In a perfect world, we would be able to look at a building and say, “Let’s put away $700 per unit per year to fund our capital plan, and that will fund all asset replacements needed.”
Then, we would be able to get down into the “weeds” – looking at a specific piece of equipment like a chiller and predict: “That will last another five years and cost me exactly X to replace at that time.”
Reality isn’t perfect. It’s messy, things fail early, renovations are needed to stay competitive and we don’t always have the money to replace something when we planned to.
So what is a senior living operator to do?
Whether you are a single-site or multisite operator, the reality for most is the same. Front-line staff guess at what will be needed in the next one to three years and put together a wish list, and decision-makers recognize the wishes for what they are and make their own guess as to what actually is needed. Those at the community level are then forced to make do with what they have and hope that nothing major breaks and blows the budget.
In this reality, the entire capital planning process becomes one of guesses and wishes – a tug-of-war between various departments and needs.
The end result? In addition to extreme frustration at all levels, mounting levels of deferred maintenance and surprise expenditures begin piling up. In fact, less than 10% of recently surveyed communities reported having a 20-year capital plan. A recent report suggested that 20% of older communities may not be able to effectively service future resident needs while remaining truly competitive. For communities facing competition from brand new operators, the challenge is immediate.
There is a better way forward. Senior living operators now have tools that allow for improved capital planning and prioritization of needs. With three key data elements in mind, senior living operators can change the way they manage their communities:
- Deferred maintenance (what hasn’t been done that should have been done);
- Future requirements (what needs to be replaced in the future); and
- Asset repair / expense (what is being spent on repairs now)
Knowing the above information allows an operator to effectively plan for the future in three simple steps:
Step 1 – Identify deferred maintenance
Every building has items overdue for maintenance. The first step is to create an accurate list of your deferred maintenance, with an estimated cost for repair.
Step 2 – Create a capital plan
There are two routes to creating your capital plan: do it yourself or outsource the job. There are ups and downs to both. Outsourcing incurs a higher cost, whereas insourcing can present challenges in regard to time and expertise. In the end, you’ll have to decide what works best for you.
Ensure that the plan looks out at least 10 years (20 years is better) and is something you easily can update as equipment is replaced and new projects come up. Capital planning software is a great tool to consider here; it provides an easy way to keep a plan updated with minimal time investments once created.
Step 3 – Track repair costs
The vast majority of organizations do not attach the cost to repair a particular asset to said asset. Costs are tracked, but in aggregate. Because of this tendency, operators are unable to make repair versus replace decisions based on data, so it comes down to guesswork. Operators using the right maintenance software (CMMS), however, can track these data and then report on what assets should be replaced now.
Once these three steps are completed, operators will find themselves in a new position. No longer is a capital budget based on guesses and wishes; instead, the plan and budget are based on facts.
In the long term, the capital plan provides the directional information required to establish reserve fund levels and to plan for major costs (for instance, roof replacement). In the short term, capital budgets are guided by fact.
Simply running a quick report showing all assets where the repair spend has exceeded 15% of the purchase cost provides hard data on which assets to replace and which to hang on to.
Adopting a solid process for capital planning not only enables organizations to both plan for the future and easily adapt as situations change; it also ensures that operators stay competitive in the ever-changing landscape of senior living.