Access to new capital spending in recent years has been severely limited. Organizations have been understandably cautious about overextending and depleting their resources. Now, as the economic rebound gains momentum, will corporations be strong enough to regain a solid footing?
The answer to that question will depend on what actions they take today. Forward-looking organizations know that it is a strategic advantage to have readily available facility condition information that will enable rapid and decisive action. Gathering the necessary data after the economy starts to boom again will take time and result in critical delays.
Strategic Facilities Capital Planning
Corporations have $4 trillion in property, plant, and equipment on the balance sheet - and 30 to 40 percent of that total is real estate. This capital must be maintained and protected. Managing buildings is usually an organization's second-largest expense, following only employee salaries and benefits.
An organization's business operations are dependent on the building facilities and engineering infrastructure managed and operated by the corporate real estate team. Some corporate real estate teams are becoming increasingly sophisticated about their approach to long-term capital planning and managing their ongoing investment in capital improvements. Successful capital plans - and their effective execution - enable these teams to reduce both risk and cost, provide facilities that are less expensive to operate, promote a better working environment, and better serve the overall organizational goals and objectives.
In this sense, the capital plan needs to be integral to the organization's overall strategic plan, or - at a minimum - capital planning should be carried out in tandem with strategic planning activities. Organizations with strong processes and systems for assessing capital assets, prioritizing capital requirements, and documenting the impact of alternative funding scenarios are best positioned to advance their objectives in a changing global environment.
Gathering the Data
A critical ingredient in developing credible capital plans is the validity of underlying data. Accurate cost and condition information is crucial to the generation of budgets with realistic requirements and quantified deferred maintenance. Without access to detailed information regarding facility condition and lifecycle stage, capital planners cannot sufficiently defend budgets.
The absence of budget credibility is one of the major causes of underfunding. A related challenge involves the need for multiyear planning and forecasting. The development of multiyear capital plans requires predictive tools as well as an understanding of asset lifecycles. Organizations need the ability to run "what-if" funding scenarios to arrive at realistic, optimal multiyear capital plans.
It is crucial for organizations to be proactive about what investments they need to make in their facilities, by understanding:
- What inventory exists in their building portfolio
- What is the existing physical condition of their facilities
- How facilities investments should be prioritized
For organizations with thousands of facilities across the globe, the first step in that process is to categorize the buildings based on business mission, and determine those that are essential to business operations and should be managed as longer-term investments.
With a prioritized building list established, an organization needs to determine the best method for collection of building data. What method it uses may be based on budget, criticality of the function performed within the facilities, location, or other factors. Common methods include asset modeling, surveys of site personnel or facilities staff, and on-site assessments.
In the case of on-site assessments, engineering teams survey the buildings, systems, and infrastructure assets in detail using consistent best practice methodologies. By employing industry cost standards to estimate spending requirements for each suggested improvement, the organization can associate specific dollar amounts with each potential maintenance activity.
Industry-standard data about systems' expected useful life is available from multiple sources, including the Building Owners and Managers Association (BOMA) and the American Society of Heating, Refrigerating and Air-Conditioning Engineers, Inc. (ASHRAE). These data points provide a baseline for assumptions about when a particular piece of equipment, such as a boiler or chiller, will need to be replaced. Lifecycle renewal costs can be a significant percentage of major operational and maintenance expenses, and a detailed understanding of renewal timelines and costs is important to effectively prioritize deferred maintenance requirements and avoid unanticipated spikes in required funding over time.
Benchmarking Facility Condition
Gathering accurate facility data not only makes clear true facility condition, but also provides a metric to analyze the effect of investing in facility improvements. Industrywide, this benchmark is known as the Facility Condition Index (FCI).
The FCI is the ratio of deferred maintenance or problem dollars to replacement dollars, and it provides a straightforward comparison of an organization's key real estate assets. Institutions can also develop similar indices at the systems or building level to help prioritize maintenance activities and capital investments.
