ASTM E1369-15(2020)e1
(Guide)Standard Guide for Selecting Techniques for Treating Uncertainty and Risk in the Economic Evaluation of Buildings and Building Systems
Standard Guide for Selecting Techniques for Treating Uncertainty and Risk in the Economic Evaluation of Buildings and Building Systems
SIGNIFICANCE AND USE
5.1 Investments in long-lived projects such as buildings are characterized by uncertainties regarding project life, operation and maintenance costs, revenues, and other factors that affect project economics. Since future values of these variable factors are generally not known, it is difficult to make reliable economic evaluations.
5.2 The traditional approach to project investment analysis has been to apply economic methods of project evaluation to best-guess estimates of project input variables as if they were certain estimates and then to present results in single-value, deterministic terms. When projects are evaluated without regard to uncertainty of inputs to the analysis, decision-makers may have insufficient information to measure and evaluate the risk of investing in a project having a different outcome from what is expected.
5.3 Risk analysis is the body of theory and practice that has evolved to help decision-makers assess their risk exposures and risk attitudes so that the investment that is the best bet for them can be selected.
Note 1: The decision-maker is the individual or group of individuals responsible for the investment decision. For example, the decision-maker may be the chief executive officer or the board of directors.
5.4 Uncertainty and risk are defined as follows. Uncertainty (or certainty) refers to a state of knowledge about the variable inputs to an economic analysis. If the decision-maker is unsure of input values, there is uncertainty. If the decision-maker is sure, there is certainty. Risk refers either to risk exposure or risk attitude.
5.4.1 Risk exposure is the probability of investing in a project that will have a less favorable economic outcome than what is desired (the target) or is expected.
5.4.2 Risk attitude, also called risk preference, is the willingness of a decision-maker to take a chance or gamble on an investment of uncertain outcome. The implications of decision-makers having different risk attitudes i...
SCOPE
1.1 This guide covers techniques for treating uncertainty in input values to an economic analysis of a building investment project. It also recommends techniques for evaluating the risk that a project will have a less favorable economic outcome than what is desired or expected.2
1.2 The techniques include breakeven analysis, sensitivity analysis, risk-adjusted discounting, the mean-variance criterion and coefficient of variation, decision analysis, simulation, and stochastic dominance.
1.3 The techniques can be used with economic methods that measure economic performance, such as life-cycle cost analysis, net benefits, the benefit-to-cost ratio, internal rate of return, and payback.
1.4 This international standard was developed in accordance with internationally recognized principles on standardization established in the Decision on Principles for the Development of International Standards, Guides and Recommendations issued by the World Trade Organization Technical Barriers to Trade (TBT) Committee.
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Standards Content (Sample)
This international standard was developed in accordance with internationally recognized principles on standardization established in the Decision on Principles for the
Development of International Standards, Guides and Recommendations issued by the World Trade Organization Technical Barriers to Trade (TBT) Committee.
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Designation: E1369 − 15 (Reapproved 2020)
Standard Guide for
Selecting Techniques for Treating Uncertainty and Risk in
the Economic Evaluation of Buildings and Building
Systems
This standard is issued under the fixed designation E1369; the number immediately following the designation indicates the year of
original adoption or, in the case of revision, the year of last revision.Anumber in parentheses indicates the year of last reapproval.A
superscript epsilon (´) indicates an editorial change since the last revision or reapproval.
ε NOTE—Adjunct title and stock number in 2.2 were updated editorially in April 2020.
1. Scope E917Practice for Measuring Life-Cycle Costs of Buildings
and Building Systems
1.1 This guide covers techniques for treating uncertainty in
E964Practice for Measuring Benefit-to-Cost and Savings-
input values to an economic analysis of a building investment
to-Investment Ratios for Buildings and Building Systems
project. It also recommends techniques for evaluating the risk
E1057Practice for Measuring Internal Rate of Return and
thataprojectwillhavealessfavorableeconomicoutcomethan
2 Adjusted Internal Rate of Return for Investments in
what is desired or expected.
