White Paper: Predicting Costs Associated With Uncomfortable Tenants
Understanding How The Indoor Environment Affects Productivity
Communication White Paper by:
Craig Gann
Systems Marketing Manager, Commercial Unitary Systems
Carrier Corporation, Syracuse, NY
This paper will enlighten the reader as to some of the various studies and procedures
that have been undertaken to measure the impacts of human productivity and how changes
in indoor environmental conditions may affect human productivity. Losses in productivity in the work environment results in billions of dollars of losses each year,
therefore it is important to attempt to quantify these effects.
Classical studies such as the "Hawthorne Effect" have been made since the early 1920's
that have shown quantitative effects on worker output when environmental conditions
were changed. Specifically, lighting levels in a manufacturing facility were increased and this was followed by an increase in worker productivity. Lighting levels were
then increased further with another corresponding increase in productivity. When
lighting levels were increased a third time productivity dropped. Researchers concluded that worker productivity rises anytime management shows concern for employees and
drops when management shows disregard for employee complaints and concerns. Actually
many researchers concluded that there is no simple relationship between a single
environmental element and complex human behavior.
A common measure that corporations use today to measure productivity is to divide
output by input, i.e. output in number of units of production or sales; input being
either number of employees or payroll amount. The fallacy of this method is that
you can show temporary increases in productivity, without increasing output, by reducing the
number of employees since this decrease in the denominator of the equation causes
the resultant value to increase.
Measuring productivity of agricultural facilities is rather straightforward; e.g.
number of eggs harvested per day, bushels of grain per acre, etc., however measuring
human productivity is much more difficult. Inherently we all know that changes to
the indoor environment have a direct effect on productivity, however being able to quantify
this effect is the challenge.
Various attempts have been made to measure human productivity in office environments.
Many factors such as thermal comfort, indoor air quality, lighting levels and acoustics
all affect how a worker performs his or her duties. In 1988, BOMA (Building Owners and Managers Association) conducted a telephone survey of 400 executives involved
with space planning and use. The question was asked as to what was their worst operating,
management or design problem. The number one problem, by a factor of 2:1, was the HVAC (heating, ventilating and air conditioning) system at 24.3% followed by elevators
at 12.2%. The survey went on to ask what percent gain in productivity would you
expect to see if these problems were eliminated. Respondents indicated an average
productivity gain of
18%
would be realized if the HVAC system problems were eliminated. Of course, this study
was not very scientific and quite possibly could have been affected by emotions,
however the results cannot be ignored.
Other studies have been performed, such as the one documented in 1986 by Rock Mountain
Institute in Snowmass, Colorado. A Post Office in Reno, Nevada underwent energy-saving
modifications involving changes to the lighting levels as well as architectural changes which made the temperature of the mail sorting area much more stable and controllable.
After modifications, the number of pieces of mail sorted per hour increased by
6%, hence productivity increased at the same rate.
Studies have also been performed at various insurance companies to measure the number
of claims processed before and after modifications to the building were made. In
one case, in West Bend, Wisconsin, individual workstations were installed at each
worker's location that allowed for individual control of temperature, air motion, background
sound levels, and lighting. Researchers estimated that productivity of the workers
increased approximately
2.8%
after the individual controllable workstations were installed. The economic payback
of the individual workstation control systems was estimated at less than two years.
According to some building managers and researchers, productivity gains from selectively
improved workspace conditions may be in the range of
5% to 15%, however more research needs to be conducted in this area to further substantiate
claims.
Unlike productivity, measuring fixed operating costs is very easy to perform in the
working environment. Costs such as rent, utilities, taxes and payroll are easy to
quantify and may be obtained from the accounting department of most companies.
According to 1995 Energy User News statistics, annual average building operating costs
for downtown facilities for various cities throughout the U.S. is shown in Table
1 below.
City
| Rent
($/ft2)
| Utilities
($/ft2)
| Taxes
($/ft2)
| Total Annual
($/ft2)
|
Little Rock
| 11.24 |
2.34 | 0.66
| 14.24 |
Omaha |
13.52 | 2.54
| 1.29 |
17.35 |
Salt Lake City
| 14.17 |
2.00 | 1.19
| 17.36 |
Dallas |
15.49 | 1.51
| 1.71 |
18.71 |
Los Angeles
| 17.81 |
1.84 | 1.93
| 21.58 |
Atlanta
| 18.97 |
1.64 | 1.95
| 22.56 |
Pittsburgh
| 19.55 |
2.39 | 3.13
| 25.07 |
Boston |
25.78 | 2.60
| 4.29 |
32.67 |
Chicago
| 27.88 |
1.62 | 5.96
| 35.46 |
New York
| 34.15 |
3.14 | 5.80
| 43.09 |
Table 1. Building Operating Costs
According to 1991 data from BOMA and EPRI (Electric Power Research Institute) and
the Statistical Abstract of the United States, gross annual mean rent is $21/ft2 for urban commercial office space. Total energy costs were calculated to be $1.80/ft2. If we add another $2.00/ft2 for taxes and another $1.50 for maintenance that brings us to a total annual building
operating cost of $26.30/ft2 as follows:
Rent:
|
$21.00
|
Utilities:
|
$ 1.80
|
Taxes:
|
$ 2.00
|
Maintenance:
|
$ 1.50
|
|
--------------
|
Total Annual:
|
$26.30/ft2
|
These numbers are well within the range indicated in Table 1 above.
According to ASHRAE (American Society of Heating, Refrigerating and Air Conditioning
Engineers), the average occupancy density for commercial office buildings varies
between a maximum of 75 ft2/person for general purpose areas to a minimum of 200 ft2/person for private offices.
Let's assume an average value of 150 ft2/person for a typical office space. Let's also assume that the average white-collar
office worker receives a salary of $15/hr. including benefits. For the typical
2000 hr. work year (8 hr./day X 40 hr./wk.) that equates to an annual salary of $30,000/yr. If we divide the average salary by the average occupancy density we get:

