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INVESTMENTS IN FEDERAL FACILITIES Asset Management Strategies for the 21st Century Committee on Business Strategies for Public Capital Investment Board on Infrastructure and the Constructed Environment Division on Engineering and Physical Sciences
THE NATIONAL ACADEMIES PRESS 500 Fifth Street, N.W. Washington, DC 20001 NOTICE: The project that is the subject of this report was approved by the Governing Board of the National Research Council, whose members are drawn from the councils of the National Academy of Sciences, the National Academy of Engineering, and the Insti- tute of Medicine. The members of the committee responsible for the report were chosen for their special competences and with regard for appropriate balance. This study was supported by Contract No. SLMAQM00C6017 between the National Acad- emy of Sciences and the Department of State on behalf of the Federal Facilities Council. Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the authors and do not necessarily reflect the views of the organizations or agen- cies that provided support for this project. International Standard Book Number 0-309-08919-0 (Book) International Standard Book Number 0-309-50857-6 (PDF) Available from: Board on Infrastructure and the Constructed Environment National Research Council 500 Fifth Street, N.W. Washington, DC 20001 Additional copies of this report are available from the National Academies Press, 500 Fifth Street, N.W., Lockbox 285, Washington, DC 20055; (800) 624-6242 or (202) 334- 3313 (in the Washington metropolitan area); Internet, http://www.nap.edu Copyright 2004 by the National Academy of Sciences. All rights reserved. Printed in the United States of America
The National Academy of Sciences is a private, nonprofit, self-perpetuating society of distinguished scholars engaged in scientific and engineering research, dedicated to the furtherance of science and technology and to their use for the general welfare. Upon the authority of the charter granted to it by the Congress in 1863, the Academy has a mandate that requires it to advise the federal government on scientific and technical matters. Dr. Bruce M. Alberts is president of the National Academy of Sciences. The National Academy of Engineering was established in 1964, under the charter of the National Academy of Sciences, as a parallel organization of outstanding engineers. It is autonomous in its administration and in the selection of its members, sharing with the National Academy of Sciences the responsibility for advising the federal government. The National Academy of Engineering also sponsors engineering programs aimed at meeting national needs, encourages education and research, and recognizes the superior achievements of engineers. Dr. Wm. A. Wulf is president of the National Academy of Engineering. The Institute of Medicine was established in 1970 by the National Academy of Sciences to secure the services of eminent members of appropriate professions in the examination of policy matters pertaining to the health of the public. The Institute acts under the respon- sibility given to the National Academy of Sciences by its congressional charter to be an adviser to the federal government and, upon its own initiative, to identify issues of medical care, research, and education. Dr. Harvey V. Fineberg is president of the Institute of Medi- cine. The National Research Council was organized by the National Academy of Sciences in 1916 to associate the broad community of science and technology with the Academy's purposes of furthering knowledge and advising the federal government. Functioning in accordance with general policies determined by the Academy, the Council has become the principal operating agency of both the National Academy of Sciences and the National Academy of Engineering in providing services to the government, the public, and the scientific and engineering communities. The Council is administered jointly by both Acad- emies and the Institute of Medicine. Dr. Bruce M. Alberts and Dr. Wm. A. Wulf are chair and vice chair, respectively, of the National Research Council. www.national-academies.org
COMMITTEE ON BUSINESS STRATEGIES FOR PUBLIC CAPITAL INVESTMENT ALBERT A. DORMAN, NAE, Chair, AECOM, Los Angeles DAVID NASH, RADM, CEC USN (retired), Vice Chair, BE & K, Birmingham, Alabama ADJO AMEKUDZI, Georgia Institute of Technology, Atlanta KIMBALL J. BEASLEY, Wiss, Janey, Elstner Associates, Inc., New York JEFFERY CAMPBELL, Brigham Young University, Provo, Utah ERIC T. DILLINGER, Carter and Burgess, Inc., Fort Worth, Texas JAMES R. FOUNTAIN, JR., Governmental Accounting Standards Board, Norwalk, Connecticut THOMAS K. FRIDSTEIN, Hillier, New York LUCIA E. GARSYS, Quality Services Officer, Hillsborough County, Florida DAVID L. HAWK, New Jersey Institute of Technology, Newark RALPH L. KEENEY, NAE, Duke University, Durham, North Carolina STEPHEN J. LUKASIK, Independent Consultant, Los Angeles CAROL Ó'CLÉIREACÁIN, Brookings Institution and Independent Consultant, New York CHARLES SPRUILL, Fannie Mae, Washington, D.C. Staff LYNDA STANLEY, Study Director RICHARD LITTLE, Director, Board on Infrastructure and the Constructed Environment CAMERON GORDON, Program Officer JASON DREISBACH, Research Associate DANA CAINES, Financial Associate PAT WILLIAMS, Senior Project Assistant iv
