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The Total Package

Typically, the largest and most significant facilities’ efforts are focused on getting a building up and running in the first place. However, these projects then take on a long and permanent life of their own—with costs that far exceed initial design and construction. Some colleges and universities are turning to a total cost of ownership (TCO) model that factors in the additional maintenance and replacement costs that make for more realistic plans and forecasts.

By Apryl Motley

With the supply of physical space often too scarce, too plentiful, or incorrectly allocated, campus leaders take different views on ways to assign resources. There's the faculty chair, for example, who makes the case for constructing a state-of-the-art research lab; or the alum who specifically earmarks donated funds for a new recreation center; or the student who thinks all study areas should include Wi-Fi for every conceivable device; or the chief business officer who wonders if it's cost-effective to maintain older buildings with outdated heating and cooling systems.

Having no shortage of competing priorities with which to contend, some institutions have begun the search for a more precise answer to this question about the costs for constructing, maintaining, and renovating facilities over both the short- and long-term.

In a 2007 APPA publication, Buildings ... The Gifts That Keep on Taking, primary author Rodney Rose, strategic consultant, STRATUS—a Heery Company; and past president of the Society for College and University Planning (SCUP), states: "The common thread among all of these [facilities-related] issues is that facilities decisions must be cast in light of their value as an investment. Usually the discussion of facilities is focused primarily on costs, especially initial costs. And the lengthy and complex process of planning, designing, and building facilities—which can take many years for complex projects—results in unforeseen changes and frustration along with the anticipation of finally getting something new built. Thus, the cost of facilities blurs their value."

One workable solution for clarifying project investment over time is the total cost of ownership (TCO) model, which E. Lander Medlin, executive vice president of APPA, says "takes into account all the costs of the facility and not just the first costs of construction, which institutions generally have a handle on." (For an overview of the total cost of ownership approach, see "Teaming Up on a Total Cost Model," in the November 2013 Business Officer.)

The approach focuses on disciplined management of three categories of costs: planning, designing, and construction; maintenance and operations; and renovation/recapitalization. According to Medlin, these costs account for 27 percent, 40 percent, and 33 percent, respectively, of the total costs associated with building and managing a facility. (See sidebar,"TCO Components and Costs," for more detail.)

For colleges and universities, it's increasingly critical to monitor all facets of cost for maintenance, operations, and recapitalization. "TCO is the best tool for them to use to reduce overall maintenance costs and capital costs," says Doug Christensen, president of Christensen Facilities Group LLC. "It will help them to make better decisions about overall asset management. In general, higher ed over-maintains buildings," he explains. "You could have replaced them three times for what you were spending to maintain them."

Christensen retired from Brigham Young University (BYU), Provo, Utah, where he says TCO practices have been in place for almost 20 years. However, for most institutions, it is a relatively new concept that will require leaders to make significant shifts as well as foster more integrated approaches to facilities management.

Taking on TCO

"Our model looked at expenses separately, whereas TCO integrates all costs," says Steve Peary, former associate director for facilities management at the University of Maine, Orono. Currently serving as assistant director of innovation at the University of Vermont, Burlington, Peary says, "Traditionally the way organizations work is to focus on funds to build—but not maintain and renew—physical assets, which typically end up costing twice as much as the original cost of the facilities."

READ MORE

For a detailed discussion of BYU's long-term view for monitoring and funding capital assets, read "Life-Cycle Funding for Capital Assets," in the February 2009 issue of Business Officer.

Last year, the University of Maine, with an enrollment of more than 11,000 undergraduate and graduate students, began work to implement TCO as a part of its overall strategic planning process, which will mean thinking differently about budgeting for new facilities. "If we're going to ask for funds to build a new $20 million building, for example, we need to raise at least $40 million more to account for maintenance and renewal of that asset. This approach hasn't always been practiced at public institutions," Peary says, "but total cost of ownership is changing our perspective about facilities master planning."

Ana K. Thiemer, renovation and renewal project manager at the University of Texas, Austin, understands the shift in thinking. "Facilities professionals are often driven to maintain a system at all costs, keeping it working for as long possible," she says. "You have to look at whether that's the best way to manage that asset's performance. You may think that you've saved a ton of money, when you've actually spent more money than if you'd replaced the building."

During the past four years, Thiemer and others at the university have put processes in place to implement TCO. Medlin says such processes are imperative: "It's important that higher education institutions get better at TCO, because as space planning and utilization become increasingly significant, leaders will need to make data-driven decisions based on how effectively they are using their facilities."

Full Circle

"You really want to know the total costs, from the birth of the building to its death," Medlin asserts. "TCO goes beyond an inventory of your space," she continues. "It involves developing and using a more sophisticated set of metrics to determine how the facility is being used and whether it's being used effectively."

"You're tracking data," Randy Ledbetter, president of R. Ledbetter & Associates, says. "For example, an asset was supposed to last 20 years, but it's deteriorating at 10 years. If you're reviewing data on a regular basis, you'll know something is off track, and you will be able to take appropriate action so that your overall costs will go down over time."

"In reality you've got an ongoing look at what it is really costing you to maintain that asset as you do your daily work," says Christensen. "However, TCO requires ongoing discussion of long-term needs and costs to maintain assets. The senior facilities director collects data and shares it with the CBO. Those two should then sit at the table with the institution's administration and board on a regular basis."

Effectively managing both people and processes is critical to successfully implementing a total cost of ownership approach. Here's a closer look at the progress the University of Maine and the University of Texas, Austin, have made in applying this cost model on their campuses.

Planning Strategically

"Our catalyst for going into TCO at the University of Maine was the preliminary discussion of the university's new strategic planning effort, which began late last year," Peary says. "One aspect of the plan is dedicated to the revitalization of buildings and physical spaces."

