Compliance + Operations

Using risk to drive capital planning

Making informed health care facility investments requires a process for evaluating risk
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A good plan begins with identifying all building components that require maintenance, assessing their condition and calculating remaining useful life.

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Health care organizations rely on facilities managers to provide a comprehensive plan that allows for the efficient allocation of resources to maintain the operation of buildings and systems. A key component in the process is evaluating risk during the development of a successful capital plan. 

Much of what drives day-to-day operational decisions in health care is based upon risk to patients, employees and the occupants of a building. All of this should be in the forefront of a leader’s decision making. A capital plan that does not account for risk would essentially undermine an organization’s ability to factor all potential costs into the equation. 

Risk-based plan

A health care facility’s capital planning efforts must align with the organization’s vision, mission and strategy. Therefore, incorporating a risk-based capital plan is paramount to success. 

Risk is evaluated by using a common National Fire Protection Association (NFPA) resource. The organization’s NFPA 99, Health Care Facilities Code, defines risk in four categories:

  • Category 1: Systems in which failure is likely to cause major injury or death of patients or staff.
  • Category 2: Systems in which failure is likely to cause minor injury to patients or staff.
  • Category 3: Systems in which failure is not likely to cause injury to patients or staff.
  • Category 4: Systems in which failure would have no impact on patient care or staff.

By utilizing this methodology, a capital plan can be created that allows for the most appropriate allocation of capital over the life of the building. 

Along with risk, timing is another important component of capital planning. When health facilities managers wait too long to allocate capital to facilities resources, they risk equipment failures that could greatly impact not only the operations of the organization but could also put patients, occupants or the building at serious risk. 

Conversely, when health facilities managers allocate too much capital too soon in the life of the equipment, they are expending resources that could be better used to meet the organizational goals. 

Key steps

Health facilities managers are tasked with creating a plan that balances these needs to the highest benefit of the organization. To make informed decisions, they should explore the following key steps: 

Conduct assessments. A good plan begins with identifying all building components that require maintenance, assessing their condition and calculating remaining useful life. This effort can be completed in-house or contracted out as a facility condition assessment (FCA). Regardless of method, it is important that expectations and deliverables are clearly defined at the onset of the project. 

The team needs to understand the limits of the scope and how thorough to be in documenting each asset. Is a manager planning to include major capitalized equipment only (e.g., chillers, boilers and air handling units (AHUs)), or are they planning to assess each variable air volume box, ice machine and med-gas panel? This decision will drive cost and time. 

Once the extent of the FCA is established, qualified professionals should visually inspect, record nameplate information, and document each piece of building equipment or system. This information can be used to calculate key metrics and values, such as anticipated remaining useful life, estimated replacement cost and risk scoring. 

The expertise required for such an extensive review of assets leads most facilities toward outsourcing FCAs. 

Ensure professional qualifications. Ensuring that the team tasked with performing the FCA is qualified is a major component of success. 

In-house staff often have vast knowledge and experience with differing pieces of specific equipment. This can be an asset because they can identify and document equipment issues easily based upon time spent in repairs. However, this level of familiarity may also lead to some unintended consequences. A technician may not have outside experience to understand exactly why a piece of equipment is performing as it is, relying on the thought of “that’s how it’s always been.” 

Outsourcing the FCA can provide a facilities manager with an independent and unbiased view of the equipment and systems performance and remaining useful life. Reviewing the proposed team’s qualifications and work history is vital to ensuring an accurate survey and assessment. 

A team of varied backgrounds, including with mechanical-electrical-plumbing systems, paired with extensive experience in multiple sites can bring added value. Facilities managers may find that simple operational changes can extend the life of an asset or that new technology can be included when planning for equipment replacement. 

As in many circumstances, utilizing in-house staff or outsourcing comes down to qualifications, cost and time. 

Rank the risks. An FCA often will be performed and delivered to the facilities manager with little more than a recommended cost to eliminate the deferred maintenance backlog, which easily can reach into the tens of millions of dollars. How is the facilities manager supposed to turn this into a functional capital plan? The answer is prioritization by risk. 

The following is an example of two AHUs of relatively equal size. One is 30 years old, and the other is 25 years old. Both have been maintained according to the manufacturers’ recommendations. Which should be replaced first? With no other information available, age would suggest replacing the 30-year-old unit would be the best use of available capital resources. With further information, however, it can be learned that the 25-year-old unit serves the operating room (OR) suite and the former serves an administrative area. How, then, should the risk of the space served be utilized to improve the capital allocation decision? 