Now perhaps you begin to see where this exercise is taking us. Remember, our average
building operating cost was around $26/ft2. That means that the ratio of employee cost to building operating cost is 7.6 to
1 ($200/$26.30). It also tells us that the ratio of employee cost to the utility
cost is 111 to 1 ($200/$1.80)!
So what if we save 30% on utilities by implementing a new energy-saving device into
the building! In our case that would mean only a savings of $0.54/ft2. Compared to the employee cost of $200/ft2 it's nearly insignificant! Not to say that energy saving modifications are not worth
their investment, many times they are, however once you begin to understand the magnitude
of the costs incurred by the employer for having employees on the payroll do you begin to see why productivity costs are so important. Perhaps this is one reason
that so many companies downsize employees as one of the first ways to reduce overhead
costs.
While we're making assumptions
let's assume that productivity in an office declines by 5% due to poor indoor environment
(temperature, humidity, indoor air quality, etc.). This loss could result in either
increased absenteeism, increased health care claims or simply cause workers discomfort
while they work. What is the cost to the employer for this 5% drop in productivity?
5% of $200/ft2 is $10.00/ft2/yr.
Or over 5 times the cost of utilities! For a 50,000/ft2 building this equates to a net loss of $500,000/yr. So, to form some general rules
of thumb, for office spaces:
Rent costs 10 times as much as utilities!
People cost 10 times as much as rent!
(or)
People cost 100 times as much as utilities!
We could also make the broad statement that:
"Energy saving modifications to the building at the expense of employee productivity
is a losing proposition!"
It has been shown that people are more comfortable in areas that allow them to adjust
their individual space comfort. The popularity of multiple-zoning systems such as
Carrier's VVT (Variable-Volume-Variable-Temperature) System is proof that this is
true. All major manufacturers now offer some type of zoning system to meet this increasing
demand for individualized zone control. More comfortable employees are more productive
employees.
There are many ways to provide better indoor environmental control in a building.
Among the options are:
- Multiple Units (1 unit per zone)
- Variable Air Volume (VAV) Systems
- Zoning Damper Systems
- Proper Air Distribution
- Adequate Air Changes & Filtration
- Adequate Ventilation & Room Air Motion
Let's discuss each of these options briefly.
Multiple Units
- probably the most expensive option from both an installed cost and a maintenance
cost. This also increases the amount of ductwork, electrical and piping required.
Unless redundancy is required, multiple units are probably not the best alternative.
Variable-Air-Volume (VAV) Systems
First introduced by Carrier in the 1960's, VAV systems have proven to be the most
energy-efficient method of providing variable steps of capacity as the cooling and
heating loads change throughout the year. The equipment is generally designed such
that it will provide multiple stages of capacity while the fan modulates it's speed to match
the load that exists in the space. The main disadvantage of VAV systems is their
higher initial cost as compared to constant volume (CV) systems.
Zoning Damper Systems
- These systems usually utilize a single-zone, constant-volume (CV) packaged unit
with duct-mounted, modulating dampers that vary the amount of cooling, heating or
ventilation air that enters the space. These zone dampers are controlled by a thermostat
in each room that indicates the amount of cooling or heating required to satisfy that