In fact, the five-year strategic plan, "The Blue Sky Project: Reaffirming Public Higher Education at Maine's Flagship University," specifically references "a total cost of ownership approach to managing UMaine's $1 billion dollar infrastructure and real estate," and the university is in the process of developing plans to incorporate TCO into the management of the university's asset portfolio to ensure a comprehensive and aligned framework for facilities management.

The university got a boost last summer, when the estate of Thomas P. Hosmer, who graduated from the university in 1958, gave the University of Maine Foundation a $7.9 million gift to primarily support maintenance projects at the university. More than 90 percent of the gift is designated for the Thomas P. Hosmer Fund, an endowed fund established at the foundation in 2005 to provide supplemental income for maintenance and repairs that would not otherwise be completed due to budget limitations.

While university leadership and financial resources are both behind TCO, Peary notes that institutions need more time to realize measurable benefits. "Since it's fairly early in the process and involves buildings with longer life cycles, there are few significant fiscal benefits yet," he says, "but bringing clarity and awareness to facilities management decision making will lay the foundation for a more sustainable future."

 Managing Maintenance

"Our campus is aging," Thiemer says. "Most of our buildings were built in the 1970s, but we have a very strong recapitalization program. We've really excelled in that area."

However, the university has not been as effective in monitoring maintenance costs. "We didn't have the tools to do predictive modeling for maintenance," Thiemer says. "Information wasn't being passed between or among departments, and we didn't have the necessary business processes in place to facilitate this.

"Recapitalization can be housed in one area, but maintenance is much bigger and broader and more difficult to reel in," she continues. "However, the bottom line was we were under budget constraints, and we were trying to decide how to fund and manage all our assets."

Thiemer offers this example to illustrate why it's imperative to monitor maintenance costs more closely: "I have a system that has a life cycle of 10 years, and the first cost of the system is $50,000. In 10 years, I need to spend another $50,000 to replace it.

"If you're not tracking maintenance calls and in year two of the system you have spent 60 percent of that replacement amount on maintenance, then you have overspent. That's where TCO comes in. You can monitor and track what's happening in maintenance and operations [M&O] and compare it to what you planned to spend. This kind of tracking should drive just-in-time replacement for that asset, and you're able to see if you need to replace it much sooner."

Three years ago, the university began requiring that all work orders be tied to an asset. Thiemer believes making changes like that has created "greater awareness of costs" and helped "maximize our budget to the fullest. Instead of making guesses about things, our decision making is smarter and more data-driven," she says. "For instance, in terms of M&O, there's substantial data that shows that we've moved to an 80/20 split between preventive maintenance and trouble calls."

Getting data and putting processes in place for departments to share that information has been at the heart of the university's TCO effort. "We don't have a formal TCO program per se. It's more of an internal grassroots effort, which has been a more effective approach," Thiemer says. "In this way, implementing TCO is more from the bottom up in terms of sharing information and understanding how others use it."

A Foundation for the Future

"In terms of long-range planning for the institution, having a seat at the table in asset management will be important for facilities managers and CBOs, as will having access to accurate information to provide to various stakeholders," Thiemer says.

"Not all facilities are created equal," adds Medlin. "For example, if I am going to focus on developing academic programs for five specific majors, I would consider the appropriate facilities as well, and put my money there."

While the benefits of implementing the total cost approach seem evident, Ledbetter acknowledges that "it's a little overwhelming to get started." He suggests breaking the process down into manageable pieces: "Start with your new buildings or most valuable assets. Once you have your data warehouse set up, you can expand it."

"Institutions have the data they need to implement TCO, but it's in a lot of different places," Ledbetter says, "which may be more cumbersome and slow, but I wouldn't let that stop me from getting started. If necessary, TCO can be done on an Excel spreadsheet."

Whether your technology tools are basic or more sophisticated, Christensen says, "your whole facilities department will become an asset management group. They start becoming the critical factor in what assets are maintained and replaced."

 APRYL MOTLEY, Columbia, Maryland, covers higher education business issues for Business Officer.

 

 TCO Components and Costs

"The ultimate question for CBOs is this," says E. Lander Medlin, executive director of APPA: "'Are we getting full value from the investments we make in our facilities portfolio?' The answer resides in a greater institutional understanding of the expenditures throughout the facilities life cycle."

Using the total cost of ownership (TCO) approach, explains Medlin, value in the facilities and utilities infrastructure consists of three major components and associated cost categories or metrics:

Planning, design, and construction (one-time costs totaling 27 to 33 percent of TCO).

  • Planning/design costs of new and existing facilities.
  • Construction costs (to include leasing or acquisition).
  • Demolition costs.
  • Total gross square footage (GSF) per full-time equivalent (FTE) student.

 Maintenance and operations, energy and utilities (annual recurring costs totaling 35 to 40 percent TCO).

  • Annual operating expenditures (for maintenance trades, custodial grounds, and other).
  • Planned, periodic maintenance expenditures (versus reactive maintenance) with a desirable 70/30 ratio.
  • Energy and utilities costs, with and without purchased utilities.
  • Total GSF maintained, cleaned, heated, and cooled.
  • Total acres maintained.

Recapitalization (periodic costs totaling 30 to 33 percent of TCO).

  • Capital renewal and deferred maintenance requirements.
  • Programmatic renovation (based on condition, functionality, adaptation, and code compliance).

In addition to understanding and evaluating the cost factors, CBOs will benefit from asking several other questions:

  • Does your institution have a set of metrics in place to measure the performance of your facilities?
  • Are those metrics supporting your institution's strategic goals and mission?
  • Is the qualitative data tracked by your institution providing the right information to enable your team to manage appropriately?

 When the CBO begins to feel confident that the responses to such questions are positive, says Medlin, "the benefits of this total cost approach are beginning to take hold."