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The problem with funding a property estate

My grandfather once told me “buy a good pair of shoes and you are making an investment” – it’s typical of those sagely statements that all grand-parents make – shoes, knives and cars. What they try to instil in us all is ‘buy the best quality you can, as it works cheaper in the long run,’ as the true cost of something goes beyond the initial expense. In construction, this is the principle that is the foundation for Life Cycle/Whole Life analysis.

But, despite this accepted knowledge, commissioners of construction projects are locked into a ‘capital costs’ only position. Why is this? If my grandad – who was a dustman (no singing please) – knew the sense in ‘quality’ why the failure to do things right?

There is of course a ‘reason.’ It stems from the fact, that unlike my grandad who looked after all of his money, most buildings (especially in the public sector) are paid for from two separate funding streams; Capital Expenditure (Capex) will buy the building and Operational Expenditure (OpEx) will run it.

It’s the way things have always been done. CapEx and OpEx budgets are generally set in isolation and it is impossible for money to flow from one to the other. Let’s be frank about this – it’s absolutely bonkers!

In these times where almost anything seems to be up for grabs has this way of doing things survived when ‘clients’ have the information that shows them that they must change? Surely they have, as the principles of whole life value are known and understood?

The answer has to be “no.” So what’s wrong?

Whilst the principles are generally accepted, and perhaps the construction industry does provide the information balancing component life cycle. The problem is though, that whilst we often talk a good game, where are the guarantees? Do window manufacturers provide a guarantee that says spend an extra £10,000 on these triple-glazed windows and your energy bill will not be [say] £10,000 a year but £8,000 a year?

Arguably, the only time the industry has attempted to deal with balancing capital and operational costs was with PFI (and other similar) projects. With these, because the operators payments were related to availability of space, they had to take into account longevity of product, replacement and operational costs. Choosing the right ‘boiler’ plant required analysis of cost of initial cost of the product, running costs, potential down time for maintenance and replacement, and replacement costs; deeper analysis may have even included the potential improvements in efficiency of replacement boilers too. It happened because the risk was firmly and squarely with the operator.

In my view, if you want someone to adopt an alternative behaviour, you need to change yours first. If you can, you open the door to allow the other person to move into the ‘space’ you have left. Rather than bemoan the fact that clients ‘don’t understand life cycle’ we have to give them a compelling reason to change – it’s time to offer guarantees and in doing so help clients combine CapEx and OpEx.

I am not alone – Peter Hansford, the Government Chief Construction Advisor – who I have the pleasure of getting to know over his term in office agrees, “the construction industry needs to help clients commission buildings thinking clearly about their total expenditure – TotEx, not CapEx and OpEx. If we can help them do this, the nations’ money will be much more wisely spent”

This blog is the fifth in a series prepared by members of the Constructing Excellence Procurement Theme Group to provoke debate and seek to provide thought leadership on a crucial aspect which we see as a major barrier to improving the productivity of the sector. Comments are welcomed on the Constructing Excellence LinkedIn page or on Twitter using the  hashtag #CEProcurement.

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