4

Effective Practices for Investment in Maintenance and Repair

In 2002, the National Research Council appointed the Committee on Business Strategies for Public Capital Investment (NRC, 2004a, p. x) to

develop guidelines for making improved public investment decisions about facilities and supporting infrastructure, their maintenance, renewal, replacement, and decommissioning. As part of this task, the committee was asked to review and appraise current practices used to support facilities decision-making in both the private and public sectors and identify objectives, practices, and performance measures to help determine appropriate levels of investment.

The resulting report, Investments in Federal Facilities: Asset Management Strategies for the 21st Century, identifed 10 principles/policies used by best-practice organizations in matters of facilities investment and management (NRC, 2004a). The report noted that despite the inherent differences between public and private-sector organizations regarding goals, missions, and operating procedures, some aspects of all the principles/policies could be adapted to the federal operating environment.

To gather information for the present report, the committee identifed private-sector companies and professional organizations that it believed to be industry leaders in effective maintenance and repair practices, and it heard directly from four: IBM, General Motors (GM), General Dynamics, and the Association of Higher Education Facilities Offcers-APPA. Information was also obtained from three major providers of facility assessment consulting services—Parsons, W hitestone Research, and VFA Inc.—and from numerous federal agencies, as noted in Chapter 1.



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4 Effective Practices for Investment in Maintenance and Repair In 2002, the National Research Council appointed the Committee on Business Strategies for Public Capital Investment (NRC, 2004a, p. x) to develop guidelines for making improved public investment decisions about facilities and supporting infrastructure, their maintenance, renewal, replace- ment, and decommissioning. As part of this task, the committee was asked to review and appraise current practices used to support facilities decision-making in both the private and public sectors and identify objectives, practices, and performance measures to help determine appropriate levels of investment. The resulting report, Investments in Federal Facilities: Asset Management Strategies for the 21st Century, identified 10 principles/policies used by best- practice organizations in matters of facilities investment and management (NRC, 2004a). The report noted that despite the inherent differences between public and private-sector organizations regarding goals, missions, and operating procedures, some aspects of all the principles/policies could be adapted to the federal operat- ing environment. To gather information for the present report, the committee identified private- sector companies and professional organizations that it believed to be industry leaders in effective maintenance and repair practices, and it heard directly from four: IBM, General Motors (GM), General Dynamics, and the Association of Higher Education Facilities Officers-APPA. Information was also obtained from three major providers of facility assessment consulting services—Parsons, W­ itestone Research, and VFA Inc.—and from numerous federal agencies, as h noted in Chapter 1. 55

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56 PREDICTING OUTCOMES OF INVESTMENTS IN FEDERAL FACILITIES The 2004 National Research Council report found that best-practice organiza- tions all did the following (NRC, 2004a, p. 2): • Establish a framework of procedures, required information, and valuation criteria that aligns the goals, objectives, and values of their individual decision- making and operating groups to achieve the organization’s overall mission; create an effective decision-making environment; and provide a basis for measuring and improving the outcomes of facilities investments. The components of the framework are understood and used by all leadership and management levels. • Implement a systematic facilities asset management approach that ­ llowsa for a broad-based understanding of the condition and functionality of their f ­acilities portfolios—as distinct from their individual projects—in relation to their organizational missions. Best-practice organizations ensure that their f ­acilities and infrastructure managers possess both the technical expertise and the financial analysis skills to implement a portfolio-based approach. • Integrate facilities investment decisions into their organizational strategic planning processes. Best-practice organizations evaluate facilities investment proposals as mission enablers rather than solely as costs. General Dynamics, IBM, and GM all follow those practices for managing their facilities. They also reported that they had been successful in obtaining ade­ quate funding for their maintenance and repair programs. They attributed their success, in part, to a combination of strategies as follows: • Facilities are closely aligned with the organization’s mission—excess or underutilized facilities are disposed of and space is proactively managed to minimize the total square footage in use. • Maintenance and repair investments are linked to the organization’s ­product delivery or bottom line because failure to invest can result in finan­ cial harm to the organization and real or perceived harm to its ­ apacity to c perform. • Investments are made to ensure compliance with regulatory or statutory requirements because failure to do so can result in legal and financial penalties. • The work undertaken results in efficient operations, which result in lower operating costs that can be documented. The private-sector representatives identified a number of practices that are used by their organizations to ensure that maintenance and repair investments result in outcomes that are beneficial to the entire organization: • Dispose of excess and underutilized facilities (buildings, structures, and infrastructure). • Pursue a proactive strategy to minimize the total facilities “footprint.”

