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OCR for page 55
4
Effective Practices for Investment in
Maintenance and Repair
In 2002, the National Research Council appointed the Committee on Business
Strategies for Public Capital Investment (NRC, 2004a, p. x) to
develop guidelines for making improved public investment decisions about
facilities and supporting infrastructure, their maintenance, renewal, replace-
ment, and decommissioning. As part of this task, the committee was asked to
review and appraise current practices used to support facilities decision-making
in both the private and public sectors and identify objectives, practices, and
performance measures to help determine appropriate levels of investment.
The resulting report, Investments in Federal Facilities: Asset Management
Strategies for the 21st Century, identified 10 principles/policies used by best-
practice organizations in matters of facilities investment and management (NRC,
2004a). The report noted that despite the inherent differences between public and
private-sector organizations regarding goals, missions, and operating procedures,
some aspects of all the principles/policies could be adapted to the federal operat-
ing environment.
To gather information for the present report, the committee identified private-
sector companies and professional organizations that it believed to be industry
leaders in effective maintenance and repair practices, and it heard directly from
four: IBM, General Motors (GM), General Dynamics, and the Association
of Higher Education Facilities Officers-APPA. Information was also obtained
from three major providers of facility assessment consulting services—Parsons,
W itestone Research, and VFA Inc.—and from numerous federal agencies, as
h
noted in Chapter 1.
55
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56 PREDICTING OUTCOMES OF INVESTMENTS IN FEDERAL FACILITIES
The 2004 National Research Council report found that best-practice organiza-
tions all did the following (NRC, 2004a, p. 2):
• Establish a framework of procedures, required information, and valuation
criteria that aligns the goals, objectives, and values of their individual decision-
making and operating groups to achieve the organization’s overall mission; create
an effective decision-making environment; and provide a basis for measuring
and improving the outcomes of facilities investments. The components of the
framework are understood and used by all leadership and management levels.
• Implement a systematic facilities asset management approach that llowsa
for a broad-based understanding of the condition and functionality of their
f
acilities portfolios—as distinct from their individual projects—in relation
to their organizational missions. Best-practice organizations ensure that their
f
acilities and infrastructure managers possess both the technical expertise and
the financial analysis skills to implement a portfolio-based approach.
• Integrate facilities investment decisions into their organizational strategic
planning processes. Best-practice organizations evaluate facilities investment
proposals as mission enablers rather than solely as costs.
General Dynamics, IBM, and GM all follow those practices for managing
their facilities. They also reported that they had been successful in obtaining ade
quate funding for their maintenance and repair programs. They attributed their
success, in part, to a combination of strategies as follows:
• Facilities are closely aligned with the organization’s mission—excess or
underutilized facilities are disposed of and space is proactively managed
to minimize the total square footage in use.
• Maintenance and repair investments are linked to the organization’s
product delivery or bottom line because failure to invest can result in finan
cial harm to the organization and real or perceived harm to its apacity to
c
perform.
• Investments are made to ensure compliance with regulatory or statutory
requirements because failure to do so can result in legal and financial
penalties.
• The work undertaken results in efficient operations, which result in lower
operating costs that can be documented.
The private-sector representatives identified a number of practices that are
used by their organizations to ensure that maintenance and repair investments
result in outcomes that are beneficial to the entire organization:
• Dispose of excess and underutilized facilities (buildings, structures, and
infrastructure).
• Pursue a proactive strategy to minimize the total facilities “footprint.”
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EFFECTIVE PRACTICES FOR INVESTMENT IN MAINTENANCE AND REPAIR 57
• Correlate the effects of failure with the organization’s mission.
• Correlate repair delay with sustainment cost.
• Remove “must-fund” projects and those supported by acceptable financial
payback from the maintenance and repair account and fund them with
other discretionary sources.
• Use consistent standards to strategically assess the condition of facilities
that require maintenance and repair.
• Conduct a year-end budget review to evaluate investment performance.
The committee acknowledges that the choice of those practices is not based
on an industrywide survey of best-practice organizations or on a scientific or ran-
dom sampling of organizations. Nonetheless, it believes that if such practices were
implemented in federal agencies, they could result in more cost-effective practices
that would yield improved long-term results, as described below.
DISPOSE OF EXCESS AND UNDERUTILIZED FACILITIES
Effective portfolio-based facilities management looks holistically at the entire
inventory of buildings and structures and aligns them with the organization’s over-
all mission and operating objectives. Continual monitoring is required to identify
facilities that become excess or underutilized because of changes in requirements
or in the operating environment.
