By November 21, 2014 0 Comments Read More →

Why don’t you have a Capital Reserve fund?

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Capital Reserve Fund

Capital funding is always an issue in facilities, with Facility managers constantly fighting for replacement and renewal funding for their buildings, competing for funds needed elsewhere within the company.

I've seen many FM's struggle at this, yet I have seen it being done by others with great success. I worked with a charity to set up a reserve fund for them and just recently spoke with someone from a municipality who has used this approach for 30 years.

The principle is very sound. You determine your capital needs over a long time frame such as 25 or 30 years and then work backwards to figure out how much you need to put aside every year so you have the funds when you need them.

In some jurisdictions, this is a mandatory approach for residential condominiums. There is no reason a Facility Manager can't use the concept for other facilities, whether corporate, retail, industrial, commercial or institutional.

It works better with new buildings, since you have a number of years to accumulate a reserve fund until the major capital expenditures are needed. This is what the municipality has been doing for 30 years. They put aside a % of the facility value each year and use that fund for capital replacement and refurbishment. The trick is ensuring the fund is left intact and not used for other purposes.

The charity started their fund on a fairly old industrial/office property. It meant they had to accelerate their reserve fund contributions to ensure they had what they needed for upcoming replacements, but they were able to justify it. We commissioned a study by a consulting engineer to quantify the requirements so they could defend having cash in their capital fund while still asking for donations to support their charitable activities. They simply recognized that the facility they were in was critical to achieving their mission and needed to be treated as a valuable asset, not a disposable belonging.

Once you set it up and start accumulating capital funding, you should do a review every 5 years or so with a qualified consulting engineer. They may suggest increases or decreases in the funding allocations based on current issues and conditions. Of course, this has to be done with input from the Facilities team to correctly identify reliability and maintenance issues and align it with your current capital plan which may have ended up a little different from the overall plan.

You can use a firm who has a software package to develop and update the capital needs and funding requirements, you can do it yourself with a spreadsheet if you have a small facility or you can purchase and use a software package such as VFA, who can also assess your capital assets for you.

This strategy requires buy-in from your senior management to put aside the budget amounts. Among the benefits are that it smooths out the funding rather than requiring large peaks in funding that typically happens. With a fund, you won't have to go begging for funding to deal with capital replacement as the needs arise, you'll have a fund to draw from. It also ensures that one of your company's largest asset is kept up to date.

The place to start is to develop your long-term capital funding requirements, as far ahead as 25 or more years. You can simply use standard lifespans for the replacements and rough estimates of the expenditures at this point. With this plan, you can demonstrate the peaks in funding requirements and identify the issues that will cause, along with the benefits of a stable, regular funding approach.

Once you get approval for implementing a reserve fund, hire a qualified consulting engineer to refine the replacement requirements, their timing and the costs based on age and observed condition. Add your own knowledge about performance, repair history, criticality, etc. to refine the timing and overall plan. Then work backwards to tell you exactly how much to put aside each year to fund future needs.

While the idea of a reserve fund approach may not be common, it is an excellent way for you, as a Facilities Manager, to ensure you have the funding you need to manage and maintain your assets for safety, reliability and asset value.

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