January 2010

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Bundles Benefit Both
Bundles should be proactive and created based on the building’s function and the owner’s priorities.

Jeff Bredeson

We all know from personal experience that packaging and bundling can create high value and great purchasing experiences. From a consumer’s perspective, think of how frustrated you can be with a very simple purchase when you get it home just to learn that batteries were not included or the power supply was an “optional purchase”. From a more complex perspective, think of how much more satisfying and value-providing experience you can get by having an expert help you select the right components for a home theatre purchase. By bundling at the store, you are ensured to get components that integrate easily, work well together and offer you the best in performance based on your definition of that term.

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On the other side of this equation is the fear of “getting ripped off” by a slick sales person who is pushing a bundled solution to avoid competition, and, by doing so, increasing his margin and commission at your expense. The best example of this is when you are buying a new car and the sales person tries to sell you the undercoating, the special paint, etc (think of the movie Fargo). Or, when you are at the electronics store and the sales person is really pushing you on the extended warranty, which, you know he / she is being highly incentivized on.

There are two perspectives to bundling that we should consider:

1. Financial Perspective for the Procurement Professional
    a. Initial costs advantages of bundles
    b. TCO advantages of bundles
2. Human Productivity Perspective for the Manager or Building Owner

Financial Perspective to Bundling

As a person who has been selling HVAC equipment, building controls and Fire/Security solutions for the past 20 years, I believe that am qualified to lead in this discussion. In the construction industry we have two conversely opposed viewpoints on this topic. On one hand we have the End User who benefits directly from Integrated, fit for purpose solutions that provide him with Total Cost of Ownership (TCO) savings (Initial Cost + Life Cycle Operational Cost = Total Cost of Ownership). This reduced TCO could be due to reduced energy spend, reduced staffing cost, etc. On the other hand we have the Procurement Department who is incentivized on Initial Cost savings without regard to TCO and the Contractors who are paid to commoditize each component in the value chain.

The fact is that when you focus on Initial cost (Procurement or Contractor approach), then you get the cheapest, individual technology available within the specification. So, when a contractor faxes out a specification for a new Air Handling Unit, what he / she gets back is the best market price available on that day for the specified product from the three to five vendors who choose to respond. At the same time, another contractor will be faxing out a specification for a Control system and another for a Security system. Each of the companies that win these bids will do as little as possible to meet the spec….guaranteed. This is because they all quoted the lowest price possible for their technology, so they have to deliver it and get it installed very cheaply, so they can make some money. You will likely get a warranty on the individual solutions (based on the spec), but you will not get any guarantees that these individual components will work together, which is exactly what you need to have your building function efficiently and effectively.

Look, it’s an accepted fact that the initial cost of the building only represents 15-25% of the total cost of the building over its life cycle (see Figures 1 and 2). Independent studies have been executed and published by ASHRAE and BOMA (as well as others) on this topic, so if we can accept these results as facts, then that leaves 75-85% of the life cycle cost of the building (range based on building use…production facilities may have a higher initial cost due to high equipment and automation cost) to be derived from operating and maintaining the building over its 30 year life. So, a new building that costs $1,000,000 to build will cost $3,000,000 to operate and maintain over the next 30 years (at the 25% / 75% ratio).

 Figure 1 – BOMA Life Cycle Graph
Figure 1 – BOMA Life Cycle Graph

Figure 2 – BOMA Opex Spend
Figure 2 – BOMA Opex Spend

So, how will bundles help me lower my TCO? Good question… the key result in bundled solutions should be buildings that have integrated technologies that communicate effectively and derive information from data, which, when handled correctly, should provide reduced operation cost. One of the highest operational costs these days is energy (based on a recent customer survey by Johnson Controls, XX% of building owners say that energy conservation is critical to their success). An integrated solution for an office building should, at a minimum, include high efficiency equipment (AHU, Chillers, Boilers, etc) with open protocol Factory Packaged Controls integrated to the open protocol building control system. The reason that I stress Factory Packaged Controls is that this will reduce the initial cost of the controls (since they are pre-engineered and mounted in the factory) while the open protocol will ensure integration to the building control system. Included in the bundle specification should be an integration section that indicates the appropriate level of system integration. Finally, in this day and age, every building should have a fit for purpose Energy Management application included with the Control System. This Energy Management application should include Energy Monitoring and Reporting capabilities, as well as, Fault Detection and Diagnosis capabilities. The Energy Monitoring and Reporting package will allow the owner to understand their “As Is” condition which is critical to making good decisions. The Fault Detection and Diagnosis (FDD) application performs Continuous Commissioning on the energy-hungry equipment in the building, keeping it in line with operating industry benchmarks and baselines. In addition to the potential energy savings, the FDD will also allow the owner to perform and prioritize maintenance on equipment “on-demand” rather than based on schedules, which will save money.