Private-sector organizations “have a direct incentive to dispose of unneeded
facilities because they are a drain on organizational resources and are readily
identifiable on their balance sheets” (NRC, 2004a, p. 97). Excess or underutilized
facilities are disposed of through sales, demolition, or nonrenewal or termina-
tion of leases to free resources for other organizational requirements. In that
way, private-sector organizations manage the risk of fiscal exposure related to
the ownerhip of facilities, reduce their maintenance and repair requirements,
s
and reduce facilities-related expenses, such as property taxes, energy and water,
insurance, and security. They also manage the risk to their public image posed
by abandoned and poorly maintained facilities, which could affect the public’s
willingness to buy their products (NRC, 2004a).
Actual disposal of excess facilities can be difficult even for private-sector
organizations. Obstacles to disposal include a lack of resources for the upfront
planning or the investment necessary to sell or demolish excess facilities, organi-
zational culture, the desire to retain space “insurance” at a local location (some-
times used for storage of underused equipment), or a belief that what is excess
capacity today may be needed in the future.
Representatives of IBM and GM emphasized that their organizations were
unable to dispose of excess facilities effectively until the effort was managed by
a central organization charged with that responsibility. The central corporate-level
organization was responsible for identifying excess facilities, identifying the
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58 PREDICTING OUTCOMES OF INVESTMENTS IN FEDERAL FACILITIES
best method for disposition (such as sale or demolition) and preparing an imple-
mentation plan. The plan was reviewed with local management before obtaining
corporate-level approval for disposal or demolition and approval of the funding
needed to execute the plan.1
As noted in Chapter 1, federal agencies own thousands of excess and under-
utilized facilities and this poses a risk of fiscal exposure to the federal government
as a whole. To date, the Base Realignment and Closure (BRAC) process that began
in 1988 and continues today has been the most far-reaching and ambitious effort
to address this issue.
In June 2010, a presidential memorandum titled Disposing of Unneeded
Federal Real Estate was issued to address excess properties in civilian agencies.2
The memorandum states the following:
For decades, the Federal Government, the largest property owner and energy user
in the United States, has managed more real estate than necessary to effecively
t
support its programs and missions. Both taxpayer dollars and energy resources
are being wasted to maintain these excess assets. In addition, many of the proper-
ties necessary for the Government’s work are not operated efficiently, resulting
in wasted funds and excessive greenhouse gas pollution. . . . Past attempts at
reducing the Federal Government’s civilian real property assets produced small
savings and had a minor impact on the condition and performance of mission-
critical properties. These efforts were not sufficiently comprehensive in dispos-
ing of excess real estate and did not emphasize making more efficient use of
existing assets.
That presidential memorandum states that federal agency actions, as permit-
ted by law, should include reducing cycle times for identifying excess assets and
disposing of them; eliminating lease arrangements that are not cost effective;
pursuing consolidation opportunities within and among agencies in common
asset types (such as data centers, office space, warehouses, and laboratories);
increasing occupancy rates in current facilities through innovative approaches to
space management and alternative workplace arrangements, such as telework;
and identifying offsetting reductions in inventory when new space is acquired.
Federal agencies are also directed to take immediate steps to make better use of
remaining real property assets as measured by utilization and occupancy rates,
annual operating cost, energy efficiency, and sustainability.
Those actions are intended to result in at least $3 billion in cost savings by the
end of FY 2012. An additional $9.8 billion in savings is expected to be realized
through the Department of Defense’s BRAC efforts from FY 2010 to FY 2012,
1GM has several examples in which the salvage revenue from demolition exceeded the cost of
demolition. In at least one instance, the salvage cost of the structural steel alone exceeded the total
cost of demolition.
2The full text of the memorandum is available at http://www.whitehouse.gov/the-press-office/
presidential-memorandum-disposing-unneeded-federal-real-estate.
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EFFECTIVE PRACTICES FOR INVESTMENT IN MAINTENANCE AND REPAIR 59
of which $5 billion is a direct result of reducing operating and maintenance costs
by disposing of excess facilities or other consolidation efforts.
Three previous National Research Council reports have addressed various
aspects of the disposition of federal facilities. Stewardship of Federal Facilities:
A Proactive Strategy for Managing the Nation’s Public Assets made the following
recommendation (NRC, 1998, p. 7):
Long-term requirements for maintenance and repair expenditures should be
managed by reducing the size of the federal facilities portfolio. New construc-
tion should be limited, existing buildings should be adapted to new uses, and the
ownership of unneeded buildings should be transferred to other public or private
organizations. Facilities that are functionally obsolete, are not needed to support
an agency’s mission, are not historically significant, and are not suitable for trans-
fer or adaptive reuse should be demolished whenever it is cost effective to do so.