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EFFECTIVE PRACTICES FOR INVESTMENT IN MAINTENANCE AND REPAIR 57 • Correlate the effects of failure with the organization’s mission. • Correlate repair delay with sustainment cost. • Remove “must-fund” projects and those supported by acceptable financial payback from the maintenance and repair account and fund them with other discretionary sources. • Use consistent standards to strategically assess the condition of facilities that require maintenance and repair. • Conduct a year-end budget review to evaluate investment performance. The committee acknowledges that the choice of those practices is not based on an industrywide survey of best-practice organizations or on a scientific or ran- dom sampling of organizations. Nonetheless, it believes that if such practices were implemented in federal agencies, they could result in more cost-effective practices that would yield improved long-term results, as described below. DISPOSE OF EXCESS AND UNDERUTILIZED FACILITIES Effective portfolio-based facilities management looks holistically at the entire inventory of buildings and structures and aligns them with the organization’s over- all mission and operating objectives. Continual monitoring is required to identify facilities that become excess or underutilized because of changes in requirements or in the operating environment. Private-sector organizations “have a direct incentive to dispose of unneeded facilities because they are a drain on organizational resources and are readily identifiable on their balance sheets” (NRC, 2004a, p. 97). Excess or underutilized facilities are disposed of through sales, demolition, or nonrenewal or termina- tion of leases to free resources for other organizational requirements. In that way, private-sector organizations manage the risk of fiscal exposure related to the owner­hip of facilities, reduce their maintenance and repair requirements, s and reduce facilities-related expenses, such as property taxes, energy and water, insurance, and security. They also manage the risk to their public image posed by abandoned and poorly maintained facilities, which could affect the public’s willingness to buy their products (NRC, 2004a). Actual disposal of excess facilities can be difficult even for private-sector organizations. Obstacles to disposal include a lack of resources for the upfront planning or the investment necessary to sell or demolish excess facilities, organi- zational culture, the desire to retain space “insurance” at a local location (some- times used for storage of underused equipment), or a belief that what is excess capacity today may be needed in the future. Representatives of IBM and GM emphasized that their organizations were unable to dispose of excess facilities effectively until the effort was managed by a central organization charged with that responsibility. The central corporate-level organization was responsible for identifying excess facilities, identifying the

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58 PREDICTING OUTCOMES OF INVESTMENTS IN FEDERAL FACILITIES best method for disposition (such as sale or demolition) and preparing an imple- mentation plan. The plan was reviewed with local management before obtaining corporate-level approval for disposal or demolition and approval of the funding needed to execute the plan.1 As noted in Chapter 1, federal agencies own thousands of excess and under- utilized facilities and this poses a risk of fiscal exposure to the federal government as a whole. To date, the Base Realignment and Closure (BRAC) process that began in 1988 and continues today has been the most far-reaching and ambitious effort to address this issue. In June 2010, a presidential memorandum titled Disposing of Unneeded Federal Real Estate was issued to address excess properties in civilian agencies.2 The memorandum states the following: For decades, the Federal Government, the largest property owner and energy user in the United States, has managed more real estate than necessary to effec­ively t support its programs and missions. Both taxpayer dollars and energy resources are being wasted to maintain these excess assets. In addition, many of the proper- ties necessary for the Government’s work are not operated efficiently, resulting in wasted funds and excessive greenhouse gas pollution. . . . Past attempts at reducing the Federal Government’s civilian real property assets produced small savings and had a minor impact on the condition and performance of mission- critical properties. These efforts were not sufficiently comprehensive in dispos- ing of excess real estate and did not emphasize making more efficient use of existing assets. That presidential memorandum states that federal agency actions, as permit- ted by law, should include reducing cycle times for identifying excess assets and disposing of them; eliminating lease arrangements that are not cost effective; pursuing consolidation opportunities within and among agencies in common asset types (such as data centers, office space, warehouses, and laboratories); increasing occupancy rates in current facilities through innovative approaches to space management and alternative workplace arrangements, such as telework; and identifying offsetting reductions in inventory when new space is acquired. Federal agencies are also directed to take immediate steps to make better use of remaining real property assets as measured by utilization and occupancy rates, annual operating cost, energy efficiency, and sustainability. Those actions are intended to result in at least $3 billion in cost savings by the end of FY 2012. An additional $9.8 billion in savings is expected to be realized through the Department of Defense’s BRAC efforts from FY 2010 to FY 2012, 1GM has several examples in which the salvage revenue from demolition exceeded the cost of demolition. In at least one instance, the salvage cost of the structural steel alone exceeded the total cost of demolition. 2The full text of the memorandum is available at http://www.whitehouse.gov/the-press-office/ presidential-memorandum-disposing-unneeded-federal-real-estate.

