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«In an attempt to focus clients’ minds on the importance of considering the construction and maintenance costs of a commercial office building (both ...»

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EXPOSING THE MYTH OF THE 1:5:200 RATIO

RELATING INITIAL COST, MAINTENANCE AND

STAFFING COSTS OF OFFICE BUILDINGS

Will Hughes, Debbie Ancell, Stephen Gruneberg and Luke Hirst

School of Construction Management and Engineering, University of Reading, PO Box 219, Reading,

RG6 6AW, UK

In an attempt to focus clients’ minds on the importance of considering the

construction and maintenance costs of a commercial office building (both as a factor in staff productivity and as a fraction of lifetime staff costs) there is an often-quoted ratio of costs of 1:5:200, where for every one pound spent on construction cost, five are spent on maintenance and building operating costs and 200 on staffing and business operating costs. This seems to stem from a paper published by the Royal Academy of Engineering, in which no data is given and no derivation or defence of the ratio appears. The accompanying belief that higher quality design and construction increases staff productivity, and simultaneously reduces maintenance costs, how ever laudable, appears unsupported by research, and carries all the hallmarks of an “urban myth”. In tracking down data about real buildings, a more realistic ratio appears to depend on a huge variety of variables, as well as the definition of the number of “lifetime” years. The ill-defined origins of the original ratio (1:5:200) describing these variables have made replication impossible.

However, by using published sources of data, we have found that for three office buildings, a more realistic ratio is 1:0.4:12. As there is nothing in the public domain about what comprised the original research that gave rise to 1:5:200, it is not possible to make a true comparison between these new calculations and the originals. Clients and construction professionals stand to be misled because the popularity and widespread use of the wrong ratio appears to be mis-informing important investment and policy decisions.

Keywords: occupancy costs, staffing costs, maintenance costs, offices, urban myths.

INTRODUCTION

The often-quoted ratio of 1:5:200 (1 = construction cost; 5 = maintenance and building operating costs; 200 = business operating costs) for commercial office buildings over their lifetime appears to have originated from a Royal Academy of Engineering paper, “The Long Term Cost of Owning and Using Buildings” by Evans, Haryott, Haste and Jones (1998: p5). But this ratio is not supported by any research, information, data or analysis in the original article, which, in fact, merely mentions this ratio in passing, in an introductory comment, as having been derived elsewhere.

This would not be particularly remarkable, but for the way that this idea has taken hold of a multitude of writers and analysts in our field. The ratio has not only become accepted by a large number of people, it also seems to have been adopted for informing major investment decisions. It frequently turns up with acknowledgement to Evans et al. (e.g. Pearce, 2003: p52) but occasionally is used unacknowledged (e.g.

CABE, 2002: p19). The ratio appears to have been simply absorbed into

1Hughes, Ancell, Hirst and Gruneberg

conventional wisdom, without challenge as to its origins or accuracy. However, six years after the ratio was first published, there is still no evidence of data to support it.

Sir Peter Gershon (2002), in a speech at a Defence Estates Conference, referred to this ratio as follows: “the UK's Royal Academy of Engineering has analysed that the typical costs of owning a building are in the ratio of 1 part construction costs to 5 parts maintenance costs to 200 building operating costs”. Similarly, Lord Sainsbury (2002) is under the impression that the Royal Academy of Engineering “found that” this ratio was typical. But the paper by Evans et al. clearly contains no analysis.

Bamfield (2002), in writing about the importance of whole life costs, refers to the “recent and widely reported research into office accommodation” curiously adding that the relationships work in reverse, and uses the 1:5:200 ratio to claim that a £100k reduction in capital cost increases a business’s operating costs by £20m.

The ratio is recommended for use at the design stage of a building when the life cycle costs (LCC) of the building are considered (Pearce, 2003: p52). What is not clear, though, is whether LCCs become the future determinants of the “5” for maintenance costs or if the “5” is an elastic/balancing figure determined by the “200”( i.e. costs of operating the business determine what is available for building maintenance) or if “5” becomes a budget figure unrelated to the projected LCC figure.

We wrote to the authors of the Evans et al. paper and they told us that they no longer had the data, recalling that it had been provided by a major contractor from mainly US sources. Although the original data is no longer available, Ray Evans, one of the

authors, has emailed his recall of the definitions of the terms used:

“the construction cost was the total construction cost, including land acquisition and professional fees, but excluding finance costs; maintenance costs included energy costs general maintenance repairs and decoration/refurbishment; operating costs included staff, equipment, consumables and all other business overheads. The building life was I think, 25 years.” He also said that he thought that Chase Manhattan Bank had developed a similar ratio.





This is confusing as in their paper Evans et al. used the phrase “operating costs” twice, in both the second (maintenance and building operating costs) and the third categories (business operating costs), whereas Evans’ clarification uses the phrase in only the third category. It is also very strange to exclude the cost of finance from the first category, as this has a huge impact on the price paid for a building. Since there was no historic data available from the authors on the original ratio, it was clearly important to establish definitions of the terms used in the original ratio, i.e.

construction cost, maintenance and building operating costs, and business operating costs.

If the ratio of 1:5:200 was correct, using the definitions of each term given by Evans et al., then some very strange numbers emerge about the costs of staff housed in office buildings. For example, a building for 308 office staff was built for an initial capital cost (excluding finance) of approximately £3.5m (Brooks and Quirk 1999). The ratio would indicate that over 25 years, the business would spend 200 times the initial cost of the building on occupying and using the building, i.e. £700m, which is £28m per annum, or £91k per office worker per year. Another office building, with a total capital cost (excluding finance) of £24m houses 1,600 occupants. If the ratio is

2 Costs of owning and occupying office buildings

correct, their costs would be £120k, per person, per year. These figures indicate that the costs of occupation may have been over-estimated in the original ratio.