Investments in Federal Facilities: Asset Management Strategies for the 21st
Century made two additional recommendations on this topic as follows (NRC,
2004a, p. 5):
Recommendation 2(c). To facilitate the alignment of each department’s and
a
gency’s existing facilities portfolios with its missions, Congress and the admin-
istration should jointly lead an effort to consolidate and streamline government-
wide policies, regulations, and processes related to facilities disposal, which
would encourage routine disposal of excess facilities in a timely manner.
Recommendation 2(d). For departments and agencies with many more facilities
than are needed for their mission . . . Congress and the administration should
jointly consider implementing extraordinary measures like the process used for
military base realignment and closure (BRAC), modified as required to reflect
actual experience with BRAC.
A third study, Intelligent Sustainment and Renewal of Department of Energy
Facilities and Infrastructure (NRC, 2004b), outlined a decision-making process
that could be used by the Department of Energy to determine whether to repair,
renovate, or replace facilities and to determine whether a facility should be re-
tained or disposed of (Figure 4.1). The process outlined may be of use to other
federal agencies.
If the disposal of excess and underutilized properties by civilian agencies can
be successfully implemented, the federal government would reduce its risk of fis-
cal exposure related to the ownership of buildings, reduce its total operating costs,
and reduce its long-term maintenance and repair requirements and costs. Disposal
of excess and underutilized facilities would also help to meet other public policy
objectives related to reductions in the use of energy and water and in greenhouse
gas emissions. To realize those long-term savings and benefits, a coordinated,
sustained, and funded effort will be required.
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60 PREDICTING OUTCOMES OF INVESTMENTS IN FEDERAL FACILITIES
Disposal Track Retention Track
Does the facility Is the facility’s
Yes condition adequate to Yes
enable a critical Sustain and monitor
DOE mission? fulfill mission
objectives?
No No
Is the facility Are suitable
needed for another Yes replacement facilities Yes Yes Relocate to
Is relocation feasible? replacement facility
mission of the landlord available at other
program? DOE sites?
No No No
Can facility be
Is the facility needed Yes restored to acceptable Yes Refurbish or
by other DOE condition for less than Recapitalize
programs? replacement cost?
No No
Replace
Does the facility
Stabilize Yes
contain toxic/hazardous
and/or remediate
materials?
No
Is the facility wanted Yes Dispose as excess
by other federal agencies, federal property
community or private
interests?
No
Demolish
FIGURE 4.1 Process for decision-making to repair, renovate, or replace. SOURCE: NRC,
2004b. fig 4-4
Landscape view
PURSUE A PROACTIVE STRATEGY TO MINIMIZE
THE TOTAL FACILITIES “FOOTPRINT”
In addition to disposing of excess and underutilized facilities, private-sector
and other high-performance organizations proactively initiate strategies to mini-
mize their total facilities footprint and the associated costs (such as those for
equipment, furniture, and landscaping). As long as a facility is occupied or other-
wise in use, even if it is underutilized, electrical, mechanical, life-safety, and other
systems must be kept in safe operating condition. Providing services to unneeded
space is not cost-effective.
As noted in Chapter 1, advances in technology are changing the concept of
workplace. Alternative work strategies, such as telecommuting, offer the potential
for both public and private-sector organizations to reduce their required amounts
of office or administrative space substantially. Doing so can also reduce their
overall maintenance and repair requirements.
IBM was described as a company that had nearly gone out of business in
1992 and had chosen to rebuild itself. Recognizing that the nature of work had
changed over the past 5 years, IBM has instituted a strategy to reduce its facili-
ties requirements. Four out of five IBM consultants now work at client sites, at
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EFFECTIVE PRACTICES FOR INVESTMENT IN MAINTENANCE AND REPAIR 61
home, or only occasionally at IBM facilities, primarily for group meetings. Almost
half its employees involved in support functions (for example, human resources,
procurement, administration, or finance) work primarily from home. Because
IBM depends on rapid communication among its staff and to ensure continued
productivity, the company has invested heavily in monitoring and surveillance
technologies to track the work that is being performed off-site. Performance-based
contracts between IBM and its employees drive variable pay components each
year (St. Thomas, 2010).
As leases expire, IBM reduces its total amount of leased space. It is also
changing the type of space that it leases from dedicated offices to meeting spaces,
team rooms, and conference rooms. In one of its locations, that strategy resulted
in a 50 percent reduction in total leased space.
Some federal agencies, such as the U.S. Patent and Trademark Office
( SPTO) have been using alternative work arrangements for more than 5 years.
U
The USPTO has been able to measure the results in productivity (for example,
sick days taken and number of patent applications examined) and employee
retenion (USPTO, 2010; Campbell, 2011). In a recent presentation to the Fed-
t
eral Facilities Council, representatives of the USPTO reported that the agency
has been able to reduce its total amount of leased space and has avoided leasing
costs of almost $20 million (Campbell, 2011). Other agencies, such as the Gen-
eral Services Administration, are implementing alternative work arrangements
to reduce their demand for office space and to reduce operating, energy, water,
maintenance, and repair costs.
