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1 Context BACKGROUND The built environment in the United States is the result of several centuries of investment decisions about buildings and infrastructure. Generations of individu- als and multitudes of public and private organizations have contributed to this evolving environment by making investments in the buildings (houses, offices, warehouses, factories, stores, museums, public safety stations, recreation centers, libraries, schools, hospitals, and research facilities) and infrastructure systems (water, waste disposal, energy, transportation, and telecommunications) that are the physical basis of our communities. This built environment and the services it provides directly affect the quality of life for more than 280 million U.S. resi- dents as well as the strength of the national economy. The magnitude of this investment is large. In 2000 the value of structures and utilities in the United States amounted to almost $22 trillion (USDOC, 2002). Seventy-seven per cent of these assets are owned by individuals, private, and not-for-profit organizations, while government (federal, state, local, and re- gional) owns about 23 percent (USDOC, 2002). And the investment is ongoing: Every year new facilities are built and existing ones are operated, maintained, and renovated. The federal government also provides loans and grants to all 50 states and the District of Columbia, 38,000 local governments, and 36,000 special districts (U.S. Government, 2002) to finance the construction and operation of roads, tran- sit systems, airports, housing, hospitals, schools, and utilities.1In 2001 such grants 1 In addition to federal loans and grants, state and local governments raise funds through income, personal, and real property taxes and borrow money through bond sales repaid by these taxes. 13

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14 INVESTMENTS IN FEDERAL FACILITIES and loans totaled approximately $145 billion (OMB, 2002). This report focuses on one aspect of the national investment in the built environment--the facilities that the federal government owns, leases, and operates directly. To provide a context for Chapters 2 through 6, Chapter 1 describes the ongo- ing magnitude of the federal government's investment in facilities; reviews some fundamental characteristics of private-sector organizations and the federal gov- ernment that affect facilities investment and management; and discusses drivers of change and conceptual shifts in facilities investment and management. THE ONGOING INVESTMENT IN FEDERAL FACILITIES As of September 2000, the federal government owned and leased approxi- mately 3.3 billion square feet of space worldwide (GAO, 2003f). This space is distributed over more than 500,000 facilities, including military installations, courthouses, embassies, hospitals, administrative offices, museums, recreation complexes, and research campuses. The total value of federal facilities is conser- vatively estimated at $328 billion, with defense-related facilities accounting for about two-thirds of that total (GAO, 2003f). Annually, the federal government spends upwards of $21 billion for the direct acquisition of new facilities and the renovation of existing ones.2 In fiscal year (FY) 2001, the federal government paid approximately $4.5 billion to power, heat, and cool its buildings (FEMP, 2003a). Federal agencies collectively spend more than $500 million per year for water and waste disposal (WBDG, 2003). Total government-wide expenditures for the operation, maintenance, repair, and disposal of federal facilities cannot be readily identified under the existing budget structure. However, annual expendi- tures are probably in the billions. Figure 1.1 shows federal agencies' facilities holdings in millions of square feet as of September 2000. These figures do not include the 630 million acres of federal land holdings, including national parks, forests, and other uses, which make up 27.7 percent of the total land in the United States (USDOC, 2002). Figure 1.2 shows the distribution of all types of facility space by use; infra- structure such as runways is not included. Office space, housing, and service space accounted for 60 percent of total federal government space (GAO, 2002b). The General Services Administration (GSA) owned or leased approximately 300 million square feet of the more than 728 million square feet of office space in- cluded in the federal inventory (GAO, 2002b). Individual departments and agencies own and lease a wide range of facility types to shelter and support the people and equipment required to carry out their 2This figure is based on historic estimates. Line items for construction in the departmental appro- priations bills were totaled for FY 2001.

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CONTEXT 15 GSA (312.4) Other383.7 10% USDA51.1 USPS247.6 VA140.6 Army778.5 Other Agencies Navy620.7 (2864.5) 90% DOT39.1 Air Force603.2 FIGURE 1.1 Federal agencies' facilities holdings in millions of square feet. SOURCE: GAO, 2001d. R&D Hospital Industrial School 5% 4% 4% 5% Other Institutional All Other 3% 6% Storage Office Space 13% 23% Service 15% Housing 22% FIGURE 1.2 Distribution of federal government space by type of use. SOURCE: GAO, 2001d.

