One of the hardest things to do as a facility manager is understanding when to replace facility assets. First mastering this, then arguing for timely life-cycle replacements becomes confusing — quickly. If you replace them too soon, you’re wasting valuable resources; but if you wait too long, operations will be in jeopardy. So, how do you know When To Replace Facility Assets? This article will cover an extremely valuable tool to not only predict when to replace capital assets, but to help you justify the expense to senior management. This tool is called the Facility Condition Index.
When I first became the facility manager in my current position, a 20-year capital plan had already been created. I thought that was a great starting place and it would point me in the right direction to modify and suggest alternatives to the current procurement strategy. However, I pretty quickly realized that the vast majority of the 20-year capital plan was not being followed.
The plan wasn’t a bad one, there were just different priorities that would present themselves through the years and there was only a certain amount of money to go around to the various departments. Of all the departments, the FM department was not the biggest. So, what could we do about this? I knew that there was no way these competing demands would slow down over time, but there had to be a middle ground. I needed a tool to justify asset replacements and get the funding. The FCI is a great tool to help you with this.
Facility Condition Index
The FCI is an equation that yields a ratio, quantifying the condition of a particular facility asset. The ratio is then given a rating of either good, fair, or poor and used in conjunction with the Estimated Useful Life (EUL) to determine when to replace an asset. First published in the book Managing the Facilities Portfolio by the National Association of College and University Business Officers in 1991, the FCI rating scale identifies the ratings as good (< .05), fair (between .05 and .10) and poor (>.10).
The FCI is a very basic equation that compares repair costs to replacement costs. Here is the FCI formula:
FCI Ratio = Current Year Repair Costs of Asset ÷ Replacement Cost of Asset
As an example, if our department spent $500 to repair a fan motor and $500 to replace a condenser in June on one particular HVAC split system that would cost $6,200 to replace, the equation would look like this:
FCI = ($500 + $500) ÷ $6,200
FCI = .16
That is a poor FCI because .16 is greater than .10 in the FCI rating scale. However, that doesn’t necessarily mean I’m going to replace the asset immediately. I use the FCI in conjunction with other information in order to make my recommendations for asset replacement.
Estimated Useful Life
Every asset has an EUL. One easy reference for determining the EUL of building assets is by using EUL tables. If your department does not currently have an estimated useful life table for your existing assets, you can find examples on the internet. These are often used by accountants to determine how long to depreciate assets. However, FMs can use the EUL in conjunction with the FCI to determine when assets will likely need to be replaced. This process is called life-cycle analysis.
If that split system was beyond its estimated useful life and it was an inefficient system, chances are good I would recommend replacement. However, if the fan repair happened because of an external cause to the system (it was damaged by something) and the asset still had over half its useful life left, I would probably wait on recommending replacement.
So, looking back at the 20-year capital plan I inherited, I reworked the capital plan and updated it with the assets that had been overlooked and came up with a new timeline based on a budget amount that was realistic. I took some assets out that I knew would be replaced with major renovation projects that were already scheduled and gave everything else a replacement year in the budget. Now, every year when it comes time to finalize the capital budget, we look at the 20-year plan and conduct an FCI analysis. Based on the rating from the FCI ratio and each asset’s EUL, we make decisions on whether or not to accept the replacement as planned or push the replacement into a future year. This gives me a great balance and a helpful management tool to argue why something needs to be replaced or how it could be delayed if another department has a valid requirement that wasn’t previously forecasted.
Thanks so much for reading! Please leave any feedback or comments below on how you conduct life-cycle analysis for facility assets. I can also always be reached at firstname.lastname@example.org. Until next time…