The Telework Enhancement Act of 2010 (PL 111-292) grants federal employ-
ees eligibility to telework and requires all federal agencies to establish telework
policies. As these policies are implemented, there will be opportunities to reduce
the federal facilities footprint further. If successful, such strategies could result
in substantial reductions in long-term maintenance and repair requirements and a
more sustainable portfolio of federal facilities.
CORRELATE THE EFFECTS OF FAILURE WITH THE
ORGANIZATION’S MISSION
The primary objective of portfolio-based facilities management is to ensure
that facilities-related investments enable the organization’s mission. Private-sector
companies, such as GM and IBM, which produce vehicles and computers, respec-
tively, have been able to correlate the failure to invest in maintenance and repair
with their organizations’ mission, which is to make a profit for their owners and
shareholders.
In the automotive industry, profit is realized by producing and selling vehicles
at a sales volume that minimizes such overhead costs as engineering and design
and increases profit per unit. At a manufacturing plant, overhead per vehicle is
reduced by maintaining the design throughput of the plant, which is about 60 to
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62 PREDICTING OUTCOMES OF INVESTMENTS IN FEDERAL FACILITIES
75 vehicles per hour, or one vehicle per minute or better. At that level of produc-
tion, an 8-minute system failure (downtime) caused by lack of maintenance of
electrical systems or equipment can reduce a plant’s output by 8 to 10 vehicles,
which can be easily quantified in terms of lost sales and in turn, lost profit. For the
facility manager, the goal is to ensure that the facility components and equipment
that are critical to production are kept in such a condition as to ensure reliable per-
formance. Similarly, at IBM, a relatively short failure (outage) on the production
line caused by unreliable equipment or infrastructure systems can result in pro-
duction of fewer computers and cost the company millions of dollars in lost sales.
When a failure does occur, companies like GM conduct a root-cause analysis
to determine why it happened, determine the appropriate solution, and share the
lesson learned with other plants that may be at risk from similar failures. For a
component failure that puts the organization’s mission at risk, the issue and the
solution are rolled up to the corporate level, where a budget line item is submitted
to fix or replace the component across the organization. The credibility of such
requests is supported by evidence generated through the root-cause analysis.
Root-cause analysis is a key component of reliability-centered maintenance
(RCM), the real-time monitoring of the performance and condition of facility
systems and equipment. RCM has been used extensively in the aircraft, space, de-
fense, and nuclear industries, in which functional failures can result in loss of life,
can have national security implications, or can have extreme environmental effects
(NASA, 1996; NRC, 1998). A rigorous analysis of failure modes and effects is
used to determine the appropriate type and timing of maintenance of systems and
equipment (for example, preventive maintenance, predictive testing and inspec-
tion) (NRC, 1998). The overall objectives are to ensure that the performance and
service lives of systems, equipment, and components are optimized and to ensure
that critical elements are replaced before they fail because of wear and tear.
Because the products and programs of federal agencies are typically related
to protecting the public’s health, safety, and welfare, not to making a profit,
the links between the failure of a system or component, maintenance and re-
pair investments, and organizational missions are more difficult to convey to
decision-makers and others. Nonetheless, several agencies have developed or are
developing approaches for doing so. Those approaches include the use of RCM,
the development of a mission dependency index (MDI), and the development of a
risk-based process for maintenance and repair investment decision support. They
are described below.
• Reliability-Centered Maintenance (RCM). The National Aeronautics and
Space Administration (NASA) began applying a version of RCM to some of its
facilities systems and equipment in the 1990s. In NASA, the RCM approach inte-
grates reactive maintenance (run-to-failure or breakdown maintenance), preventive
(interval-based) maintenance, predictive testing and inspection (condition-based)
and proactive maintenance. Those four maintenance strategies are applied to sys-
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EFFECTIVE PRACTICES FOR INVESTMENT IN MAINTENANCE AND REPAIR 63
tems and equipment on the basis of the consequences of equipment failure and the
potential effects on mission, safety, environment, and life-cycle cost (NRC, 1998).
The Smithsonian Institution has more recently implemented a version of
RCM. The Smithsonian’s RCM approach is to perform the right maintenance on
the right equipment at the right time. “Right” entails a balance of resources and
maintenance techniques developed from industry best practices. To institute its
RCM program, the Smithsonian hired an expert consultant and set out immedi-
ately to deploy the most relevant RCM technologies to conduct condition-based
tasks. An analysis looked at the following:
• The functions and performance standards of the equipment that will be
maintained,
• The failure modes of that equipment,
• The causes of each failure,
• The effects of failure,
• The tasks that could predict or prevent failure, and
• Workarounds if there are no proactive tasks to mitigate failure.
