Finance & Business Course

Acknowledgements
The references in this course have been selected solely on the basis of their educational value to the IFMA FMP
Credential Program and on the content of the material. IFMA does not endorse any services or other materials that
may be offered or recommended by the authors or publishers of the books and publications listed in this course.
Every effort has been made to ensure that all information is current and correct. However, laws and regulations are
constantly changing. Therefore, this program is distributed with the understanding that the publisher and authors are
not offering legal or professional services.
We would like to thank the following dedicated subject matter experts (SMEs) who shared their time, experience and
insights during the development of the IFMA FMP Credential Program.
Stephen Brown, CFM, SFP, FMP, CPE, CPMM, MBCP, CBCP, CESCO, REM
Marnie Cluckie, CFM, SFP, ACC, BArch, BES, LEED AP, PROSCI
Laverne C. Deckert, BA
Gerard C. Dicola, CFM, SFP, FMP, Green Assoc
Alana F. Dunoff, FMP, IFMA Fellow
John Hickey, CFM
Christopher Hodges, PE, CFM, LEED AP, IFMA Fellow, FRICS
Cal Littlejohn, CFM
Jon Eldon Martens, FMP, SFP, CFM, CFMJ, IFMA Fellow
Aykean Matthews, MBA, CFM, FMP
Phyllis J. Meng, CFM, SFP, IFMA Fellow
Anthony Miele, CFM, FMP
Basavaraju N L, FMP
Patrick Okamura, CFM, SFP, FMP, CCS, CIAQM, LEED AP, IFMA Fellow
Joel Orton, CFM, FMP
Osama Othman, MBA, BSc, FMP, PMP
John T. Pivik, MS, CFM, PE, SFP, FMP, LEED Green Assoc
Samantha Rosenthal, MA, BA
Mark R. Sekula, CFM, FMP, SFP, LEED AP, IFMA Fellow
Guy Thatcher, CMC, FMP, IFMA Fellow
Brenda J. Varner, RCFM
John Vinken, MSc Eng, RCFM, CEM, CRSP, CET, FMP, SFP
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Credential Program are owned by IFMA and protected by the United States Copyright Law as
well as the international treaties and protocols, including the Berne Convention. The IFMA FMP
Credential Program and companion online components are for your personal educational use
only and may not be copied, reproduced, reprinted, modified, displayed, published, transmitted
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uploaded, downloaded or reformatted.
In addition to being illegal, distributing of the FMP materials in violation of copyright laws will
limit the program's usefulness. IFMA invests significant resources to create quality professional
development opport unities for its members and the associated FM industry. Please do not
violate intellectual property rights or copyright laws.
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Table of Contents
IFMA Credentials •.•.•••....••••.••...•••..•••••.••••..•••....•••••••••••..••..•••••.•.••.•••.••••••••••••••••••.•••••.•.•.• 1

About IFMA Credentials •••••••.•••••••••••••.•••••..•••••.••••.••.••....•.••••••••••••.••.•••••••.•••.••••••••••.•.••• 1
Facility Management Professional (FMP) Program ••••......••••••••.•......•••..•••••••••...•...... 1
Course Overview•••••••••••••......••.•••••..•••....••••.•••••.••.••..•..••••••••••.•.••.•..••••••••••••.••••.•••••••.•.••• 2
Course Audience •••••••••••..•...••••••••.••••••••••.•••.•....••••••••••.....•.•.••••••••••.•••••.•••.•••.•.•••.•••.....•• 2
Course Chapters ............................~.............................................................................. 2
Course Objectives ······························-:········································································· 3
Course Introduction ............................................................•................~ ........................ 3
Facility Manage~ent (FM) .•••.•••••••..••••.•.••••.•••••.••••••.••.••••••••••.•.•.••••..•••••••..•••••••••••••••...•• 3
Role of Facility Managers as Related to Finance and Business ............................ 4
Chapter 1: Finance and Business in the FM Organization ••••••••.•.•.......•• 5
Finance and Business Overview ••••••.•••.•..••••••••••••..••••••••••••••••••••••..•.•.••••••••••••••••••••...• 7
The Importance of Being Finance and Business Aware ................................................ 7
Financial Terminology .••••.••.••.•••••••..••.................••...................................................•.•••...... 8
Fundamental Accounting Concepts ..•••••••••••.••.•••••••.......•..•••••••••.•...•••••••.••.••.•••••..•.• 16
Primary Goals of an Accounting Information System .................................................. 16
Financial Accounting and Management Accounting .................................................... 17
Facility Management and Management Accounting •...•••••••..••••••••.•...••.•••••••••••••••••••..•.. 19
Accounting Standards •••......•.......•.......................•..................••.•................•....•••••••••••••...• 22
Accounting Records ......................................................................................................... 25
Double-Entry Accounting •••••..••••...••••....••••..•••••••••.•.•••••...•••••••..••••••....•••••••••••••••.••••.•••••.•.. 34
Accounting Cycle .••••....•••..••.•••.•••••.••••.•.••••••...•••...•...•....•...................................•••••..•••••.•.. 38
Accounting Principles for Financial Statements ..•••.•..•••••••.•...•••••••..••..•.•••.......•••.......... 42
Progress Check Questions .•••••••••••....••....•....•..•.•..................~ ............................••••••••••.... 46
Chapter 2: Financial Management of the FM Organization ..•.••••••••••••.. 49
Budgets and Budgeting Basics .............,·.................................................................. 50
The Importance of Budgeting .......................................................................................... 50
Budget Approaches .......................................................................................................... 54
Types of Budgets .............................................................................................................. 61
Additional Budget Concepts ............................................................................................ 74
Generai .Budgeting Guidance .......................................................................................... 81
Budget Monitoring ............................................................................................................ 84
Budget Closeout.................................................................:.............................................. 86
Multinational Budgeting Considerations ....................................................................... 88
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State or Cross-Border Benchmarking and Budgeting ................................................. 89
Financial Statements •••••••••••••••••••••••••••••••••••••• ~•••••••••••••••••••••••••••••••••••••••••••••••••••••••••.• 96
Financial Statement Categories •..•.••........................................................••.••••••••••••••.•.•.• 97
Types of Financial Statements ••.....................••••••.••........•••..••••••••••••.••••••.•••..••.••........... 100
Depreciation ..................••.•..••••••••••.•••••••........................................•.......•••...••.•.••.••••••••..... 116
Capitalization vs. Expense •...•~••.••••...•••.••••...••.•..............................;....•••..••••••••.•••...•••••.• 120
Lease or Purchase Considerations for Capital Assets .............................................. 121
Proforma Statements •••.•..•.•..••••.••....................•.••••...........•..•••..••••••.••..•••••.••.•••...•.•.•.•..... 122
Summary Guidelines for Effective and Efficient Financial Operations •.•....•••••••.•.... 127
Analyzing and Interpreting Financial Documents ....................................................... 128
Progress Check Questions ................•.•....•...•••••••••••...••••.•••..•••••••••••••••••.............•.......... 149
Chapter 3: Fundamental Cost Concepts, Containment Strategies
and Chargebacks in the FM Organization ............................................ 153
Fundamental Cost Concepts ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••• 154
Cost Terms and Classifications •..................••••••••••••...•••••••....••••••.•••.••••...••.•••••••••••••••... 154
Assigning Costs to Cost Objects .............................................•..........•••..••.•••••••••..•••••.. 158
Cost Measurement Systems .•••••••..••••••.••••...................................................••................ 159
Using Costs in Decision Making •..••••....................................................•••••.•..•.•••••••.....• 169
Cost-Containment Strategies •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••• 172
Cost-Containment Opportunities ..•••••••..•••••••••••.••••••••.••••••••••.••••••••..•............................ 172
Cost-Containment Implementation ..................•..•.................••••.......••.•..•••••••.•.•••••••..••.• 175
Chargebacks ••••••••••••••••••••••••••••••••••••••••.••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••• 184
Chargebacks •••••.•••.•••••••...•••....•••••••••..•.••.••...••.••.••••••••.••••••••...•.••••••••.••..••••..••..••••••••..•••••.. 184
Advantages and Disadvantages of Chargebacks ....................................................... 185
Chargeback Systems ....•••..•.•••••••......................•..••...............•.••.••..........••••••.•••••••.••.•••.•.. 186
Facility Manager's Role in Chargebacks .••••••••..••••••••••••••••••••.••••••.•••••••...••.••................ 191
Progress Check Questions ......•....................•.••••••.••••••.••...•...•••••••••••••••••••••.••••••••••••.•••.• 193
Chapter 4: Business Cases, Supporting Documentation and
Financial Reports ..................................................................................... 197
Developing a Business Case •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••• 198
Writing a Business Case •••••••••••••..••••.•.•............................................................•.•.......... 198
Components of a Business Case ...••.•••••..••...•••••••.•••...••••••••.••.••.••••...•.••.•..••••••.•..••••••••.. 200
Business Case Sample.................•.................•••••••••••..•••••••..••••.•••••••••••••...•••.•.••...••••••••... 201
Business Case Financial Data •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••• 209
Business Case·Financial Data Overview....................................................•••••.•........... 209
Quantifying the Costs and Benefits •••.•..••..••••..•••••...••••.••••.•..••••••••.•..........•....••••........... 210

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Minimizing Risk in Capital Investments .•••.•••.•••••••.••••••..•••.••.••••••..••••..••••••..•..•...•••••••... 225
Progress Check Questions ••••..•••...•••••••••••••.•...•....•••.................•..•.......................•..•••.... 228
Chapter 5: Procurement in the FM Organization ......•....•...•.•••••....•..•... 231
Procurement Procedures ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••• 232
What is Procurement? •.....•.....•••....••••....•••............•......•.....••.....•....•.........•............••......•. 232
Procurement Principles •••.•••.•••••••••••..••...••.•...•.•••••••.•••..••.••••••.•••••••••.•...•••••••.•••.••••••••••••.. 234
Sustainable Procurement Practices ............................................................•.....•..........·2 35
Procurement Process ............•..........•••••......•.....•....................................................•.......240
Procurement and Facility Management Outsourcing •••••••••••••••••••••••••••••••••••••••••• 251
· Forms of Facility Management Outsourcing ............................................................... 251
Why Outsource?.....................•........•.............................•..•••.................•.•.••••.•••••••••••.••••..255
Outsourcing ·B enefits and Cautions ............................................................................. 257
Setting the Stage for Outsourcing •••...•••••••••••••••..••••....•••.....••...••••.•..•..................•........ 259
Progress Check Questions .............................................................................................261
Chapter 6: Contracts in the FM Organization •••••••••••••••.•••.••.•••.•••..••.... 265
Contract Development, Management and Oversight •••••••••••••••••••• ~•••••••••••••••••••••• 266
Contracts and Facility Management .............•.•..•......~.....••••...••..••••.•..••••..••••••••••.•••••••..• 266
Contract Elements•••••.......•..••••••.•••.••••.•••...•••••.•••••...•.•••..............•.............•..........••••••••••.. 268
Types of Contracting Mechanisms .•....••......••••••.••••••...•••.•..•••••••••..•.•....••••...•••.••••••••••.•. 275
Contract Terms ••......••..•••••••••..•••••••....•••••...••••.•••.•••..••.•••••...•••••••.••.••••••.••••.•..•••...•.•.•••••...• 282
Prevention of Fraud and Irregularities in Contracts •.••...•...•..•.•••................................ 289
Contract Considerations ·····•·················································································~········ 298
Contract Administration •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••• 300
Contract Administration Review ..•••..••••.••••....•...•.....................••.......•••.....•••..••••••••.••••.• 300
Contract Monitoring •••••••••...••••••••••••••••...••••.••.••••••••••••••••••....•..•.•.••••.......................•........ 302
Contract Closeout ...••••••.•••...••••••....••....•..•..•••.•••.•••.••••••••••..••••••••••••••••••••••••••.....•.........•... 322
Analyzing and Interpreting Financial Contract Elements ••••••••••••••••••••••••••••••••••• 325
Facility Management Contracts •....•••....•••.....••••....•••.•••..•.••••.••••••••••..••••••••...•••••••••••••••••. 325
Risk Management..••••.•.••••.••••••••••.••..••.•..••••.•.•••••••••..•••••••.....•••.•.•••••.••••..................•........ 326
Risks .in Facility Management Contracts •••....•.•........................•...............•.......•••••.•••... 331
Importance of Examining Contract Elements ••••••.••••...•••..•.••.•••••••....•••....•..............•.... 339
Resolving Vendor Conflicts .....................................................................................341
Nature of Vendor Conflicts ••..•••••.•..•••..•••••..................•••..•..•••....••••...••••.•..••.•••••••••••••••••. 341
Contract Dispute Resolution ••••••...•••••..•••.......•....................................•............•••••••.•••.• 343
Progress Check Questions ••.••••••.•..••.••••...•••••.••••••••••.••...•...•.....•••..•...•...............••.......... 347
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Progress Check Question Answer Key ................................................ 349
Chapter 1: Finance and Business in the FM Organization ••.....••••••••••••••••••...•.••. 349
Finance and Business Overview ............................................................................349
Fundamental Accounting Concepts ••••••••••••••.•••••••••.•..•••...•••••.•••.......•...•....•...••..••. 349
Chapter 2: Financial Management of the FM Organization ••.•.•.••••••....•.••••....•...•. 349
Budgets and Budgeting Basics •....••••••.••••••.......•.•..••.••..•••••.•...•....••....•••••••••••.•.••.... 349
Financial Statements ......••.••••••.••.•••••.•.••..••.••.•••••••.•••••.•..•••....••••.••...•.••••.•.••...••••••.•••. 349
Chapter 3: Fundamentai .Cost Concepts, Containment Strategies and
Chargebacks in the FM Organization •.•••••.••...•.••....••.••..•••••.....•....•••••.••••••••••..•••..... 350
Fundamental Cost Concepts ••.••••••••.....••••••••••••••••••..•••......••..•..••••.••....•••••••••••...••..•. 350
Cost..Containment Strategies •..•.••••.•••••.....•..•••.•...••••..•..•••.•.••••...••..•.•.•.•..•....••••.••.... 350
Charge backs ••••.....•...•••..••.....•..••••....•••••..••••.••....•.•••••.••.••..•••••••••.....•.••••••.•••.•••..•••.••••. 350
Chapter 4: Business Cases, Supporting Documentation and Financial
Repo·r ts •.....••••..•••.••••••••.•••.••.••••.•..••••••.•••••...••••.••••••••••••••••••.••..•.•••••••.•••••••••.•••••••.•..•..•. 350
Developing a Business Case •••••...•••••••••.••••......••.•••••.•..•••.•.•••••...•..•••••..•.•..•.•••••.••.•. 350
Business Case Financial Data •••...••.•...•••••••......•.•••.•.....•••.•••••••...•.••••••.••••.••.•••••.••••• 351
Chapter 5: Procurement in the FM Organization ..•••.•.••••••••••.•...•..•••••••••••••...••.••••. 351
Procurement Procedures .•....•••••••••.•.....••••••••..•••••......•••.••.••••....••...•....•••••••••••..•••••••. 351
Procurement and Facility Management Outsourcing ••.•••....••••........••••••••••...•.•.••. 351
Chapter 6: Contracts in the FM Organization •••.....•.••.••.•••....•••..•..•...••••••••••...••..••. 351
Contract Development, Management and Oversight •••••••••...•...•.••...•••••••••....•...••. 351
Contract Administration ..••••••••••.••••••••••••••••••••••••••.....••••.••••••••..••.•••••..•••••••••••...•••..•. 352
Analyzing and Interpreting Financial Contract Elements ....•...•.••..•••••••••••..•.....•. 352
Resolving Vendor Conflicts .••••••••••••.•.•••••••••••.••••..•....••..•••••.....•••..•.•...•••••••••.....•...•. 352
AJ)J)E!rlciilC •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••• ~!;~
Bibliography •....••.••...•••..••........•••••••••••••••••••••••••••••.•••..••••••~ .••...•..••.......•.•.•..•.••••...•••.•. 354
~l()!it5Clf1( ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••• ~!;~
Index ••••••••••••••.••••••••••.•••••••••.........................•.••••••••••.•••••••••••••••.•••••••••••••••• 369
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IFMA Credentials
About IFMA Credentials

Based on the GTJA, we have defined 11 competency areas on which our three world class
FM credentials- Facility Management ProfessionaiTM (FMP ®), Sustainability Facility
Professional® (SFP®), and Certified Facility Manager® (CFM ®)-are based.
1. The FMP is the

foundational credential
'for FM professionals and
industry suppliers looking
to increase their depth-of-
knowledge on the core
FM topics deemed critical
by employers.
2. .The SFP is the leading
credential for all FM and
like-minded professionals
with an interest in the
development of
sustainable FM strategies.
3. The CFM is the premier
certification for
experienced FM
professionals. A
comprehensive exam assesses knowledge, skills, and proficiency across all FM
competency areas.
Facility Management Professional (FMP)

Program
IFMA's Facility Management Professional (FMP) credential is an assessment-based
certificate program. This program demonstrates the fundamentals of facility management
(FM). Developed from a foundation based on IFMA's global job task analysis (GJTA), the
FMP Credential Program is continuously refreshed to align with current industry standards
for FM knowledge, skills and tasks. The knowledge demanded by today's global employers
is taught and tested online or in the classroom.

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IFMA 's Finance and Business Course
The four knowledge domains that the FMP Credential Program provides content and
assessments on are:
• Operations and maintenance
• Project management
• Finance and business
• Leadership and strategy
This course focuses on finance and business. To receive the FMP credential, successfully
complete all four courses (via elearning or instructor-led channels) and final assessments
and submit an FMP application to IFMA for approval.
Course Overview ·
Course Audience
This course has been designed for individuals who want to obtain their FMP credential or
enhance their FM industry professional development.
Course Chapters
This course consists of the following chapters:
• Finance and Business in the Facility Organization
• Financial Management of the Facility Organization
• Fundamental Cost Concepts, Containment Strategies and Chargeback in the Facility

Organization
• Business Cases, Supporting Documentation and Financial Reports
• Procurement in the Facility Organization
• Contracts in t he Facility Organization

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Course Chapters
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Course Objectives
After you complete this course, you will be able to:
• Explain the foundational principles of managing finance and business in the facility
organization.
• Manage the daily financial aspects of the facility organization by understanding key
budgeting .elements.
• Identify fundamental cost concepts, cost containment opportunities and the use of
chargebacks in facility management.
• Develop business cases that are supported by relevant documentation and financial
data.
• Execute procurement and charge back procedures for the facility organization.
• Manage and oversee contracts within the FM organization.
Course Objectives
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Course Introduction
Facility Management (FM)

FM encompasses multiple disciplines which ensure functionality of the built environment,
this profession requires a broad range of knowledge and skills.
IF MA conducts a global job task analyses (GJTA) to identify task, knowledge and skill areas
that are important for competent performance by facility managers. The GJTA updates the

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core foundation of competency areas that contain the body of knowledge for FM and FM
professionals.
Role of Facility Managers as Related to

Finance and Business
IFMA's most recent GJTA identifies the finance and business as a competency area,
describes the role of the facility manager as related to finance and business, and identified
key tasks, knowledge statements and competencies that support finance and business.
According to the IFMA GJTA:
Facility managers oversee aspects of the demand organization that represent significant
financial investment in technology, buildings, structures, interiors, exteriors and grounds.
They are responsible for the oversight, operation and maintenance of the buildings and
grounds as well as service contracts. The demand organization may choose to contract for
services.
Due to the dynamic global environment, finance and business management is a complex
undertaking for general management. Finance and business in FM involves:
• The administration of the financial management of the FM organization
• Procurement
• Finances associated with contracts
A facility manager's role in each area is shaped by the policies, practices and norms of the
organizational environment.
This Finance and Business course presents essential finance and business concepts
appropriate for facility managers. The information is self-contained so that an individual
with limited experience in finance and business can grasp the contents.
The perspective presented combines descriptive and prescriptive information. This course is
not meant to be an end-all in finance and business management for facility managers. lt
represents an integrated organizational function, not a stand-alone activity. Facility
managers will need to engage finance, legal, procurement, risk managers and others in
their organizations to make value maximizing decisions.
This course aims to provide proficiency and guidance. As you read through the course,
reflect on the culture of your organization and consider how this information applies.

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Chapter 1: Finance and Business in the

FM Organization
Chapter 1 Introduction
On completion of this chapter, you will be able to:
• Outline the importance and key terms in being finance and business aware.
• Outline basic accounting principles and practices that are the foundation for facility
management operations.

in FM OriJ<u"lizatlon
Chapter Objectives
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The term demand organization is referenced throughout this document. ISO

41011 defines demand organization as an entity which has a need and the
authority to incur costs to have requirements met.
The demand organization terminology is used to bring clarity to the
relationship between the parties involved by focusing on the process itself.
The demand organization and the FM organization to work together to
clearly define needs to meet the core business strategy and to develop FM
policies and practices that will enable the core business activities of the
demand organization.

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The first chapter in Finance and Business introduces finance and business in
the FM organization and addresses why it is an intricate part of the day-to-
day operation.
lessons
• Finance and Business Overview
• Fundamental Accounting Concepts

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Finance and Business Overview

Lesson Introduction
On completion of this lesson you will be able to:
• Outline the importance and key terms in being finance and business aware.
This lesson contains the following topics:

• The Importance of Being Finance and Business Aware
• Financial Terminology
'The ln1portartce o·f Berng Finance and Business

Awa
Finance is the usage, analysis, management, development and interpretation of financial
data. This data includes, but is not limited to, reports, spreadsheets, computer printouts,
budgets, proformas, cost statements and ratios. Business is the use, interpretation, and
management of documents related to the administration and management of contracts,
service providers, and leases including lease agreements, business cases, charge backs, and
procurement policies and procedures.
Financial data provides information to and interprets information from, the

demand organization in which the facility operations exists.
The interaction is between two organizations, in this case the facilities organization and the
demand organization
Financial decisions are not limited to executive management and financial specialists. The
duties and responsibilities of the facility manager are widespread. Most FM decisions have
financial and business implications. The facility manager can be entrusted with a substantial
departmental budget and will be held accountable to manage it as efficiently as any
organizational financial officer would.
A key role for the facility manager is to prepare and manage budgets to the standards
required by the demand organization.
©2020 IFMA Edit ion 2020, Version V2017PAFB_1.1

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Facility managers are entrusted with some of the most expensive assets of the demand
organization. For the facility manager to be successful, both the financial and business
implications of operational decisions must be considered. A facility manager who is unable
to recognize financial/budgetary pitfalls, will incur unexpected expenses, detrimentally
affecting the bottom-line.
A lack of financial expertise can impede the facility manager's contribution to discussions
regarding departmental and organizational strategy.
In organizations namely, public, not-for-profit, government, non-government organization

(NGO), associations, educational institutions, partnerships or sole proprietorships, facility
managers are required to understand their impact on effectiveness and efficiency and how
they can improve in their area. Knowledge of finance and business drives this success. FM
budgets are a key discretionary spend area that provide one of the best options to improve
net profitability in the short term.
This chapter provides the foundation for finance and business and explains basic finance
terminology and essential accounting concepts for facility managers.
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Identifying property and FM needs is fundamental in ascertaining what resources and
services are required to have adequate funding for projects, services, operations,
maintenance and repairs. Collectively these become the budget requirements for efficient
facility management.
Finan~e has its own specialized terminology. To ensure that FM's needs and suggestions
are heard, accepted and funded, recognizing fundamental terms and having them as part
of senior managements' financial vocabulary is a prerequisite. An overview of financial
terms and definitions is included in Exhibit 7-7. These terms will be explained in more detail
throughout the course and additional terms and concepts will be introduced.

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The terms are presented in alphabetical order; the list is not intended to be all-inClusive.
Consider the list as a baseline reference of common terms found throughout Finance and
Business. Keep in mind that these terms may be defined differently across organizations.
Exhibit 1-1: Commo-n Financial Terms for Facility Managers (continued on following
pages)
Accounting A monetary reporting system used to inform interested parties about

a firm's business transactions.
Accrual basis Revenues recorded when earned and expenses recorded when
accounting incurred.
Amortization The systematic reduction of a lump-sum amount; the expense applies

to intangible assets, such as patents, franchises, leaseholds and
goodwill, just as depreciation applies to physical assets.
An object that retains value for a period of time after purchase such
as a building or a piece of equipment.
Balance sheet A "snapshot" of a firm's financial position at a specific point in time.
Benefit-,Cos.t Ratio Ratio in which the present value of an investment or project is

divided by the investment's or project's initial cost; a ratio of greater
than one indicates that the investment or project is viable.
Budget A formal, numerical expression of how an organization expects to

operate for a defined period of time. Identifies the resources and
commitments needed t0 set and achieve specific goals over a period,
as well as t he sources ofthe funding to provide t hose resources.
Capital asset A depreciable item whose cost is significant to the company, who's
expected life-cycle exceeds one accounting period and is typically
muc:h longer.
Capital budget Shews financial impacts resulting from major, long~tertn, non ... routine
expenditures for items like property; plant and equipment.
Cash basis acceunting Recording accounting transactions for revenue and expenses when
corresponding cash is received or payments made. Cash basis differs
from accrual in that, accrual focuses on anticipated revenue and
expenses. The main difference is the timing of when revenue and
expenses are recognized.
Cash flow Net cash before financing, including acquisitions.
Chart of accounts Numerical list of all standard items that an accounting system tracks:

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assets, liabilities, net assets, revenues, expenses.
Closing fisca l period Process of transferring account balances from sub-ledgers to trial
balance account at the end of an accounting period. lt is typically
associated with income statement accounts.
The amount paid or charged for the acquisition, maintenance,

production or use of materials or services.
Cost center An organizational unit in which budgetary funding is used to sustain

operations.
Cost of operation The total costs associated with the daily operation of a facility. lt
includes all maintenance and repair costs, both fixed and variable,
administrative costs such as, clerical and timekeeping, general
supervision such as, labor costs, janitorial, housekeeping and other
cleaning costs, utility costs and indirect costs for example, all costs
associated with roadways and grounds. Could also include the
amortized or depreciation costs of capital assets.
Cost of ownership The cost to the owner of owning the building, servicing the existing
debt and receiving a return on equity. This also includes the cost of
capital improvements, maintenance and repair, operations and
disposal.
A financial accounting term, not to be confused with debt. Credit is a

positive cash entry in a bank account; an amount due to be paid to or
already residing in an account. The opposite of debit.
· Credito r A lender of money or one to whom funds are owed.
Currenc){ conversion The net rate at which the demand organization converts revenues
fa ctor and expenses from one currency into another. Often an internally
agreed rate set at the start of the budget year so as to remove the
effect of currency fluctuations from operational budgets; almost
never the same as the nominal exchange rate.
An amount due to be paid from or already paid from an account. The

opposite of credit
Debtor An individual, company or other organization that owes debt to

another individual, company or organization, the creditor. Almost
always compensates a creditor with a certain amount of interest,
representing the time value of money.
Depreciation A noncash charge against assets, such as cost of property, plant and
equipment over the asset's useful life. An expense associated with

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Term Definition ,
' '
spreading or allocating the cost of a physical asset over its useful life.
Discount rate The rate at which future cash flows are discounted because of the
time value of money; the interest rate used to compute a present
value amount.
Double~entnt An accounting system in which each transaction is recorded in at

accounting least two places! a debit to one account and a credit to another
account. Also known as dual~entry accounting.
Earnings before A measure of an organization's earning power from ongoing

interest and taxes operations, equal to earnings before deduction of interest payments
(EBIT) and income taxes.
Earnings befor.e An approximate me~sure of an organization's operating cash flow

interest tax. based on data from the demand organization's income statement.
depredation and Calculated by looking at earnings before the deduction of interest
· amortization (EBITDA) expenses, taxes, depreciation and amortization.
equity The ownership interest in an organization's assets after deducting all

of its liabilities or the difference between the assets and the liabilities
or net worth. Also referred to as sh~reholder's equity or net assets.
Eguivalentannual cost The cost per year of owning and operating an asset over its entire life
(EAC) span. This measure facilitates comparisons of the cost-effectiveness
of various assets.
Expenses Money outflow that represents goods and services consumed in the
course of business operations.
Feasibility study Study of a planned scheme or development, the practicality of its

achievement and its projected financial outcome.
8inancial accounting Relates to the preparation of financial statements for the demand
organization as a whole. May be used by owners and other internal
parties but primarily intended for external parties such as creditors,
·investors, government agencies, unions and suppliers. Information is
developed according to specific accounting stanaards.
Pina ncial Accounting The primary financial reporting standards-setting body in the United
Standards Board States; an independent, non profit group under the authority of the
(FASB} . U.S. Securities and Exchange Commission (SEC).
Financial leverage Refers to the use of borrowed money in acquiring an asset.
Financial ratios Analytical tools examining the relationship of one quantity to

another. Used to show underlying financial conditions and to help
judge the financial health of an organization.

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Financial reporting The process of presenting information about an entity's financial

position, operating performance and cash flow for a specified period.
Financial statements Documents, for example, balance sheet, income statement, statement
of cash flows, statement of retained earnings, which report financial
information about an organization.
Fixed asset An asset, such as property, plant or equipment, which has a long life
and cannot be expensed in a single year or cannot be easily
converted into cash.
Fixed costs Costs that remain unchanged in total for a given time period, despite
wide changes in the related 'level of total activity, for example, a
licensing fee or taxes.
Fixed expenses Expenses over which a company has little control.
Forecast Comprehension of and the ability to display, how a unit will affect the
cash flow of an organization.
Generally accepted In the United States, rules, procedures and conventions used to help
accounting principles govern an organization's accounting operations and the preparation
(GAAP) of financial statements.
Gross profit A company's profit before operating expenses, interest payments and
taxes. Gross profit is also referred to as gross margin.
Income statement Accounting document that represents the company's revenue and
expense transactions for the reporting period.
Incremental budgeting A budget method that extrapolates from historical data; next year's
.budget is constructed by starting with the current year's budget as a
baseline and then adjusting each line item for expected changes.
Insurance A system to protect persons, groups or businesses against large

financial loss by transferring the risks to an insurance company or
other large group who agrees to share the financial losses !n
exchange for premium payments.
Intangible assets Assets that have no physical substance. Intellectual property, items
such as patents, trademarks, copyrights, busine~s methodologies,
goodwill and brand recognition are all common intangible assets.
Internal rate of return The interest rate at which lifetime dollar S(lvings equall.ifetime dollar
OR!'<.) costs, after the time value of money is taken into account. This rate is
then compared to the minimum acceptable corporate rate of return
to determine if the investment is desirable. This is one of the most
important tools for facility managers as it is used frequently to

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IFMA 's Finance and Business Course ~tii~ U:.~.8.~.~· ~
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Term
compare competing investment proposals.
International Financial A set of international accounting and reporting guidelines and rules
Reporting Standards that organizations can follow when compiling financial statements.
OFRS)
Journal A daily, chronological record of business transactions.
Journal entry An entry to the journal, recording a financia l transaction, as a debit

and then as a credit, by date. Journal entries are eventually posted to
a ledger.
A contract between the owner of real property, the lessor and

another party, the lessee, for the possession and use of the property
for a specified term in return for rent or other valuable consideration .
Ledger . Accounting book of final entry, recording journal transactions under

seJ:>arate accounts. Sub-ledgers provide detailed information about
individual accounts.
Liabilities Debts a business incurs that are expected to result in future negative
cash flows to the firm; for example, salaries and tax liabilit,ies. Can
also include an assessment of net risk items, for example bad debts.
License Distinguished from a lease, a license is the degree of real property

interest the ~igner has in a property. A lease provides a higher level
of legal interest in a property than a license.
Life-cycle The useable life span of a product, process, facility; tool, system,
technology, natural resource and the like. lt is based on the
presumption that all things go through a continuous cycle beginning
with creation, use and disposal and then ideally start all over again.
Ufe~cycle costing Process of determining, in present~value terms, all costs- incident to

the planning, design, construction, operation and maintenance and
disposition of a structure over time.
Uguid assets Cash or assets that can be immediately converted to cash or are
easily convertible to cash.
Management Relates to the provision of accounting information for an

accounting organization's internal users, designed to support the information
needs of managers. Unlike financial accounting, management
accounting is not bound by any specific accounting standards. Also
referred to as managerial accounting.
Net assets An organizations final worth. They are value that remains from the
assets minus the liabilities.

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Net present va lue The difference between the present value of cash inflows and the
ili!:Yl present value of cash outflows over a period of time that occur as a
result of undertaking an investment project.
Operating budget A short-term budget projecting all estimated income and expenses
during a given period, usually one year. Excludes capital
expenditures, they are long-term C:osts.
Opportunity costs Represent "lost" opportunities, measured in monetary units, which

could have accrued to the entity by pursuing an alternate course of
action.
Payback period Refers to the length of time it will take to ,recoup the initial
investment cost. In other words, how long it takes to earn back the
funds spent on a project.
Time interval covered by a financial statement; typically, one year for

external statements but can be less, month or quarter, for internal
statements.
Present val ue {PV) This method is used to compare costs; all cash flows are converted to
their present value or the value of past and future dollars
corresponding to today's value.
Profitability index (PI) The ratio of the present value of the cash inflows to the initial
investment cost.
Proforma A document provided in advance of shipment, showing the

description and quantity of items without terms of payment, in order
to initiate a purchase order.
Proforma statement A financial statement prepared as a projection of the future. Attempts

to present a reasonably accurate idea of a financial situation if
present trends continue or certain assumptions hold true.
Property loss The loss in the book, balance sheet, capital value of an asset due to
changes in market conditions, requiring a devaluation in the asset
values and thus a reduction in the value of the balancing equity
value.
Property tax A tax levied against owner, lessor or occupier of any property based
on an assessment of the value of the property, its public
infr.astructure requirements or some other determining factor.
Revenues Cash or properties received in exchange for goods or services.
Statement of cash A financial statement used to show cash levels across the operating
flows period so as to ensure that predicted liabilities due to be paid at any

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given time do not exceed the ability to pay.
Statement of A financial statement that starts with the balances from the end of
shareholders' equity the prior period and shows changes due to net income, loss and
dividends for the period or any new issuances or repurchases of
stock.
Time value of money A dollar in hand is worth more than a dollar to be received in the
principle future because it can either be consumed immediately or put to work
to earn a return.
Trial balance Total of all debits and credits; if debits do not equal credits, an error
has occurred for example, mistake in entry, omission, double posting. ·
Variable costs Costs that change in total in proportion to changes in the related
level of total activity. For example, fuel costs depend on mileage
driven.
Variable expenses Expenses that fluctuate and may be influenced by factors such as
occupancy levels.
Working capital The funds required to service the worst cash flow 'position plus any
contingency provision deemed necessary.
Ze.ro.,-ba'sed
,.
budgeting A budget method in which the continued existence of items must be
justified both financially and operationally before they are included in
the new budget.
Discussion Question
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Fundamental Accounting Concepts
On completion of this lesson, you will be able to:
• Outline basic accounting principles and practices that are the foundation for FM
operations.

• Primary Goals of an Accounting Information System
• · Financial Accounting and Management Accounting
• Facility Management and Management Accounting
• Accounting Standards
• Accounting Records
• Double-Entry Accounting
• Accounting Cycle
• Accounting Principles for Financial Statements
lnfo
Accounting is financial record keeping.An FM organization uses an accounting information

system to maintain records of various financial transactions that take place on an annual
cycle, known as the accounting cycle. This framework provides financial control over the
actions and resources of an organization.
The primary goals of an accounting information system are:
• Create accurate and timely financial controls that guide the operating requirements,
actions and resources of an organization.
• Ensure that financial data and economic transactions are accurately entered into the
records.

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• Ensure that all management and financial information documents and reports are
accurate and timely.
• Ensure that financial statements are relevant, reliable and accurate representations
of the activities of the demand organization.
• Support future business planning through the provision of accurate records of past
revenues and costs.
Collectively, these goals are important in ensuring efficiency and stewardship over the
organization's resources and in satisfying legal and regulatory requirements.
Facility managers need to be proficient in applying basic accounting concepts and

principles and be able to work competently with internal and external accounting staff.
Fundamental accounting provides the foundation for FM activities such as forecasting,
budgeting and expense review, which affects the accuracy of organizational numbers.
Sound, accurate accounting principles influence how the performance of the department is
judged. A facility manager who meets the organization's requirements is perceived as
being professional and competent.
This lesson begins with an overview of financial and management accounting, followed by
an investigation into accounting standards. The conclusion includes basic accounting
concepts that assist a facility manager in collaborating with organizational decision makers
who are focused on financial considerations, the purchasing and accounting department
and vendors.
Primary Goals of an Accounting

Information System
ll'- t;rJJO:Itt!.~tmitll and tiril-ety-flrtarttiaJe<mlrQit> \mal gt.l~ tha.QPtriilctilig
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• · 'Er'St!relhil ~Mnciai data ~M .econornic.lrnr.s,.'lCtiOl)s·ore ac;wmle!~ enterad
iMoU\ei'&<:Oftl$..
,.. .Em>V1e tnat an_,.,lan<J:gl);00nt ~d fir~<JJlCiaJ it}tOrmaiionO.X~.<o~il:s illld
repo11f; are-accurate andtime.~f,
i> l;:nsme lllirl ~jai5!Ji!eltlen:!sare·relevant reli•llj!el!t.nd OOtH.JI:!I~
~~stm!a1i011sof tOO m;!ill'itiesofth0 Otganitaiiun
'I> Support fuwre OOsines&PlaMingttt:!oug.li the ·pr<M~ ci o:u:~_u:-ate records
ofpast.revi.ol;JlUe.s;. ami co.s~s
Financial Accoun·ting and Management

Account ing
The terms financial and management accounting were defined in Exhibit 7-7 as:
• Financial accounting - relates to the preparation of financial statements for the

demand organization that is used by owners and other internal parties. lt is
primarily intended for external parties such as creditors, investors, government
agencies, unions and suppliers. Information is developed according to specific
accounting standards.

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EmpoworlnJF.,dlltyProf.,.sion~I•Wgritlori.S.
• Management accounting- relates to the preparation of management reports

and accounts that provide information required by managers to make day-to-day
and short-term decisions. Unlike financial accounting, which provides annual
reports for external stakeholders, management accounting generates monthly or
weekly reports for an organization's internal audiences, such as department
managers and the chief executive officer.
A summary of the definitions above, financial accounting prepares information for external
use. lt provides information via financial statements and can be described as external
accounting. Management accounting includes the design and use of information within
organizations. lt supports the information needs of organizational managers and can be
described as internal accounting.
Exhibit 7-2 summarizes the basic differences between financial and management
accounting.
Exhibit 1-2: Financial and Management Accounting Differences
Provides data for external users such as Provides data for internal users such as
creditors, investors, government agencies, departmental managers and the CEO.
unions and suppliers.
Provides objective and verifiable financial Includes financial and non-financial

information, the emphasis on the accuracy information; may include subjective
of information. information; accuracy is important, but the
emphasis is on relevance and timeliness of
information.
Must follow externally imposed ru les. Not bound by any mandatory rules.
Reflects aggregate, summarized data for the Reflects parts of an organization such as,
demand organization. measures and reports internally about products
and services, departments, managers,
employees and customers, as well as the whole
organization.
Provides a historical orientation; records and Records and reports on events that have
reports on events that have already already happened but emphasizes providing
occurred. information about future events.
Organizational accounting systems provide both financial and management accounting

information.

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There can be variances in the accounting systems and financial and management
accounting practices across organizations. Organizational specifics such as size,
sophistication, industry, public or private characteristics, will dictate the accounts and
detailed records kept.
Some demand organizations have a single accounting system that supplies information for
both financial and managerial needs. Organizations of all sizes have multiple systems in
today's market.
The practices and conventions should be consistently implemented within an organization.
The facility manager should understand what is usual and customary and meet those
expectations.
Financial Accounting
"' .Pft.l~>'l~ daW. for-extemol ~<;,&tS.

;.. PIO.~ides_ObjeCt~atid\'eiifiable r~.l<iial
infcnmaticm. emphasl!>oo prociskm.
1> ~ustlbUow e~t~ma1fy imposeoruleG.
._ Re!let:I.& aggrega(e, ~umm!lliireddata for:!he'
entililOifto'ni:ilti'O)l
'io< Ptc\iiW!~>· ahiJ>t<ii<:al c.ul$n!&1iW\.
~>· Pro!Jide' data fo( lrue.m~r ~~~.

11: lnc:luOO&.fi"!~ncialand nor.Jil'lanc\aiiM~atiotl
Ocaasionarry 111cllldes st.bjectrw info~1naiion
wiilithe tirrophas!son (ol:llf'N;mce anti
t•m~=~ness-
ll< Nofbound b'y. ~MOO.Iory !tllf.l;-
'" R.~('!~"ts;~~of:;!JIOI;g:a!'li".r:.o~ti9nas-~as·<,tH3
whole organiralioll
~- Emphash:i>\S:prov!ding lnfDffi'latiim about future
events.
Facili Management nd Ma ement

Accot""l ng
FM costs are important in financial accounting. FM has one of the organization 's largest
budgets. Operations are reflected il} financial statements through numbers such as
property, plant or equipment or other assets and expenditures that have long lives. Most of
the day-to-day accounting in FM is grounded in management accounting.
As shown in Exhibit 7-3, decision making is an overarching activity.
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Directing
Planning
Implementing plans
Fomn.nating
plans
(
\
\ Measuring performance
and comparing actual to
planned performance
Exhibit 7-3: Cycle of Management Activities
As Exhibit 7-3 indicates, planning, directing and controlling all involve decision making. In
practice these management activities are more cyclical than linear, for example in a daily
operation, a facility manager's management activities flow from planning to directing and
controlling and back to planning for a wide variety of tasks.
Management accounting provides a facility manager with information that supports the
basic management activities of planning, directing, controlling and decision making, as
shown in Exhibit 7-4.
Exhibit 1-4: Application of Management Accounting Information
Planning Identify alternatives, select a • Review current water consumption

course of action and specify reports and water bills for a
how the actions will be commercial building
achieved • Set objectives and identify methods
to increase profits by improving
water efficiency

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Eml""'"ri"' f >dlltyPI'IIfuslcwgJsWGfldwlcl•
Management , . .
A Ct .IVI... , Descr1pt1on
• .J
' ' '
• Secure necessary organizational

approvals and funding
Directing Mobilize and motivate • Assign related tasks to FM staff

people to carry out plans • Retrain FM staff in procedures as
and execute operations necessary
• Install aerators for sinks and showers
to provide immediate reduction in
water consumption or expenses for
water
• Initiate programs to collect rainwater
and runoff for irrigation systems
• Educate customers, users and
building visitors about water
resource management efforts
Controlling Control operations to • Monitor water efficiency operations

ensure that plans are carried and programs to ensure that they
out and appropriately are being carried out as intended
modify as circumstances • Monitor program costs
change
• Review performance reports and
compare actual performance data
and any ongoing savings in water
bills with old expenditures, planned
reductions and expected savings
• Solicit feedback from PM staff,
customers and users about the
water efficiency initiatives
• Take corrective action as warranted
to improve plan execution and/or
control costs
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~rl~ tE.M.8~. ~..,.
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Decision making Make a variety of • Identify alternatives and choose

management decisions among 'c ompeting objectives and
throughout planning, methods to carry out water
directing and controlling efficiency plans
activities • Review related expenditures and
savings throughout the initiative
• Make small and large data driven
decisions that affect FM staff,
customers, users and building
visitors
• Answer questions, help solve
problems, arbitrate any disputes and
measure to verify cost reductions
The cycle of management activities shown in Exhibit 7-4 is similar to other FM process and
planning models, for example, the Plan, Do, Check, Act, four-step model.
The effective use of management accounting information in planning, directing, controlling

and decision-making can make the difference between a cost-effective, efficient property
that meets or exceeds expectations and one that struggles for financial soundness and
provides inadequate support to customers, users and visitors.
Cycle of Management Activities
nti s
1.::·:.• ··· Accounting Standards
1
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{' \o ~.:~=~la finandal'=ouding " ~~e::~~~i~~~~ncial Repatling
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1
or managemen:l at:counttng. ~~" Genem!ty m::cep!.ed acco<Jnling
1 io Org<mlzauons·miiyha>!E! !lfi)a<S pnnt.lpl~s. {CAAP)
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1!1.:·.':· ~
_•
=~2~~~~~~:shy l>e~t
,:"._,...C?_!.!ine:d bi nation:>
•••••~•··~··w•

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Accounting standards are prescribed for accounting data reporting. There are different
types of accounting standards, they range from basic to extremely complex. Some
accounting standards apply to financial accounting, others are applicable to management
accounting.
Demand organizations may have broad guidelines and detailed procedures, Sponsor-
driven standards may be in-place, this means that a main/holding organization or industry
sets specific standards and everyone in that organization/industry is required to follow
those standards. Industries can also define best practices. Individual nations may have
national accounting standards and accounting practices. There are two sets of accounting
standards that a facility manager should be aware of, the International Financial Reporting
Standards (IFRS) and the Generally Accepted Accounting Principles (GAAP).
International Financial Repo rting Standards

(I FRS)
Globally, many countries require or promote the International Financial Reporting
Standards (I FRS). The definition in Exhibit 7-: 7, states that IFRS is a set of international
accounting and reporting guidelines and rules that FM organizations follow when
compiling financial statements. These international accounting standards are established
and maintained by the International Accounting Standards Board (IASB); an independent
private-sector body formed from the accountancy bodies of numerous countries.
Multinational organizations and more than 100 countries and political and economic
unions follow IFRS; to name a few, the European Union, Hong Kong, Australia, Malaysia,
Pakistan, several Arabian Gulf states, Russia, South Africa, Singapore and Turkey. The use of
the standards allows organizations, investors, governments and others to compare IFRS-
supported financial statements with greater ease.
Generally Accepted Accounting Principles (GAAP)

The accounting profession has developed a set of standards that is largely accepted and
universally practiced. Exhibit 7-7 defines Generally Accepted Accounting Principles (GAAP)
as rules, procedures and conventions used to help govern a demand organization's
accounting operations and th~ preparation of financial statements. In the United States and
Canada, GAAP is sanctioned by the Financial Accounting Standards Board (FASB), an
independent self-regulating body. All organizations operating in the United States and
Canada are expected to follow GAAP and FASB standards, in accounting for transactions
and in representing their results in financial statements.
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t~~~~IFMAm
~ lntem~tlonol ~onogoment
Fi><lllty AJsoclnlon
EmpowuiiiJFadlltyProtusionolsW<>rtdwl""
GAAP encompasses both broad guidelines and specific procedures. A key aspect of GAAP
is an emphasis on "general." GAAP accommodates variation in applied accounting methods
as long as the methods generally adhere to the following basic principles:
• Relevance- the information presented in financial and other public statements

should be appropriate and assist in evaluating the statements to make educated
guesses regarding the future financial state of the organization.
The adoption of IFRS as a universal financial reporting language is increasing.

Today's economies require cross-border transactions and the free flow of
international capital. More than a third of financial transactions occur across
borders. In the past, cross-border transactions were complicated by different sets of
national accounting standards. This added cost, complexity and risk to both
participating companies preparing financial statements an·d for
investors/stakeholders using these financial statements to make economic
decisions. IFRS addresses this challenge by providing a high-quality, internationally
recognized set of accounting standards that provides transparency, accountability
and efficiency to the world financial markets and sets a universal guideline that
everyone works to.
• Reliability- is a measure of the neutrality of the sources of information, faith that

the information represents what it purports to represent and the information's
independent verifiability. Reliability implies that the demand organization is
representing an unbiased view of operations. A demand organization must confirm
that if an independent auditor were to base a report on the same information, it
would come up with the same results.
• Comparability- means that statements reflect the use of standards and

techniques similar to those used in other demand organizations so that users can
differentiate real similarities and differences from those caused by divergent
accounting rules. By ensuring comparability, an organization's financial statements
and other documentation can be compared to that of similar enterprises within its
industry to benchmark how the demand organization is doing compared to its
peers.
• Consistency- all information should be gathered and presented the same across
all periods. The same standards are applied over time so that financial statements
from differing periods can be compared. For example, a demand organization
cannot change the way it accounts for inventory from one period to another
without noting it in the financial statements and demonstrating that the new
accounting methods adopted are preferable to the prior methods.
GAAP is applicable in the United States and Canada and the International Standards
Accounting Board is working toward convergence with GAAP.
A key point about accounting standards, as they apply to financial statements, is that
whether the financial statements are prepared for operations in the United States, the

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European Union, Canada, Korea, India, Brazil or other countries around the globe, the
statements are expected to present fairly, clearly and completely the financial operations of
the enterprise. Without standards- whether !FRS or GAAP- each demand organization
could theoretically prepare financial statements according to their own accounting
standards and reporting practices, this can create problems when trying to compare the
financial statements of different enterprises, even within the same industries. Numerous
organizations and regulatory agencies take part in the financial standards-setting process
worldwide.
Accounting standards guide the conduct to be followed by organizational accountants. As

they influence FM financial record keeping, facility managers should adhere to the
accounting standards of the demand organization.
Discussion Question
VJhieitQf-IM' fO~S.I1:ilbf!'l&nf:$}~ f aiS&1

A. IFRS MO" GAAPfaemtate IM compans01'1<111lnardalsiatcmcntsacross
dilf~ent Ot:ganizat:"OM
8 . Accct.~l\linp sumd~nb- g\JiM the condUct io be follovMd by o(QailizstioMI
,a:::cOuntar\!S:-
C. !FRS <~~id <:iAA~af& ~~! ~pll;;odJ~ wo!kt.vl~~
Q-, . .Fii'tal_lciaisiafe?:ments w~ expected lo pr~Sl!lnl filll'ly; dt!aflJ ill'id >;);(:H1lp!ele1y
lhQ fl! lanl!iafoP'f,mli!cm of thl) Qaterpti!>Q
rrting Recc)rds
Organizational specifics influence the accounting system. For example, a small, privately
held FM organization with one location and 30 employees will have fewer record keeping
requirements and less staff will be devoted to financia l operations than a large,
multinational demand organization with global properties, complex transactions and
multiple role assignments. Regardless of an organization's unique needs, any accounting
system has standard records and practices. The next three topics cover three types of
accounting records, the chart of accounts, ledgers and journals.
Chart of Accounts
Chart of Accounts
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2. Enabli:ls U1e U!'g_ :ini"utiorll•; !e&pOnd la u~qu.::~ fOf .f:nailCialdala
rooke sou.,_~ 1\nan:::ial from reguliltory .agem::ies, leflding
dech;icr)s., imsmutionsand ot~.
3- ' Pi'O>JI® ctitit.~l dala for 1-he:
j)~IF)J)~i<IJ.iOo (l{ ·fifl<\I)Ci<ajl
~~-----------~"-'"-~
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~~ij~IFMAm
~ lntomatlonal Fa<l llty N anagomom Association
A chart of accountsis a numeric list of codes used to code and categorize each record or
invoice that comes into the demand organization. Similar to a Computerized Maintenance
Management System (CMMS), a leaking sink goes to plumbing and failed lights go to
electrical. The chart of accounts tracks orders and organizes financial date that it can be
used for reportin,g. A chart of accounts captures organizational revenues and expenses in a
systematic manner, capturing all financial information through a consolidated system
which:
• Enables the demand organization to make sound financial decisions.
• Provides critical data for the preparation of financial reports.
• Allows for accurate financial comparisons.
• Facilitates a demand organization's ability to respond to requests for financial data
from regulatory agencies, lending institutions and others.
Codes can be used to track costs across projects and matrix work units horizontally as well
as vertically within business units.
Account Categories
Typical Chart of Accounts Categories
A~t!;. Phy~il.:OJ:.t rtnam:::i;l)·or in!<lngible retlat.I!'CE:!'!> th<~:! ret,ai(l v<~h.l& +.:lr 'ies Deb~s itll:l~rt-ed lhal ~re e;wecleJe rwgatiYe ta$il
ffO"....-s, -cc:ma!~ rnt:We.rto -<:~s:ses~~nlof t~IJjSk Ut!:m~
Net asset~ An argMfzation's.ftnanctol wo;tn; Ass.e1s , Liabiliti€s w·Nat asset!>
Revermes Cash~ properties retehled m e·~c.h~_flge fc~ goods m sen.>lce!'< ur
!rom lfl\>a$~l1!ents: an org::.nit:ation·s mtome sour-ces.
CJ,i,)6(1~$ Cos~ ol ~~t$. u;sce4.op $M tn& lt\11bili!las lnc<..~rn.'d dt>ftng
~rett<¥Jt~
A chart of accounts typically covers five categories of financial information; assets,

expenses, revenues or incomes, liabilities and equity. These categories are listed in the
order in which they customarily appear in the financial statements.
• Assets- an asset retains value for a period of time after purchase such as a
building or a piece of equipment. Assets are what a demand organization owns.
Assets may be physical; they may also be financial or intangible resources. Examples
of physical assets include cash on hand, accounts receivable, which is uncollected
funds; inventory consisting of products and publications; equipment such as
furniture, computers and other office equipment and real estate consisting of
property and buildings and investments. Examples of intangible assets include,
software code, copyrights, goodwill, patents, brand recognition, trademarks, trade
nar:nes and customer lists.
Assets are listed in descending order of liquidity. Cash is listed first, followed by
items that are easily converted to cash. Equipment and real estate are usually listed
last.