Using the risk categories listed in NFPA 99, a facilities manager can assign a risk score to each asset, allowing them to prioritize replacement. Clearly, the AHU serving the OR suite would score considerably higher in the risk scale and would cause it to become a priority over the AHU serving the administrative area. The manager can continue to break down risk beyond those four categories to allow for more granularity and flexibility in scoring. 

Sometimes facilities managers are tasked with making difficult financial decisions within competing departments or priorities. A robust risk-ranking protocol allows the facilities manager to make those decisions using an objective scoring methodology rather than emotions. Some additional risk factors to consider include maintenance requirements, redundancy and history of failure. Cost of replacement should never be a consideration as a measure of risk. 

Estimate the budget. The capital plan can be broken into three major components: the list of assets, the prioritization of those assets over time and the estimated cost of replacement. Once a facilities manager has a complete list of assets, has ranked them according to risk and has sorted those needing replacement by highest risk first, it is time to determine cost for replacement. 

Many FCAs identify equipment replacement costs as a 1:1 swap out without taking into consideration additional costs such as utility service modifications, required upgrades, cost escalation and downtime mitigation. The facilities manager must take such factors into consideration when establishing the capital budget with an understanding that the plan will be developed many months and, in some cases, years before the project will take place. 

An often-used rule of thumb is to keep these numbers as whole as possible, leaving room to adjust as the scope becomes clearer. Reaching out to vendors for high-level budget numbers can be a vehicle to check market conditions. 

Along with a remediation plan for immediate needs, the FCA should include the capital to address spend scenarios for three, five and 10 years. This allows time to establish the process of project planning and allocating resources toward asset replacement and allows for an opportunity to include reengineering for operational and system efficiency improvements. 

A high-quality capital plan, when paired with a successful risk mitigation strategy, can lead to an infrastructure capital budget carveout.

Establish capital carveouts. Facilities management has an unfortunate position on the red side of the balance sheet, meaning they do not provide revenue to offset the very large cost of equipment maintenance. Nevertheless, facilities managers must be advocates for reinvestment in the building, systems and equipment. 

Working with the organization’s finance team, an infrastructure capital carveout can be established to protect those funds needed for ongoing reinvestment. A capital plan with a risk-based FCA as backup can support the argument that infrastructure reinvestment will reduce deferred maintenance and improve the life cycle
of building operations. 

When asked to provide the return on investment, facilities managers can highlight the potential long-term savings and risk avoidance due to premature equipment failure. Those fortunate enough to obtain such a carveout have the ability to independently manage capital resources throughout the fiscal year without having to fight for capital against revenue-generating cost centers, such as new imaging equipment. 

Conduct ongoing updates. Traditionally, the FCA and the capital plan have one glaring shortcoming: They both show only a snapshot in time. Utilizing information regarding the maintenance performed on equipment over time can allow for modification of the condition of an asset and the impact to the capital plan. Fortunately, there are services that can take a feed from the computerized maintenance management system and perform an update to the capital plan, adjusting the prioritization and re-ranking the equipment in line for replacement. 

Using the previous example, it is assumed that the 25-year-old AHU servicing the OR suite has not only been maintained per manufacturer’s recommendations, but also had its coil replaced within the past five years. Based upon nameplate information, it would be nearing its end of useful life. 

If the FCA did not have access to the information about the recent improvement, resources may have been allocated to a unit that was not in need of replacement. A program that allows for maintenance information to modify the baseline FCA and capital plan, turning them into living documents that can be adjusted and prioritized based on current information and conditions, will allow for a dynamic FCA. 

Whether maintenance information is fed live into the capital plan or a manual process is utilized, the plan requires time and expertise to make adjustments. It is imperative that these decisions include subject matter experts along with the facilities manager to ensure accuracy and relevancy. 

Validating results

At the onset of the creation of the capital plan, the manager should establish standardized goals, targets and metrics to measure the effectiveness of the plan. 

Questions should include: Is there a target facility health score the facilities manager sets as a goal to achieve? Is the facilities manager working toward reducing a deferred maintenance backlog? Is the facilities manager trying to simply stay ahead of the curve and establish an annual infrastructure budget? 

Whatever the goal, clear metrics and key performance indicators are necessary to validate the results of the investment that the organization is making into its facility assets. The facilities manager can be confident in their plan by relying on a risk-based structure, accurate estimating and ongoing updates to the capital planning exercise.


Clayton Smith, FACHE, CHFM, is senior director of engineering at Children’s Health, Dallas. He can be reached at clayton.smith@childrens.com.

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