Templates were developed for systems and equipment with similar failure
modes. Decisions about the type of maintenance to be performed on specific types
of equipment were based in part on whether designed bypasses or other redundan-
cies were built into the system and whether spare parts were on hand or readily
available and economical to purchase.
A number of nondestructive technologies are used for predictive testing and
inspection (PT&I) of equipment. PT&I minimizes downtime by allowing the
Smithsonian staff to conduct investigations when the systems are operating. Data
are analyzed to identify measurements that exceed known threshold values and
to identify changes in condition. The analysis is used to plan and schedule repair
or replacement of equipment or components before they fail. All PT&I data and
findings are entered into the Smithsonian’s computerized maintenance manage-
ment system to build an equipment and system history, which helps further to
detect problems before they become serious.
• Mission-Dependency Index. The mission-dependency index (MDI) was
developed jointly by the U.S. Navy, the U.S. Coast Guard, and NASA as a process
for incorporating operational risk management into facilities asset management
(Antelman et al., 2008). The MDI is a severity metric (on a scale of 1 to 100) for
risk that considers the ability to relocate a mission to another facility and the abil-
ity to withstand mission interruption. That is, if a facility or component is deemed
not usable for mission accomplishment, how long will the mission be interrupted
(minutes or days?) and can the mission be moved elsewhere (Is it impossible or
easy?). The MDI model considers both facility intradependency (facilities are
controlled by the mission stakeholder) and facility interdependency (facilities
are needed, but not controlled by the mission stakeholder). To develop an index,
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64 PREDICTING OUTCOMES OF INVESTMENTS IN FEDERAL FACILITIES
an agency must first survey the various stakeholders to collect the relocation and
interruption data that are specific to the agency. Through weights established
for both data elements, an algorithm derived from a regression analysis is used
to compute the MDI. The index identifies which facilities or components are
mission-critical, mission-supportive, or otherwise categorized. Once the analysis
is completed for an agency, the MDI can be used to help set priorities among pro-
posed maintenance and repair activities and to assess vulnerability, which could
be a mission loss predictor.
• U.S. Army Corps of Engineers. The U.S. Army Corps of Engineers
(USACE) is developing a portfolio-based, risk-related approach for maintenance
and repair investments in its inland navigation program and other civil-works
programs. The approach is an integrative one that considers all facilities-related
investments, including capital, operations, and maintenance and repair.
The goal of the inland navigation program is to provide safe, reliable, effi
cient, effective, and environmentally sustainable waterborne transportation sys-
tems for commerce, national security needs, and recreation. The infrastructure and
components required to achieve those objectives include locks, dams, channels,
and canals, gates, valves, operating mechanisms, controls, and machinery. Failure
of one of those components due to lack of maintenance and repair can result in
substantial disruption of traffic and commerce on major waterways, such as the
Mississippi River, which can result in economic losses to private-sector companies
and communities.
The USACE has established a set of investment objectives and performance
measures for the navigation program that are related to the civil-works strategic
plan (Table 4.1). It has also developed a set of budget strategies and ranking cri-
teria that are designed to link investments to the mission of the inland navigation
program (Table 4.2) and established consequence categories and consequence-
rating criteria (Table 4.3).
CORRELATE REPAIR DELAY WITH SUSTAINMENT COST
As noted in Chapter 2 and shown in Figure 2.2, timely investment in main-
tenance and repair can ensure that facilities systems and components operate
effi iently throughout their service lives. Conversely, delaying repairs of facilities
c
can shorten service life and result in an increase in sustainment cost, which is
defined as the sum of maintenance cost and renewal cost. The service-life models
and the IMPACT model described in Chapter 3 can be used to quantify the costs
of delaying repairs.
For agencies that are not using such models, it may still be possible to esti-
mate the costs of delaying repairs with an approach described by representatives
of GM. GM centralized the facility-support team for specific groups of facility
components (Table 4.4) so that the expert on a given component could build the
financial arguments needed to identify the cost of delaying repairs.
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EFFECTIVE PRACTICES FOR INVESTMENT IN MAINTENANCE AND REPAIR 65
TABLE 4.1 Navigation Objectives and Performance Measures
Program Objectives Performance Measures
Invest in navigation infrastructure when the Benefit-cost ratio (a project specific measure)
benefits exceed the costs Annual net benefits
Enhance life-cycle infrastructure management. Percentage of navigation asset inventory with
Improve the reliability of water resources recent structural or operational risk assessments,
infrastructure by using a risk-informed asset including SPRA assessments
management strategy Percentage of navigation asset inventory risk
assessments that reveal a significant level of risk
Number of funded actions under way that address
assets regarding which there is a significant level
of risk
Operate and manage the navigation Risk and reliability: facility condition assessment
infrastructure to maintain justified levels of and efforts
service in terms of the availability of high-use
navigation infrastructure (waterways, harbors,
and channels) to commercial traffic
SOURCE: USACE, 2010.