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EFFECTIVE PRACTICES FOR INVESTMENT IN MAINTENANCE AND REPAIR 59 of which $5 billion is a direct result of reducing operating and maintenance costs by disposing of excess facilities or other consolidation efforts. Three previous National Research Council reports have addressed various aspects of the disposition of federal facilities. Stewardship of Federal Facilities: A Proactive Strategy for Managing the Nation’s Public Assets made the following recommendation (NRC, 1998, p. 7): Long-term requirements for maintenance and repair expenditures should be managed by reducing the size of the federal facilities portfolio. New construc- tion should be limited, existing buildings should be adapted to new uses, and the ownership of unneeded buildings should be transferred to other public or private organizations. Facilities that are functionally obsolete, are not needed to support an agency’s mission, are not historically significant, and are not suitable for trans- fer or adaptive reuse should be demolished whenever it is cost effective to do so. Investments in Federal Facilities: Asset Management Strategies for the 21st Century made two additional recommendations on this topic as follows (NRC, 2004a, p. 5): Recommendation 2(c). To facilitate the alignment of each department’s and a ­ gency’s existing facilities portfolios with its missions, Congress and the admin- istration should jointly lead an effort to consolidate and streamline government- wide policies, regulations, and processes related to facilities disposal, which would encourage routine disposal of excess facilities in a timely manner. Recommendation 2(d). For departments and agencies with many more facilities than are needed for their mission . . . Congress and the administration should jointly consider implementing extraordinary measures like the process used for military base realignment and closure (BRAC), modified as required to reflect actual experience with BRAC. A third study, Intelligent Sustainment and Renewal of Department of Energy Facilities and Infrastructure (NRC, 2004b), outlined a decision-making process that could be used by the Department of Energy to determine whether to repair, renovate, or replace facilities and to determine whether a facility should be re- tained or disposed of (Figure 4.1). The process outlined may be of use to other federal agencies. If the disposal of excess and underutilized properties by civilian agencies can be successfully implemented, the federal government would reduce its risk of fis- cal exposure related to the ownership of buildings, reduce its total operating costs, and reduce its long-term maintenance and repair requirements and costs. Disposal of excess and underutilized facilities would also help to meet other public policy objectives related to reductions in the use of energy and water and in greenhouse gas emissions. To realize those long-term savings and benefits, a coordinated, sustained, and funded effort will be required.

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60 PREDICTING OUTCOMES OF INVESTMENTS IN FEDERAL FACILITIES Disposal Track Retention Track Does the facility Is the facility’s Yes condition adequate to Yes enable a critical Sustain and monitor DOE mission? fulfill mission objectives? No No Is the facility Are suitable needed for another Yes replacement facilities Yes Yes Relocate to Is relocation feasible? replacement facility mission of the landlord available at other program? DOE sites? No No No Can facility be Is the facility needed Yes restored to acceptable Yes Refurbish or by other DOE condition for less than Recapitalize programs? replacement cost? No No Replace Does the facility Stabilize Yes contain toxic/hazardous and/or remediate materials? No Is the facility wanted Yes Dispose as excess by other federal agencies, federal property community or private interests? No Demolish FIGURE 4.1  Process for decision-making to repair, renovate, or replace. SOURCE: NRC, 2004b. fig 4-4 Landscape view PURSUE A PROACTIVE STRATEGY TO MINIMIZE THE TOTAL FACILITIES “FOOTPRINT” In addition to disposing of excess and underutilized facilities, private-sector and other high-performance organizations proactively initiate strategies to mini- mize their total facilities footprint and the associated costs (such as those for equipment, furniture, and landscaping). As long as a facility is occupied or other- wise in use, even if it is underutilized, electrical, mechanical, life-safety, and other systems must be kept in safe operating condition. Providing services to unneeded space is not cost-effective. As noted in Chapter 1, advances in technology are changing the concept of workplace. Alternative work strategies, such as telecommuting, offer the potential for both public and private-sector organizations to reduce their required amounts of office or administrative space substantially. Doing so can also reduce their overall maintenance and repair requirements. IBM was described as a company that had nearly gone out of business in 1992 and had chosen to rebuild itself. Recognizing that the nature of work had changed over the past 5 years, IBM has instituted a strategy to reduce its facili- ties requirements. Four out of five IBM consultants now work at client sites, at