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16 INVESTMENTS IN FEDERAL FACILITIES activities, programs, and missions. Some with narrowly focused missions--for example, the International Broadcasting Bureau and the Immigration and Natu- ralization Service--primarily use office space and a limited range of facility types such as radio transmission towers or border stations. The majority use specialized space--courthouses, embassies, museums, hospitals, prisons--in combination with office, warehousing, and research/laboratory space. The military services have the most diverse portfolios: Military installations contain all the types of facilities and infrastructure typically found in a small city, including airports, in addition to specialized facilities that support the defense mission. SOME CHARACTERISTICS OF PRIVATE-SECTOR ORGANIZATIONS THAT AFFECT FACILITIES INVESTMENT AND MANAGEMENT In the U.S. market economy, private-sector organizations are relied on to supply a wide variety of goods and services, and their activities are subject to regulation by many different governmental entities. Although the "private sec- tor" is often referred to as if it is a monolithic entity, in actuality it is made up of tens of thousands of organizations with a myriad of purposes, operating with varying degrees of success. Some characteristics of private-sector organizations that affect their approaches to facilities investment and management are discussed below. Mission and Goals A private-sector organization is established to carry out a specific mission-- its overriding "business." It is afforded latitude to achieve its mission through self-determined principles, policies, and practices within a public regulatory struc- ture. Organizational missions are as wide ranging as the goods and services pro- duced, from providing hospitality (hotel chains) and personal mobility (auto manufacturers), to solving complex business and technical issues for clients (con- sulting firms). The goal of a private-sector organization, as opposed to its mission, is typi- cally to achieve financial returns by selling goods and services at a higher price than the cost of producing them. A study of 146 multinational corporations found that 54 percent of the respondents chose "maximizing stockholder wealth" as their primary goal. The remaining respondents identified other goals, such as maximizing return on assets, maximizing growth in revenue, and maximizing growth in earnings per share (Block, 2000).3 3Other studies confirm this finding: Drury and Tayles (1997); Pike (1988); and the original, "clas- sic" article by Mao (1970).

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CONTEXT 17 For private-sector organizations, decisions to lease, own, build, renovate, renew, or dispose of facilities are driven primarily, but not exclusively, by market and financial considerations. Investments in facilities are made to ensure that operations are ongoing and efficient, a condition essential to the survival and growth of the organization in the marketplace. An organization's entire inventory of facilities typically is viewed and systematically managed as a "portfolio" of physical assets. Investments are made in these assets to support the organization's operational requirements. Funding Facilities Investments In 2001, U.S. businesses invested approximately $362 billion in new and existing structures and $748 billion in new equipment (U.S. Census Bureau, 2003). As illustrated in Figure 1.3, facilities typically account for almost one- quarter of a corporation's assets and its second or third highest operating cost (Brandt, 1994; O'Mara, 1999; Erdener, 2003), after people--salaries and ben- efits--and sometimes after technologies. New facilities or renovations of exist- ing ones can cost tens to hundreds of millions of dollars, take two or more years to complete, and require annual investments for operations and maintenance over Miscellaneous Facilities Finances 5% 15% 23% 17% Products/ Services 40% People FIGURE 1.3 Distribution of total assets for a typical corporate organization. SOURCE: Adapted from Brandt, 1994.