TABLE 4.2 Navigation Budget Performance Measures
Budget Strategy Ranking Criteria
Initiate and complete replacements and Inland Waterways Users Board priority
rehabilitations
Relative risk of failure
Operations—ensure that projects perform as Cumulative benefits
designed (O&M) Cumulative O&M costs for above benefits (over
set period)
Maintenance—ensure that projects are safe to Navigation channel availability
operate (managing risk) (O&M) Lock closures exceeding 24 hours and one week
in duration because of mechanical failure—
scheduled and unscheduled
Condition assessment and consequences or
impact
Cumulative benefits
Cumulative O&M costs for above benefits (over
set period)
SOURCE: USACE, 2010.
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66 PREDICTING OUTCOMES OF INVESTMENTS IN FEDERAL FACILITIES
TABLE 4.3 Inland Navigation Consequence Categories and Consequence
Rating Criteria
Consequence Category Consequence Rating Criteria
1 Maximum risk to mission
Highest economic loss: more than 5 billion ton-miles
Probable life-safety effect
Minimum acceptable operations service level
Court-mandated action
Shutdown of energy generation or distribution facilities (such as power
plants and oil distribution facilities) for national public use with no
alternative modes of transportation
2 High risk to mission
No life-safety effect
High economic loss: 2.5 billion to 5 billion ton-miles
Diminished cost efficiency of energy generation or distribution facilities
(such as power plants and oil distribution facilities) for national
public use with higher-cost alternative modes of transportation
3 Moderate risk to mission
No life-safety effect
Moderate economic loss: 1 billion to 2.5 billion ton-miles
4 Low risk to mission
No life-safety effect
Low economic loss: 500 million to 1 billion ton-miles
5 Negligible risk to mission
No life-safety effect
Least economic loss: less than 500 million ton-miles
SOURCE: USACE, 2010.
TABLE 4.4 Categories of Facilities Components Used by General Motors
CORPORATE PROGRAMS GENERAL FUNDS
Roofing General lighting
Paving Parking lot lighting
HVAC Sewers
Fire protection Water supply
Fork truck batteries Piping distribution
Electrical substations Floors
Wastewater treatment plants Sash and glass
Truck docks and doors Elevators
Powerhouse, including compressed air, chillers, Café
and cooling
Computer rooms Restrooms
Scrap conveyors and cranes Plant administration buildings
Railroad tracks Underground and aboveground storage tanks
Externally driven environmental and regulations Signs
Decommissioning or legacy costs Landscaping
SOURCE: McNabb, 2010.
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EFFECTIVE PRACTICES FOR INVESTMENT IN MAINTENANCE AND REPAIR 67
For example, the cost to repair or replace heating, ventilation, and air-
conditioning (HVAC) units is X. If the decision to replace or overhaul them is
deferred for another year, the cost will be X + I + O where I is the added cost cre-
ated by inflation for 1 year converted to net present value and O is the additional
operational cost incurred because the equipment was not operating as efficiently
as it was designed to do (for example, additional energy was consumed because
of improperly firing burners, bad dampers, ineffective controls, or excessive pres-
sure drop on filter banks). If I + O exceeds X, repairs should proceed imme iately
d
to avoid an increase in sustainment cost. When presenting the results of such an
analysis to senior decision-makers, facilities program managers also identify other
outcomes from the proposed investment, such as employee comfort or improved
safety.
REMOVE MUST-FUND PROJECTS AND THOSE SUPPORTED BY
ACCEPTABLE FINANCIAL PAYBACK FROM THE
MAINTENANCE AND REPAIR ACCOUNT
Each of the private-sector organizations interviewed for this study identi-
fied projects that must be funded to manage risk to the organization and funded
them through sources other than the maintenance and repair account. They also
seek out opportunities to use “must-fund” projects to realize long-term operating
efficiencies.
For instance, projects that are required for an organization to be in compliance
with government regulations (such as worker health and safety and air and water-
quality regulations) are considered must-fund projects. That is because the risks
associated with noncompliance—large fines or legal action—are much greater
than the costs of the projects themselves. Similarly, activities to fix conditions that
present a hazard to workers or others are viewed as must-fund projects to manage
the risks associated with insurance claims and lawsuits. Must-fund projects are
taken out of the maintenance and repair account and funded from other discretion-
ary sources, such as the operating account.
