Thinking of Deferring Maintenance? Think Again!
The senior living industry is now an established marketplace with facilities of all ages to manage. Older buildings, constructed more than 30 years ago, represent different challenges than more recent construction. As senior living communities continue to age, the importance of maintaining and improving buildings, facilities and grounds is critical for managing continued and long-term success. This article addresses the physical and/or engineering-related aspects of building maintenance and capital improvements.
Let’s start by exploring the expenses associated with maintaining the buildings, amenities and other improvements in your senior living community. We are all familiar with words such as maintenance, repairs, deferred maintenance and capital improvements. To make sure we are all on the same page, let’s start with the definition of a maintenance activity and the definition of a repair.
- Maintenance is the work required to retain an asset’s functionality.
- A repair is the work required to restore an asset’s functionality.
As a point of reference, the Federal Accounting Standards Advisory Board, which sets accounting standards for the U.S. Government, classifies ongoing building expenses into three groups:
- Deferred Maintenance and Deferred Repairs: These are activities that were not performed when they should have been done or were scheduled to be completed, but were put off or delayed until a future time.
- Routine Maintenance and Routine Repairs: These are activities directed toward keeping fixed assets in an acceptable condition, which includes preventive maintenance; replacement of parts, systems, or components; and other activities needed to preserve or maintain the asset.
- Capital Improvements (also known as capital projects): These are generally major expenses for projects where you are expanding the capacity of an asset or otherwise upgrading it to serve needs different from, or significantly greater than, its current use.
With these three groups of expenses defined, I would like to explore budget considerations for each category.
Common Reasons Communities Defer Maintenance and Repairs:
Let’s start by exploring some reasons why a community might defer maintenance and repairs. The most common reasons we have heard fall into three primary categories.
The first reason is simply a lack of knowledge from either the maintenance department and/or from the executive suite on how to properly identify deficiencies. For example, we all can identify a leak in a roof when it is raining, but it is far more effective to discover or recognize and repair a deficiency that will result in a leak before a rain storm occurs.
The second common reason for deferring maintenance and repairs is a lack of resources in terms of adequate tools for reporting and analysis (such as having a computerized maintenance management system also known as CMMS).
The single largest factor cited is simply insufficient funding.
Why Routine Maintenance and Routine Repairs Save Money in the Long Run:
Although deferring maintenance is a common practice, many people do not fully realize the true negative economic impact it has on long-term financial viability.
Deferred maintenance can lead to asset deterioration and, ultimately, asset impairment resulting in higher costs and asset failure. In some cases, there are health and safety implications. In most cases, there is a loss of profitability. In the worst case scenario, a community may experience insolvency.
I assume we would all agree that the longer we operate a machine that needs repair, the more it will cost to fix it. Upper management, not directly involved in maintenance, knows it will cost more, but they might imagine the worst-case penalty for deferring maintenance might be up to two to three times as much.
Those of us who have many years of direct experience in managing maintenance have found the penalty is often significantly more. I personally felt the cost of deferring maintenance was three to four times as much as a timely repair, but while doing research, I came across some staggering data.
David Todd Geaslin, a building consultant who specializes in assessing facilities such as sports arenas and stadiums, created an Inverse Square Rule for Deferred Maintenance to explain the disastrous financial impacts of ignoring a problem.
Geaslin’s Inverse Square Rule states: “If a part is known to be failing and the repair is deferred and allowed to remain in service until the next level of failure, the resultant expense will be the square of the failed part.”
What Geaslin’s rule illustrates is that the penalty for deferring maintenance is much more…not twice as much…not four times as much…but that the real penalty for deferring maintenance that becomes a breakdown event is actually a mind blowing 15:1 minimum and often exceeds 40:1.
For example, Geaslin discovered a $50 toilet valve, if left in service until it overflows, can easily cost the square of $50 to create a total flood damage cost of $2,500 in carpet, pad, electrical, and document destruction.
Or, what if avoiding a $1,000 cleaning of the heat exchanger caused your central plant to go down, and you had to bring in a temporary chiller, then purchase a new chiller from available stock and pay for express freight, overtime and other related expenses. When you also factor in things like resident satisfaction, and other related costs, you can see how avoiding a minor repair could result in catastrophic expenses that could lead to insolvency.
Obviously, not every deferred maintenance item results in a failure. So if you must defer, be sure to evaluate your options carefully as to which will have the most adverse effect on your bottom line. You may not have the funds to replace a roof, but do not ignore it completely as some minor repairs/tune-up to carry you to better times when you will have the funds may be the next best solution.
Common Reasons Why Communities Don’t Make Capital Improvements:
Capital projects (also referred to as capital improvements) generally represent major expenses to upgrade an asset or to expand the capacity of an asset.
One common reason communities do not invest in capital projects is, once again, based on a lack of knowledge. We find many communities are not utilizing reporting and analysis tools properly. They are not performing effective building condition assessments. They are not keeping their finger on the pulse of changing demographics and adapting to meet shifting market conditions.
The other common reason is a lack of resources including tools to help them evaluate their situation. They typically do not have proper reserve funding plans to help them assess how much they need to budget to maintain the property, and they do not have access to capital.
The Negative Effects of Avoiding Capital Improvements:
Capital improvements have become necessary, not optional, in a more competitive marketplace where residents value more options, greater amenities, and where other properties have made improvements to public areas to make them feel more welcoming. Communities that do not reserve funds for capital projects face the following potential problems:
- Increase average age of life
- In most cases, loss of profitability
- Worst case is insolvency
Where Do We Go From Here? Tips for Improvement:
Recognizing a problem is the first step toward improving the situation. If your community is deferring maintenance and/or does not have an established routine maintenance program, these are situations to be addressed immediately. Also, if your community does not have a capital improvement budget with plans not only to maintain, but to improve facilities over time to adjust to industry trends, this is a critical issue to address, as well.
From my 40+ years of personal experience with buildings, equipment and maintenance, as well as 30+ years of working with senior living communities, here are some common staffing issues I have seen that result in greater challenges. Hiring an experienced Facility Manager and having proper support from the Executive team are critical factors in maintaining facilities and positioning them for success.
Director of Facilities – At the individual community level, this field tends to hire trades people instead of professionals. They look to fill this critical position for say $80K a year instead of compensation packages more equivalent to executive pay. Keep in mind, the typical Life Plan Community (CCRC) will be a $100M asset. It requires professionals to proactively maintain this type of property.
Executive Role in Maintenance – Executives typically do not receive any formal training related to what they should require from their maintenance departments in terms of skill sets, reporting/analysis, efficiency, and regular improvements. To better understand this topic, I have a white paper available: Facility Management Performance – Self Assessment for Executives available at www.zumbrunnen.com/news-resources/white-papers/facility-management-performance/
It is also critical to assess the physical condition of your buildings to ensure your facilities are not only properly maintained but are also properly constructed. When it comes to funding, communities that take the initiative to develop long-term capital replacement plans that help them accurately budget for the future, generally have greater access to funds and are able to plan for future capital projects and ensure their long-term viability.
John zumBrunnen is CEO and Founder of zumBrunnen, Inc., an independent construction and building consulting firm founded in 1989. zumBrunnen has a BS in mechanical engineering from the University of North Dakota, completed the US Army Corps of Engineers Training Program in 1972, and is a member of the Association of Professional Reserve Analysts (APRA) and numerous other national and state associations. zumBrunnen has 40+ years of experience in construction, property assessment, development, and reserve budgeting. He is the inventor of the FacilityForecast® software system and a respected author and speaker in the industry.