Investments for Life(Cycle)

July 6, 2005
Linking facilities and finances through total cost of ownership

Calculating the total cost of ownership is a given when you’re purchasing and installing a new HVAC system - or any new major capital expenditure, for that matter.

But have you ever stopped to consider that each line item on your facilities budget (construction, operating, maintenance, and repair costs, and other factors) adds up to the total cost of ownership for the building as a whole? Or an entire portfolio of buildings?

Total cost of ownership is commonly defined as the “cost of owning and operating an existing asset” (in this case, a building or group of buildings) at any given point in time. It assumes that all the costs associated with capital purchases over a given time are accounted for in the value assessment of that purchase.

“Total cost of ownership is a tool for investment decisions,” says Cathy Stephenson, vice president and national director of operations at Grubb & Ellis Management Services Inc., Northbrook, IL. “The total cost of ownership aims to measure the whole life cost of an asset so you and your clients can use that information to make decisions.”

Sadly, there’s no tried-and-true formula to determine total cost of ownership. You can’t gather a bunch of numbers and statistics, plug them into an equation, and end up with the final figure in a matter of seconds. That just doesn’t work in the realm of facilities management. It sounds cliché, but no two buildings are the same. And, in reality, no building is the same from one point in time to another.

“Buildings are very dynamic,” says Ben Venktash, a mechanical engineer and environmental services manager at CM Service Inc., San Carlos, CA. “The building’s status and systems can change from month to month.”

Assessing Conditions
Determining a building’s cost of ownership starts with a close examination of the facility in question.

“The first thing we do is a site assessment of the facility,” Stephenson says. “We visit the site and thoroughly review the physical plant, the physical condition of the building, and the condition of all the systems that are part of that building or portfolio. We then evaluate where the particular building is in its life-cycle. A lot of this comes from talking with the on-site teams or looking at the facility condition.”

A facilities condition audit is the first step in determining if opportunities exist for reducing ownership costs. This audit identifies potential savings areas by comparing actual costs against accepted benchmarks. It also helps identify problems requiring corrective actions.

In Facility Design and Management Handbook by Eric Teicholz, editor-in-chief (McGraw Hill, 2001), authors Harvey H. Kaiser, founder and president of HHK Associates Inc., Syracuse, NY, and Thomas Davies, assistant director of physical plant at Amherst College, Amherst, MA, note in Chapter 9 (titled “Facilities Condition Assessment”) that a well-designed audit should:

  • Conduct qualitative and quantitative assessments in order to determine “adequacy” to support mission and programs.
  • Develop a baseline of current capital asset conditions.
  • Determine priorities, costs, and phasing of correction measures necessary for renovations and modernizations, as well as for deterioration of systems and components; and also determine compliance with life safety, accessibility, and environmental requirements.
  • Restore “functionally obsolete” facilities to a usable condition.
  • Eliminate conditions that are hazardous to life safety or potentially damaging to property.
  • Identify capital renewal and replacement projects.
  • Forecast future capital renewal needs.
  • Provide a routine inspection for all facilities.

During an assessment in an existing facility, it’s important to understand the building’s “concept” and what kind of building it is. Identify the various building systems. Every system has different costs for maintenance. What kind of systems does it have? In what condition is its envelope and structure? Are they sound?

“It all becomes part of the building operating cost,” says Venktash. “For example, if a building is masonry rather than precast concrete, the energy assumption changes. It makes a difference.”

Professionals at Grubb & Ellis Management Services have begun to rely on digital photography as a tool in facilities assessments for clients. Clients receive a comprehensive written report discussing assessment findings and recommended courses of action. The report is enhanced with photographs.

“We can paint a picture both visually and with words about the implications of a condition,” Stephenson says. “It makes more sense to owners who aren’t about to walk every square inch of the property they own. It begins the dialogue with the owner about what they want to do over the holding period of that asset - for example, an investment property.”

One extremely important thing to keep in mind with respect to facilities condition assessments is the changeability of a building. Because a building and its systems are in constant flux, the results truly are accurate only for one point in time, Stephenson says.

“You have one set of assumptions today. As your equipment ages, you might want to revisit those assumptions in another 6 to 12 months,” she advises. Equipment doesn’t age at the same rate, so you need to constantly re-evaluate and confirm what your original assumptions are and make changes. Assumptions need to reflect the current condition, and that condition can change from month to month.”