At the same time that must-fund projects are identified, facilities managers
look for opportunities to support operational efficiencies and to reduce long-term
costs. For example, if the regulatory standards for the treatment of effluent water
are no longer achievable with existing, worn-out or technologically obsolete
equipment, there may be an opportunity to replace it with more technologically
advanced equipment. Even if the organization does not have to comply with new
regulations immediately, it frequently makes good business sense to replace the
equipment sooner rather than later with equipment that will allow the organization
to meet the expected regulations instead of spending additional funds to maintain
and repair obsolete equipment.
Private-sector firms also indicated that maintenance and repair projects
that have a short payback time (such as 1 to 3 years) are funded on their own
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68 PREDICTING OUTCOMES OF INVESTMENTS IN FEDERAL FACILITIES
merit from sources other than the maintenance and repair account. For example,
energy-saving projects, such as relamping lighting fixtures with more efficient
components, can quickly pay back the original investment and continue to gen-
erate benefits for additional years. Because such projects are justifiable on their
merit, they do not compete with other projects for maintenance and repair funds.
In the federal government, maintenance and repair funds for most agencies
are part of the general operations account and are not earmarked specifically
for maintenance and repair projects (NRC, 1998). “Structuring the account in
this way accommodates overlaps between work, operations and alterations. For
example, equipment operators often do routine equipment maintenance and
a
lteration projects, including work that could be considered repairs” (NRC,
1998, p. 28). Federal agencies could also identify must-fund projects and fund
them from the operations side of the account rather than from the maintenance
and repair side.
Public-private partnerships (PPPs) can also be used to secure third-party
fi
nancing to accomplish some types of maintenance and repair projects or activi-
ties. PPPs are contractual agreements between public-sector and private-sector
organizations wherein the private-sector organization, in exchange for compensa-
tion, agrees to deliver services or even facilities that could be provided by a public-
sector organization (Keston Institute, 2011). Through the use of PPPs, federal
agencies can implement necessary capital or maintenance and repair requirements
through third-party financing and can gain access to private-sector expertise. PPPs,
however, are not without risks and the risks need to be accounted for.
Energy-savings performance contracts (ESPCs) are one type of PPP that
many federal agencies are already using to leverage available funding. Under
such contracts, an energy service company (ESCO) typically conducts a compre-
hensive energy audit for groups or types of facilities and identifies improvements
that could save energy. In consultation with the owner agency, the ESCO designs
and constructs a project that meets the owner’s needs and arranges the necessary
financing. The ESCO guarantees that the improvements will generate energy-cost
savings sufficient to pay for the project over the term of the contract. After the
contract ends, all additional cost savings accrue to the owner organization. 3 The
key feature of this model is that the private sector provides front-end funding for
the project in return for the ability to receive benefits from future savings. In this
way, the risk associated with nonperformance is shifted to the private-sector part-
ner. The general concept is similar to the paid-from-savings approach promoted
by the U.S. Green Building Council.4
About $2.3 billion has been invested in federal facilities through ESPCs. The
ESPC projects contain guarantees that will result in $6 billion in avoided energy
3See Federal Energy Management Program Web site http://www1.eere.energy.gov/femp/financing/
espcs.html.
4Additional information on this approach is available at http://www.usgbc.org/DisplayPage.aspx?
CMSPageID=2204.
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EFFECTIVE PRACTICES FOR INVESTMENT IN MAINTENANCE AND REPAIR 69
costs over the life of the contracts. The contracts have also resulted in savings of
18 trillion British thermal units—roughly equivalent to the energy used by a city
of 500,000 people (Kidd, 2010).5
Performance-based maintenance contracts (PBMCs) are another type of
public-private partnership. Like ESPCs, PBMCs engage private-sector firms to
provide long-term maintenance, repair, and replacement work.
When contractors perform maintenance and repair activities for federal
agencies, the contracts typically specify the procedures and materials to be used.
As long as the contractor meets the specifications, the risks associated with the
contract are fully retained by the agency. In contrast, in a PMBC, the agency speci-
fies performance goals. The contractor is free to select the methods, mateials,
r
and timing of maintenance actions to meet those goals, but also assumes the risks
associated with failure to meet those goals.
The benefits of PBMCs include the ability to obtain financing from the
private sector for expensive repair and reconstruction work, the flexibility with
which contractors can exploit advances in methods and materials without the
need to renegotiate contract terms, and the potential for transferring knowledge
of innovative practices from the contractors to the agencies. However, to achieve
those benefits, federal agencies must clearly and carefully identify the perfor-
mance goals that are to be met, provide appropriate incentives so that contractors
will take appropriate measures before systems or components fail, and regularly
monitor implementation of the contract. Failing to do those things can result in a
failure to realize the expected benefits. Agencies also take on a long-term liability
(performance payments) that can become rather large in the case of a portfolio of
facilities and can create the risk of fiscal exposure (TRB, 2010).
