CapEx Calculations: Setting Budgets and Controlling Expenses

Originally published in Colorado Real Estate Journal

It wasn’t technically autumn back on August 20, the date of Colorado Real Estate Journal’s annual Fall Property Management Conference. Still, the event is always a mental cue to think about golden aspen trees and enjoying the cool down. It is also the season of annual budget planning, which for many in the commercial real estate sector is a real stress point. To shed light on the subject, at the Conference, I had the opportunity to be a panelist on the session “CapEx Calculations: Setting Budgets and Controlling Expenses."

Moderated by Judy Purviance-Anderson, RPA, BOMA Fellow, and Associate Director of Asset Services at Cushman & Wakefield, the panel shared personal experiences with practical takeaways. Along with fellow panelists Jim Ellis, Principal, General Contracting, DCP; Mark Dean, President, Summit Insulation; Sean Wardroup, President, Jordy Construction; and Katie Winter, NCIDQ - Principal/Interior Designer, Kieding, we shared our expertise in building operations. Discussing large-scale capital projects, such as replacing a building envelope and targeted investments, like a lobby or common area renovations, the budgets all follow a similar formula.

“As a designer, I believe a successful capital improvement project balances creativity with financial responsibility—staying in budget is just as important as bringing the vision to life.” Katie Winter, NCIDQ- Principal / Interior Designer, Kieding

The panel discussion touched on several best practices for achieving budget success.

Common Pitfalls and Best Practices

Step 1: Identify Your Needs. The most basic step, but it comes with challenges in identifying the detailed scope and the sequential scheduling. For instance, a boiler replacement isn’t just a boiler replacement; it's a comprehensive process. You will need to shut down the system, with temporary measures potentially being required, and account for the pad and infrastructure needed to support the new boiler, including the structural load of the new boiler, and so on.

Step 2: Rough Order of Magnitude. Also known as the practice swing. Assuming you have access to historical information from the managed portfolio, past projects, or vendor partners, you can insert placeholder values based on past boiler replacement.

Step 3: Budget Fine-tune. For those familiar with the ‘5 Whys’ concept of asking iterative questions, this is where we begin to look deeper. What makes this project different from historical values? Do we have a confined space to remove the old boiler? Is our boiler old enough to warrant concern about ACM? Is there a slippery slope of required code for the improvements? For optimal accuracy, engage preferred vendor partners to utilize their expertise.

Step 4: Presenting The Budget to Stakeholders. This is where the fun really begins. The upfront work noted previously will pay dividends. There will always be anecdotal references from historical projects that want to drive budgets down, which can create friction in the future as well. Know your true scope and numbers based on the market conditions to deliver a persuasive case to various stakeholders.

Specific Ways To Reduce Risk

Contingency / Cost Escalation. It is beneficial to be confident and believe that we’ve done our research to minimize contingency values. But that confidence can have consequences. Take a minute to recheck your work. The complexity of the project, the age of the building, and the age of the building system all impact the proper contingency value. As for cost escalation, it's simple: things don’t get cheaper year after year. The question is only how much it will go up?

Vendor Partner Buy-In. Teamwork makes the dream work, they say. Even with early work, formal partnering has the tangential benefit of scope and budget buy-in from partners. Create an atmosphere of accountability where achievements are celebrated. They will want to live up to the values discussed.

Cashflow. We’re facing limited available capital, but we’re also facing the challenge of drawing on that capital within a tight timeline.  This requires knowledge of potential loan terms, payment timelines for both draws and payments to potential vendors, and any deposit requirements for large equipment being replaced. This can be a benefit or a detriment to getting a project started in the first place.

Exploratory Demo. Do your homework based on the reality in the field. Make field visits with the team, open walls, and test systems and materials.  Yes, it can be time-consuming and costly before there is a direct benefit, but risk management and increased precision for the scope and budget will be a windfall.

Rule of 3s. This term exists for a reason. You may have a single preferred vendor, but feel free to “poll the audience” to gather more data. It will help support your budget for stakeholders and allow for future options. Get multiple opinions on the more complicated capital project scopes.

Budget season is tough on everyone, but we’re all in it together. By following these best practices, informed decisions can be made about the assets with available capital resources. When in doubt about a particular item, call upon your colleagues for a second opinion. Our networks are not just transactional; they are a trusted network of advisors.

Joe Zanone, Founder, Zanone Project Management