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EFFECTIVE PRACTICES FOR INVESTMENT IN MAINTENANCE AND REPAIR 61 home, or only occasionally at IBM facilities, primarily for group meetings. Almost half its employees involved in support functions (for example, human resources, procurement, administration, or finance) work primarily from home. Because IBM depends on rapid communication among its staff and to ensure continued productivity, the company has invested heavily in monitoring and surveillance technologies to track the work that is being performed off-site. Performance-based contracts between IBM and its employees drive variable pay components each year (St. Thomas, 2010). As leases expire, IBM reduces its total amount of leased space. It is also changing the type of space that it leases from dedicated offices to meeting spaces, team rooms, and conference rooms. In one of its locations, that strategy resulted in a 50 percent reduction in total leased space. Some federal agencies, such as the U.S. Patent and Trademark Office (­ SPTO) have been using alternative work arrangements for more than 5 years. U The USPTO has been able to measure the results in productivity (for example, sick days taken and number of patent applications examined) and employee reten­ion (USPTO, 2010; Campbell, 2011). In a recent presentation to the Fed- t eral Facilities Council, representatives of the USPTO reported that the agency has been able to reduce its total amount of leased space and has avoided leasing costs of almost $20 million (Campbell, 2011). Other agencies, such as the Gen- eral Services Administration, are implementing alternative work arrangements to reduce their demand for office space and to reduce operating, energy, water, maintenance, and repair costs. The Telework Enhancement Act of 2010 (PL 111-292) grants federal employ- ees eligibility to telework and requires all federal agencies to establish telework policies. As these policies are implemented, there will be opportunities to reduce the federal facilities footprint further. If successful, such strategies could result in substantial reductions in long-term maintenance and repair requirements and a more sustainable portfolio of federal facilities. CORRELATE THE EFFECTS OF FAILURE WITH THE ORGANIZATION’S MISSION The primary objective of portfolio-based facilities management is to ensure that facilities-related investments enable the organization’s mission. Private-sector companies, such as GM and IBM, which produce vehicles and computers, respec- tively, have been able to correlate the failure to invest in maintenance and repair with their organizations’ mission, which is to make a profit for their owners and shareholders. In the automotive industry, profit is realized by producing and selling vehicles at a sales volume that minimizes such overhead costs as engineering and design and increases profit per unit. At a manufacturing plant, overhead per vehicle is reduced by maintaining the design throughput of the plant, which is about 60 to

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62 PREDICTING OUTCOMES OF INVESTMENTS IN FEDERAL FACILITIES 75 vehicles per hour, or one vehicle per minute or better. At that level of produc- tion, an 8-minute system failure (downtime) caused by lack of maintenance of electrical systems or equipment can reduce a plant’s output by 8 to 10 vehicles, which can be easily quantified in terms of lost sales and in turn, lost profit. For the facility manager, the goal is to ensure that the facility components and equipment that are critical to production are kept in such a condition as to ensure reliable per- formance. Similarly, at IBM, a relatively short failure (outage) on the production line caused by unreliable equipment or infrastructure systems can result in pro- duction of fewer computers and cost the company millions of dollars in lost sales. When a failure does occur, companies like GM conduct a root-cause analysis to determine why it happened, determine the appropriate solution, and share the lesson learned with other plants that may be at risk from similar failures. For a component failure that puts the organization’s mission at risk, the issue and the solution are rolled up to the corporate level, where a budget line item is submitted to fix or replace the component across the organization. The credibility of such requests is supported by evidence generated through the root-cause analysis. Root-cause analysis is a key component of reliability-centered maintenance (RCM), the real-time monitoring of the performance and condition of facility systems and equipment. RCM has been used extensively in the aircraft, space, de- fense, and nuclear industries, in which functional failures can result in loss of life, can have national security implications, or can have extreme environmental effects (NASA, 1996; NRC, 1998). A rigorous analysis of failure modes and effects is used to determine the appropriate type and timing of maintenance of systems and equipment (for example, preventive maintenance, predictive testing and inspec- tion) (NRC, 1998). The overall objectives are to ensure that the performance and service lives of systems, equipment, and components are optimized and to ensure that critical elements are replaced before they fail because of wear and tear. Because the products and programs of federal agencies are typically related to protecting the public’s health, safety, and welfare, not to making a profit, the links between the failure of a system or component, maintenance and re- pair investments, and organizational missions are more difficult to convey to decision-makers and others. Nonetheless, several agencies have developed or are developing approaches for doing so. Those approaches include the use of RCM, the development of a mission dependency index (MDI), and the development of a risk-based process for maintenance and repair investment decision support. They are described below. • Reliability-Centered Maintenance (RCM). The National Aeronautics and Space Administration (NASA) began applying a version of RCM to some of its facilities systems and equipment in the 1990s. In NASA, the RCM approach inte- grates reactive maintenance (run-to-failure or breakdown maintenance), preventive (interval-based) maintenance, predictive testing and inspection (condition-based) and proactive maintenance. Those four maintenance strategies are applied to sys-

