Is your Capital Plan based on facts — or fiction?

Four keys to an objective capital plan

With a proactive approach to capital planning, you can minimize organizational politics and bias.

Shrinking capital budgets. Organizational politics. Personal biases. Complicated strategic master plans. Decentralized capital planning. Lack of credible data. Insufficient project vetting. How can any organization develop an effective and efficient capital plan when faced with these inevitable challenges?

To further complicate matters, facilities teams increasingly must do more with less. In many sectors, deferred maintenance backlogs are on the rise—along with the need for increased mid- and long-term capital funding. An organization may spend millions of dollars constantly responding to “emergency needs” as facilities and equipment fail. The reactionary mode often becomes an ever-increasing downward spiral, wasting precious capital dollars.

The alternative? An objective, datadriven capital plan. With a proactive approach to capital planning, you can minimize organizational politics and bias. Instead, you’ll empower your organization to make capital allocation decisions based on full knowledge of the short- and mid-term impacts of the projects. By analyzing and prioritizing project requests on an ongoing basis, you can facilitate smart capital spending.

So how do you create this proactive approach to capital planning? You’ll need the right mix of four key elements: process, people, technology and project prioritization. And, ultimately, you can optimize efficiency by working with a single partner firm that offers methodology and technology for smart capital planning.

1. Process

An effective capital planning process is all about consistency—adopting a standard process that leads to rational outcomes. Regardless of the line of business and condition of an organization’s facilities, the process should remain largely the same.

A standard approach encompasses:

  1. A facilities condition assessment, documenting the current status of your facilities.
  2. A vetted list of project requests for the upcoming fiscal year.
  3. The scope for each capital project, along with evaluations of potential options.
  4. Estimated costs for each project.
  5. A documented business case/ rationale for each project.
  6. Objective scoring/ranking of each project on the basis of overall merit.
  7. Allocation of approved capital, from the highest-ranked to the lowestranked project.

In addition, an effective capital planning process must include a feedback loop in which you constantly update facility condition information and also archive data about capital investment in any given facility. A regimented, rigorous and objective process helps you avoid the pitfalls that typically lead to wasteful, inefficient spending.

2. People/Skillsets

Where a standard process provides consistency, people provide accuracy. Specifically, effective capital planning requires accurate definitions of the scope for each project. No tool or technology can correct inaccurate or incomplete project scope—for that, you need human judgment.

Incomplete or inaccurate information leads to scope creep, which naturally leads to increased budgets. Even relatively small increases in a project’s budget can negate the cost benefit of executing the project.

That’s why projects should be fully vetted for scope, budget, justification and risk. Scope definition is the essential first step to ensure that the full project is neither under- nor over-funded. For example, if you’re considering replacing a major piece of equipment, such as a chiller, you should also consider electrical requirements or the possibility of converting to a digital control system to improve efficiency.

Accurately establishing project scope requires a combination of experience and expertise in real estate, finance and construction. It’s a unique set of skills that is rarely found in a single facilities project manager.

Capital planning requires experience and capabilities in:

  • Facility assessments
  • Strategic planning
  • Project scoping and woptions assessments
  • Project cost estimating/ budget development
  • Data analytics
  • Report writing

The best approach is to create a team of resources equipped with the diverse skills needed to perform various analyses and construct credible business cases for projects. To augment the in-house team, many organizations choose to work with a real estate service provider with proven experience and capabilities in facilities condition assessments, facility management, construction management, and capital planning and financing. A service provider partner can help relieve the stress of capital planning by sharing best-practice knowledge and experiences.

Ideally, the capital planning team comprises a capital planning manager supported by facility managers, facility engineers and project management staff. Typically, the facility management and engineering teams are already deeply familiar with your facilities and bring a depth of knowledge to the process. They often have the skills required to identify project needs, but are facility-oriented versus portfolio-oriented.

Filling this void is the capital planning manager, whose role is to sift through the information provided by facility personnel and, ultimately, weigh the costs, needs and benefits of each project to inform a recommended annual capital budget.

A solid technology platform is critical to effective capital planning.

3. Tools/Technology

A solid technology platform also is critical to effective capital planning. A modern capital planning solution will track all projects throughout the planning process, provide projections for future capital needs, and archive information pertaining to past projects.

Also important, the ideal technology platform will enable authorized team members to access a shared database of real-time capital planning data. And, it will allow you to create customizable dashboards that convey snapshots of process status and volume.

While you can archive all types of project information, standard data points include:

  • Facility information
  • Project name
  • Project scope, assumptions and exclusions
  • Business unit requesting the project
  • Estimated project costs
  • Project type and driver
  • Cashflow projections
  • Project justification
  • Project recommendation/approval

With the right technology, you can collect relevant data in a consistent format and easily generate analyses essential to evaluate projects. Typical analyses include benchmarks, trend analyses and capital allocation by region/business unit/project type.

Your technology solution also should support budgeting forecasts and real-time budget monitoring. Forecasting cash flow and requirements periodically, and tracking actual expenses against forecasted expenses, are essential aspects of implementing a capital plan.

However, many organizations lack the tools to closely monitor actual cash flow. As a result, it’s common for an organization to realize mid-year that actual spend is below estimates, leading to a “mad dash” of spending in the third and fourth quarters so as not to lose funding in future years. Reacting to future funding concerns, rather than more accurately scoping planned projects, is very inefficient and leads to project escalations and increased costs.

Ideally, your technology solution will be integrated with other aspects of the capital project life cycle, such as facility condition assessments and the execution of the approved projects. With fully integrated data, you’ll be equipped to more accurately project future capital and budgeting needs the next time around. 

4. Project Prioritization

The single biggest key to effective capital planning process is the objective prioritization of projects. Prioritization is all about balancing competing capital needs on an objective, systematic and consistent basis. Without a fact-based, data-driven process, the final capital allocation process is doomed to revert to a politically driven exercise.

By utilizing multiple scored and weighted criteria, you can evaluate projects according to the facts and ensure alignment with enterprise goals and objectives. Ideally, scoring is based on five to 10 weighted criteria. If you consider fewer than five criteria, the scores tend to overemphasize certain aspects of projects. On the other hand, using more than 10 criteria tends to mute important data. The combination of these weighted criteria brings objectivity to the analysis. Criteria may include:

  • Project driver
  • Criticality
  • Risk
  • Cost benefit
  • Growth/consolidation
  • Geographic objectives
  • Customer service
  • Business unit performance

Here again, having a modern technology platform makes a difference. Using a computer-generated algorithm eliminates the emotion, politics and personal bias from the results.

The end result of algorithm-based analysis is a list of projects and associated costs ranked from most to least critical. At that point, your team can review the list and adjust on the basis of available capital.

Ultimately, proactive, data-driven capital planning results in the efficient use of limited capital on wellplanned projects. With the right process, people and technology, you can make the most of both your capital and your facilities. 

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