Equivalent Uniform Annual Cost (EUAC): A New Approach to Life Cycle Analysis

Roof Consultants Institute
James Hoff
Firestone Building Products
Indianapolis, IN
Proceeedings of the RCI 21st International Convention Hoff – 115
Equivalent Uniform Annual Cost (EUAC):
A New Approach to Life Cycle Analysis
ABSTRACT
Unlike standard life cycle cost analysis, the Estimated Uniform Annual Cost
(EUAC) method expresses life cycle costs as an annualized estimate of cash
flow instead of a lump-sum estimate of present value. Because life cycle costs
are calculated as an annualized amount, roofing professionals may use this
new method to compare the economic value of roof systems with different
service lives. The paper will review the mechanics of the EUAC approach to
life cycle cost analysis through a step-by-step example applied to a variety of
modern roofing system alternatives.
SPEAKER
JIM HOFF (hoffjames@firestonebp.com) has served in a variety of technical and management
roles in the construction industry for over thirty years. Currently, Mr. Hoff is vice president of
technology and product development for Firestone Building Products Company. Mr. Hoff received
an A.A.S. from Indiana Vocational Technical College, a B.A. in psychology from Indiana University,
an M.S. in management from Indiana Wesleyan University, and currently is completing his doctoral
dissertation for a D.B.A. in management from the University of Sarasota.
Hoff – 116 Proceeedings of the RCI 21st International Convention
Hoff – 117 Proceeedings of the RCI 21st International Convention
INTRODUCTION; LIFE CYCLE
COST ANALYSIS AND ITS
PROBLEMS
Interest in life cycle cost analysis
(LCCA) appears to be increasing
among building owners and
designers. Some of this attention
may be attributed to a related and
growing interest in “green” building
technologies that rely in part
on the durability and sustainability
of building materials to minimize
environmental impacts. The
increasing economic sophistication
required to finance modern
construction projects may also be
a contributing factor. Finally, new
federal requirements for public
construction may be stimulating
the growing interest in LCCA. Regardless
of specific causes, however,
the growing interest in life
cycle costing is clearly reflected in
changing attitudes within the
construction industry. According
to a recent survey conducted by
Building Design & Construction
(“White Paper on Sustainability,”
2003), an overwhelming majority
of the 70,000 building professionals
surveyed agreed that building
materials should be evaluated
first and foremost on the basis of
life cycle cost.
Unfortunately, although many
building professionals are increasingly
interested in learning
about the life cycle costs of key
building components, few tools
currently exist to help them compare
the almost unlimited choices
of competing building materials.
In the case of commercial roofing
systems, designers and owners
must select from a wide variety of
roofing membranes, each with an
equally wide choice of design and
component options and warranted
service lives, varying from five
to over 30 years. The sheer complexity
of modern roof system
choices obviously makes it very
difficult to develop simple analytical
tools. However, the lack of effective
life cycle cost programs also
may be linked to other factors.
Problem 1: How Long Do Roofs
Last?
The first challenge to effective
LCCA is the lack of consensus regarding
the service life of modern
commercial roofing systems. As
an example, two of the most comprehensive
studies of service life
conducted in the roofing industry
arrived at sharply different conclusions
regarding the longevity of
various roofing systems. Based on
a survey of over 400 roofing contractors,
Carl Cash (1997) concluded
that traditional multipleply
asphalt roofing systems could
be expected to provide an average
service life of 17.4 years, while
EPDM roofing systems could be
expected to provide an average
service life of 14.1 years. In contrast
to the Cash study, Schneider
and Keenan (1997) surveyed over
20,000 actual roofing installations
and concluded that the
average service life of asphalt
multiple-ply roofs was 13.6 years,
while EPDM roofs provided an
average service life of 17.7 years.
Using the Cash study as a basis
for LCCA may favor the use of
multiple-ply asphalt roofing systems,
while the data from the
Schneider & Keenan study may
favor single-ply systems.
How can the concerned building
owner reconcile such conflicting
estimates of roof service life?
First, some of this apparent conflict
may be due to the use of a
statistical average. Within the
population of both the asphalt
and single-ply roofs, there may be
roof systems that perform much
better than the average – perhaps
well in excess of 20 years. In addition,
these better-performing roof
systems may have included a
variety of design and component
augmentations that contributed
to extended service life.
The published warranty offerings
of roofing manufacturers
may offer additional insight into
the relationship between roof system
design and roof longevity.
