Renovating an older office or manufacturing facility to be suitable for a high-tech, leading edge or mission-critical operation takes a certain amount of planning and capex.
Those two ingredients are highly related, as the quality of your advance planning tends to have a great deal of impact on capex control. If project planning is not well thought-out, capital expenditures quickly can get out of control.
Controlling and reducing capital expenditures in commercial renovations is an area that remains important to us and to our clients. Maintaining this control is particularly critical in renovation situations, where unexpected costs of repairs may arise. The costs can spiral out of control with various customer user groups demanding excellence in their work environments. As an A&E, planning, and management design consulting firm dedicated to design and planning critical operations — many of which are renovations — we’ve established strategies specifically focusing on controlling capex.
Big Picture Cost-Control
One example is a program with several large customers for a united mission to manufacture spacecraft for commercial travel to the International Space Station. Space Florida, NASA, and The Boeing Company all teamed up to work inside a repurposed 30-year-old NASA facility, and the organizations tapped BRPH to plan, design and manage this multi-million-dollar renovation.
In this case, as in any advanced commercial renovation, the first step is recognizing the program’s mission. The goals and objectives of the mission supersede all tangential activities. The owner, customer, designers, and builders must also all be on the same page from the get-go, with a cohesive mindset shared by all. To achieve this there must be one repository for all parties to develop, share and document project requirements. With all the project requirements in hand, the big picture cost-control is broken down into build sets, which is further broken down into design documents. From this, all parties need to understand from an architectural and engineering perspective what the owner intends to do in this facility to remain in budget.
Going into the Space Florida / NASA / Boeing project, we learned the program’s requirements and compared them against the features of the facility, some of which we knew would serve the program well. The existing facility had been built for NASA in 1984 as a processing facility for space shuttle missions, and as such, we knew it had been built with 100% redundancy, including a significant backup air handling system.
High-tech manufacturing facilities require significant HVAC systems for cooling, filtration and humidity control. In this case, the massive existing air handlers were designed to run constantly with giant fans capable of cooling the entire facility twice.
In recent years, however, variable frequency HVAC fan wall systems have enabled the use of smaller fans to distribute cooled air with greater flexibility and built-in reliability, leading to significant savings in equipment and energy costs. The program to manufacturer spacecraft for the International Space Station initially planned to replace the entire HVAC system as an expense of the program, having earmarked $2.5 million of the capital budget for this expense. By accepting our plan to use fan wall HVAC equipment along with new variable frequency drives, the program was able to recognize a reduction of 40% in HVAC equipment costs.
The color of money
In most companies, the color of money is defined as the difference between work funded by programs or capital expenditures, versus work funded by operating expenses. The two budgets are completely different whereas one is funded by a program of a period of time that could be multiple years, and the other is funded specifically in fiscal budget expenditure. In the aforementioned program, the upgrade of the facility HVAC systems which generated a significant energy savings to the owner, could be considered an operating expense, and therefore, paid for by the operating budget instead of as a capital cost of the program.
With the proper investigation and strategy for the use of funds, the unified team of the owner, customer, designer, and builder can maintain the focus on the program’s mission. In the example herein, NASA / Space Florida / Boeing / BRPH all played a part in saving the majority of the money earmarked for HVAC equipment. This permitted the excess funds to be spent on other facility improvements that were not part of the base budget.
Assessments, Testing and Tradeoffs
Not all cases are this drastic, but it’s an example of how advanced planning and site assessments impact capex. Under our strategy, planning begins with fact-finding missions, both at the existing site and with the project stakeholders. In addition to meeting with stakeholders, we thoroughly assess and survey the existing facility. It’s key, however, that the assessment team have a thorough understanding of the customer’s requirements first, so they will seek out both resources and concerns during assessments.
The assessment team must also conduct a risk analysis to identify hidden risks and problem areas. By doing this, the partners can develop strategies to mitigate the risks and implement testing programs where appropriate.
As a next step, the team should assess the funding requirements, government restrictive funding stipulations, incentives, and joint venture responsibilities between all parties involved. Determining how the money is colored is critical to understanding the financial success of the program.
The CAIV Strategy
Another capex control strategy is setting cost as an independent variable. Known by developers and program managers as the CAIV strategy, the method has been around for several years and remains effective for managing costs.
Much more than setting a budget, CAIV requires project partners to agree on a series of cost-performance tradeoffs between the various systems involved in the project, before the work begins. Deciding on the tradeoffs to be made is the hardest part of CAIV, because attempting to meet both customer requirements and aggressive cost goals at the same time naturally involves conflict. By agreeing on these tradeoffs up front and integrating them into a baseline, the real estate director sets costs as an independent variable, becoming a constraint on the project. If costs rise in one area, they’ll have to be reduced in another.
No Pain, No Gain
While upfront assessments and the use of CAIV require some legwork, real estate directors will find these tasks are well worth the efforts in terms of controlling and even reducing capital expenditures.
Ultimately, this planning, involving the owner, builder, architect and engineer can take a few weeks, but ideally all parties will be on the same page when it’s completed. Starting off on the right foot with complete and accurate planning sets the stage for a successful project completion, often rewarded with additional opportunities to compete for and win new business.
For more information on how to control capex and to help define the color of money in your next construction program, contact us today.