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lntom•tlon• I FacllltvM•n•t•mentM•O<Iatlon
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• Liabilities- the debts a business incurs that are expected to result in future
negative cash flows to the firm, for example, salaries and tax liabilities. Liabilities can
also include an assessment of net risk items for example, bad debts.
A demand organization's liabilities are the financial obligations or debt that must be
paid with assets or services in the future. Liabilities represent claims on the demand
organization's assets, cash or other assets that can be converted to cash. In addition
to salaries and taxes, other examples of liabilities are loans, accounts payable and
unearned or deferred revenues such as advance payments by an outside party for
goods or services to be provided in the future.
Liabilities are further classified as current and long-term. Current liabilities are
obligations due within the coming year. Long-term liabilities are debts with maturity
dates that are longer than a year; Current liabilities are listed f irst, followed by long-
term liabilities.
• Net assets or Owner's/Shareholder's Equity- reflect a demand organization's
financial worth. They are the balance that remains when liabilities are subtracted
from assets.
An equation often shown for net assets is:
Net Assets =Total Assets- Total Liabilities
In the for-profit sector, net assets are considered profits. In not-for-profit

organizations, net assets are sometimes referred to as net equity or reserves. The
equity account reflects how much the business is currently worth. lt is the residual
interest in the company's assets after deducting liabilities. Assets - Liabilities =
Equity.
• Revenues- are cash or properties received in exchange for goods or services.
Revenues collectively describe a demand organization's income sources. In addition
to income received from goods or services sold, another example is income from
investments.
• Expenses- are funds outflow that represent goods and services consumed in the
course of business operations. Expenses are the costs of assets used up and the
liabilities incurred for the purpose of operating the demand organization.
Account Structure and Numbering Conventions

Various factors influence what information should appear in a chart of accounts. Primary
considerations are:
• How the information will be used?
• What level of detail is required?
• What is the capacity of the accounting system to track information?

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~ lntematlonai Facll ltvManaJ ement Assoclat lon
Em~ri"'FadlltyProfaul.....,loWorldwld•
• What financial reports must be prepared?

Based on organizational requirements, a chart of accounts may be divided by cost centers
such as departments, projects, services and activities.
A common guideline and the level of depth they contain are up to the account/finance
department and are consistent throughout the demand organization. When constructing a
chart of accounts, start simply and revise it as the need for additional information increases.
For example, telecommunications expenses initially might be one category; the chart of
accounts could create separate telecommunications expense categories for local access,
long distance, internet access, wireless and so on.
All financial information entered in the chart of accounts is assigned an account code. This
numerical designation should correspond with the demand organization's accounting
records so that the information can be tracked through the financial reports, by
department, by location, by project, by operation and by building. Further, it is important
that items in a chart of accounts are grouped in a consistent manner.
An example of a chart of accounts follows. lt is hypothetical and not intended to be

comprehensive, but rather to provide a simple and general illustration of some common
categories and numbering conventions a facility manager may see in a chart of accounts.
In Exhibit 7-5, the following numbering convention is used to assign account numbers. The
numbers that appear below will be the leading digit in the numbering convention, for
example:
• 1 for assets
• 2 for liabilities
• 3 for net assets
• 4 or 5 for revenues
• 7 or 8 for expenses

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Exhibit 1-5: Sample Chart of Accounts- Categories and Numbering Conventions
Assets Net Assets/Equity

1000 Cash 3100 Construction revenue
1010 Checking account (name) #1 3200 Professional services
1015 Checking account (name) #2 3250 Property management
1020 Savings account (name) #1 3500 Rental property income
1030 Petty cash
Revenues
1040 Temporary cash investments
4100 Product revenues
1100 Accounts receivable
4200 Service revenues
1120 Rental property leases
5100 Other revenues
1300 Loans made to others
Expenses
1400 Inventory -land
.7000 Salaries and wages
1500 Inventory- buildings
7110 Management
1600 Work in progress
7120 Other salaries and
1700 Other assets
wages
1710 Prepaid expenses
7300 Payroll taxes
1800 Fi~ed assets - general
7320 Unemployment
1810 Business vehieles insurance and taxes
1820 Tools and equipment 7330 Workers' compensation
1830 Office furnishings and insurance
fixtures 7340 Life and accidental
1900 Depreciated assets - general death ancl clisability insurance
Liabilities 7500 Accounting fees

2000 Accounts payable 7510 Outsourcecl accounting
2010 Business taxes fees
2020 Open purchase orders 7520 Outsourced payroll fees
2030 Credit card (name) #1 7530 Outsourcecl auditing
2040 Credit card (name) #2 fees
7540 Banking service fees
2100 Short~term loans
2101 Loan (name) #1 7600 Office supplies
21 02 Loan (name) #2 7700 Telecommunications
771 0 Local access
2200 Construction loans
7720 Long distance
2201 Loan (name) #1
7730 Internet access
2202 Loan (name) #2
7740 Wireless
2300 Other current liabilities

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lntornatiOII• IFatl lltyt.tonagementAssoclatlon
IFMA 's Finance arid Business Course
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2400 Payroll liabilities 7750 E-mail service

2500 Vendor liabilities 7800 Postage and shipping
2600 Vehicle/equipment loans 7900 Printing
2601 Loan (name) #1 8000 Janitorial services
2601 Loan (name) #2
8400 Corporate travel
· 2700 Mortgages owned 8410 Airfare
2701 (address) #1 8420 Lodging
2702 (address) #2 8430 Taxi/limo
2703 (address) #3 8440 Auto rental
8450 Meals
8600 Insurance
In setting up a chart of accounts, a range of numbers is assigned to each category and

unassigned numbers should be left open to accommodate future growth and change. For
large businesses, a wider range of numbers would be required for each grouping.
Please note that Exhibit 7-5 is an example. Demand organizations have their own
classification schemes and numbering conventions. In this example, four digits are used in
the number assignments. Some demand organizations use three digits; others use five-
1
digit account numbers to allow for plenty of room to add accounts as needed.
Wt:rij il> \1 rro~rt¥;~ 1.0 as~~gn.O)(;curate t:~CC{)~fltooo~s !o B\aJX;ial.if!fO:!matlOO

~nl~rad intl:ie chari of accounts.'?
A '11'-i! info.nnati_cm ilse;!str; in making~dl!Caietl guesses regarding the /Uil.Jre
financial :.late 'of tfle otqanlzabon
9 ·n-~ r.orill"s C:O!H!JS;mn:ding.tn OllllJnimtian;lt atwun~ino te<:ords fllcilitOJt£<:
in!<>rmallonlr.ac:king.
-G- .!t en:.u:ns·tflai: fm.an~:ial srnJil:mQfll$an! !JN;I'parad ;l{;torcling te~ lht::r prop?Jr
accctmt!r,g st<t-qdar.c!r. <l!'\d t&pott)ng prat:ticec~ ·
0. lt MfrH&guiOO!ines-sel forth in either tfRS.or GAAP
Journals
Elements of .Journal Entries

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Em~FadllryPrefuolan~I~Woo1otwllle
Elements of Jol!rnal Entries
Journals, or books of original entry, systematically organize financial information by

transaction types, for example, receipts, disbursements, payroll, accounts receivable and
accounts payable. All accounting transactions are chronologically recorded in a journal
before being entered in the general ledger.
Types of Journals
The simplest journal type is the general journal, a chronological listing of transactions and
other events expressed in terms of debits and credits to particular accounts. Some demand
organizations use special journals in addition to the general journal. Special journals
summarize transactions with common characteristics, such as:
• Cash disbursement journal- provides a chronological record of all checks that

are written, according to the categories used in the chart of accounts.
• Cash receipts journal- gives a chronological record of all deposits that are made,
according to the categories used in the chart of accounts.
• Inventory purchases journal - records inventory purchases.
• Accounts payable journal and accounts receivable journal- tracks income and
expense accruals, respectively. These journals are useful in grouping the income and
expense accruals that would otherwise be too numerous to record in the general
journal.
Some financial accounting software packages will track all bills as accounts payable and all
revenue as accounts receivable. This type of software eliminates the need for the cash
disbursement and cash receipts journals.
An entry into a journal is called a journal entry or journalizing.
Elements of Journal Entries

Each general journal entry has four parts:
• The accounts and the amounts to be credited
• The accounts and the amounts to be debited
• A date

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• An explanation- made up of the creditor/debtor name; the type of transaction, for

example, "goods supplied" or "monthly fee" and the intended journal title as a
cross-check
• Payroll journal
Journal entries may or may not include currency symbols. When journal entries show
transactions within the same country, currency symbols are often omitted. However,
currency symbols specifying currency assume particular importance in situations involving
cross-border transactions and multinational demand organizations. The euro (€) is the
currency shown in Exhibit 7-6 below and in Exhibits 7-7 and 7-8 in the next section.
Exhibit 7-6 shows an example of a general journal with sample entries for the following
transactions.
• February 1: €20,000 water efficiency equipment purchased on account from Aqua
Monitoring Systems Company is debited to record cash outlay and credited to
account for an asset.
• February 2: €180 invoice received from Copy Max for brochures promoting water
conservation and explaining the FM water efficiency program
• February 11: €2,400 credit for merchandise return to Aqua Monitoring Systems
Company
Exhibit 1-6 General Journal Example
Date Account Title and Explanation Reference Amount

20XX
Debit Credit
February 1 Equipment €20,000

Accounts payable €20,000
(Purchased on water
efficiency equipment
account from Aqua
Monitoring Systems
Company)
February 2 Printing €180

Accounts payable €180
(Received invoice from

Copy Max for water
efficiency brochures)

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February Printing €2,400

11 Accounts payable- €2,400
Merchandise returns
{Returned equipment
to Aqua Monitoring
Systems Company)
The first column of the general journal shows the date of the transaction. The second
column shows the account debited or credited (recorded in columns four and five),
including a brief explanation. The third column shows a reference to the specific account;
this column is completed at the time the accounts are posted.
Posting Journal Entries

The process used to transfer journal entries to the general ledger is known as posting. Most
demand organizations use the double-entry method.
Journals and Ledgers
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di:>but:>tNl JeHtjciumat payrol!.jQasn:a!,
Ledgers
A ledger is a presentation of an account or accounts. Formally defined, a ledger is an
accounting book of final entry, recording journal transactions under separate accounts.
Most demand organizations use computers for accounting, as opposed to manual

recording. Whether done by computer or manually, a ledger compiles accounting records.
A general ledger is a collection of all the demand organization's financial information by

accounts- assets, liabilities, net assets or owner's equity or capital, revenues and
expenses. The chart of accounts serves as a table of contents for the general ledger.
Some demand organizations use subsidiary ledgers for additional detail related to a
specific general ledger account.

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General Journal with Sample Entries -

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Dol ble-l:r1try ,Accou ng

Consider why there is a debit and
credit in accounting?
• Before C!;>Mputer~<~lld t-alc.u1aW~. 4-'">Vble <3fllfi~ prQb<ibry-prt:svideO <~
CheCks and baianc~ process
io To e ns we that al! th<el infonn~tton ·.va!> MCOU1W:d ftlt, ev.eP,tlhing in cotumnA
hB:d IO !;Jo;.l m~t.er'ed 'ID ed!I.!J~In B
~- Acccuniingis~xact. ~ If a!l tBc -infurmalJ.On from calumn A .lci~l1tita!ly
matched 1 1~al in :colUmn B ttur accounts will ru;ancoe
The examples have shown that a financial account is a record of transactions that fits within
a specific category. Double-entry or dual-entry, accounting is a system in which each
transaction is recorded in at least two places, a debit to one account and a credit to
another account.
In Exhibit 7-7, debit and credit were defined as follows.
• Debit is an amount due to be paid from or already paid from an account. Debit is
the opposite of credit. In double-entry accounting, debits are shown as the left-
hand side of a journal entry or an account record, where debts and expenses are
recorded. Debit is commonly abbreviated as "Dr."
• Credit refers to positive cash entries in a bank account. A credit is an amount due to
be paid to or already residing in, an account. lt is the opposite of debit. In double-
entry accounting, credits are shown as the right-hand side of a journal entry or
account record, where payments to the account are recorded. Credit is commonly
abbreviated as "Cr."
In Exhibit 7-7, we see a posting of journal entries for the water efficiency equipment.

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Exhibit 1-7: General Journal Postings in Ledger Accounts
Equipment No. 1800
February 1 (20.000 I
The equipment account debit increases.
General Journal Postings in Ledger

Accounts,
·~--~ j,~~:!
Mt'n;:t>ml!lMf!~
'-,
Accounts Payable No. 2000
February 11 €2,400 February 1 €20;000
February 2 €180
Merchandise Returns No. 2300
€2,400
The merchandise return account credit increases.
Printing No. 7900
February ;a·
The printing account debit increases.

€180 I
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Debit and credit do not automatically mean a decrease or increase to an account; rather,
they describe where entries are made in the recording process.
• Debiting is making an entry on the left-hand side of an account.
• Crediting is entering an amount on the right-hand side of an account.
This double-entry accounting format showing both the debit and credit sides of the
account is sometimes called a T~account because the left and right side format looks like
the letter T.
Double entry posting ensures that a journal is always in balance. Every transaction has two
entries- a debit and a credit. For any transaction, there are two entries passed, what
comes in and what goes out. For example, if a printer is purchased, the printer is coming in
and the cash is going out. For assets and expenses, a debit increases the account and a
credit decreases the account. For liabilities and revenues, a debit decreases the account and
a credit increases the account. For example, the purchase of the water efficiency equipment
would initially be entered as a debit for equipment and a credit for accounts payable. When
the equipment is paid off, accounts payable would be debited and the cash account would
be credited. At any given time, the total value of the debit accounts must equal the total
value of the credit accounts.
In the journal postings in Exhibit 7-7, the "No." notations of 1800,2000, 2300 and 7900
refer to the ledger accounts to which the respective items are posted. Every demand
organization selects its own numbering system for its chart of accounts. In this example,
the "No. 2000" is associated with accounts payable. At the time of posting, these are the
numbers that are entered as references in the gerreral journal.
Exhibit 7-8 is a completed version of Exhibit 7-6. lt shows the reference numbers recorded
opposite the account titles in the journal, indicating the ledger account number involved
and that the posting has been completed for the particular item.
Exhibit 1-8 - Example of general journal with sample entries including Reference
numbers
Date Account Title and Explanation Amount

20XX
Debit Credit
February 1 Equipment €20,000

Accounts payable €20,000
(Purchased on water
efficiency equipment
account from Aqua
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ln!ematlonaiFa<lllty Manag,.,entAssodatlon
Monitoring Systems
· Company)
February 2 Printing €180

Accounts payable €180
(Received invoice from

Copy Max for water
efficiency brochures)
· February Printing €2,400

11 Merchandise returns €2,400
(Returned equipment
to Aqua Monitoring
Systems Company)
Total debits = €22,580

Total credits = €22,580
Double-entry accounting is a widely accepted international accounting practice and it is

used by most demand organizations throughout the world. Businesses that ~ave strictly
cash transactions may use a single-entry bookkeeping method instead, recording entries
once. Single-entry accounting is the way people record checks and deposits in a checking
account register.
In a manual accounting system, summary totals from all journals are entered in the general
ledger. A year-to-date balance can be maintained for each account. In a computerized
accounting system, account data is typically entered only once. The software automatically
tracks the account number wherever it appears and updates the general ledger. Most
software packages include a general ledger that shows every transaction included in the
balance for each account.
Discussion Question
Vl.'hic.ho!' t~fallew't.<~Q Sraiem~n!!la-b~ui dciublo.-t-ntrt accooniing_:i~ false?

A. Oebi.-s afe. shown a s tt.e right -hand sdde-olll jouma ! enb)<or account ·rec c.rd
9. Debil: is an .!lWOUr<t-due to-?e pail;! f;Qm or-«!rEtady p;~id" from, an. a\':eQlttll
C. Credit' i\\ an am0:unl' due<la be- ('aid 10 or'akeady .residitlg in ~~ ac:Wunt
0. OoubJ~.ailty ~1iM f.!!\50-~$-L~Olt a j!XItn.,i isnJways iD b<dM~ .

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The accounting cycle refers to the accounting procedures of recording and processing all
financial transactions of a demand organization, from when the transaction occurs, to its
representation on financial statements, to closing. The accounting cycle is repeated in each
reporting period and often referred to as a series of steps. Exhibit 7-9 shows the steps in
the accounting cycle. A brief explanation of each step follows below.
Accounting Cycle
A brief explanation of e~Kh step follows below.
Note that the first three steps, analyze, journalize and post transactions to
general ledger, are performed as transactions that occur throughout the
accounting period. The discussion of these steps reinforces the accounting
concepts. The remaining steps are performed at the end of the accounting
period.
Analyze ------,
I
"
Journalize 1-------~
Post transactions to general
ledger
Prepare unadjjuste!d trial b•~lanoce 1-------:

...
Adjust entries
Reverse journal entries

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• Analyze- the first step in the accounting cycle is to analyze a transaction and its
source documents. For example:
receive a purchase order or an invoice •
quantify the amount
identify the accounts that are affected
apply double entry accounting
identify the effect on the account balances, whether the accounts are debited
or credited
• Journalize- Most transactions affect two or more accounts for example:
an equipment purchase creates a debit for equipment and a credit for
accounts payable
they are not initially recorded in the general ledger but in a journal
journal entries should be supported by original source documents
• Post transactions to general ledger- posting records an item from a journal in
the general ledger, including summarizing and classifying the item.
• · Prepare unadjusted trial balance.,--- before any adjusting entries are made in the
ledger accounts an unadjusted trial balance is prepared. An unadjusted trial balance
is a list of the balances of ledger accounts at a specific point in time; this is typically
. at the end of a month, quarter or year. The unadjusted trial balance is a listing of all
the accounts that are going to appear on the financial statements before adjusting
journal entries are made.
The preparation of a trial balance is simple. A list of all the balances for the ledger
accounts is created, usually in a three-column format. One is the account name
according to the chart of accounts and are listed as assets, liabilities, equity
accounts, income and expenses. Column two is debits and column three is credits.
Both the debit and credit columns are calculated at the bottom of the trial balance.
These debits and credit totals must always be equal. If they are not, the trial balance
was prepared incorrectly, or the journal entries were not transferred to the ledger
accounts accurately. " .
In double-entry accounting, each transaction must be recorded with an equal debit

and credit. A difference will indicate some mistake in the recording process or
calculations. Although an unbalanced trial balance indicates an error, this does not
mean that a trial balance which is balanced is always correct. lt is possible for
incorrect journal entries to still balance the trial balance and they may escape
undetected if individual journals and ledgers are not reviewed carefully.
Some errors that may arise are:

an omission of an entry

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a transaction recorded twice

recording of a transaction in the incorrect expense account
transposing figures for example 28 becomes 82
After preparation of the unadjusted trial balance, the next step in the accounting
cycle is to pass adjusted entries.
• Adjust entries- in this step, accounts are adjusted for internal transactions, like
the use of prepaid rent or unearned revenue. Unearned revenue is cash that a
customer has paid a business in advance for services that are yet to be performed
or products that are yet to be delivered. An example of this is where a business wins
a cleaning service, the customer pays in advance for services and the money
received is unearned revenue. As the service is provided and the revenue earned, an
adjusting journal entry is created for the revenue received, which changes the
balances in certain accounts to reflect the revenue earned.
• Prepare adjusted trial balance- the adjusted trial balance is a list of all the
accounts and balances contained in the general ledger after adjusting entries for an
accounting period have been posted to the accounts. The adjusted trial balance is
an internal document and is not a financial statement.
• Close accounts and prepare post-close trial balance- this step in the
accounting cycle closes accounts in preparation for the next accounting period.
Temporary or nominal accounts are closed, while permanent or real accounts carry
their balances into the next period.
Temporary or nominal accounts are reduced to zero to be used in the next period.
This will be discussed in the subsequent discussion of income statements. Such
accounts include revenue and expense accounts by subcategory for example, sales
or interest revenue accounts or expense accounts. The accounts are closed to an
income summary account. Revenues would be debited, and income summary
credited; expenses would be credited, and income summary debited. Assuming that
revenues exceed expenses; net income or a credit balance would exist, and this
balance is transferred from income summary to retained earnings.
The post-close trial balance is prepared after closing to show that debits and credits
of the real accounts such as assets, liabilities and shareholders' equity are equal.
• Prepare financial statements- financial statements are prepared from the

adjusted trial balance.

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• Reverse journal entries- some adjusting entries made to prepare the financial
statements need to be reversed as of the beginning of the next accounting cycle. A
reversing journal entry avoids double counting the amount when the transaction
occurs in the next period. Reversing entries are recorded on the first day of the new
period. An example of this might be an accrual or deferral recorded on the last day
of the accounting period.
• An accrual pertains to expenses that should be reported now but have not yet
been recorded or paid.
An example of an expense accrual would be the electricity usage in

December where neither the bill nor the payment will be processed until
January. The December electricity should be recorded as of December 31
with an accrual adjusting entry that debits Electricity Expense and credits a
liability account such as Accrued Expenses Payable.
• An accrual pertains to revenues that should be reported now but have notyet
been recorded nor has the money been received.
An example of the accrual of revenues is a bond investment's interest that

is earned in December, but the money will not be received until a later
accounting period. This interest should be recorded as of December 31
with an accrual adjusting entry that debits Interest Receivable and credits
I
Interest Income.
• . A deferral occurs when money is paid out that should be reported as an

expense in a later accounting period.
An example is a payment made in December for property insurance

covering the next six months of January through June. The amount that is
not yet expired should be reported as a current asset such as Prepaid
Insurance or Prepaid Expenses. The amount that expires in an accounting
period should be reported as Insurance Expense.
An additional example is the insurance company receiving money in
December for. providing insurance protection for the next six months. Until
the money is earned, the insurance company should report the unearned
amount as a ,current liability such as Unearned Insurance Premiums. As the
insurance premiums are earned, they should be reported on the income
statement as Insurance Premium Revenues.
• A reversing journal entry example:
$10,000 of revenue is accrued in January because the company has earned

the revenue but has not yet billed it to the customer. The customer is
expected to be invoiced in February, so a reversing entry is created in the
in the beginning of February to reverse the original $10,000 revenue
accrual. The final billing, for a total of $12,000, is completed later in the

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month. The net result is the recognition of $10,000 in revenue in January,

followed by the recognition of an additional $2,000 of revenue in February.
All accounting systems use some variation of these steps to record and verify transactions.
When the steps in the accounting cycle are complete, the sequence starts over again in the
next accounting perioa.
Procedures in the accounting cycle help to ensure that financial records are accurate and
current and that they reflect appropriate accounting standards, such as IFRS or GAAP. A
facility manager does not have responsibility for the full accounting cycle, but a general
awareness of the steps is helpful.
Accounting Principles for Financial

Statements
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to>- -R6'\.'enue Re\Xignit1on ~ determines !he accountm~ period in •whichtfl'•'enues
and expenses :are (SC0Qll1Zed
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dsa~ lo .:~ssi-51 m ®cision m;lking:.
Individuals responsible for preparing financial statements have decisions to make about
what, how and when to report activity. Facility managers are not directly involved in these
financial accounting activities, but they do need to recognize that they take place and that
FM has a role in providing timely information to allow close-of-period accounting activities.
Facility managers should appreciate how their actions and decisions affect and are affected
by the close of period.
Some of the accounts shown in organizational financial statements clearly reflect FM

activities. Organizational assets include supplies, inventory, buildings, land and equipment.
Liabilities encompass items such as mortgages, salaries owed and taxes payable. Rents
earned, interest earned and revenues from services provided are part of revenue. Expenses
include utilities, rent, supplies, salaries, taxes, repairs and maintenance and phones.
Considering that FM is a large part of the demand organization's budget, the facility
manager must have the accounting skills to recognize what information needs to be
reviewed and when, who has the authority to approve the information submitted and who
records the FM related transactions.

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Historical Cost
Assets and liabilities are reported on financial statements at the levels at which they were
acquired or incurred rather than at fair market value. Historical cost is the amount paid to
acquire an asset or, for non-cash exchanges, it is the estimated value of the non-cash asset
or liability exchanged. Historical cost is the most commonly used valuation method.
Depreciation, amortization or other allocations reduce the book value or the residual asset
value, shown in the balance sheet of the depreciated asset to the demand organization.
The depreciation itself is shown in the demand organization's profit and loss (P&L)
statement. Property, plant and equipment and intangible assets are generally reported at
historical cost less accumulated depreciation or amortization, where appropriate. For
example, if a company acquired its main headquarters, the land and buildings, for $150,000
in 1950, but the current market value is $25 million, the asset is still recorded on the
balance sheet at $150,000.
Revenue Recognition
Revenue Recognition
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tidh !Wlllchmllf t:z,bruigM' ttano Rc~e ~ , , ~ "'
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ree~wtttn•ll$:®med.f~MOtuOfwtten:nJS :~
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• 50ftJ as inoomeewn1f-yo1Jdon'tpay it.off fur anolher 12
f'W''?.'h:i .
Accrual basis accounting is defined as revenues recorded when earned and expenses
recorded when incurred. The revenue recognition principle states that expenses should be
recorded during the period in which they are incurred, regardless of when the transfer of
cash occurs. lt determines the accounting period in which revenues and expenses are
recognized. ·According to the principle, revenues are recognized when they are realized or
realizable and are earned, typically when goods are transferred or services rendered, no
matter when cash is received. Cash can be received in an earlier or later period than
obligations are met, that is when goods or services are delivered, and related revenues are
recognized that results in the following types of accounts:
Recognized - means that revenue has been recorded as a journal entry.
Realized - means that assets such as goods or services have been exchanged for
cash or claims to cash for example, an invoice for an account receivable.
Realizable- means that the assets can be readily converted to cash without
significant extra expense through sale in an active market at prices that can be
easily determined.
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Earned- means that the organization has done a substantial amount of what it
promised to do such as provide goods or services. A prepaid service contract is
recorded as a liability until that service has been substantially performed . .
With the accrual method, income and expenses are recorded as they occur, regardless of
whether or not cash has actually changed hands. Revenue is recorded when it is earned,
regardless of when it is actually collected. In addition, all expenses are recorded when they
are recognized and not when the cash is actually paid.
Deciding if these recognition conditions have been met can be complex. For most goods,
revenue is recognized at the point of sale because the actual sales price can be verified.
The period in which the sale is recorded is used in accrual accounting as the point at which
the revenue is recognized as earned.
For most revenue, the time of sale is the point at which all of the qualities listed above are
met. Some exceptions exist for recognition, for example, long-term construction projects.
These are the concern of financial accountants, not facility managers and therefore are
beyond the scope of this discussion.
Full Disclosure
Accounting Principles for Financial
Statements
FM~ · &f~ M~dlr~uy l!'lf ohied i~ flnam;;ia! activitieoO, t"J,I.Jt ·de play I'Ji fOie ifl
przy,.idifl9 !im~ly 'iof(lft'l"l<liiOI), \o <ltio>N cJ<.;e,'*-Qf-P!l{i(ld <ICCW!lbiV,J act;\-itifffi.
The FM sh!Xild.be .;,ware ofbMlC Ol<:toutdng fHOim;!ple!i !EICh t.S'
OrganlntiOnaJ M 10eb Li~tiltit!~s;
'!or t::<ampl!.', sup:pi\:r.s.. irwcDtOI)' fl;ir ~ample, rno::tgageiJ.; s.alil:~esa.vf..-c

buildi~gs . JanO and equipment ~11 taies P,ayOOia
fur (!Xarnple,.mnts <l: amoo, inl.01est ror et:ampta, uUliibe$, rent supjjlf(IS.
eamed and re-.-er.uo:s from re;Jairs salal'les. i3~e!l, phooes. :;ml<ln~· o1her
Full disclosure and proper accounting complement each other. Financial statements should
only include items that fit within the element definitions and that are measurable, reliable
and relevant. If, for example, information is aggregated at too high a level or is overly
detailed, its usefulness is reduced.
The full disclosure principle recognizes that statement preparers must make compromises
between levels of detail sufficient to help users with their decisions while condensing that
information enough to keep it understandable. Supplementary information may be
presented outside the main body of the statements, for example, in footnotes to the
financial statements.
Other accounting principles may be encountered for financial statements. These

accounting standards and conventions are primarily the direct concern of the demand
organization's financial accountants and beyond a facility manager's responsibility.

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Em~ri,.FocllltyProfuslonaloWortdooldot
Chapter Summary
jlo .~urn~tle!hl) reasons why !inar'ica and business munayementa~ ket

IJ'\91"f!d~ol5o ifl !he su.:ce~sQf fa.;\lilyrn~gEm)Imt
it." Oefin~-key fini;mc.e lefml'. pre<Jalenl in !acilitym;uwgen-.fflt
~ E~~ai!! ba$fc o.e~;Qumlrtg priodplqs. and praclite5thall.!<"~dGfpil:rf~i!it'(
mat)agE~mMlQPeial;Ms

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~ lntem~tlon•l M•n•~•ment
Facility 1\ssocl•tl on
Em,..W.ri"'IFac:llltyProfuJI""•IsWOI'Idwlde
Progress Check Questions

1. What is providing financial information for internal users known as?
a. Financial accounting
b. Accounting for decision making
c. Accounting for transaction
d. Management accounting
2. What does the Chart of Accounts show?
a. Financial information organized by accounts

b. A numbered list of standard items that an accounting system tracks
c. · Financial information organized by transaction types
d. Financial information organized by statements
3. What does the general ledger show?

c. Financial information organized by transaCtion types
d. Information organized by T accounts
4. What does a journal show?

c. Financial information organized by transaction types
d. Financial information organized by statement type
5. What do you call the process that copies amounts from the journal to the ledger?
a. Recording transactions
b. Journalizing
c. Posting
d. Preparing a trial balance

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6. What best describes financial accounting?
a. lt relates to the preparation of management reports and accounts for day to day
decision making
b. lt generates weekly or monthly reports for the demand organization's internal
audiences
c. Relates to the preparation of financial statements that are primarily intended for
external parties such as creditors and investors
d. lt is NOT bound by any mandatory rules
7. What is GAAP an acronym for?
a. . General Accounting Acceptable Practice

b. General Account Auditing Principles
c. Generally Accepted Accounting Principles
d. Global Accepted Accounting Principles
8. Whatfinancial information does a chart of accounts typically cover?
a. Revenue and expenses

b. Cash flow
c. Debits and credits
d. Capital and expense
9. What is an example of a task that is performed in the Analyze step of the accounting
cycle?
a. Adjust an account to show unearned revenue

b. List all the accounts and balances contained in the general ledger
c. Receive a purchase order or invoice and quantify the amount
d. Reduce temporary or nominal accounts to zero
10. What is a debit?
a. lt is a positive cash entry in a bank account

b. ltis the amounts listed on the right-hand side of a journal entry
c. lt is an amount due to be paid from an account
d. lt is both a and b.

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EmpooNII~t~ FadlltyPtofHslon~IAW...t.hrid•
Chapter 2: Financial Management of

the FM Organization
Chapter Objectives
{)j'•-eomplt!iionof Ulis chapter: you 1'11l! 00 able i<J.:

./ Dwelap; recommendcmd m<inage the 'FM b udget
'<' kl~ntify lhjJ-b<:l5i<: fimo~it~l !Jf,<<lmnP.nlli nnFM org;mil:uliOfl prtlpar~W<
./ OQroiM t~e-.El'W)~nt!i Em;mctedhy FM OpE!rn.lio~.
• Develop, recommend and manage the FM budget.

• Identify the basic financial statements an FM organization prepares.
• Describe the elements impacted by FM operations.
lessons
• Budgets and Budgeting Basics
• Financial Statements
© 2020 IFMA Edition 2020, Version V2017PAFB_1 .1

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Budgets and Budgeting Basics

Lesson Introductio n
• Develop, recommend and manage the facility budget.
This lesson consists of the following topics:

• The Importance of Budgeting
• Budgeting Approaches
• Types of Budgets
• Additional Budgeting Concepts
• Budget Monitoring
• Budget Closeout
• Multinational Budgeting Considerations
• State or Cross-Border Benchmarking and Budgeting
Budget
A budget is a formal, numeric expression of how a FM organization intends to operate over
a period of time. lt identifies the resources and commitments required to satisfy the goals
of the demand organization and is the basis of the funding that will provide these
resources.
The various types of budgets and who is involved in preparing and monitoring them, can
differ across organ izations.

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Budgets
A bu~et is 0<1 totmal, r~umt!:..C (!l(pfi!SsiC~~~r ~";;;;~;;,i~~~O~J~~ryd$_-1~--- ···"h

q>ei'alt;t. ot idoolifie $ih." ftiOUft:es:an!l.tQmmtUntmlsi!X{llil'ed'to oSati!tfY ltl~
ide:niified go.al:s oH!le orgil-n;z.afic-;\ 011e1 a·defm~d_period c{ time and tOO ba:si.s
~~!:-~~~~n~-~~:-~~~1'~~-~~~~~~:r.~~r~~;,..
Additional concepts that a facility manager may encounter are discussed in this lesson,
namely:
• general budgeting guidelines
• high-level international budgeting considerations
• approaches that organizations can apply to develop budgets
Budgeting is the process of gathering information, establishing the financial

projections and monitoring progress toward them. Operating and capital
budgets directly affect the facility manager, regardless of the organizational
specifics.
Discussion Question
Whichof"lhe fni!WI!l~s:ta\ll1Tl0flls i$ mm?

A Budgets ar& actiooaQ!e pli'!os Jhai. help to ensure lis~ a! ro-spoosibillty.
B, Strat~_pfil_rn> am ch;tt;x.:~rit:ed tly $!W~~tffltfl ~~ d!\t;1 1:1f>j(!~(i'oi<%.
c;, COtl1pat~d to strategic plana, btJdQets·h.we a bto::ide;r IOOJS.,
0:. F~stingitn~s.more rti:.ftla;gementedtl_trotthai'lblsdi;el~.
A budget predicts what will happen and it estimates costs and plans for sufficient
resources. Budgets are actionable plans that help to ensure fiscal responsibility, which, in
turn contribute to the achievement of organizational goals.
Budgets are important for management planning and are similar to strategic
plans and forecasting.
A comparison of Strategic Planning, Forecasting and Budgets
• Strategic planning- is characterized as long-term organizational plans which lay

out a demand organization's long-term goals, mission and objectives. The senior

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management of the demand organization leads the strategic planning process,

which is presented to the stakeholders for approval. FM is not involved at this level.
The role of the facility manager in strategic planning is to align the department's
strategy to the demand organization's strategy.
• Forecasting - is a technique used for projecting operating results over periods of
time. Time periods vary; forecasts may be for months, quarters, one year, multiple
years, accounting periods or other time frames. Forecasts typically estimate
revenues, expenses and other items that affect cash flows. The financial manager is
required to prepare forecasts for FM and should recognize that the amounts
budgeted depend on the forecasts. If a forecast is incorrect the budget amounts will
be incorrect, which could incur unforeseen expenses to the FM department.
Financial forecasts typically include Proforma statements or some form of cash flow
forecasting.
Proforma statements are discussed in Lesson 2 of this chapter.
Forecasts can and often do change. They are typically updated as new information
indicates a change in conditions.
• Budgeting - a budget is a financial plan for a defined period of time, typically one
year. lt can include planned sales, volumes and revenues, resource quantities, costs
and expenses, assets, liabilities and cash flows. An organization uses budgeting to
express strategic plans of activities or events in measurable terms. A budget is the
sum of money allocated for a particular purpose and the summary of intended
expenditures along with proposals for how to meet them. lt may include a budget
surplus, which provides money for use at a future time or a deficit in which
expenses exceed income. Budgeting serves multiple roles of planning and control,
determining what actually happened and comparing it with the previously planned
outcomes.
Strategic planning encompasses numerous programs undertaken to implement
organizational strategies; it precedes budgeting and provides the framework for budgeting.
In that regard, resulting budgets portray a slice or segment of a strategic plan.
Forecasting involves planning but lacks the high level of control and accountability of
budgets. Variances in forecasts are analyzed and explained; the forecaster is not directly
responsible for forecasted outcomes. Budgets imply acceptance of responsibility and a
commitment to meeting the budgeted objectives.

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Budgeting Benefits
Sudge"llr'lgpr<Wid~~i lSew!Hli-!UndJiT<I!l'l!al b(!neflts. i;l(:lWin!l

~ lmpr~s c.ommunlc;monam:l c-oordination
~ Fore~ !'\lt"lfl<t_IJe:tn(lti\.W plM
lt'- --Prpvic»s. a b~i.G t<wpMthtm~Jn::.,: evaluation
-*' Allows fur tlru~-turuno-of ffie ,slftltegic pl.!ln
Budgeting provides an organization with several fundamental benefits, including, but not
limited to the following:
• Improves communication and coordination - budgets help ensure that all parts
of an organization are working together to achieve organizational strategies.
An FM budget should be linked to the demand organization's goals and objectives
and aligned to other business plans and processes.
• Forces management to plan- the detailed plans in a budget are intended to
achieve specific goals and objectives. Budgets encourage managers to foresee
problems and consider how to deal with uncertainty and the future.
An FM budget should provide accurate and realistic cost estimates. In addition to
forecasts, which play a critical role in budgeting, budgets make effective use of
historical data or previous costs, benchmark data from other organizations and
industry standard reference data. This data is used to analyze trends in cost
spending and exercise industry best practices in the budgeting process.
• Provides a basis for performance evaluation- a budget sets a benchmark or
baseline against which actual performance can be evaluated; it provides a series of
checks and balances on the actions of management and staff responsible for the
various aspects of the budget.
An FM budget provides a financial plan against which the facility manager can
compare actual results with budgeted results on an ongoing basis. Large differences
between planned and actual results can be investigated and the budget can be
revised going forward if necessary. The budget represents accountability and a
facility manager's individual responsibility can become part of the performance
evaluation process
• Allows for fine-tuning the strategic plan- strategic plans are stated in fairly
broad terms and based on the best information availa~le. Budgets assign
responsibilities for expenditures to functional areas and managers. The detailed
planning that characterizes budgets uses the latest information available.

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Example: A strategic plan includes objectives for a facility's real estate master plan. The first
draft of the FM budget projects that the repairs and refurbishing requirements for one of
those properties will be excessive. This information allows organizational management to
reassess the risks associ?Jted with the investments and revise plans before a commitment is
made.
d
Budgeting Approaches
"''S~niqrmOl.fi<Jg:~rneru .. M.-r;ag~~;Jt;:~!f "' Coi:t"lbi~s.!&<l\1-U<;'lHi!

se!a fJ"Om str<rtCilh: levels aoo ~ey alltll<lri!ali'l!li and
gca1s tlO\vn to employee:;. cooperate pwti::ipatr.'fl
im:IMdua l l~ems. i.O setbUOgets.. m~thods. .
!- L'.:>wer-rtJilfi<J~~aiW • - 'TOil nJafmgemtml * Krn:lw!'!ru>ani!erf!tive
employee:;, ful!ill mtuios finai :appo-ovaJ budget
ih4-&tl~.OOIIS. '*' Kfll;)l;o;P.<l~ :01 bollt>OI- ;;.. Cha~att"'ti24'd b'{
~ Kr.ownas -.,top- up or s~F-imposed M»-wily
tio'H11- pto::essis budget c.cromunicali:Dn.
j tuster and int;~ 1".::;:; .. Pfomote:; hutme:t
!; ;:~gencycoststhM a<:ceptanc""<:~nd
!l.. ~x:}~P-t~~-?.:~~?~-~~-----------:~P~-~~~~-t~-~
Approaches to lludgeting differ across organizations, but all fall somewhere on a

continuum between being entirely authoritative and entirely participative. Exhibit 2-7
provides an overview of these budget approaches. Currency examples are in Canadian
dollars (C$).
A facility manager needs to apply the budgeting standards and requirements of the
demand organization. Such knowledge is a critical success factor to help ensure that:
1. The financial models used to develop budgets are appropriate.
2. The format is appropriate and consistent with business requirements.
3. The process for developing the budget follows standard management and financial
practices of the demand organization.
Exhibit 2-1: An Overview of Budget Approaches
Authoritative Senior management sets Advantages:

everything from strategic • Budget goals reflect strategic
goals down to the individual objectives.
items of the budget for each
• Better control over decisions.
department and expects
• Top-down budget process is
lower managers and
faster and incurs fewer agency
employees affected by the
costs than bottom-up
budgets to fulfil! these goals.

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Also known as a top-down budgeting.

budget.
Disadvantages:
• Dictates instead of
·commu nicates.
• Senior management may be out
of touch with departmental
operations and set unrealistic or
unattainable goals.
• Can result in employees feeling
resentful and/or unmotivated.
Example: Senior management gives FM a Limit of C$200K for general Landscape maintenance
activities for the upcoming year. The facility manager must develop the operating budget with
C$200K as the Landscape maintenance expense target.
Participative Managers at all levels and Advantages:

certain key employees • Expertise leads to informed
cooperate to set budgets for budget decisions.
their areas. Senior
• Can resu lt in employees feeling
management participates in
involved and empowered.
the process at varying points,
• Promotes budget acceptance
particularly the beginning
and comprehension.
and end of the annual
process and usually retain Disadvantages:
final approval. Also known as • Strategic goals may not receive
a bottom'"'up or self-imposed priority in the budgetary
budget. process.
• If managers and key employees
do not give the budget
appropriate focus, easy or
abdicated approval can lead to
managers underestimating
revenues or overestimating
costs.
Example: A facility manager develops a department operating budget with input from
purchasing, human resources and administration. Upon completion the budget is sent to senior
financial management for review and approval.
Combined Combines the features of Advantages:

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Em~ri"'F"'dlltyPnofuslonaloWcwldwiH
authoritative and • Strategic goals are

participative budgeting and communicated top-down and
falls somewhere between implemented bottom-up.
these methods. Also known • Personal control leads to
as an iterative budget. acceptance, which leads to
Characterized by two-way greater personal commitment.
communication:
Disadvantages:
• Senior management
• A longer process, which in a
understands participants'
large demand organization
difficulties/needs.
can significantly add to the
• Participants understand budgeting timeline.
management's
dilemmas.
Example: Senior management provides FM and all other department heads with a clear
understanding of strategic goals. A facility manager works in the team to develop an operating
budget that incorporates FM tactical goals aligned to the larger strategic goals. Senior
management reviews the FM budget and once any adjustments are negotiated, the budget is
approved.
The combined iterative budget approach is commonly used in many organizations because
it provides balance between strategic and tactical inputs. Ownership of budget by the
department and thorough review by management lead to comprehensive budgets that get
applied.
Steps in a combined budgeting approach include the following:

1. Budget participants are identified from all levels of management as well as key
employees with expertise in a particular area.
2. Top management communicates the strategic direction to budget participants.
3. Budget participants create the first draft of their budget.
4. Lower levels submit budgets to the next higher level for review in an iterative
process stressing communication in both directions.
5. Thorough investigation of the budget items and approval from management sets
the final budget.

