Building standards - compliance plan manager role: cost benefit analysis

5. Cost Benefit Analysis

5.1 Introduction

5.1.1 This section presents the results of the cost benefit analysis using the individual costs and benefits set out in Section 4. The analysis shows the costs and benefits in present value terms which is the current value of a future stream of cash flows. The discounted costs and benefits take account of the fact that £1 today is worth more than £1 in future years. The benefit cost ratio (BCR) is also calculated which is the ratio of discounted benefits to discounted costs. A BCR ratio above one indicates that the benefits are greater than the costs.

5.1.2 The cost benefit calculations are undertaken for “typical” high-risk building projects as described in paragraphs 4.1.5 to 4.1.7.

5.2 Cost Benefit Results

5.2.1 Table 5.1 shows the results of the cost benefit analysis for each building type. The present value of costs are in the range £0.1 to £0.4 million with the present value of benefits substantially more across all building types. The BCR associated with the CPM role is 3.5 to 8.2 across the different building types. The analysis shows that there are net benefits to be obtained from the introduction of the CPM role across all building types.

5.2.2 The lowest BCR is estimated for leisure centres which is the building type which had the fewest monetised benefits (paragraph 4.4.35) as it was assumed that provision of alternative facilities was not undertaken. Even with this assumption, the BCR of 3.5 clearly highlights that there are substantial benefits to be obtained from the introduction of the CPM role.

5.2.3 Table 5.1 excludes all of the non-monetised benefits which were identified in Section 4. These are summarised in Table 5.2 which shows that the extent of most of these benefits will vary depending on the nature of the building failure and the severity of the building failure.

Table 5.2: Summary of Non-Monetised Benefits

Minor

Social and Other Costs

Schools

Emergency Service Response

Public Inquiry & Legal Costs Varies by type and severity of building failure

Further Investigative/Repair Work Varies by type and severity of building failure

Moderate

Leisure Centres

High-rise Residential

Varies by type and severity of building failure

Varies by type and severity of building failure

Varies by type and severity of building failure

Major

Hospitals

Residential Care

Varies by type and severity of building failure

Varies by type and severity of building failure

Varies by type and severity of building failure

5.3 Sensitivity Analysis

5.3.1 Given the number of assumptions that have been made in the assessment, it is important to test the sensitivity of the results to the assumptions adopted.

Costs

5.3.2 The analysis assumed there would be at least one full-time person undertaking the CPM role on each building type. This is considered a conservative assumption which is likely to overstate costs on some building projects. Some smaller, less complex projects are expected to require less than one full-time person which would reduce the cost of the CPM role. Given the relatively low costs associated with the results in Table 5.1 above, no sensitivities have been undertaken on the costs of the CPM role.

Benefits

5.3.3 The focus of the sensitivity analysis is the assumptions made regarding the “avoided costs” or benefits.

High-Rise Residential

5.3.4 Approximately 75% of the present value of benefits for high-rise buildings arise from avoided costs during the post construction period. The main assumptions for the high-rise residential building model relate to:

• The direct costs of rework during construction.
• The indirect costs of rework during construction.
• The costs of repairing the building failure post construction.
• The costs associated with injuries and fatalities.

5.3.5 Given the BCR in Table 5.1 is much higher than one for high-rise residential buildings, there is no need to test the sensitivity of assumptions which would increase benefits as this would only increase the BCR further above one. Hence, the following sensitivities have been tested which focus on reducing the value of benefits:

1. The cost of rework without the CPM role is reduced to 2% of construction cost. This has the effect of reducing the difference in the direct cost of rework (with and without the CPM role) from 2% to 1%.

2. Given there is less evidence of indirect costs associated with rework, this component of benefit is excluded.

3. The cost of rectifying the building failure in the examples in Section 2 varied considerably and was heavily influenced by the cost of removing and reinstalling appropriate cladding. The cost of repair per flat was assumed to be £40,000 in the initial analysis, excluding any costs associated with reinstating cladding. The sensitivity adopts a figure of £20,000 per flat.

4. It was assumed that there was one fatality, one serious injury and one slight injury in the analysis in Table 5.1. The sensitivity assumes there are no fatalities, only one serious and one slight injury.

5. Sensitivities 1-4 are combined in Sensitivity 5.

5.3.6 The results of these sensitivity tests are shown in Table 5.3. While the present value of benefits is reduced in all the sensitivities, the BCR remains above one in every test including Sensitivity 5 which combines all four changes to the assumptions. The benefits which would be achieved from the CPM role for high-rise residential buildings clearly outweigh the costs.

Schools

5.3.7 Approximately 62% of the present value of benefits are accounted for by the direct and indirect costs of rework during construction. The main assumptions for the school building model relate to:

• The direct costs of rework during construction.
• The indirect costs of rework during construction.

