Aiming for 'Less Worse' - when better just isn't in the cards
Do you find it challenging to set realistic expectations for the results of your capital renewal program? If you, you are not alone.
We work with our clients to develop Integrated Asset Management (IAM) Plans and Programs, where the goal is to create scenarios that will demonstrate the improvement of their Deferred Capital Renewal and Maintenance (DCRM) backlog over the next three to five years. The issue is the DCRM crisis has been more than two generations in the making. Unfortunately, even the most efficient and effective capital plan will be hard-pressed to overcome 40-50 years of neglect without unlimited resources (time, money, staff, etc.) within such a short timeframe.
The image below shows a portfolio with a five-year Facility Condition Index (FCI) of 10% based on $10 million in renewal need and a replacement value of $100 million. We have seen many clients make the case that if you give me $5 million in additional renewal funding over five years, we can reduce our FCI from 10% to 5%.
At first glance, this assertion might make sense. As each year passes, however, a new list of needs (that come along with additional costs) enter into the FCI timeframe. Asset Managers cannot, and should not, fall into the myopic trap of simply looking at the situation as it is today when making longer-term business cases.
The next image provides a longer-term view of the renewal need for the portfolio and provides a more complete picture from an Asset Management perspective.
With a longer-term view, we see the relatively large spike in need in 2025 and 2026. The spikes are the result of deferring elements that are at or near their Expected Useful Life, but have not yet been observed or reported as issues or deficiencies.
In a constrained funding situation, the idea is that these elements shouldn’t be replaced simply because they are old. However, from a risk management perspective, we do not want to advance the replacement too far into the future as deterioration tends to accelerate at the end of an element’s life. It is important to make sure that these “old” elements are front-and-centre during the next round of Building Condition Assessments (BCAs). In some instances, during the next round of BCAs, some of these elements may once again be “pushed out” beyond the five year FCI horizon if they continue not to exhibit any deficiencies.
Now that we have a more complete picture of the renewal need over time, let’s examine the actual impact of the $5 million in funding that is invested in the portfolio.
With the agreement to fund $5 million of capital renewal funding over five years ($1 million annually), the new FCI at the end of year five would actually be 15%, up from 10% that was promised in our original client scenario. In fact, it would have taken $10 million in funding over the five year planning time-frame to just maintain the FCI at the level it started at, and $15 million to lower it to the original target of 5%.
To avoid falling into the present day scenario trap, we recommend that clients use a 10-year Projection of three year or five year FCI to make their business cases for increased capital renewal funding. In this way, longer term trends are considered and more realistic expectations are set.
With the historic and on-going under-investment in capital renewal for our buildings and other assets, there is rarely an organization in the public, or private, sector that has sufficient capital to reduce the FCI for its portfolio over the current term. In our earlier case study, an FCI of 15% may look like a failure compared to the stated goal of reducing it to 5%. However, when you compare it to the FCI of 20% that could have been, had the $5 million funding not been invested, 15% is an improvement.
Most organizations will have to settle for making business cases where the goal is to be “LESS WORSE.” With a sustained effort over time, and a commitment to increased capital investment, and implementation of Preventative Maintenance Programs, we can start to ’bend the curve’ and get ourselves into a position where we can realistically develop plans to improve the condition of our assets over time.
To expect that we can do a 180 degree turn and undo decades worth of neglect may seem possible with a superficial glance. However, making these bold statements risks fracturing trust and causing us to slip back into under-funding scenarios.
Engaging stakeholders from across an organization to better understand the logic and discipline that goes into a capital planning process, as well as being realistic about what can be achieved in the near term, will set organizations on the path to solving their DM backlog problem.
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