A recurring question among facilities management professionals is “how much should I really be spending on renewal needs?” This question, although universal in nature, does not have a definitive correct answer. There are too many variables to determining investment levels to pin this down. The most common rule of thumb is that the capital cost of owning a structure is between 1.5 and 2.5 percent of plant (replacement) value per year.
There is, however, a better way to ascertain an accurate spend amount for your facilities portfolio. The first step, if you have not already done so, is to conduct a comprehensive facility condition assessment (FCA). This is the only way to accurately predict renewal costs long-term. If you have conducted an FCA recently and are following industry norms, your needs will be classified into one of three main buckets.
Classifying Renewal Needs
Bucket One: Nonrecurring One-time Expenditures
This bucket covers investment needs related to code upgrades, ADA compliance, facility use change, and the like. These are, as the name implies, investments made just once.
Bucket Two: Projected Recurring Renewal Needs
This bucket encompasses needs related to everything that currently exists in a facility. Regardless of the age of a chiller or a roof, they will need to be replaced at some point. The only elements in a building that do not require component replacement on a cyclical basis are the foundations and structure. Those remain in place until the entire building needs replacement.
Bucket Three: Deferred Recurring Renewal Needs
Technically, this is a subset of Bucket Two. This category includes items that should have already been renewed but have been deferred. These components are past the end of their economically useful life spans. That doesn’t mean they are in a failed state, but they should have already been renewed.
Calculating Condition Indices
Once you have established what’s in each of your three buckets, you are now equipped to calculate the answer to the original question. Using the FCA data, you can calculate two industry standard indices: FCI and FCNI.
- FCI, the Facilities Condition Index, is the measure of how far behind you already are. It is calculated by dividing Deferred Recurring Renewal (Bucket Three) by the current plant value. The higher the index, the worse the condition of the building, with industry standards stating that anything above 0.10 is in poor condition.
- FCNI, the Facilities Condition Needs Index, is the measure of the overall economic health of a facility. It is calculated by summing all three buckets (with Bucket Two being projected for a 10-year period) and dividing this sum by the current plant value. Again, the higher the index, the worse the condition. When looking at individual buildings, any FCNI above 0.40 would be considered a well-below-average condition. If evaluating an entire campus or portfolio, however, there is no definitive scale. Industry averages show that a composite FCNI of 0.25 is about average, with 0.20 being excellent condition.
The Bigger Question
With those definitions established, calculating your annual renewal funding requirements becomes child’s play. It all boils down to one basic question:
Am I satisfied with the overall condition of my physical plant?
If the answer is Yes, I am satisfied, then the logical inference is that maintenance of the status quo is acceptable. If you are shooting for status quo maintenance, then you cannot afford to lose ground. That means your annual funding must account for all items in Bucket Two. They must also account for items in Bucket One that circumstances require addressing immediately. If you’ve already conducted a comprehensive FCA, this becomes a simple calculus to determine annual funding requirements.
If the answer is No, then a little more calculation is required. Inferred in the negative answer is that you want to improve your overall conditions. To accomplish that you’ll need to not only fund renewal in a manner that accounts for all items in Bucket Two, but also whittle away at Buckets One and Three in a systematic manner.
You must establish a timeframe for how quickly you want to eradicate the deferred and one-time needs. If you choose 10 years as your eradication goal, the annual target is the status quo maintenance number plus 1/10 of Buckets One and Three.
This may seem overly simplistic, but it is not. These numbers are easily defensible if you have the comprehensive FCA data to back you up. The numbers can also be adjusted to accommodate different factors. For example, if you have one-time funding dedicated to ADA or fire safety upgrades, you can remove those needs from the buckets and readjust your targets.
Of course, following this protocol does not guarantee that you will receive what you need. But at least you will be able to illustrate the consequences of continued failure to adequately fund renewal needs.
