As we begin to come out of COVID-19 we are starting to see evidence that different clients are preparing for very different phases of their Asset Management Programs.
In some cases, clients are expecting a windfall from various government stimulus plans.
In other cases, clients are looking to retrench and are preparing for a period of reduced funding. This two-tiered recovery has been called K-Shaped since different organizations and sectors are preparing for very different situations.
Even though the situation will be very different depending on which side of the “K” that your organization is facing, the one thing that remains true is that you and your organization need a data-driven, prioritized, multi-year capital plan.
The Top Half of the “K” – Up and to the Right – Generational Windfall
For the lucky organizations that have received or plan to be on the receiving end of increased funding coming out of COVID-19, it might seem as though having a solid plan is not as necessary since you have, or will have, more money than you can spend in some cases.
However, this logic does not hold. It is easy to spend money, but it is not always easy to spend money wisely. Your team’s priority should be to spend the available money in the wisest way that will be most beneficial to your operations. This can include exploring upgrades and new technologies that will lower operational costs, improve functional performance and/or address grandfathered and other code issues. This is where a Multivariable Prioritization (MVP) process can assist in integrating organizational objectives and mission-related considerations into our plans.
We have observed many different sectors receive funding increases over the years only to see market conditions change dramatically due to misalignment with supply and demand. For instance, following the School Renewal Initiative, Ontario District School Boards (Boards) received a significant increase in capital renewal funding that continues to this day.
Disruption of the Supply/Demand Curve
In the early days of the funding, the Boards and the markets in which they operate were unprepared for the increased funding. For many major building components (e.g. roof, HVAC, pavement, etc.) the Boards were competing for limited supply in their markets and prices increased significantly.
We heard anecdotes of roofing contractors putting forth inflated bids they had no intention of winning and being picked. Ultimately, what this meant was that the amount of Deferred Capital Renewal and Maintenance (DCRM) that was being addressed was far less than the money required to pay for it.
This was especially true for Tier 2 markets, where they were used to drawing contractors for larger markets. The need in the core market was so high that some Boards could not even get contractors to bid on work in their area as there was too much demand “close to home” for the contractors.
This not only impacted the Boards, but everyone else in the market (Colleges, Universities, Hospitals, Municipalities, Private Owners and Managers) had to deal with limited availability to contractors and materials and increased costs.
Internal Capacity Challenges
In addition to the market challenges, many Boards simply did not have the resources to effectively manage the new volume of projects. Due to funding quirks, the additional renewal money could not be used to hire new staff.
Other Boards went to outside consultants to support them in executing their additional work. However, this generally resulted in increased costs as well, when compared to using internal resources.
The result was that many Boards have ended up deferring available renewal funding for in some cases multiple years as there were simply not enough resources to do the work.
Having available funding sitting there and ongoing important DCRM needs is not a situation that any stakeholder involved in the sector wanted.
Over time the market adjusted, and Boards and other market participants began to get more strategic in how they built their multi-year capital plans, considering their own internal capacity issues as well as market limitations.
Stay tuned for our next blog post in this series.