Making business case analysis and planning the first step and the underlying basis for all major capital planning is a key element of this recommended process transformation. It puts business case at the center of project definition, capital approval, and project execution. This is a significant departure from the more common process in which step one is the hiring of an architect to sketch out a building solution followed eventually by capital approval for the cost of that building. Business-case planning, instead, focuses the capital planning process on the value of capturing an academic program opportunity.

The July 2005 transformation report states that changes to the University's capital planning and execution process could yield the University a construction cost savings of at least 10 percent, and very possibly 25 percent. Based on UC's current spend rate, this amounts to one, two, or possibly even three new-buildings-a-year-worth of program expansion for free—that is, 10 to 25 percent more program growth per year without a corresponding need for construction dollars.

That's a lot of free growth!

In addition to business-case-based planning, other process changes recommended by the report include: more accountability for capital asset programs at the campus level; a shorter, simpler planning and approval process; implementation of "Best Value" contracting; and system-wide metrics, standards and data for mission-relevant metrics such as project cost per student, per bed, and per principal investigator.

The University of California faces a challenge common to many universities across the country today: campus enrollments are growing, and there are increasing restrictions on the availability of capital funds to build capacity for these growing enrollments. So the question to be answered is, "How do we get more program per capital dollar spent?"

At the time this question was asked, the University had a portfolio of $7 billion of in-process construction?a portfolio which comes under the purview of the Regent's Committee on Grounds and Buildings. Each year, the UC system launches roughly $1 billion in new projects to support growth in its teaching and research programs.

What the report makes clear, however, is that the panel of experts is not recommending that the University build cheaper buildings, bypass LEED design features, or focus on construction labor rates, but rather to put in place a new process that turns out capital solutions that yield higher program payoffs per capital dollar spent. The experts expect that in some instances that process will solve capacity problems without any capital outlays whatsoever, and when capital outlays are called for, capital projects should be executed faster so as to reduce cost escalation effects and reduce owner oversight expense.

Business Case Analysis: Step 1

A true business case analysis—conducted by business analysts, not designers—determines the best economic option for achieving specific program goals by examining the following:

• Non-building alternatives, to determine if a new building is needed at all.
• Off-campus solutions.
• Third-party developer alternatives or leases.
• Best use of land in the context of the university’s long-range plan.
• Multi-program, shared-facility solutions.

The formal analysis document sets out the business case for a capital project and its implementation plan. It contains a situation analysis, needs assessment, financial analysis of alternatives and solutions with respect to pros and cons, capital costs, operating and other costs, ROI, and a complete capital expenditure schedule including opening date.

"The view of this committee of construction-industry experts," says Steve Westfall, president of Tradeline Inc. and facilitator of the committee, "is that many institutions feel they actually do business case analysis for their projects, but that is typically done after a building solution has been envisioned, in which case we are talking about value engineering, not business case analysis.

"The radical feature of business case-based capital planning," he continues "is that a capital project is approved on the basis of a business plan for an particular program opportunity."

Success in Other Venues

The U.S. Coast Guard, like all branches of the military, uses business case analysis as a way to make the best use of limited federal dollars, says Lt. Cmdr. James J. Dempsey, executive officer, Civil Engineering Unit (CEU) Oakland, Calif.

"It helps us maintain flexibility in a very rigid industry with stovepipes of expertise," he says. "The facilities manager paradigm looks at facilities and what needs to be done to maintain them. The business case leverages the expertise of the facilities manager to relate facilities to the mission."

Business case analysis shifts the conversation from how to do construction to why do it, he says. The analysis assists in the decision-making process of how to use available resources and funding for capital projects.

"We have made, I believe, some breakthrough strides in developing metrics and methodologies on how to link facilities to mission readiness in support of mission-based, facility asset management decision-making," says Dempsey.

The University of Alberta, Canada, developed such a comprehensive method for making a business case that it was adopted by the entire province for all publicly funded projects, from roads to hospitals.