BOARD ON INFRASTRUCTURE AND THE CONSTRUCTED ENVIRONMENT PAUL GILBERT, Chair, Parsons, Brinckerhoff, Quade, and Douglas, Seattle MASSOUD AMIN, University of Minnesota, Minneapolis RACHEL DAVIDSON, Cornell University, Ithaca, New York REGINALD DESROCHES, Georgia Institute of Technology, Atlanta DENNIS DUNNE, California Department of General Services, Sacramento PAUL FISETTE, University of Massachusetts, Amherst WILLIAM H. HANSMIRE, Parsons, Brinckerhoff, Quade, and Douglas, San Francisco HENRY HATCH, U.S. Army Corps of Engineers (retired), Oakton, Virginia AMY HELLING, Georgia State University, Atlanta SUE McNEIL, University of Illinois, Chicago DEREK PARKER, Anshen+Allen, San Francisco DOUGLAS SARNO, The Perspectives Group, Inc., Alexandria, Virginia HENRY G. SCHWARTZ, JR., Washington University, St. Louis DAVID SKIVEN, General Motors Corporation, Detroit MICHAEL STEGMAN, University of North Carolina, Chapel Hill WILLIAM WALLACE, Rensselaer Polytechnic Institute, Troy, New York ZOFIA ZAGER, Fairfax County, Virginia CRAIG ZIMRING, Georgia Institute of Technology, Atlanta Staff RICHARD LITTLE, Director, Board on Infrastructure and the Constructed Environment LYNDA STANLEY, Executive Director, Federal Facilities Council MICHAEL COHN, Program Officer DANA CAINES, Financial Associate PAT WILLIAMS, Senior Project Assistant v
Chairman's Foreword Many segments of government have come to believe that an opportunity exists to introduce more objectivity into the politically sensitive issues and pro- cesses surrounding public investment in federal facilities. The U.S. General Ac- counting Office's designation of federal real property as a government-wide high- risk area on January 30, 2003, now makes it urgent to seize the opportunity. This committee, while recognizing the daunting complexities of the challenge, has nonetheless attempted to indicate some directions such a quest might take. In accordance with its designation as the Committee on Business Strate- gies for Public Capital Investment, the committee reviewed principles, policies, and practices used by a range of private-sector organizations ("businesses") in making decisions about facilities investments. The committee recognized early on that government and for-profit organizations have inherently different mis- sions and service orientations and different ways of operating, making decisions, and measuring success. Within government, the same types of differences exist among departments and agencies. The committee concluded that there is no single solution from the private sector that could apply to all federal facilities invest- ment and management, nor should we expect that one will be found. Neverthe- less, there are private-sector principles, policies, and practices integral to suc- cessful facilities investment and management decisions that appear suitable for conversion into equivalent federal precepts. This report enumerates these pre- cepts, elaborates on them, and suggests techniques for adapting them to the fed- eral operating environment. Just as there is no panacea for federal facilities investment and management, there is no substitute for good decision makers. Decision theories and processes, criteria, rules and regulations, no matter how advanced, are only tools. The fed- vii
viii CHAIRMAN'S FOREWORD eral operating environment is a complex system of differing value judgments, a wide array of justifiable goals and objectives, changing missions, interlocking authorities and responsibilities, and legitimate constituency pressures that must always be balanced against the resources judged available. Therefore, the com- mittee also emphasizes the human resources aspects: the development of good decision makers at all levels and the creation of an atmosphere of mutual respect and trust between them. In further recognition of this complex environment, the committee has out- lined an implementation program that suggests how elected officials and the many dedicated and competent career public servants might together develop legisla- tion and guidelines to improve public investment in federal facilities. The effect on the economy of properly directing the billions of dollars expended annually for federal facilities, coupled with recognition of the impact that these facilities investments have on shaping the environment of 280 million Americans, man- dates an early, continuous, and collaborative effort to transform current decision- making processes. Albert A. Dorman Chair, Committee on Business Strategies for Public Capital Investment
