CRV – Sum of the Parts Method
Continuing our series on the importance of Current Replacement Value (CRV), this post will focus on what we call the “Sum of the Parts” (SotP) methodology.
The idea behind the SotP methodology is that as part of a Facility Condition Assessment (FCA), the replacement cost of each element within a building is calculated. Therefore the CRV for the building is based on the sum of all Element Replacement Values (ERVs)
CRV = Sum of all ERVs for a building
This methodology has gained popularity mainly due to several commercially available Capital Asset Management Systems (CAMS) using this as the foundation for how CRVs are calculated.
In many cases FCAs may not inventory all of the Elements within a building and therefore a complete list of ERVs may not be available. However, this is easily overcome by updating your Terms of Reference for your FCAs to include a detailed element-level inventory, including calculation of ERV.
The SotP methodology works when there is a high-level of consistency in the FCA methodology and in particular how the ERVs are calculated across the entire portfolio.
If an Element is missed in an FCA then the CRV will be artificially low. If an element in one building is costed too high or low in one building, or by one assessor, or assessment firm across multiple buildings, the comparability of FCIs will be impacted due to the lack of consistency.
The other challenge with the SotP methodology is that the CRV can change materially from one FCA to the next, especially if you are working with a different firm (that may use a different costing methodology), or you adjust your scope of work somewhat between assessments. This can result in a material change in your FCIs, not based on anything that you and your team have done (invested additional moneys or deferred needs), but rather based on a change in the way you calculate your CRV.
In general, most organizations that we collaborate with prefer to have a stable CRV so that changes in the FCI over time is based more on the capital renewal need (the numerator) as opposed to the CRV.
As one of the most common methodologies for calculating CRVs, SotP provides an easy to understand methodology. However, organizations have to be diligent in ensuring the consistency and stability of the calculation over time.
Our next post will focus on the simple Cost Per Square Foot model for CRV calculation.