cost benefit analysis

As the director of business development for a green general contracting firm, I often hear the question, "... but what's it gonna cost me?". Of all the questions I regularly address, that is certainly at the top of the list. Right below "What is LEED?"

The biggest concern among those considering LEED is the costs, and specifically the soft costs. The costs above construction. The "vague" costs. The cost of the unknown.

My standard answer is, "Well, that really depends..." and I still argue that it does. Every project is different and unique like little snowflakes. And each snowflake requires different little snowflake systems and each has it's own little snowflake agendas and ROI expectations on overall snowfall.

The best way to determine what LEED is going to cost for your project is to gather your design and construction team to talk about goals and then talk about potential costs. Though my specialization is commercial properties, I know this holds especially true for residential projects.

Until you have that opportunity, though, let's talk about some historical data on soft costs.

Colorado is ahead of the curve in terms of Green Building and LEED-certified projects, so they have more data to provide. Peter D'Antiono, LEED AP and PE with PCD Engineering Services in Colorado wrote "Cost and Benefits of Commissioning LEED-NC Buildings" which was presented at the May 2007 National Conference on Building Commissioning. Included in this paper are facts from 11 LEED-certified buildings in his state. He detailed their square footage, construction costs, Energy cost savings, LEED cost premium and the net LEED savings. The average square footage was 98,365, with the largest project being 288,685 and the smallest at 10,000 square feet, all of which were commercial or institutional projects.

Here are some of the overall statistics:

• The cost premium for LEED NC certification ranged from 1% to 6% of construction costs.
• Two of the projects noted they were able to achieve LEED certification on schedule and under budget.
• Soft costs, including LEED registration and certification, documentation, energy modeling and commissioning averaged 0.8% of the total construction costs, or average $1 per square foot.
• Documentation was difficult to quantify as the basis for reporting was inconsistent across the projects and ranged from $3000 to $35000.
• Energy modeling averaged around $10000 across nine of the eleven projects. Eight projects fell at or below the $10,000 and one was nearly $35000.
• Small projects averaged higher costs per square foot for energy modeling.
• All the projects averaged 20% or better than ASHRAE 90.1-2004 energy saving requirements.
• The net present value of the energy savings offset all the LEED soft and hard costs in seven of the nine projects reporting energy savings.
• Commissioning averaged $0.55 per square foot and accounted for roughly 60% of the total soft costs. Commissioning costs between $0.19 and $1.50 per square foot

So, there's some unvarnished truth on the cost of building green. Remember, your mileage may vary and these should not be the 'baseline' to quote the price of green. I will point out, though, it's not the 15-25% cost premium often cited by many in the construction and design industry. Seems like we have a ways to go in terms of cost paradigm shift.

Lastly, sometimes it isn't as much about the "cost", it's about the "value". A "cost" for me might be another person's "value". Understanding your green goals and tailoring a solution provides value. The cost isn't an issue if the owner realizes value. That's Sales 101.

Let's start talking about the value of green building.

“Green or environmental accounting describes an effort to incorporate environmental benefits and costs into economic decision making.” - Gernot Wagner

If you didn’t think economic and accounting theory were important in our lives, consider this.

Much of what enters our national model energy codes is a some point filtered through a cost benefit analysis (CBA). CBA’s are subject to the principle of “lies, damn lies, and statistics”, in that much like statistics their end product is subject to underlying assumptions like the future cost of energy and discount rates. For example, the requirements for insulation levels in our codes is decided by cost benefit analysis which mysteriously always results in requirements that correspond to the exact thickness fiberglass batt that can fit into a 2×4 or 2×6 wall cavity or a 2×10 ceiling cavity.

Green, environmental, or social accounting would add in other factors to a CBA such as:

* the cost of air pollution
* the cost of climate change due to greenhouse gas emissions
* the benefit of insuring energy supply security

This would give us a “sustainable” Green CBA methodology that would transform our code requirements.

The EU and even China has already started moving in this direction, but the politics of vested interests have blocked progress in the U.S. Back in 1993 the Bureau of Economic Analysis, the official bookkeeper of the U.S. economy, did began working on a green accounting system called Integrated Environmental and Economic Accounts. However, the initial results released in 1994 showed that GDP numbers were overstating the impact of mining companies to our nation’s economic wealth. Mining companies didn’t like those results, and it didn’t take long for Capitol Hill to react. Alan Mollohan, a Democratic House Representative from West Virginia’s coal country, sponsored an amendment to the 1995 Appropriations Bill that stopped the Bureau of Economic Analysis from working on revising the GDP and that’s where things stand today.

You can imagine Owen Corning’s response to the application of a Green CBA approach to our current insulation requirements. Consider for a moment the effect a carbon tax would have on the our national requirements for insulation. I’ll use Sweden as a model. In an effort to account for the environmental costs of fossils fuels, in 1991 Sweden enacted a carbon tax of $100 per ton (raised to $150 in 1997) CO2 emitted. If the U.S. were to enact a $100/tCO2 carbon tax it would increase the current cost of natural gas by about 75% and the current cost of coal fired electricity by about 70%.

Since the basis for code requirements for insulation are primarily driven by current and projected energy costs, if the social and environmental costs of energy were included in a “green” CBA analysis, model energy code insulation requirements would increase by the order of 70%.

… more on Sustainable Economics

“To understand what sustainable economics is, and why it would be superior to conventional economics, we need to start with a brief recap of conventional economics. I’ll need to go through a number of definitions and distinctions, but this is far more than an academic exercise. The conventional economics concepts I’ll be describing provide the basis on which those in power all over the world (which to some degree includes most of us in the rich industrialized countries) justify the destruction of the Earth. It would be hard to find a more pervasive, pernicious and powerful evil than the seemingly innocent concepts that currently rule our economic lives. Let me be more precise, it is not so much the concepts on their own - they have served an historically useful role. The real evil is the continued dominant use of these concepts long after they have become seriously outdated and destructive. This is indeed the belly of the beast, and until we can replace these concepts with a more Earth-friendly approach, our prospects are grim.” - Robert Gilman