room's requirements. For instance, in the cooling mode, if one room needs more cooling
than the other, it's associated zone damper opens further to allow more cool air
to enter the space. Zone dampers serving rooms that need less cooling, because their
thermostat is satisfied, modulate closed. This ensures that air is delivered only
where it is needed with less over-conditioning occurring.
These type systems are very popular for retrofit projects since it is very easy to
install the controls in the existing duct system with little or no modification to
the HVAC unit required.
Zoning systems are probably one of the least expensive options from both a first cost
as well as an operating and maintenance cost standpoint. These systems allow for
remote monitoring of the building through telephone lines and a computer modem.
This allows a service or operating person the ability to troubleshoot or adjust the controls
from a single location without having to physically go to each thermostat and adjust
it.
Carrier introduced the original VVT System in 1981 and it has proven to be the industry
standard to which all other zoning systems are compared.
Proper Air Distribution, Adequate Air Changes, Filtration, Ventilation & Room Air
Motion
- regardless of the system type or controls installed, air that is not adequately
conditioned and distributed into the space properly results in a poor-quality, not
to mention unsatisfactory, installation. As a matter of fact, new building codes
are being driven by issues such as IAQ, Sick Building Syndrome and Building Related Illness.
New design standards are now in effect such as ASHRAE's Standard 62 which requires
designers and operators of buildings to supply adequate amounts of fresh air into
the building and properly distribute that air to dilute or eliminate known indoor contaminants.
Therefore, options 4-6 are really not options, they are requirements that must be
provided regardless of the type of system used.
As the old saying goes, skimping on costs during system selection or installation
may cost the owner or tenant of a building many more times the amount saved on first
cost in operating costs later. Numerous studies have shown that over the useful
life of most HVAC equipment installations, (15-20 yrs.), over 90% of the total owning and
operating costs incurred during that period is attributed to energy costs to run
the equipment rather than the first cost to purchase and install.
How much additional money would we need to spend up-front during the equipment design
or installation phase to ensure a high-quality HVAC system, a system that allows
each occupant the ability to adjust his or her individual space conditions? Calculations have shown that a maximum of 50% additional expenditure is required up-front to get
a high-quality HVAC system over a system that is marginally adequate. Let's put
the pencil to it and stop talking generalities here.
According to 1996 Means® Mechanical Cost Data, the installed cost of the HVAC system is approximately 10%
of the total building construction cost. A typical general purpose commercial building
might cost $80.00/ft2 to build, meaning an average HVAC system might cost $8.00/ft2. If we spent an
additional
50%
($4.00/ft2), for a total of $12.00/ft2, up-front on the HVAC system to achieve much better zone control and could prevent
that 5% loss in productivity from occurring, what would be the return on our investment?
Since we are calculating the ROI (return on our investment) we have to first determine
what our return is. Our return is the benefit we receive by not having the 5% drop
in productivity occur due to poor indoor environmental conditions. For the 50,000
ft2 building in our previous example, the return amount is:

Now let's calculate our investment amount. Is our investment $12/ft2 ? No, we know we have to install some kind of system in the building anyway which
is going to cost us at least $8.00/ft2. Our investment is the amount over-and-above our initial investment, that is the
50% ($4.00/ft2) additional amount. For our example building the total additional investment required
is:

Therefore the return on the investment may now be calculated as follows:

250%!
Where else can you earn that type of return, certainly not with the stock market
or bonds? Especially when you consider the risk involved with speculative investments.
Let's calculate the Simple Payback Period as follows:
True, the above example assumes that the tenant (employer) pays the utility bills
and the building owner pays for the upgrade costs for the HVAC system. In reality
most builders construct buildings for speculative purposes, either to lease-out to
other tenants or to sell to another owner. Therefore, minimizing the first cost of the building
is generally the main priority.
However, building owners have an important stake in the success of the building, that
is how many tenants move-in (occupancy rate) and perhaps just as important, how long
tenants stay in the building. With the overabundance of vacant office space in today's commercial real estate market, tenants have the clear advantage over building owners.
They can shop for nicer facilities and often get a better location for less money.
It's truly a buyers market right now.
According to BOMA, the number one reason tenants move-out of a building is due to
poor quality HVAC systems. If a tenant moves out of a building there are many costs
that the building owner will incur, such as:
- Lost Rent
- Renovation & Refurbishment Costs
- Re-letting Costs (classified ad, real estate commissions)
- Utilities (must keep turned-on to show prospective clients and prevent freezing)
- Concessions (free months rent, reduced rent or other modification)
Let's assume that if the building owner spent the additional $4.00/ft2 and this resulted in a higher-quality building that would retain tenants longer.
In other words, if the building owner could avoid the costs shown above, what would
be the ROI on this investment? Let's make some assumptions regarding today's commercial
office space:
Average time to re-lease space after tenant moves-out
|
4 months
|
Cost to run classified ad for 4 months in local business newspaper
|
$1,000.00
|
Cost of utilities
|
1/2 of normal utility cost for 4 months
|
Cost to remodel space (new carpets, paint, wallpaper, etc.)
|
$1.00/ft2
|
50% off first 6 months rent to attract new tenant
|
Let's do the calculations as follows:

Classified Ad
: $1,000
Utilities
: (50,000 ft2) * ($1.80) * (4/12) * (1/2) = $15,000
Remodeling Cost
: 50,000 ft2 X $1.00/ft2 = $50,000
Reduced rent for 6 mos
.: 50,000 ft2 X $21/ft2 X 6/12 X 1/2 = $262,500
Total Cost to Building Owner = $678,500


Just like the building owner, when tenants move from one building to the next there are associated
costs incurred such as:
- Lost work (productivity) due to employees packing and unpacking items as well as disruption to daily business activities
- Let's assume 2 days to move from old facility and 3 days to move into new facility. This is one week of essentially no output while salary costs are continued to be paid.
- Cost to physically move furnishings. Let's assume $1.00/ft2 for a moving company to physically move furniture, files, etc.
Calculations as follows:
Lost Employee Productivity:

Now we can calculate the ROI as follows:


Let's suppose you are a tenant leasing an existing facility without zone-by-zone control
of the HVAC system. As can be seen from the
100% ROI, it is financially advantageous to upgrade your system to one with much better
control.
According to a NEMI (National Energy Management Institute) prediction, productivity
in the U.S. could rise by
$54.5 billion/year
if all commercial buildings upgraded their HVAC systems to comply with the new ASHRAE
Ventilation Standard 62. For office buildings the ventilation requirement is 20
CFM/person (cubic ft./min./person) of outdoor air. NEMI went on to estimate that
productivity gains alone would recoup all necessary renovation and upgrade costs within
a 2-year payback period.
This same productivity analogy may be applied to other types of facilities besides
office buildings.
Let's look at a school classroom scenario. What are the overall ramifications if
the students are uncomfortable, drowsy because of lack of proper ventilation or cannot
hear the teacher due to a inexpensive HVAC system that produces excessive, unwanted
noise? What if the teacher is uncomfortable? How much would her or his productivity
decrease? And how do you measure the effects of productivity losses to school students?
Maybe their grades will suffer, maybe they will not get that scholarship to Harvard, and not get that CEO position at General Motors! It's difficult to measure these
effects quantitatively, however most people can certainly grasp the concept here.
Here's one way to look at it. According to the 1994 Statistical Abstract of the United
States, per capita spending for public schools was $5,574/student. If we assume
a school classroom contains 30 students, and productivity drops 5% due to poor indoor
environmental conditions or absenteeism what is the resulting cost to the taxpayers
per classroom?