Preface At a fundamental level, choices made today about investments in facilities and infrastructure1 directly affect the future quality of shelter, workplaces, and the delivery of services. When, where, and how to invest in facilities are critical variables for determining that quality. During the past 20 years, numerous studies have focused on the deteriorating condition of infrastructure throughout the United States, including the deteriorat- ing condition of facilities owned and leased by the federal government. Over the same period, the operating environments of both private and public-sector orga- nizations have been evolving in response to rapid advances in technologies, changes in demographics, and increasingly rapid changes in society at large. These changes both require and make possible new approaches to facilities and infrastructure investment and management. Under successive administrations, there has been a concerted effort to make the federal government more responsive to its citizens, more accountable for what it does, more performance- and results-oriented, and more open to innovative approaches, with all of these attributes being seen as "businesslike." Elected offi- cials, senior agency executives, and facilities managers have asked, Can the ex- perience of private-sector organizations with facilities investment and manage- ment provide insight for similar decisions and responsibilities facing the federal government? 1 In this report, facilities investments are defined as new construction, renewal, maintenance, retro- fitting, acquiring, leasing, and decommissioning or disposing of buildings, structures, and their sup- porting infrastructure. ix
x PREFACE STUDY APPROACH The sponsoring agencies of the Federal Facilities Council (FFC)2 formu- lated the request for the current study with these questions in mind. In 2002, the National Research Council (NRC) appointed the Committee on Business Strate- gies for Public Capital Investment to undertake the following task: Develop guidelines for making improved public investment decisions about fa- cilities and supporting infrastructure, their maintenance, renewal, replacement, 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. In discharging its task, the committee recognized at the outset that there are inherent differences in the missions, goals, and operating environments of pri- vate-sector organizations and those of the federal government, and it elaborates on these and other differences throughout this report. Nonetheless, there are also many similarities in regard to facilities investments. Large organizations of any type must answer two different but related questions: What facilities are needed to support the organization's mission? How should decisions about facilities in- vestments be made if organizational goals and objectives are to be met? The 14 committee members have expertise in the operation and management of large private and public-sector organizations, capital investment, facilities pro- gramming and management, corporate real estate, building performance and ser- viceability, government budgeting and finance, decision sciences, economics, and architecture and engineering. In addition, many of the committee members are involved in professional organizations that focus on facilities-related issues, in- cluding the American Institute of Architects, the American Planning Association, the American Society of Civil Engineers, the Society of American Military Engi- neers, the Association of Higher Education Facilities Officers, the International Facility Management Association, the National Society of Professional Engineers, and the Transportation Research Board. Biographical information about the com- mittee members is provided in Appendix A. As one of its research activities, the committee interviewed representatives of private-sector corporations, federal agencies, other public entities, and not-for- profit organizations who are responsible for facilities investment decisions. Per- sons interviewed and their affiliations and other persons who provided informa- tion to the committee are listed in Appendix B. Appendix C contains the interview discussion outline. 2The FFC is a cooperative association of 24 federal departments and agencies operating under the aegis of the National Research Council. The FFC's mission is to identify and advance technologies, processes, and management practices that improve the performance of federal facilities over their entire life cycle, from planning to disposal.