5.3.8 Given the BCR in Table 5.1 is much higher than one for schools, there is no need to test the sensitivity of assumptions which would increase benefits as this would only increase the BCR further above one. Hence, the following sensitivities have been tested which focus on reducing the value of benefits:

6. The cost of rework without the CPM role is reduced to 2% of construction cost. This has the effect of reducing the difference in the direct cost of rework (with and without the CPM role) from 2% to 1%.

7. Given there is less evidence of indirect costs associated with rework, this component of benefit is excluded.

8. Sensitivities 6 and 7 are combined in Sensitivity 8.

5.3.9 The results of these sensitivity tests are shown in Table 5.4. While the present value of benefits is reduced in all the sensitivities, the BCR remains above one in every test including Sensitivity 8. This is the “strictest” sensitivity, but the BCR is still over 3 which represents substantial net benefits.

Hospitals

5.3.10 Approximately 79% of the present value of benefits are accounted for by the direct and indirect costs of rework during the construction phase. The main assumptions for the hospital model relate to:

• The direct costs of rework during construction; and
• The indirect costs of rework during construction.

5.3.11 Given the BCR in Table 5.1 is much higher than one for hospitals, there is no need to test the sensitivity of assumptions which would increase benefits as this would only increase the BCR further above one. Hence, the following sensitivities have been tested which focus on reducing the value of benefits:

9. The cost of rework without the CPM role is reduced to 2% of construction cost. This has the effect of reducing the difference in the direct cost of rework (with and without the CPM role) from 2% to 1%.

10. Given there is less evidence of indirect costs associated with rework, this component of benefit is excluded.

11. Sensitivities 9 and 10 are combined in Sensitivity 11.

5.3.12 The results are shown in Table 5.5 and continue to show substantial net benefits from introducing the CPM role.

Residential Care

5.3.13 Approximately 34% of the present value of benefits are accounted for by the direct and indirect costs of rework during construction. Of the potential benefits arising post construction, the benefits are dominated by the assumption regarding the number of fatalities and injuries. The main assumptions for the residential care building model relate to:

• The direct costs of rework during construction.
• The indirect costs of rework during construction.
• The costs associated with injuries and fatalities.

5.3.14 Given the BCR in Table 5.1 is much higher than one for residential care, there is no need to test the sensitivity of assumptions which would increase benefits as this would only increase the BCR further above one. Hence, the following sensitivities have been tested which focus on reducing the value of benefits:

12. The cost of rework without the CPM role is reduced to 2% of construction cost. This has the effect of reducing the difference in the direct cost of rework (with and without the CPM role) from 2% to 1%.

13. Given there is less evidence of indirect costs associated with rework, this component of benefit is excluded.

14. It was assumed that there was one fatality, one serious injury and one slight injury in the analysis in Table 5.1. The sensitivity assumes there are no fatalities, only one serious and one slight injury.

15. Sensitivities 12-14 are tested individually and then combined in Sensitivity 15.

5.3.15 The results are shown in Table 5.6 and continue to show substantial net benefit from the introducing the CPM role.

Leisure Centres

5.3.16 Approximately 79% of the present value of benefits are accounted for by the direct and indirect costs of rework during construction. Hence, the main assumptions for the leisure centre model relate to:

• The direct costs of rework during construction.
• The indirect costs of rework during construction.

5.3.17 Given the BCR in Table 5.1 is much higher than one for leisure centres, there is no need to test the sensitivity of assumptions which would increase benefits as this would only increase the BCR further above one. Hence, the following sensitivities have been tested which focus on reducing the value of benefits:

16. The cost of rework without the CPM role is reduced to 2% of construction cost. This has the effect of reducing the difference in the direct cost of rework (with and without the CPM role) from 2% to 1%.

17. Given there is less evidence of indirect costs associated with rework, this component of benefit is excluded.

18. Sensitivities 16-17 are tested individually and then combined in Sensitivity 18.

5.3.18 The results are shown in Table 5.7 and confirm that even with the ‘strictest’ sensitivity test, the BCR is 1.5 highlighting that there are net benefit from introducing the CPM role. As stated in paragraph 5.2.2 the leisure centre model building was the building type with the fewest monetised benefits, but even the sensitivity tests return a very positive BCR.

5.3.19 All the non-monetised benefit identified in Table 5.2 also exist in the sensitivity scenarios.

5.4 Conclusions

5.4.1 Across all building types, the analysis shows that the benefits of introducing the CPM role exceed the costs, and often by a substantial amount. There are also a number of non-monetised benefits to be gained from the CPM role including social benefits such as reduced stress and anxiety. Depending on the nature and severity of the building failure, there could also be benefits associated with reduced costs for the emergency services, other investigative work and public inquiry/legal costs.

5.4.2 The sensitivity of the results to the key assumptions has been tested. Across all building types, the sensitivity tests all return a BCR in excess of one. For all high-risk building types modelled in this analysis, the CPM role offers substantial net benefits.