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18 INVESTMENTS IN FEDERAL FACILITIES a period of 30 years or longer. Millions of dollars may be spent annually to lease space. Private-sector firms raise money for expenditures by (1) selling goods and services, (2) borrowing from a bank or other lender at a certain interest rate, and (3) selling stock in the company. When making investment decisions, they must look at the relationship between risk--the time uncertainty and volatility of a project--and returns--the expected receipts or cash flow (Groppelli and Nikbakht, 2000). The longer the cash flow is at risk, the greater the return must be. The value of financial capital must also be accounted for, because it changes over time: Money today is worth more than money in the future. Factors that influence the time value of money are inflation, risk (uncertainty of the future), and liquidity (how easily assets can be converted to cash). Private-sector firms typically budget for two types of expenditures: operat- ing and capital. Operating expenditures (e.g., wages, salaries, administrative, and other current costs) are short-term and are written off in the same year as they occur. Capital expenditures (e.g., buildings, equipment, patent rights) are long- term and are amortized over a period of years, as determined by tax regulations (Groppelli and Nikbakht, 2000). Budgets for both types of expenditures are linked by an overall management plan. Private-sector organizations make decisions about capital expenditures sepa- rately from decisions about operating expenditures. Capital spending decisions are made based primarily on how they affect shareholders and are evaluated pre- dominately in monetary terms (PCSCB, 1999). In capital decision making and budgeting, there is no such thing as a risk-free project, because future cash flows may decline at any time owing to inflation, loss of market share, increased costs for raw materials, labor, or other resources, new environmental regulations, or higher interest rates, among other factors. When considering a potential facilities investment, private-sector standard practice is to first conduct a financial analysis. The analysis, embodied in a pro forma statement, typically evaluates the net present value (NPV) of the potential investment by projecting the revenues the investment is likely to generate, dis- counting the future cash flow by the time value of money, accounting for risk, and subtracting the initial costs. Under such a process, it makes economic sense to proceed with a more detailed evaluation of a facilities investment only if the NPV is positive. Facilities investment analyses, decision making, and evaluation processes are discussed in detail in Chapter 3. Response to Change In a competitive marketplace, the organizations that survive are those that can adapt to continual and often rapid change. For-profit organizations with long- term success are constantly modifying factors such as cost, availability, and the characteristics and qualities of goods and services to meet market conditions and

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CONTEXT 19 to prepare themselves for meeting new competitors. They also tailor their mul- tiple offerings of goods and services to fit specific market segments so as to realize the maximum yield (profits, short-term market share, or market segment control) for the dollars invested.4 As long as profits ensue, a private-sector organization's mission, values, and leadership can remain relatively unchanged for years. However, its principles, policies, and practices for meeting its mission may be adjusted continually or adapted in response to dynamic changes in the operating environment. Adjust- ments such as internal reorganization to eliminate unproductive overhead costs or to address underperforming business units may be necessary as a start-up busi- ness becomes a more mature, stable organization and as the scale of its operations grows or declines. When change requires the acquisition of new skills or access to newly developing markets, the acquisition of one company by another or the merger of two is not uncommon. For private-sector organizations, the issue fre- quently is not whether change is needed but when and how to change. Few ele- ments are fixed in the drive to improve organizational performance in order to meet financial goals and achieve strategic objectives. Timing is critical since or- ganizations that are slow to sense the need for change or to make adjustments are disadvantaged in the subsequent time period. Flexibility Successful private-sector organizations are able to respond to market or other changes relatively rapidly because they build flexibility into their decision-mak- ing processes, their procedures, their culture, and the strategies used for deliver- ing and acquiring space. They use a mix of ownership, leasing, lease-purchase, and other financial arrangements to acquire facilities depending on how the space will be used to support their operational requirements. Some private-sector organizations also build flexibility directly into their facilities: buildings with components and furniture that can be relatively easily reconfigured to accommodate new uses or new technologies, thereby allowing changes to be made in the physical environment relatively rapidly and at a rela- tively low cost. This is important in an environment where the turnover of em- ployees can necessitate the reconfiguration of workspace on a 12- or 18-month (or shorter) cycle. Flexible facilities are also built as a hedge against change: If a facility is being built to meet a particular requirement and that requirement changes soon after the facility is operational, it can be adapted to other uses. Flexibility in design can also make a facility more marketable to other users if and when the organization chooses to sell it. 4For example, the Marriott Corporation has developed distinct lines of hotel accommodations dif- ferentiated by ownership, quality, level of service, and cost per night that can be matched to local markets.