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EFFECTIVE PRACTICES FOR INVESTMENT IN MAINTENANCE AND REPAIR 63 tems and equipment on the basis of the consequences of equipment failure and the potential effects on mission, safety, environment, and life-cycle cost (NRC, 1998). The Smithsonian Institution has more recently implemented a version of RCM. The Smithsonian’s RCM approach is to perform the right maintenance on the right equipment at the right time. “Right” entails a balance of resources and maintenance techniques developed from industry best practices. To institute its RCM program, the Smithsonian hired an expert consultant and set out immedi- ately to deploy the most relevant RCM technologies to conduct condition-based tasks. An analysis looked at the following: • The functions and performance standards of the equipment that will be maintained, • The failure modes of that equipment, • The causes of each failure, • The effects of failure, • The tasks that could predict or prevent failure, and • Workarounds if there are no proactive tasks to mitigate failure. Templates were developed for systems and equipment with similar failure modes. Decisions about the type of maintenance to be performed on specific types of equipment were based in part on whether designed bypasses or other redundan- cies were built into the system and whether spare parts were on hand or readily available and economical to purchase. A number of nondestructive technologies are used for predictive testing and inspection (PT&I) of equipment. PT&I minimizes downtime by allowing the Smithsonian staff to conduct investigations when the systems are operating. Data are analyzed to identify measurements that exceed known threshold values and to identify changes in condition. The analysis is used to plan and schedule repair or replacement of equipment or components before they fail. All PT&I data and findings are entered into the Smithsonian’s computerized maintenance manage- ment system to build an equipment and system history, which helps further to detect problems before they become serious. • Mission-Dependency Index. The mission-dependency index (MDI) was developed jointly by the U.S. Navy, the U.S. Coast Guard, and NASA as a process for incorporating operational risk management into facilities asset management (Antelman et al., 2008). The MDI is a severity metric (on a scale of 1 to 100) for risk that considers the ability to relocate a mission to another facility and the abil- ity to withstand mission interruption. That is, if a facility or component is deemed not usable for mission accomplishment, how long will the mission be interrupted (minutes or days?) and can the mission be moved elsewhere (Is it impossible or easy?). The MDI model considers both facility intradependency (facilities are controlled by the mission stakeholder) and facility interdependency (facilities are needed, but not controlled by the mission stakeholder). To develop an index,

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64 PREDICTING OUTCOMES OF INVESTMENTS IN FEDERAL FACILITIES an agency must first survey the various stakeholders to collect the relocation and interruption data that are specific to the agency. Through weights established for both data elements, an algorithm derived from a regression analysis is used to compute the MDI. The index identifies which facilities or components are mission-critical, mission-supportive, or otherwise categorized. Once the analysis is completed for an agency, the MDI can be used to help set priorities among pro- posed maintenance and repair activities and to assess vulnerability, which could be a mission loss predictor. • U.S. Army Corps of Engineers. The U.S. Army Corps of Engineers (USACE) is developing a portfolio-based, risk-related approach for maintenance and repair investments in its inland navigation program and other civil-works programs. The approach is an integrative one that considers all facilities-related investments, including capital, operations, and maintenance and repair. The goal of the inland navigation program is to provide safe, reliable, effi­ cient, effective, and environmentally sustainable waterborne transportation sys- tems for commerce, national security needs, and recreation. The infrastructure and components required to achieve those objectives include locks, dams, channels, and canals, gates, valves, operating mechanisms, controls, and machinery. Failure of one of those components due to lack of maintenance and repair can result in substantial disruption of traffic and commerce on major waterways, such as the Mississippi River, which can result in economic losses to private-sector companies and communities. The USACE has established a set of investment objectives and performance measures for the navigation program that are related to the civil-works strategic plan (Table 4.1). It has also developed a set of budget strategies and ranking cri- teria that are designed to link investments to the mission of the inland navigation program (Table 4.2) and established consequence categories and consequence- rating criteria (Table 4.3). CORRELATE REPAIR DELAY WITH SUSTAINMENT COST As noted in Chapter 2 and shown in Figure 2.2, timely investment in main- tenance and repair can ensure that facilities systems and components operate effi­ iently throughout their service lives. Conversely, delaying repairs of facilities c can shorten service life and result in an increase in sustainment cost, which is defined as the sum of maintenance cost and renewal cost. The service-life models and the IMPACT model described in Chapter 3 can be used to quantify the costs of delaying repairs. For agencies that are not using such models, it may still be possible to esti- mate the costs of delaying repairs with an approach described by representatives of GM. GM centralized the facility-support team for specific groups of facility components (Table 4.4) so that the expert on a given component could build the financial arguments needed to identify the cost of delaying repairs.