PREFACE xi During 22 months of committee, subcommittee, individual, and staff work and five deliberative 2-day meetings, the committee also independently collected, studied, analyzed, and compared federal, other public, private, and not-for-profit sector facilities investment and management principles, policies, and practices. Based on this research and on their individual and collective experience, the com- mittee identified a set of principles and policies that it believes are highly effec- tive and could be beneficially adapted for use within the federal government. CONTENTS OF THE REPORT This study reviews how decisions for private- and public-sector facilities investments are being made in today's operating environments and the roles of the various groups and individuals who make the decisions. The intent of the committee is to provide specific recommendations to improve decision-making and management processes so that the resources available for federal facilities investments can be allocated more effectively and the results can be measured. To this end, the study addresses such questions as, How can the various parties to federal facilities decisions be motivated to act in the public's long-term interest, given short-term election cycles and budgets and the recognition that the results of decisions made today may not be apparent for many years? Are there better methods to align federal departments' and agencies' portfolios of facilities with their missions? Can the climate for making investment decisions about federal facilities be improved? When should federal facilities be owned or leased or dis- posed of? This report is addressed to a wide audience: decision makers in Congress, federal departments, agencies, and their advisors; federal facilities program man- agers, operating groups, and their contractors; and program and budget analysts throughout the federal government. Decision makers, facilities program manag- ers, and program and budget analysts in public agencies at the state and local levels may also find value in the report since they face many of the same issues as their federal counterparts. Because this report addresses multiple audiences, dif- ferent readers will find different chapters to be of greatest interest. For those with limited time, the Executive Summary and Chapter 6 should be read together. Chapter 1, "Context," quantifies the ongoing investment in federal facilities, identifies some fundamental characteristics of the private sector and the federal government that affect facilities investments, looks at the dynamic nature of fa- cilities requirements as compared with the longevity and life cycles of facilities, and discusses some conceptual shifts in facilities investment decision making.3 3In this and other chapters, a number of sources are cited in regard to the value of facilities and the level of investments in facilities made by public and private-sector organizations. No attempt has been made to reconcile the numbers across the various sources. For this report, the numbers are primarily cited to convey the magnitude of the investments involved.
xii PREFACE Chapter 2, "Facilities Asset Management," describes how facilities management practices are evolving to better support organizational objectives and decision making and to better manage portfolios of facilities, as well as the additional skills that are now required of facilities asset managers. Chapter 3, "Decision Making to Support Organizational Missions," describes how best-practice orga- nizations use their mission as guidance for facilities investment decisions; why and how they create frameworks for facilities investment decision making and management; basic issues related to facilities investments; and decision-making processes. Chapter 4, "Environments for Effective Decision Making," focuses on how best-practice organizations foster open communications and build trust among the various stakeholder groups to create an environment for effective de- cision making. The use of performance measures, continuous feedback proce- dures, accountability, and incentives to evaluate and improve the outcomes of decision-making processes are featured. Chapter 5, "Alternative Approaches for Acquiring Federal Facilities," describes public-private partnerships and a range of other approaches that could be tested more widely to leverage funding for federal facilities investments. Chapter 6, "Adapting Principles and Policies from Best-Practice Organizations to the Federal Operating Environment," reviews is- sues and obstacles when adapting principles and policies from best-practice orga- nizations for use in the federal operating environment. The committee sets forth 15 recommendations for adapting and implementing these principles and policies and concludes by offering an overall strategy for their implementation. TERMS USED IN THIS REPORT Terminology varies across the fields of facilities management, finance, bud- geting, accounting, and economics. For example, terms like "capital" are used in all of these fields but defined differently. This can sometimes lead to confusion and miscommunication when engineers, financial and budget analysts, accoun- tants, economists, and elected officials work together. In an effort to clearly com- municate the committee's intent, key terms used in this report are explained be- low. Where the committee has used a definition from another source, the source is cited. Best-practice organizations. Private-sector, not-for-profit, and public orga- nizations that use principles, policies, and practices that the committee--through its research, interviews, collective and individual experience, and systematic Similarly, there were many sources of data on the amount of facility space owned and leased by the federal government and the types of space. Again, the numbers are cited to convey the magnitude and diversity of the federal government's holdings, with no attempt to reconcile data differences across the sources.
