How strategic cost modelling can build value for FM

How strategic cost modelling can build value for FM

Strategic cost modelling has the potential to save developers hundreds of millions of dollars over the life cycle of their assets. Martin Gregory, International Director of Facilities Management Consulting at Drees & Sommer, explains

The master developments, business parks and residential communities we see around us have spent years in the planning, design and construction phases. Rightly so; they are expected to have decades of use in them. Yet, time and again, we see critical costs being ignored, financial risk assessments that are sorely lacking, and budgets that simply don’t add up. Here, we’ll assess why this happens, the potential pitfalls, and most importantly, suggest how proper stress tests via bespoke validation models can help create truly sustainable developments – as relevant in 50 years’ time as they are today.

Martin Gregory, International Director of Facilities Management Consulting at Drees & Sommer

Pre-concept design
Briefly speaking, all projects begin with a feasibility process, during which developers analyse the best use of their land and the market fundamentals and opportunities for this use. This leads to a pre-concept design that meets a capital budget, or CAPEX.

However, too often, there is a fundamental gap between a developer’s analysis of the capital expenditure required to build their project, and the operational costs of maintaining this asset – the OPEX. In fact, the Vast majority of developers don’t define the latter (opex) at all, or they base this cost on misleading benchmarks. For example, it’s not uncommon for developers of luxury residential projects to benchmark their service charge on an affordable housing development or compare a high-density project to one that is less efficient.

Unfortunately, at these early stages, the OPEX just isn’t front of mind; either because the developer plans to build, sell then exit, or because all attention is on minimising the CAPEX. However, in our experience, small savings on CAPEX can result in much larger spending on OPEX, further down the line.

So, with sustainability of the development as the ultimate goal, what should be done? We firmly believe that developers and architects should, as a matter of principle, not just stress test their designs for CAPEX but also for OPEX and what we call ‘Whole Life Cost’.

Broadly, this means analysing annual operating costs for the next 20/30 years, forecasting how these may increase, and looking at life cycle replacement costs and renewal costs, essentially ensuring that there is financing in place to replace and fix things to keep the development relevant. Ideally, we want to achieve an optimum balance between CAPEX, OPEX, renewal, and replacement; the four key elements in the development’s life cycle.

In our experience, Very few buildings have fulfilled their projected life cycle, but there are some that will if the investment is made. This is why we recommend that developers establish reserve funds, collected via a service charge, for example, to make such investment possible.

Strategic modelling
In practice, this analysis is far more complex than I’ve stated so far. In our cost validation models, which are bespoke for each project, we look at management costs, utility cost forecast, inflation, interest, reserve funds, hard maintenance technical costs, soft maintenance technical costs, community fees, and much more. When calculating OPEX, we take into account public realm elements and common costs for mixed-use projects and the impact of those costs from the first point of handover until the last point of occupation, which we call steady-state, or to the point of maturity or return on the investment. This could be 20 years, 50 years or 100 years, and our models will forecast for as long as the developer wants the project to be relevant.

We concentrate on the service charge per square foot and what that means for the developer, against benchmark information that is relevant for them. We examine all of this in relation to the design, budget and phasing of the project, including sub developments within a master development, from infrastructure and construction through to sales and occupation.

Developers tend to want to develop as much of their infrastructure as possible to give confidence to the market. This puts them at significant risk. There could be a two or three year lag of building that infrastructure, having it available and maintaining that infrastructure, before the plot at the end of that phase is ready and contributing to the cost. Who bears the burden of the cost in the meantime? The developer.

Essential data
Using the data our models collect, we can advise developers on how to realign the phasing strategy to tighten this lag, with major cost implications. There have been numerous cases in which we’ve saved the developer more than $1bn, and we estimate most developers can save at least $100mn in OPEX by adjusting the phasing strategy. 

At the end of this process, the developer has a live validation model that can be tested and revisited at every stage of their project; important when scenarios change because of the launch of new, competing developments, for example. It also works alongside a design review and assessment of the developer’s strategy, providing an essential hub of data that enables the developer to lower costs, maximise savings, seek the right level of financing and minimise risk, providing them with a fully transparent picture of the whole life cycle cost they have to bear. This can only be achieved with a truly experienced interdisciplinary team of experts.

In the digital era, data drives success. Arm yourselves with as much as possible and use it to your advantage.

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