To calculate the FCI for a building, divide the total estimated cost to complete deferred maintenance projects for the building by its estimated replacement value. The lower the FCI, the lower the need for remedial or renewal funding relative to the facility's value. For example, an FCI of 0.1 signifies a 10 percent deficiency, and an FCI of 0.7 means that a building needs extensive work or that it needs replacing.
Metrics, such as the FCI, give the corporate real estate team the ability to compare similar buildings to each other across regions, as well as to establish target condition ratings. Comparing buildings analytically also rapidly highlights the buildings that are in the greatest need for updates to finishes, fabric, and other repairs or replacements.
When gathered in a software database, this information provides a complete view of the necessary and recommended maintenance items and their cost for the selected portfolio, as well as the expected replacements for the major building systems (heating, air conditioning, power, etc.). It can then serve as the basis for strategic facilities plans.
Prioritizing Capital Projects
Turning an organization's strategic facilities plan, which often has a five- to 10-year horizon, into an actionable annual budget can be a challenging process. Few organizations are fortunate enough - in any economic state - to be able to fund all the capital requirements they have identified. So the process of prioritization begins, generally, by categorizing identified requirements into major "buckets." These categories typically include major operations and maintenance projects, including system renewal; strategic capital projects, such as construction of a new facility; and mandated projects, such as those involving regulatory compliance. Some funding sources are restricted to certain categories or project levels, while others can fund projects regardless of type.
With projects categorized, organizations must create consistent criteria for evaluating each and a consistent process for applying those criteria. Applying weights based on overall organizational criteria yields a comprehensive picture of how projects should be prioritized for budget allocation. Statistical ranking methods, such as pair-wise comparisons, can be used to facilitate the process, effectively tying requirements to organizational priorities. After each capital request is enumerated individually, all requests for a funding source can be ranked by score.
Using the Data Proactively to Achieve Financial Gain
The capital planning process often identifies opportunities to bundle similar capital projects. Bundling can take multiple forms. An organization may bundle projects based on the building system that is affected. For example, if multiple buildings need roof replacements, grouping these projects together can yield economies of scale that can result in cost and labor savings.
An organization may also choose to bundle projects based on physical location, such as bundling multiple smaller requirements in one building or wing into a larger renovation project to enable an organization to increase efficiency and minimize business interruption. Finally, an organization may choose to bundle projects by the trades involved to take advantage of available staff. This bundling enables the corporate real estate team to obtain better prices for materials and more competitive fees for labor.
When companies have a basis for making informed decisions about project prioritization and capital budget allocation, they are less vulnerable to emergency failures. Emergency repair projects typically result in hefty premiums for labor during non-standard work hours, rushed shipments, and unplanned, but necessary one-off purchases.
It is not uncommon for organizations to purchase duplicate materials or to make purchases on a per site basis rather than buying in bulk. Without the proper planning tools, materials and services are not bid out to multiple vendors, resulting in a lack of competitive pricing. Trying to "do more with less" is a primary goal of most facility managers and asset planners. As budgets are slashed to a fraction of what facility managers require, they are challenged to find ways to address deferred maintenance requirements and capital renewal projects more cost-effectively.
With increased demand for transparency of information, employees are increasingly held accountable for their decisions. Facility managers and capital planners must find ways to automate and streamline all workflow that is associated with the collection, storage, and reporting of facilities and infrastructure condition information, as well as the quantification of deferred maintenance and capital renewal justification. Organizations without consistent assessment methodologies and centralized databases are at greater risk for noncompliance, higher insurance premiums, and overall exposure to liability.
Be Ready for What's Next
During an economic recovery, only organizations that have managed information about their facility assets and leveraged that information in the creation of capital projects, plans, and budgets will remain strong. It is a strategic advantage to have readily available facility condition information that will enable rapid and decisive action. The benefits in cost and strategic outcome will be significant, whereas the financial and functional price of poor facility planning will be painfully high.