At BYU, this principle has matured into a long-term capital investment strategy that is now embraced on all levels, starting with the college board of trustees down through the President’s office, the facility department, and ultimately facility users.

A Trustee Challenge

“We’ve been living under the TCO concept since 1981 following a direct challenge given by our trustees to our facilities group,” says Doug Christensen, director of the Office of Administrative Solutions for Physical Facilities at Brigham Young University (BYU) in Provo, Utah. “When the board asked us to find a way to make annual spending more predictable, it caused a shift in focus from just worrying about how much money was being spent to an emphasis on making sound asset management decisions for the long run.”

BYU’s facilities group responded to the challenge by conducting a thorough review of overall business trends, and the internal culture within the University.

“At that time we found that facility managers were often seen as owning the buildings rather than serving those who occupied them, and priorities were driven more by immediate needs than by planning for the future,” says Christensen.

He adds that the review also found that within BYU, competition for funding typically favored new programs over funding for maintenance and operations. As a result, BYU trustees were often faced with surprise funding requests for unbudgeted facility upkeep.

Proactive Planning

To minimize these surprise requests, the trustees asked BYU’s facilities group to create a detailed inventory of all facility assets, including the projected life cycle of the asset and estimated replacement values.

“We regularly update this asset listing in order to provide our trustees with a 40-year prediction of possible expenditures,” says Christensen. “It helps us plan for new space based on utilization rates, and helps keep the trustees focused on the need for continual facilities reinvestment.”

Christensen adds that when costs for new facilities are presented to BYU leadership, the figures are calculated using a 75-year TCO framework to include the total cost of the project and the estimated maintenance, operating, and replacement costs.

BYU bases TCO projections on three main categories of cost. The first being what Christensen calls birth and burial expenses, which center around one-time costs stemming from concept to bidding, financing, construction and installation, and a projection of future expenses involved in eventual decommissioning, demolition, and disposal of the facility.

The second category of TCO costs is based on annual recurring expenses associated with day-to-day maintenance and operations of the facility, including utilities and all other expenses involved in equipment maintenance, custodial services, grounds upkeep, and security.

Christensen labels the third category as recapitalization costs, which include periodic recurring expenses such as retrofits or improvements, and projects such as remodeling or equipment replacements.

“Sometimes facility people are afraid to say TCO projections out loud for fear they will scare away their funding sources,” he says. “We find that these numbers, no matter how high, are an important part of getting the whole team to change their frame of reference for funding from right now to the long-term.”

Funding for the Future

To ensure that long-term facility funding will be available when the need arises, BYU trustees also made a significant change in how funding is provided. In 1981, BYU trustees agreed to fund capital money directly to the facilities group so that operating and capital funds are now separate and distinct.

“Keeping capital funds apart from operating budgets helps limit the temptation to spend money just because money is available,” says Christensen. “In the past, it was much easier for other parts of the University, including the President’s office, to use capital funds to pay for projects requiring immediate funding.”

He adds that this practice also helped to change the mindset within facilities from spending budgets so they aren’t cut, to a more proactive discipline of spending only when it’s necessary. Building trust is key.

“Knowing that capital funds will be available when the need arises helps us to look at facilities as long-term investments and to make decisions that maximize the useful life of our assets,” says Christensen. “By being able to look ahead, it’s easier to make decisions that will proactively extend the life of our facilities and ultimately provide our trustees with a better return on their investment.”

Christensen admits that the practice continues to be debated internally within BYU.

“The challenge is finding the right balance between how much funding is needed for current operational needs while still maintaining the necessary capital funds to meet TCO projections,” he says. “Realistically we all know that funds are limited, so if everything goes toward future funding there won’t be money left to meet current needs.”

Calculating TCO

To illustrate the fact that capital costs occur throughout the entire life of a building, Christensen points to research that he conducted with the Center for Facilities Research, which will be published in an upcoming book entitled “Buildings …The Gifts That Keep on Taking.”

One example in the book, called “Warbucks Hall,” is based on an actual 250,000-sf computer science facility recently built at a Midwest university.

“Although we were not able to identify the facility by its real name, the example does cite the project’s actual costs and TCO calculations,” says Christensen.

The new $80-million facility will ultimately cost the university $196 million over a 75-year period to maintain, indicating a birth to burial rate of 41 percent. This rate is the percentage of TCO: $190 million divided by $80 million equals 41 percent.

To calculate this figure, Christensen converted actual costs to present values by using Present Value Tables with an inflation factor and a cost of money factor over 75 years. Following is a breakdown of the TCO costs for “Warbucks Hall.”

One-Time Birth & Burial Costs:

Planning & Design	$5,650,000
Construction	$74,489,000
Demolition/Disposal	$240,000
	$80,379,000

 Annual Recurring Maintenance & Operations Costs:

Planned/Routine Maint.	$375,000/yr
Breakdowns/Repairs	$200,000/yr
Operations	$425,000/yr
Utilities	$1,292,500/yr
	$2,292,500/yr

 Recapitalization/Periodic Recurring Costs:

Retrofits/Improvements	$160,000/yr (1% of CRV per 5 yrs)
Programmatic Upgrade	$160,000/yr (1% of CRV per 5 yrs)
Syst. Repl/Cap. Renewal	$1,202,000/yr
	$1,522,000/yr periodic recurring costs

 75-year Present Value:

	2006 Cost	75-yr Present Value
Birth and Burial	$80,379,000	$80,379,000
Maintenance & Ops	$2,292,500/yr	$69,616,000
Recapitalization	$1,522,000/yr	$46,221,000
		$196,216,000

Christensen explains that this example of retrofit and programmatic upgrade is indicative of a current industry average of one percent of current replacement value (CRV) over five years. This represents the amount of money that institutions spend over that same five-year period to take care of retrofits and program improvements.

“However, over an annual period, institutions are more likely to spend 1.5 to 2 percent of current replacement value to replace items,” he says.

According to Christensen, this research will lead to a change in the paradigm of facilities decision-making and financial stewardship.

“Facilities are long-term investments requiring conscious and consistent care across their entire life cycle,” says Christensen. “Managing the total cost of a facility allows for better decision making and proactive change because everyone involved in the project is able to see the whole picture, not just one particular function.”

By Amy Cammell