Buildings and Building Systems
1.2 The techniques include breakeven analysis, sensitivity
E1074Practice for Measuring Net Benefits and Net Savings
analysis,risk-adjusteddiscounting,themean-variancecriterion
for Investments in Buildings and Building Systems
and coefficient of variation, decision analysis, simulation, and
E1121Practice for Measuring Payback for Investments in
stochastic dominance.
Buildings and Building Systems
E1185Guide for Selecting Economic Methods for Evaluat-
1.3 Thetechniquescanbeusedwitheconomicmethodsthat
measure economic performance, such as life-cycle cost ing Investments in Buildings and Building Systems
E1946Practice for Measuring Cost Risk of Buildings and
analysis, net benefits, the benefit-to-cost ratio, internal rate of
return, and payback. Building Systems and Other Constructed Projects
E2204Guide for Summarizing the Economic Impacts of
1.4 This international standard was developed in accor-
Building-Related Projects
dance with internationally recognized principles on standard-
2.2 ASTM Adjunct:
ization established in the Decision on Principles for the
Discount Factor Tables - Adjunct to E917 Practice for
Development of International Standards, Guides and Recom-
Measuring Life-Cycle Costs of Buildings and Building
mendations issued by the World Trade Organization Technical
Systems - Includes Excel and PDF Files
Barriers to Trade (TBT) Committee.
3. Terminology
2. Referenced Documents
3.1 Definitions—For definitions of general terms related to
2.1 ASTM Standards:
building construction used in this guide, refer to Terminology
E631Terminology of Building Constructions
E631; and for general terms related to building economics,
E833Terminology of Building Economics
refer to Terminology E833.
4. Summary of Guide
This guide is under the jurisdiction ofASTM Committee E06 on Performance
of Buildings and is the direct responsibility of Subcommittee E06.81 on Building 4.1 This guide identifies related ASTM standards and ad-
Economics.
juncts. It describes circumstances when measuring uncertainty
Current edition approved April 1, 2020. Published May 2020. Originally
and risk may be helpful in economic evaluations of building
approved in 1990. Last previous edition approved in 2015 as E1369-15. DOI:
investments.This guide defines uncertainty, risk exposure, and
10.1520/E1369-15R20E01.
For an extensive overview of techniques for treating risk and uncertainty, see
risk attitude. It presents nonprobabilistic and probabilistic
Marshall, H. E., Techniques for Treating Uncertainty and Risk in the Economic
techniques for measuring uncertainty and risk exposure. This
Evaluation of Building Investments,NationalInstituteofStandardsandTechnology,
guide describes briefly each technique, gives the formula for
Special Publication 757, 1988.
For referenced ASTM standards, visit the ASTM website, www.astm.org, or
contact ASTM Customer Service at service@astm.org. For Annual Book of ASTM
Standards volume information, refer to the standard’s Document Summary page on Available from ASTM International Headquarters. Order Adjunct No.
the ASTM website. ADJE091717-EA. Original adjunct produced in 1984.Adjunct last revised in 2003.
Copyright © ASTM International, 100 Barr Harbor Drive, PO Box C700, West Conshohocken, PA 19428-2959. United States
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E1369 − 15 (2020)
havedifferentdegreesofriskaversionandtotheatypicalcasewheresome
calculating a measure where appropriate, illustrates the tech-
investors are risk taking while others are risk averse.
niques with a case example, and summarizes its advantages
and disadvantages. 5.5 Nosingletechniquecanbelabeledthebesttechniquein
every situation for treating uncertainty, risk, or both. What is
4.2 Since there is no best technique for measuring uncer-
best depends on the following: availability of data, availability
tainty and risk in every economic evaluation, this guide
of resources (time, money, expertise), computational aids (for
concludes with a discussion of how to select the appropriate
example, computer services), user understanding, ability to
technique for a particular problem.
measure risk exposure and risk attitude, risk attitude of
4.3 This guide describes in detail how risk exposure can be
decision-makers, level of risk exposure of the project, and size
measured by probability functions and distribution functions
of the investment relative to the institution’s portfolio.