PREFACE xiii analysis--has determined to be highly effective for facilities investment decision making and asset management. Business case analysis. Tool for planning and decision making that projects the financial implications and other organizational consequences of a proposed action (Schmidt, 2003b). A business case analysis is used to ensure that the ob- jectives for a proposed facility-related investment are clearly defined; that a broad range of alternatives for meeting the objectives is developed; that the alternatives are evaluated to determine how well the objectives will be met; and that trade- offs are explicit. It is a living tool that is continually revisited, refined, and up- dated. Although at its heart the business case is a financial analysis, it also con- tains information on organizational impacts that cannot be quantified in monetary terms, such as mission-readiness or fulfillment, customer satisfaction, and public image. Facilities asset management. Systematic process of maintaining, upgrading, and operating physical assets cost-effectively. It combines engineering principles with sound business practices and economic theory and provides tools to achieve a more organized, logical approach to decision making (FHWA, 1999). A facili- ties asset management approach allows for both program- or network-level man- agement and project-level management and thereby supports both executive-level (portfolio of facilities) and field-level decision making. Facilities investments. New construction, renewal, maintenance, retrofitting, acquiring, leasing, and decommissioning or disposing of buildings, structures, and their supporting infrastructure. Investments in land are excluded. Not-for-profit organizations. Groups organized for purposes other than gen- erating profit and in which no part of the organization's net earnings may inure to the benefit of any private shareholder or individual. Not-for-profit organizations may take many forms, including that of a corporation, an individual enterprise, an unincorporated association, a partnership, or a charitable foundation. They must be designated as not-for-profit at their inception and are governed by state laws. Private-sector organizations. Enterprises formed to engage in activities that generate profit for their owners or shareholders. They can take a number of forms and legal definitions--sole proprietorships, general partnerships, limited partner- ships, joint ventures, C corporations, limited liability corporations, and S corpo- rations, among others. Pro forma statement. Strictly financial analysis included in a business case analysis.
Acknowledgments of Committee Members and Reviewers The Committee on Business Strategies for Public Capital Investment ac- knowledges and thanks all those representatives of private-sector organizations, federal agencies, other public entities, and not-for-profit institutions who pro- vided background information and shared their personal expertise through brief- ings and interviews. The chair of the committee expresses his personal appreciation to all of the committee members for sharing their expertise, views, and opinions; for making substantial contributions to concepts and text; and for giving generously of their time. This report has been reviewed in draft form by individuals chosen for their diverse perspectives and technical expertise, in accordance with procedures ap- proved by the National Research Council's Report Review Committee. The pur- pose of this independent review is to provide candid and critical comments that will assist the institution in making its published report as sound as possible and to ensure that the report meets institutional standards for objectivity, evidence, and responsiveness to the study charge. The review comments and draft manu- script remain confidential to protect the integrity of the deliberative process. We wish to thank the following individuals for their review of this report: David G. Cotts, author and management consultant, Dennis D. Dunne, California Department of General Services (retired), Carl Ference, Trammell Crow Company, Amy Helling, Georgia State University, James C. Hershauer, Arizona State University, Steven Kelman, Harvard University, and Morris Tanenbaum, AT&T Corporation (retired). xv
xvi ACKNOWLEDGMENTS OF COMMITTEE MEMBERS AND REVIEWERS Although the reviewers listed above have provided many constructive com- ments and suggestions, they were not asked to endorse the conclusions or recom- mendations, nor did they see the final draft of the report before its release. The review of this report was overseen by Dale F. Stein, President Emeritus, Michi- gan Technological University. Appointed by the National Research Council, he was responsible for making certain that an independent examination of this report was carried out in accordance with institutional procedures and that all review comments were carefully considered. Responsibility for the final content of this report rests entirely with the authoring committee and the institution.