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EFFECTIVE PRACTICES FOR INVESTMENT IN MAINTENANCE AND REPAIR 65 TABLE 4.1  Navigation Objectives and Performance Measures Program Objectives Performance Measures Invest in navigation infrastructure when the Benefit-cost ratio (a project specific measure) benefits exceed the costs Annual net benefits Enhance life-cycle infrastructure management. Percentage of navigation asset inventory with Improve the reliability of water resources recent structural or operational risk assessments, infrastructure by using a risk-informed asset including SPRA assessments management strategy Percentage of navigation asset inventory risk assessments that reveal a significant level of risk Number of funded actions under way that address assets regarding which there is a significant level of risk Operate and manage the navigation Risk and reliability: facility condition assessment infrastructure to maintain justified levels of and efforts service in terms of the availability of high-use navigation infrastructure (waterways, harbors, and channels) to commercial traffic SOURCE: USACE, 2010. TABLE 4.2  Navigation Budget Performance Measures Budget Strategy Ranking Criteria Initiate and complete replacements and Inland Waterways Users Board priority rehabilitations Relative risk of failure Operations—ensure that projects perform as Cumulative benefits designed (O&M) Cumulative O&M costs for above benefits (over set period) Maintenance—ensure that projects are safe to Navigation channel availability operate (managing risk) (O&M) Lock closures exceeding 24 hours and one week in duration because of mechanical failure— scheduled and unscheduled Condition assessment and consequences or impact Cumulative benefits Cumulative O&M costs for above benefits (over set period) SOURCE: USACE, 2010.

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66 PREDICTING OUTCOMES OF INVESTMENTS IN FEDERAL FACILITIES TABLE 4.3  Inland Navigation Consequence Categories and Consequence Rating Criteria Consequence Category Consequence Rating Criteria 1 Maximum risk to mission Highest economic loss: more than 5 billion ton-miles Probable life-safety effect Minimum acceptable operations service level Court-mandated action Shutdown of energy generation or distribution facilities (such as power plants and oil distribution facilities) for national public use with no alternative modes of transportation 2 High risk to mission No life-safety effect High economic loss: 2.5 billion to 5 billion ton-miles Diminished cost efficiency of energy generation or distribution facilities (such as power plants and oil distribution facilities) for national public use with higher-cost alternative modes of transportation 3 Moderate risk to mission No life-safety effect Moderate economic loss: 1 billion to 2.5 billion ton-miles 4 Low risk to mission No life-safety effect Low economic loss: 500 million to 1 billion ton-miles 5 Negligible risk to mission No life-safety effect Least economic loss: less than 500 million ton-miles SOURCE: USACE, 2010. TABLE 4.4  Categories of Facilities Components Used by General Motors CORPORATE PROGRAMS GENERAL FUNDS Roofing General lighting Paving Parking lot lighting HVAC Sewers Fire protection Water supply Fork truck batteries Piping distribution Electrical substations Floors Wastewater treatment plants Sash and glass Truck docks and doors Elevators Powerhouse, including compressed air, chillers, Café and cooling Computer rooms Restrooms Scrap conveyors and cranes Plant administration buildings Railroad tracks Underground and aboveground storage tanks Externally driven environmental and regulations Signs Decommissioning or legacy costs Landscaping SOURCE: McNabb, 2010.

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EFFECTIVE PRACTICES FOR INVESTMENT IN MAINTENANCE AND REPAIR 67 For example, the cost to repair or replace heating, ventilation, and air-­ conditioning (HVAC) units is X. If the decision to replace or overhaul them is deferred for another year, the cost will be X + I + O where I is the added cost cre- ated by inflation for 1 year converted to net present value and O is the additional operational cost incurred because the equipment was not operating as efficiently as it was designed to do (for example, additional energy was consumed because of improperly firing burners, bad dampers, ineffective controls, or excessive pres- sure drop on filter banks). If I + O exceeds X, repairs should proceed imme­ iately d to avoid an increase in sustainment cost. When presenting the results of such an analysis to senior decision-makers, facilities program managers also identify other outcomes from the proposed investment, such as employee comfort or improved safety. REMOVE MUST-FUND PROJECTS AND THOSE SUPPORTED BY ACCEPTABLE FINANCIAL PAYBACK FROM THE MAINTENANCE AND REPAIR ACCOUNT Each of the private-sector organizations interviewed for this study identi- fied projects that must be funded to manage risk to the organization and funded them through sources other than the maintenance and repair account. They also seek out opportunities to use “must-fund” projects to realize long-term operating efficiencies. For instance, projects that are required for an organization to be in compliance with government regulations (such as worker health and safety and air and water- quality regulations) are considered must-fund projects. That is because the risks associated with noncompliance—large fines or legal action—are much greater than the costs of the projects themselves. Similarly, activities to fix conditions that present a hazard to workers or others are viewed as must-fund projects to manage the risks associated with insurance claims and lawsuits. Must-fund projects are taken out of the maintenance and repair account and funded from other discretion- ary sources, such as the operating account. At the same time that must-fund projects are identified, facilities managers look for opportunities to support operational efficiencies and to reduce long-term costs. For example, if the regulatory standards for the treatment of effluent water are no longer achievable with existing, worn-out or technologically obsolete equipment, there may be an opportunity to replace it with more technologically advanced equipment. Even if the organization does not have to comply with new regulations immediately, it frequently makes good business sense to replace the equipment sooner rather than later with equipment that will allow the organization to meet the expected regulations instead of spending additional funds to maintain and repair obsolete equipment. Private-sector firms also indicated that maintenance and repair projects that have a short payback time (such as 1 to 3 years) are funded on their own

