# Calculating economics of HVAC systems

## Codes and standards, equipment efficiencies, energy modeling, commissioning, energy-conservation incentive programs, and lifecycle cost analysis all play into determining the economics of HVAC systems. Included are key aspects a mechanical engineer may need to consider when specifying HVAC systems into new or existing buildings, with a focus on the economic analysis provided to the client.

December 20, 2016

Learning objectives

• Interpret the various factors that determine the capital and operating costs of HVAC systems.
• Estimate the lifecycle cost of HVAC systems via economic studies.
• Recall that commissioning, recommissioning, and retro-commissioning play into the overall cost of HVAC systems.

The economics of HVAC systems include capital costs and operating costs. The operating cost comprises energy consumption, maintenance and repair, recommissioning, replacement, and asset preservation. Lifecycle analysis factors in escalation and time cost of money over the study’s period of time.

Educating the owner to understand the economics of HVAC systems is paramount to delivering an exceptional experience. The engineer should take the time to gather the owner’s requirements, establish a method of decision making, and present HVAC system options in an effective manner.

Most building owners understand HVAC systems in terms of thermal comfort and that these systems cost money to operate. Some building owners understand that HVAC systems have a greater impact on the building asset value by regulating moisture, temperature, air pressure, and particulate filtration. Even fewer understand how much the HVAC systems impact their bottom line. It is the role of the engineering team to educate the owner’s team on the economic impacts of HVAC systems.

Engineering economics

Numerous articles and books have been written to guide engineers through the mathematical representation of HVAC economic analysis. Before we dig into the indirect cost impacts, we must review some of the basic concepts of the engineering economic process.

Lifecycle cost (LCC) = first cost + maintenance and repair + energy + water + replacement – salvage value

Often, engineers are asked to determine the best option between one or more HVAC system options. There are several ways to represent the results when comparing the lifecycle costs of two or more options. Simple payback, net savings, savings-to-investment ratio (SIR), adjusted internal rate of return (IROR), and discounted payback are all methods to measure an HVAC option’s economic performance over time.

Simple payback (years) = (first cost difference) ÷ (annual operating savings cost difference)*

Lifecycle payback (years) = (first cost difference) ÷ (annual operating savings cost difference)**

Net savings (\$) = HVAC base option LCC – HVAC option 1 LCC

SIR = (option 1 net savings) ÷ (option 1 first cost increase)

Adjusted IROR = (average annual operating cost savings)** ÷ (initial investment)

* Does not factor in the time cost of money or maintenance/repair, replacement, or salvage value

** Accounts for time cost of money and maintenance/repair, replacement, and salvage value

What is deemed important?

It is the design professional’s responsibility to understand what is important to the building owner. An owner that has experience with the construction process will provide the owner’s project requirements (OPR) document. Included within the OPR may be the minimum LCC payback and/or adjusted IROR. In the event the owner does not provide an OPR, the engineer will need to survey the stakeholders to gather the project requirements.

The economics of HVAC systems can be broken into two distinct buckets: capital expenditures (CAPX) and operating expenditures (OPEX). Building owners have varying expectations regarding the overall economic impact of HVAC systems. It is safe to say all owners care about CAPX; however, not all owners understand the impact of CAPX on the OPEX. Figure 3 shows the capital construction costs of a new office, hospital, and data center. Figure 4 shows the operating costs of the different energy-consuming systems for an office, hospital, and data center. Figure 5 is a summary sheet for the lifecycle cost analysis (LCCA) of a replacement central utility plant for a health care campus.

There is a balance between CAPX and OPEX for each project. Owners often have a threshold for spending CAPX to gain OPEX. The engineer will need to understand this balance and help the owner make decisions that align with the OPR.

Energy code

At a minimum, the design professional must comply with the adopted local
energy code
. The HVAC systems that meet the energy code are considered the base option. The energy code has evolved and become more stringent so that
brick-and-mortar and HVAC systems have become more interdependent. Simply using R-values without defining the construction materials when performing the energy model will not account for the floor, roof, columns, and envelope material characteristics.

The thermal mass, vapor barrier, and envelope leakage will affect the capacity, configuration, and performance of HVAC systems. Modeling of the HVAC system’s energy consumption and peak demand should not omit the correct brick-and-mortar elements. An HVAC system that does not respond to the material characteristics of a building will underperform. An underperforming HVAC system will have an impact on energy consumption, premature equipment failure, and occupant discomfort.

