A lifecycle ratio nobody can check, and a conclusion that does not need it

The National Manual for Assets and Facilities Management, published by Saudi Arabia's Expenditure and Projects Efficiency Authority, opens its volume on construction projects with a claim and an inference.

The claim is that building an asset accounts for only 20% to 30% of the total cost of its lifecycle, assuming it operates efficiently, and that the rest is spent operating it. The inference is that operations and maintenance should therefore be involved from pre-planning onward, through design, construction, commissioning and handover.

The inference is right. The claim is the interesting part, because it is given without a source, and ratios of this shape have a history.

The most quoted ratio in the field was never research

For more than 25 years the standard citation for this argument has been 1:5:200. One pound of construction cost, five of maintenance and building operating cost, 200 of business and staffing cost, over a building's life. It appears in government speeches, procurement guidance, design advocacy and life cycle costing method.

It originates in a 1998 Royal Academy of Engineering paper by Evans, Haryott, Haste and Jones. Four researchers at the University of Reading went looking for what sat behind it.

Using published cost data for three real office buildings, the same researchers calculated roughly 1:0.4:12. Not a refinement. A different order of magnitude on two of the three terms. Their closing observation is the one worth carrying: what troubled them was less the frequency of the ratio's use than the authority it had acquired, having become treated as a finding of research by the Royal Academy of Engineering, which it was not.

So is the manual's number wrong

This is where it gets more interesting than a debunking, and where it would be easy to be lazy.

The manual does not quote 1:5:200. It makes a narrower claim, about construction as a share of lifecycle cost, and that claim can be tested against the very data used to demolish the famous ratio.

Take the first of the three buildings in the Reading study. Construction cost of 7.7m, maintenance and replacement over 25 years of 3.9m, other occupancy costs over the same period of 19.2m. Construction is therefore about 25% of the three combined.

Which sits inside the manual's 20% to 30%.

So the number is defensible, and the honest conclusion is not that the manual is wrong. It is that a reader cannot tell whether it is right, because the manual does not say what the denominator contains. Include the staff who work in the building and construction falls to about 7%. Exclude occupancy costs and count only maintenance and replacement, and construction rises to two thirds. The same asset yields answers an order of magnitude apart depending on a definition the document does not give.

The conclusion never needed the number

Here is what makes the ratio unnecessary rather than merely unverified.

Everything the manual asks for follows from a proposition nobody disputes and no ratio is required to establish: decisions taken early are cheap to change and decisions taken late are not. Whether operations are 70% of lifecycle cost or 30% makes no difference to whether maintenance access should be reviewed at detailed design, which is the manual's own instruction at 6.7.7 and which cannot be retrofitted once the plant room is built.

The manual also supplies its own better justification, in its definitions rather than its introduction. It defines operational capability as the extent of the entity's success in operating the asset according to its intended purpose.

That is very close to the test the accounting standard uses to decide when a project stops being expenditure and becomes an asset. IPSAS 45 ends the accumulation of cost when the item is in the location and condition necessary to be capable of operating in the manner intended by management. Two documents from unrelated disciplines, one written for facilities managers and one for public sector accountants, converge on the same idea: what matters is whether the thing can be run as intended, by the people who will run it.

The same test, on the accounting side of the boundary

, read: The date a project becomes an asset is not the date on the certificateThe date a project becomes an asset is not the date on the certificate

That convergence is a stronger argument for early operational involvement than any cost ratio, because it does not depend on a denominator. It says the asset is not finished until it is operable in the intended manner, and that whether it will be is settled by decisions taken long before anybody is in a position to check.

What to examine

• When a lifecycle ratio appears in a business case, ask what is inside each term and over how many years. If the answer is not immediately available, the ratio is decorative and the decision rests on something else.
• Where the answer is that nobody has a structure for saying what is inside each term, there is a free one. ICMS 3, the International Cost Management Standard, gives a classification and presentation structure for life cycle costs and, since its third edition, carbon alongside them. It was agreed by 49 professional bodies through the ICMS Coalition, and both the standard and its Basis for Conclusions are published without charge, which is not true of most of the alternatives.
• Ask whether the ratio is doing any work. If the recommendation would be identical at half the figure, the number is illustration rather than evidence, and should be presented that way.
• For any claim traced to a well-known source, check whether the source contains the analysis or merely mentions the number. The distinction is invisible at the point of citation and decisive afterwards.
• Ask what the operational involvement in design actually produced. Attendance at reviews is not the deliverable. A changed drawing is.

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Sources. ICMS Coalition, International Cost Management Standard: Global Consistency in Presenting Construction Life Cycle Costs and Carbon Emissions, third edition, and its accompanying Basis for Conclusions, both published free at icms-coalition.org, for the classification structure for life cycle costs and for the coalition of 49 professional bodies behind it. Expenditure and Projects Efficiency Authority, National Manual for Assets and Facilities Management, Volume 16, Chapter 1, the role of asset and facilities management during the phases of construction projects, document EOM-ZP0-PR-000004-AR, for the 20% to 30% claim, the definition of operational capability, the phase structure from pre-planning to final handover, and the maintenance access requirement at detailed design. Published in Arabic on the authority's knowledge centre. English quotations are translated by Projects Advisors; the Arabic original governs.

Will Hughes, Debbie Ancell, Stephen Gruneberg and Luke Hirst, Exposing the myth of the 1:5:200 ratio relating initial cost, maintenance and staffing costs of office buildings, in Khosrowshahi, F (ed.), 20th Annual ARCOM Conference, Heriot Watt University, 1 to 3 September 2004, Association of Researchers in Construction Management, Volume 1, pages 373 to 381. For the origin of the ratio, the absence of supporting data, the correspondence with the original authors, the recalculated ratio of 1:0.4:12, and the building cost figures used in the arithmetic above, which are their Table 4.

R Evans, R Haryott, N Haste and A Jones, The Long Term Costs of Owning and Using Buildings, Royal Academy of Engineering, 1998, as the source in which the ratio first appeared.

IPSASB, IPSAS 45, Property, Plant, and Equipment, paragraph 17, for cessation of cost recognition when the item is capable of operating in the manner intended by management.