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68 PREDICTING OUTCOMES OF INVESTMENTS IN FEDERAL FACILITIES merit from sources other than the maintenance and repair account. For example, energy-saving projects, such as relamping lighting fixtures with more efficient components, can quickly pay back the original investment and continue to gen- erate benefits for additional years. Because such projects are justifiable on their merit, they do not compete with other projects for maintenance and repair funds. In the federal government, maintenance and repair funds for most agencies are part of the general operations account and are not earmarked specifically for maintenance and repair projects (NRC, 1998). “Structuring the account in this way accommodates overlaps between work, operations and alterations. For example, equipment operators often do routine equipment maintenance and a ­ lteration projects, including work that could be considered repairs” (NRC, 1998, p. 28). Federal agencies could also identify must-fund projects and fund them from the operations side of the account rather than from the maintenance and repair side. Public-private partnerships (PPPs) can also be used to secure third-party fi ­ nancing to accomplish some types of maintenance and repair projects or activi- ties. PPPs are contractual agreements between public-sector and private-sector organizations wherein the private-sector organization, in exchange for compensa- tion, agrees to deliver services or even facilities that could be provided by a public- sector organization (Keston Institute, 2011). Through the use of PPPs, federal agencies can implement necessary capital or maintenance and repair requirements through third-party financing and can gain access to private-sector expertise. PPPs, however, are not without risks and the risks need to be accounted for. Energy-savings performance contracts (ESPCs) are one type of PPP that many federal agencies are already using to leverage available funding. Under such contracts, an energy service company (ESCO) typically conducts a compre- hensive energy audit for groups or types of facilities and identifies improvements that could save energy. In consultation with the owner agency, the ESCO designs and constructs a project that meets the owner’s needs and arranges the necessary financing. The ESCO guarantees that the improvements will generate energy-cost savings sufficient to pay for the project over the term of the contract. After the contract ends, all additional cost savings accrue to the owner organization. 3 The key feature of this model is that the private sector provides front-end funding for the project in return for the ability to receive benefits from future savings. In this way, the risk associated with nonperformance is shifted to the private-sector part- ner. The general concept is similar to the paid-from-savings approach promoted by the U.S. Green Building Council.4 About $2.3 billion has been invested in federal facilities through ESPCs. The ESPC projects contain guarantees that will result in $6 billion in avoided energy 3See Federal Energy Management Program Web site http://www1.eere.energy.gov/femp/financing/ espcs.html. 4Additional information on this approach is available at http://www.usgbc.org/DisplayPage.aspx? CMSPageID=2204.

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EFFECTIVE PRACTICES FOR INVESTMENT IN MAINTENANCE AND REPAIR 69 costs over the life of the contracts. The contracts have also resulted in savings of 18 trillion British thermal units—roughly equivalent to the energy used by a city of 500,000 people (Kidd, 2010).5 Performance-based maintenance contracts (PBMCs) are another type of public-private partnership. Like ESPCs, PBMCs engage private-sector firms to provide long-term maintenance, repair, and replacement work. When contractors perform maintenance and repair activities for federal agencies, the contracts typically specify the procedures and materials to be used. As long as the contractor meets the specifications, the risks associated with the contract are fully retained by the agency. In contrast, in a PMBC, the agency speci- fies performance goals. The contractor is free to select the methods, mate­ials, r and timing of maintenance actions to meet those goals, but also assumes the risks associated with failure to meet those goals. The benefits of PBMCs include the ability to obtain financing from the private sector for expensive repair and reconstruction work, the flexibility with which contractors can exploit advances in methods and materials without the need to renegotiate contract terms, and the potential for transferring knowledge of innovative practices from the contractors to the agencies. However, to achieve those benefits, federal agencies must clearly and carefully identify the perfor- mance goals that are to be met, provide appropriate incentives so that contractors will take appropriate measures before systems or components fail, and regularly monitor implementation of the contract. Failing to do those things can result in a failure to realize the expected benefits. Agencies also take on a long-term liability (performance payments) that can become rather large in the case of a portfolio of facilities and can create the risk of fiscal exposure (TRB, 2010). Other types of public-private partnerships potentially could be used to lower the costs and risks associated with facility ownership. For example, in a design- build-finance-operate contract the private-sector partner finances, designs, con- structs, and operates a facility under a long-term lease and the public organization takes ownership of the property at the end of the lease. The private-sector partner assumes the financial risks related to project delivery, maintenance, and revenue; and the public-sector partner assumes all the risks related to facilities ownership, once it takes over the facility. A private finance initiative (PFI) is a PPP-based arrangement used in the United Kingdom. In PFI contracts, the private-sector partner provides funding and delivers the public facilities and infrastructure based on the “output” (perfor- mance) specifications. The public sector does not own the facility, but reimburses the private-sector partner with a stream of committed payments for the use of the facility over the period specified in the contract (Allen, 2001). However, the pay- ments are conditional on the ability of the private-sector partner to meet the per- 5Additional information on ESPCs is available at http://www1.eere.energy.gov/femp/financing/ espcs.html.