Based on a review of the NRCA
2004-05 Low-Slope Roofing Materials
Guide (2005), roofing systems
appear to exhibit a consistent
upgrading of components
and application practices as the
term of the warranty increases. As
an example, almost all 20-year
multiple-ply asphalt roofing systems
require the use of highstrength
Type VI ply felts and
redundant flashing details, while
systems with lower warranty
lengths allow the use of lowerstrength
felts and less redundant
flashings. In a similar manner,
the thickness of single-ply roofing
membranes tends to increase as
the warranty term increases (from
45 mils at 15 years, 60 mils at 20
years, and 90 mils at 30 years),
while seaming and flashing
requirements likewise increase as
the warranty term is lengthened.
Equivalent Uniform Annual Cost (EUAC):
A New Approach to Life Cycle Analysis
Hoif – 118 Proceeedings of the RCI 21st International Convention
Although the nominal warranty
term and relative durability of
roofing systems appear to be
related, there are no studies currently
available to clearly quantify
this relationship. However, the
use of nominal warranty length
and the associated system augmentation
associated with the
warranty period may offer a reasonable
starting point. Accordingly,
this study will use typical
manufacturer warranty length
and associated system specifications
as a basis for comparison.
Problem 2: How Much Do Roofs
Cost?
The second hurdle to effective
LCCA in roofing involves the actual
costs associated with installing,
maintaining, and replacing a roofing
system. Surveys involving
mock roofing bids conducted by
the author over the past twenty
years indicate the price of identically
specified roofs may vary by
as much as 25% to 75% across
the United States. These price differences
may be attributed to different
labor and productivity rates
as well as regional differences in
roof system selection. Some of the
variability in roof system costs
can be addressed by combining
surveys of actual contractor bids
with rank-order price surveys,
which emphasize the relative
rather than the absolute difference
between roofing systems.
As an example, contractor
price surveys conducted by the
author indicate that a typical ballasted
EPDM roofing system may
vary in price from a little over
$2.00 to more than $4.00 per
square foot, while a similar, fullyadhered
EPDM roof may vary between
$2.50 and $6.00 per square
foot. However, when these two
systems are ranked by contractors
in terms of relative cost,
adhered systems tend to command
a relatively consistent cost
premium of 25% to 30% above a
ballasted system. By asking the
same contractors to rank a variety
of roofing systems, a consistent
cost differential can be obtained
for comparison purposes, even
though the actual costs may vary
significantly from contractor to
contractor. Accordingly, this
study has employed cost estimates
based on commonly available
national construction data,
but these costs will then be
adjusted based on rank-order
estimates from a survey of roofing
contractors.
Estimates of annual maintenance
costs also may vary from
survey to survey. Respondents to
the Schneider and Keenan’s 1997
survey reported annual maintenance
costs running from $0.14
to $0.19 per square foot, while
respondents to Cash’s 1997 survey
identified these costs as varying
from $0.09 to $0.15. Because
even the highest of these annual
estimates is relatively low in comparison
to initial installation
costs, the present study will apply
the highest estimate of maintenance
costs, or $0.20 per square
foot, to all roof systems in this
study.
Problem 3: How Do You
Compare Roof Systems With
Different Service Lives?
The final hurdle to effective
LCC is related to the common
methodology used to calculate life
cycle cost. Accurate life cycle costing
requires that all anticipated
costs be converted to present
value. These costs should include
the initial cost of installation,
periodic maintenance expenses,
and eventual removal and
replacement costs:
LCC = IC + MCPV + RCPV
Where:
LCC = Life cycle cost ($/sq. ft.)
IC = Initial Cost
MCPV = Present value of all future maintenance
costs
RCPV = Present value of future removal
and replacement costs
This approach requires that
all anticipated future costs be
stated as the amount of money
needed today to pay the future
costs, given an anticipated discount
rate, or cost of money. In
order to allow for a consistent
comparison among alternative
products, this present value must
be calculated over a defined
“study period.” Typically, this
study period should coincide with
the investment horizon of the
owner. For example, if a building
owner expects to occupy a building
for the next twenty years, the
study period for life cycle cost
analysis should also be twenty
years.
