As facilities professionals, one of the most frustrating concerns involves budgeting for - and then managing - the operating expenses of a property. While the budget itself reflects the priorities of the business and the resources necessary to accomplish those priorities, the forecasting and eventual implementation of that budget is clearly no small task. And, budgets vary; there’s an entirely different expectation for owners seeking long-term appreciation of the building vs. those interested in selling the property in short order. In either situation, however, a disciplined approach to documenting budget numbers and recording actual operational expenditures goes a long way in building trust and value within (and outside) the organization.
In its Real Property Administrator® (RPA) designation program, Arnold, MD-based BOMI Institute (www.bomi-edu.org) offers a “Budgeting and Accounting” course. Effective budgeting, notes the course’s text, begins with knowledge of the recent operating history of the property: “Operating history can be acquired through analysis of the detailed expenses reported in prior years, review of actual paid invoices, and discussions with contractors and tenants/occupants. Previous operating history partially supplements this fact-finding mission, but some analysis of the detailed expenses is still required. Reviewing this operating information identifies areas of recurring costs, highlights services provided by monthly contracts, and reveals recent major repairs and rehabilitation. It may also identify areas requiring additional concentration and expenses. It is similarly crucial that the manager thoroughly walk through and inspect the property to get familiar with its condition, systems, operating quirks, and needs.”
Larger (But More Predictable) Expenses
The coursework points to three cost categories that incur the largest expenses of a property:
- Utilities, which may be difficult to forecast, but rely on a good operating history of utility usage (usually 3 or 4 years) and rates, building specifications (type and condition of equipment, as well as occupancy levels and types), and weather patterns.
- Property taxes, which take into account a property’s history (relatively easy to obtain from the local assessor’s office) and anticipated increases or decreases in mill or levy rates (taxes set by local governments that encompass schools, road and sewer maintenance, public health and safety, etc.). Generally, notes BOMI, a call to your local municipality can give you a sound idea of the direction of upcoming mill rate changes. At the same time, it’s important to compare realty tax charges against your competitors’ to ensure that real property tax assessments are fair.
- Payroll/administration, which encompasses employee or contract services - the largest expense at your property. Although service providers allow you to incur easily predictable expenses through such monthly billings as landscaping, janitorial services, rubbish removal, pest control, etc., these can also be directly or indirectly tied to changes in occupancy. Additionally, it’s important to consider seasonal work requirements (i.e. roads/grounds work might fluctuate during summer vs. winter months).
The Unknowns - Maintenance and Repairs
Taken alone, repair and maintenance can mean a one-time, low-dollar expense. In total, however, these expenses can become substantial. Therefore, suggests BOMI, “a review of recurring repairs and maintenance expenses from prior years can substantially lessen the burden of budgeting for the current year. Were there recurring calls for plumbing repairs? What about changing light bulbs? Perhaps the life expectancy of the bulbs is eminent and a group replacement is in order.”
Fortunately, facilities professionals have two wonderful resources in helping to forecast the coming year’s requirements: the building operations staff (which can offer anecdotal recommendations, as well as documented building maintenance and preventive maintenance schedules as indications of needs) and equipment manufacturers (which should offer estimated useful lives of their systems within their specifications).
Perhaps most important in the process is to recognize that Versions 1, 2, or 3 of any operating budget are merely parts of the exercise; many eyes are needed to see, interpret, adjust, and ultimately approve this working document. Organization, control, and good management are key. Upon approval, the final version of the budget should be distributed to all professionals responsible for carrying it out. Only through this collaborative approach can the objectives of any operating budget be optimally realized.
Linda K. Monroe ([email protected]) is editorial director at Buildings magazine.
|Detail of Annual Expenses (pdf)|
|Demand-Control Savings (pdf)|