Why should Facility Managers be aware of the Planning Operations Budget?

Facility Managers must create an accurate budget plan that meets business objectives and stakeholders’ expectations. They need to understand financial tools, local markets, and management priorities. An effective budget plan is essential for resource allocation, cost control, transparent communication with stakeholders, and cost allocation to critical service lines.

This article comprehensively explains the different approaches to preparing an Annual Budget for Integrated Facilities Operations to facilitate informed decision-making. The primary objective of the Annual Budget is to meet building infrastructure needs while safeguarding stakeholders’ financial interests. The Annual Budget can be categorised into Operation and Capital expenditures, and it is crucial to draft it in adherence to the Service Level Agreement (SLA), using industry-specific methodologies while considering business risk ownership, cost incentives, and impacts. Therefore, it is imperative to carefully consider all factors before finalising the Annual Budget.

• Fixed Price
• Variable Price
• Guaranteed Maximum Price
• Cost plus
• Pass through
• Performance-based
• Rolling Forecast Budgeting

To establish a dependable baseline for operational expenses, it is imperative to conduct an analysis of both day 0 estimation and past trends of operating spending. In addition, it is vital to consider industry benchmarks, revenue, and functional requirements. This comprehensive approach will allow for an accurate and realistic assessment of operational expenses, which is crucial for effective financial management. By utilising these factors, businesses can optimise their spending, identify areas of potential cost savings, and make informed decisions regarding their financial strategy. Therefore, it is highly recommended that organisations prioritise the analysis of these variables when creating an operational spending baseline.

• Fixed Price

The fixed price elements usually include monthly fixed maintenance charges (— /sqm) and other mandatory costs stipulated in the Service Level Agreement.

• Variable Price

The category of Variable Price for service line elements entails annual costs that vary depending on occupancy, business operations, seasonal changes, occupants’ needs, and other independent variables. Statistical tools and science-based initiatives are employed to accurately predict costs and cost performance indicators, utilising past trending information, including anticipated inflation. This approach enables organisations to determine the optimal allocation of resources and enhance overall cost-effectiveness.

Example-

Monthly Energy Consumption (MWh) = b₀ + b₁x₁ + b₂x₂ + b₃x₃ + e

Independent variables – x₁, x₂, x₃

Constants – b₀, b₁, b₂, b₃

Residual – e

It is imperative to consider the derived value of the ‘significance F’ and P to ensure the fitness of independent variables in regression analysis. It is recommended that these values be maintained below 0.05 (< .05) to ensure the accuracy of the analysis. It is imperative to evaluate the p-values associated with the independent variables: the average monthly temperature in an outdoor setting, monthly footfall within the building, and business operating hours.

Example – Linear Regression Analysis

(The ‘Footfall/month’ P-value in the building is greater than 0.05, so it is not considered in the revised energy consumption projection.)

• Guaranteed Maximum Price (GMP), Cost Plus (CP), and Pass-through (PT)

A service-level agreement defines the pricing mechanism for service line elements based on GMP, CP, or PT.

The GMP approach calls for applying statistical tools with due consideration of the client business operating culture, operations efficiency, industry benchmarks, local demographic influences, other independent contributing factors, and customer satisfaction survey outcomes. GMP will include both ‘Fixed’ and ‘Variable’ budgeted estimates within the mandated Guaranteed Maximum Pricing. The absorption costs attributable to prevailing CPI beyond the inflation threshold must also be factored into the GMP estimation.

Example  

The cost adjustment is determined by considering the annual CPI inflation rate, which typically falls between 2% and 3%. Furthermore, a budgetary adjustment of 1% is also taken into account.

Various auxiliary services such as Medical Center, Training, specialised Cleaning, Catering, Event Management, Procurement, and Transport can be classified under the CP and PT categories. Adopting a Zero-based budgeting approach is highly recommended for projects under the cost-plus category. In the event of proposing new initiatives, it is essential to provide a Capital Investment Note that adequately addresses issues pertinent to the capital requirement and sourcing, Return on Capital employed (average of year 1-3), and financial sensitivity analysis, such as IRR, NPV, or EBIT margin. Ensuring that the Capital Investment Note includes a thorough economic sensitivity analysis to assess the feasibility, risk management, and potential profitability is crucial.

• Performance-based

The performance-based budgeting process is strategically designed to motivate the accomplishment of business objectives, including innovation, improvement, and cost optimisation within an organisation. Establishing service level agreements (SLAs) with measurable performance indexes, outcome-based rewards, and penalties for service providers is a significant component of this approach. This methodology allows organisations to align their budgetary planning with their overall business objectives, ensuring that all stakeholders work toward a common purpose and that resources are allocated effectively. Implementing performance-based budgeting can help organisations achieve their long-term goals while promoting transparency and accountability.

• Rolling Forecast Budgeting

The rolling forecasting model represents a valuable tool for change management processes in budget planning. This method considers the impact of market pricing fluctuations and the reallocation of budgeted amounts to priority cost heads. Such estimates are obtained through a meticulous application of statistical and financial techniques. The model holds great promise in optimising budgetary allocations, ensuring their efficacy, and contributing to sound decision-making practices.

• Common pitfalls in ‘Annual Budget Planning’

Successfully planning an annual budget necessitates a comprehensive understanding of financial tools, management expectations, and objectives. To avoid common errors, meticulous attention to assumptions and estimations, diligent monitoring of expenses, continuous analysis of expenditure trends, end-use feedback gathering, and periodic assessment of the ‘Facility Condition Index’ are required.

Common pitfalls in this process include deficient forecasting due to inadequate historical expenditure data and prevailing market pricing, alterations in business operations throughout the financial year, insufficient contingency amounts, poor communication and collaboration among stakeholders, and inadequate comprehension of operational sustainability.