Deferring maintenance can lead to a “breakdown event” and can easily escalate to a mind-blowing 15:1 ratio or even exceed a 40:1 ratio in terms of cost.
The senior living industry is now an established marketplace with facilities of all ages to manage. Older buildings constructed decades ago present challenges very different than those experienced with 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.
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.
- 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: These are generally major 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.
Common Reasons Communities Defer Maintenance and Repairs:
There appear to be three main reasons why a community might defer maintenance and repairs.
The first reason is simply a lack of knowledge on the part of the maintenance department and/or the executive suite on how to identify deficiencies. For example, we all can identify a leak in a roof when it is raining, but it is far more effective to recognize and repair a deficiency that will result in a leak before a rainstorm occurs.
The second common reason for deferring maintenance and repairs is a lack of a preventive maintenance program. A good PM program will likely incorporate tools for reporting and work flow, such as 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 don’t fully realize the negative economic impact it has on long-term financial viability.
Deferring 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.
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 in the order of 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 indirect 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 for an immediate roof replacement, but don’t turn a blind eye to the need. Sometimes partial repairs or a tune-up can carry you to better times when you have the funds for a proper replacement.
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 don’t invest in capital projects is, once again, based on a lack of knowledge. We find some 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 don’t have proper reserve funding plans to help them assess how much they need to budget to maintain the property, and they don’t have access to capital.
The Consequences of Neglecting Capital Improvements:
Capital improvements have become necessary, not optional, in a more competitive marketplace where residents want more options, greater amenities, and where other properties have made improvements to public areas to make them feel more welcoming. Communities that don’t fund and execute capital projects face a competitive disadvantage.
Where Do We Go From Here? Tips for Improvement:
From our 35+ 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.
Hire the Right People
Director of Facilities – At the individual community level, operators tend to hire tradespeople instead of professionals. They look to fill this critical position with compensation packages that do not attract and retain professionals with the capacity for strategic thinking. Keep in mind that many Life Plan Communities (CCRC) are complex facilities with development and construction costs exceeding $100M. It requires professionals with ample support staff to proactively maintain this type of property.
Executive Role in Maintenance – Executives typically don’t 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.
Make Assessment a Regular Process
It is critical to assess the physical condition of your buildings to ensure your facilities are properly maintained and that capital projects are properly executed. When it comes to funding, communities that take the initiative to develop long-term capital replacement plans generally have greater access to funds, and are able to plan for capital projects that ensure their long-term viability.