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Setting Budget Assumptions

Budget AS$umplions
FM tfu<!!J<9tlng_rt:<t.U~ m.akingt!!<a:son~~ a.$~1,m~pt~~..t theJt~\UtB'

~~~p~;
" Reo.-enue expec\«!ltm~

1> Pi'Qj<:~C!EKI ~f-CUiQQ:eJo:~S.es.
1>· NUIYIIW a~~· iX>~)p<ffi$$tie~<Jt fUU-Ii/'1'\'e~l.l?-/al~t FM flrnploy~"
• · . StakeholderstrategiC reqt~l:~menls and ('!t:pectatil)flS f01 elample, ((wt.o1 o1
·s.er.~ce
!t> NumbeJ cf C:ontm~t ptm:;Or:mel af"ld oub"ciurning. C~l:s

., Sif>p{ier j){ir:e p~ajecti:ans
J> RP.nt i~<ltll:rlC& and 1:ax;;s
Regardless of a demand organization's unique requirements or budgeting approach, the

budget process involves developing a set of assumptions. Assumptions are formulated at
the start of budgeting and are generally described as premises - statements that are
assumed to be true, without proof or demonstration, from which a conclusion can be
drawn.
Developing an FM budget requires making reasonable assumptions about the future.
Developing Budget Assumptions
t.aws Tmde joama!s
Su~ and ~~ndkx

FM~r\lfc:;.uS
Once assumptions are in place, the budgeting process unfolds according to organizational
protocol, culminating in an agreed-upon pact between FM and senior management.
Formulating reasonable budget assumptions requires consideration of questions such as,

but not limited to:
• What are the expectations for revenues in the upcoming year?
• What are the projected operating expenses?
• How many full-time equivalent (FTE) facility management employees will be

needed? How much will the employees be compensated?
• What are the projected costs for health-care benefits?
• How many contract personnel will be required? How much will the outsourcing
cost?
• Are supplier prices expected to increase or decrease?
• What are the required needs and expectations of service to the stakeholders?
Stakeholders include, business unit leaders, managers and directors.

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• What are the stakeholders' forecasted needs for the coming year and how will this
affect the budget? For example: Is there a reorganization or move planned? Will the
demand organization be taking on new hires? Will a new workflow process be
introduced? Will organizational growth be outsourced? Will there be staff layoff?
• How much will rent, insurance and taxes be?
lt is inevitable that the list of questions will vary.
To develop budget assumptions and forecasts, historical data about past performance,
intuition and experience- even in changing times- can collectively provide a starting
point. Due diligence is warranted. Conducting research, reading trade journals, reviewing
industry best practices and taking the demand organization's policy and approval levels
into consideration are all appropriate when formulating budget assumptions.
Discussions with colleagues and other organizational personnel are valuable activities:
• Senior management- for a clear view of strategic goals
• Finance- for records of past performance and forecasts of future trends
• Human resources- for shifts in the labor market
• Sales- for revenue generating
• Purchasing -for information about suppliers and price trends
it's important to realize that the elements behind the questions and assumptions are
dynamic. Employment costs and conditions change, the supply of and demand for facility
management services varies, laws that affect business and employment change and a
myriad of other factors can shift up or down. To develop reasonable budget assumptions,
facility managers need to stay current with what is going on. In the end, assumptions are
educated guesses about the future.
FM ·s Alignment to the Organization in future

Work Environm,ents
Technology has brought a revolution to business. Organizations and FM are being forced
to make rapid changes and meet challenges as these transformations evolve. This will
affect the budgeting and forecasting process and facility managers need to be aware of the
changes and challenges that lie ahead and be conscious of how this will affect the future
budget and forecast plans.
Increasing customer expectations and stricter government regulations are reshaping the
FM industry in areas such as, but not limited to:
.. health and safety

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• labor management
• environmental and resource management
• data security
FM faces the challenge of assisting organizations improve their profitability and reduce
costs. Sustainability is a key factor and the future for facility managers will involve a greater
focus on indoor ecology, energy usage, water conservation and waste management, which
will change the focus of the traditional budget.
An evolving organizational trend is to elevate the facility manager to a strategic, long-term

planning partner. This involves changing basic skillset requirements, in addition to technical
skills which require building maintenance and compliance to government regulations;
Facility managers will need to acquire critical thinking, business management and
communication skills to convey the motives for the new budget requirements that will be
inevitable.
The trend to shift away from traditional work styles affects FM from an operational
perspective and how buildings are occupied. Facility managers will be required to
effectively accommodate varying occupancy rates, which in turn will affect power usage
and energy conservation. Global collaboration ha's become the norm in business and the
requirements to effectively administer the requirements for this to run proficiently will be
added to facility managers portfolio.
Security and health and safety will still play a fundamental role in the FM organization and
FM will need to pay closer attention to factors that contribute to employee health and
productivity. Lighting and ergonomics play an essential role in this and will have to be
factored into future planning and budgets.
Energy conservation is paramount to current and future government regulations. The U.S.
Department of Energy has a goal to reduce energy usage in commercial buildings by 20%
by 2020. Modifications will need to be made in the conservation of energy in features such
as daylight vs. artificial light, airflow, insulation and heating and cooling systems.
Everything discussed in this section will have an impact, some more substantial than others,
on the planning, budgeting and forecasting required by FM in the future. These changes
will require creative, imaginative and realistic thinking while investigating trends and
preparing future budgets.

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Budget Preparation Guidelines for Future Work

Environments
Considerations that will need to be considered by FM when preparing budgets and
forecasts for future work environments include:
• Employee Requirements- the generations that will need to be accommodated in
the future are Gen Z and millennia Is who have increased requirements for freedom
at work and flexible working patterns. These individuals connect, create, contribute
and collaborate. The main workplace features that they prefer are bright, open eo-
working spaces with amenities such as fresh food options, daily cleaning, 24/7
building access as well as on-demand workspaces that have shared or dedicated
desks and provide access to meeting rooms.
• Sustainability- global warming is a paramount environmental challenge.
Organizations need to become more energy and carbon efficient. This can be
achieved by creating or introducing more sustainable buildings. The trend towards
sustainable solutions will affect management and maintenance, building design and
supply and value chains.
Sustainability is discussed further in Chapter 5- Procurement in the FM

Organization.
• Technology- there has been a substantial increase in productivity, income growth

and the development of industries due to technology. Progress in intelligent
technology is increasing. lt is envisioned that with robot technology improving, low-
skill labor will be replaced and a skillset change will be necessitated.
• Health and Well being- workplace wellness is a growing trend. New standards
and technologies have driven the design of buildings more around humans and
their health, referred to as "wellness architecture." This includes air and water
supply, centralized staircases to encourage physical activity, access to nutritional
information and health food options.
Existing facilities and tight budgets put limitations on the facility manager, but there are
ways that FM can keep up with the trends.
Ex~mple: Stair climbing is regarded as vigorous exercise that is good for your health, bones
and heart. A recent study revealed that 10 minutes of stair climbing gives a bigger boost than
a cup of coffee. A facility manager can make the stairs that they currently have in the building
accessible, visible and attractive to employees.

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Facility managers will always play a crucial role ensuring that the workplace meets with the
employees' needs. As the workforce changes, facility managers will need to stay aware of
trends, make provision for what is realistic in their budget preparations and develop the
skills needed to communicate to senior management whatthe negative impact of inaction
will be.
"rypes
Operating and capital budgets are two types of budgets that are extremely important in
FM. From a broad perspective, operating budgets are considered short-term, as they
typically project only one year at a time. By comparison, a capital budget is long-term and
may project two, five or more years into the future. Operating budgets and capital budgets
have several other distinguishing characteristics.
Operating Budget
Types of Budgets: Operating Budget
M :f)f}erat!ng bt.ldget is 3 $~Ort·le(m-budge-t projecting alli:!Stln:tat~hleotoo

a!'Jd !fXP!!Il:S!!s dut~~.i! yi~lm p&ritl;d, usouallyone ~ar. lt .m~clu(,les ~pita1
~xpEnditures.because·the-)" arn loog-tetm coot:s. tf:
•- Con!>ists. of fl$ld~;o th.al ;ue I.I$M' t<'i suptloct rlaily t>pera!K->ns.
~>- estil'Matos re"'ffnw:, inr.Qrn,·Jif\Q.ft~!'lse i~emson a nu:mtNybasiS,
~ l(lcfudesp:rojoctloosfors oM.yeatpeti«<.
~" 1$- alsetct~.IIW ~r, ~t<~tiOrlalbUd()et -or~ti:Ona! el!{:*'td1tuie:S.
Formally defined, an operating budget is a short-term budget projecting all estimated

income and expenses during a given period, usually one year. lt excludes capital
expenditures because they may be long-term costs.
Operating budgets provide an important management planning and control mechanism.

Development of the budget should take into consideration the following minimum
requirements:
• Management's objectives for the site and facility
• Trend data such as surveys, demographic research and benchmark reports
• Probable changes in economic factors- anticipated changes in external factors
such as higher utility costs, labor costs/availability, material costs/availability,
regulations and new codes
• Detailed information on the site and facility's age, physical condition and finances
• Internal customer needs for ongoing services and upcoming projects
• Organizational initiatives

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An operating budget consists of funds used to support daily operations. An operating

budget estimates revenue or income and expense items on a monthly basis and includes
projections for a one-year period. Specific items contained in an operating budget may
vary. An example of customary operating revenue and expense categories are shown in
Exhibit 2-2.
Exhibit 2-2: Example of Customary Operating Budget Revenue and Expense

Categories
Revenues, if any
Chargebacks, if any
Expenses -categories such as, but not limited to:
• General and administrative
• Office- rent and utilities
• Operations and maintenance
• Noncapital projects
• Design and engineering
• Taxes
• Insurance
• Marketing
• Leasing
• Depreciation (all capital depreciation)
Operating projections take into account seasonal variations in expenses and income, for
example, utility costs or snow removal and expenses that are paid on something other than
a monthly schedule, for example, real estate taxes or insurance.
An ongoing challenge in FM is to be proactive in conducting due diligence regarding asset

management and maintenance. This avoids reactive initiatives of fixing assets as they break.
Developing an annual work plan, as a precursor to the operating budget, can result in a
helpful tool to plan and organize expense information about projects, operations,
maintenance and other costs and expenditures for the projected period. The annual work
plan (AWP) covers short-term needs, is very specific and based on solid projections.

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Note that the list of cost categories reflects the expense categories shown
above in Exhibit 2-2.
Exhibit 2-3 shows an example of customary information found in an annual work plan.

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Exhibit 2-3: Common Cost Categories in Annual Facility Management Work Plan
General and administrative Operations and maintenance,

Salaries continued
Employer's taxes Maintenance
Employment insurances • Preventive
Pension payments • Scheduled
• Deferred
Health-care insurance
Other benefits Repair
Office Custodial
Cleaning contract
Purchase
Consumables
Rental
Pest control
Clothing and uniforms
Car fleet Moving/porter services
Fuel and oil Noncapital projects

Maintenance and repairs Minor construction
Office automation Renovation
Telecommunications Repair
Land lines Design and engineering

Mobile phone charges Computer-aided design
Switch maintenance (CAD) photography and
renderings
Printing
Copier leases/renewals Taxes
Insurance
Mail
Building insurance
Postage
Liability insurance
Equipment
Couriers Marketing
Leasing
Operations and maintenance
Depreciation (all capital depreciation)
Utilities
Natural gas
Electricity
Steam
Water/sewage
Fuel oil

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Eml"""ftrlnJF•dlltyProfusi"""IJWorllholdot
~ ~ Kv '""k-.J A ~ " ," "''':V~ ~/ 0 Mf1f-"""VfZf'""'V'*' , /'<>t 0 )<::JSW ," w~ ~ '\ "0-~"""~~ ,('t'- z ~" 'f%\""' ~ M
J3omm~n Cos~ Oategori~ in A~n~~ltEacility Management Work ~lan '""~'"'",: , , , ;/ , ,~

"""' + ;~ A :rrsiL;, :u" 1 vv "'"" ,_., _.m/<t\~ *" 0.Jtt ~,%, '*' '" ,.. ., o,.. " , ::<i:tiwN&LA *'J.s&.;:;, n "
Environmental
Waste management
Operations
Landscaping and grounds

maintenance
Health and safety operations
Life and safety
Emergency and disaster

planning
Security
Guards
Systems
Fire precautions
Detection and alarms
Extinguishers
's now removal

,Employee amenities
Vending areas
Cafeteria/food service
ATM
Day care
Spreadsheet software can be used to translate the categories into an actual work plan.
Exhibit 2-4 is a work plan excerpt showing the general and administrative costs from Exhibit
2-3.

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/Ffv1A 's Finance and Business Course
Exhibit 2-4: Annual Facility Management Work Plan Sample Excerpt
General and administrative

Salaries
Employer's taxes
Employment insurances
Pension payments
Health-care insurances
Other benefits
This work plan excerpt is just an example of possible categories. lt is not intended to be a
ready-made template. A category and how it is populated is a function of what is
appropriate for an organization. There are many possibilities that could exist due to the
types and complexities of facilities. The line items shown here are included as likely
categories of general and administrative costs but are not meant to be all-encompassing or
complete.
In this sample, there are no entries in the fields. The Amount headers should specify the
currency being used. Any remarks that might be helpful to clarify the costs or expenses can
be included in the Comments column. For example, regarding personnel, if the facility
manager is planning to hire one new FTE maintenance person, the comment might be:
'Includes one new hire FTE maintenance'.
This annual work plan excerpt could be translated into an operating budget. Exhibit 2-5
shows a sample excerpt of a hypothetical operating budget for general and administrative
costs for the calendar month of April. Actual expenses are shown in comparison to budget;
variances are also included.
A well-planned operating budget:
• Helps to optimize FM department performance- careful and meticulous

monitoring of expenses against budget allocations allows appropriate adjustments
to be made.
• Greatly enhances a facility manager's ability to recognize patterns and trends

- it facilitates a manager's ability to take appropriate preventive action to avert
potential problems or implement corrective action if problems or unplanned needs
do arise.

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E"'powtl'lnt h cHiry PntfusiGnlllo Worlotwld•
Exhibit 2-5: Facility Management Operating Budget, April 20XX Sample Excerpt
Salaries 250,000.00 187,500.00 166,666.67 -20,833.33
I Employer's taxes 25,000.00 18,750.00 16,666.67 -2,083.33

Employment 81,250.00 60,937.50 54,166.67 -6,770.83
insurances
Pension payments 10,000.000 7,500.00 6,666.67 -833.33
Health-care 62,500.00 46,875.00 41,666,67 -5,208.33
insurances
Other payments 25,000.00 8,762.25 16,666.67 7,904.42
Total 453,750.00 330,324.75 302,500.00 ~27,824.75
Salaries 22,315.00 18,475.22 3,839.78 270,833.33 -20,833.33

Employer's 2,231.50 1,847.52 383.98 27,083.33 -2,083.33
taxes
Employment 7,252.38 6,004.45 1,247.93 88,020.83 -6,770.83
insurances
Pension 892.60 739.01 153.59 10,833.33 -833.33
payments
Health-care 5,578.75 4,618.81 959.95 67,708.33 -5,208.33
insurances
Other 250.00 1,000.00 -750.00 17,095.58 7,904.42
payments
Total 38,520.23 32,685.00 5,835.22 481,574.75 -27,824.75

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lntematlonaiFadlltyManagem..,t Anoclatlon
D.iscussion Question
Capital Budget
Types of Budgets: Capital Budget
A eapft~! ~udget \>11-Qws-t':n<lrK:i.;~! imp<~?\~> fEl$U!~g tr()l'll m~}or, !ongctelm. :fltm-

rotl.lfle t~:>::PI!f'IQ:tures ror it.,ms. l:k<" crooorty. p!aN ar<d e<;lipmt~nt
!<
.,_ ·Pf!:i\lideiS' ~ Ji;ect hlg~J-dt:ilti.Or- (l)$j.Jt»'f!il;l' !o th e (l!9anlz:idlo.."l'to!Jvt!ne~s
objeelive-1$
~< Requires an orgarilatran to 1-e-setw svbShl:nih<ilturl<Js: and ;esousces- for u.se
on large i~Westmellis, ofl.entitnei> 1D realtz:i!: benefia lar into !he luime
;,. lnr.tuOt!r. )'}itlj~!itm!i for ;a multi-?oijM pr~!mn!Oition
A capital budget shows financial impacts resulting from major, long-term, non-routine
expenditures for items like property, plant and equipment.
Two related terms are capital asset and capital expenditure:

• Capital asset- a depreciable item whose cost is significant to the company and
whose expected life is longer than one accounting period. lt can be substantially
more.
• Capital expenditure- acquisitions of new or expanded long-term plant assets.
A capital budget is a direct, high-dollar response to the demand organization's business
objectives. Capital budgeting requires an organization to reserve substantial funds and
resources for use on large investments, often to realize benefits far into the future. A capital
budget may be a multi-year presentation, attributable to the magnitude of capital
expenditures.
The demand organization's finance department sets organizational rules for capital
program development and finance personnel. For example, the CFO, controller and
analysts are involved in capital budget approval and monitoring. A facility manager has a
major role in gaining approval for capital projects and in capital program development. The
facility manager or any other operational department manager, does not set policies for
capital budgeting and execution. No capital project should be started without appropriate
approvals by the management levels authorized by organ izational financial policy.
Organizations may set capital thresholds or cutoff levels that establish the sphere of
influence that finance and operational managers each have for capital projects. For

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~ lnternatlonaiFodlltyMonog...,entAssO<Iatlon
example, finance may delegate more authority and responsibility to a facility manager for
capital requirements below $50K. The finance department then takes ownership for any
expenditure above $50K. Facility managers and all other department managers, must
understand organizational rules, policies and procedures for capital budgeting set by
finance management and they must unconditionally observe the protocol.
Capital projects are evaluated internally. The FM department and other departments
submit capital requirements for approval. Senior management makes the go/no go
decisions through a process that assesses, prioritizes, programs and budgets initiatives,
before releasing them back to the submitting department for execution. Ideally,
submissions for capital requirements show long-term economic and operational benefit to
the demand organization. There can be situations where capital project justification is
driven by another reason, for example compliance with a new mandatory regulatory
requirement.
~~ ~~~it~:lr~~~~~;onsiderations for ............... .. ifi~~.
!
' _!·•.
.
!!- OW!i nu,.proj0c! l>!..ippori-01J;l"i1iMtiol'lal bi•:Si.wssob~ti>K!~> ~M (t!1laet the
pr!t:.l,ityof_lfme~et~?
;.. Whatthe bound~rie:s -ror the-project jJffl !Of. eJ~ample-, What the pwj_~t.will dP
r~~ : ~:;~;;:;,:~::~,:,::.':,~:!~~:::uf~m~"'
jf ;. ::~:7m:pcciedr~mJIR!!nin'((l!;lmtmtforth~prqjacr?
J! .,_ Will this pro}et:tfoodemii:e wOO! proee$:5~s.-.arni r~lt !'!__eastsU~'it~Gs:?
I, ! l"' 15 !hi!> proj~~ rmetled to t!n$ure th~ 9f9otni~ation'&. fif!~tlal lnt~Jrn<i?
, !I>' 1s ihfs proj~t ooc.e:ssary fo ccmply'vfflh lc~\'regW.atort tcqUireiTI(!nl$?
! ,r,~~;re the fi(lar'lci.;tl ri'6it£a:U>tX:iate<h<;ith itlis projtl<;l?
Consider the questions listed in Exhibit 2-6 that may increase the probability for capital
project approval.
Exhibit 2-6: Considerations for Capital Projects
,ponsiderations for Capital Projects

&~>e"' " "' ,,~ ' '!' -'-~>-< ,"~;;_t
• Does the project support organizational • Will this project modernize work
business objectives and reflect the processes and result in cost savings?
priority of those objectives? • Is this project needed to ensure the
• What the boundaries for the project are demand organization's financial integrity?
for example, what the project will do and • Is this project necessary to comply with
what it will not do? legal/regulatory requirements?
• Is the funding needed to complete an • ~ What are the financial risks associated
ongoing project? . with this project?
• Does this project involve maintenance or
replacement of worn-out equipment?
• What is the expected return on
investment for the project?

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Empowtri"'F•dllty'ProfuslorulsWOI'Idoolde
Capital budgeting is complex. Capital expenditures can have a different tax treatment from
operational expenditures and are sometimes more or less attraCtive to the CFO, depending
on that tax treatment. Decisions on whether an expenditure can be treated as capital versus
operating expense are determined by finance policy and therefore beyond the control of
the facility manager.
The upcoming discussion of Business Cases in Chapter 4 discusses the

justifications related to capital investments. Capital investment decisions are
crucial to an organization's welfare as they involve large expenditures that
have a long~term impact.
The Relationship Between Operational and

pital Budget
Operational vs. Capital Budget
Operational versus Capital Budget
JO<- Oper"'JIOn~l b~~"' are short-tt#n'i. o"li! ¥Mf ot ies!>, wt!!'l ;,,~n~ sc«.niny
ami clcse &amin~tion of lineJte~ms
)< C::ap;ta1 ~dgets at~ mu:wy~ar, :spanning L1etwe!u1 t'...,oto teH yea<~ , they are
c~~ted iO CMJU!Wiibn With the C!)ril-panji'S 5tr<lle-glt !)IM
nm ordw. orp, ~dty t01 catJital budgilt&is. a s td!owg;;
-I.A(Joll>:~l!iiaoo::ell!lll'~l$n~r~qliir,;1To<~l'lt:i
- P?citeelk:n o r ed.potilil tinam:~nl tr,~~r.y <'t>~i~4ments
~ Gr410.1>9Pioj«:-le~noo
w Mai!l!t-na~ . Qff~~~-r<en~ Q(:p(;fl"·OOi e~:ptTiomt
- War.i;proces.srr.OOemi2~o~
- Hig~ t!'4~~ RO: ~w c~ ii!'
·• A'>'1!fll~l! ~~t~ -~01 ne~ . a:i~t'J

;: ..:::.•~•«®el ptoje.:.ts.
From a FM perspective, budgets can be categorized by program, such as maintenance,

operations, space build-out, environmental and security. A continual challenge for facility
managers who set up budgets is taking the time to define and set rules for semiannual,
annual and capital expenditures. The facility manager should be capable of managing and
tracking each program, both in operating and capital budgets.
Operating Budgets
Conversations in a company regarding budgets typically refer to the operating budget. As

a rule, facility managers are more likely to have control of the operating budget than the
capital budget. The operating budget is more likely to be the subject of intense scrutiny
and cost-reducing efforts. There is closer examination of line items in an operating budget
than on a capital budget.

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The yearly operational budget is divided into portions which are allocated to each
corporate department to cover day-to-day operations. The total allocation for the FM
department is subdivided into portions allocated to personnel costs, such as, but not
limited to staff salaries and benefits and non-personnel costs such as rent, electrical bills
' .
and minor repairs. Most companies use a large portion of their revenue-generated cash
flow to cover costs anticipated in the yearly operating budget.
A portion of the cash flow of the demand organization is allocated each month to spend
on running the company's operations. Any income not used to pay operating expenses at
the end of the fiscal year is retained earnings and can be used to pay out dividends (if the
company is a public-traded company) or reduce debt.
Operating budgets can be both short-term, which is one year, or less and mid-term, which
is between one and two years. Operating budgets represent out-of-pocket costs, which
organizations prefer to avoid if possible.
Capital Budgets
Capital budgets for FM specifically include new real estate, office space, interior fit outs,
building systems, HVAC equipment/component replacement, fire sprinkler line
replacement, tenant improvement and new initiatives such as solar energy and water
conservation.
Capital budgets appear to be more static than operating budgets and involve fewer cost
types and longer terms. Occurrences are expected to happen slower than with an operating
budget, but sometimes they don't. When interest rates rise, investment capital for real
estate-related and facilities-related projects becomes limited. Capital budget plans can
become disrupted when government raises prime rates to control inflationary growth.
Implications of Capital Spending on Operating Budgets and of Operations Costs on

Capital Budgets
Capital budgets are affected by how operating budgets are managed. For example,
preventive maintenance, if funded and completed, has a beneficial long-term impact on
capital projects by extending the useful life of capital assets. Preventative maintenance
programs can provide reasonable predictions of how long mechanical equipment will last,
enabling FM to make predictions about planned equipment replacement, which is capital
expense.
The demand organization will only benefit from these savings if it remains in the facility or
uses the equipment long enough. This situation generally does not make financial sense for
a leased/rented space unless it is a long-term triple-net lease. A triple net lease (or "nnn"
lease) is a form of real-estate lease agreement where the tenant or lessee is responsible for

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IF MAN
lntemailona i Facll lty Man2Jement .._noo:latlon
the ongoing expenses of the property~ including real estate taxes, building insurance, and
maintenance, in addition to payingthe rent and utilities.
Capital projects and investments require maintenance and care after they are purchased or
built. lt is vital to examine capital expenditure for the ongoing effects that they will incur on
the budget. The most commonly used tool to identify these costs is life cycle cost (LCC)
analysis. LCC accounts for all costs associated with an item over its expected life, including
purchase, operation, maintenance and disposal. Large capital investments are often
approved on the basis of LCC claims that they will reduce operating expenses.
If these predictions are inaccurate or overstated, the facility manager will incur higher
ongoing operation costs, higher maintenance or housekeeping for each project. The facility
manager may have difficulty proving why costs continue to increase if unable to research
LCC analysis for projects and compare the predicted figures with actual results. lt is
important to remember that operational budgets carry the depreciation resulting from
purchasing new assets or improving existing ones in the capital budget.
Capital Budgeting Process
A decision to invest in the workplace is made in conjunction with the company's strategic
plan and capital budget development process.
Step 1 in the process is for management to determine the size of the total capital
amount for a particular time period. The amount is established by the company's
financial position, investments required, other investment opportunities and
priorities and the anticipated revenue for a set period. Total capital investment is
normally a small portion of the revenue stream.
Step 2 is allocating the capital budget between projects competing for corporate
funds. lt needs to be determined how the corporation selects or rejects projects and
how it ranks the ones it accepts. Decisions will be made according to what supports
the strategic business plan the most. If a facility manager cannot demonstrate
support of the plan, there will be minimal or no capital investment. Government
requirements can force capital expenditure.
A priority system should be determined for FM projects. Mandatory projects as required by
regulatory bodies usually take priority, followed by equipment replacement and
discretionary investments. A distinction of mandatory and discretionary may not always be
clear and could depend on the nature of the business strategy. A detailed breakdown in
general order of priority may take the following format:
• Legal compliance and personnel ' safety requirements
• Protection of corporate financial integrity requirements
• Ongoing project completion

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• Maintenance or replacement of worn-out assets

• Work process modernization
• High expected Return-On-Investment (ROI) for new capital expenditure capacity
• Average expected Return-On-Investment for new capital expenditure capacity
• Other projects
Budget Planning Periods
Unlike operating budgets, capital budget time frames are typically multi-year, spanning
between two and ten years. Governments normally use longer time frames. Due to the long
time frames, the time value of money becomes a significant factor in capital planning, more
so if capital funds are borrowed or acquired through equity partners such as stock issues.
Getting accurate cost estimates on long-range projects is problematic and vital. Consulting
with corporate financial planners on what bng-range planning assumptions are being
implemented by other departments can be helpful.
Regardless of applying present value and discounting techniques to individual capital

projects, applying present value to the entire capital budget over several years across the
course of multiple projects will change it substantially. The differences between present-
day and discounted dollars will be most evident in the futu~e of the capital budget plan
when the diminished value of the dollar will have its greatest impact. These factors are
essential to corporate financial planners who must issue bonds or debentures or take on a
mortgage to raise capital funds for projects.
Guidelines have been provided above on how to separate operating and capital expenses,
be aware that there are no set rules and it can differ from organization to organization.
A standard that is set to differentiate between categories and can be allocated to the
annual budget, could follow these guidelines:
• maintenance
• repair
• major repair- which is above a certain dollar level
• alteration
• minor construction
• major construction and replacement
The reality is that no set standard is going to suit every demand organization. A facility
manager can define some clear rules and by following them consistently in the absence of
a standard, can ensure that there are positive fiscal impacts and ensure that like to like is
being compared when budgeting or when being audited.

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EmpowHinfF..:bltv"""-•olon>oi • W...tdwld•
[
Several important operating and capital budgeting principles have been presented. The
following overview of some additional budgeting concepts can help facility managers to
better coordinate efforts with upper management and promote their departments in terms
that finance, and business-oriented senior management will understand.
Estimating Revenue and Expense ProJections

A budget must account for revenue and expense projections. The facility manager needs to
know the building condition and assessment to ascertain if the demand organization is
looking at past deficiencies or upcoming issues. In addition to this, the facility manager
must ascertain what other departments are planning for capital investments. For example,
will the Radiology department be purchasing a new X-Ray machine? Variance reports
should be generated to indicate any impacts on the demand organization.
Revenue Projections
Revenue Projections
.. lha: fac. ilityma~agt~twill ttla!ize ri!lfl'!~ ~~(Jffi .~al;ing

or .&t~"ti!t'l~sir~g r~ti3·tJ $pa:cll'or;,a reg:o l.arbaSi~ to;'!
.s,;,cond.O(.thirdparty
~> Some revet~~:~es · m:Jy tes;Ui't'frOin 'iill emal chatgeoboc!>:.&
!> Maktl' ;tiJjut;lmentswl!e!'l·!here is Su!f<C~nl i~fQJtnatio!J
lo ~mticipa:ted!Jt<ue ~IJS,(<S, ,
Most facility managers do not have any revenue projections- unless they have space that
they are leasing or subleasing on a regular basis to a second/third party. The facility
manager will realize monies from these leases. Some FM departments have a chargeback
requirement to their internal customers, where the facility manager would realize revenue
from the work provided to internal customers.
When based on experience, revenue can be projected with some degree of accuracy.
Adjustments should be made when there is sufficient information to anticipate future
changes. If there are revenue projections, remember that unpredictable events can affect
revenues.

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IFMA 's Finance and Business Course ttl~ .u:.~.8~.-~.
!mPo-rlnt:FxUityProfusi...,.I•Worfofwld•
Expense Projections
Expense Projections
•· .Should WliSod~raU !he- tos.ts'~~irE!cl to actiie~ the

IX9aililaii<l_tl'sCJb¥.-c!J'ia~- fur ex;11np!e-. capii~_
eY.pt!OS6 ar.d genetilt-~inistr:.WI.'"E!. !n:poense$
• Based 0.1 experience aOO nntk:ipation of cilang:es ;md
unknowns l'ot ~rr....,"le•.pel'$cmnel oosis Mcl
as.~>tteia(OO~P:pen_.ses. admin.i;tr~iooto$;t$, f>l)<l~fl<."''!
.,..l!r(a!ioo!l"
Expense projections should consider all the costs required to achieve the demand
organization's objectives- capital expenses and general administrative expenses.
Experience and historical data can help determine some of the expenses. Upcoming
changes and unknowns must then be factored in, such as, but not limited to:
• Increased personnel costs and associated expenses, for example, compensation and
benefits, training, additional office space and supplies and any additional
supervision.
• Rising administrative costs, for example, increases in rent and insurance premiums.
• Seasonal variations, for example, temporary increases or decreases in labor
requirements, periodic maintenance, utility costs and snow removal among others.
Ultimately, revenue and expense projections must be compared, even though there is no
rule that says they must always balance. Deficits and surpluses or break-evens may occur.
Certainly, large deficits are undesirable. Typically, when revenues and expenses are not at
desired levels, FM activities are re-evaluated and, in some situations, readjusted.
Fixed/Variable Budget
Fixed/variable budgeting separates costs according to how they relate to other areas of an
organization's business.
Fixed Costs
Fixed costs are costs that remain unchanged in total for a given time period, despite wide
changes in the related level of total activity, for example, rent and equipment leases which
don't vary during the term of the agreement and are charged on a regular basis. Despite
wide changes in the related level of total activity these costs remain constant.
The demand organization is committed to fixed costs for the whole of the accounting
period and in general, such costs cannot be reduced or deferred without incurring some
significant additional risk, business impact or cost of change.

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~tD~ tE.~.8~. .,. , .
EmpoweriiiJFxllltyPtDfusl...,alsWOiichold•
In addition to remaining stable, fixed costs tend to be recurring. Examples are rent held
constant by a lease, annual liability insurance premiums and depreciation. Without a major
change, such as the renegotiation of a lease, an organization's actual and budgeted fixed
costs should be identical month after month.
Although fixed costs remain stable and do not change up or down for the time period, they
can and often do change between budget cycles. Taxes, for example, can go up or down
but are not activity-driven.
Variable Costs
Variable costs change in total in proportion to changes in the related level of total activity.
For example, fuel costs depend on mileage driven. Variable costs are cost elements that
can be changed in the short term with few constraints, however, often there is still some
business impact.
Variable costs are not stable -they vary directly with changes to activity in a budget, such
as assets and expenses. If a budget activity increases, so will variable costs and vice versa.
Other examples of variable costs are the costs of mail services or printing- expenses that
vary based on usage.
Dls~ussion Question
lllen1ify !nt.·fo:l!()wiog ~ll!lt~f(!t1ll& ~~ re!atQ(t' tc fixed costs .Qr vartab* eom .

A Reffiail'l ·lmchal'lged ,;, !p1;111iX a i)iven i'fme ~ -despije widtocflsnges. in
th~ r~alated tev0.1'of {ut.a l -adV.~·-
a . Changa in tot3{ 1n ptOporlloO to change& i11t.'l& rele1ted IE~'>'e: of tota13Cti<.<il.y.
C_. Can hi.! ~H.aJ~e<l" hi ~ ;.hott te~_m w\lht~ comtra!!>li!i
0. Anrtual liab~~ty i'nsariince ptelmumseuro ~prec<ation are ewrnple:.~
E. Mall Mlf~s or ptinling eo~ts based ott w..sa~ are.e~ampl!!s.
f Tettd to 00 ttfCWting.
Discussion Question

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IFMA 's Finance and Business Course ~~~~~IFMAm
~ lntem~on•IF;ttllltvM•n~omontAJsoc~llon
Empoworln( FodlltyProfusl.... loWorl. , . .
Budget Periods
Budget Periods
Jo TypicaHy es.tiab((r;hctdfur th4 (it)&.- ¥ tnerea:>ir.gly popq~rnmtttudi&:
.
ymu period~ CO:!Tft<'...ponds.to.itt!! e.ootlnuous b>.Jdgeiing, it rollmg
organiza1lon 's tlscaf)•ear. trudget; m& forNard ~:. month.
quatt&roryeru, a.s.,ead -.petiod
.,.,._
} Maynotbe~sam'f!:as..tbe ~ Oflellhfo.kendownintoqu:;ir1el1y
'--,..~~~~11}:~~-~-~- -~~~~!1~~~0~-
FM organizations must prepare budgets for a set time period. A budget is typically
established for the one-year period that corresponds to the fiscal year of the demand
organization, although the demand organization's fiscal year may not be the same as the
government's tax year.
Annual budgets are often broken down into quarterly and monthly time periods, allowing
managers regular opportunities to compare actual data with budgeted data. This process
can highlight any problems and allows managers to remedy the problems quickly.
An increasingly popular budgeting method is continuous budgeting, also called a rolling

budget, which is a 12-month budget system that rolls forward one month or quarter, as the
current month or quarter, is completed. A continuous budget has a month, quarter or year
basis. As each period ends, the upcoming period's budget is revised, and another period is
added to the end of the budget.
Supporters of continuous budgeting maintain that this type of budget will be more
relevant than a budget prepared once a year. The continuous budget can reflect current
events and necessities in its estimates. Continuous budgets have the advantage of breaking
down a large process into manageable steps. lt is thought that, because managers always
have a full period of budgeted data, theytend to view decisions in a longer-term
perspective than with a one-year budget, which will cover a shorter and shorter time period
as the year progresses. Potential disadvantages of continuous budgets include the need to
have managers use part of each month working on the next month's budget.
Budget Methods
Budgeting Methods
Jo E;maptli;lW$ trot'n Jo' · Rtiq!iiie-~ju~tifylfig "' Fi?<£u~0S(11l :.t:\i'...itiQS,'

historical data. the continued ,__ lrn:ll:IOOs the tml! o!
~ . ~artswi'th_ta5t ye~t~ e~&te.~e_ol'ltems ocb>oity-bas:eC costs.
budget'aoo mfds to it financ1aUy and iO-e.Orinect reso-urce
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There are several different budgeting methods an organization can use; some methods a
facility manager may encounter could include any one of the following.
Incremental Budgeting
Incremental budgeting is a budget method that extrapolates from historical data. Next
year's budget is constructed by starting with the current year's budget as a baseline and
then adjusting each line item for expected changes.
In incremental budgeting, a manager starts with last year's budget and adds to or subtracts
from it, according to anticipated needs. Of the various budgeting methods, incremental
budgets generally are easier to complete and involve less work. An advantage of the
method is that history, experience and future expectations are used to develop the budget.
The main drawback to incremental budgeting is that such budgets tend to only increase in
size over the years. Managers may simply use the figures from the past budget period and
increase them by a set percentage rather than devoting appropriate time to research the
realities of the current and future environment. A sense of entitlement may also arise with
the use of an incremental budget.
Zero-Based Budgeting
Zero-based budgeting is a budget method in which the continued existence of items must
be justified both financially and operationally before they are included in the new budget.
Most budgeting methods incorporate some review of historical data. Zero-based

budgeting incorporates a unique perspective regarding historical records. Zero-based
budgets help to avoid situations in which ineffective activities continue to exist simply
because they were in the prior budget. While the traditional incremental budget focuses on
changes to the past budget, the zero-based budget focuses on a critical review of every
assumption and cost justification for all proposed expenditures.
If an organization uses zero-based budgeting, facility management and other departments,

would be required to rank all its activities from most to least important and project costs
for each activity. For example, statutory compliance with standards for accessible design
that apply to new construction and alterations might be highly ranked as essential for
business to continue, a necessity for business growth and an important organizational
commitment to improve services.
Senior management reviews these lists and cuts items that lack justification or are less
critical. In the process, questions are asked, such as, "should the activity be performed and
if it isn't, what will happen?" or "are there substitute methods of providing this function,
such as outsourcing?" Senior managers may also use benchmark figures and cost-benefit

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IFMA 's Finance and Business Course ttl~ ~.E.M.8:.K·-
Eni~NdlltyPnlfusl......t. worldwld.o
analysis to help decide what to cut. Only those items approved appear on the budget.
Once the justification is made, the budget must be based on the most accurate information
available.
The primary strength of the zero-based budget is that it forces review of all elements of a
business. A facility manager would have to perform an in-depth analysis of each line item
- considering objectives, exploring alternatives and justifying requests.
Zero-based budgeting is more analytic than incremental budgeting and can improve
budgeting accuracy. lt presents some distinct challenges, such as:
• A significant amount of budget preparation time
• Added paperwork
• The potential for unwanted competition for resources and morale problems, as
senior management eliminates programs
• Potential for inaccurate estimates, if prior budgets are not considered and past
expenses and lessons learned from prior years are ignored
Activity-Based Budgeting
Activity-based budgeting (ABB) is a system that records, researches and analyzes activities
that lead to costs for a company. Activities are any activity engaged in the primary purpose
of making a profit. This general term encompasses all the economic activities carried out by
a company during the course of business, including operating, investing and financing
activities which are ongoing and focused on creating value for the shareholders. Every
activity in a demand organization that incurs a cost is scrutinized for potential ways to
create efficiencies. Efficiency signifies a level of performance that describes using the least
amount of input to achieve the highest amount of output. lt requires reducing the number
of unnecessary resources to produce a given output, including personal time and energy. lt
is a measurable concept that can be determined using the ratio of useful output to total
input. lt minimizes the waste of resources, such as physical materials, energy and t ime while
accomplishing the desired output.
ABB includes the use of activity-based costs to make a clear connection between resource
consumption and output. This allows managers to better understand how resource
demands are affected by changes in activity.
Implementing ABB in developing an FM operating budget would require three basic steps:
1. Identifying activities for the department
2. Estimating the demand for each activity's output
3. Assessing the cost of resources required to deliver the activity output

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t7'iJ~IFMAm
~ lnttm~tlon~l F;>o:llltyM~n~l[!mtntAssod~tlon IFMA 's Finance and Business Course
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Assuming that two or more activities share spaces or buildings, ABB must naturally be
balanced by some type of chargeback system to the activity. This means that each relevant
activity will be charged the costs of building/floor usage.
'U(P Chargebacks are discussed in Chapter 3.
The ABB approach emphasizes value-added activities and expresses budgeting units in
terms of activity costs. By identifying value-added versus non-value-added activities, ABB
provides opportunities for cost reduction and elimination of wasteful activities.
ABB proponents maintain that traditional incremental budgeting focuses on departments

or products and services and obscures the relationship between costs and outputs by
oversimplifying the measurements and grouping them into broad categories. Traditional
budgets rely on past/historical budgets; there is more potential to continue funding items
that would be cut if their cost-effectiveness or lack thereof were better known. ABB
supporters believe that an activity-based budgeting approach coordinates and
synchronizes activities of the demand organization to better serve customers.
Determining Appropriate Budget Method

The facility manager needs to see the historical financial cost center and information for the
facility department; this will provide the financial model and required format for budget
preparation. Although there are various budgeting methods available, the demand
organization will determine the appropriate method to be used.
Using the Appropriate Financial Model to Develop a Budget

Financial modeling is the task of building an abstract representation of a real-world
financial situation. This type of model represents a simplified representation of the
performance of a department and indicates the funding, the anticipated Return on
Investment (ROI) and the present and future value for the department. This information is
typically prepared by financial services and not the facility manager, however, the facility
manager should be aware of where this information resides, how to obtain it and
understand of what it entails.

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Em~riiiJFadlltyProhuiOMII Worldwld•
Discussion Question
1_iuc <tt"la!~~? Ac~ilieJsrntlf lnuememalb~ing. is' lhaHUoeuses ort h1Monc<lt

budyets, pmdw;ts and s-tsMJ::m;;~~ ob!Ocum~-the_tOJ!J~ticm!.11ip 00-IW~I)n cq.stS
· ando-..!tp<Jt~
Gen I Budgeting Guidance

General Eludgefing Guidance 'l'fM!\,
Many factors characterize an FM budget. No single factor can lead to a successful

operating or capital budget. FM is a major consumer of organizational resources and FM
budgets are subject to closer scrutiny than those of other departments. Facility managers
do not need to be budget experts, but the high-level visibility of the budget necessitates
comprehension of the process to contribute to the budget process. The facility manager
should be able to answer resource questions with FM and business knowledge, use the
financial language that management understands and demonstrate the department's
efficient and effective use of resources.
Finance and business personnel who review and approve FM budgets are often unfamiliar
with department practices and principles. The budget process provides a facility manager
with the opportunity to educate those individuals about what FM does to accomplish the
following: ·
• Support the organization's core business- when presenting the current budget,
a facility manager can discuss how it supports business and operational objectives
by showing, where possible, how FM costs are determined in response to
organizational requirements.
• Control costs- budget discussions with finance and business personnel provide
the chance to review FM cost savings, control and avoidance strategies and
accomplishments.
• Outline anticipated cost increases and/or decreases for the budget period - a
facility manager should identify the cause for the changes and the strategies the FM
department is employing to counteract any negative effects. Any requests for funds
should be in sync with objectives set by senior management.
© 2020 IFMA · Edition 2020, Version V2017PAFB_1.1

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E..,..........FadlltyPnofuolonai•Worldtrld•
• Quantify the impact of any capital requirements on the operating budget - a

facility manager can demonstrate how capital project requirements influence the
operating budget line items for increased or decreased space, increased expenses
and depreciation.
The overall goal of the budget process is to produce accurate and detailed financial
projections and provide for fiscal accountability. Throughout the budgeting content
presented here, organizations will vary in how they gather information and implement,
monitor and adjust activities. A proactive FM budget process facilitates the preparation of
both operating and capital budgets. Exhibit 2-7 offers some general guidelines appropriate
for facility management across all types of organizations.

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IFMA 's Finance and Business Course ~tll~
I
IFMAN
lntemi ti..,•I FO<IIItyMonagtmtf1tAuodallan
E,.po-rine: fKilltyProfuslonalsWorldwld•
Exhibit 2-7: Guidelines for Effective Facility Management Budgeting
• Know the demand organization's strategic plan, core business and operational objectives.
Make budget decisions that align FM to these. Demonstrate that alignment to external
reviewers and stakeholders.
• Obtain knowledge of the demand organization's budgeting process- the guidelines to
follow, the timing of the process and how the demand organization will use the budgets.
• Be able to identify all line items in the budgets that FM contributes to. Ask questions to
find out if there is uncertainty about the meaning of items or of how a number is derived.
• Foster buy-in from decision makers. Understand the concerns of the people making
decisions about the FM budget. Be sure to address those concerns in the department
budgets.
• Establish rapport with finance staff involved in the budgeting process. Regularly
communicate and coordinate FM requirements. Ask questions about points that are
unclear or not understood. As appropriate1 seek advice about the assumptions being
made of the FM budget process.
• If other Fryl personnel are to participate in the budget process, make sure that everyone
involved understands elementary accounting principles.
• Design the FM budget process to be consistent and easy to understand. Clarify everyone's
role in the budget process.
• If time permits, draft a preliminary budget that estimates revenues and expenses. If they
are not within senior management parameters, look for ways to make adjustments.
• Once a budget is implemented, regularly monitor expenses against budget levels to track
progress toward budget goals.
• If budget problems arise, be prepared to correct them through formal plans of action and
to offset negative budget variances.
• Have ongoing discussions with those involved in FM budgeting. Better communication
and planning increases the chance (.')f handling and responding to unplanned
contingencies.
• Have several contingency projects and activities identified should spending levels be lower
than anticipated.
Discussion Question
Whil;:t~·ofiOO. follOWin{J'!:IIQC:Iitl&.$ i$-'t\Ot'liko!ylo-ecn!rib\rl0 to ~ffn~ti\'1!1 FM

ht;rlgeting?
~ .Aiighmctltto tl'lo ()(ganliilltlot\'5 s.trlite{lic plan and coie bus\nes& arid
operational objectives
a. -R~I8f ft'IO!)rturi!l9 ot ~!)e!:l~S a~sinMbud!i~ leo..et& 1<) -lra<:.k progress
.towat<:l~ bodg_e~ .gc_
al
C. ,O¥t."f~ ,.PtiJt)ii~k::r~~e projec~!OOs
o ; .Un®reilv'lding IM ooncerr.s-of thf:. peopl-e m~~!fl9.~CI~loMaOO'Jt lhe-:FM
bOOge t

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~~~~~IFMA~
~ M•n•~omontAssod•tlon
lntom•tlOfl•l F..:llity
Budget Monitoring
-.. FreqUQil(.y fl:EIY be ~\feel<iy. rnonth;y, quarter!~·. n'lidy~a:t Of aM<J~l.

, _ Helps IQ detetmine lf ailocateti.fU~~ds ·have OO&n ~nt as apecilioed.
" AIIOW$'14rialil)ns bet.,>Jeer~ the appro-..00 budg~t ar'ld MW:ai spendirv,; to lie
aria1:fled erx:l. ltwarnmttid. apprUPfiate adiuslments tube ma~.
Monitoring expenses against budget levels is a core management activity for a facility
manager.
The frequency, be it weekly, monthly, quarterly, midyear or annual, is determined by the

detail required, organizational practices and personal preference. Regardless of timing,
each review provides a facility manager with important data. Periodically monitoring the
budget by reviewing reports and accounting records helps to determine if allocated funds
have been spent as specified. lfdeviations appear between the approved budget and
actual spending, variations can be analyzed and appropriate adjustments made.
Weekly Analysis
Weekly analysis facilitates tracking of large or seasonal expenditures on a timely basis.
Most accounting systems routinely update financial information on a monthly basis. There
may be an additional reporting lag before the information is available for a facility
manager's review. Weekly checks help ensure that there are no surprises when monthly
budget reports become available.
Monthly Analysis
Monthly analysis provides expenditures for that month and assesses short-term spending
patterns, timing of billing and payments and similar activities.
Monthly Combined with Vear ~ over -Vear and

r-to -Date Analysis
This combination facilitates comparisons of current monthly and year-to,..date expenses
with both the authorized budget and previous spending. The combination helps to identify
trends and variances.

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Emplllftri"'FxllltyPnrfusi.,.I~Worlthoid•
Monthly comparisons of actual expenditures may be made with budgeted expenditures for
that month. Variances between actual and anticipated expenditures can be noted. Actual
monthly expenditures can be compared to the same month last year and budgeted
amounts at year-end can be compared. Lease costs at the end of a fiscal year, for example,
could be compared to budget or lease costs could be compared from month to month or
the previous year.
Quarterly Analysis
Quarterly analysis coincides with the demand organization's fiscal calendar. Organizations
monitor their targets on a quarterly basis and report to the stock market and/or
shareholders on that performance, so it is key from a "whole organization" perspective and
from a target/results basis.
• Variances identified by quarterly cost reviews can be used to fine-tune budgets and
reallocate funds as necessary.
• As quarterly analysis at the end of the second or third quarter is usually tied to
organizational profit and loss statements, a facility manager can use the analysis
results to ensure that the department's budgeting and spending approach is
consistent with the demand organization as a whole. Profit and loss statements are
discussed in subsequent content on Financial Statements.
Midyear Analysis
Actual expenditures for the first six months can be compared with budget and projections
for the second six months. This is also the point at which some organizations start to plan
budgets for the next fiscal year.
Annual Analysis
Year-end budget reports can provide further i'nsights about how efficient the department is
and where improvements may be needed. Valuable comparisons can be made, such as:
• Percentage of maintenance and repair versus new work
• Trends in maintenance and repair versus new work
• Unit costs compared to benchmarks, such as the IF MA benchmarks for facil ity costs
Data analysis and statistical analysis software has greatly increased the amount of data and
information that budget analysis can compile. Spreadsheets, databases and financial
analysis software can produce accurate, up-to-date information for review. In addition,
many organizations incorporate enterprise resource planning (ERP) programs into their
budgeting process. ERP programs have the ability to consolidate all of an organization's

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operating information into a single computer system: For example, a facility manager and
finance personnel, could use ERP data to estimate and then track the effects that an FM
budget alteration has on other parts of an organization.
The accounting systems that organizations and FM use to monitor budgets may vary.
Regardless of how it is done, there is a clear message for a facility manager:
If expenses against budget levels is not regularly monitored, it is highly

probable that the budget status will not be properly understood by FM. There
is an increased likelihood that wrong decisions will be made based on
misunderstanding.
Remember, that for some organizations, expenditures can be a direct cost to a business
unit and a wrong decision can result in a direct loss to that business unit versus profit for
the year or longer.
Unexpected Budget Impacts

The relationship between budget reductions and down-time increases will have an impact
on business units. This could result in having to lay people off or discontinuing certain
services on offer. Variances and cost changes need to be tracked throughout the year.
Actuals and budget numbers need to be compared. This can result in re-forecasting a
project for future quarters. Unexpected growth or a cost reduction are some factors that
can affect variances and cost changes. Either of these impacts will be related to the various
departments and will affect staffing, contracting and investing.
Budget Cioseout
ExatY!P~!I
• Can be-simpleol complet •· Ga¥etnmM~t sec.tots:

;,. Tjpictill:t leqOlt-e!i 000t!:l1!"1~Von • Rigt<!QUS CIQ-SeOl.!I.Qt pll(t;h3:S.S
Petweenlt\e raci!!!y tr><U"~<'~!)&t <'!fld of.dQI!i
tf1e f~;umce depa,-t::rmnt • Boo\<:s :Close~ ovt a! end (:lf
~'"" R&"o.<Eals h<Y>v wen a ~a:ci!ity (r./err t.scal<,;oor
n1<!r<~!h.a$-rnimagtl;Jitlebudge1 • 1-'inanc-iaLar:di:
.- J¥..-g\es.e<:1or>t:
• Ae~<~~.~niiJ'I9!1}{<-J<:e<:•mls;
Budget closeout coincides with the end of the fiscal year. As with many aspects of
budgeting, budget closeout can be simple or complex. Some organizations may have

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~ lntomatlon•IFarllltyManagolnftlt,..sod~
Em~rl"f FodlltyPn>luolanaiiWorlclwiH
formal authorization requests to close; others may have a more informal closeout process,
signaled when all administrative actions have been completed and expenses have been
posted to accounts. Simple or complex, the process typically requires coordination between
the facility manager and the finance department.
Legal and financial requirements and even simple tasks may differ across organizations. For
example, in most government sectors, there is a rigorous closeout of purchase orders. With
few exceptions, the government closes out its books at the end of every fiscal year since
the authority to obligate those funds normally expires at the end of that year. Expenses are
simply accounted for based on the obligation incurred during the fiscal year in which the
funds were appropriated. Customarily, this is followed by a financial audit.
In the private sector, accruals are a part of the year-end closeout process. An accrual refers
to either accrued revenues, which are earned revenues yet to be received as cash or
recorded or accrued expenses, which are incurred but unpaid expenses yet to be recorded.
\
FM must follow the rules prescribed by the demand organization and its environment.
There are two ways to account for receiving cash or paying expenses:
• Cash basis- or cash basis accounting, accounts for cash when it is received or
spent. Items promised to be paid or received, such as accounts payable and
receivable, are ignored. ·
Cash basis accounting is not allowed under IFRS or GAAP.
• A~crual basis- revenues are recorded when earned and expenses recorded when
incurred.
For example, utilities accruals may be based on meter readings and self-calculation
of the sum due, as utility invoices are often issued too late by the provider for year-
end purposes.
Accrual basis accounting is the accepted norm for most organizations.
In FM, an accrual is an expense accounted for at the time the goods or services are
received. At fiscal year-end, a facility manager identifies the value of the goods or services
received to-date but not yet invoiced and/or paid for.
In The Facility Manager's Guide to Finance and Budgeting, authors David Cotts and Edmond
P. Rondeau describe good budget management as a learned skill and they use the analogy
of the budget as a map. Good budgets are like maps; they allow a facility manager to know
at all times where he or she is in order to reach a destination.

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~~~~ tE.~.8~""' "o
Em~riftiFxWityPiofHIIDnalsWorldwld•
Multinational Budget Considerations
~ l-.t19al ant;!: reglJla\(;)r}' HY.JOlWlllt:~ts

l> CUirency
