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Newspaper headlines over the last few years say it all: overpasses collapsing, building facades crumbling injuring and killing pedestrians, sewer systems flooding, and hospital and school buildings which have not been able to keep up with technology. This deterioration of infrastructure and buildings are a direct result of the enormous backlog of deferred capital maintenance that has been increasing in our economic system over time. The reasons for the ever increasing buildup are a direct consequence of improper capital funding levels particularly for those institutions and corporations whose infrastructure is incorrectly viewed as secondary to the institution’s primary mandate.

Securing increased capital funding and embarking on a programmed strategy to tackle an institution’s high levels of deferred maintenance requires a number of prerequisites, including:

·         Identification of the assets in question;

·         Determining the funding requirement to replace them;

·         Prioritizing the locations based on their relative condition; and

·         Communicating the results and the implications of inaction to the decision makers and stakeholders of the institution.

The first step of identifying the assets and their replacement costs requires an Asset Management Data Base (AMDB) which for each location has a listing of each and every asset and piece of equipment. In addition, each asset/equipment needs: (1) to be evaluated and rated in terms of it condition (e.g., excellent, fair, poor, requires immediate replacement); its expected life; its year of installation; its replacement cost; and finally, its priority based on predefined criteria, such as:

·         Health & safety;

·         Laws, codes & regulations;

·         Ensure continuous uninterrupted operation;

·         Asset safeguarding; and

·         The public image of the institution.

With a comprehensive AMDB in place, identifying and establishing the deferred maintenance level and estimating the amount of capital that the institution’s infrastructure portfolio will require in future years requires the development of investment criteria based on the expected life, age, condition and priority of the assets. The best way of portraying this is reflected in the table below whereby management much decide when a particular asset is to be replaced (Note: OL = Overlife; NOL = Not Over Life).

Integrating the above methodology, data and decision criteria with a powerful yet simple Excel model will quantify the institution’s capital requirement, by location, over the next number of years.

The next step is to prioritize the capital investment dollars, by location based on that location relative condition, and effectively communicating the results. This is where the Facility Condition Index (FCI) needs to play an important role.

The FCI was developed in the 1980’s by the US Navy and first published by National Association of College & University Business Officers (NACUBO) in 1991. FCI has gained broad acceptance across numerous industries, public and private corporations, including Ministries of the Canadian, Quebec and Ontario Governments and many others.

FCI is a method of measuring the relative condition of a single facility or group of facilities and is used in setting annual funding targets and the target for duration of the level of deferred maintenance. The FCI is the ratio of (1) the level of deferred maintenance and cost of remedying facilities; and (2) the replacement value of the facility(ies).The higher the FCI, the worse the condition.

       FCI =                   Current Amount of Deferred Maintenance 

                                 Current Replacement Value of Base Building

FCI can be better understand with a practical personal example: If your home has a replacement value (not market value) of $100,000 and the deferred maintenance in your home is $3,000 (FCI = 3%), you would probably be quite satisfied that things are under control. Alternatively if your neighbour with an identical house with a deferred maintenance level of $25,000 (FCI = 25%) he is likely feeling a lot less comfortable.

In terms of categorizing and prioritizing FCIs the most widely accepted industry accepted FCI standard is:

• 0 to 5%: considered Good;

• 5% to 10%: considered Fair;

• Greater than 10%: considered Poor.

Having determined the FCI for each building, the capability (1) of prioritizing investment locations can now be undertaken – particularly when combined with a risk assessment related to each location (a separate article in itself for another time); and (2) of estimating the institutions medium and longer term capital investment requirements.

The results of the study should be shared with senior management as well as with the Board of Directors who have the responsibility of addressing risks and ensuring that they are appropriately managed. There are significant risk issues that result from inadequate capital funding and from excessive deferred maintenance levels and these risks needed to be recognized:

• Increased business risk;
• Risk of and financial implications of operational disruptions;
• Health & safety of employees;
• Risk of larger future expenditures to correct backlog, such as compliance to  costly building codes which may not apply to minor renovations;
• Potential legal liability issues;
• Impact on productivity and employee morale;
• The institution’s public image.

In fact, these risks are so important that in the United States the US Federal Accounting Standards Advisory Board (FASAB Statement No. 6) mandates that deferred maintenance standards require disclosures related to the condition and the estimated cost to remedy deferred maintenance of property, plant and equipment. Similarly, in Canada, the CICA & the Public Sector Accounting Board (PSAB) are examining the issue of deferred maintenance disclosure.

Stay tuned. There is more to come as we are only beginning to see the tip of the iceberg as deferred maintenance levels continue to climb in an economy of declining corporate cash flows and shallow financing availability.

William Jegher is President of Wika Consulting, a consulting company specializing in facilities management and real estate benchmarking, communications and consulting. Contact him at wjegher@wikaconsulting.com

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