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20 INVESTMENTS IN FEDERAL FACILITIES As important, if not more important, to meeting the organizational mission are the people within the organization, the quality of the leadership and manage- ment, and the skills of the workforce. Private-sector organizations have consider- able flexibility to adjust their workforce to achieve their organizational mission and goals. They can adjust their compensation packages to the market, offering high salaries and a range of benefits to attract those who possess the leadership, management, and technical skills required to execute the organization's core busi- ness lines. Within labor practice constraints, they can lay off workers in response to changing markets, mergers, or other factors and can dismiss on short notice those who do not perform satisfactorily. SOME CHARACTERISTICS OF THE FEDERAL GOVERNMENT THAT AFFECT FACILITIES INVESTMENT AND MANAGEMENT In addition to the President, Congress, and the judicial branch, the federal government's executive and legislative branches today comprise 15 departments, 40 independent agencies, 22 corporations and commissions, and approximately 1.7 million civilian employees (U.S. Government, 2003). This structure incorpo- rates a system of checks and balances that ensures that many aspects and possible outcomes and consequences of policies and decisions are identified, considered, and accommodated in some fashion. Decision-making authority and responsibility for establishing missions, ob- jectives, policies, and practices are spread throughout the executive and legisla- tive branches--the President and the Cabinet, the Congress, senior executives and a multitude of managers in operating and oversight agencies and, ultimately, the voting public. The judicial branch acts as another check on the system by ruling on the constitutionality of decisions made or actions taken. Because of its size and organizational structure, the federal government does not act as a single, independent, monolithic entity. Instead, it operates more like a network of distinct but interdependent organizations with multiple missions, cul- tures, structures, and decision-making processes. One distinction between nongovernmental and governmental organizations is the beneficiary of their respective investments in facilities and infrastructure. Nongovernmental organizations directly reap most of the benefits, or losses, from spending on their facilities, buildings, and equipment. When the federal govern- ment invests in facilities, the public at large benefits or loses. Investments that confer benefits on a wide class of parties are referred to by economists as "public goods," because no private person or firm can capture all of the benefits. Public goods and services are distributed universally, that is, to all segments of society regardless of whether it is economically efficient to do so.5 Thus, decisions about federal facilities investments must take into account the benefits to the public at large, not just the benefits to a specific organization, agency, or department. In

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CONTEXT 21 many cases, these benefits are nonfinancial in nature--for example, preservation of a historic structure. However, it is difficult for the public at large to directly influence facilities investment decisions at the federal level.6 Those who most directly influence federal facilities investment include department and agency senior executives, facilities program managers, budgeting and financial analysts, Congress, the President, other policy makers, and special interest constituencies. The President and Congress are responsible for providing leadership and vision, setting poli- cies, enacting legislation, establishing regulations, and authorizing and appropri- ating public funds. Civil service employees and political appointees within the various federal departments and agencies are responsible for administering pro- grams, establishing and executing processes, analyzing their results, recommend- ing initiatives, enforcing regulations, and expending public funds efficiently, ef- fectively, and legally. In this decision-making structure, the various government entities have di- verse but overlapping objectives. As shown in Figure 1.4, some decision-making and operating groups, such as the Office of Management and Budget (OMB) and the Congressional Budget Office (CBO), focus on government-wide issues, like balancing the budget. Departments and agencies focus on issues related to their specific missions. Goals and Missions At the highest level, the goal of the federal government is to promote the public's health, safety, and welfare. Individual agencies have specific missions designed to support achievement of this goal. Their missions include, but are not limited to, providing national defense and homeland security; conducting foreign policy; protecting wilderness areas, national parks, and national landmarks; con- serving the nation's historical documents and cultural artifacts; supporting public education; and regulating businesses, transportation safety, and the quality of food, water, workplaces, and the environment. These missions are viewed as in- herently governmental, although some of the activities of all of them are per- formed by private-sector organizations.7 5 An example is the provision of mail delivery by the U.S. Postal Service to all residents, even in sparsely settled and isolated areas, where the per capita costs of providing such services result in operating losses. In addition, the price to the consumer of a first-class stamp is the same anywhere in the United States although the cost to the Postal Service for delivering a letter varies greatly, depend- ing on distance and location. 6 At state and local levels, the public can have a direct say in facility investment decisions by voting for or against bond referendums and by directly influencing the setting of tax rates. 7 For example, although the government is responsible for providing national defense, it contracts with private-sector organizations to produce the weapons systems required to achieve that mission.

