zumBrunnen, Inc., founded in 1989, is an independent building consulting firm serving a diverse base of national clients. The firm has developed unique, industry-specific building consulting services bringing cost-savings to existing facilities and start-up, expansion and renovation projects. The company’s construction consulting services help mitigate poor construction, project overruns, contract disputes and non-compliant construction. These services can be coordinated to fulfill financial institutions’ construction monitoring requirements.
zumBrunnen offers a unique FacilityForecast® System, a proprietary facility condition assessment and data management system designed to manage long-term capital and operating costs, depreciation expense, and required repairs. The system is supported by FacilityForecast® Software.
Remember as a child when the allowance your parents gave you was never enough? Isn’t it ironic that capital expense budgets are much like your allowance? These budgets often come up short and are often established by others without your input.
The good news is it doesn’t have to be this way. Using long-term budget forecasting tools, management can stay ahead of the competition and ensure adequate funds for all capital expenses. Since pricing (income) may remain relatively consistent for long periods, it is paramount to properly project and reserve for capital expenses to mitigate the potential for budget shortfalls. A strategic budget plan should include five-year projections for operating expenses and 20-year projections for capital expenses.
There are two basic components to this process:
- Assembling complete and accurate data.
- Using sound data projection techniques.
Accurate cost data already exists in the records of most facilities. If a facility is 10 or more years old, the majority of capital expense items, including effective useful life data, has already been gathered and is available as an accurate data point. It then becomes simply a matter of assembling the data. For those cost items not yet encountered, or for newer facilities, data is readily available from outside sources.
Although there is little accuracy in projecting operating expenses beyond five years, projecting capital expenses is just the opposite. Most facilities, during a 20-year life cycle, will encounter 70 to 80 percent of the total capital budget in years 10 and 20. For the retirement industry this is especially true since building exteriors and common area interiors need paint, carpet and wall coverings every 10 years at a minimum, and progressive communities have unit refresh programs averaging seven years.
In all industries, when queried about projecting data, managers report that they typically develop only one-year budgets, and fewer than one in 10 do five-year projections. The reasons quoted are usually among the following:
- You cannot project out accurately 20 years.
- Meaningful forecasting tools are not available.
- We do not have the budget, time or expertise.
The reality is that tools and resources for long-term capital planning are readily available and affordable.
A recent Campus-Wide Facility Audit™ conducted for a progressive 15-year-old Life Plan Community (CCRC) in North Carolina revealed that 45 percent of the total 20-year capital budget was accounted for just by the costs of maintaining paint, carpet and wall coverings! Other major costs that fall in the 20-year cycle include replacement or major service of paving systems, HVAC and refrigeration equipment generators, elevators, life safety systems and security systems, to list a few. In addition, one of the largest expenses you will probably encounter is your roof systems. If poorly installed, you can expect major repairs within the first 10 years, though the average life of the typical roof is 20 years.
For these reasons, long-term capital expense projections of at least 20 years are a necessity to identify and accurately amortize these capital expenses. Once detailed listings of capital items are made, the next step is to identify the best forecasting technique and then apply the math to the historical data.
By including 20-year capital expense projections in your strategic budget plan, you can eliminate capital surprises and accurately align income with expenses. When this is achieved, your allowance will be enough!
Although there is little accuracy in projecting operating expenses beyond five years, projecting capital expenses is just the opposite.
John H. zumBrunnen is the founder of zumBrunnen, Inc., an independent building consulting firm based in Atlanta, Georgia (www.zumbrunnen.com). The recipient of a BS in mechanical engineering from the University of North Dakota and a member of the AAHSA Senior Leadership Council, zumBrunnen has 35 plus years’ experience in construction, assessment, and property development. He is the inventor of the FacilityForecast® software system and a respected speaker in the industry.
