ASTM E1369-11
(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
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.
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.
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.
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.
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.
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 is that a given investment of know...
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.
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.
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Designation: E1369 − 11
StandardGuide for
Selecting Techniques for Treating Uncertainty and Risk in
the Economic Evaluation of Buildings and Building
1
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.
1. Scope for Investments in Buildings and Building Systems
E1121Practice for Measuring Payback for Investments in
1.1 This guide covers techniques for treating uncertainty in
Buildings and Building Systems
input values to an economic analysis of a building investment
E1185Guide for Selecting Economic Methods for Evaluat-
project. It also recommends techniques for evaluating the risk
ing Investments in Buildings and Building Systems
thataprojectwillhavealessfavorableeconomicoutcomethan
2
E1946Practice for Measuring Cost Risk of Buildings and
what is desired or expected.
Building Systems and Other Constructed Projects
1.2 The techniques include breakeven analysis, sensitivity
2.2 Adjuncts:
analysis,risk-adjusteddiscounting,themean-variancecriterion
DiscountFactorTables Adjunct to Practices E917, E964,
and coefficient of variation, decision analysis, simulation, and
4
E1057, E1074, and E1121
stochastic dominance.
1.3 Thetechniquescanbeusedwitheconomicmethodsthat
3. Terminology
measure economic performance, such as life-cycle cost
3.1 Definitions—For definitions of terms used in this guide,
analysis, net benefits, the benefit-to-cost ratio, internal rate of
refer to Terminologies E631 and E833.
return, and payback.
4. Summary of Guide
2. Referenced Documents
3
2.1 ASTM Standards: 4.1 This guide identifies related ASTM standards and ad-
E631Terminology of Building Constructions juncts. It describes circumstances when measuring uncertainty
E833Terminology of Building Economics and risk may be helpful in economic evaluations of building
E917Practice for Measuring Life-Cycle Costs of Buildings investments.This guide defines uncertainty, risk exposure, and
and Building Systems risk attitude. It presents nonprobabilistic and probabilistic
E964Practice for Measuring Benefit-to-Cost and Savings- techniques for measuring uncertainty and risk exposure. This
to-Investment Ratios for Buildings and Building Systems guide describes briefly each technique, gives the formula for
E1057Practice for Measuring Internal Rate of Return and calculating a measure where appropriate, illustrates the tech-
Adjusted Internal Rate of Return for Investments in niques with a case example, and summarizes its advantages
Buildings and Building Systems and disadvantages.
E1074Practice for Measuring Net Benefits and Net Savings
4.2 Since there is no best technique for measuring uncer-
tainty and risk in every economic evaluation, this guide
concludes with a discussion of how to select the appropriate
1
This guide is under the jurisdiction ofASTM Committee E06 on Performance
technique for a particular problem.
of Buildings and is the direct responsibility of Subcommittee E06.81 on Building
Economics.
4.3 This guide describes in detail how risk exposure can be
Current edition approved Nov. 1, 2011. Published December 2011. Originally
ε2
measured by probability functions and distribution functions
approved in 1990. Last previous edition approved in 2007 as E1369–07 . DOI:
10.1520/E1369-11.
(see Annex A1). It also describes how risk attitude can be
2
For an extensive overview of techniques for treating risk and uncertainty, see
incorporated using utility theory and other approaches (see
Marshall, H.E., Techniques for Treating Uncertainty and Risk in the Economic
Annex A2).
Evaluation of Building Investments,NationalInstituteofStandardsandTechnology,
Special Publication 757, 1988.
3
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
4
Standards volume information, refer to the standard’s Document Summary page on Available from ASTM International Headquarters. Order Adjunct No.
the ASTM website. ADJE091703. Original adjunct produced in 1984.
Copyright © ASTM International, 100 Barr Harbor Drive, PO Box C700, West Conshohocken, PA 19428-2959. United States
1
---------------------- Page: 1 ----------------------
E1369 − 11
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, re
...
This document is not anASTM standard and is intended only to provide the user of anASTM standard an indication of what changes have been made to the previous version. Because
it may not be technically possible to adequately depict all changes accurately, ASTM recommends that users consult prior editions as appropriate. In all cases only the current version
of the standard as published by ASTM is to be considered the official document.
