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Supporting Capital Expense Decision-Making

Recently, I saw a facility management article that suggested ways facility managers can put budget excesses to good use. I can’t recall that I’ve ever had that problem. In my experience, facility managers are always juggling resources, be it money, people, technology, or time. If your experience is like mine, then you understand the importance of choosing the right investments.

This is especially true when deciding which capital expenditures (CapEx) to fund, since they tend to be the largest and most complex, and thus a significant business lever. Sometimes, these decisions are not in FM’s hands but are dictated by leadership based on important strategic initiatives. Even when this is the case, however, FM is responsible for fulfilling the requirement. In most cases, however, FM will have a voice, possibly a large one, in determining how the organization deploys its capital. This results from FM being a trusted thought leader inside the organization, because it takes a larger than parochial view of organizational needs and presents objective analyses. The key to doing that is in knowing your business intimately, partnering with business leaders, and doing the good work of developing options and decision support materials.

Chief among decision support documentation must be a rigorous and objective Cost Benefit Analysis (CBA) which surveys the entire decision domain with depth, cohesiveness, and in a concise form that allows its intake. A CBA should include all of the following elements.

1. Summary of requirements, the proposal, arguments for and against, and project financials,
2. Business case justification that identifies linkages to strategic initiatives,
3. Summary of all options considered, including the “do nothing” option,
4. Discussion of requirements, challenges, and available leverages, and
5. A detailed financial analysis, including a diligent NPV, debt/financing, and market analyses

A strong business case justification should be mandatory, as projects will be competing against each other for funding approval. Only those projects which provide the greatest leverage on the business should be funded. Making the case and making it well is important.

FM sometimes functions as a sort of clearing house for requests, providing an opportunity for early review of how projects stack up against each other, before a lot of the legwork is done. This is a good time to look for weak justifications and either send them back for more work, or to begin shuffling the deck on a value add basis. Tools for determining project value include the following.

Requirements gathering should give voice to stakeholders, who should be required to sign off on the final requirements document. The resulting documentation then forms the basis of a first cost estimate for the project and its deployment. It will also help mitigate against downstream scope creep. Estimates at this stage can be on a rough order of magnitude (ROM) basis, intended to inform analysis and decision processing.

All CapEx options require project scoping to develop expected parameters, including requirements, costs, schedules, strategic linkages to other business initiatives or projects that may influence timing or requirement.

Decision trees are used to diagram possible strategies and options, and are a good way to summarize options and the journey to what is being recommended They can be as simple or complex as needed to inform a decision. My personal bias is to load them up with as much information as can be portrayed in an organized and digestible manner. This is the one slide in the deck that tells the whole story. Real estate options, for example, can include summary financial information (CapEx, NPV, depreciation, lease costs, term commitment, strategy alignment, and more for each site under consideration). They start as a humble diagram and evolve over time to be information rich.

Scoring and ranking: Each project should be scored against requirements, financial goals, and other strategic factors to develop a picture of its ability to satisfy goals. Projects are then ranked against each other to help determine their position. This process should be done for each option under consideration to meet a single requirement, and later when multiple projects meeting various needs compete for funding authorization. This filtering process, first to sort out options at the individual project level and later when surviving options compete for funding is important to driving depth of understanding into the decision process.

Leadership can use these materials to evaluate CapEx requests and make investment decisions. Often times, they will shorten the deck and send final contenders back for additional scoping and scoring. Better informed estimates and schedules, and rigorous financial analysis are likely at this point.

A few traps to avoid when forecasting and planning future projects.

It takes time and effort. Trying to scope, decide, fund, plan, and execute in one fiscal year is not viable for projects of any size and complexity. Most organizations budget CapEx in rolling multiples of three to five years. Do not wait to start the due diligence and scoping effort, get as much done as you can as early as you can. Doing so will put you ahead later, when detailed planning and fulfillment activities consume more time.

Requirements have a habit of being fungible. Enforcing requirements gathering and sign-off discipline at the start will save heartburn later when scope requirements begin to creep, thus impacting project costs and schedules, which are rarely fungible. Establishing management discipline at the beginning is the best way to protect the ending.

The effort you put into developing project justifications, decision trees, scoping documents, scoring and ranking, NPV analyses and the sort will be an iterative process and probably include revisions along the way. That’s okay. All of this work will enable you to prepare concise, well-informed, and effective decision packages for executives. Give them the information they need to make their best decisions, in the manner and form they need it. Do not overwhelm them with details. Keep it top level with a focus on decision points.

ROM estimates developed in the earliest stages have a way of being chiseled in stone early before due diligence is complete. To counter this, schedule periodic project scoping reviews with decision makers as the project suite evolves. Providing updated estimates as project intelligence matures allows leadership to understand the maturation and its basis, enabling better investment decisions.

Ken Burkhalter is a facilities and project management consultant, focused on strategic planning, capital projects, and organizational development. You can contact him at ken@kburkhalter.com

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