,. Coltf.'~;We b;ug.,irung, ernplo)'(le rep!e~fl!illion
_ ~tl gc-.<emmenl mMdales
1> Cultum
11o f;!isi< Management
Multinational organizations have additional considerations in budgeting. Operating and

capital budgeting theory does not change, but the process is more complicated .
Furthermore, there are many additional complexities in global investment analysis. Even
though a facility manager cannot directly influence global budgeting practices, it is wise to
have a general awareness of the major issues and challenges such as, but not limited to,
those listed in Exhibit 2-8. These same issues and challenges prevail when evaluating global
investments.
Exhibit 2-8: Impact of Select Global Factors on Budgeting
Legal and regulatory requirements Country-specific factors must be carefully

researched, documented and understood.
Government policies and regulations can
affect acquisitions and purchases, taxation
and other budget items.
/
Currency Unpredictable events can sometimes result in

rapid changes in rates of inflation and
monetary exchange rates.
Employees in most parts of the world are

Collective bargaining, employee protected from actions that impact their
representation and government mandates wages and employment conditions. The
implications for minimum wages, severance
packages and pensions must be understood.
Culture Cultural differences necessitate involving

local contacts to understand usual and
customary practices.

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Global Factor Potential Budget l~p!ications
Risk management There are many potential issues that can pose
high levels of risk to the safety and well-
being of employees and other organizat ional
assets.
State or
Budge·ting
State or Cross-Border Benchmarking *~KL
and Budgeting
···EEN<s·~iidl;;~rki~tl"&l$;~~d·;d~tities.m~;·t~·ii;~i·c;;·;~;p~ti:~~;;;;··
~ bus\ll(l$!;itl $la~~ £4' :;;fQ:!>S-OOfdtlr ~llCh!n~fllij.
:Examples:
,_ NallOtwl rules und, u~gul~iOfls ~to LINt!"! uf ouli0u!Cil:1g
,.. CUr<cncy ox-:~angc ~!IWM! • Subk!t:ing
!>. Taxatl<ln :~r)d Ya!4e: add~d-tlX ~ Sp:m~ cap<tdty- l!!tmporaryts/'rori
~ Ac.ccunling tlJ!es te!l"'''v.Jcantspaee
~ ReiliaI baSis:olnd'seMclt tharges *" Effettof in~emalrec,harginv
!I> tabor tosts
.t There is general international acceptance that standards are a proven business facilitator
.J
'\~
'· and standardization increases consumer confidence, lowers costs and otherwise supports
the growth of economies.
The European Committee for Standardization (CEN) is such a business facilitator in Europe.
Through its services, CEN provides a platform for the development of European standards
and other technical specifications that become the national standards in each of its
member countries. CEN along with its American counterpart, the American National
Standards Institute (ANSI), are both member organizations of the International
Organization for Standardization (ISO).
CEN has developed several European standards for real estate and facility management.
These standards are of key importance to many of the European Union member countries
who have traditionally worked to their own standards. In a globalized world, CEN standards
strive to promote conformity, provide a transparent basis for management and support the
communication of information. All of these outcomes have the potential to reduce the
challenges of real estate and facility management across states and borders and help
organizations make better decisions.
Specific to measuring, analyzing and comparing performance data important to real estate
and facility managers, objective and consistent benchmarking across borders poses
challenges. CEN's benchmarking standard attempts to facilitate meaningful comparison

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between services in different geographical locations, especially in different jurisdictions or

countries.
CEN's benchmarking standard identifies many factors that can impact finance or business
in state or cross-border benchmarking, such as, but not limited to:
• National rules and regulations
• Currency exchange rates
• Taxation and value-added tax
• Accounting rules ·.
• Rental basis and service charges

• La bor costs
• Level of outsourcing
• Subletting
• Spare capacity, temporary/short-term vacant space
• Effect of internal recharging
The impact of these factors, among others, cannot be ignored but must be understood
when deciding whether to use bench marking or which factors to benchmark.
In general, cross-border benchmarking should be used with extreme care and should
include careful analysis of all relevant factors. lt is likely to be a valid exercise when the
objective of the bench marking is to establish at least one of the following comparisons:
• Real operating costs within a demand organization so as to make an informed
decision on relocation
• The cost/benefit/risk of potential investment in a new operation in a new territory
• Resource usage or effectiveness within existing operations in two or more different
territories to assess best practices within the demand organization
• Resource usage or costs per output unit to assess the impact of best practices on
outputs between organizations in the same or similar industry but in different
locations
Now that budgets have been reviewed, look at the example in the case study.

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E..,.,.-Il... FKIIIt¥~......~. woridwlde
Case Study: The example provided is an example of an FM budget for two years
increasing annually.
Budget Actual, ,' ·~

""' vffi
o;,.;cp,,..,J ~ 0 ;
F=inancial~ ,', F=inancial

~ ' ?< '
v ,~v "" ~~
Year 1018 'Year 1018

' '
SERVICES
Building Engineering Provide qualified $800,000 $780,000 $820,000 $815,000

Services staffing to perform
preventative
maintenance/repair
on building
systems along with
maintaining the
cent ral plant
Janitorial Services Provide cleaning $250,000 $245,000 $256,250 $250,000

services to entire
building to ensure
the building
maintains required
health
requirements
along w ith
maintaining an "A"
rating
Security Services Provide safety and $300,000 $325,000 $330,000 $305;000

security for
building and
occupants
Security System Preventative $50,000 $50,000 $52,500 $51,500

Maintenance maintenance &
repair of
computerized
security system
and wiring
Chiller certification & Required by $20,000 $17,500 $22,500 $18,800

testing Environmental
.Protection Agency,
chillers not
properly

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Empowtrinlf<>CUityProl'ull...,.l•WCN'Idwldt
functioning could
cause possible air
contamination or
ajc shut down.
Required by AQMD
Boiler Certification & Required by City $20,000 $15,000 $22,000 $18,300

testing and AQMD if not
tested and certified
could be shut
down
Fire Extinguisher Required by City $7,000 $5,000 $8,000 $5,500

Recharging Fire Department
Regulation 4 testing Required by City $25,000 $24,000 $26,500 $24,500

Fire Department
Certify/ maintain/ City requirement to $10,000 $75,000 $15,000 $12,500

repair building be tested on a
backflow devices yearly basis
Maintain/repair/clean Required by health · $16,000 $16,000 $18,000 $17,000

cafeteria exhaust department to
fans prevent clogging
and fire
Grease Interceptor Required by City to $50,000 $50,000 $55,000 $55,000

cleaning remove grease
prior to entering
waste stream
Maintain/ repair To ensure $5,000 $25,000 $6,500 $5,450

trash compactor compactor working
at all times
otherwise trash
picked up daily and
trash hauling cost
will rise more than
100%
Water mitigation Service to mitigate $10,000 $15,000 $15,000 $15,000

water intrusion to
prevent oil, mildew

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Enl~"fFKilltyPrefaaiGftalo WDI'Idwlde
Description
and disease
.Pest control services Ensure building is $30,000 $20,000 $25,000 $21,000

free of pests and
rodents
Thermal scanning of Annual services to $6,000 $6,000 $6,000 $6,000

building electrical detect possible
electrical problems
prior to having a
major electrical fire
Water treatment Quarterly $10,000 $5,000 $5,500 $5,500

testing and analysis consulting service
required to test
water system and
ensure building
system including
cooiing towers and
chillers are fee of
contamination.
TOTAL SERVIC:ES $1,589,000 $1,673,500 $1,683,750 $1,626,050

C:OMPUTER
SER.VIC:ES
CAFM system Provide software $20,000 $20,000 $15,000

upgrades/ repairs upgracles and
expansion
CAFM System yearly Annual licensing $25,000 $25,000 $25,000 $25,000

license fees fees to software
proclucer
Tools & equipment
TOTAL COMPUTER $45,000 $25,000 $45,000 $40,000

SUPPLIES
Office Supplies Supplies necessary $25,000 $20,000 $25,000 $22,500

to maintain normal
business
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Empowulnf: Fadllt¥Pmuslonoi1Wortdwldt
~x ~ $~ "' '""'~\ "r~f}k'J"'~, :,~
" ""* ~ " '
Uustification
operations for
Facilities
Computer Supplies Printer cartridges, $5,000 $4,000 $5,000 $5,000

storage disks,
anything needed
to maintain daily
operations
functioning
smoothly
Tools & equ ipment $30,000 $24.000 $30.000 $27,500
TOTAL SUPPLIES
MEMBERSHIPS,
TRAVEL&
CONFERENCES
Membership in IFMA Provide up to date $2,000 $700 $700 $700

for 3 staff information and
assistance for
facilities staff
Seminar/ Registration for $5,000 $5,000 $3,000

conference fees facilities
conferences
Travel Transportation and $5,000 $5,000 $5,000

lodging for
attending facilities
conferences
TOTAL $12,000 $700 $10,700 $8,700

MEMBERSHIP.
TRAVEL&
CONFERENCES
TOTAL BUDGET $1,676,000 $1,723,200 $1,769,450 $1,702,250

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IFMA 's Finance ·a nd Business Course ttl~ .~. E.M.8~. .~"
Elll~rfnt FxlllryP!efuJ!on~I•Workholll•
Case Study Discussion Questions
The but!g!M fXC'.<l!!cL'd, is an e)-an'lp!f! of an FM budgel for 2 years io.:.:reas.l!lg

annually TI.1is js.a :z;e,(P bolu.<d b~gt'!l w[th ~~th b~dge1 ilbm b(ling re.Ww~<l
andjuslified.
From the ex9mple prwirll:ld aos·,uer fhe ~o:[Qw~gqt~£~Stmns.'

A. Wllat 'i<wlayou do iryau 1'\ava tp re::luce the but~gei'?
[ =~=~~;~==~~'t;;e~~g;/'eductHJos?
D. Are. there'~!'IY l_in e !~mnt~ y~, weJ;utd_flag a:s l"'(!:ed!n.J alieytion?
F.. ~0\VdOEH> lhe ABB t.n.ldgt!t OlpprQ.<H:h a!Hli!i1 yo;~ <M&1 y~l.lf curt!;!lt! budgm
nwtt!Qd7
F .WMt~s 1~ budgo! docis,ion m~Arnl spPfo<~eh bociilg" folloWed inyouf
L. ,.:;:~•;o.tron:l

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~~
IFMAN
lntemotlonoiFarllltyM•n•g•m•ntAssocl•llon
Financial Statements
Lesson Introduction
• Identify the basic financial statements an organization prepares and describe the
elements impacted by FM operations.
Financi<.'ll Statements
FnaMi~l Gtate:ftloHJIG rx;m;:~y tho!: emrl'!<nt f!n~n:r4!1 heal!;tl ~~:ndt"&<:~nt fin.<~Mt-~iill

NstOI')>'-cf ~I'I.Qrg~n,~a:non. Th~y a!Xl pr&p~e_ ~bi:U! an O!'gantU~Ii«t !>tXh il$~
~» Wllatdoa"S.:tawo?
1<- What: am it!~ $0UIO:::C$ Of 1t.>Wnuc?

.,.. HowtsmoMy:§pent?
•· Howmw.h;on·)fl\ i$maoe ()r ~().')$ ir.~uned1
~>' WM!is lOO State ol th-e org;~ni:;>:.atmJ'I"s fim:Jnc.iB!n~aflll?
Financial Statement Principles
!» Ctear
~ Ateurate
10- Cornplate
l'- > Con:>~t
;.. Tornely
• Financial Statement Categories
• Types of Financial Statements
• Depreciation
• Capitalization Versus Expense
• Lease or Purchase Considerations for Capital Assets
• Proforma Statements
• Summary Guidelines for Effective and Efficient Financial Operations

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~lllpow.rlfti FadlltyPtofuslonalsWDfldwld•
• Analyzing and Interpreting Financial Documents
Finan I
Financial Statement Categories
lnicrnal .,._ Pnnl ut:ed un u Jegul M~e ~ilab~ lo !!~mka'rrmnagenKmt~tarl)nomay!l:~t.J~If'!
and other$ wi}h operotir1!·or ovm-~ig:ht ~-es.poMibiHties
~ Ser(<) tls esse11l'iill ~epomng rroet;hanlsms and ma!lagement
tools
!oO R~uirOO b'{la\Y for pYlilic!y traded eomp<mies
I>" Prepared mao:.ordance v.1UI accoumift9.standards -lFRS or
GAA.P.aml FASB
Au dited )> Pt-ap~rOO .and .:.ertlt!o;.d by ;in ~~- fur ro:.ample <J- t.erllfi~"<d
ac<:oootant or c.h31"101'ed l'l!:counttlnt
;. IIK.hJde ~ rlgoroo~.rtlilltr#oOh& orgMi~tton·s rman_cutls.a'$
well a"' ade:lltiOn8.1 dociJfrl~ti!S
*' 1ikhkle an t~i1\io1'1 iloou::nent
Financial statements portray the current financial health and recent financial history of an
organization. They answer basic questions about the demand organization, such as, but not
limited to:
• What is owned?
• What is owed?
• What are the sources of revenue?
• How is money spent?
• How much profit is made or how much loss is incurred?
• What is the state of the demand organization's financial health?
An organization prepares its financial statements in accordance with the GAAP and/or IFRS
which indicates that all data must be:
• Clear- appropriate for the intended audience
• Accurate - free of errors
• Complete- including any additional information the intended audience might
need to understand the statement. For example, reporting variance against the
actual budget and comparative data from the previous year or including text-based
notes
• Consistent- fulfilling any applicable accounting standards or requirements

• Timely- prepared and distributed.so well-thought-out action can correct any
problems

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liInternational Facility Man•J•m..,t Association
EmpowHI"'FacilltyProfaulon•lsWorldwld•
Provisions of the Sarbanes-Oxley Act of 2002 (SOX) have important implications for FM.
This legislation was enacted in the United States in response to high-profile corporate
financial scandals. The intent of SOX is to protect shareholders and the general public from
accounting errors and fraudulent practices in the enterprise. Key provisions of SOX:
• Define the responsibility of boards and senior management to provide accurate and
complete financial reports and address conflicts of interest by auditors and stock
analysts.
• Extend whistleblower protection -legal protection for employees reporting
fraudulent practices, including U.S. workers overseas.
• Apply to all companies listed in the United States and their auditors, both foreign
and domestic.
Since SOX applies to organizations trading in or with the United States, no matter where
they are based, it is also applicable to facility managers globally. Any significant changes
from FM capital or expense projections must be brought to the attention of finance to
ensure that the organizational financial statements accurately reflect operations.
Organizations may prepare two sets of financial statements- one for internal purposes~
know'n as management accounting. A second set for external disclosure- financial

accounting. Publicly traded companies have an additional requirement for their external
financial statements- they are required to produce external audited financial statements.
Internal Financial Statements

Internal financial statements are produced on a regular basis and made available to senior
management, staff management and others with operating or oversight responsibilities.
Internal statements serve as essential reporting mechanisms and management tools. They
may present information about the demand organization as a whole or they may report on
data for each department or units within departments.
Periodic review of this type of data provides a management control mechanism and alerts
an organization to any necessary remedial actions. The method of disclosing information in
internal statements and the degree of detail provided is often adapted for the audience's
requ irements and level of financial knowledge.
Many organizations internally audit their financials. Through a systematic methodology,

statements and supporting documentation are reviewed and analyzed. The specific scope
of internal audits varies, but they customarily consider items such as compliance with the
demand organization's policies and procedures, the efficacy of operations, the reliability of
financial reporting, potential fraud, safeguarding assets and compliance with laws and

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regulations. Such internal organizational audits are different from financial statement audits
required for compliance with accounting standards.
External Financial Statements

Most companies, including the public sector, prepare their financial statements per the
GAAP/IFRS or country specific standards such as IAS (India Accounting Standard). The
terminology in external financial statements is precisely defined by the applicable
accounting standards. Full disclosure, mandated by regulatory bodies, such as the
Securities and Exchange Commission in the United States and Canada, requires that
external financial statements be made available to regulatory bodies, banks, lending
institutions, the public and other interested parties. Companies that are not publicly traded
do not have a similar mandatory requirement, they still typically produce external financial
statements for their private owners, banks and lende,rs.
Audited Financial Statements

Audited financial statements are prepared and certified by an auditor. The credentials of
the auditor may vary. In the United States, an independent certified public accountant
(CPA) is the auditor; in the United Kingdom, a Chartered Accountant serves as the auditor.
During the audit process, the demand organization is responsible for providing source
documents for its financial statements to the auditor. Source documentation includes a
wide range of financial documents, such as accounts payable and accounts receivable
information, expense reports and budgets. The audit includes a rigorous review of the
organization's financials as well as the additional documents. The auditor examines,
evaluates and cross-references them. The outcome is a professionally prepared set of
audited financial statements that the demand organization can then present to interested
parties. In the United States, for example, the auditor certifies that the financial statements
meet the requirements of the GAAP.
Audited financial statements include a document that is referred to as an opinion. lt is the

responsibility of the auditor to provide either an unqualified opinion or a qualified opinion.
Unqualified Opinion:
• States that the financial statements are presented fairly
• Provides the highest level of assurance an auditor can supply regarding the
accuracy of the financial statements
• Indicates that the auditor is satisfied with the financial statements as a whole

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Qualified Opinion:
• Suggests that there is a material problem with one or more aspects of the financial
statements
• Flags an issue that the auditor has reservations about, such as a minor departure
from IFRS, GAAP or the Sarbanes-Oxley Act
In extreme cases, the auditor may express no opinion on financial statements. Such a
disclaimer of opinion results from incomplete records, unauditable records, litigation, lack
of auditor independence and so forth. When an auditor declines to issue an opinion, it is an
indication that the financial statements are unreliable and unpredictable. This indicates that
the demand organization needs to examine and retool its internal accounting procedures
so it can operate according to customary and proper accounting standards.
Increasingly, not-for-profit organizations undergo similar independent financial statement

audits, examining the accuracy and completeness of information presented in their
financial statements. These audits may be voluntary or legally required, such as a result of
tax exemption regulations, terms of the demand organization's bylaws or funding
requirements.
When reviewing financial information, keep in mind that, a single underline designates a
subtotal, a double underline indicates a grand total and numbers enclosed in parentheses
indicate negative values or losses. The currency shown in the financial statement examples
that follow are in U.S. dollars (USD) .
. Discussion Question
True at FaJ!&? AquallfledopiniOn or M i)iJdi~ lili<:Wti'!!l~ fiiatement ~t. .a goOO

thiDg,
External Financial Statements

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Em~rlnJ FocllltyProfudcn3!. W........d•
In accounting, the core set of financial statements includes the:

• Income statement
• Statement of shareholders' equity
• Balance sheet
• Statement of cash flows
Collectively, these four external financial statements capture transactions that reflect the
operations and activities of an entity. All transactions are supported by appropriate source
documents.
Exhibit 2-9 provides the general order and process used to generate the statements and
includes brief notes about each one. First, net income is determined, including
shareholders' equity (on the income statement and the statement of shareholders' equity),
then assets and liabilities are determined and presented on the balance sheet. The
statement of cash flows is used to reconcile the other statements.
Of the four financial statements, facility managers should have a fundamental awareness of
the income statement, the balance sheet and the statement of cash flows. Shareholders'
equity is a financial statement that starts with the balances from the end of the prior period
and shows changes due to net income or loss and dividends for the period or any new
issuances or repurchases of stock. Since this is not a statement that directly impacts FM, we
will focus our attention on the remaining three statements.

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Income Statement
• Record of revenues and expenses for

current period
• Revenues - Expenses = Net
income/Net loss
Statement of Cash Flows
Net change in shareholders' equity

• from operations over specified period • Shows sources arid uses of cash
of time
• Shown as a footnote to income • Three sections: operating, investing,

statement financing
• Assets- Liabilities=
shareholder/owner's equity
Balance Sheet
• Snapshot of performance at one point

in time
• Assets = Liabilities +
shareholder/owner's equity
Exhibit 2-9: External Financial Statements
Review the sample financial statements, keep in mind two points:

• In most organizations, financial statements are prepared by a stand-alone financial
accounting division or department.
• Much of the content of financial statements comes from departments or divisions
outside the FM arena.
lt is important that a facility manager have a working knowledge of organizational financial
statements. A facility manager must be able to track and report supporting information
that financial managers need to prepare the statements.

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IFMA 's Finance and Business Course ~;~1~ H:.M.8~·-··~·
Empcow.rfnt FKIIItyProfuslonalsWarlot.IH
Income Statements
Sample Adapted Income Statement
~-;;;;;""'· ·;;.
'"
......
····<'······· . ':
The income statement is an accounting document that represents the company's revenue
and expense transactions for the reporting period. Also called the profit and loss (P&L)
statement or the earnings statement, it shows the profitability of an organization for a
specific period. In other words, the income statement indicates cumulative business results
within a defined time frame. lt does not reflect the demand organization's financial
solvency. An income statement is comparable to the statement of activity (SOA) prepared
by not-for-profit businesses.
Exhibit 2-70 shows a simple version of an income statement (an adapted excerpt) reporting
revenues and expenses and the results of operations. A total is compiled for each category
and the difference between the two totals is then reported as the change in net income.
. Often referred to as the bottom line, the difference between revenues and expenses,
including taxes, indicates net profits or net losses for the period. In not-for-profit
organizations, the change in net income is referred to as the demand organization's
change in unrestricted assets. Unlike the adapted excerpt shown here, in a complete
organizational income statement, the categories of revenues and expenses reported would
be more extensive and would vary depending on the demand organization.
Exhibit 2-10: Sample Adapted Income Statement
Sample Adapted Income Statement
(For-profit organization; USD in millions)
Current Year Prior Year

I I
Revenues $8,380 $7,757
Expenses:
Cost of operating expenses 4,982 4,594
Cost of goods sold 2,300 2,109
Interest expense 173 172
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Net Operating Income: $925 882

I I
Depreciation and amortization 39 24
Income before income taxes 886 I 858 I

Income tax expenses 269 275
Net income $617 $583
Legend for key terms in adapted income statement:

• Statement date shown- a specific period of time, in this case, annual figures; at
year-end, the result of operations is added to or deducted from net income
reported on the balance sheet.
• Revenues- also called income; reported as gross not net.
• . Expenses- all expenditures to produce the fiscal year revenues, that are not
capitalized; refers to current period debts.
• Cost of operating expenses- administrative costs such as FTE salaries and
benefits, rent and other costs not directly related to the cost of delivering a product
or service.
• Cost of goods sold - actual cost to the organization for items sold.
• Depreciation and amortization- counted as an expense on the income
statement even though it does not involve out-of-pocket payments.
• Net income- for-profit terminology for profit or loss.
• Net operating income- for the period revenues and the expenses to provide
those revenues
The sample income statement excerpt presents collective information, capturing data for
different departments, programs and other cost centers on one statement. There may also
be separate income statements prepared for FM operations or other departments,
programs and cost centers.
In this adapted income statement, FM would principally impact the operating expenses.
In addition to serving as a budgeting tool, the income statement helps management to

understand the financial condition of the demand organization. For example, comparing
results from one annual period to a previous year will show what items affect the bottom
line.
The next rendition of the adapted income statement, in Exhibit 2-11, shows the dollar and
percentage changes through a comparative horizontal analysis.

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IF M Am
lnttmatlon•I Faclllty Managtm"'tAssotlatlon
Ellp<IW*ri"' Fadlltyl'nlflluiorui•WDfldwid•
Exhibit 2-11: Sample Adapted Income Statement Comparative Horizontal Analysis
Increase (Decrease)
Current Year Prior Year Amount Percentage
Revenues $8,380 $7,757 $623 8.0%
I Expenses:
Cost of 4,982 4,594 388 8.5
operating
expenses
Cost of goods 2,300 2,109 191 9.1

sold
Interest expense 173 172 1 0.6
Depreciation 39 24 15 62.5
and amortization
Income before 886 858 28 3.3

income taxes
Income tax 269 275 (6) (2.2)

expenses
Net income $617 $583 $34 5.8
A simple horizontal analysis that studies the percentage changes in these comparative
statements reveals the following.
The dollar change was $623, computed as follows:
$8,380 - $7,757 = $623
Revenues in the current year increased by 8 percent, computed as follows:
Dollar amount· of change

Percentage change =
Base - year amount
US$623
Percentage change =
US$7, 757 = 0 ' 080 = 8 %
While revenue increased by 8 percent in the current year, the bottom line grew by only 5.8
percent. This may be attributed to the fact that expenses grew faster than revenues. The
cost of operating expenses by 8.5 percent and the cost of goods sold by 9.1 percent.

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EmpoweriiiJFadl ltyPn>fuslonolsWOI'Idwldo
Many decisions in an organization hinge on the trend of revenues, income, expenses and
so on. In addition to the simple horizontal analysis shown here, finance will perform a
variety of additional trend analyses that are critical in management planning.
Our sample adapted income statement shows comparative figures on the same page, for
example, current year to prior year. There are different variations of income statements. For
example, a two-column format may be prepared showing current month totals and a
second column with year-to-date figures. Income sta.tements may show only a singular
period. Generally, analysis is greatly aided in a multi-period format, allowing the reader to
spot trends and turnarounds.
Balance Sheet J
Balance Sheet
in tune
The balanc:e.sheet:
J< Re-pari:>~ oil an org;:miai:lon's~:<s.seis, l!.'!bili!ie, an-1 net a :sselstll u· ~ified
"''•
li' musa rales an organization's so!venc:y and cas.hDosfion
..,. Doer. not retl~t prc:rl'tt~~~h!y ·
~ !s · ~;ornp;~~<;~bll) ID- th&.stat&mantof.thHimcialposil.ion 150FP) pc~r~d b.' f
nor-ror-prOfit bUsines.sea
-~o IMicales oow e!fl>::l(!fJtly.._fl otganiU.ib:ln is.otilit!Bg tts astet1>a:M n~anag::ng
i!SIIabilil~$
A balance sheet is a "snapshot" of an organization's financial position at a specific point in

time. lt reports on an organization's assets, liabilities and equity at a specified date. The
statement illustrates an organization's solvency and cash position; it does not reflect
profitability. The balance sheet is comparable to the statement of financial position (SOFP)
prepared by not-for-profit businesses.
A balance sheet is usually divided into two sections, with assets on top and liabilities and
owner's/shareholder's equity or net assets listed below.
• Assets- are resources obtained, owned or controlled by an organization as a
result of past transactions or events that will probably result in future economic
benefits to the demand organization. Assets are divided into categories and shown
. in the order of their liquidity- arranged from most to least liquid. Typical
categories include current assets; plant, property and equipment (PPE); long-term
assets; and other assets.
• Liabilities- are what the organization owes to others. They are listed in order of
the time frame in which they are due, usually as current and long-term. Current
liabilities or accounts payable, are expected to be settled within the normal
operating cycle or one year of the balance sheet date and include the portion of
long-term debt expected to be paid in this period. Long-term liabilities such as
mortgages and bonds are any liabilities not qualifying as current and other are
those liabilities that are not material individually.

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• Equity- is the ownership interest in an organization's assets after deducting all of

its liabilities or the difference between the assets and the liabilities or net worth.
Also referred to as shareholder's equity or net assets. The balance sheet assets must
always equal liabilities plus equity. Exhibit 2-72 indicates that total assets equal total
liabilities and shareholders' equity.
The balance sheet also indicates:
• The amount the demand organization has invested in assets and where the money
is invested.
• The amount of the monetary investments in assets that comes from creditors
(liabilities) a~d shareholders (equity).
Analysis of a balance sheet indicates how efficiently an organization is utilizing its assets
and managing its liabilities. A balance sheet is prepared by accountants, but it has
important implications for managers relative to working capital and financial leverage.
• Working capital- is the amount of money tied up in short-term investments. Too
little working capital can indicate that the demand organization may be unable to
pay bills or take advantage of profitable opportunities; too much working capital
reduces profitability because it must be financed in some way, usually through
loans.
• Financial leverage- is the use of borrowed money in acquiring an asset. A high
percentage of balance sheet debt relative to the capital invested by owners
incjicates that the demand organization is leveraged. Interest paid on loans may be
deductible but can be negated if the asset doesn't retain value, for example, drops
in value or fails to produce anticipated revenues.
To provide a context for decision making, a current balance sheet should be compared to
previous ones. A comparative balance sheet shows a second set of figures for another
reporting period. As with other multi-year presentations, a comparative statement allows
some interpretation of how the demand organization has changed over time.
A simple version of a balance sheet, an adapted excerpt, is shown in Exhibit 2 - 72. A legend
of key terms follows the statement.
Sample Adapted
Balance B heet
jf.:)(!lM 2-Utoo~)

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~tlj~IFMA~
•lntemotlon~I F•<IIItv M•n•!ement llnocl•tlon
. IFMA 's Finance and Business Course
Em~ri"'FacUityProfuslonaloWorldwtd•
Discussion Question
!tl~01if>flhe balance sheet.secOOn!l., .assets.li.abil:li~:sor f!Quity. Oe!lcnt;~er:l

b\cwr
A.R.:;;s.t~urees oM9ine<l ..ownM or c<m~ro.te<l by ;md orgaria9lion
8 i$ tha- ownetstiip inter~s t in an otgani:t<l:!QI'I's as sa{&. af\$f

dedw:;ljnrJ<'!IIQI ill! li~biiitfesor lll~ dtff~t&"fl(<:t~een tiw iill>~l~>
.:md U1~ liabi!itlesor net vocrth
C, \'\>'h<i!\lw Ot!Jil.,itillionzy.ves lo o~ha":S.
0 , Lhted m ordar of 1/lc& time tramf: mwilicll they are d~~e
.13. mooen. in!o categories .af'td sho\f.·n in !he otder of: their iiQuidit{
Exhibit 2-12: Sample Adapted Balance Sheet
XYZ For-Profit Organization

December 31, 20XX and 20XX
USD in Millions
Current Year Prior Year
Assets
Current Assets
Cash and cash equivalents $192 $130

Short-term investments 15 27
Accounts receivable, net 169 168
Inventory 67 63
Prepaid expenses and other 363 342
Total current assets 806 730
Plant, property and 3,280 3,037

equipment, net
Intangible assets 878 849

Other assets 656 784
Total assets $5.620 $5.400
Liabilities and Shareholder's Equity
Current Liabilities
Accounts payable and other $1,213 $1,166

current

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IF M Am
lnttm.;t lon•lFodllty~•n•-;:omtf1t,..soclatlon
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Income tax payable 238 208
Short-term debt 10 146
Total current liabilities 1,461 ' 1,620
Long-term liabilitJes 2,056 2,299
Other liabilities 983 987
Total liabilities 4,500 4,806
Shareholders' equity
Common stock 916 1,046
Retained earnings 414 (203)
(accumulated deficit)
Accumulated other {210)

comprehensive (loss)
Total shareholder's equity 1,120 594

Total liabilities and $5.620 $5,400
shareholders' equity
Legend for key terms in adapted balance sheet:

• Statement date shown -the specific date the statement was prepared -the
snapshot taken at midnight on December 31, 20XX.
• Current assets- cash and cash equivalents and assets held for sale or expected to
be realized in the current operating cycle or within one year of the balance sheet
date. Some examples include; cash, prepaid items, accounts receivable, certificates
of deposit and inventory.
• Accounts receivable- monies owed to the demand organization by customers,
members and so forth.
• Inventory- items owned by the demand organization and held for eventual sale.
• Prepaid expenses- expenditures made in a current period that the demand
organization will benefit from in a future period.
• Plant, property and equipment- includes cost, accumulated depreciation and
resulting book value of land, buildings and furniture. All assets are recorded at
original cost, regardless of whether they have appreciated or depreciated in value.
• Other assets- assets not classified in the other accounts.
• Total assets- the subtotal of all four asset accounts -the aggregate value of all
assets held by the demand organization. This total is used in computing financial
ratios.
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• Current liabilities- amounts owed by the demand organization and due within
12 months of the statement date.
• Accounts payable- amounts owed to creditors and vendors and the current-year
portion of long-term debt.
• Long-term liabilities- monies owed by-the demand organization not due to be
paid in the current year.
• Other liabilities- any liability not classified as current or long-term debt.
• Total liabilities- the subtotal of all four liability classes- the aggregate value of
all liabilities owed and due to the demand organization.
• Equity- is the ownership interest in an organization's assets after deducting all of
its liabilities or the difference between the assets and the liabilities or net worth
In this adapted balance sheet, FM would principally impact the plant, property and
equipment asset.
Every accounting transaction affects an organization's balance sheet. In particular, capital

projects can have significant implications. What constitutes capital costs are determined by
tax law and organizational policy, both of which are complex and can vary widely across
nations and organizations.
The next rendition of the adapted balance sheet, in Exhibit 2-73 on the next page, shows
the dollar and percentage changes.
Horizontal analysis reveals:

• Total assets grew by 4.1 percent.
• Total liabilities fell by 6.4 percent.
• Retained earnings turned from a deficit to a positive balance indicating growth of
operations in the current year.
Exhibit 2-13: Sample Adapted Balance Sheet
XYZ For-Profit Organization

December 31, 20XX and 20XX
USD in Millions
Current Year Prior Year Increase (Decrease)
Assets Amount Percentage
Current Assets
Cash and cash $192 $130 $62 47.7%

equivalents

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Short-term 15 27 {12) (44.4)

investments
Accounts 169 168 1 0.6

receivable, net
Inventory 67 63 4 6.3
Prepaid 363 342 _21 6.1

expenses and
other
Total current 806 730 76 10.4

assets
Pli!nt, property 3,280 3,037 243 8.0

and equipment,
net
lntangibl' 878 849 29 3.4
assets
Other assets 656 784 (128) (16.3)
Total assets $5,620 $5,400 $220 4.1
Liabilities and Shareholder's

Equity
Current
Liabilities
Accounts $1,213 $1,166 $47 4.0%
payable and
other current
Income tax 238 208 30 14.4

payable
Short-term debt 10 146 (136) (93.2)
Total current 1,461 1,520 (59) (3.9)

liabiliti~s
. Long~term 2,056 2,299 (243) (10.6)

liabilities
Other liabilities 983 987 ___H)_ __{QA).

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Total liabilities 4,500 4,806 (306) (6.4)
Shareholders'
equity
Common stock 916 1,046 (130) (12.4)
Retained 414 (203) 617 303.9

earnings
(accumulated
deficit)
Accumulated (210) (249) 39 15.7

other
comprehensive
(loss)
Total 1.120 594 526 88.6

shareholder's
equity
Total liabilities $5,620 $5,400 $220 4.1

and
shareholders'
equity

rh!: ~taiemeat of ~;aKh fh;wt~s ahmvst:<l$h je<m!:>1l'.;rc.n>~ ihe QlffiW!lng !)(!ffud

:w -li:S. 10 IM!Sura _!hat ptOOit;J~d i:ab~!ities dutHo be paid 011 :my _gtwnl tim~ do not
excoed the ability io pay, lt
"' Provides re~Mnt ;n!nrmali<m atW;a cash rer.aipi'l>and .::ash.disb•.»"settu>ms
,.. tr.di<:;ate-s w!'i~m tl'l\'10 ~~ni;r,1;Urm'".$.ca$h<:.ijBlP.- fram and hc>N it w;.Ji u~d
-dw.1og ~no trrne mt~mal wec!iicd- in ils ht:ad:ing
~- Is p;epared t».'. tearra1'!9ir.,g items: ftf.>iTI tile baoiMltE' st~l:!.t NW Jru:orne
!>Wiemen1
A statement of cash flows is used to show cash levels across the operating period to ensure
that predicted liabilities due to be paid at any given time do not exceed the ability to pay.
The statement provides relevant information about cash receipts and cash disbursements
-where the demand organization's cash came from and how it was used- during the
time interval specified in its heading. The specific time frame may vary: a quarter, multi-
period or multi-year presentation may be prepared.

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As we see in the simple cash flow statement in Exhibit 2-74, uses of cash are recorded as
negative figures and sources of cash are shown as positive figures. A legend of key terms
follows the sample.
Note that this sample provides the traditional (financial accounting) view of
cash flow- a year-end annual statement- a "snapshot" of the year-end.
Nevertheless, a facility manager should be generally aware of the statement
and the implications. Later in this chapter, in Exhibit 2-77, the FM perspective
of cash requirements at each period end over the year is shown.
Exhibit 2-14: Sample Statement of Cash Flows
'ABC For-Profit Organization

Year End 20XX
USD in Millions
Operating activities
j
Net income $35,000

Adjustments for noncash
items
Depreciation $14,000
Net increase in current assets (24,000)
other than cash
Net increase in current 8,000 {2,000)

liabilities
Net cash flow from 33,000

operating activities
Investing activities
Sale of plant, property and $91,000

equipment
Net cash flow from

investing activities
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Financing activities
Borrowing $22,000
Payment of long-term debt (90,000)
Purchase of treasury stock (9,000)
Payment of dividends to (23,000)

stockholders
Net cash used for financing (100,000)

activities
Net increase (decrease) in $24.000
cash
Legend for key terms in adapted cash flow statement:

• Operating activities- primarily results from day-to-day revenue and expense
activities depicted on the income statement; converts the items reported on the
income statement from the accrual basis of accounting to cash.
• Investing activities- reports the purchase and sale of long-term investments and
property, plant and equipment as well as certain transactions involving securities or
other non-operating assets.
• Financing activities- results from activities involving cash transactions by and for
owners; reports on the contribution and redemption of equity capital. For example,
the issuance and repurchase of the company's own bonds and stock and the
payment of dividends and creditor loan repayments.
Some of the analysis findings from this statement of cash flows reveal:
• Operations provides less cash than net income; this may be harmless, or it may
signal difficulty collecting receivables or selling inventory.
• The sale of plant, property and equipment is the major source of cash; due to the
amount, it is probably a one-time situation or a sell-off of unproductive assets. Sale
of plant assets should not persist, or the demand organization could go out of
business.
• There was more payment of long-term debt than new borrowing, a positive
indicator.
Cash flow statements routinely include a section of supplemental information reporting the
exchange of significant items that did not involve cash and the amount of income taxes
and interest paid.

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Cash flow statements are prepared by rearranging items from the balance sheet and
income statement. Much like a bank statement for a checking account, a cash flow
statement shows where the demand organization's money went and how much is left for
the given period. Further, the statement portrays how an organization is able to turn
accounts receivable into cash. lt provides a reasonable indication of solvency and the ability
to pay bills as they come due.
Statements of cash flow are important in understanding investment and credit decisions.
To many investors and creditors, the beginning and ending cash balances on the statement
are the primary barometer of an organization's financial well-being.
In large organizations, changes in cash flow do not typically impact day-to-day FM

operations. But cash flow projections may be important considerations during the annual
budget process. If cash is limited, budget spending should be appropriately conservative.
Conversely, good cash levels may present opportunities for new purchases or investments.
Cash flow for small organizations typically has great significance both for day-to-day
operations and the longer-term outlook.
Statement of
Cash Flow
Example
(E.#R~t :<Ml fn~J
Notes to Financial Statements

Notes are an important part of financial statements because they help to portray an
organization's finances beyond the actual numbers. Notes to financial statements for a
publicly traded organization generally start with highlights of significant accounting
policies and proceed to describe matters of importance such as, but not limited to:
• Major acquisitions
• Changes in operations
• Pension requirements
• Any pending litigation
• Any special contracts or major agreements
Not-for-profits may have different supplemental notes about contributions receivable,
investments, joint fund-raising costs and so forth.

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Auditors review notes and footnotes as part of the annual audit process. Other interested
parties should also carefully review notes and footnotes for the relevant information they
contain.
Accurate assessment of an organization's financial health requires a thorough analysis of all

financials plus any supplementary notes. Such analysis is a complex undertaking. Detailed
analysis ?f financial statements is not an expectation for a facility manager. lt is prudent for
a facility manager to understand some of the managerial issues implicit in the income
statement, the balance sheet and the statement of cash flows. Data for standard financial
ratios is derived from an organization's financial statements.
Ratios will be discussed in more detail in the next chapter.
Depreciation
Deprt!cialion i:> a I'IU!lC!le>h ct-.arg!l aya.;mn asr;~l$ , !liJch m; cost of property,

pia m ana E:qtJipn'lt!nto>l~f the assers usn.fullile, 1t is an e:ip!!ns.e. wtll-;!'1
s preads :or a!!o::ates.lhe: cost of a physical asset over ~·s 1uru:iional~sage. lr
jl;- "sho'A>s, fClt fl'.MI asseh;., lh<.l t !:hay h.we ~lU".&d in ~alue as .a res.uil f)f'l..aar
Oltl(j ~~~L ~Or" (lbOOI&&C.>':'i'l<:l?

I> Is cusioma-rily as$0Cjat:cd with langiOic<~S~t:ts lor e~mP::o bvi!d-lnQs alld
eqUipment. tot is also appl!c.ntY-e 'lo natlrm~ 'esource'io and :ntangib!tJ lll>&ets
Depreciation is a noncash charge against assets, such as cost of property, plant and
equipment over the asset's useful life. lt is an expense associated with spreading or
allocating the cost of a physical asset over its useful life. Depreciation is the only expense
where money is not paid out. lt reflects the amount of the asset that is used up during that
accounting period to provide the associate revenues.
For most assets, depreciation is a way of showing reduced value as a result of wear and
tear, age or obsolescence. With the exception of land, most assets lose their value over
time, in other words, they depreciate and must be replaced once the end of their useful life
is reached. Land rarely declines in value; this is why land is not depreciated. In the case of
buildings, they may depreciate, or they can appreciate in value. What depreciates is the
investment in the fabric, fittings, fixtures, plant and equipment in the building. Revaluation
is very often undertaken to offset tax liabilities and "mop up" excess profits.

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To a certain extent, the concept of depreciation may be counterintuitive. For example, a

portfolio may include a priceless historical building that was long ago depreciated to zero
on the financial books but may still be a very valuable property.
In FM, depreciation is customarily associated with tangible assets such as buildings and
equipment. The concept is also applicable to natural resources and intangible assets such
as, goodwill, patents and brand standard. When accounting for natural resource assets, the
assets are expensed through depletion and depletion expense is the portion of the natural
resource's cost that is used up in a particular period. For intangible assets-:- those with no
physical form- cost is most often systematically expensed through amortization.
A facility manager should be aware of the rules of the demand organization and regulatory
bodies and ensure that the FM organization adheres to those rules in every way. Land
cannot be depreciated. In the United States, depreciation is governed by the IRS, who are
very strict on the number of years for depreciation and the method that is used. Buildings
can only be depreciated for 37 years. In India, depreciation is administered as per the rule
of the Income Tax Department.
In accordance with standard accounting practices, the cost of a fixed asset initially recorded
in financials is not just the cost of acquiring the asset. In addition to purchase price, the
amount recorded includes all additional expense necessary to get the asset ready for
intended use. For example, the figure for a new piece of maintenance equipment should
include all additional expenses for delivery and installation. In some countries, costs
incurred for employee training would also be included.
Depreciation reduces the balance sheet value of the asset over time. To depreciate an
asset, it is necessary to start with the original cost and then determine the asset's
depreciable base. The depreciable base is the asset's original cost less its salvage value.
Salvage value, sometimes called residual value or scrap value, is the estimated value of an
asset if it is sold at the end of its depreciat ion period or service life. Salvage value can be
zero. The difference between the cost and the salvage value is the depreciable cost.
The example below shows the depreciable cost for maintenance equipment.
Depreciation Example
ftt~ kMVi ~ntiaHOml1 ~cllri:mfl nrk•Md adtumt to tf'lon
<'i" ft,t!t!Sitl'tM.tOi:~)t
E.11ample In USO: Oep!~tiable cos! for I'Tl<iintenaru::eequipm&nt

Purcb;ls.c prko foi«t!,Jil)fi'lel)f $20.0,000
Freight d;,!Nmy' char.QEts S2;s00
lnsteUation. $6.500
S1.000 .
TO'{QI eosi:

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Exhibit 2-15: Depreciable Cost for Maintenance Equipment
Purchase price for equipment $200,000

Freight delivery charges $2,000
Installation $6,500
·Employee training $1,000
Total cost $210,000
Less salvage value $60,000
Depreciation cost $150,000
(Example in USD)
Why Depreciate Assets?
-
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Generally speaking, there are two reasons to depreciate an asset- for accounting
purposes and for tax purposes.
From the accounting perspective, expenses incurred in producing revenue should match
the revenue they helped to earn for that period. This embodies the following two
accounting principles.
• Revenue recognition- according to the revenue recognition principle, revenue

should be recognized at the time the transaction is completed, for example,
recording revenue in an account when the customer is billed. For simple cash
transactions, the revenue is recorded when the sale is completed, and the cash
received. However, for capital expenditures, the application of this principle is not
always as simple. Consider any large project that takes a number of years to
complete. An organization cannot wait until the project is entirely completed before
it bills. Instead, it bills periodically- for the amount of work completed- and
receives payments as the work progresses. Revenue is taken into the accounts on
this periodic basis. Application of the revenue recognition principle helps to ensure
that revenue is taken into the accounts properly and the earnings statements of the
demand organization are accurate.

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• Matching- an extension of revenue recognition, the matching principle states

that each expense item related to revenue earned must be recorded in the same
accounting period as the revenue it helped to earn. If this is not done,. the financial
statements will not measure the results of operations fairly.
Considering the maintenance equipment in the previous example, if 20 percent of its useful
life is used up in the first year of operation, it should be depreciated by that amount.
The second reason for depreciation is for tax purposes. Some nations tax the depreciated
value of an asset using a flat rate. Based on other taxation rules, organizations may be .
allowed to depreciate assets according to accelerated schedules- rates faster than their
useful life- or methods that write off assets over a predetermined amount of years that
has nothing to do with the asset's useful life.
Depreciation M eth~ds
Depreciation Methods
.................
hnt«,..,._
_
~..=:::
Different depreciation methods exist Common methods include the following:

• Straight-line depreciation method- the simplest form of depreciation is the
straight-line depreciation method. Straight-line depreciation assumes that the asset
has the same usefulness and repair expense in each year. While this may be
unrealistic, the method ispopular because it is straightforward.
The straight-line method determines the amount to depreciate per year by simple
division.
Depreciation base
Straight- line depreciation per period = Estimated service life
In our example, estimating five years of service life, the maintenance equipment would be
depredated as $150,000/S = $30,000 per year. In year zero, the asset would be worth
$21 O,OOOi in year one, it would be worth $210,000 - $30,000 = $180,000; and in year five it
would be worth US $60,000; its salvage value.
Depreciating the maintenance equipment attempts to allocate the acquisition cost

of the equipment over five years, what was established as its useful life.
• Activity method ---'- unlike the straight-line method, the activity method is not based
on the passage of time but on a measure of productivity relative to the total

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expected productivity for the asset. This may be applied to machinery or equipment
where utilization varies over a period of time for example a photocopier.
• Accelerated depreciation - accelerated depreciation methods have a steadily
decreasing charge so that assets are depreciated quickly in early years, which can
better match the usage patterns of many assets. Items that have increasing
maintenance costs will have more balanced total costs if accelerated depreciation is
applied. Accelerated methods include the sum-of-the-years'-digits method and the
declining balance method.
• Modified Accelerated Cost Recovery System- in the United States, theIRS
allows a Modified Accelerated Cost Recovery System (MACRS) for tax filings that
employs straight-line and accelerated depreciation methods. MACRS includes an
asset classification system that groups similar types of assets together and shows
the number of years of depreciation for each type of asset. Besides real estate, two
common asset classes are the five-year asset class (including automobiles and light-
duty trucks) and the seven-year class (including most machinery and equipment). A
light-duty truck would be depreciated for five years and a copier would be
depreciated for seven years - both according to depreciation rates set for each
class.
Facility managers do not have discretion in choosing between depreciation methods;
rather, they follow organizational protocol. Accountants generally choose the method that
fits the usage pattern and service life of the asset most closely. Taxation also influences
depreciation methods in different ways.
Depreciation is an important concept to be aware of because facility managers often

manage assets that necessitate depreciation. In some organizations, FM may be required to
pay back all depreciation charges through centralized accounting. In other scenarios, FM
may receive an annual depreciation charge equal to the sum of all annual depreciated costs
for all depreciable assets managed by the department. This expense item, which can be
significant, shows up on the FM budget throughout the depreciable life of the asset. A
facility manager would have to budget for the amount because it reduces the amount of
operating funds available for other work.
Capitalization Versus Expense
11- Ortflm!U by !~~ t~Witotl (llgani:za!iorwl pol.i<:)"

-'1 Typical ~o r.sldet:alionsarnc-
~ ihe u~fJ1 1ifc.ofthe .ass.tJt. k1r 6'::<:<nupl~, k<sz or longer IM11 one y~ar.
- l'he cos t oi'tM rt&Mcfor j!¥.am:ol.:~. ·.vM~ilr it £xceeds the otganizal l!lrwl
capit31~ti.(}<J{:\OO(ffX~ir.t
Example: A b:ufld~ng nmy h~ - a 50~ye.ar ~ire- fur ~ru¥1C_iai PiJij)(l5!$rt. That·

buildingm~y tuwe a roof->Mth a· 20-year !ife. 'Rep:!ac.emern.of·!hatroof may be
very cosily. Some<'lft,}anl7.a.'titm5. may ch:3:mcterize-tha! m<>jnr r;!palr a5 <~- c:<1p\tal
at:tMiy; tilh~tf.i _may~q~4,sa !M adr..ily

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Whether an asset should be capitalized or expensed is defined by tax law and

organizational policy. Typical considerations in making the determination are:
• The useful life of the asset, for example, less than or longer than one year.
• The cost of the item, for example, whether it exceeds the organizational
capitalization cutoff point.
This capitalization cutoff point is a designated limit or floor, for capital requests under
which an item is expensed in the period purchased and over which it will be capitalized and
depreciated for the length of its useful life.
If an item is capitalized, it is recorded among the fixed assets of the demand organization
and depreciated according to the demand organizational depreciation policy.
Returning to the maintenance equipment purchase, let's say that the demand organization
had a policy of capitalizing goods and assets with a value in excess of $20K. Since the
equipment cost $200K, it was capitalized and depreciated over the five-year period
established as its useful life.
A facility manager may also have to consider organizational policies and practices when
performing certain high-cost maintenance or repair activities. For example, a building may
have a 50-year life for financial purposes. That building may have a roof with a 20-year life.
Replacement of the roof may be very costly. Some organizations may characterize that
major repair as a capital activity; others may expense the activity.
This is yet another demonstration of why it is important that a facility manager know and
understand the demand organization's rules and policies
tease or Purchase Considerations ·for Capita~

Assets
Lease or Purchase Considerations for
Capital Assets
" O~l:S.ions as~ dt.iven by !~peeifiC rma~!.eonskteralioJ\saJXI
!ocom~!IJ:ia!\9ni~OI· acq\liring t:~pitalass~~s
~· Oftlir;\.;;uy- depeOOnnoru~asset
~ ·sroutdirwohle life-cycl:eoos!ru~.al)•sis.
!>- tnfluericingfadoi<s_ine.WQ(l: ·
- - lax. impli~<:~tiOm>
- Tm< ari};tri!~~~~~:U:i$ caM~;:rio.sWon
N The oost or-altema-tt<te·dcclsiotl:$
Whether an organization is public or private, the. CFO, finance director or seniorfinancial

manager will have established specific financial considerations and recommendations for
acquiring capital assets. These financial considerations related to lease or purchase often
vary depending upon the asset for example, equipment, land, buildings and vehicles.

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Management might decide to pay off and buy a maintenance vehicle at the end of a three-
year lease term. For other leased assets, management may have concerns over ongoing
operating expenses and the investment in or financial commitment for those assets.
Lease or purchase considerations for capital assets should involve life-cycle cost analysis.
Generally speaking, the influencing factors between lease and purchase decisions are tax
implications, the demand organization's cash position and the cost of alternative decisions.
There is a myriad of financial, legal and tax issues that enter into lease ve~sus purchase
decisions. The outcomes influence the demand organization's financial statements, FM
budgets, cash position and many other factors. We will examine this complex issue further
in subsequent content on business cases and financial analysis.
Proforrna
Proforma Statements
f>ro!b::n'«1 iru:;~·s~te~!it. surnmartze_s ~ror~ tomponenl projectfons

Of rENel'lo.tes and ~!15e$ fQr !l",e DU®E<t
p~rio~:t !t i~dk;al.e$-ltre etpeo<:'imi n~l income
for the -Period. Also calleo -a bl.id.Q€le<l \ncome
.f.>talemefll.
~;;JQ<tna b,;;;~~v;h;;j"'-~v-·u·;~; tt, proJ~th~;;;;;;;;;;t;v~~-;;·g~d--~
J! :,:;:~~~!~~:~~~= ~~~(~7:.:ftor
j; ;:~+h:-~~=~~~:;~:~np~:c~~
c.:=---······ .. ................... ~~~~~~-~:.~::~~~~~~~~':.?. ~!:~:-.....
L ...?:::_ ,
In finance, the term "Proforma" describes financial statements, income statements, balance
sheets and cash flow statements that have one or more assumptions or hypothetical
conditions built into the data. Stated another way, Proforma financial statements are
forecasts of goals for a future period. They predict how the income statement, the balance
sheet and the cash flow statement will look in the future if expected events occur.
Proforma statements are the result of the budgeting process. An individual pro forma
statement is a budgeted financial statement based on forecasted data - historical
documents adjusted for events as if they had occurred. Proformas portray financial
conditions for the end of the specified budget period if events happen according to plan.
Exhibit 2-15 provides basic descriptions of each type of Proforma statement.
Exhibit 2-15: Proforma Statement Types
Proforma income statement Summarizes various component projections of

revenues and expenses for the budget period. lt
indicates the expected net income for the period. Also
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Statement j ', , Description

'
called a budgeted income statement.
Proforma balance sheet Used to project how assets will be managed in the
future. Starting with the beginning balance sheet, the
figures are adjusted for expected events during the
coming fiscal year. The adjusted balances comprise the
Proforma balance sheet of the end of the fiscal year.
Also called a budgeted balance sheet
Proforma cash flow statement Provides an idea of what average cash flow may look
like during a given period. Classifies cash receipts and
disbursements depending on whether they are from
operating, investing or financing activities (as does the
regular statement of cash flows). Also called a
budgeted cash flow statement.
Proforma statements are used routinely in preparing "what-if" scenarios, formulating

business plans, estimating cash requirements or submitting financing proposals. Most
Proformas are prepared for one year.
Discusllion Q~estion
ldeotify·the PtU fotOla' !lfatCmetltts"dase~ib«ibel~,

A .. _C.Of]lp<lo'lef\i.~;;.1i01'1Solrete~ue~ -arn:l _.eqlerises!Ot ltle
budget period: lr.d~catE;~S th€toexpec!e-d net Income k>t-i.M
periOd.
a.-C!a!:1~ifiQS(tii3$"fec.eipt&a~ 4i~n.BmAnts;~n<)i"('!{l
on 'd.ihl!Jtwrlh~ art~-!ram OfJ&f~tirl!l: ill\<t:Win~ or
fiJ'!anciilQ activities.
C. Pioject&Mw a~set&-wiU be managedin lhe 1\t.ure:
adjusts figur'e_$ -~Or e~G~-even\s during tf,e.;;:o;ning
fis_clil_y1Mh ·
Forecasting Cash Flows

Estimating Cash Flow Effects
;.. Wtlfm.~c~(I!JUI~tia'~l'!iv<l'b~ dc:aean, 111.a1 ~~:l\l'.:trn:ltii.~RE. nf- tl'lf!rn h'alff! .

t)m!n_.call'<'~ into CASH tfl<a'l i$~09:~~!!$ for ~~s~
,.. \•/hen a.ccou.ots pa_~,~~~ increa:s~; that ~ean.s.1hat. Le.s:s or m.em hRV~
been. pald__a!l11 ~iolW: ca101i ~s~a1Jab1e fur~-
"' !ncrea&e..lhat rooam ihai lESS: of ti'IMl nave
When_'aQCfJ;mi:S..rectlli•ab~ll'
been CQ!W~ bto CASH ih3t !S: av.iila?te.fur·u~. ·
~o<- W hen ac~:..~n~ pa'f~'l!e der::rea-se; that tne~f!!> thatMORE ofth~rn hfu<e
t!Emn pllldand t ES$ c ;l$h hs ;wail<lbie fOr u~e:,
The importance of forecasting cash flows cannot be overstated. Running out of cash is not
a desirable position for any organization. Even a profitable organization can end up in
bankruptcy if it runs out of cash at the wrong time, for example, when loans and other
large payments are due.

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Cash flows are influenced bythe collection of accounts receivable and the payment of
accounts payable. Speeding up the collection of receivables and postponing the payment
of payables can have a positive short-term effect on cash flows.
Cash flow effects can be projected by estimating ending balances in the receivables and