Contents EXECUTIVE SUMMARY 1 1 CONTEXT 13 Background, 13 The Ongoing Investment in Federal Facilities, 14 Some Characteristics of Private-Sector Organizations That Affect Facilities Investment and Management, 16 Some Characteristics of the Federal Government That Affect Facilities Investment and Management, 20 Facilities Requirements, Longevity, and Life-Cycle Costs, 25 Conceptual Shifts in Facilities Investment Decision Making, 28 2 FACILITIES ASSET MANAGEMENT 30 Background, 30 Facilities Asset Management, 32 Components of a Facilities Asset Management Approach, 32 Facilities Asset Managers, 37 Examples of Facilities Asset Management Systems, 40 Principles and Policies from Best-Practice Organizations, 43 3 DECISION MAKING TO SUPPORT 44 ORGANIZATIONAL MISSIONS Background, 44 The Roles of Analysis and Values in Decision Making, 45 Management Approaches for Achieving a Mission, 47 xvii
xviii CONTENTS Information for Decision Making, 50 Decision-Making Processes, 55 Principles and Policies from Best-Practice Organizations, 59 4 ENVIRONMENTS FOR EFFECTIVE DECISION MAKING 62 Background, 62 Open Communications, Trust, and Credible Information, 62 Performance Measures, 65 Evaluations and Continuous Feedback, 68 Forms of Feedback, 69 Accountability, 72 Incentives, 73 Principles and Policies from Best-Practice Organizations, 73 5 ALTERNATIVE APPROACHES FOR ACQUIRING 76 FEDERAL FACILITIES Background, 76 Issues Related to Full Up-front Funding of Facilities, 77 Issues Related to the Use of Alternative Approaches for Acquiring Facilities, 78 Summary and a Recommendation, 88 6 ADAPTING PRINCIPLES AND POLICIES FROM 89 BEST-PRACTICE ORGANIZATIONS TO THE FEDERAL OPERATING ENVIRONMENT Background, 89 Special Aspects of the Federal Operating Environment, 90 Adapting Best-Practice Principles and Policies to the Federal Environment, 93 An Overall Strategy for Implementation, 113 BIBLIOGRAPHY 118 APPENDIXES A Biographical Sketches of Committee Members 127 B Committee Interviews and Briefings 134 C Interview Discussion Outline 137
List of Figures and Tables FIGURES 1.1 Federal agencies' facilities holdings in millions of square feet, 15 1.2 Distribution of federal government space by type of use, 15 1.3 Distribution of total assets for a typical corporate organization, 17 1.4 The various stakeholders in facilities investments and their diverse and overlapping objectives, 22 1.5 Facility life cycle, 27 2.1 The evolving focus of facilities asset management, 30 2.2 Factors driving the evolution of facilities management, 31 2.3 Components of a facilities asset management system, 33 2.4 Linking organizational goals with facilities investment and operations, 33 2.5 A facilities asset management structure (BYU), 41 2.6 A facilities asset management framework (BYU), 42 3.1 Typical decision-making process for facilities investments, 56 6.1 A sociotechnical system view for decision making, 114 6.2 A model for integrating scientific and social values in decision making, 115 xix
xx LIST OF TABLES AND FIGURES TABLES 2.1 Skills Required by Facilities Asset Managers, 38 2.2 Business Skills for the Facility Manager, 39 3.1 An Approach for Nonmanufacturing Facilities (GM), 50 4.1 Strategic Assessment Model Matrix of the Association of Higher Education Facilities Officers (APPA), 67