The right size?

Engineers spend time evaluating the building envelope construction, codes/standards, and OPR impacts to select the appropriate HVAC system configuration. In the early program/schematic design phase, engineers often will use rules of thumb to establish air handling system airflow, chiller plant capacity, and heating plant capacity. As the design of the building program progresses, engineers can start to develop block loads and room-by-room heating/cooling calculations.

Often, the initial HVAC equipment sizes are adjusted to satisfy the engineering-calculated heating/cooling peak demand. At this point, engineers will consider any diversity in operating the HVAC systems to represent real-life occupancy and program schedules. Once again, the HVAC equipment and distribution systems’ capacities can be adjusted. At the end of the design-development phase, updated equipment selections are made and finalized.

So what does this have to do with the economics of HVAC systems? The most direct answer is when the design process is accelerated or altered to omit the refinement of the HVAC systems, the system capacities may end up significantly oversized because they were selected on rule-of-thumb calculations and never adjusted for the refined load calculations and diversity of operation. The impact on the CAPX budget can be significant. The impact on OPEX will be problematic due to the operating limitations of the HVAC equipment. Short-cycling and unsatisfied hours of operation or underperformance of the HVAC system can create early equipment failure, inefficient operation (increasing operating expenses), and occupant discomfort. To assume this oversizing is a safety factor is not a prudent assumption.

Energy-conservation incentives

Utility energy-conservation incentive programs should not be overlooked.
Incentive programs often employ third-party engineers to evaluate annual
energy cost savings of HVAC options. In some utility territories, LCC payback calculations are performed by the local utility company or a third-party engineer hired by the local utility company.

The engineer should check with local natural gas and electric utility providers to see if their project qualifies for an incentive program. In recent years, incentives as large as \$1 million have been paid to owners for implementation of energy-saving measures. Factoring these incentives into LCC analysis could make the difference in selecting a more efficient solution.

Estimating costs

As identified in the LCC equation, the maintenance and repair, energy, water, replacement cost, and salvage cost should be evaluated. All of these costs will vary over the LCC study period. As with any detailed analysis, there are varying degrees of accuracy that can produce varying results. Understanding annual cost escalation (inflation) and the time cost of money (discount rate) should be included in the detailed analysis.

Inflation is an annual adjustment factor that applies to the cost of energy, equipment, and labor. The federal government publishes numerous inflation rates to reflect everything from textiles, large appliances, automobiles, energy, general cost of living, etc. Calculating the impact of inflation is an iterative process and is a subjective factor that can influence the LCC. The longer the LCC analysis period, the more uncertainty is introduced through the compounding of error. An attempt to predict future costs should not be avoided. Rather, the engineer should ensure consistent application of inflation rates for similar future costs.

Just as inflation attempts to predict future cost escalation, the discount rate is used to account for the time cost of money. The discount rate is applied to future costs to represent these costs in present dollars (i.e., present value). Federal projects use the U.S. Department of Commerce National Institute of Standards and Technology (NIST) Energy Price Indices and Discount Factors for Lifecycle Cost Analysis, Supplement to NIST Handbook 135. Privately funded projects use discount rates that represent the interest rate of a loan for the capital investment. In some cases, the discount rate is the difference between the owner investing money in replacing/upgrading HVAC systems or investing in revenue-producing solutions.

Maintenance and repair considerations must include technical support costs that are required for specific HVAC equipment. Understanding what maintenance and repair tasks are needed, and when and how often the maintenance will be performed, will have a direct impact on the accuracy of the LCC. Using the owner’s service contractor for estimating these costs is a viable method of understanding these costs. Another method is to seek this information from a database built from survey data. The Whitestone Facility Operations Cost Reference includes benchmark cost data compiled through building-manager surveys.

Two costs that might not be obvious are unscheduled repair costs and vendor-specific maintenance requirements. The Whitestone Facility Operations Cost Reference includes unscheduled maintenance and repair cost estimates. If the maintenance and repair costs are received from a local contractor, the omission of this expense is more likely to occur.

