By Jim McIntosh and Russ Witt
When Hurricane Ike battered Houston in September 2008, some buildings emerged from the storm practically unscathed while others suffered costly damage. Two Army Reserve facilities located right next to each other show the difference (see Figure 1). One building's roof — Roof A — is intact. Roof B, in contrast, required over $1 million to repair the roof and interior damage.
Why did Roof A weather the hurricane so much better? While we can't claim to know all the reasons, we do know this: what governed Roof B decision-making was simply a desire to keep initial costs low. In contrast, the decisions about Roof A were made in order to manage the total lifecycle costs. This approach has been captured by the Army Reserve Roof Lifecycle Management program. It standardizes roof specifications; provides for onsite quality assurance, control and regular inspections; monitors performance — and mandates a 20-year "no dollar limit (NDL) warranty" for new roofs. The program shifts focus from minimizing short-term cost to maximizing long-term performance. Interestingly, all Army Reserve roofs of this kind survived the hurricane undamaged.
The total lifecycle cost benefits to this approach are quite substantial. By ensuring a high-quality design and using high-quality contractors, the Roof Lifecycle Management program has the potential to lower the Army's annual low-slope roofing expenses by as much as 20 percent. Across roughly 200 million square feet of roof area, that adds up to big savings.
The story behind the Roof Lifecycle Management program will be familiar to all facilities managers. Chronic underfunding of maintenance forces tough decisions about priorities. Managers who need to stretch limited budgets may focus on short-term cost rather than quality when selecting contractors or when deciding to patch a roof rather than fund a needed replacement. In addition, managers seldom have the budget for assessments or tools for proactive facilities management.
The result is predictable: substantial project backlogs and funding requirements get pushed into the future. And when repairs and replacements are postponed, the eventual price tag is inevitably larger.
To regain control, facilities managers must shift their focus from keeping near-term costs low to optimizing total lifetime costs. Even when budgets are constrained, managers can adopt a total lifetime cost perspective when prioritizing and contracting for projects, to better understand how to get the biggest impact from limited dollars.
The question is, of course, how can facility managers make informed decisions? To trade off low initial purchase price against long-term cost of ownership, they need to understand what an asset will cost over its lifetime and why. With this information, they can select the best strategic option. The final hurdle is to implement what may be a counter-intuitive approach among their people on the front line.
Identify Lifecycle Costs: How Much Does It Really Cost?
Human nature primes us to think more about immediate, short-term costs than about all the associated costs incurred over time. Additionally, we usually have a pretty clear picture of the immediate costs but are uncertain about future costs. This presents a challenge because, in many cases — and frequently with facility assets — "sustainment" costs far outweigh the initial purchase price. To understand the true cost, managers should consider ongoing maintenance, energy, externalities (such as collateral damage and downtime), and employee morale and productivity that continue well beyond the initial purchase.
Identifying these cost elements requires a mix of art and science. The mix includes personal observation (the equivalent of managing by walking around), talking to people (including vendors and facilities occupants), analyzing current spending and brainstorming.
In the roofing example, there was no shortage of anecdotal evidence that the roofs were not lasting as long as people thought they should. Leaks and regular repairs occurred too often. Indeed, recently repaired roofs lasted just five years against a much longer expected life. In addition to the leaks themselves, collateral damage disrupted work and added to repair costs. For example, damaged electrical systems exposed both soldiers and civilians to risk of electrical shocks, ruined office equipment and interrupted other system functions. A less dramatic but quite costly connection was the link between roof insulation and energy costs: HVAC is a major contributor to total energy costs, and roof insulation affects HVAC efficiency.
Not surprisingly, when weighing the various lifecycle costs, the largest cost areas turned out to be direct replacement and repair costs.
Identify Cost Drivers: Why Does It Cost What It Does?
It is often tempting to stop with the major cost elements and attempt to reduce those expenses. But our ability to reduce costs is significantly increased by identifying why those costs occur, not just what they are. Armed with that understanding, managers can then spot opportunities to change their approach and take costs out of the supply chain. Key questions include:
- What factors influence volume?
- What factors impact the timing of costs?
- What decisions need to be made now or in the future that will impact future costs?
With roofing, replacement and repair costs were largely a function of how long the roofs were lasting and how frequently they needed repairs. What was driving those factors turned out to be the original roof design and the quality of the contractor that did the roof replacement. Interestingly, these are not line-item cost elements. Cost driver analysis also eliminated potential approaches such as preventive maintenance, which surprisingly did not have a significant impact on lifecycle cost.
Select the Best Strategic Option: How Do We Use What We Know?
Understanding the cost drivers allows us know which levers we can pull to lower lifecycle cost. Selecting the best strategic option involves weighing the costs against all the other factors related to an organization. In some cases, implementation challenges, cash flow restrictions or regulatory mandates may lead an organization to select an approach that may not have the lowest lifecycle cost. However, even in these cases, the total lifecycle cost approach helps an organization understand the tradeoffs and the implications of their decision, whatever it may be.
In the roofing case, cost drivers suggested two general management approaches: using low-quality roofs with higher repair costs and more frequent replacement, or high-quality roofs with minimal repair costs and less frequent replacement. Analysis estimated that the high-quality approach offered the lowest cost among all options. Additionally, the inclusion of a 20-year NDL warranty aligned contractor interests far more closely with those of the Army Reserve.
Figure 2 illustrates the relative cost per square foot over a 20-year lifetime of three low-quality scenarios against the 20-year NDL warranty approach. The tradeoffs are clear. The low-quality scenarios offer lower initial-year costs by about one-third. Yet repairs quickly escalate their total cost. In contrast, the higher initial cost of the 20-year NDL roof is offset by no additional costs after the first year.
Making It Happen: How Do We Get Compliance and Commitment from the Field?
Convincing people to change long-held habits is never easy. When decisions are made or new protocols established centrally, it takes effective communication and engagement to move people to comply and commit.
As cost elements and drivers are being identified, seek local expertise and input across facility locations. Not only will the program benefit from on-the-ground knowledge, but people are more likely to commit to initiatives to which they've contributed. Then keep those individuals involved by providing updates as the project moves forward.
When it's time to implement, scorecards and dashboards — the more specific and quantifiable, the better — will track progress. With a target such as "no leaking roofs within three years," there is no gray area. Either you have leaky roofs or not.
For many organizations, simply developing a comprehensive view of total lifecycle costs of facility assets will help managers identify new cost reduction opportunities. True lifecycle cost management, however, involves understanding those costs well enough to know how various asset management approaches impact them. Although this level of understanding may initially seem daunting, there are a number of simple steps organizations can take to get started:
- Leverage the experience of people who work with the facility and know it best.
- Increase visibility and tracking of lifecycle costs.
- Start small to gain some experience identifying cost drivers and to generate some quick, visible successes.
- Reward lifecycle cost management, rather than short-term cost reduction.
It takes time and effort to change an organization's mindset from thinking about the "now" to thinking about the total impact of facility assets. But actively managing total lifecycle cost is a powerful way to reduce cost over the long-term, improve performance, and make sure that we are getting the most out of our facilities.
About the Authors:
Jim McIntosh is a director at Censeo Consulting Group, a firm that advises clients on strategic issues related to operations, supply management and procurement. Russ Witt is a senior associate at Censeo Consulting. More information at www.censeoconsulting.com.