Turning to the maintenance part of the ratio, indicating that over its 25 year life we can expect to pay five times the capital cost of the building in maintenance costs, it is interesting to note that gross construction activity for the whole sector indicates that the UK spends less on repairs and maintenance than it does on new buildings (Department of Trade and Industry 2003), not five times as much. The DTI’s construction statistics are based on contractors’ orders, so, like Evans et al. also do not take account of the cost of finance, and therefore one would expect an approximate match.

These approximations lead us to question how this ratio of 1:5:200 came about, and whether there is a more accurate ratio available, as the ratio seems to be wildly exaggerated.

THE MISSING CONTEXT

A simple internet search on UK sites reveals many uses for the ratio – ranging from industry (e.g. Building Design Partnership 2004) and government (e.g. Gershon 2002, Ministry of Defence 2002, etc.) through to various authoritative publications (e.g. a Guide to Risk Management from Collaborating for the Built Environment (2003), and the Client Guide for Arts Capital Programme Projects (CABE 2002: p19). Although not an accurate reading of the frequency with which these statistics are used, it shows how a simple “rule of thumb” has become “the norm”, apparently without question. It is discussed by various government agencies and taken as authoritative and appears to be used in PFI project thinking. The spread of the ratio is like a game of “Chinese whispers”, and few who quote the ratio pause to calculate what it really means.

Hutcheson (1994) wrote about the need for building managers to develop a maintenance programme which optimized the building operating costs and the need for “tenants to occupy buildings on the basis of the cost-effectiveness of facilities, location, fit-out, and aesthetics balanced with rent”. This implies that any fixity between the three parts of the ratio can be realigned depending on the tenant and his or her needs and building operating costs could become a “balancing” item and flexed with available funding. Riley and Cotgrave (2004) stress that lifecycle, refurbishment and maintenance costs are important with planned maintenance reducing the need for reactive maintenance. They note that refurbishment can be triggered by poor maintenance – i.e. not tied to any construction cost or business operating cost.

Saxon (2002) picks up the idea of the ratio, and asserts that Evans et al. assumed a 20 year building lifespan, whereas Evans’ e-mail to us claims it is based on 25.

Moreover, he asserts that in Net Present Value terms, the ratio is a far less dramatic 1:1.5:60, but, like Evans et al., he shows no data to support this calculation.

Moreover, the ratio is now applied to all building types, not mentioning offices, but in the same paragraph, mentioning the significance of this ratio for hospitals, schools and laboratories. In a later paper, Saxon (2003: p2) returns to the 1:5:200 ratio and stresses the importance of “improving value by lowering costs” and concentrating on best serving the customer (i.e. tenant) and considering “benefit definition”. He further adds to the 1:5:200 ratio by including a fourth term, design, at 0.1 of the original construction cost and then a fifth term, the performance for the occupying activity, which he pitches in a range from 250 to 2000. This extended ratio means that over the life of the facility the benefit generated from design runs from 1:2500 upwards. This

3Hughes, Ancell, Hirst and Gruneberg

is done to support the view that by putting emphasis on design there is greater performance benefit from the occupying organisation later; good design creates buildings which have no net cost! Again, there is no data to support these statistics and by taking the 0.1 out of the “1” the “1” is reduced to 0.9 and thus the original ratio is altered (or was the 0.1 supposed to have been excluded from the 1? It is impossible to say).

The inflated claims that follow in the wake of the simple ratio are in stark contrast to the wider literature. For example, Seeley (1996), in his text on cost modelling, stresses that no two projects are identical and that using the historic data from one can be dangerous as a predictor of another. This would undermine the case for a fixed ratio of construction to building maintenance to business operating costs. Skitmore and Marston (1999) examine all the inputs of cost modelling, and the various available models show that, depending on which is used, the data and information output will vary. This is endorsed by the BMI (2003: p5) noting that when considering the occupancy costs one should consider the building size, shape and layout, specification, intensity of use, location and orientation and noting that “the actual cost and ratio of the costs between these elements can vary from building to building…” It is not as if this were a new idea. Stone (1980) deserves considerable comment. He provides alternative ratios as well as a guide to initial cost and building operating costs. He suggests that “often the running costs of a building are three times as great as the first costs” (p xii), conflicting with the notion of 1:5 in the ratio under review.

Stone also states that “Energy costs are two or three times as great as maintenance costs and equivalent to a substantial proportion of structural costs.” (p xiv) He also stresses “…the cost of construction is only the first cost and far less important than the subsequent costs associated with running the building and operating it.” (p 3) He also considers such issues as rates of interest which could affect a ratio and the sensitivity of interest rates on the life of the building, as well as inflation and other resource costs. Short lifetimes reduce a building’s value without reducing costs – simply because there is no way of economically constructing a building for a short life.

Stone also sets out a cost table (p15) which shows that the initial cost of offices is 53%, with maintenance at 14% and fuel and attendance for heating and lighting at 33%, at a net discount rate of 5%. “The proportions of running costs tends to be lower the higher the initial cost of the building and the fewer the hours per year for which the building is used” (p15). Stone also examines the cost of multi-storey buildings, the costs of which can be affected by the country in which the building is constructed.

Running costs too, increase with storey numbers because of the additional services needed to access the upper levels.

Wong (2000) examines a method for assessing the value of commercial property in order to be able to cost and time the refurbishment most economically. This, too, could affect a ratio: higher quality in the construction process (but not necessarily at higher cost) should reduce the costs of maintenance.



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