When guiding the owner to purchase a unique piece of equipment, the additional costs for manufacturer technicians to provide scheduled interval service should be considered. This can be a significant cost that can come as a surprise to the owner. The engineer should remind the owner that skilled technicians are often required for complex equipment.

A lifecycle time period may be dictated by the owner. It is not unusual to choose a 20-year lifecycle study period. Most major HVAC systems will require replacement, major repair, or minor repair during this period. ASHRAE publishes life expectancies of major HVAC equipment. Omitting the replacement cost of the HVAC system in the LCC does not represent true costs of owning the HVAC system. The engineer should include the replacement costs in the year of expected system failure.

A salvage cost is a credit applied to the lifecycle costs. The salvage cost of an HVAC system is rarely included in the LCC. Salvage costs should be included when the owner has an asset-preservation plan that includes fixed-year HVAC equipment replacement that occurs before the expected life of the HVAC system. Salvage costs are difficult to predict. The engineer can discuss resale of aged HVAC equipment with equipment vendors to estimate the salvaged value. The engineer should be cautious when applying this credit and confirm the owner accepts this credit.

Accounting for water usage is similar to energy modeling. The annual consumption is determined and the inflation and discount rate applied to the annual consumption and costs over the lifecycle study period. Once again, omitting these costs does not represent the true costs of the HVAC option. Sanitary and sewer costs also should be considered in the LCC.

Asset preservation, other costs

Asset-preservation programs involve proactively planning and performing maintenance and repair on all assets, not just HVAC systems. The HVAC system can affect the building structure and interior materials. Should the engineer factor in other building assets in the economics of the HVAC system? Quantitatively, maybe. Qualitatively, yes. At a minimum, a discussion with the owner regarding the impact of the HVAC system decision should take place. In the case of a capital-cost-driven decision, lower-cost HVAC systems will not be able to maintain the desired conditions in all scenarios. Capacity control and feedback parameters are often sacrificed in lower-cost HVAC systems. In certain climates, this will cause repair costs of the exterior envelope. These costs should be included if the owner understands this impact and has an active preservation program.

In certain urban municipalities and campuses, district energy (the local utility) is an option for the owner to consider. Evaluating a district energy solution must be compared to onsite central utility plant or onsite distributed energy generation. If the central plant is the base HVAC solution and will be compared to a district energy option, all assets associated with the central utility plant must be included. In addition to the chillers, cooling towers, pumps, piping, boilers, and other supporting HVAC equipment, the costs associated with the central utility plant building and system operators could be included in the annual costs of operation as a fluctuating external factor. Ignoring these factors will skew the results of the LCC comparison. [subhead]

Commissioning

Commissioning of the HVAC system is a systematic process of verifying the HVAC system is operating as it is intended. Commissioning of a newly installed system is often performed formally by a third-party engineer, commissioning provider, or informally by the contractors. Recommissioning is often overlooked. HVAC systems have numerous dynamic components and, similar to an automobile, require adjustments. HVAC systems that fall out of operating tolerances can have an impact on operating costs. Most maintenance and repair schedules do not involve recommissioning. A progressive asset-preservation program should include scheduled recommissioning of the HVAC systems every 3 to 5 years, which might be built into the LCC. Part of the engineer’s process of interpreting the OPR should involve discussions on measuring and reporting of key energy-consumption values to be used for indicating the need for recommissioning. Mission critical HVAC systems may employ predictive analytics to proactively predict failure in an effort to minimize shutdowns and loss.

All aspects of HVAC systems’ costs should be emphasized when evaluating their economic lifecycle. The engineer’s role is to facilitate proactive dialogue with the building owner to establish a protocol for effective decision making. Representing realistic costs is the job of the engineer. Operating costs of HVAC systems include maintenance and repair, energy consumption, and water consumption. Lifecycle operating costs of HVAC systems include replacement, building-asset repair, and salvage credit. All of the operating costs in a lifecycle analysis of two or more HVAC systems options must account for inflation and discount rates. Understanding and representing the economics of HVAC systems is paramount to delivering an exceptional experience.

Paul Dvorak is a senior mechanical, electrical, and plumbing design-phase manager at Mortenson Construction. He has 18 years of experience as an HVAC/plumbing/fire protection design consultant, 5 years as a design-build mechanical contractor, and 3 years as a design-phase manager.