Reducing Facilities Risk: Five Indicators that Frame Future Exposures

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1 Reducing Facilities Risk: Five Indicators that Frame Future Exposures

2 Reducing Facilities Risk Five Indicators that Frame Future Exposures Exposing your campus to higher levels of risk through increased annual maintenance deferrals, growing project backlogs, and in some cases, decreased organizational capacity translates to greater likelihood of facilities failures, program interruption, and decreased market position. To remain competitive, college and university leaders need to be more strategy-minded to maximize the value of dollars invested and avoid the most serious facilities exposures. Thankfully, there are five simple risk indicators that finance and facilities officers can examine to help identify the largest exposures at their institutions and begin making a plan to minimize their risk based on current and future investment levels. 1. Age Profile One of the most valuable indicators of pending facilities needs is the age profile of buildings and components. For most campuses, understanding the percentage of space that falls into certain categories (such as younger than 10 years old, between years, between years, and over 50 years old) is a simple and important indicator of your risk profile. However, examining your campus profile within the context of construction era is also important. As an industry, we have simply constructed buildings differently over time due to architectural trends and technical complexity of Sightlines database highlights the distribution of the age profile of campus space. The chart shows the majority of space (69%) is buildings older than 25 years of age. Through renovation, institutions have been able to lower the effective age of their buildings to 55%. systems. To fully understand your risk profile and the drivers for current investment decisions, the era of construction is often even more helpful in explaining the intersection of component, repair, renovation, and modernization requirements. Viewing your campus profile in this way will help you anticipate the risk and likelihood of failure to avoid emergency repairs. Five Indicators that Frame Future Exposures 2

3 2. Annual Stewardship/Deferral Rate One of the questions we continually help our member institutions answer is, How much should I be investing in my facilities annually? The answer needs to be something more specific than three percent of replacement value per year. This question is crucial to the long-term facilities health of the institution, but so is the inverse: How much should I be deferring every year? In order to anticipate major building projects, gifts, and new space, it s important to defer some maintenance in order to get the most value from precious capital. However, it is important to not take future funding for granted and let deferrals get out of control. You want to keep track of how much you are investing annually, how much you are adding to that deferred maintenance backlog, and your ability to coordinate repair needs with modernization investments that address functional obsolescence. Make sure that the project plan, or lack thereof, does not create a liability that will be hard to mitigate in the years to come. The chart above shows a sample institution s spending into their existing space through annual stewardship (AS) and asset reinvestment (AR), blue bar and green bar respectively, from 2004 to The two lines represent targets for AS and AR. In years when this institution spent less than their target, say 2006, the backlog and facilities risk increased. In 2005, spending levels helped this institution reduce their risk, and in 2009, they surpassed their targets, which increases the net asset value of campus. Since 2007, on average, public institutions have increased their spending into envelope and building systems, while private institutions have maintained their spending in this category. Five Indicators that Frame Future Exposures 3

4 3. Facilities Project Mix In finance, investment diversity is important to avoiding risk. Facilities management is no different. In fact, one of the best indicators of future risk is past diversity. We suggest that schools measure facilities investment among discrete project packages and examine the distribution. For most institutions, a breakdown among building envelope, building systems, infrastructure, space renewal, and safety/statutory is sufficient. The key concept is balance over time. Historical investments should balance the backlog of needs, lifecycle requirements, and mission. Unfortunately, this balance is often hard to facilitate and project selection can tend to skew towards particular packages. At many schools, space renewal receives much of the focus until a major mechanical system or envelope reaches a crisis point. Be proactive and use your historical project mix to advocate for projects that don t have a champion. A good practice is to treat the capital budget as a multi-year program in order to avoid alienating departments whose project requests do not make the cut for the current allocation. Having a five-year budget separated by package also gives campus administrators the ability to anticipate when approval of major repairs can be expected. 4. Work Order Hot Spots The pie chart on the left shows the historical investment level of a college in our database over a 3-year period. The majority of their spending went towards space renewal. When their 3-5 year needs were analyzed (right pie), this institution was shown that 63% of their spending should be allocated to building systems. This indicated a need to shift priorities in order to make the most of their capital dollars. Many schools have implemented computerized maintenance management systems (CMMS) as a means to manage work order submission and completion. These systems take different shapes, from fully deployed enterprise systems that integrate with financial platforms and payroll to much simpler web-based SAAS solutions. Any system a school chooses will give it greater workflow management and reporting ability than in the past. One of the most valuable reports we suggest, but rarely see, is what we refer to as Daily Service Concentration or Hot Spot report. This report answers an important question: are there specific locations that require a disproportionate level of facilities labor? For example, running such a report at a large member institution revealed that almost a full FTE was dedicated annually to answering hot and cold calls in one specific area of the school. A further engineering review showed the aging system needed replacement and upgrading. These findings influenced project selection priorities and Five Indicators that Frame Future Exposures 4

5 ultimately freed up labor that was redirected to planned maintenance and projects rather than reactive repairs. 5. Energy Cost and Consumption Utility cost and consumption are important to watch. From procurement and generation to distribution and building energy use, energy management requires technical competency, sound operations, and effective communication. A breakdown in any one of many cogs in the wheel can lead to wasteful energy consumption and higher utility expenditures. Ask for a simple monthly utility report showing energy cost, consumption, and unit cost three separate issues. Compare consumption to previous years and benchmark unit costs among peers. With this discipline, you may be able to identify issues that are invisible to the naked eye but which could have big impacts on your bottom line. Conclusion With these five risk indicators in mind, business officers and facilities professionals must harness the power of existing data and predictive analytics to mitigate facilities risks. With facilities and financial officers working together on the core indicators of facility health, your institution can get in front of facilities deferral, continue to support your programs, and improve your market position. Five Indicators that Frame Future Exposures 5