"At the very least, business case analysis is a very useful tool to get faculty to really think through their capital project," says Elizabeth Dechert, director of strategic planning services for the University of Alberta. "When a dean can answer all the questions put forth in a business case analysis, it contributes to the quality of the project."

Faculty are required to explain, among other factors, the current trends in research, what other institutions are doing, and the justifications through research for a new building. This process generates significant results. By doing a business case analysis for the new Health Research Innovation Building, scheduled for occupancy in fall 2006, the dean realized the need to include a clinical component to enhance both the university’s research capability as well as its contribution to the community.

"Had this component been considered later in the process, the economic impact on the project would have been significantly greater," says Dechert.

One deficiency in the process is a tendency by deans to underestimate the cost of a project by as much as 25 percent in order to make it look more desirable, she says. The university compensates for that problem by requiring two analyses. The first establishes the priority of the project, states who will benefit from it, and provides an initial plan. The second is a more complete analysis, which is the economic basis of the preliminary plan for the project.

A Quantum Shift in Thinking about Construction

Of the expert committee's recommendations to the University of California, the biggest conceptual change for U.S. universities is conducting business case analysis as the first step in capital projects.

"When we talk of business cases, we're likely to scare a lot of people off," says Peter Morris, a principal with Davis Langdon Adamson, a cost estimating consultant. "Universities don't want to be thought of as businesses. They're universities; they're in the knowledge business, not in the manufacturing business."

It is unusual to find U.S. institutions outside of the private sector doing business case analysis, says Morris. Part of the problem is the difficulty in measuring the intangible assets, such as the students and faculty or the level of research and prestige.

"It is somewhat alien to the institutional clients," says Morris. "To a certain extent, they don't know what their business is. That may sound a bit harsh, but it can be difficult for them to know what their business measures of success would be. For example, what is the revenue arising from an individual student, and then what is the revenue arising from a certain instructor?"

Universities should be doing a business case analysis, despite those inherent challenges, says Morris.

"The alternative is to decide based on emotion, or because it feels as if we ought to be doing it," he says.

According to Morris, the solution is to rethink the way the analysis is done. Businesses tend to boil everything down to a single variant: money. Universities, on the other hand, could develop multi-variant analyses, even though there may be no scientific way to compare the values of different variants.

"The thought process gives the institution the tools to weigh the tangible single variable against the intangibles," he says. "For example, an institution can make or save a lot of money by doing XYZ, but that could wreck its reputation in the academic community. Or, the institution can go $20 million into debt, build a flagship building, and keep its Nobel laureates. Is it willing to pay $20 million for that? Possibly."

Business case analysis also is a useful—and often underutilized—tool in deciding whether to scuttle a project that is already under way, which Morris says is a decision few institutions have the stomach to make.

"The area where I think it has a lot of opportunity—where we haven't seen it being developed—is at what point does a project move over the go/no go threshold?" says Morris. "In other words, the business case format gives us the basis to act as we should when we’ve discovered some new things that would say take the project out and kill it."

Morris cautions that even projects that are carefully planned with business case analysis come with a level of risk.

"Business case is all about forecasting, and forecasting has a lot of uncertainty in it," he says. "There's a natural tendency to think that if I put dollars on it, it must be accurate, whereas dollars are no less subjective than what feels right. We need to be very honest that a business case analysis still has a high degree of subjectivity in it."

Morris predicts that if analysts are very clear about this with their client institutions, the institutions eventually will begin to feel comfortable with the process.

"It's going to be a very slow process to have people decide they're really willing to live without a building, or with a much smaller building than they thought they wanted. The system is stacked toward the process of fighting for as many dollars as you can get, and once you have them, not letting anyone pry them out of your hands."

Given the still-prevailing academic culture surrounding capital spending, the University of California's thinking about capital process transformation is newsworthy.

By Lisa Wesel

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