(see Annex A1). It also describes how risk attitude can be
6. Procedures
incorporated using utility theory and other approaches (see
Annex A2).
6.1 The recommended steps for carrying out an evaluation
of uncertainty or risk are as follows:
5. Significance and Use
6.1.1 Determine appropriate economic measure(s) for
evaluating the investment (see Guide E1185).
5.1 Investments in long-lived projects such as buildings are
6.1.2 Identify objectives, alternatives, and constraints (see
characterized by uncertainties regarding project life, operation
Practices E917, E964, E1057, E1074, and E1121).
and maintenance costs, revenues, and other factors that affect
6.1.3 Decide whether an uncertainty and risk evaluation is
projecteconomics.Sincefuturevaluesofthesevariablefactors
needed, and, if so, choose the appropriate technique (see
are generally not known, it is difficult to make reliable
Sections 5, 7, 8, and 10).
economic evaluations.
6.1.4 Compile data and establish assumptions for the evalu-
5.2 The traditional approach to project investment analysis
ation.
has been to apply economic methods of project evaluation to
6.1.5 Determine risk attitude of the decision-maker (see
best-guess estimates of project input variables as if they were
Section 7 and Annex A2).
certain estimates and then to present results in single-value, 5
6.1.6 Compute measures of worth and associated risk (see
deterministic terms. When projects are evaluated without
Sections 7 and 8).
regardtouncertaintyofinputstotheanalysis,decision-makers
6.1.7 Analyze results and make a decision (see Section 9).
may have insufficient information to measure and evaluate the
6.1.8 Document the evaluation (see Section 11).
risk of investing in a project having a different outcome from
7. Techniques: Advantages and Disadvantages
what is expected.
7.1 This guide considers in detail three nonprobabilistic
5.3 Risk analysis is the body of theory and practice that has
techniques (breakeven analysis, sensitivity analysis, and risk-
evolvedtohelpdecision-makersassesstheirriskexposuresand
adjusted discounting) and four probabilistic techniques (mean-
riskattitudessothattheinvestmentthatisthebestbetforthem
variance criterion and coefficient of variation, decision
can be selected.
analysis, simulation, and stochastic dominance) for treating
NOTE 1—The decision-maker is the individual or group of individuals
uncertainty and risk. This guide also summarizes several
responsible for the investment decision. For example, the decision-maker
additional techniques that are used less frequently.
may be the chief executive officer or the board of directors.
7.2 Breakeven Analysis:
5.4 Uncertainty and risk are defined as follows. Uncertainty
7.2.1 When an uncertain variable is critical to the economic
(or certainty) refers to a state of knowledge about the variable
success of a project, decision-makers frequently want to know
inputstoaneconomicanalysis.Ifthedecision-makerisunsure
the minimum or maximum value that variable can reach and
of input values, there is uncertainty. If the decision-maker is
still have a breakeven project; that is, a project where benefits
sure, there is certainty. Risk refers either to risk exposure or
(savings) equal costs. For example, the breakeven value of an
risk attitude.
input costvariable is the maximum amount one can afford to
5.4.1 Risk exposure is the probability of investing in a
pay for the input and still break even compared to benefits
project that will have a less favorable economic outcome than
earned. A breakeven value of an input benefitvariable is the
what is desired (the target) or is expected.
minimum amount the project can produce in that benefit
5.4.2 Risk attitude, also called risk preference, is the will-
category and still cover the projected costs of the project.
ingness of a decision-maker to take a chance or gamble on an
investmentofuncertainoutcome.Theimplicationsofdecision-
NOTE 3—Benefits and costs are treated throughout this guide on a
makershavingdifferentriskattitudesisthatagiveninvestment
discounted cash-flow basis, taking into account taxes where appropriate.
(See Practice E917 for an explanation of discounted cash flows consid-
of known risk exposure might be economically acceptable to
ering taxes.)
an investor who is not particularly risk averse, but totally
unacceptable to another investor who is very risk averse.