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70 PREDICTING OUTCOMES OF INVESTMENTS IN FEDERAL FACILITIES formance specifications (standards); the specifications address the strategic needs of the facility owner and occupants. Chapter 5 of the report Investments in Federal Facilities: Asset Management Strategies for the 21st Century (NRC, 2004a), describes and evaluates various funding approaches for acquiring federal facilities. It offers the following recom- mendation (NRC, 2004a, p. 10): Recommendation 11: In order to leverage funding, Congress and the administra- tion should encourage and allow more widespread use of alternative approaches for acquiring facilities, such as public-private partnerships and capital acquisi- tion funds. STRATEGICALLY ASSESS THE CONDITION OF FACILITIES Private-sector companies and government organizations conduct or contract for some facility condition assessments to provide the information necessary to develop a credible maintenance and repair request. As noted in Chapter 3, tech- nology can also be used to monitor the condition of systems and equipment in real time. To realize other operational efficiencies in conducting condition assess- ments, such organizations as Marriott and GM perform most of their facility assessment at a corporate level according to type of component (such as roofs, HVAC systems, and electricity distribution). For example, an expert in roofing- condition analysis will visit all plants in a region within a short period to minimize travel expenses. The assessment may be spread over a 4-year cycle so that about 25 percent of the facilities are assessed each year. At the completion of assess- ment, an analysis is conducted to determine whether the average life of roofs is improving or deteriorating. The resulting information is used to set priorities for roof repairs throughout the organization, ensuring that facilities whose roofs are in the worst condition are addressed first. The corporate roofing expert also trains local staff during the assessment visits, advising them of potential changes in roof- maintenance practices, of the latest trends in roofing technology, and of which roofing type is most cost-effective for their climate and particular plant conditions. The National Nuclear Security Administration (NNSA) has implemented a similar process for the inspection, management, and maintenance of its 16 million square feet of roofs as an element of its facilities and infrastructure revitalization program. In a presentation to the Federal Facilities Council, it was reported that the program has resulted in improved condition of the NNSA’s roofing portfolio; in increased average remaining service life; in the replacement of 3 million square feet of roofs with more energy-efficient, sustainable roofs, including 2 million square feet of cool roofs; in $17 million of savings in overhead costs; and in other benefits (Moran, 2010).

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EFFECTIVE PRACTICES FOR INVESTMENT IN MAINTENANCE AND REPAIR 71 CONDUCT A YEAR-END BUDGET REVIEW TO EVALUATE INVESTMENT PERFORMANCE Investments in Federal Facilities: Asset Management Strategies for the 21st Century stated that (NRC, 2004a, p. 69): Continuous evaluation and feedback on processes and investments are essential to controlling and improving them. Feedback can be positive or negative, take many forms, and be used over various timescales. . . . In best-practice organiza- tions, the performance of projects, processes, people, business units, physical assets, investments, and the organization as a whole are continuously monitored and evaluated over both the short and long term using performance measures and a variety of feedback processes. In addition to a variety of feedback processes described in Chapter 4 of the 2004 report, the conduct of a year-end evaluation of budget performance was identified during the course of the present study. This concept was used by at least one of the facility organizations at GM. The evaluation compared the “sub­ mitted budget” the “approved budget” and the “actual funding spent” by line item. Where there was a substantial variance (greater than 10 percent), the root cause was analyzed by using the same basic process as would be used for analyz- ing an equipment failure. The root cause of the deviation was shared with senior decision-makers throughout the organization. GM facilities managers found that this type of analysis improved their future budget submissions and increased their credibility with other decision-makers including those who approved the budget.