Although the use of a common
study period allows for an
“apples-to-apples” comparison of
different roofing systems, it may
fail to account for several important
economic issues. In the previous
example, even if a building
owner expects to occupy a building
for twenty years, the same
building owner will also expect to
sell the building at the end of the
20-year period. If the roof on the
building requires replacement
after twenty years, the owner may
end up paying for a new roof,
either by agreeing to replace the
roof prior to transfer to a new
owner, or through a discount in
the selling price. Conversely, if the
roof on the building is considered
to be suitable for an additional 20
years of use, the building owner
will suffer little if any loss of value
in the sale of the building. In
either case, the arbitrary 20-year
study period may misrepresent
the actual costs of ownership
experienced by the building
owner.
The use of an arbitrary study
period also makes it difficult to
effectively compare the value of
roofing systems with different
estimated service lives. As an
example, the true value of a 15-
year roof may be understated as
compared to a 20-year roof if a
Hoff – 119 Proceeedings of the RCI 21st International Convention
15-year study
period is selected
that provides
no economic
value for
the additional
five years the
20-year system
offers. Conversely,
the
true value of
the 20-year
roof could be
signi f icant ly
overstated if a
20-year study
period is selected
that requires
the complete
replacement
of the 15-
year roof but
then understates
the longterm
value of the new replacement
roof.
Both of these problems can be
resolved by deducting the residual
value of the roof from the life cycle
cost calculation, but this may add
unnecessary complexity to what
started out to be a fairly simple
statement of present value. A
more effective alternative may
involve the use of Equivalent
Uniform Annual Cost (EUAC) in
lieu of standard LCCA. Unlike
LCCA, EUAC allows for the use of
differing study periods by
expressing costs as an annualized
estimate of cash flow instead of a
lump-sum estimate of present
value:
EUAC = (A/P, i, n)
Where:
EUAC = Equivalent Uniform Annual Cost
A/P = Annualized cash flow or payment
($/sq.ft.)
i = annual interest rate (%)
n = service life (years)
In simpler terms, Equivalent
Uniform Annual Cost is the “payment”
required to fund the Life
Cycle Cost over the service life.
This “payment” is calculated using
the same principles as mortgage
financing. The Life Cycle
Cost represents the “purchase
price” and the Estimated Uniform
Annual Cost represents the
“mortgage payment” needed for a
given interest rate to fully fund
the Life Cycle Cost by the end of
the stated service life.
Because EUAC costs are stated
as an annualized amount, it
becomes possible to compare roof
systems with different service
lives.
ROOF LIFE CYCLE ANAL Y SIS
USING ESTIMATED UNIFORM
ANNUAL COST (EUAC)
STEP 1: IDENTIFYING ALTER-NA
TIVES AND TIMEFRAMES
Using the NRCA 2004-05 Low-
Slope Roofing Materials Guide
(2005) as a reference, a wide
selection of roofing specifications
were identified based on warranty
length. In addition, specifications
incorporated all major categories
of low-slope commercial roofing
systems, including traditional
asphalt, modified bitumen,
EPDM, and thermoplastic systems.
In all cases, these roofing
designs increased in redundancy
and augmentation as the warranty
term increased. As an example,
a typical 15-year EPDM specification
may allow the use of a 45-mil
membrane, while 20-year and 30-
year designs require minimum
60-mil and 90-mil membranes,
respectively. In a similar manner,
a typical 15-year modified bitumen
system may allow the use of
a non-modified fiberglass base
sheet, while a typical 20-year system
requires a modified asphalt
base sheet.
For the purposes of this study,
the nominal warranty period was
also designated to be the service
life period for each roofing system.
It is very likely that the actual service
life may exceed the warranted
service life, but the variation
based on warranty length allows
for relative comparison among the
systems. The roof system specifications
and warranty periods
selected for the study are identified
in Table 1.
STEP 2: IDENTIFYING AND
Table 1 – Roof System Specification and Warranty/Service Life
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CALCULATING COSTS
Initial Cost
As mentioned previously in
the introduction of this study, initial
costs were developed using a
two-pronged approach of 1) establishing
initial costs using commonly
available industry construction
estimating data, and 2)
modifying these initial costs using
rank-order data derived from a
survey of roofing contractors.
Initial costs were established
using Means Building Construction
Cost Data 2005. This initial
cost data was then adjusted in
accordance with average rankings
as identified in a survey of 50
commercial roofing contractors
located throughout the United
States, who were asked to list the
rank order of each system in
terms of installed cost. The
adjusted costs for each system as
determined by this method are
summarized in Table 2.