Efficient equipment + integrated control systems w/ Energy Monitoring = reduced Operating Cost

Efficient equipment + integrated control systems w/ Energy Monitoring = reduced Operating Cost

In the more traditional approach, we would have 5 vendors supplying their solutions without any regard to how the system works after it is installed, or how much it costs to operate after it is installed. You would have the following:

•  a vendor that supplies AHUs and air distribution equipment (terminal boxes, etc)
•  a vendor that supplied Chillers
•  a vendor that supplied Boiler
•  a vendor that supplied a Control System
•  a vendor that supplied an Energy Management application (not likely)
•  contractors installing it as cheaply as possible

All this would be happening in parallel and no vendor would be responsible for integration and overall Building System Operational Efficiency (BSOE).

In the modern (TCO) approach, you will likely have one vendor working with the owner’s consultant to specify the right, proactive bundle for the building. Then that same vendor can be contracted directly by the owner (Technology Contract), by the General Contractor or several mechanical / electrical contractors. If the owner is sensitive to cost issues (which most, if not all, are), then the right approach would be to write one contract direct with the owner. This offers several benefits for the owner:

1.  maximizes accountability to the ultimate customer
2.  allows End User to control incentives and penalties
3.  minimizes contracting costs (one contract rather than 5 or more)
4.  minimizes project management costs (1 vendor running one project vs 5 vendors all with their own project manager)
5.  minimizes resource mobilization costs (again 1 vendor mobilizing once rather than 5)

Human Element Perspective to Bundling

So, the previous paragraphs really addressed bundles from a financial perspective. This is the one that seems most discussed and controversial in the industry today. However, there is another argument that should be addressed. If we look at the building as a whole and apply the right bundle to maximize the value of the building to its owner AND inhabitants, then this would create a slightly different picture. The owner, as we have established, is primarily concerned with making money in his/her building. However, he / she is also interested in what the building says about him / her and how it affects the reputation of the company or the individual. We can call this Image. A good building owner is also interested in the happiness of its occupants. This is true whether it is a tenant-occupied building or a dedicated company building. In the case of a tenant-occupied building, the tenants will be willing to pay more for a building that gives them a sense of satisfaction and productivity. From a dedicated company occupied building, the company benefits from a more productive and loyal workforce.

Reliable Controls In this scenario, we would still want to address the operating cost issues and provide all the capabilities mentioned previously in this paper. However, in addition to that, we would want to provide technologies that could increase productivity within the building and/or make the building more livable. This would include things like the following:

1.  integrated access control and security systems (allows multiple decisions to be made based on card presentation)
2.  integrated fire alarm systems (increased safety for inhabitants)
3.  SmartCard technologies (provides a “cashless” lifestyle within the building)
4.  Green technologies to reduce the building’s impact on the environment (Image)
5.  Renewable energy solutions (cost and Image)

As virtual employees and virtual offices become more and more popular, we are presented with handling building space usage issues through technology. Let’s take an example of a virtual employee who has some meetings in the office today (let’s name the employee Emily). Emily is a virtual employee, which means that she typically works from home and, as such, does not have any assigned office space within the building. However, today she is coming to the HQ building because she has some internal meetings and meetings with customers. As Emily approaches the building, she will present her Access Control SmartCard at the parking gate for entrance to the employee parking. Once the system identifies her as an employee and opens the gate, it also recognizes that she is a virtual employee that is coming to the office. Since Emily sent the building system an email yesterday outlining her schedule, the system knows that she will need an office that can accommodate multiple people. Based on her needs, the system assigns Emily an office with a door and conference table for her meetings. Emily sits in the car for 30 minutes finishing a conversation with a client and then makes her way to the door. Once at the entrance she again presents her SmartCard for ingress into the building. The system again recognizes her and realizes that she is now physically entering the space, so, as it knows the office that was assigned to her, it activates the lighting down the corridors to her office and activates the HVAC system and lighting in her office (the lighting and HVAC are motion controlled, but need to be activated prior to allowing the motion sensor to turn things on). She gets on the elevator and presents her SmartCard once again and the floors that she is authorized to visit light up. Once she enters the office, the HVAC and lighting enter the occupied mode and come on. She then walks to the café to get a coffee and croissant. At the pay station, she simply presents her SmartCard to pay (if she has credit on it, then it accepts…or the company can set it up to allow a certain amount of monthly credit that will be auto deducted from her paycheck). When her customers arrive at the building, they are assigned visitor badges that are associated with Emily, so she is automatically called by the System to indicate that the customers have arrived.

Some of these decisions require Enterprise level integrations, so be sure that your Technology Supplier can communicate up to the ERP level before requesting this level of integration.

Figure 4 – Frost & Sullivan Bright Green Building
Figure 4 – Frost & Sullivan Bright Green Building

So, you see that system integration can really make a building very livable, but what are the advantages to the owner? Well, what about the following:

1.  reduced floor space due to the ability to assign flex offices
2.  reduced energy consumption due to Access Initiated HVAC and Lighting
3.  increased security and safety
4.  increased productivity due satisfied employees

See Figure 5 for a more graphical view of the integrated building.

Figure 5 – Graphical View of Integrated Building Advantages
Figure 5 – Graphical View of Integrated Building Advantages

There are many reasons why bundles offer value to both the End User and the Technology supplier. At the end of the discussion, bundles should be proactive and created based on the building’s function and the owner’s priorities. And, at the end of the day, Bundles Benefit Both!

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