In my last two post, I reviewed the different considerations that one needs to factor in when determining what forecasting horizon (or evaluation period) is needed for your Facility Condition Assessments (FCAs) and determining how far into the future you want to forecast renewal needs.
For organizations that are looking to do a longer-term (generally over 20 years) forecast, you need to consider if and how you are going to address cyclical renewals in your forecasting.
First, let’s define what we mean by cyclical renewal. For elements that have an Expected Useful Life (EUL) that is less than your planning horizon, in theory you may replace some elements more than once over the course of the planning period. For example, if you do a 30-Year Forecast for carpet, which has an EUL of 10 years typically, you might replace it 3 times within the 30-year period, if it has a low RUL at the time of the FCA – Year 3, Year 13, Year 23.
The benefit of adding cyclical renewals to your long-term forecast is that multiple replacements do come with a capital cost that can have a material impact on your forecast of future renewal need. To get a true “worst case” or most conservative view of your future capital needs, cyclical renewals are critical.
However, the drawback is that for many elements you are likely to defer them beyond their EUL, especially those that have a lower criticality. As such, the cyclical renewal assumes that you will replace the element each time it hits its EUL. If an organization had unlimited funding, this might make sense from a forecasting perspective, but is not likely to be a real-world scenario when the time comes.
Some clients have suggested only using cyclical renewals for certain elements of high importance or criticality. While this is possible it really starts to get complicated and can muddy the waters in terms of telling your asset management story to your stakeholders. As such, we typically recommend that clients either forecast including cyclical renewals for all elements or none. It is just a forecast after all. As we have discussed previously a forecast is a list of needs, not a capital plan.
Ultimately, you need to decide for your organization what the story is that you are trying to tell your stakeholders and focus all of your decisions, including whether to use cyclical renewals or not, on that overall objective.