Replacement Cost
In order to develop an effective
life-cycle cost comparison, the
cost for the eventual replacement
of the roofing system must be
determined. Unlike the initial roof
installation, replacement cost will
include both the equivalent cost of
the initial installation as well as
the tear-off and disposal costs of
the original roof. Although costs
for replacement after tear-off and
disposal can be calculated using
the original installation cost values,
tear-off and disposal costs
must be determined independently.
One of the most comprehensive
and consistent estimate of
disposal costs can be found in a
study of roofing durability conducted
by Cash in 1997. Based on
a survey of roofing contractors,
Cash estimated that the removal
and disposal costs for the types of
roofing systems included in the
present study varied between
$0.83 and $0.98 per square foot.
Because these costs appear to
vary within a relatively narrow
range that may have little significant
impact on the outcome of the
life cycle cost calculation, the current
study assigned a uniform
value of $1.00 per square foot for
the removal and disposal costs for
each systems studied.
In addition, this assigned
removal and disposal cost was
converted to present value in
order to adjust for the timing of
the replacement. In effect, this
present value is equal to the
amount of “cash on hand” that
can grow at a given interest rate
into the amount of “future cash
needed” to fund the roof replacement.
As an example, using an
annual discount rate of 5%, the
cash on hand or present value
necessary to replace a roof in 15
years is equal to 56% of the future
cash needed, while the present
value for a roof that must be
replaced after 20 years is equal to
46% of the future cash needed.
Table 2 – Roof System Specification and Initial Cost
Hoff – 121 Proceeedings of the RCI 21st International Convention
(Please note that a discount rate
of 5% was selected, as currently
recommended by the Federal
Energy Management Program.
See Fuller & Rushing, 2005). The
present value or “cash on hand”
replacement costs for each roof
system specification are summarized
in Table 3.
Maintenance Cost
As mentioned previously,
annual maintenance costs were
based on data from Schneider &
Keenan (1997) and Cash (1997)
that identified annual maintenance
costs to vary between $0.09
and $0.19 per square foot. To
simplify this current study, these
costs were rounded up to $0.20
for every roofing system. In addition,
the total maintenance cost
for each roofing system was converted
to present value (or “cash
on hand”) by calculating the discounted
cash flow of the annual
costs for the warranty period. As
an example, the cash on hand
required to fund a $0.20 annual
maintenance cost for a 15-year
warranty period is $2.18, while
the same present value for a 20-
year warranty period is $2.63.
These present value maintenance
costs are summarized in Table 4.
STEP 3: CALCULATING LIFE CYCLE
COST
Once the present values of all
initial, maintenance, and replacement
costs have been established,
the calculation of Life Cycle Cost
is simply accomplished by combining
these costs into a single
amount. Table 5 summarizes all
Life Cycle costs for all roofing systems
identified in this study.
Step 4: Calculating Equivalent
Annual Uniform Cost
The problem with a simple life
cycle cost model becomes apparent
in Table 5. The life cycle costs
of many 15- and 20-year roofing
systems is very similar, and in
some cases, the life cycle cost of
some 15-year systems is lower
than the corresponding 20-year
system. As an example, the present
value cost of a 15 year modified
bitumen system is only $7.81
per square foot, while the more
durable and redundant 20-year
Table 3 – Roof System, Service Life, and Replacement Cost
(1) The Present Value Discount Factor is based on 5% annual percentage rate applied for the length of service life / warranty period. As an
example, a 15-year service life requires 56% or 0.56 of the replacement cost “up front” as the present value of the future cost, while a 20-year
service life requires only 46% or 0.46 of the cost “up front,” due to the longer time period to accumulate interest on the initial amount.
modified bitumen system has a
higher cost of $8.49 per square
foot. The problem, of course, is
that the 20-year system provides
a longer service life than the 15-
year system, and the value of this
additional service life can only be
evaluated by annualizing the
costs associated with both systems.
This can be accomplished
by expressing the costs of both
systems as an annual cash flow or
“payment” for the expected life of
each system. This annualization
of life cycle costs is achieved using
the Equivalent Uniform Annual
Cost (EUAC) method, as previously
identified in this article. Using
the same 5% discount rate as in
the LCC calculation, the EUAC for
each roofing system is summarized
in Table 6 and graphically
compared in Chart 1.
