Analysis Strategy, has two headings. The information presented under the first heading focuses on documenting the steps taken

to ensure that the analysis strategy is logical and complete. The information presented

under the second heading focuses on summarizing the key data elements and associated

assumptions needed to calculate the values reported in Section 3. Section 3, How Key

Measures Are Calculated, Summarized, and Traced, has three headings. The first

heading calls for information that provides enough detail on the calculation of key

measures for others to understand how the calculated values were produced. The second

heading calls for the calculated values for life-cycle costs for each alternative as well as

the calculated values for each of the Proposed Alternatives of present value net savings, savings-to-investment ratio, and adjusted internal rate of return. The third heading calls

for information to ensure traceability; it includes cited references to specific ASTM

standards or any other standards, codes, or regulations used. The material presented in Sections 1 and 2 of Figure 5-1 provides senior management or

other key decision makers with a basic understanding of the problem being analyzed and

the steps being taken to address it. For example, Section 1 describes the characteristics of

the data center, the hazards it faces, and the renovation strategies designed to address

those hazards. Section 2 describes in words the four key measures of economic

performanceólife-cycle cost, present value net savings, savings-to-investment ratio, and

adjusted internal rate of returnóand lays out the key data and assumptions that drive the

economic evaluation. Section 3.a presents the results of the baseline analysis and the

Monte Carlo simulation, both of which indicate that the Enhanced Security alternative

and the Enhanced Bio Protection alternative are cost effective. Note that the Enhanced

Bio Protection alternative is preferred to the Enhanced Security alternative in most but

not all instances.

 19 ASTM International. ìStandard Guide for Summarizing the Economic Impacts of Building-Related

Projects,î E 2204, Annual Book of ASTM Standards: 2006. Vol. 04.12. West Conshohocken, PA: ASTM

International.
67

Figure 5-1 Summary of the Data Center Case Study

1.a Significance of the Project:

The data center undergoing renovation is a single-story

structure located in a suburban community. The floor area of the

data center is 3 716 m

2 (40 000 ft2). The replacement value of the

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

data center contains financial records that are in constant use by

the firm and its customers. Thus, any interruption of service will

result in both lost revenues to the firm and potential financial

hardship for the firmís customers. The building owners employ four different renovation

strategies. The first, referred to as the Basic Renovation, employs

upgrades that meet the minimum building performance and

security requirements. The second, Enhanced Security, results in

enhanced security as well as selected improvements in building

performance. The third, Enhanced Bio Protection, provides a high

level of protection against particles (biological agents) but no

gaseous (chemical agents) protection. The fourth, Enhanced

Chem/Bio Protection, provides a high level of protection against

particles and gaseous agents. All of the alternatives recognize that

in the post-9/11 environment the data center faces heightened risks

in two areas. These risks are associated with the vulnerability of

information technology resources and the potential for damage to

the facility and its contents from chemical, biological, radiological, and explosive (CBRE) hazards. Two scenariosóthe

potential for a cyber attack and the potential for a CBRE attackó

are used to capture these risks.

1.b Key Points:

1. The objective of the renovation project is

to provide cost-effective operations and

security protection for the data center. 2. The renovation is to upgrade the data

centerís HVAC, telecommunications and

data processing systems and several

security-related functions. 3. Four upgrade alternatives are proposed: - Basic Renovation

- Enhanced Security, augments the Basic

Renovation by strengthening portions of

the exterior envelope, limiting vehicle

access to the site, and improving the

buildingís HVAC, data processing and

telecommunications systems. - Enhanced Bio Protection, augments

Enhanced Security by making the

building more air tight, installing a high- performance particle filtration system, and modifying electrical feeders. - Enhanced Chem/Bio Protection, augments

Enhanced Security by making the

building more air tight, installing a high- performance particle and gaseous

filtration system, and modifying electrical

feeders.

2. Analysis Strategy: How Key Measures are Estimated

The following economic measures are calculated as present-value (PV) amounts:

(1) Life-Cycle Costs (LCC) for the Base Case (Basic Renovation) and for the Proposed Alternative (Enhanced

Renovation), including all costs of acquiring and operating the data center over the length of the study period. The selection criterion is lowest LCC. (2) Present Value Net Savings (PVNS) that will result from selecting the lowest-LCC alternative. PVNS > 0

indicates an economically worthwhile project. Additional measures:

(1) Savings-to-Investment Ratio (SIR), the ratio of savings from the lowest-LCC to the extra investment required

to implement it. A ratio of SIR >1 indicates an economically worthwhile project. (2) Adjusted Internal Rate of Return (AIRR), the annual return on investment over the study period. An AIRR >

discount or hurdle rate indicates an economically worthwhile project. Data and Assumptions: - The Base Date is 2006. - The alternative with the lower first cost (Basic Renovation) is designated the Base Case. - The study period is 25 years and ends in 2030. - The discount or hurdle rate is 7.0 % real. - The minimum acceptable rate of return is 7.0 % real. - Annual probabilities for the outcomes for each attack scenario are given along with outcome costs. - Annual probabilities and outcome costs differ by renovation strategy.
68

3.a Calculation of Savings, Costs, and Additional Measures

Results of Baseline Analysis (Savings and Costs in Thousands of Dollars ($K))

Economic Measure

Base

Case

Alt 1 Alt 2 Alt 3

Life-Cycle Cost $4 643 $4 359 $4 254 $4 859

Investment Cost $1 150 $1 765 $1 935 $2 153

Delta Investment Cost N/A $616 $785 $1 003

Non-Investment Cost $3 493 $2 593 $2 319 $2 706

Savings N/A $899 $1 173 $787

Present Value Net Savings N/A $284 $388 -$216

Savings to Investment Ratio N/A 1.46 1.49 0.78

AIRR N/A 8.63 % 8.73 % 5.97 %

Results of Monte Carlo Simulation (Savings and Costs in Thousands of Dollars ($K))

Statistical Measure

Economic Measure

Minimum Median Maximum Mean

Standard

Deviation

LCCBC $3 614 $4 687 $6 171 $4 755 $605

LCCAlt 1 $3 549 $4 447 $5 600 $4 492 $447

LCCAlt 2 $3 385 $4 396 $5 759 $4 415 $430

LCCAlt 3 $3 922 $5 019 $6 430 $5 049 $506

PVNSAlt 1 -$5 $239 $587 $264 $160

PVNSAlt 2 $77 $291 $662 $340 $182

PVNSAlt 3 -$434 -$332 -$77 -$293 $108

3.b Key Results 3.c Traceability

*LCC (Thousands of Dollars ($K))

Basic Renovation $4 643

Enhanced Security $4 359

Enhanced Bio Protection $4 254

Enhanced Chem/Bio Protection $4 859

*PVNS (Thousands of Dollars ($K))

Life-cycle costs and supplementary

measures were calculated according

to ASTM standards E917, E964, E1057, and E 1074.

Enhanced Security $284

Enhanced Bio Protection $388

Enhanced Chem/Bio Protection -$216

*SIR

Enhanced Security 1.46

Enhanced Bio Protection 1.49

Enhanced Chem/Bio Protection 0.78

*AIRR

Enhanced Security 8.63 %

Enhanced Bio Protection 8.73 %

Enhanced Chem/Bio Protection 5.97 %

Treatment of uncertainty and

measures of project risk were

calculated according to ASTM

standards E 1369 and E 1946.