The NIST Building Life-Cycle Cost (BLCC) Computer Program helps users
NOTE 2—For completeness, this guide covers both risk averse and risk
calculate measures of worth for buildings and building components that are
takingattitudes.Mostinvestors,however,arelikelytoberiskaverse.The consistent with ASTM standards. The program is downloadable from http://
principles described herein apply both to the typical case where investors energy.gov/eere/femp/building-life-cycle-cost-programs.
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E1369 − 15 (2020)
7.2.2 To perform a breakeven analysis, an equation is nomic analysis for each of the three values to see how the
constructed wherein the benefits are set equal to the costs for a outcome changes as they change, with other things held the
given investment project, the values of all inputs except the same.
breakeven variable are specified, and the breakeven variable is
7.3.2 Sensitivity analysis also applies to different combina-
solved algebraically.
tionsofinputvalues.Thatis,alterseveralvariablesatonceand
7.2.3 Suppose a decision-maker is deciding whether or not
then compute a measure of worth. For example, one scenario
to invest in a piece of energy conserving equipment for a
might include a combination of all pessimistic values, another
government-owned building. The deviation of the formula for
all expected values, and a third all optimistic values; or a
computing breakeven investment costs for the equipment is as
combination might include optimistic values for some vari-
follows:
ables in conjunction with pessimistic or expected values for
others. Examining different combinations is required if the
S 5 C (1)
uncertain variables are interrelated.
C 5 I1O&M1R
7.3.3 The following illustration of sensitivity analysis treats
an accept/reject decision. Consider a decision on whether or
S 5 I1O&M1R
not to install a programmable time clock to control heating,
ventilating, and air conditioning (HVAC) equipment in a
I 5 S 2O&M 2 R
building. The time clock reduces electricity consumption by
where:
turning off that part of the HVAC equipment that is not needed
S = savings (benefits) in reduced energy costs from
during hours when the building is unoccupied. Using the
using the equipment,
benefit-to-cost ratio (BCR) as the economic method, the time
C = all costs associated with the equipment,
clock is acceptable on economic grounds if its BCR is greater
I = initial investment costs of the equipment,
than 1.0. The energy reduction benefits from the time clock,
O&M = operation and maintenance costs of the equipment,
however,areuncertain.Theyareafunctionofthreefactors:the
and
initial price of energy, the rate of change in energy prices over
R = replacement costs required to keep the equipment
the life cycle of the time clock, and the number of kilowatt
functional over the study period, and where all cost
hours saved. Assume that the initial price of energy and the
and benefit cash flows are discounted to present
number of kilowatt-hours saved are relatively certain, and that
values.
the sensitivity of the BCR is being tested with respect to the
7.2.4 By rearranging terms, the breakeven investment un-
following three values of energy price change: a low rate of
known is isolated on the left side of the equation. Substitution
energypriceescalation(slowlyincreasingbenefitsfromenergy
of known values for the terms on the right side allows the
savings); a moderate rate of escalation (moderately increasing
analyst to solve for the breakeven value. For example, if S
benefits); and a high rate of escalation (rapidly increasing
=$20000, O&M=$2500, and R=$1000,
benefits). These three assumed values of energy price change
then
might correspond to our projections of pessimistic, expected,
andoptimisticvalues.ThreeBCRestimatesresultfromrepeat-
I 5$20000 2$2500 2$1000 (2)
ing the BCR computation for each of the three energy price
or
escalation rates. For example, BCRs of 0.8, 2.0, and 4.0 might
result.Whereasadeterministicapproachmighthavegenerated
I 5$16500 (3)
a BCR estimate of 2.0, now it is apparent that the BCR could
7.2.5 This means that $16500, the breakeven value, is the
besignificantly less than 2.0, and even less than 1.0. Thus
maximum amount that can be paid for the energy-conserving
accepting the time clock could lead to an inefficient outcome.
equipment and still recover all costs through energy savings.
7.3.4 There are several advantages of sensitivity analysis.
7.2.6 An advantage of breakeven analysis is that it can be
First, it shows how significant a single input variable is in
computed quickly and easily with l
...
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