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One of the first challenges in balancing capital expenditure costs and operating costs is determining the correct category for the expense and the source of the funding. Managers often ask themselves “at what point do operational repairs become a capital expense? Can capital budgets be carried over year to year if work is not complete and if they are carried over, do you lose capital if the project is not completed?”. Management firms often have coded systems for classifying expenditures. Defining what code a repair gets can be problematic for managers with only a basic understanding of building components and systems.
Operational repairs can be a capital expense if:
In most cases capital budgets can be carried over if a project is deferred or incomplete, but the capital plan should be updated to reflect changing project timing. In some cases, capital dollars must be used in the year in which they are allotted; this is typically driven by management requirements or objectives. Tt may be appropriate to pre-pay for some portion of the work, but this obviously is at increased risk. In those cases, a consultant should help manage the scope.
Although budgets are approved annually, they should be monitored and updated on an on-going basis and adjusted accordingly. Often budget approval arrives half way through a fiscal year and project timelines are compressed. Managers need a good understanding the scope of work and timeline required for design, tendering and execution.
The biggest challenge is often prioritizing the work required. A good capital plan should take into account the overall budget, the current performance level of the systems, the benefits of completing the project now (good examples might be to take advantage of temporary energy incentives or low prices in one sector) and the risks involved in deferring one project over another. A building engineer will help define those.
Capital budgets are sometimes underestimated. Possible hidden increases and unplanned capital expenses in the budget can be curtailed by including a contingency allowance. Contingencies provide a financial cushion for unforeseen budget increases such as scope creep and change orders. Planning ahead as much as possible can help capital budgets from going over budget.
A property manager’s responsibility is to bring together the best team to define and execute a capital project; it’s not to provide expertise on budget, scheduling, scope or construction management of a capital project. Managing the building and managing a capital project are two very different and unique skill sets.
It’s important to consider what success would look like to your client: the building occupants! For the owners and occupants, a project will be successful if it:
Each category of schedule or coordination change introduces unique risks which can all lead to increases in project budgets.
Interest(s): Date: November 16, 2015