Analyzing Costs
A valuable tool in determining total cost of ownership is a life-cycle cost analysis (LCCA). While this process is most frequently used to determine the costs involved in owning and operating specific building components (such as HVAC, life safety systems, and energy management initiatives), LCCA also can be used to evaluate the cost of a facility, or even an entire site complex, by collectively calculating the life-cycle costs of the building’s various systems, components, and assets.

The National Institute of Standards and Technology (NIST) Handbook 135, 1995 edition, defines life-cycle cost as the “total discounted dollar cost of owning, operating, maintaining, and disposing of a building or building system” over a period of time - a definition that mirrors that of total cost of ownership.

“It’s really the grand total cost of ownership. All of the pieces have costs,” Grubb & Ellis’ Stephenson notes.

Experts agree that LCCA is the premiere economic evaluation technique that determines the total cost of owning and operating a facility over a period of time. “Life-cycle costing should become an integral part of the design, planning, and maintenance of a building,” Venktash says. “It should be an ongoing process.”

According to the State of Alaska’s Department of Education & Early Development’s Life Cycle Cost Analysis Handbook, 1st edition, the first component in a life-cycle equation is cost. Cost can be broken down by two categories: initial expenses and future expenses. Initial expenses are all the costs incurred prior to the occupation of the facility. Future expenses are all costs incurred after occupation.

“Ask yourself, ‘What is the building doing right now? What do you expect the building to do?’ Venktash says.

To further break it down, life-cycle costs have three components - construction, maintenance, and capital renewal - says E. Lander Medlin, executive vice president of The Association of Higher Education Facilities Officers (APPA), Alexandria, VA. All are important, she says. In fact, federal studies have shown that operations and maintenance account for between 60 and 85 percent of total costs of ownership.

“There is so much focus on design, planning, and construction, but there really are three components. You need to look at the total cost of all three things and consider useful life vs. life expectancy,” Medlin says.

Marrying Facilities and Finances
Another factor to consider is the idea that the facilities budget should not be separate from the overall budget; it should be part of management’s strategic decision-making process.

Results gleaned from a thorough facility life-cycle cost analysis should be shared with whom Venktash refers to as the “financial people,” and Medlin calls the “senior institutional officers.” The facilities department and its budgetary decisions should not be an island unto itself.

“If you are doing a summary of the life-cycle process, you need to put together a capital budget that includes the planning, concept, and design for any new project, as well as the ongoing operations and maintenance aspects,” Venktash says.

The consultant says that the facilities department needs to develop a strong working relationship with those who hold the purse strings and make the financial decisions within an organization. Guidelines for a facilities budget based on total cost of ownership should be done in association with the financial department.

“You should be talking all of the time. It should be a wonderful marriage,” Venktash says. “Talk to the finance guy about the length of life-cycle costing you are looking at. The ideal number is 25 [years]. The government uses it; it’s a good number.”

He adds that it is imperative to have money set aside for replacement costs. “You don’t want to get into a break-down maintenance scenario,” he says. “That’s a nightmare.”

Staying in Shape
Total cost of ownership can be improved by the careful implementation of ongoing, robust preventive maintenance and operations to a facility. Each building’s needs in this area should be benchmarked in a facilities condition assessment. “Much of what we do as building managers is not only preserving the value of the asset, but also looking as proactively as possible for conditions that could harm the asset,” Stephenson says.

For example, the team at Grubb & Ellis Management Services uses periodic testing to anticipate failures of equipment. “Proactive testing allows you to identify a problem that might be minor at the time it is identified, but if left to fester, could prove to be a more expensive issue down the road,” Stephenson says.

With all of the variables involved in a building and even more involved in an entire campus or portfolio of buildings, it might seem that calculating the total cost of ownership for a facility is about as easy as cracking the Da Vinci code and uncovering the Holy Grail.

“There’s no easy answer,” Stephenson admits. “There are so many components, but if you have a model that works for you, you can refine it over time with the intelligence you’ve gained from operating that building. If you have 5 years [of] experience with a building or portfolio, you’re going to be smarter than the first year. You’re going to know how the equipment ages. You’re going to see the wear and tear. Our philosophy is that it pays to be proactive. And it pays off.”

Robin Suttell ([email protected]), based in Cleveland, is contributing editor at Buildings magazine.

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