´2
Designation:E1369–07 Designation: E1369 – 11
Standard Guide for
Selecting Techniques for Treating Uncertainty and Risk in
the Economic Evaluation of Buildings and Building
1
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.
1
´ NOTE—Footnotes updated editorially in August 2007.
2
´ NOTE—Section 2.2 and Footnote 5 were editorially corrected and Section 12 was editorially added in January 2009.
1. Scope
1.1 This guide covers techniques for treating uncertainty in input values to an economic analysis of a building investment
project.Italsorecommendstechniquesforevaluatingtheriskthataprojectwillhavealessfavorableeconomicoutcomethanwhat
2
is desired or expected.
1.2 The techniques include breakeven analysis, sensitivity analysis, risk-adjusted discounting, the mean-variance criterion and
coefficient of variation, decision analysis, simulation, and simulation. 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.
2. Referenced Documents
3
2.1 ASTM Standards:
E631 Terminology of Building Constructions
E833 Terminology of Building Economics
E917 Practice for Measuring Life-Cycle Costs of Buildings and Building Systems
E964 Practice for Measuring Benefit-to-Cost and Savings-to-Investment Ratios for Buildings and Building Systems
E1057 Practice for Measuring Internal Rate of Return andAdjusted Internal Rate of Return for Investments in Buildings and
Building Systems
E1074 Practice for Measuring Net Benefits and Net Savings for Investments in Buildings and Building Systems
E1121 Practice for Measuring Payback for Investments in Buildings and Building Systems
E1185 Guide for Selecting Economic Methods for Evaluating Investments in Buildings and Building Systems Guide for
Selecting Economic Methods for Evaluating Investments in Buildings and Building Systems
E1946 Practice for Measuring Cost Risk of Buildings and Building Systems
2.2 Adjuncts:
Discount FactorTables,Adjunct to Practices
4
DiscountFactorTables Adjunct to Practices E917, E964, E1057, E1074, and E1121
3. Terminology
3.1 Definitions—For definitions of terms used in this guide, refer to Terminologies E631 and E833.
1
This guide is under the jurisdiction of ASTM Committee E06 on Performance of Buildings and is the direct responsibility of Subcommittee E06.81 on Building
Economics.
Current edition approved April 1, 2007. Published April 2007. Originally approved in 1990. Last previous edition approved in 2002 as E1369–02. DOI:
10.1520/E1369-07E02.
´2
Current edition approved Nov. 1, 2011. Published December 2011. Originally approved in 1990. Last previous edition approved in 2007 as E1369–07 . DOI:
10.1520/E1369-11.
2
Foranextensiveoverviewoftechniquesfortreatingriskanduncertainty,seeMarshall,HaroldE.—H.E., Techniques for Treating Uncertainty and Risk in the Economic
Evaluation of Building Investments, National Institute of Standards and Technology, Special Publication 757, 1988.
3
ForreferencedASTMstandards,visittheASTMwebsite,www.astm.org,orcontactASTMCustomerServiceatservice@astm.org.For Annual Book of ASTM Standards
volume information, refer to the standard’s Document Summary page on the ASTM website.
4
Available from ASTM International Headquarters. Order Adjunct No. ADJE091703.
4
Available from ASTM International Headquarters. Order Adjunct No. ADJE091703. Original adjunct produced in 1984.
Copyright © ASTM International, 100 Barr Harbor Drive, PO Box C700, West Conshohocken, PA 19428-2959, United States.
1
---------------------- Page: 1 ----------------------
E1369 – 11
4. Summary of Guide
4.1 ThisguideidentifiesrelatedASTMstandardsandadjuncts.Itdescribescircumstanceswhenmeasuringuncertaintyandrisk
may be helpful in economic evaluations of building investments. This guide defines uncertainty, risk exposure, and risk attitude.
It presents nonprobabilistic and probabilistic techniques for measuring uncertainty and risk exposure.This guide describes briefly
each technique, gives the formula for calculating a measure where appropriate, illustrates the techniques with a case example, and
summarizes its advantages and disadvantages.
4.2 Sincethereisnobest
...
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