payables accounts and calculating the changes in those balances from the beginning of the
year. The following relationship illustrates this concept:
• When accounts receivable decrease, MORE of them have been converted into CASH
that is available for use.
• When accounts payable increase, FEWER of them have been paid and MORE cash is
available for use.
• When accounts receivable increase, FEWER of them have been converted into CASH
that is available for use.
• When accounts payable decrease, MORE of them have been paid and LESS cash is
available for use.
Sample Cash Flow Forecast

(Exhibit 2v16)
...
~~
'~
l'j..;.>
, ~!" . ur~ ~~- .1,,-;o ..,..,,. -.~;.w ~~.,.~
Exhibit 2-76 provides a sample cash flow forecast showing the monthly effects over a six-
month period.

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Exhibit 2-16: Sample Cash Flow Forecast
Month 1 Month 2 Month3 Month 4 Month 5 Month 6
Cash bal BIF 500.00 470.50 477.00 - 72.50 -21.50 - 21.00

Revenue
Month of receipt of payment due 500.00 600.00 600.00 600.00 600.00 750.00
Working Capital
Salaries
200.00 200.00 250.00 250.00 250.00 250.00
Employer's tax payments 50.00 . 50.00 55.00 55.00 55.00 55.00
Other staff costs 1.50 1.50 2.00 2.00 2.50 2.00
Expenses 3.00 2.00 2.50 2.00 2.00 2.00
Operating costs 200.00 250.00 250.00 150.00 200.00 250.00
Caoital exoenditure 0.00 0.00 500.00 0.00 0.00 0.00
VAT/sales tax 75.00 90.00 90.00 90.00 90.00 112.50
Total outgoings 529.50 593.50 1,149.50 549.00 599.50 671 .50
Surplus (deficit) for month - 29.50 6.50 - 549.50 51 .00 0.50 78.50
Capital available (required) 470.50 477.00 -72.50 -21.50 -21.00 57.50
Why are Proforma statements important? Organizational financial statements indicate what
has happened in the past. Proformas predict how financial statements will look in the
future. Collectively, these budgeted Proforma financial statements are instrumental in the
allocation of resources.
If senior financial management has serious concerns about the Proformas resulting from
the FM budgeting process or cash flow forecasting, a facility manager may have to revisit
the budget process and re-create the Proforma statements. This reiterative process may
continue until senior management finds them acceptable or is convinced there are no
better alternative plans.
.. Smoothing .. FM Investments
Planning is critical in FM. Decisions exist in a resource-constrained environment.
Forecasting and other financial analysis techniques can provide voluminous information.
Decision making comes down to what can or should be afforded and when. Financial
statements, Proformas and other cash flow forecasting helps to quantify FM investments.
Critical and noncritical projects are generally obvious. For example, major building
renovations might be mandated to comply with the passage of new occupational safety
and health regulations. In FM, there's often a struggle for funding and resources for many
mainstream middle-ground items. For example, a major piece of equipment needs a costly
repair. The reality is that it needs to be replaced, but adequate funding for the replacement

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is not available because the facility manager did not have a sound plan for repairing and
replacing assets that have exceeded their useful life span.
A simple way to avoid this problem is to develop a five-year plan to keep track of assets. A
computer spreadsheet can facilitate the task.
• Assets, both capital and operations and maintenance (O&M), that are of
considerable expense and are therefore likely to be viewed as a budgeted project
can be listed in the leftmost column- column A.
• The Remaining Useful Life (RUL) of each asset can be listed in the column B.
• Column C identifies the year the asset was installed.
• The next series of columns represents the next five years, column D being the
current year. Each year is divided into two categories- capital expenditures and
O&M expenditures.
• As assets reach the end of their useful life, the cost of the replacement is identified
in the appropriate column.
• At the far right, a column can be added for comments.
Example of a Five- Year Plan to Track Assets:
i!>!jj btil1o!o1 m~ tw•.t""" 1...1 r.•n y..,,. v...t U~u!
lbi~~ ~lllM\lt ~ ~ Oll!l {~ ~hill ~ (I&'J C~ ~i.i ~ ~i.i ~-

_________"!__,__,,_.J'~~·· ~·m , ~t> , [qt- ~ &;o.- ,"'t:or.:~::::-::::;,:;.,:,~::.:
· = '::::.::;:.;'l>l:::r,c'=-
= ::;:.;,- - - - - - - - 1
~,_,;_ 1 :ill1 5H«= ~t.tf) -~n; }~i)i Jt:~'D s:u.tt n:;,_©)
w.••l J.t? ~-ru;; Tt-W -:~tm i«'Jf.'& }nr,~ %(Ul

::;:,-~ N~t: }!;,SX •f15li }~, ~H ;:s $~~( ~ m,'J:X'i {lH'Xt:'? tr%.Wl ~
~L"1f: tL~\1 HS!L ~.~<t~ ~;f! tl.i:C 7.illk:b~~:vJ:
l\I\1 jj';-JJ f:LH~
Since this plan is revised on an annual basis, each year the RUL will decrease by one year . .
The spreadsheet format easily and quickly communicates assets and their costs and the
date of scheduled replacement. lt can provide a logical way to augment financial planning
and decision making.

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Summary uid i r and

na I Opera·t ions
Guidelines for FM Financial
Operations
• u~rSiaftd 1t1e orgtV~iulllo!'l:$ ·mist.i«<Nld how !tie FM bodge:~a11df1ha:tre1at
· declsion_s fYlO'(E!; t~ orGani2l!lli~n low:Wd !ha~ ffl\~sl·oo,
>t Estai:!Usllrapport with £1!"93ni%il[onal finan~ ~i<JnMI and externa!
cus lomefS·.
.r Cl~m1y~t;,e rc.les ;fl the fM l:>t~dgeltng fii;OC&SS . top·d<l'o\'nV&fSU.-S bottom ·
up >Uld L11e apPrtMll {trot~~$
..,.~ UM4(li!Mld fu~damen~! itGCow'ltif19 pr~{icti~~nd -orsant:.af.cn.l!p<tdf~e
p!"l!ctiws
<~' Mqinta;ncJoar.- wen-understood and .:fuc!.lll"'CnOOdtinancial handling
"'"""'""
Guidelines for FM Financial

Operations (continued)
'>" Kc(fp :)CC.~ta;e fiml;'!tiat rel'»fd$._
< · corupile!~Urale hl:oloricalt:fllta_.fClrE!v$aiing _!ftti'!ds andiP~s,ting..
>r- PrepaJe aC&U.a_t~and time!y."Qperat!onal am:h::upil'ollbudg:etfli,
.,.- Monitor budgets and take.,ppropriate actK>nsiadflistmenlsfbqillre:d ro
crure:c;l!offsel neg~li>~e' b1,.1<!get V<lriance-s.
. .t K.J"'KvN"how to dJ5ceft1 Qle ~oaget~ lmplicatiQru;;of Qll(el:~i "t~-rn:l ~nlem.al
ml""ll;~l ~>tatm"~~-
Simply stated, facility managers must have efficient and effective financial systems and
procedures in place. Reflecting on the content just presented, we conclude with the general
guidelines in Exhibit 2-7 7 that facility managers should keep in mind. Organizations may
vary in how information is gathered, implemented, monitored, adjusted and the like, but
the guidelines that follow are appropriate in all environments: public, not for profit,
government, nongovernmental organization (NGO), partnerships or sole proprietorships.

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Exhibit 2-17: General Guidelines
• Understand the demand • Keep accurate financial records.

organization's mission and how the • Compile accurate historical data for
FM budget and financial decisions evaluating trends and forecasting.
move the demand organization
• Prepare accurate and t imely operational and
toward that mission.
capital budgets.
• Establish rapport with organizational
• Monitor budgets and take appropriate
finance personnel and external
actions/adjustments required to
customers.
correct/offset negative budget variances.
• Clearly define roles in the FM
• Know how to discern the managerial
budgeting process (top-down versus
implications of external and internal
bottom-up and the approval
financial statements.
process).
• Understand fundamental accounting
practices and organization-specific
practices.
• Maintain clear, well-understood and
documented financial handling
processes.
In this topic some of the primary documents in finance have been examined, including;
accounting records, budgets, financial statements and Proformas. Several important
accounting principles have been covered, which should facilitate a knowledge of concepts
that are critical to FM success.
FI"'
The goal of financial analysis is to assess organizational performance in the context of

stated goals and strategies, which provides insight into financial health and highlights
problems and opportunities. Ratio analysis is the principal tool organizations use for
financial analysis. In FM, specific metrics and ratio analysis are also used.
Financial Statement Ratio Analysis

Financial statement ratio analysis assesses how various line items in financia l statements
relate to one another. Such ratio analysis is a more useful exercise than discovering the

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dollar amount spent because of the variables affecting an organization's spending that
uniquely apply to it.
Many organizations use ratios to analyze budget and financial report data. However, ratios
are useful at any given point in time.
)
Many different ratios can be used to analyze financial data. We examine the following that
are most relevant to facility managers:
• Liquidity/short-term debt ratios

• Asset management ratios
• Profitability ratios
• Return-on-investment ratios
All ratio calculation examples are shown in U.S. dollars (USD). Note that in
practice, some ratios may have different formulas. The point here is to
understand what the ratio measures. No financial statements are shown here;
hypothetical numbers are used to illustrate each ratio.
Liquidity/Short-Term Debt Ratios

LiquiditY/Short-Term Debt Ratios
CUrrent" lndlcate5ihel)Eiriewl ~
r011to aviit~hifily tlf Ca!>./1, to Cu!mnfitabililill~
p~-::otfliaf,j!itlt!!i
{d®tl'.~ 0:.10 f~y come
Que,
-~~,~~ ~=~.:r~~k c_~!ID:·~~!'?~~~.\\~~;.~~
f&!st)r.'itio .or!:J~il<l&ll,'s
... ............. -i~~~i~~~ ~~-~!~~o/: ...
Liquidity ratios primarily show an organization's solvency- its ability to pay bills and other
short-term obligations without undue hardship. For each of the following liquidity or short-
term debt ratios, the higher the ratio, the stronger the liquidity.
Current Ratio
The current ratio answers the question, "Does the demand organization have sufficient
current assets to pay its bills during the year?" lt indicates the general availability of cash to
pay off liabilities (debts) as they come due. .

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The equation for the current ratio and an example is shown below. The example is based
on a situation in which:
• Current assets = US$250,000.
• Current liabilities = US$1 00,000.
Current assests
Current ratio
Current liabilities
US$250,000
= US$100,000 = 2 .5: 1
The ratio indicates that the demand organization has US$2.5 in current assets for each.
dollar of its current liabilities or 2.5 times the current assets.
The current ratio cannot provide data on cash flow timing. Lowering current ratios over
time shows declining liquidity, but if too high, could show that the demand organization
has too much invested in low-yield short-term assets.
Quick (acid .. test) Ratio

The acid-test ratio provides a quick measure of an organization's immediate liquidity. lt is
generally considered a more rigorous test of liquidity than the current ratio. lt eliminates
inventories and prepaid expenses, (for example insurance premiums), from the current
assets then compares these quick assets to the current liabilities (excluding long-term
liabilities, other liabilities and net assets) to assess the demand organization's ability to pay
the current liabilities.
The equation for the quick ratio and an example appear below. The example is based on a
situation in which:
• Cash = US$200,000 .
• Cash equivalents= US$10,000.
• Accounts receivables = US$1 0,000 .

Cash + Cash equivalents + Receivables
Quick ratio =
Current liabilities
US$200,000 + US$10,000 + US$10,000

US$100,000
= 2.2 :1
The quick ratio may be a more accurate indicator than the current ratio of an organization's
ability to meet its financial obligations in a short span of time. Since the quick ratio

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excludes the least liquid current assets, primarily inventory, comparing it to the current
ratio shows the effect of inventory on liquidity. A stable current ratio plus a declining quick
ratio imply increasing inventory that could be temporary or permanent.
Asset Management Ratios
Asset Management Ratios
AVerage Sl\owstw,...m~rwtimesan [.I,I'J~~

lnv~otory organiU!iOO"-.s 1mentory !.$ A.\IE\t~ i!'l'>'en~cry
WrflovOf !;(lid-~n_a rep!~!llci !WM .;;a
--~··· ~~~
Asset management ratios measure how efficiently an organization's assets are used to
generate income- in other words, how well the demand organization uses resources to
generate revenue.
Average Inventory Turnover

Average inventory turnover is a ratio showing how many times an organization's inventory
is sold and replaced over a period.
Average inventory turnover is calculated as shown below. The example is based on a

situation in which:
• Sales = US$1,500,000.
• Average inventory = US$300,000.
Sales
Inventory turnover =
Average Inventory
US$1,500,000
= US$300,000
5 times
If relatively high, the inventory turnover ratio shows that the inventory is efficiently
managed, while a declining ratio could show excess inventory due to poor sales or ·
obsolescence. Too high a ratio could mean lost sales due to stockouts (ineffective buying).
Average inventory turnover is generally calculated using sales, but it may also be calculated
with cost of goods sold (COGS). Although the first calculation is more frequently used,
COGS may be substituted because sales are recorded at market value, while inventories are
usually recorded at cost. Also, using average inventory instead of the ending inventory
levels helps to minimize seasonal factors.

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Profitability Ratios
Profitability Ratios
Me>Josurel" ar. O:!gft;ti~t~n~$ ~mni>"~g pQ~t
liMP ih· *f+§,Lj...j. ifut.[J,.,i¥-

Gross prom Re!.1t~ sales!<> prod!JtliM 9J:m..w:9~J
m"-rgin t:~:$~$ Net tmles
op~~ttng ·;;:;~iit ·- ····---~;;~;;~· a ·~;;~~~~~;;i ------ ~~~if_o·g _-P7Qi_;! ·· ····
.!!:v~~!~----· N~f~~~--~~!1 S~!~.?.Y .. ·vvvv.--:~~~-~~~!-wv•·v· .· -· o

NCt profit margiJl PIU'ii®s an inQicutiDfw! how Nt~!J%MtM
eftectl\<eanor-ganl.zatbni&at Ne! sales
CQS!con!ro!.
Profitability ratios measure an organization's earning power. They help judge operating
performance such as sales versus related expenses, leverage and risk. Profitability ratios
answer the question "How well did the demand organization operate during the period?"
They indicate the effectiveness of management in controlling expenses and earning a
· reasonable return for owners and shareholders in public companies.
Gross, operating and net profit margin are three measures often compared to each other.
For example, if compared to industry averages over several years gross profit margin has
been holding steady, but operating profit margin and net profit margin have been
declining, then the cause must be from indirect costs since gross profit equals net sales less
COGS while operating profit and net profit deducts COGS and a number of indirect items.
Gross Profit Margins

This ratio relates sales to production costs.
The gross profit margin is calculated as shown below. The example is based on a situation
in which:
• Gross profit = US$750,000.
• Net sales = US$1,500,000
Gross profit
Gross profit margins
Net sales
US$750,000
0.50
US$1,500,000
For each dollar of sales, the demand organization generates US$0.50 in gross profit.
Net Operating Profit Margin

The operating profit margin ratio provides a measure of operating efficiency.
The operating profit margin is calculated as shown below. The example is based on a
situation in which:
• Net sales= US$1,500,000.

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• COGS= US$1,100,000.
• Selling, general and administrative expenses = US $150,000.

Operating profit
Operating profit margin- =
Net sales
(US $1,500,000 - US$1,100,000 - US$150,000)

0.167
US$1,500,000
For each dollar of sales, the demand organization makes US $0.167 in operating profit.
Net Profit Margin

Net profit margin provides an indication of how effective an organization is at cost control.
The higher the net profit margin, the more effective the demand organization is at
converting revenue into actual profit.
The net profit margin is calculated as shown below. The example is based on a situation in
which:
• Net income = US$140,000.

• Net sales = US$1,500,000.
Net income
Net profit margin =
Net sales
US$140,000
0.093
US$1,500,000
Normal net profit margin depends on the industry; a relatively low margin could mean that
competitors are forcing price cuts or that the demand organization has poor cost controls.
Return-On-Investment Ratios
RQtum-on..ass.nts . G.'V~S~ .an i00.1 a$ to how f\'!Ur!f.9ffi~

{ROA) efficienunariagementis al Total ass!ltS:
u~in~.i~<JSSd!l.toge:!'lef<lie
e!1m(ngs,
R~tum,on.oquily ... -R~~i;~~~·~;;:;;t·~~dif~;;~·-·v•w··yy···yyNI)t_profii,
(ROE) ornanlz;~:fi.on ea11'led In Equ\ly
tomp.iirls:on to i!Je_iotat
amoullt of shurehotder equity
foarxl on !he tla~auce: sheet
................ ...... .. ....................................................... y·······

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(continued)
Mlfit\!,
Rf!:(~ m-on - Mi!'(jli'Ut'IS!silweffic:ientt
Csp!ta l aOO pn:ifil.:l!>il:tyol
ernpi<ly.ed caphalii'IVe!>trrieni!>; Tota\ Mse\5 · Current liabilitier;
(ROCE') al!io lndi~at~ whether
!JI~;e iire! J>:.lf'fici(!n!
mvnn:.~t:Hl nn<l pt-ofils tQ
in::llt:a:e-!heh~I<S.E'(Jf
capl_tal~?~et~.
Return-on-investment (ROI) or return divided by investment, has a number of alternate

formulas depending on how the user defines return and investment. Common variations on
ROI include the following:
Return-on-assets
A return-on-assets (ROA) ratio indicates how profitable an organization is relative to its
total assets. ROA gives an idea as to how efficient management is at using its assets to
generate earnings; it is displayed as a percentage.
The return-on -assets ratio is calculated as shown below. The example is based on a
situation in which:
• Net income= US$140,000.
• Total assets= US$1 ,800,000.
Net income
Return - on- assets (ROA)
Total assets
US$140,000
= 0.116 11.6%
US$1,200,000
For each dollar invested in total assets, the demand organization makes US $0.116 in net
income or 11.6 percent. A variation adds interest expense to net income to give
organizations with high debt financing a more appropriate ratio.
The ROA percentage gives an idea of how effectively the demand organization is
converting the money it has to invest into net income. The higher the ROA number, the
better, because the demand organization is earning more money on less investment.
Return-on -Equity
Return-on-equity (ROE) reveals how much profit an organization earned in comparison to
the total amount of shareholder equity found on the balance sheet. The ratio is usually
expressed as percentage.
The equation for the ROE ratio and an example appear below. The example is based on a
situation in wh ich:
• Net profit = US$120,000.

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• Equity = US$900,000.
Net profit
Return - on - equity =
Equity
US$120,000
US$900,000 = 0 ' 133 = l3. 3 o/o
This 13.3 percent is the return the demand organization is earning on shareholder equity.
An organization that has a high ROE is more likely to be capable of generating cash
internally.
Return-on-Capital Employed
Return-on-capital employed (ROCE) measures the profitability of an organization by the
pre-tax profit, which is earnings before interest and taxes or EBIT, achieved on an
organization's capital employed. The capital employed is the capital investment necessary
for a business to function. lt is commonly represented as total assets less current liabilities.
The equation for the ROCE ratio and an example appear below. The example is based on a
situation in which:
• EBIT = US$1,000,000.
• Total assets = US$400,000.
• Current liabilities = US$320;000.
EBIT
Return - on - capital employed
Total assets Current liabilities
US$1,000,000
=
(US$400,000 US$320, ,000)
US$1,000,000
= 12.5 = 12.5%
(US $80,000)
The ROCE ratio measures the efficiency and profitability of capital investments undertaken
by an organization. An organization acquires capital assets such as vehicles, computers and
so forth to help make its operations rnore efficient, cut down on costs and realize greater
profits or acquire more market share. ROCE also indicates whether the demand
organization is earning sufficient revenues and profits in order to make the best use of its
capital assets. The higher the percentage, the better.
Ratios such as the ones described highlight organizational strengths and weaknesses. They
either provide assurance of financial health or detect early warning of any significant
financial difficulties. Ratios should not be relied upon as sole indicators for decision
making. There are many other evaluative measures that may be used in conjunction with
ratio analysis. Balanced scorecards, best practices and surveys are a few of the possibilities.

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Financial ratios are used by banks to see if they are able to loan money at a lower rate and
also by shareholders to see if the stock is worth investing in. They can be extremely useful
as benchmarks by which to compare financial performance with industry averages for
organizations of similar type, scope and size and even key competitors. Benchmarks from
comparable organizations enable facility managers to identify areas of conformity and
variance from the norm with similar or competing organizations. For example, knowing that
the organization spends a certain percentage of revenue on external building maintenance
allows for a comparison to the building envelope (made up of siding, masonry, sash,
glazing and window washing) and exterior signage expenditures of any other comparable
organization.
When using ratios for benchmarking, keep in mind that every demand organization's
circumstances are different. Consider any mitigating circumstances that might explain
variance or conformity with a norm. Ratios themselves have many variations. Even though
they share a common name, one organization may use different numerators or
denominators than another in performing the calculation.
Exhibit 2-24: Summary of Financial Ratios
Ratio Description Calculation
Liquidity/short-term debt ratios
Current Indicates the general availability Current assets

ratio of cash to pay off liabilities Current liabilities
(debts) as they come due
Quick Provides a quick measure of an Cash + Cash equivalents + Receivables

(acid-test) organization's immediate Current liabilities
ratio liquidity
Asset management ratios
Average Shows how many times an Sales

inventory organization's inventory is sold Average inventory
turnover and replaced over a period
Profitability ratios
Gross Relates sales to production Gross profit

profit costs Net sales
margin
Operating Provides a measure of operating Operating profit

profit efficiency Net sales
margin

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Net profit Provides an indication of how Net income

margin effective an organization is at Net sales
cost control
Return-on-investment ratios
Return- Gives an idea as to how efficient Net income

on-assets management is at using its Total assets
(ROA) assets to generate earnings
Return- Reveals how much profit an Net profit

on-equity organization earned in Equity
(ROE) · comparison to the total amount
of shareholder equity found on
the balance sheet
Return- Measures the efficiency and EBIT

on-capital profitability of capital Total assets - Current liabilities
employed invest ments; also indicates
(ROCE) whether there are sufficient
revenues and profits to indicate
the best use of capital assets
FM Metrics and Ratio Analysis

Benefits and Calltions .of Ratio
Analysi\>
Sene~fits Jo· HlgllightQrgan.i::t::al)Oi"jaiWQ119.lhJ ilt'ld WP.!ll<f'I<IU11~,
. .._ 'E;:)~q>f?'•'~ ~'Hi!iW<'1'1C~!}t!~~~AAo:l!lti_u d(.f~tl:t(earl'y·
WMrli"!J'OI an~ siQn~icsn~ lioaric~tGilicu!llcs
i'>- Can be erltemery .ut;efu! a1~·bem:hmarks and en<~ble facility
m~llaQe!~ to ~nllfy aeasot ~Mformltyand va(iti.>:'lce 1(e~n
th~ OOrl)l v.;tl\ sirililtitO( t:ompetlny otg<ajiU:fftiens,
·cautions a. Should ndf be- rellod·upon as role mdic~.ror decision
mn~lng.
.._. Wtler\ t.r.oll19mtioSk!rt:u:r:n.;~k!ng;M}' roi~liflg
c itcvml>W$!iS ihl:t!. ri'ligtlt ~!Mtfl '!<1!_iq~~ on:ortfO!I'flilj ' with ;;~:
l't()rm-woV:Icfbe corosldete<~,
,._ Ratios- ttwmSel1~s nav:& many vana_tiol'tS; oigaitizoili9iu>-in<ly,
use dilre!eM mxne-latot!t&.-denom!nabrs.
Demonstrating the bottom-line performance of the FM organization to senior

management can be challenging, but it is a critical task for a facility manager. Facilities do
not generate sales, so facility managers have to be creative in promoting the financial
contributions of FM. Documenting cost avoidances and cost savings are two ways this can
be accomplished. Developing specific FM metrics (ratios) to relate, compare or measure
performance against quantifiable standards is another.
lt is challenging to apply metrics across all FM departments. Initiatives such as the

European benchmarking standards processes are developing metrics for real estate and FM
across states and borders.

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While no universal metrics exist, per se, several possibilities are shown in Exhibit 2-25.
Computer software can be used to accumulate and process the required data and calculate
ratios. The metrics chosen to track and report should be appropriate to the demand
organization and whatever senior management considers important to financial well-being.
Facility Management Metrics
Analyzing and Interpreting Financial Documents
The goal of financial analysis is to assess organizational performance in the context of

stated goals and strategies, which provides insight into financial health and highlights
problems and opportunities. Ratio analysis is the principal tool organizations use for
financial analysis. In FM, specific metrics and ratio analysis are also used.
1. Financial Statement Ratio Analysis
Financial statement ratio analysis assesses how various line items in financial statements
relate to one another. Such ratio analysis is a more useful exercise than discovering the
dollar amount spent because of the variables affecting an organization's spending that
uniquely apply to it.
Many organizations use ratios to analyze budget and financial report data. However, ratios
are useful at any given point in time.
Many different ratios can be used to analyze financial data. We examine the following that
are most relevant to facility managers:
• Liquidity/short-term debt ratios
• Asset management ratios
• Profitability ratios
• Return-on-investment ratios

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All ratio calculation examples are shown in U.S. dollars (USD). Note that in
practice, some ratios may have different formulas. The point here is to
understand what the ratio measures~ No financial statements are shown here;
hypothetical numbers are used to illustrate each ratio.
a Liquidity/Short-Term Debt Ratios
Liquidity ratios primarily show an organization's solvency- its ability to pay bills and other
short-term obligations without undue hardship. For each of the following liquidity or short-
term debt ratios, the higher the ratio, the stronger the liquidity.
Current Ratio
The current ratio answers the question, "Does the demand organization have sufficient
current assets to pay its bills during the year?" lt indicates the general availability of cash to
pay off liabilities (debts) as they come due.
The equation for the current ratio and an example is shown below. The example is based
on a situation in which:
• Current assets = US$250,000.
Current assests
Current ratio
Current liabilities
US$250,000
= US$100,000 = 2 ' 5 : 1
The ratio indicates that the demand organization has US$2.5 in current assets for each
dollar of its current liabilities or 2.5 times the current assets.
The current ratio cannot provide data on cash flow timing. Lowering current ratios over
time shows declining liquidity, but if too high, could show that the demand organization
has too much invested in low-yield short-term assets.
Quick (acid-test) Ratio

The acid-test ratio provides a quick measure of an organization's immediate liquidity. lt is
generally considered a more rigorous test of liquidity than the current ratio. lt eliminates
inventories and prepaid expenses, (for example insurance premiums), from the current
assets then compares these quick assets to the current liabilities (excluding long-term

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liabilities, other liabilities and net assets) to assess the demand organization's ability to pay
the current liabilities.
The equation for the quick ratio and an example appear below. The example is based on a
situation in which:
• Cash = US$200,000 .
• Cash equivalents = US$1 0,000 .
• Accounts receivables = US$1 0,000 .
• Current liabilities = US$1 00,000 .

Cash + Cash equivalents + Receivables
Quick ratio =
Current liabilities
US$200,000 + US$10,000 + US$10,000

US$100,000
= 2.2:1
The quick ratio may be a more accurate indicator than the current ratio of an organization's
ability to meet its financial obligations in a short span of time. Since the quick ratio
excludes the least liquid current assets, primarily inventory, comparing it to the current
ratio shows the effect of inventory on liquidity. A stable current ratio plus a declining quick
ratio imply increasing inventory that could be temporary or permanent.
b Asset Management Ratios
Asset management ratios measure how efficiently an organization's assets are used to
generate income- in other words, how well the demand organization uses resources to
generate revenue.
Average Inventory Turnover

Average inventory turnover is a ratio showing how many times an organization's inventory
is sold and replaced over a period.
Average inventory turnover is calculated as shown below. The example is based on a

situation in which:
• Sales= US$1,500,000.
• Average inventory = US$300,000.
Sales
Inventory turnover
Average Inventory

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US$1,500,000
US$300,000 = 5 times
If relatively high( the inventory turnover ratio shows that the inventory is efficiently
managed, while a declining ratio could show excess inventory due to poor sales or
obsolescence. Too high a ratio could mean lost sales due to stockouts (ineffective buying).
Average inventory turnover is generally calculated using sales, but it may also be calculated
with cost of goods sold (COGS). Although the first calculation is more frequently used,
COGS may be substituted because sales are recorded at market value, while inventories are
usually recorded at cost. Also, using average inventory instead of the ending inventory
levels helps to minimize seasonal factors.
c Profitability Ratios
Profitability ratios measure an organization's earning power. They help judge operating
performance such as sales versus related expenses, leverage and risk. Profitability ratios
answer the question "How well did the demand organization operate during the period?"
They indicate the effectiveness of management in controlling expenses and earning a
reasonable return for owners and shareholders in public companies.
Gross, operating and net profit margin are three measures often compared to each other.
For example, if compared to industry averages over several years gross profit margin has
been holding steady, but operating profit margin and net profit margin have been
declining, then the cause must be from indirect costs since gross profit equals net sales less .·
COGS while operating profit and net profit deducts COGS and a number of indirect items.
Gross Profit Margins

This ratio relates sales to production costs.
The gross profit margin is calculated as shown below. The example is based on a situation
in which:
• . Gross profit = US$750,000.
• Net sales= US$1,500,000
Gross profit
Gross profit margins
Net sales
US$750,000
= 0.50
US$1,500,000
For each dollar of sales, the demand organization generates US$0.50 in gross profit.

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Net Operating Profit Margin

The operating profit margin ratio provides a measure of operating efficiency.
The operating profit margin is calculated as shown below. The example is based on a
situation in which:
• Net sales = US$1,500,000 .
• COGS = US$1, 100,000 .
• Selling, general and administrative expenses = US $150,000 .

Operating profit
Operating profit margin =
Net sales
(US $1,500,000 - US$1,100,000 - US$150,000)

US$1,500,000 = 0 ' 167
For each dollar of sales, the demand organization makes US $0.167 in operating profit.
Net Profit Margin

Net profit margin provides an indication of how effective an organization is at cost control.
The higher the net profit margin, the more effective the demand organization is at
converting revenue into actual profit.
The net profit margin is calculated as shown below. The example is based on a situation in
which:
• Net sales = US$1,500,000.
Net income
Net profit margin
Net sales
US$140,000
US$1,500,000 = 0 ·093
Normal net profit margin depends on the industry; a relatively low margin could mean that
competitors are forcing price cuts or that the demand organization has poor cost controls.
d Return-On-Investment Ratios
Return-on-investment (ROI) or return divided by investment, has a number of alternate

formulas depending on how the user defines return and investment. Common variations on
ROI include the following:

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Return-on-assets
A return-on-assets (ROA) ratio indicates how profitable an organization is relative to its
total assets. ROA gives an idea as to how efficient management is at using its assets to
generate earnings; it is displayed as a percentage.
The return-on-assets ratio is calculated as shown below. The example is based on a

situation in which:
• Total assets= US$1,800,000.
Net income
Return - on - assets (ROA) =
Tatal assets
US$140,000
US$1,200,000
= 0116
.
11.6%
For each dollar invested in total assets, the demand organization makes US $0.116 in net
income or 11.6 percent. A variation adds interest expense to net income to give
organizations with high debt financing a more appropriate ratio.
The ROA percentage gives an idea of how effectively the demand organization is
converting the money it has to invest into net income. The higher the ROA number, the
better, because the demand organization is earning more money on less investment.
Return-on-Equity
Return~on-equity (ROE) reveals how much profit an organization earned in comparison to
the total amount of shareholder equity found on the balance sheet. The ratio is usually
expressed as percentage.
The equation for the ROE ratio and an example appear below. The example is based on a
situation in which:
• Net profit = US$120,000.

• Equity = US$900,000.
Net profit
Return - on - equity =
Equity
US$120,000
= US$900,000 ~ 0; 133 = 13"3 %
This 13.3 percent is the return the demand organization is earning on shareholder equity.
An organization that has a high ROE is more likely to be capable of generating cash
internally.

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Return-on-Capital Employed
Return-on-capital employed (ROCE) measures the profitability of an organization by the
pre-tax profit, which is earnings before interest and taxes or EBIT, achieved on an
organization's capital employed. The capital employed is the capital investment necessary
for a business to function. lt is commonly represented as total assets less current liabilities.
The equation for the ROCE ratio and an example appear below. The example is based on a
situation in which:
• EBIT = US$1,000,000.
• Total assets = US$400,000.
• Current liabilities = US$320,000.
EBIT
Return - on - capital employed
Total assets Current liabilities
US$1,000,000
(US$400,000 US$320, ,000)
US$1,000,000
12.5 = 12.5%
(US $80,000)
The ROCE ratio measures the efficiency and profitability of capital investments undertaken
by an organization. An organization acquires capital assets such as vehicles, computers and
so forth to help make its operations more efficient, cut down on costs and realize greater
profits or acquire more market share. ROCE also indicates whether the demand
organization is earning sufficient revenues and profits in order to make the best use of its
capital assets. The higher the percentage, the better.
Ratios s.uch as the ones described highlight organizational strengths and weaknesses. They
either provide assurance of financial health or detect early warning of any significant
financial difficulties. Ratios should not be relied upon as sole indicators for decision
making. There are many other evaluative measures that may be used in conjunction with
ratio analysis. Balanced scorecards, best practices and surveys are a few of the possibilities.
Financial ratios are used by banks to see if they are able to loan money at a lower rate and
also by shareholders to see if the stock is worth investing in. They can be extremely useful
as benchmarks by which to compare financial performance with industry averages for
organizations of similar type, scope and size and even key competitors. Benchmarks from
comparable organizations enable facility managers to identify areas of conformity and
variance from the norm with similar or competing organizations. For example, knowing that
the organization spends a certain percentage of revenue on external building maintenance
allows for a comparison to the building envelope (made up of siding, masonry, sash,
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glazing and window washing) and exterior signage expenditures of any other comparable
organization.
When using ratios for benchmarking, keep in mind that every demand organization's
circumstances are different. Consider any mitigating circumstances that might explain
variance or conformity with a norm. Ratios themselves have many variations. Even though
they share a common name, one organization may use different numerators or
denominators than another in performing the calculation.
Exhibit 2-24: Summary of Financial Ratios
Ratio Description Calculation
Liquidity/short-term debt ratios
Current Indicates the general availability Current assets

ratio of cash to pay off liabilities Current liabilities
(debts) as they come due
Quick Provides a quick measure of an Cash + Ca$h equivalents + Receivables

(acid-test) organization's immediate Current liabilities
ratio liquidity
Asset management ratios .
Average Shows how many times an Sales

inventory orga!lization's inventory is sold Average inventory
turnover and replaced over a period
Profitability ratios
Gross Relates sales to production Gross pro[tt

profit costs Net sales
margin
Operating Provides a measure of operating Operating profit

profit efficiency Net sales
margin
Net profit Provides an indication of how Net income

margin effective an organization is at Net sales
cost control
Return-on-investment ratios
Return- Gives an idea as to how efficient Net income

on-assets management is at using its Total assets
(ROA) assets to generate earnings

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Em~riiiJFac:UityPnofusloNI•WIH'I<Mide
Return- Reveals how much profit an Net profit

on~equity organization earned in Equity
(ROE) comparison to the total amount
of shareholder equity found on
the balance sheet
Return- Measures the efficiency and EBIT

on-capital profitability of capital Total assets - Current liabilities
employed investments; also indicates'
(ROCE) whether there are sufficient
revenues and profits to indicate
the best use of capital assets
2. FM Metrics and Ratio Analysis
Demonstrating the bottom-line performance of the FM organization to senior

management can be challenging, but it is a critical task for a facility manager. Facilities do
not generate sales, so facility managers have to be creative in promoting the financial
contributions of FM. Documenting cost avoidances and cost savings are two ways this can
be accomplished. Developing specific FM metrics (ratios) to relate, compare or measure
performance against quantifiable standards is another.
lt is challenging to apply metrics across all FM departments. Initiatives such as the

European benchmarking standards processes are developing metrics for real estate and FM .
across states and borders.
While no universal metrics exist, per se, several possibilities are shown in Exhibit 2-25.
Computer software can be used to accumulate and process the required data and calculate
ratios. The metrics chosen to track and report should be appropriate to the demand
organization and whatever senior management considers important to financial well-being.
a Case Study:
Organizations and bankers may request a number of different figures in order to compare
alternative ratios than presented within this case study. These numbers and ratios are
based on the consolidated statements of financial position for Union Pacific and the
Burlington Northern Railway based on millions of dollars for 2007. This is a good example
of a comparison between two for-profit freight railroad companies. Not all financial
statements are clear cut, for example, the gross profit margin could not be computed to
net sales, due to no indication of gross profit in the financial statement.
This case study serves to demonstrate how to obtain the ratios and why they are important.
If the demand organization wants to invest in infrastructure, they need to know the
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financial position, whether there is i unding or if funding is available to finance the

improvement(s). If there is an interest to invest in stock, a good indicator and benchmark is
to see how profitable the demand organization is.
Case Study: Comparison of financial statements of two companies in the same

industry Exhibit 2-26
Current Ratio Current Ratio
Current Current Current Current

Assets Liabilities Assets Liabilities
2594 3041 0.85 2181 3235 0.67

'
Quick Ratio Quick Ratio
Cash + cash Current Cash + cash Current

equivalents Liabilities equivalents Liabilities
+Accounts +Accounts
Receivable Receivable
878+632 3041 0.50 330+790 3235 0.34
Operating Profit Margin Operating Profit Margin
Operating Net S<:!les Operating Net Sales

Profit Profit
3375 16283 0,21 3486 15802 0.22
Net Profit Margin Net Profit Margin
Net Income Net Sales Net lncorne Net Sales
1855 16283 0.113 1829 0.115
Return-on-Assets Return-on-Assets
Net Income Tota I Assets Net Income Total Assets
1855 38033 ' 0.049 1829 33583 0.054

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Return-on-Equity Return-on-Equity
Net Income Equity Net Income Equity

(shareholders) (shareholders)
1855 15585 0.119 1829 11144 0.16
Return-on-Capital Employed Return-on-Capital Employed
Earnings Current Earnings Current

before Assets- before Assets-
Interest & Current Interest & Current
taxes Liabilities taxes Liabilities
3375 2594-3041 3486 2181-3235
Compare the railroads and indicate which is operating more efficiently. The
railroads invest heavily in the rolling stock, each engine can cost over one
million dollars.

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1. What does a budget do?
a. Provides a formal, numerical expression of how an organization expects to operate

for a defined period oftime
b. Is a strategic plan device characterized by short-term goals and objectives
c. Organizes financial information by statements
d. Provides financial data for external users
2. What best describes the authoritative budget approach?
a. Expertise leads to informed budget decisions

b. Strategic goals do not receive priority in the budgetary process
c. Budget goals reflect strategic objectives
d. Employees feel involved and empowered
3. What does a capital budget do?
a. Provides a short-term projection of all estimated income and expenses during a

given period, usually one year.
b. Requires an organization to reserve substantial funds and resources for use on
large investments
c. Identifies funds used to support daily operations.
d. Has NO impact on operating budgets
4. What best describes fixed costs?
a. They remain unchanged in total for given period of time, despite wide changes in
the related level of total activity
b. Change in total in proportion to changes in the related level of total activity
c. They can be changed in the short term with few constraints
d. Mail services or printing costs based on usage

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5. What does an Incremental Budget do?
a. Starts with last year's budget and adds to it or subtracts from it, according to
anticipated needs
b. Helps to avoid including ineffective activities just because they were in the prior
budget
c. Includes the use of activity-based costs to connect resource consumption and
output
d. Emphasizes value-added activities
6. What is true about Internal Financial Statements?
a. Are required by law for publicly traded companies

b. Are prepared and certified by an auditor
c. Are made available to senior management, staff management and others with
operating or oversight responsibilities
d. Are prepared in accordance with accounting standards - IFRS or GAAP and FASB
7. What best describes Balance Sheet Assets?
a. Resources obtained, owned or controlled by an organization

b. An organization's net worth
c. What the demand organization owes to others
d. Listed in order of the time frame in which they are due
8. What information does Current Ratio give you?
a. Indicates the general availability of cash to pay of liabilities, debts as they come
due
b. Provides a quick measure of an organization's immediate liquidity
c. Shows how many times an organization's inventory is sold and replaced over a
period
d. Relates sales to production costs

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9. What do Operating Activities do?
a. Report the purchase and sale of long-term investments and property, plant and
equipment
b. Primarily show the results from day-to-day revenue and expense activities
depicted on the income statement
c. Show the results from activities involving cash transactions by and for owners;
reports on the contribution and redemption of equity capital and creditor loan
repayments
d. Report all expenditures to produce the fiscal year revenues that are not capitalized
10. What is meant by Depreciation?
a. A noncash charge against assets, such as property, plant and equipment over the
asset's useful life
b. A cash expense associated with the acquisition of an asset
c. A one-time expense reflected in the operating budget
d. A way of showing reduced value of land as a result of wear and tear, age or
obsolescence

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Chapter 3: Fundamental Cost Concepts,

Containment Strategies and
Chargebacks in the FM Organization
On completion of this chapter you will be able to:
• Identify the fundamental cost concepts and the subsequent cost behavior, in
response to business changes and activity levels in the FM organization.
• Identify cost-containment opportunities.
• Explain the use of chargebacks to allocate facility costs.
ent
J>'tJ"<ate~ties and
Charg.:backs in the FM
Organization
Chapter Objective$
V'. Identify" the llmdainental CO!.! corwepl~ ;:tr(d the sub~uentoot.t bM~vior:, jn
respon.sk ttr llUslness ttla;:l9e5 and.'a.c-~N1y le\oe:4 ln ~~FM crganizotlo:n.
~ ld!ltltif:y cos.t~ontainm~tnto?J:oMUnitUls~
¥' !::xplain !he use of.cha~badcsto :;dlocaiofadlffy cos.ls .
lessons
• Fundamental Cost Concepts
• Cost-Containment Strategies
• Chargebacks

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Fundamental Cost Concepts

lesson Introduction
• Identify the fundamental cost concepts and the subsequent cost b~havior in
response to business changes and activity levels in the FM organization.

• Cost Terms and Classifications
• Assigning Costs to Cost Objects
• Cost Measurement Systems
• Using Costs in Decision Making
Cost rJns nd Class:"icatio

FM Costs
FM co~H:> 01r~ ~l:l ptk:~>q,.'i!id for ~~;qoislt:.:m. tn::tit};etJ_ano;:!l-;ptlXi~l~ti<m or lt$.f!' t)f

m a!ufi<tlsor seJW:;es-. ll1ey ~ !hn<most ~rat~(!d<'~sooc! :X' FM pmformM>t&
Fm:iit.yffiana,gt~r!>
i> -M"nag& $la!"~ costwllhirnm or-oatti<t:otjo(l
~o- Must na~-e- kflowledge.onna to:S-ts o! <loir;s bus~-s
All organizations incur costs. The term cost can differ from one organization to another.
Within the same organization the term cost can have differentimplications. Management
classifies costs according to its usage. The preparation of financial statements requires the
use of historical cost data and budget preparation and decision-making typically involve
predictions about future costs.
What does the term cost mean? Is it the price paid for an asset? A cash outflow?
Something that affects department profitability? Speaking in general business terms, costs
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are a measurement of the resources required to achieve a specific objective- to produce

a product or a service. Costs are monetary measures.
The importance of understanding costs to an organization cannot be overstated. In for-

profit organizations, profits are the result of total revenue less costs. In not-for-profit
organizations, costs are fundamental to the organization's survival. Revenues come in and
cost expenses go out. Ultimately there needs to be a higher balance in cash reserves than
the amount spent. If expenses consistently exceed reserves and revenues, the organization
fails.
In The Facility Manager's Guide to Finance and Budgeting, authors David Cotts and Edmond
P. Rondeau define costs as "the price paid for acquisition, maintenance, production or use
of materials or services." There have been several critical points made previously in the
course content about cost as they pertain to FM. Among the comments are:
• Facility managers manage a large cost center within an organization
f
• Costs are the most scrutinized aspect of FM performance

• Facility managers must have knowledge of the costs of doing business
In this topic some of the principal cost terms and cost accounting concepts encountered in
FM are examined. Knowledge of the basic cost terminologies and concepts facilitates
communications with other managers and organizational finance personnel. lt also
facilitates effective and efficient management, accurate cost accounting, proper financial
analysis and sound recommendations to senior management.
lt is necessary to predict how a particular cost will behave. Cost behavior doesn't refer to
good or bad behavior but rather, how a specific cost will behave in response to changes in
business activity levels. Costs may stay the same or change proportionately, that is rise or
fall, in response to a change in activity.
In FM, knowledge of cost behavior is valuable in a variety of situations such as creating a

budget, preparing a forecast or determining which of two alternatives should be selected.
Example:
A facility manager expects to undertake a xeriscaping or water wise landscaping project neXit
year. The facility manager needs to know how that will affect the FM operating budget. The
facility manager anticipates that expenses for premises support, mentioned in the budget, will
change in the following manner:
• Make provision for the expense of a landscape designer to draw up plans and consult as
required.
• Planti'ng materials will increase, but the grounds won't expand.
• On completion of the project, costs for water, fertilizer, maintenance and pest control will
decrease. While consumption WILL decrease, unit costs are still subject to market

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conditions.
• Existing full-time staff will execute the plan, additional staff will not be required.
To develop an accurate budget for next year, the facility manager needs knowledge of the
behavior of all the different costs involved. To help make distinctions about which costs will
change and by how much, costs are often categorized as variable, fixed, mixed or total.
Hard and Soft Costs

Hard costs- costs that can be determined or estimated in advance.
Soft costs- costs that are tricky to determine/estimate. They relate to lost productivity,
opportunity costs for use of organizational assets and internal staff, impact on customers,
learning curves or employee morale.
Variable Costs
Cost Terms and Classifications
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f!fom:;biJ$if1•%S <1t.1k•iry_
Variable costs- as per Exhibit 7-7, are costs that routinely increase and decrease in
proportion to changes in the activity level, such as fuel costs which depend on the mileage
driven. For example, the cost of xeriscaping project materials will vary in direct proportion
to selection of drought-resistant grasses, indigenous or adaptive low water plants and the
use of rocks and accent boulders.
Examples are variable costs in FM:

• Utilities
• Waste disposal
• Costs of materials and supplies
• Travel expenses, billing costs and cost drivers
Cost drivers- also referred to as allocation base, are activities that have a direct and
casual relationship to the incurring of overhead costs. Cost drivers can be any factor that
has a cause-and-effect relationship on costs. A change in a cost driver will result in a
change in the total cost of a related cost object.

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A cost object is anything for which cost data is accumulated. A cost object is used to
determine how much a particular thing or activity costs. In FM, items or activities, such as
customers projects and services are considered as cost objects.
Fixed costs typically do not have cost drivers. Fixed overhead is allocated to cost pools ,
using an allocation base.
Fixed Costs
Fixed costs- are expenses that are paid by an organization irrespective of the business
activity for a given time period. For example; the facility manager's salary would not be
expected to change appreciably while overseeing the xeriscaping project, nor will the salary
of the FTE grounds staff who do the landscaping.
In FM, rent, depreciation, insurance, property taxes, licensing fees, supervisory salaries and
administrative salaries are all examples of fixed costs.
Fixed costs remain constant in total unless they are influenced by an outside force, such as
a price change. A cost that is fixed means that it is fixed within a relevant range.
Relevant range- is the range of activity in which the assumptions about fixed costs and
variable costs are valid. Relevant range is typically expressed as specific cost drivers for a
specific duration of time.
A cost object- is anything for which cost data is accumulated. A cost object is used to
determine how much a particular asset or activity costs. In FM, items or activities, such as
customers, projects and services are considered cost objects.
This example puts all these concepts together to illustrate fixed costs and relevant range. The
example is based on a situation in which: The assumption that the rent for a FM copier is
US$200 per month is valid within the relevant range of o to 20,000 copies per month. The
object would be the copies and the driver would be how many copies have been made on a
monthly oasis. A significant increase in the demand for copy services that greatly increases the
monthly copy count would mean renting an additional copier. The fixec;l cost of monthly rent
for reprographics will increase due to the second copier.
Cost pool- is an aggregation or grouping of cost objects defined in a way that is

meaningful to management for assigning accountability. For example, cost objects such as
a trenching machine used to modify the landscape irrigation system during the xe~iscaping
project and the labor for a maintenance employee may be included in the maintenance
department cost pool, which is a cost object for FM.
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Mixed Costs
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Mixed costs or semi-variable costs- are costs that vary with changes in volume or
activity, but not by a direct proportion. Many mixed costs are a combination of fixed and
variable costs. They change in response to a change in volume ,and activity but by less than
a proportionate or equally corresponding amount. For example, if there is a fuel price
increase, the price of other commodities will be subject to increase.
Total Costs
Total costs- are all the fixed and variable costs for a cost object.
0
Assigning Costs to Cost Objects
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Assigning costs to a cost object is pertinent in many FM applications including pricing,

profitability studies, control of spending and chargebacks, which are discussed later in this
chapter. When assigning costs to cost objects, costs are classified as direct or indirect.
Direct Costs
Direct costs- are costs that can be traced to an item or activity, for example, repairing a
hole in the roof. Costs can accurately be traced to a cost object, such as direct labor and
direct materials.
For example, to reduce water usage outdoors, the standard automatic timer that turns on
irrigation controller systems at set intervals is replaced with a"smart" controller. This
controller uses weather data and site information, such as plant type and sprinkler

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controller system output, to adjust watering times and frequency. The maintenance labor
and material costs related to that activity are direct costs.
Indirect Costs
Indirect costs - are costs that are spread over a period of time, regardless of specific
activities, for example, yearly insurance premiums.
Indirect costs are related to a cost object but cannot be easily and accurately traced to a
cost object, such as overhead. In other words, indirect costs are related to an item or
activity but not directly and solely associated with that item or activity. In addition to
annual insurance premiums, other examples of indirect costs in FM include some
maintenance costs, utility costs for a building or salaries.
Indirect costs are allocated or assigned to a cost object through reasonable estimation. For
example, an FTE corporate concierge will have multiple varied responsibilities for building
occupants and visitors. Assigning a concierge's salary to any one service provided, for
example, document delivery, catering or event planning, is not reasonable. lt is a cost
incurred supporting a variety of activities and should be allocated across all services
provided.
How the demand organization perceives FM is often measured in terms of cost

effectiveness. Facility managers must be relentless in evaluating past cost performance and
continually look for ways to reduce necessary costs and eliminate unnecessary
expenditures. Building on all of the fundamental cost concepts and terms just presented,
we look at cost measurement systems and how they support cost control efforts next.
Cost Measurement Systerns

Cost Measurement Systems
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Costs are measured in order to manage them. A cost measurement/allocation system

performs the following functions:
• Informs the facility manager how resources are consumed in creating and delivering
products and services to customers.

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• Provides insight into how these costs contribute to FM costs and what factors cause
them to change.
• Provides information to estimate the costof providing new or adding additional
features to products and services.
• Tracks and quantifies costs to provide customers with affordable, timely, high
quality products or services
There are different cost measurement systems that organizations can implement. They are
often broadly categorized as traditional and contemporary. Contemporary is generally
synonymous with activity-based.
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the propor'.i<lfls of the !dal resoua:e c.ost cons.umed.t)'
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n the foftTI of a Oltio
Before explaining characteristics of traditional and activity-based cost measurement

systems, some related baseline terminology is clarified. These terms are use.d throughout
the aiscussion of the various cost systems.
• Cost accumulation- collects and organizes cost information in an organized way

through an accounting system. Whenever a cost is incurred, such as a purchase of
equipment or supplies or performance of a service, that cost is accumulated over
the accounting period.
• Cost assignment- precedes an activity or takes place without measuring an
activity. lt makes an assumption about the proportion of costs that relates to the
activity. lt is normally done when:
The costs are too small to be worth accurate allocation.
The data collection would be too expensive or difficult relative to the cost.
There is reliable historical data on which the assignment can be based.
• Cost allocation- determines the proportional share of a total cost that belongs to
a particular cost object, based on data about the proportions of the total resource
cost consumed by the cost object.
• Cost tracing- assigns direct costs to a particular cost object.
• Unit costs- relates resources consumed to outputs or outcomes provided by
those resources in the form of a ratio.
There are different schools of thought about the use and merits of traditional versus
activity-based cost measurement systems. Most organizations use different cost systems

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because they produce different outputs. Facility managers, as a rule, do not have a choice
in the matter. The point of discussion here is to provide an overview of how traditional and
activity-based systems differ and to explain the basics of how each cost measurement
system converts data into information of interest to management.
Traditional and activity-based costing both start with the same basic cost elements. As
shown in Exhibit 3-20, traditional and activity-based cost measurement systems are built on
conceptually different foundations.
Exhibit 3-20: Comparison of Traditional and Activity-Based Cost Measurement

Systems
Basic cost Include salaries and wages, utilities, Include salaries and wages, utilities,
elements depreciation, materials and supplies depreciation, materials and supplies
and taxes. and taxes.
Cost object Use responsibility centers; for • Use activities and operations* as
selection and example, departments or functional intermediate cost objects in
procedures for · areas as the key cost object in tracing costs to final cost objects.
tracking cost tracking flows. • Assign costs to final cost objects
flows based on cost drivers.
Cost allocation • Use a single base for allocating • Include all traceable activities, for
rules indirect/common costs. example, marketing, customer
• Limit what is included, primarily support, business support and
to materi~ls and direct support non-traceable indirect activities.
costs. • Focus attention on the process of
• Focus attention on who does the work.
the work. • Provide comprehensive
information by functions,
resources, activities and
cost drivers.
*An activity is generally described as a series of related tasks perform'ed by a person; an

operation is a series oftasks performed by a machine. The distinction is not always definitive.
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Traditional Cost Measurement Systems
Traditional Cost Measurement

Systems
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Traditional, department-focused cost measurement systems differ from contemporary,

activity-focused or operation:..focused systems.
Traditional cost measurement systems reflect the influence of mass production and focus