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22 INVESTMENTS IN FEDERAL FACILITIES U.S. Public Agency Management OMB and CBO President and Congress Programs Facility Managers Human Building Administration Operating Resources Condition Budgetary Vision Costs Goals Fiscal Regulatory Mission Objectives Policy Projects Compliance Facilities and Life-Cycle Infrastructure Legislative Management Mandates New Initiatives Constituent Concerns FIGURE 1.4 The various stakeholders in facilities investments and their diverse and over- lapping objectives. Funding Facilities Investments The U.S. government primarily collects taxes and sells debt instruments, such as Treasury bonds and notes, to raise funds to support its activities.8 All expendi- tures, both operating and capital, are accounted for in the annual Budget of the United States Government.9 Since 1945, a number of actions and studies have been initiated to determine if the federal government should institute procedures to allow for separate consideration of operating and capital expenditures.10 To date, such procedures have not been implemented, and the government continues to make decisions about and budget for operating and capital expenditures to- gether, unlike private-sector organizations. Thus, facilities investment decision making in the federal government is driven in large part by the annual budget process and its associated time frames and procedures. These processes and pro- cedures drive a short-term perspective, one that focuses on current expenditures as opposed to long-term investments. Federal budgeting is a continual process that has specified milestone dates, 8The government also raises funds by charging for some services and leasing properties to outside interests. 9The federal government first instituted a central budget under the Budget and Accounting Act of 1921. Prior to 1921, federal departments and agencies submitted individual budgets to Congress. 10These initiatives include the Hoover Commission (1949); the President's Commission on Budget Concepts (1967); and the President's Commission to Study Capital Budgeting (1999).

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CONTEXT 23 usually annual, by which time a formal budget must be presented. Two parallel processes and two time cycles are at work: the Presidential budgeting process and the Congressional budgeting process and an annual cycle that meshes with tax reporting and appropriation cycles (the operating budget) and a longer-range (out- year) budget cycle that gives a better picture of where a department or agency is going beyond the current snapshot in time. Unlike private-sector organizations, which have some flexibility to internally establish their own budgeting and fund- ing processes, all federal departments and agencies must comply with one gov- ernment-wide set of budgeting procedures. In the federal budget process, as in many private-sector enterprises, requests for funding typically exceed expected resources. Only a relatively small propor- tion of the federal annual operating budget is discretionary, because the bulk of it is constrained by prior agreements, such as entitlements, and by the need to main- tain ongoing programs and services seen as critical or valuable. In any environ- ment where expectations exceed resources, trade-offs must be made. Decision makers in Congress and federal departments and agencies are asked to balance the competing demands of very different programs: Funding for facilities invest- ments must be weighed against funding for medical research, weapons systems, homeland security, education, or numerous other public programs.11 In many cases, therefore, federal policy and budget decisions are fundamen- tally matters of achieving political consensus. Where a difficult decision is at stake, the government often operates on the principle that, absent a clear consen- sus, it is better not to act but rather to continue to seek a consensus. The govern- mental process is not one that chooses to settle on one or another proposal based solely on a financial or technical analysis. Instead it seeks to fashion a compro- mise proposal that will command the greatest degree of consensus from among those offered. In this operating environment, programs or investments whose re- sults are not highly visible or will only be realized in the long term, such as facilities maintenance, tend to be put off to out-year budgets. Response to Change The federal government is less driven to change or to adapt its operating principles, policies, or practices or its organizational structure than is the private sector. Change or adaptation in government is not driven by market forces but is more likely to occur in response to elections, major events, socioeconomic trends at home and abroad, budget projections, media attention, outside or internal evaluations of agency performance, or changes in perceived good management practices. 11Private-sector organizations are rarely involved in making trade-offs among such disparate de- mands.

