Measuring Economic Performance

Abstract

Traditional economic methods--life-cycle costing, benefit-to-cost ratio, net benefits, adjusted internal rate of return, and discounted payback--are described for evaluating building decisions about accepting or rejectinga given building investment, the economically efficient design or size of a building, and the economically efficient combination of projects competing for a limited budget. Appropriate applications for each economic method are described. Technically correct formulas for the methods are presented. These economic methods are often applied using best-guess estimates of project input variables as if they were certain values. Such applications generate single-value, deterministic answers which provide decision makers insufficient information to know their economic risk exposure. Techniques are described that to some extent account for uncertainty in input variables and in some cases risk exposure and risk attitude. The techniques are sensitivity analysis, risk-adjusted discounting, decision analysis, simulation, and portfolio analysis. Advantages and disadvantages of each are described. Additional research is recommended for providing better methods, improving databases, and incorporating risk attitude in evaluating risky projects. A standard practice is needed for measuring uncertainty and risk associated with building investments.