STEP 5: ANALYZING RESULTS: THE
EUAC METHOD OF LIFE CYCLE
COSTING
Longterm Value of Specification
Enhancements
The EUAC method of life cycle
costing may help to identify the
real benefits inherent in roof systems
than have been enhanced to
extend service life. Based only on
a comparison of the basic LCC of
15- and 20-year roofing systems
in this study, the benefits of
enhanced specification might be
questioned because the LCC costs
were so close. However, the EUAC
cost method identifies that 20-
and 30-year systems may hold an
advantage more than sufficient to
justify the additional up-front
expense. As an example, the
EUAC calculations indicate that
the 20-year roofing systems in the
study may offer long-term costs
10% to 15% lower than their 15-
year counterparts. In addition,
the EUAC of the single 30-year
system studied offers an additional
cost savings of 12% beyond a
similar 20-year system.
The EUAC data in the present
study appear to support the
proposition advanced by many
roofing consultants that the
investment in enhanced system
design may provide a real economic
return to the building
owner. As perhaps best stated by
Richard Boon (2001) in Roofing
Contractor Magazine, “…the higher
up-front costs of premium roof-
Table 4 – Roof System, Service Life, and Maintenance Cost
(1) Present Value Adjustment Factor based on a 5% annual percentage rate applied for the warranty period or service life of the system. As
an example, the initial present value or “up-front” funding necessary to cover annual maintenance costs for a 15-year service life requires 10.9
times the annual maintenance cost, while the “up-front” funding for a 20-year service life requires 13.15 times the annual maintenance cost.
Hoff – 122 Proceeedings of the RCI 21st International Convention
Proceeedings of the RCI 21st International Convention Hoff – 123
Table 5 Roof System Life Cycle Cost (LCC)
(1) Present Value Adjustment Factor based on a 5% annual percentage rate applied for the warranty period or service life of the system. As
an example, the initial present value or “up-front” funding necessary to cover annual maintenance costs for a 15-year service life requires 10.9
times the annual maintenance cost, while the “up-front” funding for a 20-year service life requires 13.15 times the annual maintenance cost.
Table 6 – Roof System Equivalent Uniform Annual Cost (EUAC)
Note: Equivalent Uniform Annual Cost is the “payment” required to fund the Life Cycle Cost over the service life. This “payment” is calculated
using the same principles as mortgage financing. The Life Cycle Cost represents the “purchase price” and the Estimated Uniform Annual Cost
represents the “mortgage payment” needed for a given interest rate to fully fund the Life Cycle Cost by the end of the stated service life.
Hoff – 124 Proceeedings of the RCI 21st International Convention
ing systems can be fully justified
through long-term savings.”
Economic Similarity of Major
Roofing Systems
The EUAC method also suggests
that the major types of commercial
roofing system used
throughout the United States
today provide a very similar economic
benefit. Although roofing
industry professionals may hold
widely divergent opinions regarding
the relative performance of
EPDM, thermoplastic, modified
bitumen and built-up roofing systems,
their relative similarity of
these systems in terms of EUAC
may indicate that no single system
offers an unassailable economic
advantage. Perhaps this is
why each of these major
approaches to roofing enjoys a
respectable share of today’s commercial
roofing market.
REFERENCES
Boon, R. A. “Better Roofs are
Less Expensive.” Roofing
Contractor, November 2001.
Cash, C. G. “The Relative Durability
of Low-slope Roofing.”
Proceedings of the
Fourth International Symposium
on Roofing Technology,
119-124. National Roofing
Contractors Association:
Rosemont, IL. 1997.
Fuller, S. K., and Rushing, A.
S. “Energy Price Indices and
Discount Factors for lifecycle
Cost Analysis, April 1,
2005 to March 31, 2006.
Annual supplement to NIST
Handbook 135 and NBS
special publication 709 (NISTIR
85-3273-20). Gaithersburg,
MD: National Institute
of Standards and Technology.
2005.
2004-05 Low-slope Roofing
Materials Guide. Rosemont,
IL: National Roofing Contractors
Association. 2005.
Means Building Construction
Cost Data. Kingston, MA: R.
S. Means. 2005.
Schneider, K. G., and Keenan,
A. S. “A Documented Historical
Performance of Roofing
Assemblies in the United
States, 1975-1996. Proceedings
of the Fourth International
Symposium on
Roofing Technology, 132-
137. Rosemont, IL: National
Roofing Contractors Association.
1997.
“White Paper on Sustainability.”
Building Design &
Construction, November
supplement. 2003.
Chart 1 – Equivalent Uniform Annual Cost (EUAC) of Roofing Systems