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24 INVESTMENTS IN FEDERAL FACILITIES Typically, change occurs slowly, except perhaps in isolated cases during cri- sis situations. The system of checks and balances guards against constant or rapid change and upheaval in the delivery of public goods and services. Consensus building to make a change can take years and span several election cycles be- cause of the many vested interests involved--elected leaders, Congressional com- mittees, agency staff, contractors who work for the government, and the public. The reorganization of departments and agencies or the divesting of government programs is typically a lengthy and controversial process. However it is possible and can be done when the need is clear.12 For these reasons and others, the mis- sions of the federal government, its departments, and agencies often remain rela- tively unchanged at strategic levels for long periods of time, although many man- agement practices change over time and the missions of individual agencies do evolve.13 Flexibility The scale of government operations is invariably large and typically pre- cludes flexibility and scalability. The government is frequently a monopoly pro- vider of goods and services, either because the function is inherently governmen- tal or because of legislation. In some instances, the government's role is to develop products and services initially and then spin them off to the private sector once the feasibility has been established and risk factors have been understood.14 Because of the federal government's size and other factors, most of its activi- ties are governed by numerous procedures that are designed to achieve some uniformity in the use of and accounting for resources. Such procedures limit the flexibility that can be applied to operations, including the hiring and firing of the workforce. Leadership in the federal government is primarily provided by the President, the Congress, the Cabinet, and other high-level political appointees. In contrast to the private sector, the election process may cause constant change in leadership. Each administration establishes a vision of the future and puts forward strategies for achieving that vision. However, it does not have the flexibility to unilaterally implement those strategies but must either work within established procedures 12Examples include the separation of the regulatory and advocacy functions of the Atomic Energy Commission (now the Department of Energy), the establishment of a Department of Homeland Secu- rity, and the divestiture of some aspects of the communication satellite business. 13The Department of Energy (DOE), for example, was originally established as the Atomic Energy Commission in the 1940s to produce nuclear weapons. Today, in addition to the nuclear stockpile, DOE's missions focus on energy production and conservation and the cleanup of waste from the weapons programs. 14Space-based systems for communication and Earth imaging are cases in point.

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CONTEXT 25 and processes or enact legislation to change those procedures, typically a time- consuming and difficult process. Civil service employees, whose tenure is not dependent on the political party in office, carry out federal government programs and initiatives. Federal depart- ments and agencies must seek to attract workers with the required management and technical skills by using relatively standardized compensation packages with clearly established salary ranges and salary caps. Their ability to adjust their workforces to meet changing requirements is similarly limited in that it is a time- consuming process to reassign or lay off workers whose skills are no longer es- sential to the achievement of the mission. Dismissal of civil service employees for unsatisfactory performance can also be a difficult and lengthy process. As a catalyst for workforce restructuring, federal agencies have repeatedly been given "buyout" authority in recent years. Such authority provides financial incentives for individuals to retire or seek work elsewhere, allowing some adjustments in the size of the workforce and the allocation of positions. The lack of flexibility in processes and procedures also applies to most facili- ties. Historically, federal departments and agencies acquired the majority of their facilities on a one-off basis--that is, a facility was designed to serve a specific purpose or function; such facilities include courthouses, embassies, research labo- ratories, museums, and hospitals. In addition, many federal buildings are historic in character and require specialized renovation techniques. Because most federal facilities are used for 50 years or longer, many of them must be adapted to sup- port new functions when requirements change: A former barracks might be reconfigured for use as administrative space. Efforts such as GSA's integrated workplace are intended to provide more flexibility in building systems and components so that they can be more easily adapted to changing requirements and technology (GSA, 1999). However, the vast majority of federal facilities were clearly not designed for flexibility and are difficult and expensive to reconfigure or adaptively reuse in response to changing requirements. FACILITIES REQUIREMENTS, LONGEVITY, AND LIFE-CYCLE COSTS The last two decades have brought great changes in the way Americans live and the services they demand. External and internal forces such as radical ad- vances in computers and communication, the regulatory environment, changes in demographics and socioeconomic conditions, and a renewed emphasis on the safety of personnel and customers are driving change in the operating environ- ments of all types of organizations. Today, organizations can operate around the clock by having business units located around the world and networked through technology. An increasingly diverse workforce requires greater accessibility and work arrangements such as

