EEJ Article (750 Words)

Evaluating Deferred Maintenance as a Driver for Energy Management Programs in Higher Education

Duane Stucky, Ph.D., Vice President, Finance and Administration, Middle Tennessee State University Joe Whitefield, P.E.,C.E.M., Director, Center for Energy Efficiency, Middle Tennessee State University

There are many compelling reasons for colleges and universities to implement an energy management program. Administrators often cite energy and environmental stewardship, economic stewardship, and an increasing number of academic mission support opportunities as being important to them. Well-designed and implemented energy management projects and initiatives can, of course, meet many of these desires.

Why then is comprehensive energy management so rare given these motivations and the significant opportunities that exist? For many physical plant managers, the issue rests with the “real-world” problems stemming from the physical condition of the aging facilities coupled with the lack of adequate funding to address their needs. When the ability to provide the basics - a clean, safe, functional, environmentally controlled facility - is diminished, altruistic motives of stewardship become secondary or fade away all together. Simply put, it is the battle of facilities’ physical needs and the fiscal constraints. In recent years, this condition of deteriorating facilities brought on by inadequate funding has frequently been referred to as “deferred maintenance.” This article will examine the basic problem of deferred maintenance and consider its impact on facilities and energy management planning.

A Closer Look at Deferred Maintenance

To understand deferred maintenance we must first consider capital maintenance. For Middle Tennessee State University, capital maintenance projects are classified as major, non-routine, repairs and replacements of facility systems unrelated to new construction with a minimum value of $100,000. Project scopes include:

 Repair to restore a facility to its former or a better state without a change in use  Replacement of exhausted or damaged utility systems, lighting, and building shell (roofs, etc.)  Removal of hazards; i.e. asbestos encapsulation or abatement  Alteration of safety or accessibility features to rectify code deficiencies  Modernization of obsolete building systems, for continuation of educational program

In estimating the general need for annual capital maintenance, we often apply the formula:

Annual Capital Maintenance = 2/3 BRC * (BA/1275) 1

where BRC is the building replacement cost, BA is the building age in years, and 1275 is the sum of the years digits for a building with a 50 year expectant life.

1 Three Approaches to Setting Recapitalization Rates, FM Data Monthly, August 1997 Deferred maintenance can be defined in terms of the accumulating capital maintenance that is not being accomplished and is therefore deferred. For aging campuses, deferred maintenance is typically estimated in tens of millions of dollars (i.e. $50M - $120M).

While the deferred maintenance estimates can be impressive (or scary), they are not always easily understood. When using the capital maintenance formula above to estimate deferred maintenance, we like to consider 5-year intervals. By using these intervals, the estimate can be scaled applying any capital maintenance investment history. Table 1.0 demonstrates a deferred maintenance estimate for the most recent 5-year interval for a 30-year old facility with an initial building replacement cost of $10,000,000.

Table 1.0 - 5-Year Deferred Maintenance Estimate for Sample Building Building Age (years) Building Replacement Annual Capital 5-Year Deferred Cost ($) Maintenance ($) Maintenance ($) 1 10,000,000 5,229 … 26 14,509,454 197,253 27 14,727,095 207,912 28 14,948,002 218,847 1,095,639 29 15,172,222 230,062 30 15,399,805 241,566

The Current Replacement Cost is escalated 1.5% per year Annual Capital Maintenance = 2/3 BRC * (BA/1275)

A capital maintenance history review and/or a more detailed needs-assessment of this sample building would indicate if additional deferred maintenance intervals should be considered.

Assessing the Impacts of Deferred Maintenance

The importance of deferred maintenance is not its estimated value but the liability it represents. Major equipment breakdowns, system failures and plant shutdowns, typically at the most inopportune times, become more common. Not only are the building systems at risk for damage, building contents and people may be at increased risk as well. The real challenge of deferred maintenance is in assessing the areas of greatest risk and probability of an event occurrence or system failure.

This difficulty in predicting and preventing an occurrence/failure is superceded only by the difficulty in dealing with the occurrence/failure both physically and financially once it has occurred. Assuming there are no emergency funds available, the financial impact of an occurrence/failure that must be fixed is typically borne by the Operations & Maintenance (O&M) budget. O&M budgets are designed to provide for the ongoing routine service and minor maintenance needs of the facilities not major, corrective maintenance projects.

Consider the same 30 year-old sample building above. If that building has 125,000 square feet, and O&M is budgeted at $3.00/sf, then the total annual O&M budget for this building would be $375,000. Applying 75% of the budget ($281,250) to operations and service-type activities (custodial, grounds, non-maintenance services, preventative maintenance, etc.) leaves only 25% of the budget ($93,750) for the minor, routine repair and replacement activities. Table 2.0 compares the deferred maintenance liabilities with the elements of the O&M budget for the sample building.

Table 2.0 - Deferred Maintenance/O&M Summary for Sample Building Services ($) Maintenance ($) Deferred Maintenance (5-yr) 1,095,639 Operations & Maintenance Occurrence/ Operations/Services 281,250 Failure Repair/Replacement 93,750

In this example, occurrences/failures resulting from deferred maintenance are putting tremendous financial pressure on the repair/replacement portion of the O&M budget. A single occurrence/failure of $15,000 represents only 1.4% of the deferred maintenance estimate but has an impact of 16% on the repair/replacement portion of the O&M budget. This typically leads to reductions in the service-type activities that are provided in this budget. Grass is mowed less, custodial services are reduced, or preventative maintenance activities are eliminated to make financial room for a non-scheduled, unfunded , corrective maintenance project that just developed. Clearly, O&M budgets are not adequate funding sources for the realized liabilities of deferred maintenance.

In addition, these O&M impacts, particularly reduced preventative maintenance, sustained over time, produce a snowball effect that is the acceleration of the deterioration of the facility and increase in the capital maintenance need and subsequent increase in deferred maintenance. The impact of a deteriorating, poor performing facility will also usually result in higher energy consumption and utility costs. In short, capital maintenance, O&M, and utility costs are interdependent and should be considered collectively.

Targeting the Benefits of an Energy Management Program

Energy professionals understand well that an energy management program can help the deferred maintenance problem. Retrofit projects can provide needed mechanical and electrical equipment replacements (major or minor) and improved facility functionality leaving a better performing, more efficient building. Capital financing options and operational savings makes these projects a seemingly perfect fit.

In order for this to happen, however, a direct connection must be made between the benefits of the energy project and basic needs of the facility. Identifying deferred maintenance is typically easy. Treating it as a liability and understanding its affects on capital building and maintenance efforts, O&M efforts, and utilities is not as easy. Both the owner and energy service provider/consultant should spend more time on the issues and affects of deferred maintenance and less time on the estimate. This should lead to an energy management program that delivers more than just energy savings. Energy management programs that meet the basic needs of a facility will deliver on many of the higher motivations of stewardship as the by-product. Once that is accomplished, other program elements can be included to address additional needs and motivations.