Other types of public-private partnerships potentially could be used to lower
the costs and risks associated with facility ownership. For example, in a design-
build-finance-operate contract the private-sector partner finances, designs, con-
structs, and operates a facility under a long-term lease and the public organization
takes ownership of the property at the end of the lease. The private-sector partner
assumes the financial risks related to project delivery, maintenance, and revenue;
and the public-sector partner assumes all the risks related to facilities ownership,
once it takes over the facility.
A private finance initiative (PFI) is a PPP-based arrangement used in the
United Kingdom. In PFI contracts, the private-sector partner provides funding
and delivers the public facilities and infrastructure based on the “output” (perfor-
mance) specifications. The public sector does not own the facility, but reimburses
the private-sector partner with a stream of committed payments for the use of the
facility over the period specified in the contract (Allen, 2001). However, the pay-
ments are conditional on the ability of the private-sector partner to meet the per-
5Additional information on ESPCs is available at http://www1.eere.energy.gov/femp/financing/
espcs.html.
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70 PREDICTING OUTCOMES OF INVESTMENTS IN FEDERAL FACILITIES
formance specifications (standards); the specifications address the strategic needs
of the facility owner and occupants.
Chapter 5 of the report Investments in Federal Facilities: Asset Management
Strategies for the 21st Century (NRC, 2004a), describes and evaluates various
funding approaches for acquiring federal facilities. It offers the following recom-
mendation (NRC, 2004a, p. 10):
Recommendation 11: In order to leverage funding, Congress and the administra-
tion should encourage and allow more widespread use of alternative approaches
for acquiring facilities, such as public-private partnerships and capital acquisi-
tion funds.
STRATEGICALLY ASSESS THE CONDITION OF FACILITIES
Private-sector companies and government organizations conduct or contract
for some facility condition assessments to provide the information necessary to
develop a credible maintenance and repair request. As noted in Chapter 3, tech-
nology can also be used to monitor the condition of systems and equipment in
real time.
To realize other operational efficiencies in conducting condition assess-
ments, such organizations as Marriott and GM perform most of their facility
assessment at a corporate level according to type of component (such as roofs,
HVAC systems, and electricity distribution). For example, an expert in roofing-
condition analysis will visit all plants in a region within a short period to minimize
travel expenses. The assessment may be spread over a 4-year cycle so that about
25 percent of the facilities are assessed each year. At the completion of assess-
ment, an analysis is conducted to determine whether the average life of roofs is
improving or deteriorating. The resulting information is used to set priorities for
roof repairs throughout the organization, ensuring that facilities whose roofs are
in the worst condition are addressed first. The corporate roofing expert also trains
local staff during the assessment visits, advising them of potential changes in roof-
maintenance practices, of the latest trends in roofing technology, and of which
roofing type is most cost-effective for their climate and particular plant conditions.
The National Nuclear Security Administration (NNSA) has implemented a
similar process for the inspection, management, and maintenance of its 16 million
square feet of roofs as an element of its facilities and infrastructure revitalization
program. In a presentation to the Federal Facilities Council, it was reported that
the program has resulted in improved condition of the NNSA’s roofing portfolio;
in increased average remaining service life; in the replacement of 3 million square
feet of roofs with more energy-efficient, sustainable roofs, including 2 million
square feet of cool roofs; in $17 million of savings in overhead costs; and in other
benefits (Moran, 2010).
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EFFECTIVE PRACTICES FOR INVESTMENT IN MAINTENANCE AND REPAIR 71
CONDUCT A YEAR-END BUDGET REVIEW TO EVALUATE
INVESTMENT PERFORMANCE
Investments in Federal Facilities: Asset Management Strategies for the 21st
Century stated that (NRC, 2004a, p. 69):
Continuous evaluation and feedback on processes and investments are essential
to controlling and improving them. Feedback can be positive or negative, take
many forms, and be used over various timescales. . . . In best-practice organiza-
tions, the performance of projects, processes, people, business units, physical
assets, investments, and the organization as a whole are continuously monitored
and evaluated over both the short and long term using performance measures
and a variety of feedback processes.
In addition to a variety of feedback processes described in Chapter 4 of the
2004 report, the conduct of a year-end evaluation of budget performance was
identified during the course of the present study. This concept was used by at
least one of the facility organizations at GM. The evaluation compared the “sub
mitted budget” the “approved budget” and the “actual funding spent” by line
item. Where there was a substantial variance (greater than 10 percent), the root
cause was analyzed by using the same basic process as would be used for analyz-
ing an equipment failure. The root cause of the deviation was shared with senior
decision-makers throughout the organization. GM facilities managers found that
this type of analysis improved their future budget submissions and increased their
credibility with other decision-makers including those who approved the budget.