If the average classroom is 40'x30' = 1,200 ft2 and it costs $80/ft2 to build a school classroom that equates to $96,000. If we spent an extra $4.00/ft2 to get the better HVAC system and this created a comfortable learning environment
preventing this 5% drop in productivity from occurring what is the ROI?

Spending the extra money up-front for a high-quality HVAC system is a good investment.
As a matter of fact, each 1% drop in productivity that we can prevent from occurring
will justify an additional $2.00 /ft2 at the initial construction or renovation stage. Returns on investment (ROIs) in
excess of 100% are not uncommon, especially when you consider that the benefits of
the better system last for the life of the equipment, which is often in excess of
15 years.
Advantages For Building Owner:
- Less tenant turnover
- Higher-quality building is more prestigious in the community and may command higher rent than other facilities
Advantages for Tenants
- Increases employee productivity
- Saves operating costs
Advantages for Our Industry
- Improves profitability (fees and gross margins)
- Helps retain customers
We looked at the financial effects of losses in productivity for an office building
and a school classroom. Hopefully this exercise has given you a better understanding
of how the costs related to people are indisputably the highest costs incurred when
operating buildings.
In the past, most activities aimed at reducing costs have focused on energy consumption.
Energy consumption is very important and should be analyzed appropriately in the
proper context of overall cost reduction and efficiency. However, reducing people
costs (by increasing productivity) offers a 100 to 1 advantage in payback over simply
reducing energy costs alone.
Use your own imagination when dealing with productivity issues. Continual research
is being conducted to try to more closely document the effects of productivity caused
by the indoor environment.
If you do not agree with any of the numbers used in any of the assumption calculations
you are welcome to apply your own numbers based on your local conditions.
You can download a Microsoft® Excel® spreadsheet program has been written titled
Productivity Calculator (available as a 'zipped' file as productv.zip) which allows
you to change any of the assumed values used in any of these analyses.
REFERENCES
Abdou, O.A., and H.G. Lorsch, 1994. The impact of the indoor environment on occupant productivity - Part 1: Recent Studies,
Measures and Costs
. ASHRAE Transactions
100(2).
Abdou, O.A., and H.G. Lorsch, 1994. The impact of the indoor environment on occupant productivity - Part 2: Effects of
Temperature
. ASHRAE Transactions
100(2).
Abdou, O.A., and H.G. Lorsch, 1994. The impact of the indoor environment on occupant productivity - Part 3: Effects of
Indoor Air Quality
. ASHRAE Transactions
100(2).
ASHRAE Technical Data Bulletin, Vol. 10, No. 4. Impact of Indoor Environment on Productivity, 1994. American Society of Heating, Refrigerating and Air-Conditioning Engineers,
Inc.; Atlanta, GA
ASHRAE Handbook, 1995: HVAC Applications. Office Buildings Load Characteristics,
p. 3.6. American Society of Heating, Refrigerating and Air-Conditioning Engineers,
Inc.; Atlanta, GA
BOMA. 1988. Office tenant moves and changes
. Washington, DC: Building Owners and Managers Association International
Browning, William D., 1995. Greening The Building and The Bottom Line: Increasing Profits and Productivity Through
Environmentally Responsive Design
. Rocky Mountain Institute, Snowmass, CO. Excerpts from presentation at the Global
Engineering Conference, Vancouver, BC; May 3-5, 1995.
Mean's Mechanical Cost Data - 19th Annual Edition, Copyright 1995, R.S. Means Co.,
Inc., Kingston, MA
U.S. Department of Commerce - Statistical Abstract of the United States 1994. 114th
Edition; p. 168
Office Building Index; Energy User News, Vol. 20, Nos. 3, 4, 5, 7, 8, p. 4. Chilton
Company, Radnor, PA
An edited version of this article is available in the February
issue of Contracting Business Magazine.
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