Figure 5-1 Summary of the Data Center Case Study (Cont.)
69

5.2.2 Creating the Executive Summary Report

The generic format is a convenient means for summarizing the purpose, data, assumptions, and results of the economic evaluation. Its function is that of an abstract; it

summarizes the important points. The Executive Summary Report supplements the

generic format by providing the type of information needed to make a better informed

decision. The Executive Summary Report is created via a dialog box. The dialog box is reached by

selecting the Executive option under the Reports node on the Main Menu. Figure 5-2

shows how the dialog box looks when first opened. Figure 5-2 Dialog Box for Creating the Executive Summary Report

The flow of information in the Executive Summary Report follows the analysis processó

baseline analysis, sensitivity analysis, Monte Carlo simulations. Emphasis is first placed

on presenting and documenting results; supporting information is then presented. Referring to Figure 5-2, we see that individual sections of each Report option can be

selected or deselected. If all sections are desired, select Check All. Groups of sections

can be deselected by clicking Uncheck All. To examine the Executive Summary Report

as it will appear when printed, select View. The ìfront-endî of the Executive Summary Report includes the user selected sections

from the Results Report. Recall that the Results Report presents the results of the

baseline analysis. Decision makers may find some sections under the Results heading of

greater interest than others. We recommend that the first four sectionsóEconomic

Measures of Performance, Life-Cycle Costs, Life-Cycle Costs: Input and Event-Related, and Costs by Alternativeóbe selected in all cases because they provide a frame of

reference for everything that follows. Next are the results of the sensitivity analysis and the Monte Carlo simulations from the

Uncertainty Report. Because the treatment of uncertainty is so important in developing a

cost-effective risk mitigation plan, we recommend that the last two sectionsóChange in

Multiple Factors and Monte Carlo Simulation Summaryóbe selected in all cases.
70

The third part of the Executive Summary Report presents selected material from the Data

Report. Here the emphasis is on documenting the information underpinning the baseline

analysis. We recommend that all four sectionsóBackground Information, Descriptive

Summary, Input Cost Data Summary, and Event/Outcome Cost Data Summaryóbe

included because they provide the kind of information that will help decision makers

have confidence in the data and assumptions that shaped the economic evaluation. To complete the Executive Summary Report, include as supporting documentation

information compiled from the risk assessment and a description of the process by which

combinations of risk mitigation strategies were assembled. This information is contained

in the Project Notebook. Once again, we recommend that all four sectionsóProject, Alternatives, Input Costs, and Event/Outcome Costsóbe included because they provide

the kind of information that will help decision makers have confidence in the data and

assumptions that shaped the economic evaluation. Also contained in the Project

Notebook is information tied to the critical resource documents (e.g., the reports

produced by the risk assessment team or a condition assessment prepared by an

architectural/engineering firm containing recommended mitigation strategies and cost

estimates for implementing them), which enables analysts to quickly locate key

documents and plans if they are requested by the decision maker.
71

6 Next Steps

Now that you have completed the guided tour, use the test files that you created to gain

familiarity with the software. Experiment with the various means for editing, creating, and deleting data elements. Create simple applications using your own data to master the

full capabilities of the Cost-Effectiveness Tool. Build more complex applications and

use the sensitivity analysis and Monte Carlo simulation features to evaluate how

changing the values of key inputs affect economic performance. Use the Results Report

to learn how to drill down on key cost drivers and use that information to help guide you

in conducting and saving additional sensitivity analyses and Monte Carlo simulations. Have as a goal to use the software as a decision support tool; it is largely self

documenting, it lays out the information going into the analysis, and provides guidance in

choosing a cost-effective risk mitigation plan. Visit the OAE website to learn about future updates and pending software releases.
72
73

Appendix A Technical Considerations

An economic evaluation may be divided into four stages: (1) identification; (2)

classification; (3) quantification; and (4) presentation. The identification stage identifies

the investment alternatives to be evaluated. The identification stage involves identifying

and listing all of the ìeffectsî of the alternatives being analyzed. In principle, this set of

effects produces a checklist of all items that should be taken into consideration. The

second stage entails classifying these effects into investment and non-investment cost

categories. The third stage produces year-by-year estimates of the values of each of the

cost categories. The final stage is the presentation and analysis of the measures of

economic performance in a form that clearly details the important assumptions

underlying the economic evaluation and the implications of these assumptions for the

studyís conclusions. Once all costs have been identified and classified, it becomes necessary to develop year- by-year estimates for each of the cost categories for each alternative under analysis. We

denote the alternatives as Aj (where the index for j ranges from 0,Ö, N, for a total of N+1

alternatives). Each alternative under consideration meets certain feasibility requirements. First, it must

satisfy all of the specified functional requirements. Second, it must not exceed any stated

budget constraints. The first requirement insures that all technical criteria (e.g., thermal

performance and indoor air quality) and all regulatory constraints (e.g., building codes

and standards) are met. The second requirement excludes any proposals which cannot be

implemented due to insufficient funds. The material presented in this appendix assumes that all alternatives are feasible in that

they meet the functional requirements and have been screened vis-‡-vis any stated budget

constraints. Thus, there is no requirement that alternatives be optimally configured, although the evaluation methods presented in this chapter are all applicable to choosing

among a set of optimally configured alternatives. Associated with each alternative are investment cost categories k (where the index k

ranges from 1,Ö, Kj) and non-investment cost categories m (where the index m ranges

from 1,Ö, Mj). The potential for future terrorist attacks, as well as other natural and man- made hazards, are measured by the expected value of annual losses. Associated with

each alternative are expected loss categories p (where the index p ranges from 1,Ö, Pj). Some of the expected loss categories accrue to investment costs and some accrue to noninvestment costs. Expected losses are modeled separately from investment costs and

non-investment costs to better characterize the nature of low-probability, high- consequence events.20

It is important to note that some costs entering the analysis may be negative. For

example, the salvage and sale of equipment and components at the end of the study

 20 The information needed to perform the expected loss calculations is a byproduct of the risk assessment

and the identification of potential mitigation strategies.
74

period result in a salvage value whose present value equivalent is subtracted from other

investment costs. Similarly, improvements to indoor air quality may result in

productivity improvements which favorably impact occupants; these ìsavingsî are

subtracted from non-investment costs. Any pure benefits which result (e.g., increased

rental income due to improvements) are subtracted from non-investment costs (i.e., benefits are treated as negative costs). At the heart of the economic evaluation methodology is an economic concept referred to

as the time value of money. This concept relates to the changing purchasing power of

money as a result of inflation or deflation, along with consideration of the real earning

potential of alternative investments over time. The discount rate reflects the decision

makerís time value of money. The discount rate is used to convert, via a process known

as discounting, costs which occur at different times to a base time. Throughout this

report, the term ìpresent valueî will be used to denote the value of a cost found by

discounting cash flows (present and future) to the base time. The base time is the date

(base year) to which costs are converted to time equivalent values.

