Invaluable advice for body corporates, property owners and asset managers.
As an industry we have been refining our approach to construction and capital costs for eons. Unfortunately this focus has traditionally failed to consider the longer term operational cost. One aspect of operational cost analysis is Lifecycle Costing (LCC).
The principles of LCC have been around for some time however it is rarely applied in a comprehensive manner – and when it is used it is often to simply justify a predetermined outcome (for example the decision to “up-spec” a piece of equipment).
In this imperfect world, accepting that LCC may not have been applied – how can we better manage operating costs? Facilities Management expert Adam Adkin offers us some key areas of focus:
Managing Third Party Suppliers
Trusting specialists to provide maintenance services is an essential aspect of property management. However, the term ‘Specialist’ should not mean ‘Exempt from justification’. Regardless of the specialist that you are engaging with, their cost for services will be calculated by labour rates, plant costs and material costs, with overheads and profit built into the charge out rates or identified separately.
As the client you are fully justified in requesting this breakdown. Your own accountability for approving this expenditure may be scrutinised and you should be able to produce this information when requested, reducing your own personal exposure to risk.
Third party contracts will usually include three elements of work:
- Planned Preventative Maintenance (PPM);
- Reactive Maintenance (RM); and
- Emergency Call Outs
Planned Preventative Maintenance
When negotiating contracts for planned maintenance works you should list the equipment that is to be maintained and specify your requirements for maintenance, usually by issuing a copy of your maintenance specification to the specialist supplier, including the following as a minimum:
- Outline when the planned preventative maintenance will be carried out and the frequency and nature of this work (e.g. weekly, monthly, quarterly or annual);
- List the maintenance tasks to be carried out at each frequency;
- Comply with the requirements set out in the Operating and Maintenance Manuals; and
- Set out the required statutory testing and certification required by laws, regulations, codes of practice, Australian Standards, good industry practice, warranties and insurers.
The specialist supplier should demonstrate to you where the maintenance service that they are proposing to provide will meet your maintenance needs and comply with your maintenance specification. This will allow you to complete a comprehensive compliance and risk review of the service that is being offered.
To review the cost of any proposed service, split the work down into a cost per asset/per equipment or a labour cost per day. In addition to this a breakdown of materials and consumables to be used will provide a greater level of cost certainty. This will allow you to ascertain whether the costs for the work are reasonable and assess the service in terms of value for money.
The hourly labour rates and percentage mark-ups on plant and materials for reactive works should be agreed with your suppliers as part of the wider package of works (including PPM and emergency call outs). Two distinctive things to consider about Reactive Maintenance are labour rates and minimum call out fees and duration (during normal business hours and after business hours). Approaching the service contract this way may increase the chances of the supplier agreeing to discounted reactive rates when they are procured as part of a comprehensive maintenance service.
A client should also take this opportunity to agree the format for reactive work order claims, including the completion of timesheets to support times on site, the provision of invoices for materials and plant items and an agreed format for measured work submissions (sketches, photographs, dimension set outs etc.).
This will greatly improve the level of audit that a client will be able to complete on any future claims and encourage an open, transparent approach to reactive work claims from the supplier, allowing the client to ensure best value for money and reduce the risk of any over-payment for reactive works.
You should also track the number of times reactive maintenance is required (also known as the failure rate) for each asset which will assist in budgeting forecasts and asset performance management.
Emergency Call Outs
Emergency call outs have two main factors which will need to be agreed and documented prior to an agreement being signed and accepted. The first is the response timeframe – this will need to be in line with your business objectives and the importance of each asset that is being maintained. Any call out to OH&S or business critical items should preferably be one hour or less, with less critical faults or equipment failures on a longer call out response (at a lower premium).
The second item to be agreed for call outs is the cost of each emergency attendance. Again, labour rates and minimum call out fees (during normal business hours and after business hours) should be considered. Agreeing these costs upfront will save time in the event of an emergency and also assist with any budgeting forecasts that you are required to produce. It is also advisable to agree that the supplier will act on a verbal instruction from nominated individuals in the event of a true emergency – this will assist you to keep a level of control over expenditure for emergency works.
In summary, the best contracts will find a balance between the level of service that is being provided for planned works to a set scope of services, the cost for unplanned works and the auditability of these ad-hoc costs, and coverage for works of an emergency nature that will not ‘break the bank’. Always consider the level of accountability and ownership that you have over the operational costs for your facility and this will ultimately protect your personal interests whilst driving best value from your operational maintenance contracts.
For advice about driving down operational costs contact our Asset and Facilities Management expert Adam Adkin.