on inventory measurement. As noted in Exhibit 3-20, responsibility centers are used for cost
tracking and a single base for allocating costs to products and services. A responsibility
center groups units, sub-units, departments and divisions based on the functions they
perform.
Two popular forms of traditional cost measurement systems are job order costing and
process costing. In practice, many organizations use hybrids of the two.
Job Order Costing
Key Differences Between Job Order

Costing and Process Costing
Job order costing/job costing- is direct labor, direct material and overhead costs
associated with a job or batch that meets the specific demands of a designated customer.
This system accumulates resource costs from multiple sources that are brought together to
deliver a product or service. Job order costing is used in situations where many different
products are produced or services delivered. Each period and each unique job uses a
different amount of resources.
Job costing systems- assign costs that go into the product or service to a specific job,
this being a distinct unit, batch or lot of a product or service. An example would be
applying the direct cost of materials and labor to a specific job, along with the appropriate
overhead. Overhead costs are typically applied at a predetermined percentage rate. Each

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job is given a unique identification code or number and a job cost sheet is used to record
and accumulate job order costs.
A job order costing system assigns costs to individual jobs using the following steps:
• Identify the job by a unique code or other date-specific reference method
• Trace the direct costs for the job
• Identify indirect cost pools associated with the job/overhead
• Choose the cost allocation base/cost drivers to be used in allocating indirect costs
to the job
• Calculate the rate per unit of each cost allocation base
• Assign cost to the cost object by adding all direct and indirect costs which are
based on a combination of machine and labor hours
The benefits of job order costing systems include the following:
• They provide detailed results of a specific job or operation
• They are flexible enough to be used by a wide variety of organizations
• They can have strategic value for an organization because they give a detailed
breakdown of all the different types of costs
• They can help pinpoint sources of cost overruns across different jobs
Process Costing
Process costing- issued where there are no distinct jobs associated with processes. A
process costing system accumulates product or service costs by process or department and
then assigns them to a large number of nearly identical products by dividing the total costs
by the total number of units produced.
Process costing is appropriate for automated, repetitive processes where the cost of one
unit is identical to the cost of another. lt lends itself well to situations where a continuous
flow of nearly identical products is produced or where there are no distinct jobs associated
with a service rendered.
Costs of direct materials, direct labor and overhead are traced to individual departments or
processes. Costs are accumulated for each step in the process and a record of units worked
on is also maintained. At the end of the accounting period, the total cost is allocated to
units processed in that given time period. This is accomplished by dividing the total cost of
production in that time period by the units produced, resulting in a cost per unit.

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Job order costing and process costing systems share a number of similarities.
• Both systems assign material, labor and predetermined overhead costs to products
produced and services provided as a mechanism for computing unit product or
service costs.
• Both systems use the same basic accounts, such as overhead, materials, work-in-
process and finished goods.
• The flow of costs through the accounts is basically the same in both systems.
Despite the similarities, the differences between the systems are significant, as shown in
Exhibit 3-2 7.
Exhibit 3-21: Key Differences Between Job Order Costing and Process Costing
• Used with a wide variety of distinct • Used with similar or identical products
products or services. and a steady stream of units.
• Total job costs consist of actual direct • Costs are assigned uniformly to all units
materials, actual direct labor and passing through a department during a
overhead applied using a predetermined specific period.
rate or rates. • Costs accumulate by process or
• Costs accumulate by the individual job or department.
order and are tracked separately. • The flow of costs is simplified because
• Unit cost is computed by dividing total costs are traced to fewer processing
job costs by units produced or served at departments.
the end of the job. • Unit cost is computed by dividing total
process costs of the period by the units
produced or served at end of the period.
Activity-Based Costing
Activity-Based Costing
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ca!c-:slatedcosl_S .ar~ u_J>sigfl!KI,
Activity-based Costing (ABC) - is used to track and control overhead costs. lt

accumulates costs of activities that consume resources.

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ABC is a method of assigning costs to customers, services and products based on an

activity's consumption of resources. lt emphasizes the management of activities and
operations rather than the department or functional area that performs the work.
To allocate indirect and support activity expenses to products and services, traditional cost
measurement systems use direct labor and machine hour bases. Engin.eering changes,
setups and parts maintenance are included.
Activity-based costing segregates the expenses of indirect and support resources by

activities. The expenses are then assigned to the products and services based on the drivers
of the activities.
Instead of applying a flat overhead percentage across the board, ABC identifies and
quantifies specific overhead costs, which assists managers in understanding and containing
overhead costs. The level of detail provided with ABC costing facilitate more accurate .
benchmarking and/or chargeback systems.
ABC systems are used in organizations that have multiple products and services and/or
products and services that use varying amounts of resources. This includes not only
materials and other direct costs but also indirect costs such as customer service, quality
control and supervision. When each product or service consumes each of these costs at
different rates, a broad brush or uniform cost for all items tends to make some products
and services appear more profitable and others less profitable than they really are.
Key steps for designing an activity-based cost measurement system are included in Exhibit
3-22. .
Exhibit 3-22: Implementing ABC in Facility Management
From a selection of cost driver activities extract all costs that represent the gross
overhead component o( each of those activities; set them aside.
Identify separate and unique overhead activities associated with each full cost
driver's gross overhead component and create a cost pool for each of those
overhead activities. From here, e1;1ch cost pool will be used to accumulate activity
base costs from different and widely varying cost drivers, hence the name activity-
based costing. Cost pools might include overhead activities such as building
maintenance, heating the building and service equipment repairs, among others.
Determine how overhead costs can best be measured bly determining an activity
base unit for each overhead activity base such as square feet, per person, per
hour, among others.
Determine the exact amount or proportion of activity base units consumed by

each cost driver activity.
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Consolidate identical activity base units under their appropriate cost pools.
For each associated cost pool, sum the activity base units to arrive at a gross
activity base for that cost pool.
Calculate an overall cost per unit for each overhead activity by dividing the total
cost pool for that overhead activity by its gross activity base.
Allocate future overhead activity costs to non-overhead activities based on usage

using proration of the cost pool or, by applying the unit costs derived in step
seven.
Periodically repeat the process, particularly steps four through seven, to ensure
the validity of the applied overhead activity costs.
Implementing ABC in FM
ABC Allocation a nd Apportionment
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Let's consider some examples of ABC allocation and apportionment in FM.

• Allocation -two basic conditions must exist before a facility manager can allocate
costs. First, the cost center must have caused the overhead to be incurred and
second, the exact amount of the overhead must be known.
Examples:
Power consumption in a stand-alone data center

Courier delivery costs, such as FedEx or a similar courier, that can be tracked
directly
Rebranding a reception area, usually in the marketing or public affairs
departments
Hospitality catering

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Overtime costs for FM staff to keep a building open and provide services, for
example, during a corporate acquisition
Staff canteen subsidy- when FM has usage figures by department, for
example, from payment cards and can allocate by proportion of users or
money spent by each department
Internal moves requested by a department- where FM can allocate whole

cost and any related "domino effect" costs
• Apportionment- where the overheads cannot be specifically identifiable to the

specific cost unit center, a suitable basis must be found to charge the various cost
units with a fair share of the overhead. There is no right way of doing this, but it
should be agreed and published in advance so departments can budget for it.
Examples:
Power consumption in a shared office (and rent, property taxes, water)
apportioned by floor area occupied or by head count
FM office salaries, apportioned by departmental head count

Staff canteen subsidy, apportioned by departmental head count when there is
no data on departmental usage
Internal moves dictated by corporate need, apportioned by departmental head

count or by numbers of heads/desks actually moved
Computer data bases have made tracking individual costs using ABC more feasible.
Organizations that adoptABC will be able to use it not only in accounting for costs, but
also for decision making. They can cost products and services, analyze processes, assess ·
management performance and assess profitability better than firms that use a volume-
based or traditional costing system.
The information derived from ABC can be used to eliminate non-value-adding activities.
Some activities and resources necessary to create and deliver a product or service are also
valued by customers. If an activity or resource can be eliminated without increasing the
cost and/or without decreasing the desirability of the product or service to customers,
potential cost savings are possible.
ABC has many advantages. Exhibit 3-23 lists general advantages and disadvantages of
activity-based cost systems.

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Advantages and Disadvantages of

ABC .
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.,, 8e11CJr vndcrst;lAd:ng of O\'Elth~<~~; mq~;ifeS rHlmerou~· oo-.r~lopm~t ·
mcas~re;, a,::Wjly-drivi~ costs, an.d maintenancehcu~, e'ten with
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Advantages and Disadvantages of

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eo5l!'va!illl are n1Yet100 ifcllan~s into concen!ra.liOG Oil !ne wrong
'l'latn.
Exhibit 3-23: Advantages and Disadvantages of Activity-Based Costing
• Accurate costing of products/services; • Not all overhead costs can be related to a

reduces distortions caused by traditional particular cost driver; some may need to
cost allocation methods. be arbitrarily allocated.
• Utilizes unit cost rather than total cost. • Cost of buying, implementing and
• Better understanding of overhead; maintaining activity-based system;
measures activity-driving costs. requires numerous development and
fTlaintenance hours, even with software
• Makes waste/non-value-added visible;
and databases.
allows management to better understand
how overall cost/value are affected if • Generates vast amounts of information;
changes are made. the volume of information can mislead
managers into concentrating on the
• Facilitates benchmarking .
wrong data.
Discussion Question
id~!1\il'j !lie Cn5t !nil<I~Ul"tliTU.JntS}'!il~"(n, 1t~i!<Q!Iilt . ~!Miy-b>a$~ Of boih.

de:sctib«lh\'!i(w(
A.. &;;ck;; eo,.teh::m~:;; ili~!Vd~ ~~Jtliie$ aJ\d wagh;i.ltilili.e~.
~ePJea.iirtion, n;ateti~ls and J>ilppiies. am:l ta~~ -
B. Ass;gnsc:osts to fimal cost objecls"l:msed en cos I diD:eB
C. Uses relllprinsjbili'iyc.enleD a;, the .l<.e;· oo:!il ohj~tin
"trockingtM'Il'>
D. Uses a single base fOr ai!Q<:.«6nt~ tndirectf(":Ortm"lQh t-0$.15.
E.. FocUl<e!>llU~n1lon <m lh~ ptor::el'>l'i Qf il:le WQrk

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IFMA 's Finance and Business Course ~tl~ .u:.M.8~. .,.
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Using Costs in Decision Making

Using Costs in Decision Making
Costs are an important part of many business decisions in FM. Consider the following:
• What sorts of property, plant and equipment should the FM organization hold?
• Should the FM organization modernize or sell an old property?
• Should the FM organization upgrade mechanical systems at a property?
• Should services be reduced to reduce cost or could they be improved with little or
no cost impact?
• Should a service be done in-house or outsourced?
When making FM decisions such as these, it's important to understand the following cost
concepts.
Differential Costs
The differential cost concept implies that costs and revenues differ depending on the
conditions. Incremental costs and relevant costs are other terms for differential costs.
Differential costs- are costs that differ between two or more possible uses of funds and
are used to evaluate and choose between alternative courses of action. When assessing
differential costs, a facility manager should ignore the costs that are the same for all of the
alternatives under consideration; only costs that differ are considered relevant to the
decision-making process.
Example: A facility manager is considering the purchase of a replacement machine. The

replacement machine will have depreciation of $100,000 per year, while the current machine
has depreciation of $65,p00. The differential cost woulcl be $35,000 of depreciation per year.
Opportunity Costs
Opportunity costs- represent "lost" opportunities that are measured in monetary units
that could have accrued to the FM organization by pursuing an alternate course of action.
Opportunity costs are the potential benefits sacrificed when choosing one alternative over
one or more other possibilities.

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Example: When investing time and funds in a major renovation project the maintenance
employees cannot work on anything else and even if there are no other viable projects, the
funds could have been invested to earn a return.
Finance for Facility Managers offers another example of opportunity costs related to
investments.
Example: Instead of implementing plan A, which could have netted $1,000, plan B was
selected, which will probably cost the business $1,500. The cost of passing up alternative A in
favor of alternative B will mathematically cost $1,000 minus (-$500) dollars. Perhaps alternative
B was expected to result in greater returns than alternative· A in the long run. Regardless of the
reasoning or the eventual outcome, opportunity costs are an important factor to consider in
business decision making, especially when resources are limited. The yield on the best
alternative is known as its opportunity cost. The alternative that offers the best investment
opportunity is preferred. If another investment is chosen over that one, the opportunity to
invest in the first alternative is given up.
Sunk Cost
Sunk costs- are money that has already been spent on decisions that cannot be
changed. A sunk cost should ·be ignored in a decision-making process because the cost
was incurred in the past and cannot be changed . The money is history and therefore
irrelevant to decisions about any future business activities.
Example: A car is taken to the mechanic and the repair cost is $1,000. Two months later the
car has problems once again and needs to return to the mechanic. The repair cost this time is
$1,500; some would say that this cost needs to be paid because the initial $1,000 has been
paid already. However, the $1,000 is a sunk cost- it has been spent and is done. A new
decision has to be made as whether to spend the $1,500. This decision shou ldn't include the
'emotion' of having already spent $1,000.
Sometimes facility managers erroneously include sunk costs in investment analyses in order
to justify continued expenditures in a particular area.
On occasion in real estate, sunk costs warrant some consideration. For example, following
the purchase of a property and money spent to engineer the site, the property cannot be
used. The property acquisition costs, attorney fees and engineering costs become sunk
costs. If management directs that the property be disposed of, these sunk costs would be
included to understand the total investment made in the property and help to set a sale
price. Ideally, it would be best to sell the property for what was paid for it, plus the sunk
costs.

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A summary of these cost concepts as they relate to investment decisions in FM:

• Differential costs and revenues always relate to future outcomes and are critical to
accepting or rejecting alternative capital budget projects t hat are also future-
oriented decisions.
• Opportunity costs must be included in an investment decision and are typically
treated as a cash outlay at the onset of the project.
• Sunk costs are ignored because they are historical costs that are not relevant to the
investment decision.
Discussion Questi.on
ldon~fy lhti foi!Gwing stoat~mwnts: ;;n; rruo Qt fals~.

F\, Diftenlfllial costs f)ntf re.oenoos. alwaysm·la~. t::~ future
outc.ome&: atld are cmk:allo accepting or 1ujeding aliemative
capiial·bu,;!getprojeds.
E\._ ~!.inj.;_-c(')!;.1iNif~- igr>Offld ~>)I,!:;~ If!&)' ('l;f'!;- ll:<.~!Qric.>)l e.Qi;!~ t !'\.itt
are no-\ r~\'ani 1t~ lilt! ifrwsimeffi.Q:~cisiofl
C. Otmoounil:( <:osts afP. typlt:aUy trooied OJS{i· I'J;)~h 0<1H"y u'll.he
oos~i of the: pr<~jm;t

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~ \n!omotlon•IFacllltyN.,..~ementA<sD<IIIIon IFMA 's Finance and Business Course
Em~rlftiFadlltyProtusiOMis WDiidwlda
Cost ... containment Strategies

Lesson Introduction
• Identify cost-containment opportunities.

• Cost-Containment Opportunities
• Cost-Containment Implementation
cc~si: ~· rt."& ities

Cost Containment
COs~ t.ont~tno'l~t1trequin~-s·
!> Mt~intauiDg organ!lationahms.ts wiihirra specif=ed'bvtigt!t
I> Contr!:Rilng'!Y.pendrtur.es- so·ih:at U">e""f meatfinanc~~e\!..
·Many pOl:>iM<!~S fOf FM cost-~on~amm~Jnt hitiot(i'.'el§.e:wst. Ql:3st,cun;;inm~n!
% ~$fllnv~ r~duc:lr,g·•j(j)(!he'll1~$ (}I Tfl(lo<~\Q ef growtll Qr
strntegi_
expendillll'cs.
No matter what the type of organization, the size, the industry, for profit or not-for-profit,
few organizations function successfully without controlling their costs. Exacerbating the
situation of constant cost pressure is the time-proven reality that more costs rise than fall.
As a large consumer of organizational financial resources, facility managers have a never-
ending challenge to contain costs.
This topic covers practices that can transform the task that can never be completed into
positive cost-containment actions no matter what the unique organizational demand and
concludes with guidelines for implementation.

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Cost-containment requires maintaining organizational costs within a specified budget and

controlling expenditures to meet financial targets. Cost-containment strategies involve
reducing expenditures or the rate of growth of expenditures.
There are many possibilities for FM cost-containment initiatives. In Exhibit 3-26, several
self-explanatory suggestions based on the collective experience of numerous practitioners
are listed.

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Exhibit 3-26: Cost-Containment Opportunities in Facility Management
• Implement zero-based budgeting. • Market test to check value for money

• Promote efficiency programs to reduce from current service delivery structures
resource units consumed in each activity. whether internally or externally sourced.
• Work on supply chain consolidation: • Consider opportunities for activity
deferral to delay expenditure to another
Reduce costs of buyer
budget period.
administration and management
through managing fewer suppliers. • Invest in planned maintenance so as to
reduce reactive maintenance costs, for
Remove duplication of supply chain
example planned revamping rather than
management, administration and
reactive replacement.
overhead costs.
• Review risk profiles and consider
Leverage volume purchasing
accepting heightened risk on some
opportunities.
facilities or services.
• Develop multi-skilled staff to reduce total
• Invest in productivity improvements, for
resource requirements, cover vacations
example, energy-efficient plant.
and absences
• Change core business activity cycles or
• Reduce staffing levels to meet norms, not
processes that create high facility costs,
peaks of activity and procure temporary
for example re-plan space allocations,
resources for peak activity periods.
contribute to production planning
• Subcontract services to remove margin- decisions.
on-margin pricing markups and replace
• Revamp property disposal through
with transparent costing for costs of
improved space usage effectiveness:
procurement and administration.
Sublease vacant leased space.
• Implement service level reviews to
Sell vacant property.
understand and act on opportunities to
reduce service levels, activity frequencies • Sell used furnishings and equipment.
and so forth to save materials and other • Analyze risk sharing with vendors.
resource usage.
• Introduce effective chargeback practices
• Implement process reviews to remove to service users.
unnecessary stages in processes and thus
remove time or cost.

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Cost-eo Im mentation
There are merits to cost-containment strategies. Management embraces ideas for cost
savings but employees and customers can become resistant if change potentially disrupts
the status quo.
Some cost-containment initiatives may be transparent to employees and customers but for
those that require employee or customer buy-in, provision should be made to remove any
fear of change so that resistance issues can be resolved. At a minimum, these types of
undertakings necessitate clear communication about the purpose and provide the
opportunity for two-way communication with employees and customers.
Management must set the example and can verbally promote cost-containment strategies
but if their actions fail to match their words, the initiatives will fail. Without basic provisions
for cost containment in place, the likelihood of mistrust will increase. Improperly managed
cost-containment initiatives can derail projects, damage morale and negatively impact the
demand organization's growth, performance and reputation in the marketplace.
Successful cost-containment implementation has its challenges, but it need not be difficult.
Exhibit 3-27 offers simple guidelines that enhance the chances for success.
Guidelines for Cost~Containment

Implementation
~>· '!1)6tilutlooa!il.I9COSir~Uon " F«>\11-de.·a IO!"maeto g;~Lher t0$1·
~pec:;jall)'tfldeeislon-maki1l'.i eOfltai!'lme!\t~s!J;Ofls.i~t
processa&. prorno:ee(J'lploy~ I!WO~.ietr.tn.l
i> kienti~ areas v.m'l h_ igh cost• \'llld b l.>y--in.
t.ontiilnmei:.:·poter.tial-m¥1 a.cl 011 .,__ Est abfiSh·a ptUCed!Ji"e.to en~mre
lhosef-rst thirt a~;~::_epled ~mooestkir>5. a~!!'
~ Miniml:tt!W<:S$t(!. im!)fulru.n!«<
, Mitigatafnmdu1ent prac:tiees. Ji>· Provide ilccnti~s; fnf me:anir.gfctl
11- ~neraie.speci'!icsaving ideas oand-a ccepf.ed cos,t.cof:!ta.ioment
.suggeStions
Guidelines for Cos!cContainment !it'""'

Implementation (continued)
~ Oeofelbps·_n~thodologyblfatk !to Ci!lebfate·W<:Ge'iws.
;le~uar~\lil'.>f}$~ ji, l...f!~cye...~mplo,
jo lnte:~te..c:oJ;;I<>anlaimnenHl!l part
of th_e r~~ dep;3rttT:el'l~l obje-ct(~'$,
jobdeseript;oos, ~rform:am:~
t~M!m

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~rl~ tE.~.8~. .,..,'"
Em~ri"'FacllltyProfuslon•lsWorldwldo
Exhibit 3-27: Guidelines for Cost-Containment Implementation
• Institutionalize cost reduction, especially • Provide a format to gather cost-

in decision-making processes. containment suggestions that promote
• Identify areas with high cost- employee involvement and buy-in.
containment potential and act on those • Establish a procedure to ensure that
first. accepted suggestions are implemented.
• Minimize waste. • Provide incentives for meaningful and
• Mitigate fraudulent practices. accepted cost-containment suggestions.
• Generate specific savings ideas. • Celebrate successes.
• Develop a methodology to track actual • Lead by example.

savings.
• Integrate cost-containment as part of
the FM departmental objectives, job
descriptions, performance reviews.
When implementing cost-containment initiatives, keep in mind:
• Strategies need to fit the demand organization.
• Actions should be quantifiable and measurable.
• Strategies should be chosen carefully to mitigate any harm to the business or

people.
The best cost-containment strategy of all is to plan ahead. Ultimately, the goal should be to
focus on being proactive instead of reactive. Being proactive implies that the opportunities
for improvement have been anticipated, being proactive costs a lot less than being
reactive.
Discussion Question
Wh~n imp:~moo!itf9co!l.i-ccmtaiun~nt ;:\iti/.I:Ne!E. 'hhithof~h~ .IQ!IO'<'Iill!.l il>

~J:>PfOfll'i~f.ePtactit:rM;:?
A. lJse only pmw:m mdu:>fry bc.S.tpratlices.
9. E"nsur~ that S!.l£1\()gies ljt the O:'Qilniza'!iO[lo
C. I<JM!if}' ati::i):S. Witfl K¥ovwst cc:mtainmentpo1«Jiial
0 . ldenl.ify _>M;;to>lfJ; v.~m higt'! CQSH::.,ot:;~jorr~Npotenli<~l a:rW ~cl 011: tn.,s~ liiSt
Case study:
• Refer to the Case Study example in the State or Cross-Border Benchmarking and
Budgeting topic.
• You've been asked to cut the budget by 10%.

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• What are some of the actions you might take and why?
Ca~Je Study
C<!<"t.E! ~Ivdf
• Refer·to the Case Study eKa:m p'&in tha state or Cros:s--Blxrier:
Benchms:Kimj~nd Butig~f/ng topic.
~ Y(lt('>re~n a!$ke<il0eu~. ltle boog~lb);• 10%.
• What a:e some of the <K:Ikms ~~ m ignt take nnd ~'<hy?.
Exhibit 3-28 Case Study: Example of FM Budget
SERVICES
Building Engineering Provide qualified $800;000 $780,000

Services staff to perform
preventative
maintenance/repair
on building
systems along with
maintaining the
central plant
Janitorial Services Provide cleaning $250,000 $245,000

services to entire
building to ensure
the building
maintains required
health standards
along with
maintaining an "A"
rating
Security Services Provide safety and $300,000 $325,000

security for
building and
occupants
Elevator Maintenance Provide $350,000 $350,000

& Repair elevator/escalator
maintenance and
irs required by

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~
IFMA~
lntern~lonaiFacllityManagomentAs•od;otlon IFMA 's Finance and Business Course
Em~rln.-FacllltyPrvfuslonoiJWorhllllid•
the State of
California and City
)
Security System Preventative $50,000 $50,000
Maintenance maintenance &
repair of
computerized
security system
and wiring
Maintain/repair Preventative $80,000 $90,000

building management maintenance &
system repair of
proprietary BMS.
Consists of
automatic controls
and devices for
building heating,
ventilation and air
conditioning as
well as lighting
systems
Computer rooms Maintain clean $50,000 $45,000

cleaning room atmosphere
for all building
computer rooms
Chiller certification & Required by $20,000 $17,500

testing Environmental
Protection Agency,
chillers not
properly
functioning could
cause possible air
contamination or
ale shut down.
uired by AQMD
Boiler Certification & Required by City $20,000 $15,000

testing and AQMD if not

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tested and certified .

could be shut
down
Fire Extinguisher Retquired by City $7,000 $5,000

Recharging Fire Department
Regulation for testing Retquired by City $25,000 $24,000

Fire Department
Fire alarm repairs & Required to $10,000 $15,000

certification maintain proper"ly
functioning fire
alarm system,
provide
certifications of
systems as
required
Fire sprinkler repair To repair leaks in $15,000

building sprinkler
pi pi
Certify/maintain/repair Cit¥ retquirement to $10,000 $75,000

building backflow be tested on a
devices yea basis
Roll up door repairs Maintain and $10,000 $0

repair roll up doors
Maintain/repair/dean Retquired by health $16,000 $16,000

cafeteria exhaust fans department to
prevent clogging
and fire
Grease Interceptor Retquired by City to $50,000 $50,000

cleaning remove grease
prior to entering
waste stream
Maintain/repair trash To ensure $5,000 $25,000

compactor compactor working
at all times

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~ ~·n~ement
Interna t ional F;oclllty An odatlon
ENp<MMri"'Fao:UityProfuslonalsWorldwid•
otherwise trash
picked up daily and
trash hauling cost
will rise more than
100%
Repair of vertical For repair and $5,000 $2,500
blinds replacement parts
of the building
window coverings
Repair/replace carpet To mitigate trip $10;000 $2,500

hazards carpet
needs to be
red asap
Water mitigation Service to mitigate $10,000 $15,000

water intrusion to
prevent mold,
mildew and
disease
Pressure wash To prevent exterior $15,000 $15,000

building and clean building
windows deterioration from
dirt and grime and
to maintain a Class
A building
Pest control services Ensure building is $30,000 $20,000

free of pests and
rodents
Thermal scanning of Annual services to $6,000 $6,000

building electrical detect possible
electrical problems
prior to having a
m electrical fire
Cooling tower and Weekly service to $30,000 $25,000

chiller chemicals and provide and aCid
chemical monitoring chemicals for

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~
IF MA~
· Mana~em...,t
International f ao;IIJtv Auodotlon
EN~rl"' FadlllyPnfuslonaloWorldwlda
building water
systems to
maintain proper
chemical balance.
Necessary for
monitoring and
servicing
equipment that
regulates the
chemicals and
water in the
building chillers
and cooling
towers. Reduces
liability of staff
handling the
chemicals and
having hazardous
chemicals stored
on site
Water treatment Quarterly $10,000 $5,000

testing and analysis consulting service
required to test
water system and ·
ensure building
system including
cooling tewers and
chillers are fee of
contamination
TOTAL SERVICES $2,179,000 $2,233,500

COMPUTER
SERVICES
CAFM system Provide software $2.0,000 $0

upgrades/repairs upgrades and

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~ lntemot10f1oiF..:IIity M • n• gementA>Sod• tlon
Elll~rt"'FacllltyPrvhssl..,oi•Woriclwide
CAFM System yearly Annual licensing $25,000 $25,000

license fees fees to software
producer
Tools & equipment
TOTAL COMPUTER $45,000 $25,000

SUPPLIES
Office Supplies Supplies necessary $25,000 $20,000

to maintain normal
business
operations for FM
Computer Supplies Printer cartridges, $5,000 $4,000

storage disks and
supplies needed to
maintain daily
operations
functioning
smoothly
Emergency supplies, Replenish $5;000 $1,000

food and water emergency
supplies that have
expired or have
been used
Tools & equipment $35,000 $25,000

TOTAL SUPPLIES
MEMBERSHIPS,
TRAVEL&
CONFERENCES
Membership in IFMA Provide up to date $2,000 $700

for 3 staff information and
assistance for
facilities staff
SeminarI conference Registration for $5,000 $0

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~ lntern~tlon~I Fi<:lllt'flol;~mgementA•soda!lon
EmpoMrlnc FKllltv l'nmuiORllls Worldoold•
fees facilities
conferences
Travel Transportation and $0

lodging for
attending facilities
conferences
TOTAL $12,000 $700

MEMBERSHIP,
TRAVEL&
CONFERENCES
TOTAL BUDGET $2,271,000 $2,284,200

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Empowm"' F;odl!ryl'fofuslon•I• Worl<hwld•
Chargebacks
Lesson Introduction
• Explain the use of chargebacks to allocate facility costs.
• What is a chargeback?
• Advantages and Disadvantages of Chargebacks
• Chargeback Systems
• Facility Manager's Role in Chargebacks
"C bar~backs, -<!I!>Q knQWf1:<JJ$ f=CA. cra!l$ -ci\;lr.Wn~t or t!M:hll(ging. <W~Gribt!!he

ahll(t:y of ;:"M to·chil!f9~ its ~c. cr.~ ilflOthe:r grwp tt:.at is f«ji,IG:sling thosf!
A GM;rgeback·I>Y&tem is a $YS!e!l)Whel~ ,;ortiP<i!?lie$ reQVIre ~lee .

de~ltfr'J(!IIt~ to-charga ?ttwr ~E>f:>:/rrtmeoni ~~Of S.t.<flik:%tl}'f~f«l
c ·tlal::§l-ebacka ate- :hot rtone Jn every organization. lfthey are, me pr<n: tlee!ii
must b~n<~:llor~d 't(l ttw organlutkm and mlniml<:e any perc:~plion>& abQUI
unfait or urH'Q<J !istic allocation& or 1:;harg~s~
FM and accounting view chargebacks as an opportunity to create accountability and

transparency. This results in gaining a better grasp of business allocations and tosts and
allows organizations to effectively fund and reallocate resources to match the momentum
of business change and evolution, resulting in the moving and sharing of resources across
the demand organization. Facility Cost Allocation (FCA) is typically a corporate decision
with senior administrative support from the Finance Department. While the facility manager
can propose and promote FCA, it requires support and commitment from senior
management or else the push-back can be insurmountable.

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What is a Chargeback?
A chargeback, cross-charging or recharging is when a department is internally billed for the
space it uses. The objective is to identify and communicate departmental costs and to
reduce the inefficient use of space; it can pertain to all FM services. A well-designed
chargeback system can provide a fair allocation of facility costs and services to the end
user.
Chargeback have not been designed to penalize the workforce for the resources and real
estate it uses and the goal is not to create a source of profit. Chargeback have been
created for the FM team to ensure that the workforce is productive in the most efficient
way possible, while maximizing company profits. lt is about an awareness of where the
budget is allocated and improving cost strategies.
In today's business environment workspace dynamics are constantly evolving and the
facility manager needs to adjust the strategies to match the growing needs.
Adva
Char·gebacks
Chargebacks offer the demand organization and FM some important benefits. The main
advantages of chargebacks include:
• In organizations, they make FM costs more apparent and understandable to line
managers.
• In manufacturing environments, they allow FM costs to be more easily tied to a
product.
• They promote cost-conscious behavior and encourage thrift and efficiency.
• For those FM services where end users have options to use an outside provider,
facility management must earn the business and that can lead to department
efficiencies.
• Promotes the FM unit as a resource partner and preferred provider of support to
other business units.
Some of the primary disadvantages are:
• Chargebacks may not be market-competitive costs.
• Systems may lack flexibility and can be time-consuming and difficult to administer.
• Chargebacks are not determined by negotiation with the customer. Customers

often do not have a choice in whether to use the internal supplier and subsequently
the service levels.

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Emi'OW"rlltfFao<llltyProfuslonalsWorlclwld•
• If customers have a choice, a facility manager may have to prepare many more
annual cost estimates for customers to convince them that FM is a vendor of choice.
• Chargebacks may involve unrealistic cost allocation rules.
• Chargebacks may penalize departments that have problems in reducing head count
or space occupancy.
• Systems may deprive FM of any discretionary budget.
In an office setting, chargebacks can lead the FM department to focus on costs and politics
instead of services. When this happens, chargebacks may not be worth the time or effort.
C rg
Chargebacks are not applied in every organization. If they are, the practices must be
tailored to the demand organization.
Systems for administering chargebacks may be broad or quite specific. FM may:
• Charge actual direct costs.
• Charge actual direct costs plus an overhead charge.
• Charge an allocation based on specified criteria, such as space occupied or number

of employees.
• Use flat fee rates (tiered or negotiated), tied to internal service-level agreements
that define objectives.
• Use a combination of these approaches or use different ones.
Even more complex chargeback methodologies are based on external market-based or

industry-wide pricing.
Chargeback Benefits & Services
- Cc.-.;IAWfiN'oW:U
Fe~·fof-Ser<'i~C!
- ~tJ!iliS Costs·A~'*<!Wit> $pa£!!

-Oi'>(l~<;t><;f..e<$S
-· O!m:t Fa~i~W fhttt a Or.:;:,. Timt: COsts

- N£~!<1!)1 Se~w:~ ~::l"b)'f:k1
Benefits of Chargeback Systems

By implementing a fair equitable chargeback system, there are two primary benefits:
• Cost Awareness- FM becomes acutely aware of the costs. Cost awareness

benefits the company as a whole by reducing costs. lt helps avoid unnecessary work
by allocating resources more closely in line with the original, budgeted purpose.

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Em~rlnf:FadlltyProfusl.....,l•Wothhold•
• Fee-for-service - in the early stages of growth most facilities departments are set
up as an overhead cost center, which means that costs are not allocated to the
users. End users will continue to ask for services until they are turned away by the
facilities department due to a lack of funds. Shifting from this mode of operation to
a fee-for-service is usually difficult because corporate attitudes about facilities
services must change at every level of the FM organization. Once this shift is made,
the facilities department will be seen as a service provider.
In a budget, a chargeback is recorded as either revenue or expense recovery to FM. If the

chargeback is for another department within an organization, it is recorded as a cost or
expense by the department occupying the facility and using the FM services.
Levels of Service
Chargeback systems can be organized into five levels of service. This breakdown reflects
the structure of standard lease packages.
1. Basic Rental Cost- basic rental may be standard for all departments or it can be
adjusted to reflect the capital asset value of space. lt is based on an appraisal of the
type of construction. The baseline for cost comparisons is standard fin ished office
space. Alterations above the building standard are billed as a separate, one-time
charge. Basic rentals include the following:
Rental per square foot, including the repayment of base building construction,
loan interest, reasonable profit, insurance and taxes.
Repayment of the cost to construct the required space to the building

standard specified in the tenant work letter in commercial practice.
Repayment cost of the initial space layout and working drawings for standard
alterations.
2. Operating Costs Associated with the Space- a single rate for all user
departments is usually set, unless they have a sophisticated space accounting and
tracking system that will break out costs by department. Space-associated
operating costs typically include:
Utilities
UPS - Unint erruptible Power Supply
Facility administration
Site management
3. Ongoing Services Rendered- setting a baseline is important. Some departments

may require more service than others, for example a day porter for executive areas.
Either some means of tracking these differences or a schedule of above-standard
charges is needed. Examples of ongoing services:
Routine responsive maintenance

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Preventative maintenance, inspections and monitoring

Security service
Landscaping maintenance
Housekeeping service
Technology services
4. Other Facility-Related One-Time Costs- expenses associated with rearranging
facilities to support a change in the basic operation of the user constitute a facility-
related one-time cost. One-time costs are tracked by work orders for specific jobs
and include the following:
Moving
Furniture rearrangement
Space redesign
Above-building-standard alterations to prepare the space for occupancy
Extra design services for above-standard alterations, such as extra detailing,
millwork shop drawings, installation drawings and specification of systems
furniture
5. Ancillary Services Provided by Facilities Departments -demand for a wide
range of services that are time consuming and expensive. If these services are
provided, extra charges are levied. These services can include but are not limited to:
Catering for special meetings
Chauffeur service
Picture framing
Setting up and clearing of conference rooms
A well implemented chargeback system assists facility managers in fairly allocating facility
costs to the end user. There are challenges in implementing and maintaining the system,
but the benefits do outweigh the difficulties.
Chargeback Challenges
• Addi1ion<aiS!o!ffRe_quitBroori1$
• Compatlbiiitywnh t~isur.g PoliciEs
·• Coru;uo~·-E.d~>oca.tioo
• l!'f!balartce ot Suppti/\ Peman<;l
• Def•nit!o!'l cl Maje'!"W> Min« !fnpit:W-eo"te-ntr.
• Ot.<~tt<>nsofF;<~;rm:>l.l

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Change in an FM organization can be difficult, and when implementing a chargeback

system, obstacles may occur such as:
• Additional staff requirements- the facilities department has the following five
options where this is concerned:
1. Allocate more staff to manage the system
2. Hire part-time or temporary assistance

3. Eliminate other tasks
4. Estimate where the chargeback system will reduce unnecessary work and use
the existing staff to manage the service
5. Ensure staffing flexibility and scalability to meet the various needs
• Compatibility with existing policies- before procedures can be implemented,

they need to be dovetailed with existing policies, manual procedures and
automated sequences, so that data can be tracked smoothly across organizational
lines.
• Consumer education -the facilities department must educate the building users
about how the system works and why specific items are charged. If this is not done,
claims of unfairness may arise and end users will become less cooperative.
Once the challenges of implementing a chargeback system are overcome, additional

challenges can arise, these being:
• Imbalance of supply and demand - services are demanded according to the

budget. There may be a year-end rush to finish the budget which will overload the
facility management department. The reverse is also possible, over ordering of
items or services and then reneging on the commitments.
• Definition of major vs minor improvements- a comprehensive chargeback

system covers the life cycle cost of operating and paying back a building's useful
life. lt does not cover costs of major replacement or renovations that will extend a
building's useful life. The cost for this is factored into some chargeback systems to
develop a general fund from which all projects can be funded. This leaves users
displeased for having allocated resources to a long-term investment that does not
pay off.
• Questions of fairness- when users become conscious of costs, they also become
conscious of how costs are allocated across all departments. Across-the-board
charges are simple for administration, but unless clearly communicated, will cause
concerns about inconsistencies.

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Chargebacks in the Evolving Workplace

'
The concept of understanding resource usage is not new to FM. This knowledge is used to
forecast future needs, plan for annual budget meetings and ensure that all user needs are
met.
When the chargeback strategy was initially designed; space was allocated by department,
with each individual assigned their own workspace. The chargeback process grouped
allocations based on department. lt brought awareness regarding what was being used and
how, offering real data for making informed business decisions. With the emergence of
mobile tools, these departmental structures are being eroded, making way for a
collaborative workspace environment, in which teams are comprised of individuals with
varying strengths from multiple departments. This transformation has forced management
teams to adjust their mindset regarding space and asset allocation.
Re-evaluate the Space Allocation Strategy

As greater emphasis is being placed on workspaces becoming collaborative and
cooperative, a similar shift of emphasis from departmental structure and cost center level
to space usage, coupled with workforce behavior has occurred. The productivity of the
worker is paramount, and the arrangement of workspaces is shown to have a substantial
effect on this metric. In order to truly analyze space utilization from every angle, facilities
teams are developing different ways of considering how to allocate space with particular
focus on the different workspace groupings and the personal dynamics within them.
Previously clients used their chargebacks through the space cost center, where each
department and each individual was assigned their own space. A department could be
identified if it was under utilizing the allocations and revisions could be made accordingly.
With the evolving workspace the mindsets and tools need to adjust.
While the concept is still the same, the cost center has been renamed "category", so that
facility managers have the flexibility required to define their own categories. The view has
been expanded to allow for more flexibility, with the ability to define different groupings.
Employee X might be working on multiple projects, moving around from space to space as
the needs arise. Rather than assigning a specific department or space to this individual, it is
more effective to group him in multiple categories, based on specific projects, job title or
job description. This flexibility empowers the facility manager to run better analytics and
visually see the relationships which will, in turn, allow them to make better decisions
regarding how to enhance the work environment.
This allows for more precision in cost-cutting efforts, expanding efforts to maximize all
resources. Chargebacks can now be addressed more as billing and tracking spaces per

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employee and become tools for examining the needs of the individual as well as the
Chargebacks still have their value and place and will continue to be a valuable tool for data
analysis of space usage. With so much flexibility occurring in modern business practices,
there has to be a shift in the ways the assets are being applied, the spaces allocated and
the needs of the workers addressed. There is a shift toward more collaborative spaces but,
there are many organizations that have their staff in more traditional workstation
environments. There is both a shift and continuum; there may be some activities that are
charged to the customer- if they want it, they have to pay for it from their budget and not
the FM. This is a hybrid of chargebacks and traditional costs. The important questions are,
who pays for the actual service? Is it part of the facility manager's budget? Does it come
from the business unit?
Facili Manageris l{ole i Chargebacks

Managing a chargeback system is challenging. Facility managers need to be able to
calculate true costs for products and services, including overheads. Allocation rules can at
times seem unrealistic.
Example: Within an organization, two operating units occupy approximately the same gross
square footage. One is in a brand~new property and the other is space in a 30~year~old rental.
Should each unit be charged the same base rent? How can FM account for the qualitative
differences so that <jillocations do not appear arbitrary?
If a facility manager is required to implement and administer a chargeback system, it will

need to ensure that the department has software and hardware to administer a chargeback
budget. The facility manager will need to define, justify and apply chargeback procedures
so that:
• What costs to charge back, on what basis the charges are computed, such as square
foot or per use and on what terms services will be-provided are determined,
documented and communicated.
• Agreements with customers on what services to deliver are tracked and charges
incurred during the agreements are documented and communicated.
• The system used to do the chargebacks is in keeping with the demand
organization's philosophy and policies regarding chargebacks.
• . Actual operational costs are determined.
• A standard method for defining and charging occupied and vacant space is
determined and communicated to the appropriate parties.

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• Business units understand the financial implications of facility-related requests.

• The method used to determine and calculate what is charged back and at what rate
is documented and communicated to the relevant business unit or operation.
• The services to be charged back are adequately communicated and agreed to by
the customer.
• Where appropriate, a contract or service level agreement is entered with the
customer.
• The true cost of the space and services is reflected in the profit and loss statement
of the business unit.
lt is commc:m for clients or business units in an organization to challenge the fairness of a
chargeback model or to dispute invoices. Facility managers will need to hone their
communication skills; it has been suggested that chargebacks are 20% reporting and 80%
politics.

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&a~linfF..:UityPmusl"""loWorlcholll•

1. What best describes a variable cost?
a. A cost that varies with changes in volume or activity, but not in direct proportion
b. A cost that routinely increases and decreases proportionately with changes in
activity level
c. A cost that remains unchanged in total for a given time period
d. A cost that Is fixed within some relevant range-specific cost drivers for a specific
duration of time
2. Why do cost allocations?
a. To collect and sort cost information in an organized manner through an

accounting system
b. To relate resources consumed to the outputs or outcomes provided by those
resources in the form of a ratio
c. To assign direct costs to a particular cost object
d. To determine the proportional share of the total cost that belongs to a particular
cost object, based on data about the proportions of the total resource cost
consumed by the cost object
3. What is meant by differential costs?
a. Costs that have been incurred on decisions that cannot be changed

b. Costs that represent the potential benefits sacrificed when choosing one
alternative over one or more others
c. Costs that differ between two or more possible users of funds
d. Costs that should be ignored because they were incurred in the past
4. What does job order costing do?
a. Accumulates resource costs from multiple sources that are brought together to
deliver a product or service
b. Traces costs of materials, direct labor and overhead to individual departments or
processes
c. Accumulates product or service costs by process or department then assigns them
to a large number of nearly identical products
d. Determines unit costs for similar or identical products and a steady stream of units

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5. What is an appropriate practice when implementing cost-containment initiatives?
a. Use a top-down approach

b. Make sure actions are quantifiable and measurable
c. Do not implement initiatives unless there are budget challenges
d. Initiatives should support the status quo
6. What are cost containment opportunities in facility management?
a. Increasing staff le~els to cover forecast peak periods of activity

b. Deferring or delaying expenditures to another budget period
c. Bringing subcontracted services in-house
d. Eliminating chargebacks
7. What operating costs are associated with space?
a. Training
b. Utilities
c. Financing
d. Marketing
8. What are examples of ancillary services provided by facility departments?
a. Catering for special meetings and chauffeur services

b. Space redesign and moving
c. Security and landscaping
d. Above-building-standard alteration
9. Once a chargeback has been implemented, what other issue might arise?tify an
additional issue that may arise:
a. FM becomes acutely aware of the cost

b. Increase in service requests
c. Questions of fa irness
d. Increase in FM department's discretionary budget

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10. Chargeback, cross-charging, or recharging are also known as FCA. What is FCA an
acronym for?
a. Facilities Calculation Allowance

b. Facilities Cost Allocation
c. Facilities Cost Allowance
d. Facilities Calculation Allocation

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Chapter 4: Business Cases, Supporting

Documentation and Financial Reports
• Develop business cases that are supported by clear documentation.

• Determine the relevant financial data that should be included in a business case.
Busin0ss Cases,
SvppQrting
Docum£:-ntatlon and
F!nancia! R<:ports
Chapter Objf:)ctives
O:!l- r~TW~~OOMI fuir; l<a~(')n·,)'Qu w!!l M a~IR :0~

.f Oev~ buiiAc ss cases that iilre>supperlcd by.cie.a! docum.entation ·
....
;r ~teirnlne :l~.ft'~arn firlwldaJdat-lli 1h'!lliho~Jid be inc.lodedin a buslf\f:ls.s·
lessons
• Developing a Business Case
• Business Case Financial Data
© 2020 IFMA Edition 2020, Version V20l7PAFB_1 .1

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Developing a Business Case

Lesson Introduction
• Develop business cases that are supported by clear documentation.
This lesson consists of the following topics: ·
• Promoting Facility Management in Business Terms
• Writing a Business Case
• Components of a Business Case
• Business Case Sample
Wri1:i
Writing A Business Case
A ~$i:'II%S<:<~sa lflus;irutas. I'!Qw a pmj$<:t ar iriil~h'E:! lhat·has,bae:n.ahgr'l(!d lo

t /:Q t:le:ma~ orjj<~m~~fum'_s s!tAt~;c plan, ~tra:legi~;lj\d otljrn::ti~s. <:M <i<W
't<lh.!~ aM effu<:tively meeibusi.'lc !is Be:.edS.
lmpo;t~r.i ~&mem_so1 wMtlM a bi.Jairlto$11. -Ci~W il>tlt<de:
~ P~uaSlila w:;n~g
I> Relevant and a.;;cun~!~: $l.IWOfi~w~ do~a.Jmentaiioo

1> SWOT AMI1~-s~s
~· Un!jet$~'1nding me bw;~na;~; prm:e$$o3S. or I~ cemando(g.an~mioD
A business case illustrates how a project or initiative that has been aligned to the demand
organization's strategic plan, strategies and objectives, can add value and effectively meet
business needs.
A facility manager cannot be successful without aligning the FM organization to the

demand organization in all aspects of its identity. To meet the FM organization's objectives,
it is integral that FM understands the core business objectives. Alignment to the core
business objectives is essential when developing business cases for the FM initiatives.

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When preparing a business case, demonstrate knowledge of the demand organization's

pursuit of profits and reduction of costs.
A well-crafted written business case provides information about the what, when, where,
how and why of the proposed initiative. All relevant narrative and financial data should be
linked together into a cohesive presentation to justify resource and capital expenditures.
Important elements of writing a business case include:

• Persuasive writing- encourages careful word choice, the development of logical
arguments and a cohesive summary. A business case should be compelling and
should adequately capture the qualitative characteristics, quantifiable and
unquantifiable elements and tangible and non-tangible benefits of a proposed
undertaking. A well written business case will promote the FM organization as a
valued partner to the demand organization.
• A focus on the bottom line- will hold senior managements' attention. Include
the funds required, the return-on-investment (ROI) which is the profit anticipated or
saving that will result from the project/initiative, the improvement of morale,
productivity and welfare of employees and the fulfillment of legal or mandatory
compliance requirements.
• Relevant and accurate supporting documentation - will promote

understanding of how the proposed initiative will support the demand
organization's objectives. The FM needs are not always obvious to other
departments and explaining these in language that is understood by the decision
makers is a critical function for a facility manager.
• An analysis of the strengths, weakness, opportunities and threats (SWOT)- as
they relate to the proposed initiative or project will provide an assessment of the
current state and rationale for the proposed initiative. A key benefit of the SWOT
analysis is that it not only focuses on fixing or mitigating weaknesses but also shows
how to nurture and leverage strengths. The internal data is more reliable if some of
the stakeholders interviewed are external customers and suppliers. External
viewpoints add perspective, particularly for weaknesses that internal stakeholders
may minimize.
• Understanding the business processes of the demand organization - such as

the approved business case format as well as budget cycles, approval authorities
and competing demands for resources, and working within this framework
increases the likelihood of the project receiving funding. Proposed capital
investments in FM have to compete for capital funding. Finance and other senior
management will review the case and prioritize the project against many other
initiatives that may require capital investment. Facility managers who are familiar
with the business terms and principles that senior management use and adhere to
business process will increase the chances of their projects being approved.

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Components of a Business Case
&< E~~cul~e :s-:Hlf!la~r

._ lntrodwction
~ A~~umpllOM
*' Bu!Sinesso'lalysis
~ RiskM;)I}'~is
tJ;;;;;;;;;;;;:.;/ ~ RoJ-c"(>l'njt'lt!hd.atw:m
All reJe'lfant n.aHatjve aoo f(I'IO)ricit~! ca~a $l-:t:~~!ltl be [n~ed IC)lelf1er i~to a
c;tlhefliYEl p~P.sent~\ior..~o ·~ur.li~ re!lourc~l'< .und r.t~pltal f.!:<pendilurl!!'!>
A business case should follow the preferred or approved organizational format and include
expected elements. Exhibit 4-7 provides a list of commonly found components. Due to the
diversity of the subject, this list is not prescriptive but more a general indication. Some of
these elements are dealt with in more detail in a subsequent section.
Exhibit 4-1: Common Components of a Business Case
Executive summary A high-level overview of the proposed initiative, including why it

is necessary and key recommendations.
Introduction A description of the current situation, the requirement for the

proposed initiative and recommendation and how the effort will
fulfil! organizational objectives.
Assumptions Recognition of what major assumptions are behind the

proposed initiative.
Business analysis Financial analysis results: Initial cost estimates, funding required
and related expenses, projected cash flows and financial
payback.
Business case financial data will be covered in more detail Later in
this chapter.
Rationale for change: A discussion of how the solution addresses
issues or opportunities.
• Potential benefits; such as improved customer satisfaction,
increased retention of tenants, or reduced maintenance
costs.
• Compliance with mandatory regulatory requirements, such
as standards for accessible design or legislation related to
health and safety at work.
Risk analysis An overview of:

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Components What lt Provides
• Risks involved in the proposed init iative.

• Alternative options in ranked order to demonstrate the
optimum solution.
• What will happen if the effort is not undertaken, also
referred to as the do-nothing scenario, where the FM
organization would be without the project.
Recommendation Content describing the recommended solution(s).
Timeline Estimates about money, people and time that will be needed to
deliver the solution and realize the benefits.
Business Case Sample

Excerpts of a sample business case which compares the choice between two different
investment options for the purchase of a new chiller are shown below. The presentation
highlights a comparison of the long-term financial implications for a purchase decision.
This scenario is hypothetical, and the information describes some of the likely components
of a business case. As noted in Exhibit 4- 7, "Common Components of a Business Case,"
additional information would logically be included in such a business case.
Remember that most organizations have a required format for their business cases and
specify the type of financial analysis required. lt is incumbent on a facility manager to
ensure that FM business cases follow organizational protocols.
Executive Summary
The organization's strategic plan mandate is: "Strive to become more competitive and
effective and provide the best, safe and productive workplace possible for employees." All
decisions for FM operations and processes are measured against this mandate.
In terms of the critical comfort needs of the employees in a building, a high-performance

heating, ventilating and air conditioning (HVAC) system makes a building a more desirable
work environment. After an assessment performed by an engineering firm, it has been
determined that the current chiller is beyond its useful life. To continueto provide air
\ conditioning and sustain a competitive and pleasant workplace, a chiller must be replaced.
Additionally, the organization is concerned about its impact on the environment and the

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community. In addition to cost savings, sustainability factors must be a consideration when

replacing equipment.
This proposal for capital funding is based on the analysis of two mutually exclusive
investment choices. The recommendation is a new 300-ton chiller. The new chiller will play
a significant role in creating a more comfortable environment by providing the right
temperature, humidity and ventilation. lt will reduce the building cost of operation, provide
energy efficiency and minimize environmental impact.
Introduction
The reliability of the current chiller is declining; a facility condit ion assessment performed
by an engineering firm has confirmed that the unit is in a state ofdisrepair and should be
replaced very soon. lt is currently costing more to continue operating the current chiller
than to replace it. Running the HVAC at maximum efficiency is the best way to minimize
service calls, eliminate surprises and control total cost of operation.
Possible Solutions
This proposal for capital funding analyzes two mutually exclusive investment choices:
• Option one: a new 300-ton chiller to replace the current one.
• . Option two: Six 50-ton package units, a change to the current system.

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In researching the best course of action, the facility manager must consider:
• The best equipment to provide the right comfort environment along with the right
temperature, humidity and ventilation.
• The new equipment must reduce the cost of operation by being more energy efficient.
• The new equipment must be able to integrate into the existing building automation
system (BAS).
• How the alternative option, six 50-ton package units, compares to replacing the 300-ton
chiller.
What are their costs and maintenance schedules?
What is the estimated useful life of the equipment?
What is the life cycle costing (LCC) for each option for 20 years which is the expected
useful life of the chiller? What are the total costs, maintenance, operations, parts,
labor, energy costs for each recommendation?
Are there physical and/or infrastructure constraints to installing six 50-ton package
units? Is there adequate space for either the chiller or the package units?
How reliable will the new equipment be?
During installation, how will it affect the building occupants?
Business Analysis
Business Analysis
Qptk>n&'.
1. OptioA of'IC.: ·30o-ton c.tlili&r
2:. Opt<oo&fo:Si!l: SO-ton pl;l<lkjlgt;'Ur'!il.$
The financial analysis shown here outlines the 'initial cost estimates for the two options
under consideration.
Option one: 300-ton chiller

The first table that follows represents a running total of expenses for option one, the 300-
ton chiller.
The last column (PV$) identifies the present value in dollars. That number is derived using
an annually decreasing factor (PV factor) based on a discount rate of ten percent. The PV
factor is a discount factor that establishes future costs in today's dollars.

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lt is important to note that both the maintenance and utility costs are subject to an annual
4% increase, FV (Future Value) factor in column three. The annual adjustment is included in
this analysis and is totaled in column "Total M&U."
Note that in year ten, an expense of $170,000 is identified. This expense is for a major
overhaul of the chiller system based on the manufacturer recommendations.
FV
Year Initial Cost Factor Maintenance Utilities Total M&U Total Cost PV Factor PV$
0 $ (295,000) 1.0000 $ .(1,725) $ (20,000) $ (21,725) $ (316,725) 1.0000 $ (316,725)
1 1.0400 (1 ,794\ (20,800) (22,594) {22,594) 0.9091 (20,540) _
2 1.0816 (1,866) (21,632) (23,498) (23,498) 0.8264 (19.419)
3 1.1249 (22,498) (24,438) (24,438) 0.7513 ('18,361)
4 1.1699 (2,018) (23,398) (25,4 16) (25,416) 0.6830 (17,359)
5 1.2167 (2 099) (24 334) (26433) (26433) 0.6209 (16.412\
6 1.2653 (2, 18.3) (25,306) (27,489) (27,489) 0.5645 (15,5'17)
7 1.3159 (2,270) . (26,3'18) (28,588) (28,588) 0.5132 (1 4;67 1)
8 1.3686 12361\ 127.372\ 129.733) {29,733\ 0.4665 (1 3.870)
9 1.4233 (2,455) (28,466) (30,921) (30,921) 0.4241 (1 3,114)
10 (170,000) 1.4802 ·(2,553) (29,604) (32,157) (202,157) 0.3855 (77,932)
11 '1.5395 {2,656) (30,790) (33,446) (33,446) 0.3505 (11,723)
12 1.6010 (2,762) (32,020) (34,782) (34,782) 0.3186 (11,081)
~1 3 1.6664 (2,874) (33,327) (36,201) (36,201) 0.2910 ('10,533)
14 1.7317 (2 987) (34 634) (37,621) 137 621) 0.2633 (9906)
15 1.8024 (3,109) (36,047) (39,156) {39, 156) 0.2405 {9,4 '1 5)
16 1.8730 (.3,231) (37,460) (40,691) {40,691) 0.2176 {8,854)
17 1.9494 (3,363) (38,988) (42,351) (42,351 ) 0.1988 (8,4'17}
18 2.0258 t349sl 140.5'16) (44,011) (44,011'} 0.1799 a 9'17l

19 2.1085 (3,637) (42.169) (45,806) (45,806) 0.1643 (7,524)
20 2.'191 1 (3,780) (43,822) (47,602) . (47,602) 0.1486 {7,074)
$ (636,364)
Option one (300-Ton Chiller): Present Values (PV) of Annual C.ash Flows
Option two: Six 50-ton package units

In this second table, the life-cycle cost of option two (six 50-ton package units) is identified.
In year ten, an expense of$392,253 is identified. This expense is for replacement of the six
package units. The present-day price of this replacement is $265,000, the cost is being
escalated by 4% per year to accurately reflect the rising cost of inflation, parts and labor;
hence, the larger cost of $392,253.

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EmpMmnf: FKILity Profusionals Wortlhold•
FV
Year Initial Cost Factor Maintenance Uti.lities Total M&U Total Cost PV Factor PY$
0 $ {265.000) 1.0000 $ (1,600) $ (18 750) $ (20 350) $ (285.350) 1.0000 $ (285.350)
1 1.0400 (1,664) (19,500) (21;164) (21,164) 0.9091 (19,240)
2 '10816 (1,731) (20,280) {22,01 1) . {22,01 1) 0.8264 (1 8, 190)
3 1.1249 (1 ,800) (21,092) (22,892) (22,892) 0.7513 (17,199)
4 1.1699 (1 ,872) (2 1,936) (23,807) (23,807) 0.6830 (16,260)
5 1.2167 { 1,947) (22,81 3) (24,760) (24,760) 0.6209 (15,373)
6 1.2653 (2,024) (23,724) (25,749) (25,749) 0.5645 (1 4,535)
7 . 1.3159 (2,105) (24,673) (26,779} (26,779) 0.5132 (1 3,743)
8 1.3686 (2,'190) (25,661) (27,851) (27,85'1) 0.4665 ( 12,992)
9 1.4233 (2,277) (26,687) (28,964) (28,964) 0.4241 (1 2,284)
10 (392.253) 1.4802 12368) (27 754) (30. 122) (422 375\ 0.3855 1162.8261
11 1.5395 (2,463) (28,866) (31 ,329) (31 ,329) 0.3505 (10,981)
12 1.6010 (2,562) (30,019) (32,580) (32,580) 0.3186 (10,380}
13 1..6664 (2,666) (31,244) (33,910) (33,91 0) 0 .291.0 (9,866)
14 1.7317 j2,771) (32.469) (35,240) (35,240) 0.2633 (9,279)
15 1.8024 {2,884) (33,794) [36,678) (36,678) 0.2405 (8,819)
16 1.8730 (2,997) (35 1191 (38,'116) (38 1'16) 0.2'176 (8294)
17 1.9494 (3, 1'19) {36,551) (39,670) (39,670) 0.1988 (7,884)
18 2..0258 (3,24 1) (37,984) (41,225) (41,225) 0 .1799 (7,416)
19 2.1085 {3,374 ) {39,533) {42,907) (42,907) 0.1643 (7,047)
20 2..1911 (3,50&) (41,083) (44,589) (44,5139) 0 :1486 (6,626)
$ (674,585)
Option two (Package Units): Present Values (PV) of Annual Cash Flows
Final Recommendation
Fin!;ll Recommendation
OpliM!V."o
Six SO.lon .p~kag-~
Ur.il"t-
lnltialc~taicosl· $265,000
M.:ail\\el'<lmce c:()$1'5". S1 .fl00
Anr.wal uiifityc.U~I$.~ SHVSC
Us.eM!le!>pan HJyears
The recommendation is the purchase of option one, a new 300-ton chiller.
As shown in the following table, when initially comparing two options in a total cost
analysis, the projections for the initial capital costs, annual maintenance costs and annual
utility costs for option one (300-ton chiller) are higher than for option two (six 50-ton
package units).
Annual Net Cash Flow (Disbursements): Exhibit 4-2
Option one Option two

300-Ton Chiller Six 50-Ton Package Units

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£mpowni,.-FxilltyProfas.lion• I•Wortdwld•
Initial capital cost $295,000 $265,000
Maintenance costs* $1,725 $1,600
Annual utility costs* $20,000 $18,750
Useful life span 20 years 10 years
* Subject to 4% escalation per year
**Additional expenses identified at 10 years: Option one, major overhaul $170,000 overhaul,
Option two, equipment replacement $392,253
While the inclination may be to select option two, the package units, because it is initially
less expensive, it is not the best choice. A decision based solely on the initial purchase price
is a short-term tactical one.
Note that the service life of the option two package units is 10 years, compared to the 20-
year useful life span for the option one 300-ton chiller. A potential threat that can be
identified is the uncertainty of future replacement costs. An escalation in cost of 4% per
year has been taken into account to reflect rising cost of inflation, however, the cost of
inflation cannot be guaranteed. The assumed replacement cost could be higher.
Based on life-cycle costing that considers all the costs incurred during the service life of an
asset, the economically sound choice between the two alternatives is Option one, the 300-
ton chiller. The decision to purchase the 300-ton chiller is based on a long-range strategic
evaluation.
Assumptions
The following assumptions support the choice of the 300-ton chiller:
• Installation of the recommended 300-ton chiller has zero physical constraints .
• There is adequate space for the chiller .
• The 300-ton chiller will provide energy efficiency, therefore providing a positive
impact to the organization's sustainability goals.
• The 300-ton chiller model was chosen not only because it's one of the latest and
most reliable products on the market, but it will enhance the reliab ility of the
building HVAC system.

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~ lntematl0<1alfadlltylolana~ementA•soda!lon
Business Case Template

A business case is typically presented as a structured written document, but a case may be
made through a short verbal argument or presentation. Other situations may require a
written document in combination with a presentation. Content may vary depending on the
needs and expectations of the demand organization or the size and scope of the initiative.
Below is a template that might be used to develop a business case.
Business Case Template: Exhibit 4-3
lt includes the following four sections:

• Executive Summary
• Finance
• Project Definition
• Project organization
Section Heading Question Answered .

EXECUTIVE SUMMARY
FINANCE
Financial Appraisal How much?
Sensitivity Analysis How much?
PROJECT DEFINITION
Background Information Why?
Business.Objective Why?
Benefits and Limitations Why?
Option Ident ification and Selection What?
Scope, Impact and lnterdependencies What?
Outline Plan What? When? Who?
Market Assessment Context?
Risk Assessment Context?
Project Aplproach How?
Purchasing Strategy How?
PROJECT ORGANIZATION

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tt!i~ H:.M.8~. .,. ,.
Em~rt111Fadllty~on.a ls Wotldwld•
Project Governance How? Who?
Progress Reporting How?

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/FMA 's Finance and Business Course ~~~~~I
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FM A'"
lntem•tlon•IFocllltyMon•t•montAssoc"'tlon
Business Case Financial Data

Lesson Introduction
Financial Data
• Determine the relevant financial data that should be included in a business case.
This lesson consists of the following topics:

• Business Case Financial Data Overview.
• Quantifying the Costs and Benefits.
• Minimizing Risk in Capital Investments.
Business Case F'inancial Data Overview .

Business Case Financial Data *'!.0&:,
Overview
T~ ~l'l'e.O!tl~!ltkmsh tl~ bllSini!.S..'>C9:MI'fl.fe btasad.:m the ma~t curre:ri.f
ffn.arsc~l a~d ~i'f9o/flal'o<"JG da!~, 1'h~$··:nc lti9'&~
~ ~':ayba.ck ·
~o< .RebJfJl oo fnvesttnenl 1Ro!.i
if , Pfe$etit andft>fur_e'/Q!ue
A well-crafted business case includes relevant financial data in order to justify the capital
expenditure and to demonstrate an understanding of the organization's concerns for
profits, reduced costs and similar financial concerns. As most organizations are ever
mindful of the bottom line, a business case should define how much money will be
involved in the project or initiative and how much the organization will make (or save)
through the change.
The recommendations in the business case are based on the most current financial and
performance data, this includ~s:

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~poweri"'FIIdlltyProfuslon~IJWoo1dwl6a
Business Case Financial Data Overview: Exhibit 4-4
Discounting Internal rate of return (IRR)- a discounting method that

determines the rate of return promised by an investment project
over its useful life. lt is sometimes simply called the yield on a
project. IRR should not be confused with ROI, or return-on-
investment. ROI gives the overall picture of the investment and its
returns from beginning to end. IRR takes into account the future
value of money; it is very important to calculate.
Present and Future Value- present value is the method used to

compare costs; all cash flows are converted to their present value
or the value of past and future dollars corresponding to today's
value. Future value is the amount that a given amount, invested
today at a given rate of return or interest rate, will be worth at
some designated future time.
Non-discounting Payback- a non-discounting method that determines the time

required for a demand organization to recover its original
investment, the speed of recovering the initial investment.
Return-on-investment (ROI) - a non-discounting method that is

a measure of cash generated by or lost due to an investment. lt
measures the cash flow or income stream from the investment
relative to the amount of invested. Return~on-investment is derived
as the "return" incremental gain from an action divided by the cost
of that action. The ROI is a measure of investment profitability not
a measure of the investment size. lt reflects the percentage
returned based on the capital invested. The higher the investment
risk, the greater the potential investment return; and the greater
potential investment loss.
the CcJsts a
Financial information and performance information are important components in a
business case. Compiling such information involves:
• Researching the problem or opportunity~
• Identifying the alternative solutions available.
• Quantifying the benefits and costs of each solution.
The level of due diligence required to quantify costs and benefits and secure the necessary
funding will vary depending on the specific business case need. The concepts and

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/Ffv1A 's Finance and Business Course ~tii~ ~. E.~.8:. . ,.
&o.powed"'FKllltyPrvfu<l""ai~WO<Idwlda
techniques that follow may not apply in every scenario, but a facility manager should
understand their potential utility.
These include:
• Capital Investments and Time Value of Money
• Capital Investment Analysis
• Concept of Best Value
• Life-Cycle Costing
• Benchmarking
Capital Investments and Time Value of Money

Capital is a limited organizational resource, and organizations can experience difficulty
recovering money tied up in bad capital investments. Given these two simple facts, all FM
capital projects or initiatives must be carefully evaluated.
Determining how to analyze capital investments, requires knowledge of what constitutes a

capital expenditure versus an operational expense and an appreciation of the concept of
thetime value of money.
Capital Expenditures and Operational Expenses
Capital and Operational Expenditures
Capital expenditures, or capital investments, are long-term. A capital investment results in a

current cash outlay with the expectation of future benefits. The value of the initial cash
outlay is gradually reduced (amortized) over a period of years according to tax regulations.
Examples of capital investments include major expenditures for new or replacements
equipment, construction and renovations. A capital budget provides a plan of proposed
outlays for acquiring long-term.
Operational expenses, also called operating expenses or current expenditure, are short-
term in nature, which are considered current investments that can be written off in the
same year that the expenses occur. Wages, salaries and many administrative expenses are
examples of operating expenses. The operating budget provides a plan for the operating
expenses and revenues associated with activities for the current time period.

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Empo>'IMrlriiFachltyPnll'uolonoi~Warldwld •
Time Value of Money

lime Value of Money
The· tlrne VD.!ue of money priro.;ipi~ !l.t~~~ !hl)l a d(Jilllr in h.flt)(l i(< .,.'<)l'th ~rQre
~i",a:h a du!'ar to be m~e~1ed in 6c {uivr!ll•ecau~.;:. 1t -.;;~rr either be conr.<.Ut)Ej<J
'immedlme!ym put ic work 10 earn 01 re!t:(m
~> . A doll a~ er ar<y other moae:aty ur:it, i$o wortt, more ~vde;y lh<m a doUm
receiver.! tom:mow because lhal Oo!I<J! can b{! in-relite<l !lXiay t(l eam a
t~Wr"<
~ A dtJ!Iar iom6nbW is ·\'h'lritlle:s:s than a dollar lad$"{ bAeaw>& nf IM il\!1;1rt!!>l
k#egor~!!'
EXAMPLE
Petiotl Beginning Value tnteresl E11rned Ending Value
$3.000,000 ,. $300,000 $3,300,000
$3.aoo,ooo + sm,ooo $3,63o.uoo
Present Value and Future Value
The time value of money principle states that a dollar in hand is worth more than a dollar
to be received in the future because it can either·be consumed immediately or put to work
to earn a return.
Stated differently- the time value of money recognizes that:

• A dollar, or another monetary unit, is worth more currently than a dollar received
tomorrow because that dollar can be invested today to earn a return.
• A dollar tomorrow is worth less than a dollar today because of the interest that is
not earned.
If finance grants FM funds for a capital project, the demand organization loses the
potential to invest that money in an interest-bearing account.
Time Value of Money: Exhibit 4-4
To further explain the time value of money, consider the cafe renovation below:
Results of the current year-end client satisfaction survey highlight ongoing problems with the
building cafeteria. Low user ratings of the cafe have been a consistent trend in the past three
annual surveys, progressing from "somewhat dissatisfied" to "extremely dissatisfied." In the
current survey, the users' open-ended comments note numerous issues with the cafe.
During a survey results review meeting with the demand organization's regional manager, it is
mutually agreed with the facility manager that it is time to renovate the 10,000-square,..foot
cafe. This has been on hold for some time. The facility manager estimates the project to be a
$3 million investment and develops a business case to request capital funds for the renovation.
As shown below, if finance could invest it and secure a 10% annual interest rate, rather than

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~ lnttmatlon• I F3cllltyM•n"i""'eniA.,.odatlon
granting FM that money, $3,000,000 would be worth almost $3,630,000 in two years because
of the cumulative interest earned.
Period Beginning Value Interest Earned Ending Value
1 $3,000,000 +$300,000 $3,300,000
2 $3,300,000 + $330,000 $3,630,000
This simple example demonstrates that money has value over time. lt sets the stage for a
discussion of two additional capital investment concepts: present value and future value.
Present value (PV) 'is the method used to compare costs; all cash flows are converted to their
present value or the value of past and future dollars corresponding to today's value. PV is the
amount that a given future amount is worth today at a specific rate of interest. In our example,
the $3,000,000 is the present value.
Future value (FV) is the amount that a given amount, invested today at a given rate of return or
interest rate, will be worth at some designated future time. The $3,630,000 is the future value.
There's a simple formula used in finance to calculate the time value of money.
Present value x Future value interest factor ;;;: Future value
$3,000,000 X 1.21 00 = $3,630,000

Note that the future value amount arrived at in this calculation reveals the same result as
identified in the PV section above.
Where did the 1.2100 future value interest factor come from? Finance has interest factor
tables. For years, it was necessary to locate the appropriate interest multiplier in a table and
then do the calculation. In this case, the factor is 1.2100 for 10% over two years. Business
calculators and electronic spreadsheets now have the interest factors and formulas
preprowammed. If the variables are known, the time values are easy to determine.
Future value is intuitive; money is invested and interest collected. If the investment is seeure,
the future value is expected to increase.
Present value is the monetary value today of a future payment that is disceunted at some
appropriate interest rate. The present value of $3,630,000 is $3,000,000. The 10% interest rate
is called the discount rate. As with future value, there are present value interest tables for
calculating the present value of money received in the future.
The formula used in finance to calculate the present value is:
Future value x Present value interest factor ;;;: Present value
$3,630,000 X 0.826 = $2,998,380

The present value interest factor for 10% over two years is 0.826. The reason for $2,998,380,
not $3,000,000, is because of rounding of the present value interest factors in the table. Facility

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~ Internat ional Fadlltv ManagomontAssocladon
managers do not have to do manual calculations like this, financial calculators and
spreadsheets perform the calculations.
Two final points about future value and present value:
• The operation of evaluating a present value into the future value is called capitalization. In
our example, it shows how much $3,000,000 today will be worth in two years.
• The reverse operation, evaluating the present value of a future amount of money, is called
discounting. This explains how much $3,000,000 received in two years, at some interest
rate, is worth today.
In many organizations, finance is responsible for time value calculations. Facility managers may
have little, if any, responsibility related to calculating the numbers, but they should understand
the terms and concepts as it is part of the language of senior rnahagernent.
There are, of course, different sources of money for capital investments. Money for an FM
capital project may be internal, capital investments may also be funded externally through
numerous ways.
Example: bank loans, private loans, venture capital, public offerings of shares of company
stock to investors and so forth. Depending on the source of the funding, a facility manager
may have different responsibilities.
Capital Investment Analysis

C13pital Investment Analysis
Xey quutions irt e-vatua1ing poumtia_l capital l.lwcstmm ts:

"' Ar:eUJil pro)ect.s. ln~ndentormutualt)'(!ltlusf~e?
v' _ Dcrffie pf(ljects ~- tM soame ()fditft!I'M! sit.e, ot:M<h_
flow p<illatf< al'!d 11~?
./ tu~ lhe. pra_ie{;ts-~bjec.t to.cs;::.itafralioni:'l_g?
,t 00 th<'i protects have tMs<!:me risK?
Vario.us c.apitat bU(Igebf'l9le~::nni(lues afe use-d to walu.att;! al'id select
i(ldepeo;:~em~id l'l'lciuallyi9:etustJe PtOJeets and make ~isioosul'ldet-capital
tationifltl, rot ~.:<ample, 1\ct pwsent va\Ve<, i_
n!emal r_aie af re tom amtthe
paybackme-tiwd.
There are four key questions that finance considers when evaluating potential capital
investments.
1. Are the projects independent or mutually exclusive?

2. Do the projects have the same or different size, cash flow pattern and life?
3. Are the projects subject to capital rationing?

4. Do the projects have the same risk?
Let's consider some of the terms and concepts behind these questions:
• Independent- acceptance or rejection of an independent project has no impact

on the acceptance or rejection of other projects under consideration.

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IFMA 's Finance and Business Course ttl~ .u:.~~8~.K0-
EmJI<If"rl"' f MU!ryPnt.uJ"""IoWoridwlole
• Mutually exclusive - situations where the acceptance of one capital budgeting

project precludes the acceptance of others.
• Size, cash flow pattern and life- size is the magnitude of the capital investment.
Cash flow is the income from all sources less expenses, indicating how much cash is
available at a given time. Stated another way, cash flow is net cash before financing,
including acquisitions. lt refers to the actual flow of cash into cash receipts and
savings and out of cash payments of an organization during a given period of time.
Estimating capital project cash flows is critical because erroneous assumptions or
inaccurate or unreliable data can corrupt the entire capital budget. "Life" in this
context generally refers to the duration of the project or the stages of a project over
time, from initiation to completion.
• Capital rationing- capital rationing is the allocation of investment funds among

multiple projects when senior management places an upper limit on the size of the
capital investments or the demand organization lacks sufficient money.
• Risk- risk, or the chance of loss, is the possibility that the actual benefits provided
by the investment will deviate from the investor's initial expectations.
Capital investment analyses can be quite complex and involved. An overview of some
techniques a facility manager may encounter is provided below and includes net present
value (NPV), internal rate of return (IRR), and simple payback period.
The facility manager needs to be aware of what other departments are planning for capital
investments. For example, in a hospital, if the diagnostic imaging department is planning to
install a new x-ray machine, then the facility manager will need to add lead shielding to the
walls and possibly upgrade the electrical services, backup power, lighting, HVAC and more.
Capital investments factors are used to aid in decision-making of capital investment

projects. These elements of a project decision, such as cost of capital or the amount of time
the investment could take, are to be weighed in order to determine whether an investment
should be made. Maximizing utility for the investor is key; the manner, in which the
investment is made must be in the best interest of the investor. Capital investment factors
may be described as "factors influencing investment decisions" or "capital investment
determinations."
Net present value, internal rate of return and the payback method can be classified as
discounting methods and non-discounting methods. The use of discounting methods has
increased over the years. Some organizations still use the non-discounting methods, and
many use both.
Discounting methods recognize the time value of money. The net present value method
and the internal rate of return are two approaches that make capital budgeting decisions
using discounted cash flows. The same basic assumption underlies both the NPV and IRR

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~tl~ H:.M.8:."...
Em""""'rlntFoo:UityPnfuslonoiJWoridwkle
methods; risk or uncertainty is not factor. They evaluate a capital investment by comparing
the equivalent present values of all future net cash flows for the initial investment.
Discounting methods also acknowledge that those projects promising earlier returns are
preferable to projects promising later returns.
Exhibit 4-5 summarizes key characteristics of net present value, internal rate of return and
the payback method. The intent of the information is to assist facility managers to grasp
the principles in order to provide the information that finance needs from them. A
discussion comparing the three methods follows the exhibit.
Comparisons of Capital Investment

Analysis Techniques
~ Oelerri"llnt!S mtJnelar,· ~- Oeltmnine;; fait! cl ~o Deterrrtir.E!$ hme

Viilkl~ tod<ily th<~t ra1um J>I-Om~ed Uy rE!Qul$"tJdiot
im•e.!>tmenl project in~t"!!:!menl proj13c! OfJ;l;lll'!iroti<mto
e~Vns aftcryieldlng <r«:r il:. usdullife: reoo¥eroricgint~!
desired fl'lte Of f8tllfl' SCNr.'!!ilmeS&Jin~ty' mve~ment- speeq
tor e~h _period &alleC yield 011 or ret-0';'81:~ fni!:i~l
dl~(l!J (tie m proj~t;t irr.~t.tment
inv'*tn~nt.
H~t~ntV~Mt trtMflliiltR!ittOfRI!tmit p~
-Oil '
V
{NPV) t>ii~ fiRR}U~Irtlng NCndi5CtfumJttg ~
..
N•W><~
Com~:~~.PVof .J'-
-
(;_atfrn"''~$di~mt 1> flaS<~d·oo t_a-r9~1
!nV(tSimo:!ntpro}ect' s raie m.,t mat-esPY payback p{;:fjoQ {PP)
cash Inflows, of nel car.h i!lfloWs -lll3ximumcy~O(t
Wf'lefi\s,t<)PVol equaHo-fliliat t.oi\Siden~.a to ee
' ln\~lmenfscM.tt !mes!mtml- ~coeptab~ !-ellgih of
oo!f!om,cosit. di!lcoufll ~~!e that wii ~ \\me (Of project
,. Yialds.mooe-tar; Jnala!"NP\to-f 8- Jgnm~s tim6•,aJ\.It~ of
v aluf!. h-r.~m~n1 zea. money. def.cleOC"~'
Comparisons of Capital Investment

An&lysis Techniques continued)
ltot-V•m 1-l'llilWOf~ ~·
tN~ ote;~g (IRR) D!ieau:Ming NOfitltRO"'m1n;
M~ ~*"~ " ~ ~
~ '(~Id$ oon;am~g~ ~ Usf:!f">JI a!! $1:ree;nif19
~nwingtE~IHf:l !ll'! l'M'""~lii'E'!"On"f.
eachdona~ ~~ted .
Exhibit 4-5: Comparison of Capital Investment Analysis Techniques
Net present value (NPV)

The difference between the present value of cash inflows and the present value of cash outflows
over a period of time that occur as a result of undertaking an investment project.
Description Advantages and Disadvantages
• Compares the present value of an Advantages:

investment project's cash inflows,
• Recognizes the time value of money.

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IFMA 's Finance and Business Course ttl~ .~.E.Ml:~~·-··,.
ElllpOIIfllliiii F.tllty ~OMIIWorldwid•
Comparison of Capital Investment Analysis Techniques
benefits to the present value of the • May be used to evaluate investments

investment's cash outflows, costs. with uniform net cash flows and uneven
• Yields a monetary value. cash flows.
• Reference point for NPV for accepting or • Provides theoretically correct
rejecting projects is zero. accept/reject decisions.
For independent projects if the NPV Disadvantages:
is zero or greater; an investment • Does not provide any indication of
project is acceptable. relative profitability.
For mutually exclusive projects, the • Present value monetary value can be
investment with the highest positive difficult to understand.
NPV should be accepted.
Internal rate of return (IRR)

A discounting method that determines the rate of return promised by an investment project over
its useful Life. lt is sometimes simply called the yield on a project.
Definition/Description Advantages and Disadvanta~es
• Estimates the discount rate that makes Advantages:

the present value of net cash inflows
• Recognizes the time value of money.
equal to the initial investment, a discount
rate that will make the NPV of an • The percentage rate of return facilitates
investment zero. comparisons with the demand
organization's minimal acceptable rate of
• Yields a percentage showing the return
return or hurdle rate.
on each dollar invested.
• May be used to evaluate investments
• Comparing the estimated internal rate of
with uniform net cash flows and uneven
return for a capital investment to a
cash flows.
predetermined criterion.
Disadvantages:
• The criterion rate, hurdle rate, serves as a
cutoff point. Projects below this cutoff • Requires a process of trial and error.
rate are rejected, unless they are • Delivers only a percentage rate of an
mandatory projects. investment's potential earnings, not the
For independent projects, accept if magnitude or duration of cash flows.
IRR is equal or greater than the
criterion rate; reject if IRR is less.
For mutually exclusive projects, the
investment with the highest positive
IRR that exceeds the criterion rate
should be accepted.
Payback

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A non-discounting method that determines the time required for an organization to recover its
original investment- the speed of recovering the initial investment.
Return-on-Investment (ROI)
A non-discounting method that reflects the percentage returned based on the capital invested.
ROI is a measure of investment profitability not a measure of the investment size. The higher
the investment risk, the greater the potential investment return, and the greater potential
investment loss.
Definition/Description Advantages and Disadvantages
• Based on a target payback period (PP) - Advantages:

the maximum cutoff considered to be an
• Easy to understand.
acceptable length of time for a project to
• Provides an indicator of liquidity and risk.
recover its original investment.
Projects with a PP shorter than the
Disadvantages:
target are accepted, those with PPs • Ignores time value of money.
longer than the target are rejected. • Based primarily on experience and
For independent projects, except if judgment, no firm guidelines for setting
the PP is less than or equal to the the maximum payback period.
maximum payback period, • Does not measure profitability, only
otherwise, reject. speed of recovering original investment.
For mutually exclusive projects,
accept the shortest PP that is less
than or equal to the maximum
payback period.
Both the NPV and IRR methods have gained widespread acceptance as decision-making
tools.
In comparing the two methods, it is important to keep in mind that:

• The NPV method is often simpler to use because the IRR method requires a process
of trial and error. However, computer spreadsheets can be used to automate the
IRR method.
• The NPV method makes a more realistic assumption about the rate of return that
can be earned on cash flows from a project. If the NPV and IRR methods disagree
about the worthiness of a project, it might be wiser to use the data from the NPV
method.
• A major difference is that the end result of NPV is a monetary value; whereas, the
final computation for IRR is a percentage. Because the NPV values of individual
projects can be adde.d to estimate the effect of accepting some possible

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Empowvlnf: FadlltyProfusl.....l.w........do
combination of projects, this is an advantage for NPV. IRR yields a percentage.

Multiple projects cannot be added or averaged to evaluate any combination of
capital investment projects.
• Another advantage of the NPV method is its usefulness in evaluating a project in
which the required rate of return varies over the life of the project. The total present
value of the cash inflows can be determined and compared with the total initial
investment to evaluate the attractiveness of a project. lt is not possible using the
IRR method to infer if the project is unattractive. Different required ret urns for each ·
year means that there is no single rate of return or a single IRR value.
Reliability cautions are evident in both methods:
• NPV is only as reliable as the discount rate that is selected. An unrealistic discount
rate can result in an erroneous decision to accept/reject a project.
• A capital investment project should not be accepted solely on the basis of a high
IRR value. A high IRR result must be investigated to assess if an opportunity to
invest cash flows at such a·high IRR is realistic.
Among all the various methods to analyze capital investments, the discounted cash flow
methods are theoretically some of the most reliable. The NPV and IRR methods will yield
similar results as long as there are no differences in:
• The project size, the amount of the initial investment
• The net cash flow pattern

• The life of the project
• The cost of capital over the life of the project
Compared to the NPV and IRR discounting methods, the non-discounting payback method
ignores the time value of money. This is a critical deficiency. The payback method can lead
a manager to choose investments that do not maximize profits.
The payback and ROI methods are useful as screening measures and can help identify
investment proposals for managers to consider further. If a proposal doesn't provide a
payback within a specified period, the potential project can be rejected without additional
consideration.
Discounting and non-discounting techniques have distinct strengths and weaknesses

organizations should use multiple criteria for evaluating investment projects. Collectively,
multiple methods mitigate the potential for estimation errors and/or incorrect decisions
that are not in the best interests of the demand organization.

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/Ffii/A 's Finance and Business Course
Empoweri"'FacilltyProfuslonolsWorlct..ldt
lesson Activi
Completing a Business Case
The purpose of this activity is to perform a payback analysis.
Railroad Capital Budget Business Case

T & P Railroad Capital Budget Project
This proposed capital project is very visible and very political.
BACKGROUND:
T & P Railroad trains provide passenger service between two major cities. Three trains arrive at
the outlying depot and are fueled and serviced daily. These three trains layover at the depot
overnight. At one time, the depot was in a sparsely populated area. However, the area is now
densely populated with residential units. The residents are complaining loudly about the
constant noise overnight along with the diesel emissions.
The locomotives continue to run overnight to provide power to the passenger cars for
servicingi lighting, refrigeration and more. lt is estimated that the trains consume more than
137,592 gallons of fuel for the continuous operation of the auxiliary HEP (head end power)
engines providing power to the trains over the course of a year.
PROPOSAL: )
lt is proposed to provide 480V ground power to the engines. The engines could then be shut
down and "plugged in" to the auxiliary electrical power. This will result in reducing fuel
consumption, reduce background noise and reduce diesel emissions.
PROJECT COSTS AND STATISTICS:
• The cost of the project is $850,00 Emissions reduction:

• Cost of Capital - 6% • 1.5 tons HC (Hydrocarbons) per year
• Maximum term of loan - five years • 4.03 tons CO (Carbon Monoxide) per year
• 40.95 tons NOx (Nitrogen Oxides) per
year
• 1.01 tons PM (Particulate Matter) per year

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Ero""""'ri.... FKIIItyPI-ol'tni......5WIIfldllold.
Current statistics: Proposed electrical costs:
• Fuel cost $4.30 gallon • $6,590 per month

• 21 gallons of diesel per hour per train for • $347 per day
HEP
• Three.,four gallons per hour additional for
engine idle .
• 15-20 hours idle per night
Perforr;p a payback analysis.
The group is to report back as to the recommendation on this project and why, based on your
financial analysis.
Concept of Best Value

Concept of Best Value
Ex!Gif\lk l.ho catwt1~licn01l wii;dtlm~irif\g tr.ilun aoo mowta OO [ns~Qad lrtip!le"

a )'\(!Dd1o cont.b~.r:y $\riwrt(!r·sorrt6JI:'\ng~upmitM' allhtt. lowastpt;actill:ablo
co.st_.
~ V>l!t.te •s abOu1 J:he rel~tfoo:$hlp l)f t:o:<>t« prii::e aod .Qva1~V' Qi': ooff<ir~Y~an-ce.
htluld boU1 be considefali~>nshl Ff'J Jjec:isiOOs.
} ldcid!Y, co'!OI and'q-Jalil:y 'S_
io CoSt s:llO".J!d take oo!S priority only wben·fiJl'Qneial c'onskaiflts :we ieVere.;and
dictate so.
iO IJ_alue far mot~~r- ~mpa~M~the qu;,Ry o! a 5el"'iice. a;,r:lthe ectMm1>
efficier>..ey and e-lfecl~$i$ wi:lh"whict; 1i is t~e!iYered.
In business, value is generally described as an amount of goods, services or money

considered a fair and suitable equivalent for something else. Value is often equated to
satisfaction with the cost of a good or service for the given quality received.
In Total Facilities Management, authors Brian Atkin and Adrian Brooks discuss best value.
They note that best value extends the conventional wisdom pairing value and money and
instead implies a need to continually strive for something superior at the lowest practicable
cost
Atkin and Brooks make succinct points underpinning best value decisions:
• Value is about the relationship of cost or price and quality or performance.
• Ideally, cost and quality should both be considerations in FM decisions.
• When financial constraints are severe and indicate as such, cost should take sole
priority.
A demand organization may think it is achieving best value when it pays less for goods and
services. Costs are typically easier to measure and by their nature more readily quantified.
To equate value with a mere reduction in cost can be shortsighted. According to Atkin and

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E.. pctfftri"'FKllltyProfusl0111loWOI'Idwlde
Brooks, value for money encompasses the quality of a service and the economy, efficiency
and effectiveness with which it is delivered.
life ~ Cycle Costing

Life-Cycle Costing (LCC)
Lffe.cyele (:O!Jting i$IIW' pt<X:.>}'M>Of <lt>Ui>f!\~tn>;1$), ~~ j:)l'litS-~;.l)l·V>!I!u'<} \>'!<'~)~, ~J

CO$t-~ine1dtmt 10 the plartnins, de'>l9n. ccnowuctlon. ~rafi•.,-n and maintt.<fl<irn>~>< '
and dlS!JQ:.llion of a ~!ruclure oo.o.er tltne. lt involVes the ana_!y!>ls of th-e cos~'5o ot a
sr·stem Of a ~ompory,en! wer ils. enure life span
&llSiccot'lsidt!rafton!l
j>- lde-r<&y-a!t~a!Nes
;.. Es tiom3tflct:SIS
- MA~ <::~:~~ f!eym; ~;,.,~;.,~~r~l lly <>=-e<t;,-,g ijiQ«< ~., Fe!<imt ~~~
- Tol~~~.:.st;;;
~· Conduc! ~PPI·apria!~lilk Md ut~-Cert.:.ioty ass:t)%:nw•l~
Life-cycle costing (LCC) aids the decision-making process by determining, in present-value

terms, all costs incident to the planning, design, construction, operations and maintenance
and disposition of an asset over time. This process takes into account aspects such as the
total cost of acquisition and support of an item throughout its useful life, including the cost
of removal and disposal. LCC is needed to plan for activities such as maintenance and
preparation for future needs and funds. Life-cycle cost reflects the hard costs or the upfront
costs of an asset, including capital investment costs, operating costs, maintenance costs
and the cost of disposal.
Life-cycle costing is covered in more detail in the Operations and

Maintenance Course.
Life-cycle costing considers all the costs incurred during the service life of an asset; it
facilitates making economically sound decisions. LCC provides a basis to compare the
merits of competing project implementation alternatives. The economic consequences of
mutually exclusive project alternatives can be evaluated over a period of time.
In practice, there are different methodologies for LCC. lt is beyond the scope of our
discussion here to present any specific methodology, but the basic considerations inherent
in most approaches are:
• Identify alternatives
• Estimate costs

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IFMA 's Finance and Business Course ttl~ ~.E.M.8~.~-,.
Enlpowttri"'fKilltyPnofusl..,.liWorldwlde
• Compute life-cycle costs for each alternative
Make cash flows time-equivalent by converting them to present values
Total all costs
• Conduct appropriate risk and uncertainty assessments
There are different ways to test assumptions made and "what-if" scenarios for high-cost
items, such as what happens if maintenance costs are 15% more or less than planned.
Sensitivity analysis, scenario analysis and other ways to assess and mitigate investment risks
will be covered later in this topic.
Life-cycle cost analysis is often calculated with other supplementary measures of economic
evaluation, such as NPV, IRR and payback methods, that were discussed earlier in the
module. LCC is consistent with these other common valuation measures when the same
parameters and length of study period are used.
LCC is an analytical process. Although, the concepts underlying LCC are fairly
straightforward, their application can present some challenges, such as uncertainty as to
when and how LCC should be employed and what assumptions should be made during the
analysis. There are many variables that are key to the assumptions made in the process.
LCC is a useful decision-making tool. lt is valuable for ranking and prioritizing projects and
making data-driven recommendations to senior leadership. A facility manager's
recommendation should take into account the demand organization's strategic plans and
other environmental factors. The lowest LCC may not be the best recommendation based
on market economics and the long-term outlook.
Bench marking
Benchmarking
13enctnua.$ir.>g~' EI tJ)O! to~

~ P1ovide a ·rationa! me:U10d tc·sel gn;~ls.
• En!Surte l.tl31 plal'lrling and cloo~sionu~e- tutud Oll be:!il pr~_ctius ami cin
obj~ t!~l!2fnal tornp;Mi~M~and fa:cl:.
• To esiabl_f5-lra bas.e!l!i'le a~ Ill" · lo e~IJ!i!Oh if there. if> ~o~ fQr
imptovement. what that m:ghlrls.~.-cosfend whai bMafit would lJC.cfue.
• Tti~~"&l1UfiQI'il.r<IV-!.~~W$~ti)Eitll
Benchmarking is the continuous, systematic process of measuring products, services, costs,

quality and best practices against the best levels of performance. A misconception of
benchmarking is that it captures best-in-class information, but the practice has a much
wider application. The best performance levels often are comparisons to external
benchmarks of industry standards. They may also be based on internal benchmarking
information or measures from other organizations outside an industry that have similar

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ttfj~
~
IF MA"
\nttm~tlon~l F~(llltyM~n"l•m .. t A••oc:l•tlon
E"'~riiiJFKIIItyProfullonaiJWoridwllle
processes. Measuring effectiveness of activities may be enhanced through benchmarking

with peers.
Initially, manufacturing companies primarily used benchmarking to improve products.

Benchmarking practices are now commonly used in service industries as well and applied
to customer service and other types of departments. Bench marking studies can differ in
focus, for example, operational or strategic. They can take many formats, including best
practice, functional, process, and competitive.
Benchmarking is another tool that a facility manager can use when quantifying costs and
benefits. Consider a few applications for FM:
• To provide a rational method to set goals, taking the emotion and bias out of
arguments.
• To ensure that planning and decisions are based on best practices and on objective
external comparisons and facts.
• To establish a baseline for self-improvement by investigating how peer

organizations/similar buildings/similar functions are performing; to establish if there
is scope for improvement, what that might risk, cost and what benefit would accrue
• To provide an unbiased assessment of what needs to change or what course the FM

department or the demand organization should pursue in an investment.
Discussion Question
WhaJhi;-NQT >l'l :;a:p;W."!Ptialt~ .;tppt:ca\lml.a f FM tmhctun<trkimJ?Why?

A. TOO idenii1icaliona00 ~luatlon ol?roblcm!> !hat when solw!d. resrore lhe
0. Rrv-,kli~ a Hlli<ma.l.e ;-,.-~dto-5-et goa!:i>, ta!li!lg U1e ·e:mi!ios~a~UJ l:;as o-.rt cf

!!>gu~n($.
Discussion Question
Whitho!-tha· fcill;;wif1!ft:hatac.h'ute;h~::>d$liM11i~ll!l!li>d!~C>1Jnti<"1(:1 rf)Qthot}s frtJtn

f!C>ft<Ji:scoi-<!1fl:ngm>s{nttd!;7
A. Basfugdedsk!m.tprimariti on-experience andjlX.Igmet!l
8. Pto~W.<J ptOj(!{';to;;. proonisiatllfl\.er retlJ!l'<S, r~>!N<r lh;ln t><tliy t~lufM
C. l~nori09 lhtt i::me >J'31:.reo! monl!:)'·
0 R~og~ffi.<J lh('; nn~ 11~:1te Q~ money
Discussion Question
Ylfult-to~;~~mmer.ti,._f~l$e?
.1\. If the N?V l'o!ld IRR-mcttmds dis.ag~ Qbe!J{ Uw worthm<?ss of a pr~t, it
rnfght"b!lo:«<wdt> use ·the data !i"om the IR:R method
8, "NPVvJd®S ·fJ~ itldlvii:fuat proje<ci'3
c-.at") b-e added t..-:: <$hl"fl<it!;! the erfi:;ct cl
acC'-'P!""lg somll' posso:b!e C(J~ibir\a!ioo of ptOjt<el::;..
C Ar, U'lleahshc NPV dis-cOUnt rate Cl21fl resuft io ;m erfoneous decisi-on to
m::cePtirej-ect~ p.-ojet:t
0 The pa'jl.l!'lcl<: mc-!l)o-:l ig:-rom!> lhc- time va!~m of monuy.

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IFMA 's Finance and Business Course ttl~ H:.M.8~. . ..
Enl~ri"'FxUityProfu.d~loWo<ldwicl•
Minimizing Risk in Ca I Investments

Minimizing Risk in Capital Investments
-~
.~ ..
••...;,s;.: ,.........., .
Risk impl ies uncertainty and instability. Consider just a few reasons why this is an accurate
statement:
• Future cash inflows can vary unexpectedly throughout the life of a project.
• The rate of return used in calculations may not be accurate for the life of the
project.
• The cost of financing may increase during the life of a project.
• New mandatory regulatory factors can require additional investments at any given
point in time.
·• The life of the related product or service could be significantly shorter or longer
than anticipated.
• Inflationary or recessionary economic conditions may impact the value of cash
flows.
• Domestic or global political events may impact project cash flows or the viability of
the project.
There are different ways to minimize the risk in capital investments. Sensitivity analysis and
scenario analysis are two useful approaches that one should be aware of in FM.
Sensitivity Analysis
Sensitivity analysis measures the change in one variable because of a change in another
variable. lt determines which variables have the greatest impact on a capital project's
outcome.
As it pertains to capital investments, sensitivity analysis is a "what-if" technique evaluating

how NPV, IRR and other indicators of the profitability of a project change if the discount
rate, labor or materials costs, sales or some other factor varies from one case to another.
The purpose is to assess how sensitive the NPV, the IRR or another specified profitability
measure is to a change. Spreadsheet programs facilitate the "what-if" analysis.

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~tl~ tE.~.8~. ". . .
EmpDMrlrltFKIIItyPrefuslonai•Warhhrido
Sensitivity analysis can be used to answer questions such as, but not limited to:
• What happens to NPV if cash flows increase or decrease for each year of the
project?
• Will NPV remain positive throughout a project if there is no cash inflow in the
second year of a three-year project?
• What will happen to NPV if the discount rate increases or decreases?
• What would happen to NPV if a major redesign, requiring additional capital
investments, becomes necessary at some point during the project in order to
address competitive new products?
• What would be the impact on NPV if the project is extended, with decreasing cash
flows and increased maintenance costs in the extended years?
The principal merits of sensitivity analysis are the ability to pinpoint forecasting errors and
the fact that computer spreadsheet programs eliminate many tedious manual calculations.
Sensitivity analysis does not account for the probability of any of the outcomes or the
impact of simultaneous changes in variables, and it does not provide a decision rule for
accepting/rejecting projects.
Scenario Analysis
Scenario analysis examines what happens to profitability estimates such as NPV if a certain
set of events, called a scenario, arises. Probability estimates are examined against different
sets of assumptions or conditions.
Scenario analysis is a variation of sensitivity analysis. Where sensitivity analysis measures

the change in one variable as a result of a change in another, scenario analysis measures
the impact of simultaneous changes and reflects a range of outcomes as reflected by a
probabil ity distribution.
An infinite number of assumptions or conditions exist, but scenario analysis often includes
the following three.
• Optimistic- the outcomes of some variables are better than the most likely
variables.
Example: Operating revenues and the salvage value of an asset could be greater than the
most likely values.
• Pessimistic- the outcomes of some variables are worse than the most likely
variables.

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Em ~rtnr FadlltyProfuslon:atsWorlclwlde
Example: The initial cash outlay and the tax rate could be greater than expected, the useful life
could be less than expected.
• Most likely- the most likely scenario results from the range of possible optimistic
and pessimistic values for each variable.
Pros and cons exist for scenario analysis. A distinct benefit is the "what-if" analysis
considers other possible outcomes beyond the most likely case. A pessimistic scenario can,
for example, help avoid surprises and a tendency for forecasting optimism. Severe
consequences of a worst-case scenario might lead to rejection of a project. There are
weaknesses in scenario analysis, a principal one being that it is typically limited to a few
discrete outcomes. Realistically, many other possibilities exist because subjective judgments
are involved in what forms optimistic and pessimistic scenarios may take. While sensitivity
analysis has uses, it is by no means routine and is usually led by a specialist accountant.

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,tD~ tE.M.8~. ·"·"·
Era~rlnt F:.cU ityPnohulona1oWorldwlllo

1. When creating a business case, how should all relevant narrative and financial data be
treated?
a. They should be linked together into a cohesive presentation

b. They should be treated separately to allow for individual presentations
c. They should be a combination of narrative, financial, and capital expenditures
d. None of the above .
2. What element is NOT important when writing a business case?
a. Persuasive writing
b. Having the data available
c. Relevant financial data
d. Health and safety analysis
3. What are the main components of a business case?
a. Executive summary, Assumptions, Business Analysis, Risk Analysis and

Recommendation
b. Executive summary, Future Status, Business Analysis, Risk Analysis and
Recommendation
c. Executive summary, Assumptions, Business analysis, Risk analysis and Timeline and
Deadline
d. Executive summary, Future status, Business analysis, Risk analysis and Timeline and
Deadline
4. What is NOT an example of why persuasive writing should be used?
a. lt inspires new ideas

b. lt encourages carefu l word choice
c. lt aids the development of logical arguments
d. lt formulates a cohesive summary
5. What does SWOT stand for?
a. Strengths, Weaknesses, Objectives, Threats

b. Sustainability, Wining, Objectives, Threats
c. Strengths, Weaknesses, Opportunities, Threats
d. Strengths, Weaknesses, Opportunities, Time

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Em~rl"'fxllltyPn>fwu!.....,l•Worldwid•
6. What is meant by present value?
a. The estimated discount rate that makes the present value of net cash inflows
equal to the initial investment
b. The monetary value today that an investment project earns after yielding the
desired rate of return for each period during the life of the investment
c. The equivalent dollar value today of future net cash inflows
d. The current value of an investment project calculated from assumed future value
7. What is meant by net present value?
b. The difference between the present value of cash inflows and the present value of
cash outflows over a period of time that occur as a result of undertaking an
investment project.
d. The monetary value that an investment project earns before the investment is over
8. What is meant by internal rate ofreturn?
b. The monetary value today that an investment project earns after yielding the
desired rate of return for each period during the life of the investment
d. The equivalent dollar future value of present net cash inflows
9. What-financial data would NOT typically be included in a business case
a. Payback
b. IRR (Internal Rate of Return)
c. Present and Future Value
d. Liquid Assets Summary
10. What is one of the basic considerations inherent in most approaches to Life Cycle
Costing (LCC)?
a. Placing asset in the facility register

b. Capital Budget Planning
c. Conducting appropriate risk and uncertainty assessments
d. Commissioning plan development

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£m~rt.. fao:HltyProfusloft~IJWIDIIdwtd•
Chapter 5: Procurement in the FM

Organization
Chapter Slntroduction
• Explain procurement principles and procedures in compliance with the demand

organization's policies and guidelines.
• Determine sourcing needs and implement outsourcing standards within the fac,ility
management organization.
Chaptl:)r Objectivl:ls
,0t1 r.otr'lPl~f.ionof this IM;stm, )'Oil wm h~:~ ah~ m.-

.: E_xpia)r.: procacmcntprindpiM cmd procedure:< fn compiiant.eWith the
defnalld«QaO!lai.km'S-PQIICi&S· and guidelines
-l Oet~tmlnesoon::fng .o~s tWd jn)plemeflt0tl~$0U!l';i~ $t~mdard$W!thn ~
taem!ymanagi!:<IM~lorganiz:atiM,
Lessons
• Procurement Procedures
• Procurement and Facility Management Outsourcing

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~tD~ ~,.E..~.8~. ., .
EmpowerlnrF•illtyl>fofuslcnalsWe•hlwld•
Procurement Procedures
lesson Introduction

• What is Procurement?
• Procurement Principles
• Sustainable Procurement Practices
• Procurement Process
Procurement
.Procunummt ~~ IJ'<E:I SJ'$Mm;a,ticpf'IXE:!ti>l> by whk: ~ an wg<mi:t~ti011 mO!t;/110'!;

fOttr.ai a:g~e>9(t)(!J~S f~Y- ·IM pill!::h<lll>& ol tM .supptt af gond5 ~nfflcr SGf'li:::(!s
Whc~-Dearing w:th£~ ~WP!y cMin. 'tt!a process miat 00 ceUC<:i supply
O),_'lM\}llmi3-!lttt· .
11- Is lf!l&t1dM lo ll)a~ \illil& C(>St~l1evt!ifflN!S$<'!ndiOp!\ltev.: <,~;l'/,<.My•A>'I)~Ii{t-1>(<
pvctlasen>.
·:.. Is cusioma:ri!y ochte11ed throogh open compe'iil:ionprocess.es that promot.e
ra:il' and· eqt>t); trel:ltmenl (If w!.tidde1S
} Diff<>l~t> fr~m p<.~J"Wa!<ing, 'l'>'h ith !s. iho spec ilit: t:n:yitlii acii;;ny or tltc pt<~eing !.lf
ordmll ul'<der the- umbrel!il of a PfC:CI.lr.xi gqods. or se.otvk:E> oon tr'ac.t
Procurement- the process by which an organization reaches a formal agreement to

acquire goods and/or services. When dealing with members of a supply chain, the
procurement process may be called supply management.
The terms procurement and purchasing are sometimes erroneously interchanged.
Purchasing- is the buying activity or the placing of orders under the cover of a procured
goods or service contract.

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Enol""ftftnl: Fa<UiryPrcrf.ul.....I·W.........ol·
Procurement policies and procedures are designed to govern the purchase of goods and
services of the right quality, in the right quantity, at the right time, at the right price and
from the right sources. Procurement rules are intended to maximize cost-effectiveness and
protect purchasers. Procurement is customarily achieved through open competition
processes that promote fair and equitable treatment of all bidders.
In accordance with the company's purchasing and procurement guidelines in most

organizations, the facility manager may be responsible for the coordination of the
procurement of real estate, equipment and products or services. The facility manager, with
the support and assistance of procurement specialists, follows any set procedures for
product and equipment purchases, the out-tasking and outsourcing of services, contractors
and designers and the general requirements for overall facility management.
At times, the procurement process and FM needs may not align. Consider a few such
scenarios:
• FM situations may arise necessitating a swift response which is not conducive to a
prolonged open bidding process.
• A facility manager may have a preference for a particular vendor because of
superior quality and best value.
• Shortly after goods are procured throu~h competitive bidding, unforeseen events
may necessitate a change in quantity.
• Proprietary equipment or spare parts are obtainable only from one source.
Procurement staff must follow procurement procedures. In these situations, a facility
manager may struggle with procurement rules if they hinder the ability to expedite the
delivery of a product or service. Procurement services include procedures to work around
any unusual one-off situations. Procurement processes exist to protect both the buying
manager, the facility manager and the demand organization from fraud and corruption by
creating a clear, agreed-upon and auditable process for the procurement and purchase of
goods and services.
To avoid conflict and be effective, a facility manager should have good rapport and an
excellent working relationship with the procurement officer. Even though procurement and
FM priorities may sometimes differ, the basic management practices of negotiation and a
willingness to explore alternatives together can often address both parties' needs and
requirements.
FM pr~furements take time to complete and involve collaboration and cooperation

between facility management, procurement and others. Each party has an important role:
• The facility manager writes the scope of work and specifications along with
indicating building constraints

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• Procurement manages the structure and process

• Purchasing and legal contribute expertise and guidance as required
~ C<lnformwithaH ~plicable !aw$&M:eg:tlations

~<· Trelilt .:;~.11 pms.periti,,e. _slJpplii!rs 00100 therr repres.ent::lt~!> iairly and
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Achif!"<."Blh~ t~l»tv~i.~
Joc Red"<Jce pra>.·;t.tr~t process. costs andensme continuous t:nprovemenL
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s.t<mdard$ and ll!thic~
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is emt!edd~ i:1 !h{! Qrg.1.nir.atlr.m
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•- PrO'iitla coeu-rnentt~tton <.~mft:ommuni.;;atitm to <"PPtoptiate ettU1J&$
All procurement actions should be based on conformance with all applicable laws and
regulations. All prospective suppliers and their representatives should be treated fairly and
impartially. Additional general procurement principles include, but are not limited to:
• Achieve the best value for the money on all procured goods and services.
• Reduce procurement process costs and ensure continuous improvement.
• Ensure that all procurement activity adheres to organizational policies, such as
sustainability, diversity, equality and workforce issues.
• Ensure that procurement is undertaken in accordance with high professional
standards and ethics.
• Ensure that procurement activity is organized in an effective, structured way and is
embedded in the demand organization.
• Develop management information and the use of performance measures of
procurement.
• Provide documentation and communication to appropriate entities.
Procurement practices should consider ability, capacity, integrity, financial status,
performance, reliability, quality of product or service and delivery when evaluating
prospective contractors.

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Traditionally, procurement activities were paper based. Like many other organizational
functions, procurement is constantly expanding the scope for doing business electronically.
This promotes competitive bidding, improves customer-supplier relations in evaluating a
potential supplier before and during a purchase contract, assists in driving down
transaction costs and improves accuracy. The use of tools and services to move towards an
online or electronic process, to share information, is considered good business practice.
Sust~~® le Proc~tl ren·te

Sustainable Procurement Practices
FAc.ility man;;l~!"$.-~0\tid s"!e~ tQ' rninirnij:e er#irornw.:mtal d~m<tgf!s e:ss:otiatl:ld

wi1t'! \heir PUr~base$ by iMrea&illQthe acqolsmon o! eflllirOfln'l(!;ota!!y p~:~~ahlQ
prodoc~.
Facility managers have been required to consider sustainability for years. With
responsibilities being centered on the built environment, efforts related to green building
materials and energy efficiency have become the focus of facility managers internationally.
The Leadership in Energy and Environmental Design (LEED) standard for green buildings is
applied globally by organizations and has driven sustainability initiatives since the early
2000s.This has led to environmental improvements and cost savings associated with
reductions in energy use. Facility managers have integrated sustainability into their work
routines and the environment has benefited accordingly.
When institutional purchasers, which include governments, businesses, educational

institutes and nonprofit organizations require something the market usually responds. This
provides purchasers leverage for making positive changes.
The U.S. Environmental Protection Agency produced a report in 2018 which estimated that
22.2% of greenhouse gasses in the U.S. could be attributed to industry. This finding
suggests that anyone interested in sustainability must place emphasis on procurement and
the entire life cycle of a product. The cycle extends from the mining and extraction of
materials, to the manufacture and distribution of the goods and finally the end-of-life
management.
To optimize sustainable procurement practices, environmental considerations should

become part of normal purchasing practice. Facility managers should seek to minimize
environmental damages associated with their purchases, by increasing the acquisition of

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Fodl~
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International Manogem..,t Associat ion
