Six Steps to Building a Better Facilities Capital Budget

Learn objective, data-driven techniques to prioritize capital projects and create capital budgets that deliver the greatest business value.

How will your organization determine which capital projects to fund next year? How will you determine the priority of needs? And when the inevitable unanticipated requirement arises � be it an emergency equipment replacement or a new management mandate � how will you determine the impact on the budget? Most organizations struggle with questions such as these as they undertake the process of developing capital plans and budgets. Despite their best efforts to make this process objective and transparent, in reality, it can often be highly subjective and political. In some cases, high-profile projects may garner the lion's share of funding. In others, the "squeaky wheel" gets the grease, possibly at the expense of greater overall organizational priorities. Understanding how organizational priorities translate to capital projects and to budget line items requires an objective, data-driven process that aligns project criteria with strategic business goals and objectives. It also requires a process flexible enough to adapt to the inevitable mid-course corrections and unplanned spending needs that arise over the course of the year.

Making Your Capital Budget Bullet-Proof

The six-step process below, which VFA employs with its clients, helps organizations create consensus about overall business values and priorities, use these to rate the value of capital projects, and ultimately creation of capital budgets that deliver the greatest business value. A prerequisite to this process is accurate and complete data about the current condition and the renewal and maintenance requirements of your organization's capital assets. Your budget depends on the quality and integrity of this data. This information may be collected by your own facility personnel, outside assessors or a combination of both. But everyone should employ consistent methodology for gathering this data. All stakeholders should also have some level of access to this data through a centralized database, along with the tools to analyze requirements and estimate funding needs, promoting accurate "bottom up" budget projections.

Step 1: Establish a Team

Define a core group responsible for establishing key goals, objectives and responsibilities. The team will typically include representatives from Finance, Facilities, Operations and Executive Management. Depending on your organization, it may also include representatives from each line of business or each region.

Step 2: Create a Common Understanding

The members of your budget team will have different backgrounds, skills sets and perspectives on the capital planning process. Provide them with "basic training" in the language of capital assets, including assessment terminology, asset and requirement categorization methods, cost estimation techniques, key performance metrics and how they are calculated, and requirements for various funding sources.

Step 3: Identify Evaluation Criteria

Understanding how organizational priorities translate to capital projects and to budget line items requires an objective, quantitative data-driven that aligns project criteria with strategic business goals and objectives.

With organizational goals and priorities clearly in mind, the group should determine the specific criteria that will be used to evaluate requirements and to assigned priorities. These may include such factors as building use, building system, requirement category, current facility condition, and the impact of remediation on the facility condition index. For example, one municipal government identified life and safety issues as the top priority in evaluating capital requirements.

Step 4: Prioritize Projects

With prioritization criteria established, the team can begin ranking facility requirements based on business importance factors. VFA often uses the pair-wise comparison method to simplify the choices clients face in prioritizing projects. Pair-wise comparison rates factors such as Urgency, FCI Score, Category, System Type, and Building Use, and then ranks and weights those items as a basis for prioritizing capital projects. This method may also be used to prioritize items within a category, for example, comparing and ranking different types of building uses, from administration to classroom to research. The capital budget is then based on the rankings and weighted scores from the pair-wise comparisons.

Step 5: Create the Budget

With a ranked list of projects in place, the capital budget process boils down to where your organization "draws the line" for funding. Invariably, there will not be enough to cover all your capital improvement projects. With a ranked list of projects by priority, it is easy to see what the current funding level will address, and what will be deferred till the next budget cycle.

Step 6: Communicate the Plan

The capital budgeting process invariably requires defending that budget to decision-makers. By following an objective, data-driven process, you can communicate the rationale for budget decisions, down to the specific requirement level, and demonstrate the impact of different funding levels to the CEO, CFO, board of directors, and other key stakeholders. You can also readily communicate the impact of changes that may occur over the course of the year, and how they impact current capital projects. By basing your capital budget on overall organizational priorities, quantifying those priorities, and consistently applying them to your capital projects, your organization can ensure that the squeaky wheel won't drive derail your capital strategy, and that capital investments it chooses will add the greatest possible business value and support organizational objectives today and in the future.

About VFA

VFA helps organizations strategically manage their facility portfolios with Capital Planning and Management Solutions (CPMS�) that combine software, assessment services and business process consulting. Organizations in government, education, healthcare and corporate markets employ VFA solutions to manage more than two billion square feet of real estate. Contact us to learn how VFA can help your organization to optimize its facilities investment.
In the U.S.: (800) 693-3132
In Canada: (888) 685-3757
On the Web: www.vfa.com
Email: info@vfa.com

Author Bio

Ray Dufresne is a Vice President in the Consulting Services Group of VFA, Inc., a leading provider of software and services for facilities capital planning and asset management. He helps government, education and corporate clients to analyze their facilities portfolios, develop benchmarks, create cost models, and define optimal processes for capital planning. Prior to joining VFA in 1992, Ray was a practicing architect working on the design and construction administration of office, medical, retail and transportation facilities. Ray holds a Bachelor of Architecture from Virginia Polytechnic Institute and State University and is a member of the American Institute of Architects and the Boston Society of Architects. He speaks at industry conferences and has authored articles on the value of effective capital planning and facility management.