In order to describe each of the four standardized methods of economic performanceó

life-cycle cost, present value of net savings, savings-to-investment ratio, and adjusted

internal rate of returnówe define a series of terms.

t = a unit of time;

21

T = the length of the study period in years;

d = the discount rate expressed as a decimal. The prefix, PV, is used to designate dollar denominated quantities in present value terms. The present value is derived by discounting (i.e., using the discount rate) to adjust all

costsópresent and futureóto the base year (i.e., t = 0). The present value terms are: the

present value of investment costs (PVI), the present value of non-investment costs (PVC), and the present value of expected losses (PVE(L)). Because PVE(L) includes some loss

categories which accrue to investment costs and some which accrue to non-investment

costs, we denote the present value of investment costs inclusive of losses as PVI' and the

present value of non-investment costs inclusive of losses as PVC'. The cost terms that make up the mathematical formulations for the four standardized

methods are given in Equations (A.1) through (A.6). While there may be many different

ways of classifying costs (i.e., classification schemes), their explicit treatment in both the

mathematical formulation and the standardized methods ensures that a close coupling

results between the mathematical formulation and each standardized method. The investment costs for alternative Aj in year t are expressed as:

 21 Denote the beginning of the study period as the base year (i.e., t = 0) and end of the study period as T. Thus, the length of the study period in years is T.
75

1

K j

jt kjt k

I I

   (A.1)

where Ikjt = the estimated cost accruing to the k

th

investment cost category for alternative

Aj in year t. The non-investment costs for alternative Aj in year t are expressed as:

1

M j

jt mjt m C C

   (A.2)

where Cmjt = the estimated cost accruing to the m

th

non-investment cost category for

alternative Aj in year t. The expected losses for alternative Aj in year t may now be expressed as:

   

1

Pj

jt pjt p E L E L

   (A.3)

where Lpjt = the expected loss accruing to the p

th

loss category for alternative Aj in year t. The present value of investment costs for alternative Aj are expressed as:

0 1

/(1 )

T K j t

j kjt

t k

PVI I d

 

     

    (A.4)

The present value of non-investment costs for alternative Aj are expressed as:

0 1

/(1 )

T M j t

j mjt

t m PVC C d 

     

    (A.5)

The present value of expected losses for alternative Aj are expressed as:

   

0 1

/(1 )

T Pj t

j pjt

t p PVE L E L d 

     

    (A.6)

A.1 Life-Cycle Cost Method Formulas

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

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

a specified period of time. The basic premise of the LCC method is that to an investor or
76

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

that decision, including future as well as present costs. Applied to constructed facilities, the LCC method encompasses all relevant costs over a designated study period, including

the costs of designing, purchasing/leasing, constructing/installing, operating, maintaining, repairing, replacing, and disposing of a particular design or system. Should any pure

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

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

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

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

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

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

is not needed to show that the former is economically preferable. The LCC for alternative Aj may now be expressed as:

 

0 1 1 1

/(1 )

T K j M j Pj t

j kjt mjt pjt

t k m p

LCC I C E L d

   

       

      (A.7)

The LCC for alternative Aj may also be expressed in present value terms as:

LCCj = PVIj + PVCj + PVE (Lj) (A.8)

or, by explicitly including losses in investment costs and non-investment costs, as:

LCCj = PVI'

j + PVC'j (A.9)

Denote the alternative with the lowest initial investment cost (i.e., first cost) as A0; it is

referred to as the base case. Then:

00 j0 I  I for j = 1,Ö, N (A.10)

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

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

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

satisfying that requirement over a specified study period. With respect to the base case, alternative Aj is economically preferred if, and only if, LCCj < LCC0. A.2 Present Value of Net Savings Formula

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

applicable for finding the economically efficient choice among investment alternatives.
77

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

the foregone opportunity (e.g., some other alternative or the base case). The PVNS for a given alternative, Aj, vis-‡-vis the base case, A0, may be expressed as:

PVNSj:0 = LCC0 - LCCj (A.11)

Any pure benefits that result (e.g., increased rental income due to improvements) are

included in the calculation of PVNS, since they are included in the LCC calculation. With respect to the base case, if PVNS j:0 is positive, alternative Aj is economic; if it is

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

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

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

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

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

all of the necessary information to calculate the SIR. The SIR for a given alternative, Aj, is calculated vis-‡-vis the base case. The numerator and denominator of the SIR are

derived through reference to Equation (A.9). The numerator equals the difference in the present value of non-investment costs

inclusive of losses between the base case and the given alternative, Aj. The resultant

expression, denoted as present value of savings, is given by. PVSj:0 = PVC'0 - PVC'j (A.12)

The denominator equals the difference in the present value of investment costs inclusive

of losses for the given alternative, Aj, and the base case.22 The resultant expression, denoted as present value of increased investment costs, is given by:

PVIIj:0 = PVI'j - PVI'0 (A.13)

The SIR for a given alternative, Aj, vis-‡-vis the base case may be expressed as:

:0

:0

:0

j

j

j

PVS

SIR

PVII  (A.14)

 22 Do not use the savings-to-investment ratio as a decision criterion if PVI'j ≤ PVI'0. See Appendix C of

Chapman and Leng for a discussion of this and other topics associated with the calculation of the savingsto-investment ratio. Chapman, Robert E., and Leng, Chi J. Cost-Ef ective Responses to Terrorist Risks in Constructed Facilities. NISTIR 7073 (Gaithersburg, MD: National Institute of Standards and Technology, 2004).
78

A ratio less than 1.0 indicates that Aj is an uneconomic investment relative to the base

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

and a ratio greater than 1.0 indicates an economic project. Readers interested in a

mathematical derivation of the SIR calculation and how to interpret the calculated value

of the SIR for three special cases are referred to Appendix C of Chapman and Leng. A.4 Adjusted Internal Rate of Return Formula

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

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

AIRR calculation explicitly includes the reinvestment of all net cash flows, it is

instructive to introduce a new term, terminal value (TV). The terminal value of an

investment, Aj, is the future value (i.e., the value at the end of the study period) of

reinvested net cash flows excluding all investment costs. The terminal value for an

investment, Aj, is denoted as TVj. The reinvestment rate in the AIRR calculation is equal to the minimum acceptable rate of

return (MARR), which is assumed to equal the discount rate, d, a constant. When the

reinvestment rate is made explicit, all investment costs are easily expressible as a time

equivalent initial outlay (i.e., a value at the beginning of the study period) and all noninvestment cash flows as a time equivalent terminal amount. This allows a

straightforward comparison of the amount of money that comes out of the investment

(i.e., the terminal value) with the amount of money put into the investment (i.e., the time

equivalent initial outlay). The AIRR is defined as the interest rate, rj, applied to the terminal value, TVj, which

equates (i.e., discounts) it to the time equivalent value of the initial outlay of investment

costs. It is important to note that all investment costs are discounted to a time equivalent

initial outlay using the discount rate, d. Several procedures exist for calculating the AIRR. These procedures are derived and

described in detail in the report by Chapman and Fuller.23 The most convenient

procedure for calculating the AIRR is based on its relationship to the SIR. This

procedure results in a closed-form solution for a given alternative, Aj, vis-‡-vis the base

case, rj:0. The AIRR is that value of rj:0 for which:

1

:0 :0 (1 )( ) 1

T

j j r   d SIR  (A.15)

With regard to the base case, if rj:0 is greater than the discount rate (also referred to as the

hurdle rate), alternative Aj is economic; if rj:0 equals the discount rate, the investment is as

good as the base case; if rj:0 is less than the discount rate, the investment is uneconomical.

