Budgeting and Cost Control - FMLink (2023)

The budgeting process has evolved from a straightforward annual ritual to a complex test of a corporation’s priorities and plans. As the economy expands and business becomes more competitive, priorities and projections become difficult to define within scheduled time frames. Many corporations find themselves operating on continuing resolutions: that is, operating well into a new fiscal year at last year’s funding levels until policy differences among budget makers can be resolved.

Since budgeting in today’s economy always involves working with less than ideal funding, priorities and trade-offs become part of the budgeting process. Most importantly, when facility managers are working out their funding allocations, the priorities that govern decisions are not likely to be those of the facility management department, but rather those of the company as a whole. For example, a number of critical repair and maintenance jobs should be completed to offset deteriorating conditions at an essential facility. To do so may leave other necessary but less critical items uncompleted. The facility manager decides whether they should be postponed, funded from a contingency budget (if one exists), or assigned to a different budget.

Senior management is likely to evaluate performance of corporate investments largely in terms of ROI (return on investment) and increase of asset value. In the past, facilities were not evaluated on these bases. In some cases, significant facility management decisions were made by outside consultants who only had experience with the budgeting and financial analysis of individual facility-related projects. These consultants made recommendations without detailed knowledge of organizational business objectives. As a result, organizations were saddled with unworkable decisions. Such decisions lessened the perceived value of the facility assets and minimized their use as a corporate resource for productive gain. This is not the way industry deals with real estate; they view it as an investment.

The terms real estate and facilities are used to describe the same buildings and property, but from different perspectives. In many corporations, owned real estate holdings are the largest single type of all capital assets, contributing substantially to asset value and net worth – sometimes as much as 25 percent. Contractual obligations to pay mortgages and lease space can also be one of a corporation’s largest long-term financial commitments. Therefore, both the ownership and the leasing aspects of real estate often become pivotal issues that affect the amount of upfront cash and long-term obligation to be assumed in major deals such as mergers and acquisitions.

Unfortunately, senior management often does not recognize the connection between a real estate asset and its ongoing cost for operation and maintenance. Because these are essential facility issues, the facility manager should inform senior management of their significance.

Every facility manager should study the budget process of his or her company. Budgeting is the single most informative indication of how the company works, what it cares about, and what direction it is pursuing. A review of budgetary decisions will also reveal whether or not a particular business line is likely to warrant new or continued investment in facilities.

It is important to understand the basic position of facility management as compared to other corporate departments in most budgeting processes. The budgetary position of facility management is directly related to its organizational posture and mission. Consider the following:

  • When presenting a case for funding, facility management is held to a higher standard of justification than core business departments. This is because of its usual position as an overhead (cost center) function that does not generate corporate income (profit center).
  • Facilities projects frequently involve high operating and capital costs and long-term financial commitments that run counter to efforts to maintain as much financial flexibility as possible. These commitments make it more difficult to “travel light” in a financial sense.
  • Facility work often involves high profile and highly sensitive projects for several departments. To gain support for such initiatives, the facility manager should build a consensus of support across typical organizational lines.

Budget Approvals

Getting approval of any budget is a challenge in almost every company, especially if core business markets are overcrowded and competition is keen. Any observer of past budget battles between the U.S. Congress and the president can recall instances in which an entire appropriations bill was held hostage by some group trying to advance its own interest on a relatively small part of the bill. The much debated line-item veto was designed to resolve this problem for future presidents, who would have the authority to veto one part of a congressionally approved bill without vetoing the entire bill. This is a form of compartmentation: intentionally isolating individual components of a budget so that a dispute in one area does not imperil approval of all the others.

If your company does not have compartmentation, consider discussing it with senior management. It provides strategic value to facility managers who can get on with their business while executives debate policy differences and make funding adjustments in isolated areas of the budget. It also makes rational strategic planning much more achievable when the business climate is so turbulent that many managers have given up on planning altogether.

Control

Control of a budget, once approved, is as critical as gaining approval. If an approved budget is not followed, the intensive effort invested in developing it is wasted. Control of a budget depends on understanding three key items.

  • factors that enable control
  • credibility issues at stake
  • comparing accurate and timely data on actual costs and expenditures to budget projections

Factors that Enable Control

A budget is both a predictive tool, enabling a corporation to plan its future activities, and an accountability tool, useful for measuring the performance of corporate managers against the monetary targets established in the budget. Therefore, the more accurately you can predict the outcome, the greater your chances of success. Although every situation is unique, most facility managers must reckon with the following factors when planning their budgets.

  • ability to predict internal facilities program needs for staffing, required service levels, and space allocation standards
  • accuracy of customers’ projections and needs and the reliability of their information
  • stability of external factors, such as competitors’ plans to get new products to market, economic trends on critical issues such as interest rates, or regulatory actions on environmental issues or zoning ordinances
  • age of the most valuable equipment such as chillers, compressors, or energy management systems
  • churn rate in customers’ departments
  • contingency allowances that managers are permitted to build into budgets

Credibility Issues at Stake

A facility manager’s adherence to a budget as dynamic and uncertain as a facility management budget should earn corporate respect for that person’s management ability, as well as for the credibility and contribution of the facility management department as a whole. Unfortunately, senior management does not always appreciate the dynamic nature of facility management. It is the responsibility of the facility manager to inform senior management of these factors, which will then result in praise and acknowledgment of the manager’s performance.

Credibility issues acquire enormous significance when funding is scarce. They may make or break the facility manager’s ability to survive the next round of budgeting. Such issues include:

  • basic ability to meet spending targets for all categories, including contracted services, utilities, lease costs, and other costs that are notoriously difficult to control
  • ability to interpret and anticipate users’ behavior and needs for ongoing services and upcoming projects
  • sensitivity to factors and events that may affect facilities programs, such as upcoming union contract renegotiations, projected shortages in needed supplies and construction materials, or reorganizations that will create many churn projects

Comparing Actual Costs and Expenditures to Budget Projections

Ultimately, budgetary control means tracking expenditures against budget targets. Much budgetary failure originates in not tracking expenditures early enough to exercise any meaningful control or take any corrective action. The following three tactics are essential for tracking expenditures:

  • Actual to budget variance reports should be reviewed in detail on a monthly basis. The facility manager can spot material variances or anomalies thus identifying a facility problem and mitigating the financial impact. For example, a high water bill can be the result of an irrigation leak. If the leak occurs during the three-month period that many municipalities calculate wastewater fees, this leak can have a major impact on your annual budget.
  • Keep accurate data in formats that match the budget in order to make realistic comparisons. To achieve real cost control, facility management departments must often create their own internal accounting systems to track facility costs in sufficient detail; overall corporate accounting categories are often of little use in facility management departments.
  • Generate data on time. Facility managers must notice budget deviations early and correct problems in time to maintain the integrity of the budget.

Facility management budgeting is a complex, challenging endeavor. Of all the strategic activities that facility management departments perform, budgeting is often the one that requires the greatest day-to-day attention. Understanding the budgeting process is critical to knowing how your company works and how your department must function to be a corporate contributor.

In fact, budgeting has more immediate, obvious, and tangible impact on the survival of the facility management department than any other activity. Properly performed, it provides the lifeblood that enables your department to function.

This article was excerpted from BOMI Institute’s Fundamentals of Facilities Management textbook. For more information on this course, call 800-235-2664 or email service@bomi-edu.org.

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