Page 14

Facilities Management Journal July 2014

COMMENT THE CAP EXPLOSION The economic downturn has created a lengthy period of corporate cost control. In many instances savage reductions and deferrals in commercial property maintenance have been instigated. Campbell Devine, head of hotels and European consulting at interdisciplinary surveying and property practice McBains Cooper, emphasises the importance of regular building and services condition assessments, and the need for increased Capital Expenditure (Cap Ex) awareness Cap Ex – financial reserves used to maintain and repair buildings and services installations – enhance property value by extending life expectancies and driving operational eff iciencies for every business. Traditionally building and engineering services reviews operate over a five-year cycle while hotel sector cap ex extends to fixtures, fittings and equipment, which are generally reviewed on a seven-year cycle. Coincidentally, seven years of economic trauma has caused many organisations to pare back cap ex commitments to the detriment of property performance and in some cases, safety. A number of businesses have turned a blind eye to condition or been forced to under-prioritise maintenance investment in order %0 with a tendency to address only ‘essential cap ex’ on interiors and front of house. Meanwhile the condition of fabric, services, plant and equipment # to the point of failure. Problematic situations, caused by anything from reduced maintenance regimes have included air conditioning breakdowns, ceiling collapses, service shut-downs and legionella contamination. Obviously the costs of reacting to these incidents, putting everything back into place, and purchasing new headaches. That’s without even mentioning the long term costs incurred by any lasting damage to a % Cap ex cutting now presents a ) organisations in terms of continuity, 14 JULY 2014 safety, reputation and cost, at a time when businesses should be well placed to take advantage of improving market % 5# retail sectors there is an increasing awareness that deferred cap ex is / transactions, occupation, returns and asset value. Fortunately many organisations realise that an ‘extend and pretend’ cap ex mode represents a false economy. Quality standards drive occupancy levels, tenant satisfaction %$ needs of commercial tenants, shoppers and hotel guests, combined with a proliferation of social media and the potential for ‘death by online review’, is helping to reignite proactive property assessments and maintenance with appropriate re-application of cap ex funds. Some organisations are now allocating 6-8 per cent of revenue for future cap ex; others have applied a dedicated 2-3 per cent for plant and machinery and even 3 per cent for ‘technical’ capital expenditure. & ) attitude to cap ex planning and implementation. Property negotiations # packages and ‘price chips’, especially on mechanical and electrical services. Increasingly landlords have had to become proactive with regard to physical condition, collating accurate records and data prior to technical due diligence being carried out by investors’ or tenants’ advisors. The main sources of capital expenditure can be divided into three categories. Firstly the need to replace equipment which is failing, has failed or simply doesn’t perform as required. Perhaps an air conditioning unit, maybe something else. Secondly there are needs which weren’t foreseen when the budget was drawn up. This is not necessarily down to a lack of foresight and most, if not all, managers have been hit by costs they couldn’t possibly have anticipated. Usually at the worst possible time! The best way to deal with this eventuality is to have an unassigned contingency fund, ready and waiting to deal with any nasty surprises. Finally there are new projects which have been approved by the board or senior management. This may not have seemed so relevant over the past few years, but with the growth many businesses are foreseeing new projects and expansion could soon be back on many FMs agendas. A robust approach to cap ex and implementation of planned preventative maintenance helps to avoid reactive situations, breakdowns and major disruptions. The life expectancy of systems is also 6 \/ repair and maintenance can be 5 knowledge-based forecasting. This in turn helps to drive occupier satisfaction and consistency of tenancy. Given the 5 managers have faced since 2008, perhaps it is understandable that so many have chosen to ‘extend and pretend’, when the alternative is ) 5 5 capital expenditure costs for as long as possible. It might seem quite a good idea, but isn’t. The damages that result from burying your head in the sand this way can be far, far greater than being fully prepared. Thankfully, the days of ‘extend and pretend’ appear to be at an end, with the economy seemingly improving organisations and facilities managers alike have the time, budget and ability to test and invest, leaving themselves protected against the pitfalls of capital expenditure. ADVICE & OPINION


Facilities Management Journal July 2014
To see the actual publication please follow the link above