 23 Chapman, Robert E. and Fuller, Sieglinde K. Benefits and Costs of Research: Two Case Studies in Building Technology. NISTIR 5840 (Gaithersburg, MD: National Institute of Standards and Technology, 1996).
79

Appendix B Glossary of Terms

Adjusted Internal Rate of Return (AIRR): The average annual yield from a project

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

reinvestment rate in the AIRR calculation is equal to the discount rate. Notes:

(1) See Section 2.3.4 and Appendix A.4. (2) Output window ñ cost summary

(3) Input windows ñ cost summary (pull-down menu)

Example:

In the provided case study, the proposed alternative, Enhanced Security, has an

AIRR of 8.6 %. AIRR: See Adjusted Internal Rate of Return. Alternatives: Means by which costs and events/outcomes sequences for various risk

mitigation plans are differentiated. Once owners and managers assess the risk of natural

and manmade hazards to the constructed facility, they must identify potential strategies to

mitigate this risk. The identification includes potential risk mitigation measures and

predictions of the effectiveness and costs of these measures. The final step in the

protocol for creating a risk mitigation plan is economic evaluation of the risk mitigation

alternatives. Notes:

(1) See Section 2.2. (2) Output window ñ cost summary

(3) Input windows ñ alternatives, capital investment cost information, O&M

cost information, other cost information, event information

(4) Reports ñ data (alternative information ñ descriptive summary), uncertainty (change in a single factor, most significant factors), results

(alternative information ñ descriptive summary)

Example:

The case study compares the base case (basic renovation) alternative with the

proposed (enhanced renovation) alternative. Amount: Attribute of cost, which is calculated as the quantity of a cost item (capital

investment, O&M, or other cost) multiplied by its unit cost.
80

Notes:

(1) Reports ñ data (alternative information ñ input cost data summary, event/outcome cost data summary)

Example:

An O&M filter replacement cost item of quantity 75 with a unit cost of $100 will

yield an amount of $7 500. Annual Value: A uniform annual amount equivalent to the project costs or benefits

taking into account the time value of money throughout the study period. Life-cycle

costs may be expressed in either annual value terms or present value terms. Annually Recurring: Means of classifying/allocating costs that occur every year within

the frequency of occurrence choices of the CET software for O&M or other cost items. The three occurrence frequency choices are annually recurring, periodic (other than

annual), and aperiodic. Notes:

(1) See Section 3.2.1.1; see also Figure 3-9. (2) Input windows ñ O&M cost information, other cost information

Example:

In the provided case study, site security is an O&M cost that is annually recurring

throughout the study period. Aperiodic: Means of classifying/allocating costs that follow an irregular schedule (not

strictly periodic) within the frequency of occurrence choices of the CET software for

O&M or other cost items. The three occurrence frequency choices are annually

recurring, periodic (other than annual), and aperiodic. Notes:

(1) See Section 3.2.1.1; see also Figure 3-9. (2) Input windows ñ O&M cost information, other cost information

Example:

In the provided case study, duct cleaning is an aperiodic O&M cost item incurred

in year 17. Baseline Analysis: The starting point for conducting an economic evaluation. In the

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

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

address the effects of uncertainty.
81

Notes:

(1) See Section 2.4.1 and Chapter 3. (2) Output window ñ cost summary

(3) Reports ñ data, uncertainty, results

Example:

In the Data Center Case Study.lcc file, the data elements displayed on the various

software screens are the baseline values. Base Year (Time): The date to which all future and past benefits/costs are converted

when a present or annual value method is used. Notes:

(1) See Appendix A. (2) Input windows ñ project description

(3) Reports ñ data (background information), results (background

information)

Example:

2006 is the assigned base year in the case study. All cash flows are discounted to

a 2006 dollar value. Bearer of Costs: One of the four dimensions by which costs are classified in the detailed

cost-accounting framework (bearer of costs; budget category; building/facility

component; mitigation strategy). Means by which cost items are assigned to the group

that is responsible for shouldering the cost burden. There are three bearer categories:

owner/manager, occupant/user, third party. Notes:

(1) See Section 2.5; see also Figure 2-1. (2) Output window ñ cost summary

(3) Input windows ñ capital investment cost information, O&M cost

information, other cost information, event/outcome cost information

(4) Reports ñ data (alternative information ñ input cost data summary, event/outcome cost data summary), results (summary of life-cycle costs, summary of costs by alternative)

Example:

The case study cost item, basic renovation is a capital investment assigned to the

owner/manager as the cost bearer.
82

Budget Category: One of the four dimensions by which costs are classified in the

detailed cost-accounting framework (bearer of costs; budget category; building/facility

component; mitigation strategy). Budget category is defined as one of three cost types:

capital investment, O&M (operations and maintenance), other. Notes:

(1) See Section 2.5; see also Figure 2-1. (2) Output window ñ cost summary

(3) Input windows ñ edit costs/events

(4) Reports ñ data (alternative information ñ input cost data summary, event/outcome cost data summary), results (summary of life-cycle costs, summary of costs by alternative)

Example:

In the provided case study, enhanced renovation is a cost item assigned to the

capital investment budget category. Building Decision: A decision regarding the design, financing, engineering, construction, management, or operation of a building. Building/Facility Component: One of the four dimensions by which costs are classified

in the detailed cost-accounting framework (bearer of costs; budget category;

building/facility component; mitigation strategy). Building/facility component is defined

as one of three cost types: building/facility elements; building/facility site work; non- elemental. The first two cost types are associated with the elemental classification

UNIFORMAT II. Notes:

(1) See Section 2.5; see also Figure 2-1. (2) Output window ñ cost summary

(3) Input windows ñ capital investment cost information, O&M cost

information, other cost information, event/outcome cost information

(4) Reports ñ data (alternative information ñ input cost data summary, event/outcome cost data summary), results (summary of life-cycle costs, summary of costs by alternative)

Example:

In the provided case study, site security is a non-elemental building/facility

component cost item. Building/Facility Elements: One of the three cost types that define the building/facility

component of the detailed cost-accounting framework: building/facility elements;
83

building/facility site work; non-elemental. The building/facility elements cost type is

associated with the elemental classification UNIFORMAT II. Notes:

(1) See Section 2.5; see also Figure 2-1. (2) Output window ñ cost summary

(3) Input windows ñ capital investment cost information, O&M cost

information, other cost information, event/outcome cost information

(4) Reports ñ data (alternative information ñ input cost data summary, event/outcome cost data summary), results (summary of life-cycle costs, summary of costs by alternative)

Example:

In the provided case study, HVAC upgrade is a cost item assigned to the

building/facility elements cost type. Building/Facility Site Work: One of the three cost types that define the building/facility

component of the detailed cost-accounting framework: building/facility elements;

building/facility site work; non-elemental. The building/facility site work cost type is

associated with the elemental classification UNIFORMAT II. Notes:

(1) See Section 2.5; see also Figure 2-1. (2) Output window ñ cost summary

(3) Input windows ñ capital investment cost information, O&M cost

information, other cost information, event/outcome cost information

(4) Reports ñ data (alternative information ñ input cost data summary, event/outcome cost data summary), results (summary of life-cycle costs, summary of costs by alternative)

Example:

In the provided case study, site lighting is a cost item assigned to the

building/facility site work cost type. Capital Investment: One of the three cost types that define the budget category

classification: capital investment, O&M (operations and maintenance), other. The cost of

acquiring, substantially improving, expanding, changing the functional use of, or

replacing a building or building system. Capital investment costs accrue to the

investment cost category, while O&M and other costs accrue to the non-investment cost

category. Notes:

(1) See Section 2.5; see also Figure 2-1. (2) Output window ñ cost summary
84

(3) Input windows ñ edit costs/events

(4) Reports ñ data (alternative information ñ input cost data summary, event/outcome cost data summary), results (summary of life-cycle costs, summary of costs by alternative, summary of annual costs by alternative

and budget category)

Example:

In the provided case study, basic renovation is a cost item assigned to the capital

investment budget category. Cash Flow: The stream of monetary (dollar) values ñ benefits and costs ñ resulting from

a project investment. Notes:

(1) See Appendix A. (2) Reports ñ data (alternative information ñ input cost data summary, event/outcome cost data summary), results (summary of annual costs by

alternative and budget category, summary of annual costs by alternative)

Classification Information: The group of associated attributes for a given cost, including: bearer, budget category, component, and mitigation strategy. Notes:

(1) See Section 3.2.1.1 and Section 3.2.1.2. (2) Input windows ñ capital investment cost information, O&M cost

information, other cost information, event/outcome cost information

(3) Reports ñ data (alternative information ñ input cost data summary, event/outcome cost data summary), results (summary of life-cycle costs, summary of costs by alternative)

Example:

In the provided case study, basic renovation is a cost item with the following

classification information: bearer ñ owner/manager, budget category ñ capital

investment, mitigation strategy ñ engineering alternatives, component ñ

building/facility elements. Constant Dollar Analysis: Dollars of uniform purchasing power exclusive of general

inflation or deflation; based on the value of a dollar in a specified base year. Notes:

(1) See Section 3.2.1. (2) Output window ñ cost summary

(3) Input windows ñ project description
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(4) Reports ñ data (background information), results (background

information)

Example:

In the provided case study, the costs are estimated and analyzed based on the

value of a dollar in the assigned base year of 2006. Constructed Facilities: Permanent structures, including infrastructure, buildings, and

industrial facilities. Copy Alternative: Command that allows an existing alternative to be copied another

alternative (e.g., Base Case to Alternative 1; Alternative 1 to Alternative 2; etc.). Once

copied to another alternative, the ìduplicateî copy is accessible for editing. Notes:

(1) Input windows ñ alternative description

Copy Cost: Command that allows an existing cost to be copied. The copy is accessible

for editing and use only within the alternative to which the original cost item was

assigned. Notes:

(1) Input windows ñ edit costs/events

Example:

Repairs to air handling units may share many of the same attributes as the HVAC

repairs that have been defined within the case study. Thus, copy cost allows the

user to make a copy of HVAC repairs that can later be revised/edited to reflect

specifics of repairing air handling units. Copy Event: Command that allows an existing event to be copied. The copy is

accessible for editing and use only within the alternative to which the original event was

assigned. Notes:

(1) Input windows ñ edit costs/events

Example:

In the case study, cyber attack (years 11-25) shares all attributes with cyber attack

(years 1-10) except for the assigned years. Thus, the copy event command could

be used to make a copy of cyber attack (years 1-10) and edited slightly to yield

the event cyber attack (years 11-25).
86

Cost-Accounting Framework: Methodology for tracking how costs affect stakeholders

in different ways. The cost-accounting framework promotes a detailed, consistent

breakdown of life-cycle costs. Notes:

(1) See Section 2.5; see also Figure 2-1. (2) Output window ñ cost summary

(3) Reports ñ data (alternative information ñ input cost data summary, event/outcome cost data summary), results (summary of life-cycle costs, summary of costs by alternative)

Cost Effective: The condition whereby the present value benefits (savings) of an

investment exceeds its present value costs. Notes:

(1) See Section 2.3.1; see also Sections 2.3.2, 2.3.3, and 2.3.4. (2) Reports ñ results (summary of life-cycle costs, summary of annual costs

by alternative)

Example:

In the provided case study, the proposed alternative is the cost-effective

investment choice because it has the lowest life-cycle cost. Cost Item: Name/description assigned to a cost associated with a given alternative and a

specific bearer, budget category, component, and mitigation strategy. Information on

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

two broad headings: input costs and event-related costs. Notes:

(1) See Section 2.5; see also Figure 3-8 and Figure 3-14. (2) Input windows ñ capital investment cost information, O&M cost

information, other cost information, event/outcome cost information

(3) Reports ñ data (alternative information ñ input cost data summary, event/outcome cost data summary), uncertainty (change in a single factor, most significant factors), results (summary of costs by alternative)

Example:

In the case study, basic renovation is a cost item associated with the base case

alternative that embodies the following attributes: bearer ñ owner/manager, budget category ñ capital investment, component ñ building/facility elements, mitigation strategy ñ engineering alternatives.
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Cost Summary Window: Main screen in the CET program that provides a snapshot of

the costs associated with each alternative in regards to cost classification information. Notes:

(1) Output window ñ cost summary

(2) Input windows ñ capital investment cost information, O&M cost

information, other cost information, event/outcome cost information

Current Dollar Analysis: Analysis of the costs incurred in dollars of purchasing power

in which actual prices are stated (not corrected for inflation or deflation). Notes:

(1) See Section 3.2.1. (2) Output window ñ cost summary

(3) Input windows ñ project description

(4) Reports ñ data (background information), results (background

information)

Data Report: Report that organizes all user inputted data for each project alternative. Useful method of checking that all values were inputted correctly previous to conducting

further analyses. Notes:

(1) Data Report includes: background information; alternative information ñ

descriptive summary, input cost data summary, event/outcome cost data

summary

Delete All Costs: Command that allows all existing costs associated with a specific

alternative to be deleted. Notes:

(1) Input windows ñ edit costs/events

Delete All Events: Command that allows all existing events associated with a specific

alternative to be deleted. Notes:

(1) Input windows ñ edit costs/events
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Delete Cost: Command that allows an existing cost to be deleted from the associated

alternative. Notes:

(1) Input windows ñ edit costs/events

Delete Event: Command that allows an existing event to be deleted from the associated

alternative. Notes:

(1) Input windows ñ edit costs/events

Descriptive Summary: Section appearing in both the data report which provides a

summary of each project alternative and the associated outcomes. Notes:

(1) Report ñ data (alternative information ñ descriptive summary)

Disaster Mitigation: Measures, procedures, and strategies designed to reduce either the

likelihood or consequences of a disaster. Notes:

(1) See Section 3.2.1.1. (2) Output window ñ cost summary

(3) Input windows ñ project description, alternatives

(4) Reports ñ data (background information), results (background

information)

Discount Rate: The rate of interest reflecting the investorís time value of money, used

to determine discount factors for converting benefits and costs occurring at different

times to a base year. The discount rate may be expressed as nominal or real. Notes:

(1) See Appendix A. (2) Input windows ñ project description

(3) Reports ñ data (background information), results (background

information)

Example:

In the provided case study, a real discount rate is used; it is assigned a value of

7.0 %. This value is used to adjust costs incurred in different years to the value of

a dollar in the base year, 2006.
89

Edit Costs/Events: Command that allows the user to edit attributes of an existing cost or

event (including create new, copy, or delete). Notes:

(1) Output window ñ cost summary

(2) Input windows ñ edit costs/events

Edit Outcomes: Command that allows the user to edit attributes of an existing outcome

(including create new, copy, or delete). Notes:

(1) Input windows ñ event information, edit outcomes/outcome costs

Engineering Alternatives: One of the three mitigation strategy classifications

(engineering alternatives; management practices; financial mechanisms). Technical

options in the construction or renovation of constructed facilities, their systems, or their

subsystems to reduce the likelihood or consequences of disasters; types of engineering

alternatives include designs, materials, components. Notes:

(1) See Section 2.5; see also Figure 2-1. (2) Output window ñ cost summary

(3) Input windows ñ capital investment cost information, O&M cost

information, other cost information, event/outcome cost information

(4) Reports ñ data (alternative information ñ input cost data summary, event/outcome cost data summary), results (summary of life-cycle costs, summary of costs by alternative)

Example:

In the case study, the HVAC upgrade is a capital investment that employs an

engineering alternatives mitigation strategy. Escalation Rate: The rate of change in price for a particular good or service (as

contrasted with the inflation rate, which is for all goods and services). Notes:

(1) See Section 3.2.1.1 and Section 3.2.1.2. (2) Input windows ñ capital investment cost information, O&M cost

information, other cost information, event/outcome cost information

(3) Reports ñ data (alternative information ñ input cost data summary, event/outcome cost data summary)
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(4) If the value of the escalation rate entered was 0.0 % and a sensitivity

analysis is requested for that factor, then a notice appears indicating that

the percentage range will be tied to the inflation rate. Example:

In the provided case study, the escalation rate associated with the O&M cost item

site lighting is ñ0.10 %. This indicates that the value of the cost incurred will be

adjusted by this percentage before being factored into the life-cycle cost of the

project. Event Description: Section that allows the user to enter more specific information about

the circumstances/details of a specified event. Notes:

(1) Input windows ñ event information

(2) Reports ñ data (alternative information ñ descriptive summary), results

(alternative information ñ descriptive summary)

Example:

The event description for the event Cyber attack specifies the parameters that

qualify as a cyber attack. Event Information: Window that allows the user to input/alter data defining an event

associated with a specific alternative (includes description and occurrence years). Notes:

(1) Input windows ñ event information

Example:

The event information screen allows the user to input pertinent information that

differentiates cyber attack (years 11-25) from cyber attack (years 1-10). Executive Summary Report: Report that organizes all user-generated data, intermediate calculations, and results for presentation to senior management or other

decision makers. The report is constructed through a dialog box, where the user selects

the appropriate sections for inclusion. Use the Executive Summary Report to support the

recommendation of one alternative as the most cost-effective risk mitigation plan. Notes:

(1) Executive Summary Report includes: background information; alternative

information ñ descriptive summary, input cost data summary, event/

outcome cost data summary; economic measures of performance;

summary of life-cycle costs; summary of life-cycle costs: input and event-
91

related; summary of costs by alternative; summary of annual costs by

alternative and budget category; summary of annual costs by alternative;

summary of annual and cumulative net savings by alternative; saved

sensitivity analyses; most significant factors; saved Monte Carlo

simulations; and Project Notebook. Externality: The discrepancy between private and social costs or private and social

benefits. Financial Mechanisms: One of the three mitigation strategy classifications (engineering

alternatives; management practices; financial mechanisms). A set of devices relating to

finances that facility owners and managers can utilize to reduce their exposure to natural

and man-made hazards. These devices include purchase of insurance policies and

responding to external financial incentives to engage in engineering-based or

management-based risk mitigation. Notes:

(1) See Section 2.5; see also Figure 2-1. (2) Output window ñ cost summary window

(3) Input windows ñ capital investment cost information, O&M cost

information, other cost information, event/outcome cost information

(4) Reports ñ data (alternative information ñ input cost data summary, event/outcome cost data summary), results (summary of life-cycle costs, summary of costs by alternative)

Example:

Financial mechanisms that serve as incentives include government subsidies for

investments to harden a facility and rental premiums paid by tenants who value

the facilityís added safety features. First (Initial) Costs: Attribute of a capital investment. Costs incurred in placing a

building or building subsystem into service, including, but not limited to, costs of

planning, design, engineering, site acquisition and preparation, construction, purchase, installation, property taxes and interest during the construction period, and constructionrelated fees. Notes:

(1) See Section 2.3.1; see also Section 3.2.1.1 and Figure 3-8. (2) Input windows ñ capital investment cost information

(3) Reports ñ data (input costs data summary)

Example:
92

In the provided case study, basic renovation is a first cost cost item because it is

incurred in order to place the building into use.

Inflation: A rise in the general price level over time, usually expressed as a percentage

rate. Notes:

(1) See Section 3.2.1.

Investment Cost: First cost and later expenditures which have substantial and enduring

value (generally more than one year) for upgrading, expanding, or changing the

functional use of a building or building system. Notes:

(1) See Section 2.5. Example:

In the provided case study, HVAC upgrade is classified as an investment cost

because, as a modernization of an existing system, it is a long-term investment. Key Parameters: Grouping of attributes related to a specific event outcome (probability

of outcome, first year, and last year). Notes:

(1) Input windows ñ event information, outcome information

(2) Reports ñ data (alternative information ñ descriptive summary), results

(alternative information ñ descriptive summary). Example:

In the provided case study, the minor damage outcome linked to the CBRE attack

for the basic renovation alternative is defined by the following key parameters:

probability of occurrence, 0.5 %; first year, 2006; last year, 2030

LCC: See Life-Cycle Cost. Life-Cycle Cost (LCC): A technique of economic evaluation that sums over a given

study period the costs of initial investment (less resale value), replacements, operation

(including energy use) and maintenance of an investment decision. Life-cycle costs may

be expressed in either present value terms or annual value terms. Notes:
93

(1) See Section 2.3.1 and Appendix A.1. (2) Output window ñ cost summary

(3) Input windows ñ cost summary (pull-down menu)

(4) Reports ñ results (summary of life-cycle costs, summary of costs by

alternatives, summary of annual costs by alternative and budget category, summary of annual costs by alternative)

Example:

The base case alternative in the case study has a life-cycle cost of $4 642 554, taking into account the present value costs/benefits of all cash flows throughout

the study period. Management Practices: One of the three mitigation strategy classifications

(engineering alternatives; management practices; financial mechanisms). Practices

employed by building owners and managers to reduce the risks associated with natural

and man-made hazards. These practices can be procedural or technical and related to

security, training, communications, site location, and systems access, among others. Some management practices complement engineering alternatives, while others

substitute for them. Notes:

(1) See Section 2.5; see also Figure 2-1. (2) Output window ñ cost summary

(3) Input windows ñ capital investment cost information, O&M cost

information, other cost information, event/outcome cost information

(4) Reports ñ data (alternative information ñ input cost data summary, event/outcome cost data summary), results (summary of life-cycle costs, summary of costs by alternative)

Example:

In the case study, site security is an O&M cost that employs a management

practice mitigation strategy. Mitigation Strategy: One of the four core components of the cost-accounting

framework (bearer of costs; budget category; building/facility component; mitigation

strategy). Means of classifying/allocating costs within the CET software in regards to

risk management. The three mitigation strategy classifications include engineering

alternatives; management practices; financial mechanisms. Notes:

(1) See Section 2.5; see also Figure 2-1. (2) Output window ñ cost summary

(3) Input windows ñ capital investment cost information, O&M cost

information, other cost information, event/outcome cost information
94

(4) Reports ñ data (alternative information ñ input cost data summary, event/outcome cost data summary), results (summary of life-cycle costs, summary of costs by alternative)

Example:

In the provided case study, the HVAC upgrade is a capital investment that

employs an engineering alternatives mitigation strategy. Monte Carlo Simulation: A means for addressing the effects of uncertainty. Monte

Carlo simulation varies a small set of data inputs according to an experimental design. Associated with each data input is a probability distribution function from which values

are randomly sampled. A Monte Carlo simulation complements the baseline analysis by

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

about their baseline values. Notes:

(1) See Section 2.4.3 and Section 4.2. (2) Input window ñ Monte Carlo (Include Factors). (3) Output window ñ Monte Carlo (Results). (4) Reports ñ uncertainty (saved Monte Carlo simulations). Nominal Discount Rate: The rate of interest reflecting the time value of money

stemming both from inflation and the real earning power of money over time. This is the

discount rate used in discount formulas or in selecting discount factors when future

benefits and costs are expressed in current dollars. Notes:

(1) Input windows ñ project description

(2) Reports ñ data (background information), results (background

information)

Non-Elemental: One of the three cost types that define the building/facility component

of the detailed cost-accounting framework: building/facility elements; building/facility

site work; non-elemental. Non-elemental costs are all costs that cannot be attributed to

specific functional elements of the project. Notes:

(1) See Section 2.5; see also Figure 2-1. (2) Output window ñ cost summary

(3) Input windows ñ capital investment cost information, O&M cost

information, other cost information, event/outcome cost information
95

(4) Reports ñ data (alternative information ñ input cost data summary, event/outcome cost data summary), results (summary of life-cycle costs, summary of costs by alternative)

Example:

An example of a non-elemental/capital/owner cost item is the purchase of a right- of-way, or easement. O&M (Operations and Maintenance): One of the three cost types that define the

budget category classification: capital investment, O&M (operations and maintenance), other. Cost items falling under the O&M cost type include energy and water costs, maintenance and repair costs, minor replacements related to maintenance and repair, and

insurance premiums paid by owners and/or occupants to reduce their risk exposure. O&M costs are usually paid from an annual operating budget, not from capital funds, and

accrue to the non-investment cost category. Notes:

(1) See Section 2.5; see also Figure 2-1. (2) Output window ñ cost summary

(3) Input windows ñ edit costs/events

(4) Reports ñ data (alternative information ñ input cost data summary, event/outcome cost data summary), results (summary of life-cycle costs, summary of costs by alternative, summary of annual costs by alternative

and budget category)

Example:

In the provided case study, HVAC repairs is a cost item attributed to the O&M

budget category. Occupant/User: One of three bearer categories: owner/manager, occupant/user, third

party. Specifically, the burden of the associated cost falls on the facility user or occupant. Occupant/User costs frequently include operations and maintenance costs and selected

types of repairs not covered by the projectís owner or agent. Occupant/User costs can

also include delay costs and business interruption costs due to temporary closures for

repair and reconstruction activities. Notes:

(1) See Section 2.5; see also Figure 2-1. (2) Output window ñ cost summary

(3) Input windows ñ capital investment cost information, O&M cost

information, other cost information, event/outcome cost information

(4) Reports ñ data (alternative information ñ input cost data summary, event/outcome cost data summary), results (summary of life-cycle costs, summary of costs by alternative)
96

Example:

The case study the cost item, HVAC repairs is an O&M cost assigned to the

occupant/user as the cost bearer. Operating Cost: The expenses incurred during the normal operation of a building or a

building system or component, including labor, materials, utilities, and other related

costs. Other Costs: One of the three cost types that define the budget category classification:

capital investment, O&M (operations and maintenance), other. Other costs are non- capital costs that cannot be attributed to the O&M cost type. Notes:

(1) See Section 2.5; see also Figure 2-1. (2) Output window ñ cost summary

(3) Input windows ñ edit costs/events

(4) Reports ñ data (alternative information ñ input cost data summary, event/outcome cost data summary), results (summary of life-cycle costs, summary of costs by alternative, summary of annual costs by alternative

and budget category)

Example:

In the provided case study, change in traffic pattern is a cost item attributed to the

other budget category. Outcome Description: Section that allows the user to enter more specific information

about the circumstances/details/probability of a specified event outcome. Notes:

(1) Input windows ñ outcome information

(2) Reports ñ data (alternative information ñ descriptive summary), results

(alternative information ñ descriptive summary)

Example:

The outcome description for the minor damages Cyber attack outcome specifies

the parameters that qualify a cyber attack as minor as opposed to major damages. Owner/Manager: One of three bearer categories: owner/manager, occupant/user, third

party. Specifically, the burden of the associated cost falls on the facility owner or

manager. Owner/Manager costs are all costs incurred by the projectís owner or agent.
97

These costs include but are not limited to design costs, capital investment costs, and

selected types of repairs to the constructed facility. Notes:

(1) See Section 2.5; see also Figure 2-1. (2) Output window ñ cost summary

(3) Input windows ñ capital investment cost information, O&M cost

information, other cost information, event/outcome cost information

(4) Reports ñ data (alternative information ñ input cost data summary, event/outcome cost data summary), results (summary of life-cycle costs, summary of costs by alternative)

Example:

The case study cost item, site protection, is a capital investment cost assigned to

the owner/manager as the cost bearer. Periodic (other than annual): Means of classifying/allocating O&M and other costs

that occur on a scheduled timeframe other than on an annual basis. The three occurrence

frequency choices are annually recurring, periodic (other than annual), and aperiodic. Notes:

(1) See Section 3.2.1.1; see also Figure 3-10. (2) Input windows ñ O&M cost information, other cost information

Example:

The case study cost item, HVAC repairs, is an O&M cost incurred every 6 years

in the proposed alternative, Enhanced Security. Present Value: The value of a benefit or cost found by discounting future cash flows to

the base year. Life-cycle costs may be expressed in either present value terms or annual

value terms. Notes:

(1) See Appendix A. (2) Output window ñ cost summary

Example:

The base case alternative in the case study has a life-cycle cost of $4 642 554, taking into account the present value costs/benefits of all cash flows throughout

the study period. Present Value Net Savings (PVNS): A method for finding the economically efficient

choice among investment alternatives. It measures the net savings from investing in a
98

given alternative instead of investing in the foregone opportunity (e.g., some other

alternative or the base case). The PVNS for a given alternative, Aj, vis-‡-vis the base

case, A0, may be expressed as: PVNSj:0 = LCC0 - LCCj. Notes:

(1) See Section 2.3.2 and Appendix A.2. (2) Output window ñ cost summary

(3) Input windows ñ cost summary (pull-down menu)

Example:

In the provided case study, the proposed alternative, Enhanced Security, results in

a PVNS of $283 642. Probability of Occurrence: Provides the chance that a there will be a specific outcome

associated with a given event. The sum of all outcome probabilities for a single event

must be equal to 1. Listed as one of the three key parameters for a given outcome:

probability of occurrence, first year, last year. Notes:

(1) See Section 3.2.1.2. (2) Input windows ñ outcome information

(3) Reports ñ data (alternative information ñ descriptive summary), results

(alternative information ñ descriptive summary)

Example:

In the provided case study, the major damage outcome for the CBRE attack event

is assigned a probability of 0.05 %. Project: Resources and activities used to achieve a specific set of objectives within a

specified time schedule. Notes:

(1) See Section 2.2; see also Section 2.6. (2) Input windows ñ project description

(3) Output window ñ cost summary

(4) Reports ñ data, uncertainty, results

Project Notebook: Report containing data and information associated with the risk

assessment and the formulation of risk mitigation strategies stemming from the risk

assessment. The Project Notebook is an important resource for documenting the sources

of key data elements.
99

PVNS: See Present Value Net Savings. Quantity: Attribute of cost items that specifies the number of units that require

installation or replacement. The amount displayed for a cost is the multiplicative product

of quantity and unit cost. Notes:

(1) See Section 3.2.1.1 and Section 3.2.1.2. (2) Input windows ñ capital investment cost information, O&M cost

information, other cost information, event/outcome cost information

Example:

In the case study, the salvage and sale of equipment and components is assigned a

quantity of 1. Real Discount Rate: The rate of interest reflecting that portion of the time value of

money related to the real earning power of money over time. This is the discount rate

used in discount formulas or in selecting discount factors when future benefits and costs

are expressed in constant dollars. Notes:

(1) See Section 3.2.1; see also Section 2.6.3. (2) Input windows ñ project description

(3) Reports ñ data (background information), results (background

information)

Example:

In the provided case study, the real discount rate is assigned a value of 7.0 %, which is used to calculate life-cycle costs. This value is used to adjust costs

incurred in different years to the value of a dollar in the base year, 2006. Replacement Costs: Building component replacement and related costs, included in the

capital budget, that are expected to be incurred during the study period. Notes:

(1) See Section 2.5. Example:

In the provided case study, the HVAC upgrade for the proposed alternative, Enhanced Security, is a $30 000 replacement cost incurred in year 17.
100

Resale Value: The monetary sum expected from the disposal of an asset at the end of its

economic life, its useful life, or at the end of the study period. Notes:

(1) See Section 2.5. Results Report: Report that summarizes the results of the economic evaluation. The

report provides a series of measures of project performance. The report provides a

summary of life-cycle costs using the cost-accounting framework as well as detailed

present value tabulations on all cost items. The report provides annual cash flows

(expressed in base year present value dollars) for each budget category and overall for

each alternative. Notes:

(1) Results Report includes: economic measures of performance; summary of

life-cycle costs; summary of life-cycle costs: input and event-related;

summary of costs by alternative; summary of annual costs by alternative

and budget category; summary of annual costs by alternative; summary of

annual and cumulative net savings by alternative

Retrofit: The modification of an existing building or facility to include new systems or

components. Notes:

(1) See Section 2.6.1 and Section 2.6.2. Example:

In the provided case study, both the basic renovation and the enhanced renovation

are considered a retrofit of the existing facility. Risk Analysis: The body of theory and practice that has evolved to help decision makers

assess their risk exposures and risk attitudes so that the investment that is ìbest for themî

is selected. Risk Mitigation: The actions or decisions designed to reduce the financial and

nonpecuniary risk from uncertain events. Notes:

(1) See Section 2.5; see also Figure 2-1.
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Salvage Value: The value of an asset, assigned for tax computation purposes, that is

expected to remain at the end of the depreciation period (represented as a negative cost

value). One of three time classification attributes of a capital investment: initial, future, salvage.Notes:

(1) See Section 2.5; see also Section 3.2.1 and Figure 3-8. (2) Input windows ñ capital investment cost information

Example:

In the provided case study, the salvage value for the HVAC upgrade in the

proposed alternative, Enhanced Security, is -$12 500.00; it occurs in year 25, the

final year of the study period. Savings-to-Investment Ratio (SIR): Either the ratio of present value savings to present

value investment costs, or the ratio of annual value savings to annual value investment

costs. Notes:

(1) See Section 2.3.3 and Appendix A.3. (2) Output window ñ cost summary

(3) Input window ñ cost summary (pull-down menu)

Example:

In the provided case study, the proposed alternative, Enhanced Security, has an

SIR of 1.46. Sensitivity Analysis: A means for addressing the effects of uncertainty. A test of the

outcome of an analysis by altering one or more parameters (key data elements or input

variables) from (an) initially assumed value(s). A sensitivity analysis complements the

baseline analysis by evaluating the changes in output measures when selected data inputs

are allowed to vary about their baseline values. Notes:

(1) See Section 2.4.2 and Section 4.1. (2) Input window ñ sensitivity analysis, change in single factor tab (range), most significant factors tab (compute), change in multiple factors tab

(range)

(3) Output window ñ sensitivity analysis, change in single factor tab (results), most significant factors tab, change in multiple factors tab (results)

(4) Reports ñ uncertainty (saved sensitivity analyses, most significant factors)

SIR: See Savings-to-Investment Ratio.
102

Study Period: The length of time over which an investment is analyzed. Notes:

(1) See Appendix A. (2) Input windows ñ project description

(3) Reports ñ data (background information), results (background

information)

Example:

The provided case analyzes the life-cycle costs of alternative data center

renovation strategies over a 25 year study period, from 2006 to 2030. Third Party: One of three bearer categories: owner/manager, occupant/user, third party. Specifically, the burden of the associated cost falls on a party other than the facility

owner or user. Natural hazards, industrial accidents, and terrorist acts that occur

infrequently, but whose consequences are devastating, highlight the importance of

including the Third Party cost type in the private sectorís life-cycle cost calculus. Notes:

(1) See Section 2.5; see also Figure 2-1. (2) Output windows ñ cost summary

(3) Input windows ñ capital investment cost information, O&M cost

information, other cost information, event/outcome cost information

(4) Reports ñ data (alternative information ñ input cost data summary, event/outcome cost data summary), results (summary of life-cycle costs, summary of costs by alternative)

Example:

An example of a third party cost is the lost sales for a business establishment

whose customer access has been impeded (e.g., due to a road closure during

construction/reconstruction). Triangular Distribution: A probability distribution often used in a Monte Carlo

simulation. Specification of the triangular distribution requires three data points, the

minimum value, the most likely value, and the maximum value. In CET 4.0, the most

likely value is set equal to the baseline value. The triangular distribution is recommended

whenever the range of input value is finite and continuous and a clustering about some

central value is expected. Notes:

(1) See Section 4.2. (2) Input window ñ Monte Carlo (Include Factors).
103

(3) Output window ñ Monte Carlo (Results). (4) Reports ñ uncertainty (saved Monte Carlo simulations). Uncertainty Report: Report containing saved results from the Change in a Single

Factor tab, the Most Significant Factors tab, Change in Multiple Factors tab, and Monte

Carlo Simulation tab. Useful in supporting a recommendation of an alternative as the

most cost-effective risk mitigation plan. Notes:

(1) Uncertainty Report includes: saved sensitivity analyses; most significant

factors; and saved Monte Carlo simulations. Uniform Distribution: A probability distribution often used in a Monte Carlo

simulation. Specification of the uniform distribution requires two data points, the

minimum value and the maximum value. All values between the minimum and

maximum are equally likely. The uniform distribution is recommended whenever the

range of input values is finite and continuous but no clustering about a central value is

expected. Notes:

(1) See Section 4.2. (2) Input window ñ Monte Carlo (Include Factors). (3) Output window ñ Monte Carlo (Results). (4) Reports ñ uncertainty (saved Monte Carlo simulations). UNIFORMAT II: An elemental format based on major components common to most

buildings. It serves as a consistent reference for analysis, evaluation, and monitoring of

buildings during the planning, feasibility, and design stages. It also enhances reporting at

all stages in construction. The two cost types, building/facility elements and

building/facility site work, under the building/facility component cost classification are

associated with the elemental classification UNIFORMAT II. Subcategories under

UNIFORMAT II include: substructure, shell, interiors, services, equipment & furnishings, special construction/demolition. Notes:

(1) See Section 2.5. (2) See ASTM International. ìStandard Classification for Building Elements

and Related Site WorkóUNIFORMAT II,î E 1557, Annual Book of

ASTM Standards: 2006. Vol. 04.11. West Conshohocken, PA: ASTM

International. (3) Input windows ñ capital investment cost information, O&M cost

information, other cost information, event/outcome cost information
104

Unit Cost: Attribute of cost items that specifies a cost per unit that require installation or

replacement. The amount displayed for a cost is the multiplicative product of quantity

and unit cost. Notes:

(1) See Section 3.2.1.1 and Section 3.2.1.2. (2) Input windows ñ capital investment cost information, O&M cost

information, other cost information, event/outcome cost information

Example:

In the case study, the cost of HVAC repairs under the Basic Renovation

alternative is assigned a unit cost of $5 000. Year Cost Incurred (Timing): Attribute of cost items that specifies when a cost is

incurred.Notes:

(1) See Section 3.2.1.1 and Section 3.2.1.2. (2) Input windows ñ capital investment cost information, O&M cost

information, other cost information, event information

Example:

In the case study, the HVAC upgrade is a capital investment specified under the

Enhanced Security alternative that is assigned a cost incurred year of 17, which

corresponds to the year 2022.
105

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