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A new ROI narrative

The future will arrive, as it always does. The question remains — how prepared will we be? There’s a new ROI narrative emerging, and it’s demanding new thinking.

The ROI analysis of the future is far more three dimensional in its approach — presenting the elements of design as interconnected pieces of a living and dynamic puzzle. The drivers of a building’s ROI have also shifted to include aspects that everyone from building owners to occupants can intuit and harness its compound value. The ‘estimated’ (or ‘perceived’) and ‘actual’ costs of constructing a sustainable building can be very different.

Estimated and actual cost premium for green buildings

Source: The Business Case for Green Building, World Green Building Council 2013

Proving value starts at the design phase

Solving the investment conundrum is a key hurdle for Buildings of the Future. Often, initiatives get culled during the schematic design and design development stages because we don’t yet have the necessary financial models to convey the message.

Efficiencies in operations, building practices and response to climate change are at the heart of innovation in the building of the future.”

To solve the investment conundrum, we will need to focus on improving the tools we use to calculate the cost-value equation. We’ll need to develop better metrics to support the business case for Buildings of the Future, and take advantage of government incentives to foster innovation in this field.

The first step in proving the value of an innovation should start at the design stage. This involves working hand in hand with a client to identify which innovations will provide real value and instilling a shared understanding of the vision. For example, space optimisation doesn’t only involve asking “how small can we make the space?” Rather, it involves understanding a client’s future space requirements and the need for flexible design, which will minimise long-term operational costs.

Returns on investment aren’t always financial

Traditionally, when calculating the cost of a building, two factors were taken into consideration: the start-up cost and the cost of construction. Buildings of the Future demand a more robust and full-bodied evaluation of their ROI.

“A holistic approach is needed because everything from operating and maintenance costs, employee comfort and productivity, as well as the building’s ability to attract prospective tenants needs to be considered.”

A holistic ROI package will account for energy savings on operational efficiencies, for example, as well as tax incentives from the resulting utility savings. Employee satisfaction and increased productivity also leads the pay back picture to become much more complex than kilowatt savings alone.

Energy savings have typically been the main financial driver for sustainable buildings (which makes sense, since building automation and integrated control systems can save 10-40% on electricity bills alone). In fact, buildings achieving Green Star certification in Australia have been shown to consume considerably less energy and therefore produce 62% fewer greenhouse gas emissions than average Australian buildings.1 But simply focusing on the hard numbers won’t embrace the full ROI for intelligent design. There’s more to the story than energy savings alone.

Today’s war on talent requires a physical environment that can match its people’s creative and innovative spirit. That’s where the benefits of sensor technologies play out, offering invaluable insight into the way in which people interact with their built environments. Analytics track the effect of air quality, acoustics and natural lighting on employee well-being and productivity. A healthier work environment means less days at home in bed and more time to innovate with engaged colleagues. And the more these interdependencies are understood, the more changes can be made to the overall design of the building which, in turn, boosts staff engagement, customer service, ‘rentability’, while reducing building maintenance.

While these aspects may seem like ‘soft’ benefits because they aren’t always easy to quantify, they carry a very real return on investment.

“According to the Green Building Council of Australia, when Indoor Environmental Quality (IEQ) elements are given good attention, productivity increases by up to 10%. For most businesses, that 10% boost is enough to completely change the game.”2

And the good news is these options apply to existing buildings as much as intelligent ones. The Internet of Things is helping to bring old buildings into the future.

Taking a long-term view of investment is key

Taking a short-term view could lead you to end up with wasted space, inefficient designs and inflexible storeys within your building.

Looking at what is needed today and in the short-term can lead you to miss the disruptors on the horizon (much like Apple’s parking garage). When you consider 75% of a building’s life-cycle cost is operational compared to 25% in the development period, the investment focus should be in the operational phase.

Life-cycle cost of a building
Source: Schneider Electric

Today, legislation can also present significant disruption for those who don't invest in the right tools and methodologies from the outset. The building sector is still lagging behind the implications of buildings becoming micro-energy hubs. The European Commission is currently proposing a voluntary scheme for rating the ‘smart readiness’ of buildings. The scheme, which is expected to be adopted by the end of 2019, will include the development of a Smart Readiness Indicator (SRI) and a methodology to calculate this. The SRI will measure a building’s capacity to use Information Communication Technology (ICT) and electronic systems to optimise operation and interact with the grid.

While it’s true that in the short-term, Buildings of the Future have marginally higher start-up costs (2-6% more expensive than that of traditional buildings), many buildings can boast that ROI is achieved within six months to two years. With focus given to heating, ventilation and air conditioning (HVAC), lighting, and some types of electrical loads, operating costs can be reduced anywhere between 10-50%. Maintenance costs are between 8-12% lower; employee productivity increases by 10%; and landlords can charge 5% more for premium property rentals. All of these statistics offer significant savings down the line and it’s also important to remember, as the cost of new technologies continues to become more affordable, even the initial cost of a Building of the Future will decrease in time.

 Percentage increase in rental premiums for green buildings

Source: The Business Case for Green Building, World Green Building Council 2013

Explore the next chapter – Thinking of designing a building? Forget what you know!

1 World Green Building Council
2 Green Building Council of Australia

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