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26 INVESTMENTS IN FEDERAL FACILITIES telecommuting, flexible or part-time schedules, child care, and the like. Tech- nologies such as the Internet and wireless connectivity are changing the ways in which the public accesses services and the ways in which organizations interact with their employees, customers, and clients. Because electronic communication allows for the rapid exchange of information and the rapid collection and tabula- tion of demands and viewpoints, it provides ways to increase the number of par- ticipants in the marketplace and in public processes. All of these changes have an effect on facilities requirements, design, and operations. Facilities Requirements Changes in society and in organizational environments affect facilities re- quirements--that is, the properties of a facility that will achieve a balance be- tween the external environment, the facility's long- and short-term objectives, and the functions it is expected to serve (Erdener, 2003). Twenty-four-hour op- erations, together with computers and other office equipment, make the uninter- rupted supply of a facility's power, heating, ventilation, and air-conditioning systems more critical. Increasing turnover rates for employees and operating units and new technologies for business and security functions necessitate facili- ties that can be adapted to new interior layouts quickly, efficiently, and cost- effectively. An increased emphasis on physical security calls for methods to reduce the vulnerability of a facility to terrorism and natural hazards so as to better protect the people and equipment inside. Greater accessibility for the physically handicapped, employees, and visitors requires new facilities designs. Facilities' Longevity Although facilities requirements are dynamic, facilities themselves are rela- tively static and can be long-lived. Most facilities are designed to provide at least 30 years of service. With proper maintenance and management, buildings can perform adequately for 100 years or longer. The longevity of an individual facility is dependent on such factors as quality of design; quality of construction; durability of construction materials and com- ponent systems; incorporated technology; location and local climate; type and intensity of use; operation and maintenance methods; damage caused by natural and man-made disasters; and human error (NRC, 1998; FFC, 2001c). Facility longevity is also influenced by its value to its owner: A facility that is performing adequately may still be demolished if it no longer fulfills an organization's oper- ating requirements, or if other opportunities for the land on which it is situated provide greater value. Thus, a central issue in addressing facilities investments is the relative lon- gevity of facilities and the likelihood that whatever is built and however it is maintained will eventually become obsolete to the original objectives in the short,

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CONTEXT 27 intermediate, or long term. There will also be changes in ownership, occupancy, regulations, condition, internal and external technologies, and the opportunities that inhere in a facility or the real estate it occupies. Life Cycles of Facilities Facilities are complex structures with a number of separate but interrelated systems--exterior walls, roofs, and windows; mechanical and electrical systems; heating, ventilation, and air conditioning; fire protection; security; and others. The individual systems require extensive renewal periodically, on cycles that vary from 10 to 50 years. Because a facility's systems can be repaired or replaced and its interior spaces can be reconfigured to support new functions, its service life can be extended well beyond the life of the individual systems. For this reason, facilities can be viewed as renewable assets. Facilities pass through a number of stages during their lifetimes: planning (programming, conceptual planning, design), acquisition (construction, start-up), operation (use, renewal, repair or revitalization), and disposal (sale, demolition) (Figure 1.5). The direct costs of facilities over their life cycle include those for programming; conceptual planning; financing; design; construction; maintenance; repairs; replacements; alterations; normal operations such as heating, cooling, lighting; and disposal. Design and construction expenditures, the so-called "first costs" of a facility, typically account for 5 to10 percent of the total life-cycle costs. However, deci- sions made during design and construction about how much to invest in a building's materials and systems can significantly impact its operating and "exit" or disposal costs. Operation and maintenance costs typically are 60 to 85 percent of the total life-cycle costs, with land acquisition, programming, conceptual plan- ning, renewal or revitalization, and disposal accounting for the remaining 5 to 35 percent (NRC, 1998; FFC, 2001c). For facilities to perform adequately and reach their design service life, annual investments in preventive maintenance and minor repairs are required. Facilities, of course, are built to shelter people and equipment and their ac- tivities. Thus, in addition to the cost of the facility itself, there will be related costs such as those for staffing, furnishings, equipment, and information tech- nologies. These costs can be 2 to 10 times greater than the cost of the facility over its entire life cycle. Plan Acquire Operate Dispose FIGURE 1.5 Facility life cycle.

