Maintaining productivity

An asset is something you own which is of use. Classical physical features are assets to screen personalities and add value at the box office – not to mention their owner’s bank account. Unfortunately, such good fortune does not last forever; good looks inevitably fade, in much the same way as a photocopier or a coffee-making machine becomes inadequate, inoperable or too expensive to run.

Buildings will eventually suffer the same fate and for the same reasons – although for a large proportion of their lives some buildings may appreciate in value, particularly when viewed as an investment in real estate terms.

Real estate has a unique investment value in that its value is dictated by both the supply and demand of users, and by the weight of money looking to gain income from tenanted buildings. In the latter case, the location of the asset and the tenant’s ability to pay the rent may be more critical in terms of market value than the quality of building design and specification; yet building design will probably be more important to the user than the location.

It is therefore quite conceivable that an owner/occupier investing, say, £20m in a new headquarters building might find it is worth £40m a few years later. But to the occupier of a building, the true value of the asset is not its paper value but its usefulness in terms of the contribution it makes to the productivity of the people it accommodates.

The hard-nosed professional property investor could not care less about that, as long as the tenant keeps up the rental payments and the investment yield holds its own.

However, inventory-type assets such as photocopiers and coffee-making machines have a depreciatory pattern, much like cars. That means that from day one they lose the value of the initial cost and this continues in a relentless downward spiral until the value is written off.

In order to keep assets working, it may be necessary to maintain and clean them, supply them with energy and operators, and, from time to time, refurbish them. Such non-recoverable investment comes straight off profits (save only for any tax relief), so it tends to be regarded as a necessary evil to be minimised or eliminated where possible.

However, regardless of the accounts department’s attitude, maintenance expenditure does provide a service to core business. It adds value to the output of the users by preventing the designed performance of the building or equipment from falling to unacceptable levels.

Maintenance expenditure prevents the designed performance of the building or equipment from falling to unacceptable levels

So, if building maintenance adds value, how much is it actually worth? What is the return on investment in it? The answer can only be expressed in terms of time saved, or any other factors contributing to productive output, which would otherwise have been lost if the investment in maintenance had not been made.

The business case for maintenance can be made by looking at the potential risks (such as temperatures becoming unacceptably low or high), their probable consequences (loss of productivity due to debility or closure) and the order of costs involved in the risk containment strategy.

The convention in risk appraisal is to give a weighting to the probability of occurrence. So, if a potential loss of productivity of £200,000 a year was predicted, and it was rated with a 50:50 chance of occurrence, then the potential loss would be seen as £100,000 a year. If the extra maintenance needed to avoid this risk entirely were £50,000 a year, then the return on the additional investment would appear at first sight to be 200%: (100,000/50,000) x 100%.

People often forget that the cost of maintenance, and any other item of operating expenditure, sinks without trace – it can never be an asset in accounting terms. So the investment must first be recouped by the saving. In this case, the £50,000 extra maintenance comes out of the £100,000 saving, to leave a net gain of £50,000 for the extra £50,000 spent – the latter having been salvaged out of the £100,000 gain.

So the gain is ((£100,000 - £50,000)/£50,000) = (50,000/50,000) x 100 = 100%

The value of – and the business case for – the investment in the other facilities services may be assessed in a similar way.