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28 INVESTMENTS IN FEDERAL FACILITIES As noted previously, private-sector organizations invest in facilities to en- sure that the production of goods and services and other operations are efficient and ongoing in order to maximize their returns. When public-sector organizations face choices on where to invest limited resources, facilities investments, particu- larly investments in maintenance and repairs, are often the first to be deferred or cut altogether. For public-sector officials, this decision is relatively easy, because in the short term operations will continue without an obvious immediate decline in services to the general public. As maintenance is deferred over the longer term, however, the capital investment required to renew or replace a facility is twofold: the replacement cost and the return on the original investment. It has been esti- mated that the cost relationship is between $4 and $5 in capital liability created for each $1 of deferred maintenance (Kadamus, 2003). Thus an accumulation of deferred investments over the long term may be significantly greater than the short-term savings that public-sector decision makers were initially seeking. CONCEPTUAL SHIFTS IN FACILITIES INVESTMENT DECISION MAKING In the drive to achieve their missions, increase profitability, and become more competitive, private-sector organizations have sought to significantly improve critical areas of performance by being results-driven. They focus on improving operations linked to financial, functional, and corporate objectives such as in- creased yields, reduced delivery times, increased inventory turns, improved cus- tomer satisfaction, [and] reduced product development time (Schaffer and Thomson, 1992). Research reports published in the 1980s and early 1990s found that finance directors and corporate planners responsible for the business planning and direc- tion of private-sector organizations were not closely linked to their facilities man- agement or real estate departments (Then, 2003). As competition and the pressure to produce results increased in the 1990s, financial directors and corporate plan- ners began scrutinizing all of the costs of doing business, including facilities costs, in order to remain competitive. Some organizations began to take a more inte- grated, all-encompassing approach to managing their resources--people, facili- ties, information technology, and dollars--to better meet their missions. When senior managers recognized that the facilities required to support the delivery of goods and services were a means to a more basic economic end, their organiza- tions began to evaluate facilities investment proposals as they would proposals for other investments--as mission-enablers rather than solely as costs. In this construct, investments in facilities and decisions on their location are typically made to ensure that business operations are continuous and efficient, essential ingredients to an organization's current and future success. The emergence of new information technologies in the 1990s also drove and enabled more integrated approaches to facilities investments and management,

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CONTEXT 29 although such technologies also present organizational challenges. Using infor- mation technology for facilities management is not new: Computer-aided facili- ties management systems have been available for almost two decades. What is new is the capacity to integrate data from facilities management systems with data from financial and personnel systems in order to track all of the resources involved and provide the information needed to make decisions about invest- ments. These technologies also allow for the rapid aggregation of large amounts of data from geographically dispersed sites. Thus, data can now be gathered for entire portfolios of facilities and their staffing and operating costs as opposed to data for individual buildings only. At the same time, determining which data are actually useful in decision making can be difficult. Doing so is likely to require a concerted effort to identify, verify, and refine data in order to develop informa- tion that is helpful in differentiating the consequences of alternative actions. All of the above factors--the desire for flexibility, responsiveness to change, changing expectations, integrated management, information technologies--are driving significant change in the field of facilities management. The evolving discipline of facilities asset management is the focus of Chapter 2.