Efll,......nn.Fxlllry....,faulonals Worldwkl•
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environmentally preferable products. From a sustainability standpoint, the first guiding

principle in procurement is:
Environment + Price + Performance = Environmentally Preferable Purchasing
Consider the Following for Sustai nable

Facility Management:
it- Rapl'J.!yft,!tw.Wii.htl;! r~j;!)Uf!;&$
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In the practice of sustainable facility management and good corporate citizenship,

procurement should consider:
• Rapidly renewable resources- includes linseed, straw, cotton, wheat, sunflowers,
natural rubber, bamboo and cork. These feedstocks can produce green building
products such as linoleum, straw bales, cotton bat insulation, wheatboard panels,
bamboo cabinetry, cork flooring, soy-based foam release agents and fabrics.
• Embedded energy- also referred to as embodied energy. This is the sum of the
energy that is required in making a product, be it goods or services. lt attempts to
measure the total of all the energy required for an entire product lifecycle, as if that
energy is incorporated or embodied in the product itself.
• Virtual water- also referred to as embodied water. This is the hidden flow of
water when commodities are traded from one place to another. For example, it
takes 1,340 cubic meters of water to produce one ton of wheat. The precise volume
fluctuates according to climatic conditions and agricultural practice.
• Packaging- should be environmentally friendly and biodegradable, preferably
compostable, recyclable, reusable, non-toxic, made from recycled products, is based
on biomass or natural products or manufactured through low-impact means.
Examples of some eco-friendly options available are biodegradable packaging
peanuts, corrugated bubble wrap, air pillows made from recycled materials,
cornstarch, mushroom and seaweed packaging and recycled cardboard and paper.
• Indoor environment__:_ efforts to improve t he indoor environmental quality
involve planning, designing, building, operating, maintaining and renovating
buildings in ways that reduce pollution sources and remove indoor pollutants.
Being aware of the above considerations will entail collecting information from product
and service providers. This could result in the development of an eco-friendly contract
language, which will ensure that vendors provide the quantifiable and defensible
information required.

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With environmental factors becoming a source of competition among vendors, there is

increased competition which stimulates continuous environmental improvement and
increases the availability of environmentally preferable products and services with no cost
premium.
This expansion is creating opportunities for organizations to minimize the impact on their
environments, but it has also provided challenges. One challenge in particular is being able
to develop a procurement plan for products and services that are used regularly by
maintenance technicians.
lt is critical for managers, when developing an Environmentally Preferable Purchasing (EPP)

program, to distinguish between the benefits and drawbacks of green product offerings.
Facility managers should consider the following:

• Track the Trends
Manufacturers are addressing the needs of the green movement with their
products. There have been improvements in the overall environmental quality
of products such as furniture, window fittings such as blinds and shutters and
wall coverings. Carpeting in particular has made substantial developments in
sustainable products by featuring more recycled content and curtailed
emissions with the use of lower levels of fossil fuels.
There is increased interest in biodiesel and alternative fuels, which has
provided more options for ground care equipment.
Advances in energy efficiency, with the use of compact fluorescents and solid-
state lighting or LEDs, have changed the lighting industry.
Manufacturers are paying attention to where their products end up after their
useful lives end. Paint is still a substantial solid-waste issue and although
manufacturers have made their products more environmentally friendly some
organizations still have large amounts that need to be disposed. Paint-
recycling concerns enable facility managers to reduce their disposal costs,
while minimizing the amounts that reach the landfills. Suppliers have begun
offering more recycled paints, which can be a 50% or more saving on the
budget.
• Watch the Words
The wide spectrum of green products and services must make the FM cautious
in weighing the promised benefits of the offerings. The increase in demand for
environmentally friendly materials has led to overselling the benefits of
products. The words natural organic and other generic phrases are used in
descriptions in an effortto position the product as "green". Facility managers
need to be aware that supporting data should accompany these claims. A
better option is to obtain independent information confirming that the

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product being considered is more sustainable than other products that serve
the same purpose.
Greenwashing is the practice of making unsubstantiated or misleading claims
about the environmental benefits of a product. These false claims can make a
company appear more environmentally friendly than it is and can frustrate a
facility manager sourcing products and services. Not being able to
differentiate between a legitimate and a deceptive claim can result in the
facility manager giving up on trying to source environmentally preferable
products.
Eight Steps to a Successful EPP

program :
;;,. OefiooEPP
:>o Efl&l.'!'e f~nat:~ciil! l"e11sibi~ity
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ll> Cr-aata;ah Er.:vlromieoWUyAw~-e'feam
~ S1attSrnaU
~ Tra_<:kResull:$
~ Rtl-G011iiti<::n
The eight steps to success that facility managers can follow to ensure the
sustainability of an Environmentally Preferable Purchasing (EPP) program:
1. Obtain Top-Level Support- within the limits of their responsibility, the
progressive facility manager should take steps to develop an EPP if one does not
exist. Obtain buy-in from someone in upper level management who can champion
the efforts and provide credibility for the program.
2. Define EPP- Environmentally Preferred Purchasing is the purchasing of products
or services that have a positive effect on human health and the environment when
compared with competing products or services that achieve the same purpose.
Facility managers can fine-tune their definition by classifying eligible EPP products
as those that are more durable and less hazardous, conserve energy or water and
can be reused, re-purposed or recycled at the end of the intended useful life. The
product content can be taken into consideration. Products that are made from
plant-based materials are more environmentally friendly than those made from
non-renewable resources. The product's end-of-life impact should be considered,
and products made from biodegradable materials are preferable.
3. Ensure Financial Feasibility- the triple bottom-line approach has successfully
been implemented when developing an EPP program. This strategy ensures that the
environment, the social benefits of products and services and the financial benefits
are all considered. In this approach efficiency and cost in products do not have to
be compromised and environmental aspects are encompassed.
4. Collaborate with Suppliers- facility managers should work with suppliers and
enquire about their EPP efforts and green alternatives. Suppliers may be able to
offer products that have been recycled, have less toxicity, are more energy efficient

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or save more water than their alternatives. These types of discussions can drive
product development. Suppliers inform researchers about what is being requested
in the marketplace and research is undertaken to make products more
environmentally friendly in order to increase sales and profits.
5. Create an Environmentally Aware Team - identify individuals/groups who are
interested in this initiative in the department and task them with finding alternative
products that are environmentally preferable. This strategy can help establish an
EPP culture that stretches beyond the maintenance and engineering departments. lt
can initiate discussions about how to make the department and organization more
environmentally friendly and gain more commitment to the demand organization
green-purchasing goals.
6. Start Small- EPP initiatives can cover a large range of products, services and
issues. This can be overwhelming at the onset. Begin the process by focusing on
one goal and building from there, for example buying products with less packaging.
When a product or contract is scheduled for renewal, start looking for options for
that one product. Small successes will encourage the building of the
program/initiative.
7. Track Results- track the successes of the effort. Figures that show results that are
meaningful, such as reductions in energy, water or chemical use, will encourage
continued support. Calculate greenhouse gas emissions, trees saved, and the
amount of material diverted from landfills, by using one of the on-line greenhouse
gas calculators a web search will provide. Share these figures/report with the
demand organization to show the department's accomplishments and help
encourage future EPP efforts.
8. Recognition- recognize staff members who demonstrate sustainability in their
sourcing initiatives. Share their successes with other members of the demand
organization.
Becoming environmentally aware does not have to be difficult. In-depth research or
complex chemical formulations don't need to be performed to reach a conclusion.
Common sense should prevail; if a product has a strong smell, it can be concluded that it is
emitting fumes into the environment.
Greener practice has payback for an organization, not only in cost, but in absenteeism,
worker compensation claims and health issues such as allergies.
© 2020 IFMA · Edition 2020, Version V2017PAFB_1 .1

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IFMAm
lntomat1nnal Fodlltv Manatement An oclotlon
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Process
FM Procurement Processes
Procurement practices vary across different organizations.
Procedures for the procurement process must be documented and communicated to all
parties. The correct methods must be identified for developing provisions to ensure that
clarifications and expectations are specified.
Procurement documentation must be complete, accurate and signed. All terms must be.
listed.
Consider a few distinctions between the following calls for responses:

• Request for proposal -the request for proposal (RFP) is a formal statement to
vendors informing them of an upcoming requirement for goods or services.
Prospective suppliers are invited through a formal bidding process to submit a
proposal. Vendors attempt to respond, point by point, to the RFP when they make
their proposals and are required to submit them within the specified time period.
The RFP may dictate to varying degrees the exact structure and format of the
vendors' response. The creativity and innovation that suppliers choose to build into
their proposals may be used to judge proposals against each other.. At the risk of
failing to capture consistent information between bidders, suppliers are allowed to
make their best efforts in their response. Effective RFPs typically provide sufficient
details upon which suppliers will be able to offer a matching perspective. RFPs may
also be a two-part exercise -technical and commercial. If the technical proposal is
acceptable the commercial proposal is included for the final review round. This final
round allows the financial manager to review the cost or commercial proposals
from those responses that qualified technically.
• Invitation to tender- an invitation to tender (ITn process or tender process, is a

special procedure for generating competing offers from different bidders looking to
obtain an award of business activity in works, supply or service contracts. This
method for managing the supplier selection process typically involves creating a
suite of formal solicitation documents and specific instructions to suppliers for
compiling and submitting information. The intent is to help interested third parties
produce a competitive solicitation with information requested in the specified
format. Using a formal ITI process helps to ensure that all parties are given equal
consideration and that the preferred supplier was selected fairly.

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• Request for quotation (RFQ) -a request for quotation is used when discussions
with bidders are not required, mainly when the specifications of the business
activity in works, supply or service are already known and when price is the main or
only factor in selecting the successful bidder. An RFQ may also be used as a step
prior to going to a full-blown RFP to determine general price ranges.
The type and complexity of the acquisition and the level of the expend iture also influence
the practices and process. Along a continuum, simple procurements with a low monetary
value generally take much less time and rigor than procurements of high monetary value or
those that require a public bidding process.
Even though organizational procurements vary, most FM procurement processes

conceptually involve the activities described in Exhibit 5-7. The activities as they are listed
here provide a general sense of customary order and are not intended as prescriptive steps.
Exhibit 5-1: Typical Activities in Procurement
What lt Involves
Identify the need - • Clarify the need.

develop scope of Review current arrangements, if any exist or simila~ previous
work and or procurements.
specifications.
Identify stakeholders and other parties who have an int erest
in the procurement and should be involved in the rorocess, for
example, FM staff, other organizational personnel, customers,
providers and suppliers, statutery authorities, the general
public.
• Perform due diligence to identify employment or ~public
procurement legislation and other compliance requirements, for
example, internal and standards.
Prepare the request. • Develop applicable service specifications and service level
agreement(s).
• Identify specifications that should be included in the bidding
process and/or contract terms and conditions.
• Prepare evaluation criteria, for example; how vendor submissions
will be rated or scored.
Finalize the request • Review evaluation criteria. If necessary, involve stakeholders for
and submit it to verification and buy-in.
procurement. • Revise request as necessary.
Review the request. • Determine the scope and scale of the procurement request.

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• Identify the monetary value.
Draft contract. The draft contraCt is usually completed by purchasing/procurement as

they have legal review, the contract and statement of work (SOW).
Supply market ·• Compile a long list of potential bidders.

assessment (market • Issue a request for information (RFI), which is also known as a
survey). prequalification questionnaire (PQQ), to the bidders on the long
list.
• Screen for basic conditions and proof of competence and
experience, financial stability and adequate resources.
• Select a short list of bidders to be issued the RFP or ITT.
Solicit bids. • Open the contract for bids. For the private sector, a prequalified
list of selected bidders is a usual practice. For the public or
government sector, bidding is almost always open to any qualified
vendor.
• Hold a briefing, if warranted. Depending on the procurement
scope, ·scale and monetary value, this may require a briefing of
prospective vendors. Such information may also be done with e-
enabled tools.
Evaluate bids. • Review submissions. In the private sector, bids and evaluations are
usually performed in private. In the public or government sector,
bid openings are generally performed in public.
• Schedule formal interviews with bidders as necessary.
• Use the evaluation criteria to assess bids and convert to scores.
Award contract. • Select the best bid.

• Hold a precontract meeting, if necessary, to review items such as:
The vendor's plan for contract initiation.
Insurance coverage with respect to statutory requirements
and eventualities.
Contract administration--,-payrnents, meetings and other key
events.
• Purchase orders are assigned and generated by the

procurement/purchasing department once all required
documentation such as insurance and safety procedures are
received.

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lnternnh>n~l F;od l tylol•n~eml!'ntAssoclatlon
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Bid Award Selection Criteria
Award selection criteria, which are specified early on in the procurement process, can range
from lowest price to unique service aspects.
• Lowest responsive bid -this is a straightforward award, based on the lowest ·
bidder who can meet the specified requirements. lt is typically used for reorders,
routine and well -defined user requirements.
• Evaluated/best value for money bid - this award is based on evaluation of
technical criteria, qualifications, experience, expertise, as well as bid price. Vendors
are rated against a floor, a minimum passing score. Public-sector rules in Europe
allow for a competitive negotiation as well, with a very short list of bidders.
• Unique service- this type of award may be based purely on technical evaluation
criteria, with the price and terms negotiated after selection. For example, if a unique
service is required, the provider with the highest technical quality might be selected
on technical merit and the final contract price and terms negotiated.
• Single Source- proprietary equipment where there are no other bidders for the
service; an example would be printer supplies that must be the same brand as the
equipment.
The monetary value of the procurement may require the involvement of a formal
procurement review committee or team.
Depending on the scope and scale of the procurement, consideration should also be given
to:
• Life-cycle costs
• Best-value judgments of quality and costs
• Risk assessment
No matter how the procurement process is executed, it should be carried out in
compliance with organizational policies and existing laws and regulations. Exhibit 5-2
provides general tips to help ensure procurement success.

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~tl~ tE.M.8~. ~" '"
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l<)'li<;!w commii~t-G::ot' \e~m,
Stope 1md ~cale!o lliDY ~~-a;iLat~ .e:ar..s.>df!:rauoo of:
- Uf~H:;yde~oSI!i.
aest-value jlldgmentsol qu~Jity <ll'ld c-c:;ls ,
- RisKas;;es:s!'l'len!
"'" M~ny ~itiona!_aetk\fl~, ti~, io~ suet:.e$.$...

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Exhibit S-2: Tips for Successful Facility Management Procurement
" ~ ~ ' "'

Apply these tips for successful FM Procurement:
~, ;<' "'
• Do not try to outsource known problem areas without resolving them first.
• Ensure that the current levels of contracteGI and actual expenditure on the services are
fully understood. ·
• Ensure that all constraints are understood, especially:
Existing contract end dates
Ownership of materials and equipment
Ownership of software used in the services
Data ownership and location
Planned process of transfer between contractors
Any key staff who should be retained and who employs them
The roles and availability of client team members, especially decision makers and
signatories
Labor unions or work councils
• Assemble all the information that bidders will need to know to provide a complete and
accurate price.
• Create a complete service specification that lends itself to objective measurement through
performance indicators.
• Provide suggested performanc:e indicators based, if possible, on c:urrent performance.
• Do not prescribe servic:e methodologies or specialist subcontractors unless it is absolutely
e~sential; focus on the outputs and performance required.
• Be clear about any elements of a normal service specification that are not req~Jired, for
example, if they are provided by internal teams.
• Make clear the resources; accommodation, IT, storage facilities and so on, that will be
· available to the contractor.
• Set out a clear pricing model to allow comparison between proposals/bids.
• sJ clear about the evaluation criteria before issuing the solicitation, for example, RFP, ITT
or RFQ and tell the bidders what they are.
• To get the best out of the bidders, offer an opportunity for alternative proposals as well
as, but not instead of, a compliant proposal.
• Ensure that a mobilization plan and mobilization costs are requested from the bidders.
Mobilization is the initial )::>hase of implementation; it puts in place the necessary physical
and organizational arrangements needed for the activity.
• Establish and publish the process for management during the bid process preparation
phase, including:
The overall timetable

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A bidder briefing
Sample site visits
How questions and clarification requests will be managed
The process for returning the proposals to the client
The period allowed for negotiation, if any
The period allowed for mobilization
• Establish clear variation and change control processes.
a. r~utlM for Pl'(l!)l)S:<f', (RFPi, ~o

~d~t'llify · rhf!. rcUC<t~ing PtO<=urefr'l&ntPfOOtices as
~nvitatun·w l.!lnder(ITii o~ a ~aque$t ror qwi.f.ltitm (RI'Q)
A. Suppliers. are:at!c-v.<ed ro make l!leir Des.1 etroris ~ iheinesponse
B. IJse<lwhen dJsc:u:>s.ionswi!hhidder:s are not requirerl ariD -price islhe main
rn'oll~/fm:tar
C Typicaily inelut:IM a $l,llt!'l<?l f<)rtn~ dr)curn:.,nt$ and sp~Kifir, rn~>trocli..'ltl$ t<1
!01,1ppl:i3rs..-mr ~;Cmpilil'lg ;:and f.ll-btr)ilting informa!iQn
D Cre:atMty and irllKWatfornn: .a -~.upp!i~r-~ r~spOI'I!>lt ~~ br, US.tld to juctgQ
submissiofl.t: .
E lnt.e:odetf to M lp rnteresteo tt'l irtl p.at~Jes protluoee a competitl'.'e &unmrsS}9n
Wtth iokll'matJon feq~o~ested io the ~pec1f!OO !orow~
Procurement Documentation
Procurement Documentation
·v S~ilicatwl)s:
Delivery Dm~s & Mil&stone!i
{' All_th~X"_ity L~e! of Pom~e
Job _SC!!p(i {' De:sC!\puon
, Sche4Jle Oellelu.pi"netil & lntegraMn
<> Cotxdin&ionwii~M':IltiplePrw;dter$
P roc\.iremen!Me1ri<:&
Include the following requirements in procurement documentation:

• Specifications- the specifications for the material being acquired must be listed
in enough detail. Any customizations or installation requirements must be noted.
Each specification lists the method to measure its compliance and quality.
• Delivery Dates and Milestones- ordering and delivery times must be specified.
• Authority level of purchase- the purchase must be signed off by the appropriate
authority, including reference to the applicable purchasing criteria.
Professional services requirements are contracted for a project or sub-project that is
outsourced. Professional services requirements should be developed as a Statement of
Work (SOW) that is progressively updated and elaborated on as the contractor is chosen
and the parties interact and coordinate a contract. Facility managers use judgment to
assess alternatives or options and stated constraints or limitations.

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The statement of work in an RFP or RFQ defines a project's goals, deliverables

and performance criteria. A scope of work, included in the statement of work,
describes the specific tasks the contractor will perform to meet objectives.
Scope of work is discussed further in Chapter Six: Contracts in the Facility
Organization.
Documentation for professional service requirements includes scope/statement of work.

SOWs define the project scope and work breakdown structure to be provided, including
deliverables and product support. Additional elements to be included in the SOW are:
• Job scope and description -the scope of work and the deliverables must be
defined in detail for the work to proceed.
• Schedule development and integration- either the internal schedulers or the
professional service is designated to develop the schedule for items listed in the
SOW. External schedules must list the approval and project schedule integration
process to be used.
• · Coordination with multiple providers- SOWs must specify work that is
subcontracted, the general contractor's responsibility for subcontractor tasks and
the coordination. SOWs note the points of coordination with contractors or the
project team.
• Work breakdown structure updates- SOWs can require that the professional
service updates the relevant portions of the work breakdown structure (WBS).
• Permits- the required permits and their required lead times must be listed.
• Procurement Metrics- SOWs must specify how the products or results of
services are assessed, such as the frequency and level of detail of performance,
quality or cost data to submit.
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Sample Template Statement of Work ·· . X
'>.~« ,'7~x ~f ,x , : ~ " ~~
Scope:
Title: The title is how the work will be referred to.

Introduction: Provides a brief description of the tasks or services required.
Estimated Value: Provides a total estimate of the overall value of the requirement, including the
cost of the professional services, the travel and living costs, translation; miscellaneous costs,
GST/HST and any other costs which will be associated with the requirement.
Objectives of the Requirement: Describes what is to be achieved or delivered by the completion
of the contract. lt also identifies the intended use of the completed requirement.

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Background and Specific Scope of the Requirement Identifies the situation Leading up to the
requirement. lt describes the range, extent and parameters around the work to be completed in
association with the contract and those events and circumstances Leading to the need for this
contract. This section may also include a description of the demand organization, end users,
previous contract work and its success or failure, bibliography, references, technical experts in the
field and, previous contractors.
Requirements: The requirements describe the tasks or activities to be performed by the facility
manager. lt also includes a detailed description of what is required for each of the identified
deliverables. This section will provide information on the Language, format, version and content
requirements for each task or activity and each deliverable or milestone in the work.
You may see all this information included in a table and/or text.
Tasks. Activities. Deliverables and Milestones (Work Breakdown Structure):
TASKS/ DELIVERABLES/ CONTRACTOR HEALTH MILESTONE TIME

ACTIVITIES MILESTONES LEVEL OF CANADA PAYMENT TENTATIVE
EFFORT ACTIVITIES & SCHEDULE
REVIEW
Specifications and Standards: This section identifies the manner in which the work is to be
delivered and will be measured as completed. In some cases, the information provided in the
deliverable or the method and source of acceptance sections of the SOW will be sufficient. In
other cases, specific reference will be made to the details and qualitative and quantitative
measures which will be used by the demand organization to determine completion and
satisfaction with the work. lt also identifies the guidelines and templates that must be followed or
used by the facility manager in completing the work.
Technical, Operational and Organizational Environment: Provides details on the technical
organizational and operational environment in which the work will be completed.
Method and Source of Acceptance: Provides a description of the performance, quality, format
and testing requirements which will be used to measure whether the work is acceptable or not.
Reporting Requirements: Describes any performance or status reporting requirements which will
be expected of the facility manager during the life of the contract. Includes the format, frequency;
number o{copies and specific content requirements. lt will also identify the need for
presentations, conferences or status meetings, if required between the facility manager and the
Project Management Control Procedures: Provides details of how the demand organization will
control the work, progress meetings, demonstrations and, prototypes. lt will identify how the

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IFMA 's Finance and Business Course ~~q~
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IFMAm
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payment schedule will be matched to the measurement of performance throughout the contract.
Contract management and controls in the SOW should be specific to the work and tasks.
Change Management Procedures: Provides a description of the process by which any changes to
the scope will be handled. lt clearly defines that no changes will be implemented without first
obtaining the approval of the demand organization in writing and as required the complete
processing of a contract amendment.
Ownership of Intellectual Property: lt is expected that there wilt be no intellectual property,

created as a result of the contract.
Other Terms and Conditions of the SOW:

Authorities: Identifies who will perform the role of the facility manager and the demand
organization and the person who will hanclle aclministration and invoicing questions. lt also
clarifies how the demand organization is to interact with and obtain direction from the facility
manager.
Contractor's Obligations:
The following are exam.ples of the contents that may be included under this heading:
• Keep all documents and proprietary information confidential
.,
r. • Meet ail tasks, deliverables and milestones as identified
• Attend meetings'with the demand organization, if necessary
• Participate in teleconferences
• Maintain security clearance with no conflict for the duration of t he contract
• Conduct and maintain all documentation in a secure area
Lo<iiation of Work, Work site and Delivery Point: Identifies where the work is expected to be
completed.
Language of Work: Identifies if the work must be conducted in a particular language and if so by
which role or for which task.
Special Requirements: Indicates if there will be any requirements for special licenses, information
on patents,
.
permits, bonds or import/export cletails which may be required of either Party
'' ,. ,. .
Security Requirements: In order to undertake the work the facility manager wlll need to
demonstrate that they meet the security requirements in advance of being awarded the contract.
Project Schedule:
Expected Start and Completion Dates: Identifies the period in which the work is to be completed.
More details are provided in the SOW which identifies the specific schedule which will be
re€(uired for completion of the work.
Required Resources or Types of Roles to be Performed: Provides a brief description of the roles

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~~Q~IFMAm
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to be performed by the facility manager's resources, if applicable, and the specific expertise or
minimum requirements for each role.
Applicable Documents and Glossary:
Applicable Documents: Appends any relevant background documents, drawings, specifications,

samples or information which will be important to demonstrate what, how and when the work
will need to be completed. '
Relevant Terms, Acronyms and Glossaries: Provides an explanation of any relevant terms,
acronyms or wording used in the body of the SOW
Sign-off for proposed resource: The following phrase will appear at the end of each Statement
of Work. "Note: Before signing the Statement of Work, if you have any questions or concerns,
please call the demand organization authority indicated above to negotiate any issues."
If you agree to the requ irements of this statement of work, please sign and date the document
which will be accepted as your proposal.
.
Please return an,original signature copy by mail.
Signature: I Date:

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IFMA 's Finance and Business Course ~tq~·
~
IFMA'"
lntemotiOilal fo<llltylolonagom.nt"'-lotlon
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Procurement and Facility Management

utsourcing
Lesson Introduction

• Forms of Facility Management Outsourcing
• Why Outsource?
• Outsourcing Benefits and Cautions
• Setting the Stage for Outsourcing
Forms of Facili Management Outsourcing

FM and Outsourcing
Outsout:cing gt.tnr.raUy dust~iOO!> lh~ prqus.~; nf ~on«~11hgW.h cmo.!~t

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- l ®J!.FM.tootia,.ctor
Before concluding the discussion of procurement and beginning the chapter on contracts,
outsourcing is examined. The reason for this is that, procurement often leads to
outsourcing and outsourcing agreements require contracts.

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Outsourcing describes the process of contracting with another .company or person to do a

function. Outsourcing encompasses anything not done with in-house labor. In facility
management, the terms outsourcing and contracting out are often used interchangeably.
Facility management outsourcing can take many forms. Demand organizations may hire a
full-service, single-source vendor to provide many services bundled together or an
organization may out-task and hire individual, specialized vendors to provide one or more
functions.
Example: Outsource is when one firm is hired to handle all grounds maintenance. Out-task is
hiring multiple firms to perform each process individually.
Other examples of out-tasking include processes such as component tasks found within
cafeteria/food service operations, janitorial services and heating, ventilation and air
conditioning (HVAC) maintenance.
Additional forms of outsourcing in FM include:

• Managing agent
• Managing contractor
• Total FM contractor
Managing Agent
The Managing Agent (MA) is an external FM specialist. This is an individual brought in to

manage FM services. The arrangement is adopted when the demand organization
determines that it does not want to hand control of its facility to service providers but does
not have the skill or expertise internally to manage them efficiently and cost-effectively.
The de!mand organization retains control of the procurement of all services and contracts
directly with the service providers. The MA acts as an extension of the demand
organization, usually under specific performance criteria and serves in a supervisory role.
The MA is paid a fee, usually expressed as a percentage of the value of the expenditure
managed. The demand organization continues to provide most support activities rather
than package them with the MA's scope of work.
This model maintains direct client control over specifications but risks delegating
responsibility for del,ivery to the MA without delegating the direct power to resolve
problems. The demand organization may also experience higher indirect costs due to the
volume of transactions associated with multiple contracts.
Managing Contractor

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1FMA 's Finance and Business Course ttl~ ~"E.M~~·-· ~
Eno~li"'FadlltyProtuslonalsWorldwf.S.
The shortcomings of the managing agent model often lead organizations to the next stage,
which is to procure the services of a Managing Contractor (MC) to serve in the role of
primary service provider.
The demand organization contracts directly with the MC, who serves as the single point of
contact for the client. In this scenario the demand organization will usually retain control_of
the specification of services and often imposes key contract terms to be passed down the
supply chain. The MC will self-perform many services but typically subcontracts some
services to secondary service providers.
The demand organization may specify suppliers to be used for critical operations, such as,
equipment maintenance to meet warranty obligations; otherwise, the client has no
involvement in the relationship between the MC and the secondary service providers. The
MC is generally paid a fee, similar to the MA arrangement but larger since the MC is
responsible for the transaction costs associated with the multiple service provider
contracts.
The impact of this arrangement is that the demand organization receives a single monthly
invoice and is able to reduce resources and costs for supporting management activities
that become the responsibility of the MC. lt is important that the contract between the
demand organization and the MC includes a provision for open-book accounting, allowing
access to the MC's premises, books and records- including invoices from the
subcontractors- to prevent misunderstandings as to the cost of services.
Total FM Contractor
Under this arrangement the demand organization passes the full responsibility for
managing its facility to a single service provider for a fixed price. With a fixed-price contract
the Total FM Contractor (TFMC) assumes greater risk. The demand organization must
provide sufficient flexibility to enable the manageability of the various services efficiently
and cost-effectively. The demand organization role is reduced to strategic planning,
performance management and budgetary control.
While the TFMC model might appear to offer an ideal solution, because it provides a single
purchasing point for the demand organization, the reality can be that the TFMC
subcontracts all or most of the services. This increases the chance that the terms and
conditions of the primary contract are not mirrored in the agreements between the TFMC
and its subcontractors, leading to performance management issues. The TFMC might be
able to offer a more complete and competitive solution to the demand organization's
needs than in the case of the MA of MC. Relationships built up over the years with
subcontractors can mean that efficient working relationships are established from the start.
The TFMC model can provide a sound solution, but only if the demand organization is

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prepared to spend time in identifying the right basis for such an arrangement and then in
selecting the best service provider.
Exhibit.5-5 summarizes key characteristics of the three outsourcing models.
Characteristics Managing Agent Managing Contractor Total FM Contractor
Form of Fee Fee Fixed price

Compensation
Client Relationship Acts as demand single point of single point of

organization's agent; contact; may contact; may
independent of subcontract some subcontract all
service providers services services
Pros Flexibility to procure Single point of Single point of

& manage contracts contact contact
of Managing Agent &
service providers
separately
Ability to have both Reduced transaction Reduced transaction

in-house and out- costs costs
tasked/outsourced
services
efined cost
May be able to offer

most complete &
competitive solution
Cons Higher indirect costs No control over No control over

due to multiple subcontracted service subcontracted service
contracts providers providers
Gaps may occur Delayed response in Delayed response in

between scope of the corrective action due corrective action due
various contracts to longer chain of to longer chain of
command command
May be difficult to
clearly account for
cost of self-
performed services

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/Ffv1A 's Finance and Business Course ~~~~~IFMAm
~ lntem~!I...,•IFocllltylolan•ll•mentAuoclitlon
EIB~rl"'fadlltyProfusl"">lo W"""""dt
Internationally Used Outsourcing Models

There are multiple models of accounting function outsou rcing used internationally. The
following are some of the more common forms:
• Freelancer- this model works on a low cost, project basis. A job or task can be
listed that needs to be completed. Different companies or individuals from across
the globe will bid on the job and be selected according to the job's requirements or
personal credentials involved. This model is a quick and easy way to get one task
completed, such as creating a database or providing graphic design work. There are
numerous online portals which provide the platform for freelancers and buyers.
• Project Style Work- this model is a specialized outsou rcing center that is created
to complete work on a project basis. lt enables a backlog of work to be completed
cost-effectively and on time, without having to employ additional staff and with a
fixed cost for the work. Time zones and language differences can cause barriers with
this model.
• Business Process Outsourcing (BPO)- this model is one of the fastest growing
areas of outsourcing. lt is a labor hire and service office in one. The BPO provides an
office environment set-up, management and all/any facilities required for a(n)
new/offshore team. All the recruitment of the new/offshore team is done; they
. manage the HR, payroll and all employee-related matters. The demand
organization controls the workflow and training required for the team members to
· fulfill their role. More BPOs are becoming specialized and focused on specific
markets, for example, software development.
• ' Build-Operate-Transfer Model (Bon-is a form of project financing where a
private entity receives a concession from the private or public demand organization
to finance, design, construct and operate a facility as stated in the concession
contract. BTO is viable and cheaper than BPO when there are fifteen or more
members in the team. lt allows the demand organization to scale and control the
entire offshore culture and team.
Why Outsource?
Why Outsource?
~ Cost r~duciioo-.oppO<tuniiie$
!> At~!! SS IO exper.isc·T!Ol IIV(lifilble in--hO'J.Se
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;- At~& lo ~~trN:niw·?l' ~Y~tEirm. th~i WQ~leqtJn~ capit.~ltn~( e411Jl<:ltbfl
justihct1<n tna hOf.t «ganiuitlc~
;;. F'* ~ ":'ansg:erne!l\ ti•~· to Jocus on sti'~teQI~'isS.tM'S and p!~n!'li~

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~tl~ H:.~.8~. .,.,.
Em~"'facllltyPmutlon~I•Worldwld•
There are many reasons to outsource in FM. Outsourcing may offer cost reduction
opportunities. Other reasons include, but are not limited to:
• Access to expertise not available in-house.
• Improved resource flexibility.
• Improved cost flexibility.
• Improved career opportunities for FM staff; for example, staff members who show
proactive and innovative leadership skills, while overseeing an out-tasked service,
can be selected for promotion.
• Access to investments or systems that would require capital that cannot be justified
in the demand organization.
• Management time freed up to focus on strategic issues and planning.
• Cost avoidance- the elimination of long-term obligations such as employee-related
liabilities like pensions.
From a finance and business perspective, outsourcing may provide a cost containment
opportunity. Outsourcing, in whole or in part, is the difference between fixed and variable
costs.
There are qualitative reasons to outsource. Facility customers may be demanding more in
terms of services and amenities than the department can provide. Outsourcing offers
smaller departments the resources and expertise for capabilities they may not have
internally. Even in larger departments, outsourcing can improve specific functions.
Many times, the function being outsourced is considered non-core and outsourcing it
allows the demand organization to concentrate its activities and resources on its core
business. Outsourcing allows an organization to capitalize on the expertise of other firms
that are more efficient, effective or knowledgeable at specialized tasks that are peripheral
to the core competencies. Alternatively, the function being outsourced may be of a very
low level; outsourcing will allow staff to focus on the higher level tasks.
Discussion Question
Which of the folk:Wl~Slatemenl!l: ®6ut ootwur:;:ir;g <1u~wntaQ~$ ·Wicl

disai.l~.a.nta~ iSftti:uq
A_ 0U\.SO!Jt'CIN!J irK:ieas.es. COH!m\
a. OutsO!.<Tcfng can i:mpro<~e effk.ie~cyii~ efle...."tiveness
C. Outs1:1urcfng IT1<1Y provlfJe s.peci.ahzedFM service& er best prru;JJces
D. Oui:!>»Utting_c-an re~vce Oper;~tional eJ~peMes

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IFMA 's Finance and Business Course ttl~ ~.E.~.8~.-.,.
Empewviii(FxMiryProfusl"""JJW.tohrld•
OtAtsourci.ng Benefits an Cautions

Although outsourcing offers many attractive advantages, it may not be the answer for all
activities or functions. In the U.S. Federal Government, certain functions are described as
"inherently governmental" and may not be outsourced because the function is so
intimately related to the public interest that it must be performed by federal government
employees. These functions are typically found in jobs that require decisions about the use
of resources such as, spending money, accepting work, management and
ownership/landlord functions.
At best, outsourcing has some potential cautions. Exhibit 5-8 lists notable advantages and
disadvantages.

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~tD~ ~. E.~.8~. ···"·
Empowoflnt:Faclllty"Profuslon•t•Worldwld•
Exhibit S-8: Common Advantages and Disadvantages of Outsourcing
• Can save FM administration and • May cost more to go outside for specific
management time expertise
• Increases FM ability to focus on core and • Potential loss of control
strategic revenue-generating activities • Potential for poor staff morale
• Provides flexibility, by allowing staff to • May necessitate a learning curve by the
complete other projects outside organization
• Can improve efficiency and effectiveness, • Managing the relationship may require
by gaining access to additional staff and different supervisory skills than used for
skill sets internal staffing and a change
• . Can reduce operational expenses, extends management approach with customers,
staff capabilities without incurring fixed staff and management
staffing/benefit costs • Potential for privacy and confidentiality
• May lead to sharing of savings with the issues
outsourced firms on a risk/shared reward
basis
• May improve the quality .and/or timeliness
of FM services
• May provide FM staff hired by the
outsource company with training and
career paths that would not be available in
the FM department
• May provide specialized FM services or
best practices that the FM department
cannot provide or would not have the
financial resources to provide
lt is important to realize that there can be implications that affect outsourcing which are
driven by national laws, regulations, standards and legal conventions set forth by
international organizations such as the International Labor Organization, the organization
for Economic Cooperation and Development and the European Union.

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IFMA 's Finance and Business Course ~r-lj~ IFMAm
• lnttmnlonal fxlllty Man•! • ""'niA,.odatlon
ElllpooNrin&FadlltyPrcrfusl...WIWotldwtft
Example: In the United States; there are liability cautions in hiring contract employees.
Government regulations are very specific in terms of what characteristics differentiate an
ext ernal contractor from staff. In the European Union, the Acquired Rights Directive specifies
several points about business transfers from one entity to another, as in a sale of a business
unit or a merger; there are liabilities for all statutory rights and claims arising from contracts of
employment, including the transfer of services such as office cleaning, catering, security.
National laws in many countries apply to internationally owned subsidiaries operating

within a nation's borders. A facility manager should be aware that employment laws in the
countries in which the demand organization operates and employment laws developed by
global and regional bodies, can impact outsourcing. Human resource practitioners and/or
employment law specialists in the demand organization should be consulted to ensure
compliance.
Setting the e for Ou1:sou

Setting the Stage for Outsourcing
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• Adequa:e documemationQfwslli.for "in·hou:;e and ouisourccd dcll<Jery et
\ -ser-&es
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~ ~lilj~ti()n(!~·h)gJ)d>!!~ily'S(tt'.l~(f$:M.d f!$1<:~5Qiit.m.&titof lh£>.6& ~Q:Q
~ · Col'$1defaoor, of f!e~Jbi!it)' !ltld ·~~Ms:Mty r" denw.r1d~
;. Coi'1Sldefairoo;ofman8gi!JU8fltlrn p!icaiion!;,:too ~httqvirC<t
1> Appfopriat>e< !?id e \lilluation dileri:J, (soft arul hard n"<ea5:lires'an.thlomp::J:(ISO!l
of aU coe.t..<>. oot )'J~t lawe~r:pric·el
Facility managers have responsibility for developing, managing and overseeing contracts.
Before reaching the point of contract, the facility manager needs to spend up-front time on
properly defining the outsourcing objectives and requirements and the quality needed to
meet those requirements. To do so helps to mitigate problems in the procurement process
and performance execution of the contract terms.
This involves having secured approval from senior management, working with procurement
personnel and possibly legal counsel in the organization. To be prepared to do so, a facility
manager should have performed due diligence regarding items such as, but not limited to:
• Definition of objectives and key attributes of services required, including description

of the current arrangement and identification of stakeholders.
• Adequate documentation of direct and indirect costs for in-house delivery and
outsourced services to facilitate comparison and decision based on best value.
• Identification of special demands or the uniqueness of the service .
• Identification of high-priority services and risk assessment of these areas so the

consequence of failures is documented and the speed of response can be planned.

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Em~rtltJFxUityProfuslon•I•Wofldwld •
• Consideration of flexibility and variability in demands.

• Consideration of management implications, effort and involvement required to
manage service providers.
• Appropriate bid evaluation criteria, soft and hard measures and comparison of all
costs, notjust lowest price.

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IFMA 's Finance and Business Course ttl~ .~.E.M.8:_.,.
ENpo>W*rlntFadlltyPnfusiCIIl:llc<Worldoildtt

1. What is a Request for Quotation?
a. An official statement to vendors about the business activity in works, supply or

service required
b. A special procedure for generating competing offers from different bidders
c. Procedure used when discussions with bidders are not required
d. The process by which an organization reaches a formal agreement for the
purchase of goods or services
2. What is an Invitation to Tender?
a. An official statement to vendors about the business activity in works, supply or

service required
c. The process by which an organization reaches a formal ag(reement for the
d. The buying activity or the placing of orders under the cover of a procured goods
or service contract
3. What is a Request for Proposal?
a. A formal statement to vendors informing them of an upcoming requirement for

goods or services
c. The procedure used when discussions with bidders are not required
d. The process by which an organization reaches a formal agreement for the
4. You are working with the procurement officer to secure a new provider for janitorial
services. At what point in the procurement process should you draft a service level
agreement?
a. While FM prepares the procurement request

b. At the time the contract is drafted
c. While the bid is out for solicitation
d. After contract award but before a PO is assigned

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5. Which award selection criteria is appropriate for reorders, routine, and well-defined
user requirements?
a. Lowest responsive bid

b. Evaluated/best value for money bid
c. Unique service
d. Standard bid
6. Facility management decides to outsource administrative services. What potential

advantage is the demand organization most likely to realize?
a. . Greater flexibility, because the vendor will be able to customize employee benefits
b. Improved staff morale by gaining outside experience
c. May provide specialized FM services or best practices that the FM Department
cannot provide
d. Greater leverage to secure employee benefits at reduced costs
7. What is the main reason facility managers outsource?
a. Possible cost reduction opportunities

b. Access to expertise not available in-house
c. Management is freed up to focus on strategic planning
d. Improved opportunities for FM staff
8. What does EPP stand for or mean?
a. Efficient Product Purchasing program

b. Environmentally Preferable Purchasing program
c. Environmentally Purchased Product program
d. Efficient Preferable Purchasing program
9. What is a common disadvantage to outsourcing?
a. There is flexibility for staff to focus on other projects

b. lt may Qecessitate a learning curve by the outside organization
c. lt may provide specialized services that the FM department is unable to provide
d. lt may lead to sharing of savings with the outsourcing firm on a risk/shared reward
basis

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IFMA 's Finance and Business Course ttl~ H:.M.8~... ..
e...,.._rt.,.FKIIItyProfusion•loWorldwltl•
10. What is a common advantage to outsourcing?
a. May necessitate a learning curve by the outside organization

b. lt can reduce operational expenses, extends staff capabilities without incurring
fixed staffing costs
c. There is potential for confidentiality issues
d. Different supervisory skills may be required, and a change management approach
may need to be adopted

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IFMA 's Finance and Business Course ~tl~ .HEM.8~. oo-
Empow>~rtr. FocllltyProfuslon·t· WottMW·
Chapter 6: Contracts in the FM

Organization
• Identify the principles involved ih the development and oversight of facility

management contracts.
• Outline the requirements for administering contracts and monitoring their
performance.
• Analyze and interpret contract financial elements and manage risk.
• Resolve conflicts that arise with vendors in the facility organization.
Chapter Objectives
Cm COi1'fl)l@!iOIHd t)1i!'; T:l'lapl.et}'01/l.'<i!J. 1:\e -llbltt' lo:

~"> lc!&nri1y,lheprinc.ip~Gslrwch.~ in lh&'dCNe!opmcn: and a>~GI'sighl o.f' f.x:ility
management<:o.'1traet~
,.. outlitle the feq:ult.emel)t!l fOJ" ~Mintsteri~X~COf'lt(ootsand motuloot\g tMir
Pen~rmance
~ Analyze al)1fi:'llet~l fihandal _t ontrncf elerneols to mariage iitk
l'<· R~solw- confliWs '!hat.ilJis'e wilh Wmdl)r:L_in ~ f~llity OfQ:tttlil"*ti"On
lessons
• Contract Development, Management and Oversight
• Contract Administration
• Analyzing and Interpreting Financial Contract Elements
• Resolving Vendor Conflicts

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Contract Development, Management and

Oversig ht
Lesson Introduction
·· ······ ·· ········ ····································· ········ ·············· ······ ······················ ·········· *·;rmi~ - ,
• Identify the principles involved in the development and oversight of facility

management contracts.

• Contracts and Facility Management
• Contract Fundamentals
• Types of Contracting Mechanisms
• Contract Terms
• Prevention of Fraud and Irregularities in Contracts
• Contracting Considerations
Co
Contracts and Facility Management
; A prtmal)> ~llit:Je to id(!fllify"f!l)l:l tJefin~

O;J?Jrlvni!.ie.s:for.:prochJWI or servi<:-es procwed Fr-c:m
e.o:te-ma!Picvider:;.
~- A framework !or r~hJtory c:ompji<u-.ce, repu!_,jiooru
risk manag~ni and effective thlml)e.eontool, _a
wurcEt fp~ ;dd!Xl vahK> Md innzymtio~:~
• PMti?ls )<OO,y Q!{aeuy whal is. i!WQMM! an<l expQtl~d
of tl)em
Facility managers are under increasing pressure to manage and maintain their facilities
effectively. Few organizations have the capacity and capability to manage all aspects of

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operations through an internal workforce. Various aspects need to be procured from

external providers. Virtually every organization source some services in this way.
Contracts are one of the primary vehicles through which organizations identify and define
opportunities for goods or supplies procured from external providers. In a complex,
globally networked world, many believe that the quality of contract management has
become a key indicator of an organization's performance and integrity. The contracting
process provides a framework for regulatory compliance, reputational risk management
and effective change control. lt offers a source for added value and innovation. Added
value has the potential to go much further than simple price cuts. Cost reduction can drive
measures such as improving control and reliability performance of contractors or ensuring
continuous improvement of speed and quality of services.
A contract defines the details for the delivery of products, environmental services or other
deliverables between the owner and the contractor or consultant.
Planned services such as:
• Preventive maintenance
• Predictive maintenance
• Planned or unplanned maintenance
• Planned minor works

• Construction
Unplanned services such as:
• Breakdown and corrective maintenance
• Unplanned property services
• Unplanned replacement/refurbishment maintenance
• Unplanned minor works
Property services such as:
• Cleaning services
• Mechanical or HVAC services
• Security services
• Grounds maintenance
• Waste management
Environmentally sustainable services including but not limited to:
• Energy
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• Waste
• Water
Facility managers must develop a contract language that clearly outlines the deliverables,
cost and performance criteria so that the service needs and terms of agreement of the
demand organization are fully met. This chapter provides an overview of fundamental
contract elements, customary types of contracts, terms found in FM contracts and finally,
fraud and irregularities in contracts.
Valid Contract Elements
A contract is a legally binding agreement between two or more entities. lt provides terms
and conditions that describe the agreement and constitute a legal obligation. To be
deemed valid, a contract typically requires the following elements.
• Mutual agreement- is an express or implied agreement that helps ensure that
both parties understand and agree to the essential details, rights and obligations of
the contract. While this may seem obvious, a mutual agreement should explicitly
clarify the terms of the deal so that when the parties subsequently agree to formally
enter into the contract, they are agreeing to the same thing .
• Consideration- once the parties have met, they must each exchange something
of value in order to create a contract. This includes goods or a promise to do
something, for example, the price paid by one side and the goods supplied by the
other. The Latin term quid pro quo, meaning "something for something," can be
used to refer to contract consideration.
• Competent parties- means that each person who signs the contract must have
the legal authority to sign on behalf of an organization or another person. The
parties involved must have the capacity to understand the terms of the contract.
Minors cannot enter into contracts without the additional signature of their parents
or guardians. Individuals considered to be lacking sound mind, mentally
handicapped or impaired by the use of drugs or alcohol, cannot enter into
contracts.
• Proper subject matter- the contract must have a lawful purpose .

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• Mutual right to remedy- both parties must.have an equal right to remedy a

breach of terms by the other party.
• Agreement to enter into the contract- once both parties understand the deal
and understand what type of consideration will be exchanged by each party, they
are ready to form an agreement. The parties demonstrate that negotiations have
ended and an agreement has been reached when the parties sign the contract.
Contract administration is an important responsibility for facility managers. Contracts
establish agreements between an organization and landlords or tenants, suppliers and
customers as well as other businesses. They are negotiated for a wide variety of products
and services.
Contracts are legal documents developed with the direct or indirect review and input of
lawyers/solicitors. Even simple contracts have legal jargon. The content that follows won't
make an individual an expert in contract "legalese," but the fundamentals presented should
enable facility managers to achieve far better negotiated results on behalf of FM and help
in contract administration and management.
Contract Case Study

Company name I Company Logo
CONSTRUCTION CONTRACT
I. PARTIES AND PROPERTY
A. This Construc;:tion Contract is made on {DateOf} and indicates the terms of the agreement
between {CompanyName} and {OwnerName}.
B. The property for the construction to be completed is located at:
{PropertyAddress}
11. DESCRIPTION AND SCOPE OF WORK
A The Contractor will perform the construction services as follows

B. The Contractor shall furnish all the materials and perform all of the work shown on the
construction plan in the site property.
Ill. TERM OF CONTRACT
The term of this Contract will begin on {StartDate} and will remain active until the completion
of the service. The term can be extended with the written consent of both parties involved.
IV. START DATE AND COMPLETION DATE

A. The construction will begin on {StartDate}.

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B. The construction shall be completed on or before {Completion Date}.
V. CONTRACT PAYMENTS
A. The Owner should pay the Contractor a total amount of ${Contract Price} for the
completion of the job.
B. Payments for the job will be due as stated below:
The Owner should deposit ${Deposit} of the total amount upon contract signing.
Payment Terms
c. Payment will be made by {Payment Method}.

D. Failure to pay when due will result in breach of contract. The Contractor has the right to
stop the construction if payments are not made.
E. Once the final payment on this contract is received, then the parties involved will be
released and discharged from any claims for any work performed.
VI. PERMITS AND LICENSES
The Contractor must obtain and pay for all required permits and licenses. The Contractor will
also obtain and pay the fees for the governmental inspections if necessary.
VII. LABOR AND MATERIALS TO BE USED
A. The Contractor shall provide and pay for alllabor and types of equipment which includes
construction tools, machinery and transportation.
B. The materials that will be used shall be brand new and in good condition.
VIII. OTHER RESPONSIBILITIES OF THE CONTRACTOR
A. The Contractor shall be responsible for supervising, managing and completing all
construction services under this Agreement.
B. The Contractor shall be responsible for keeping all records and documents in a safe place
at the property. The contractor shall store these documents in safe storage as it will be
presented to the owner once work has been completed.
c. The Contractor shall be responsible for taking all precautions for the safety of its
employees and the public at the property. The contractor must take full responsibility for
the acts or negligence' of its employees. The contractor is also responsible for training its
employees about the Occupational Safety and Health Regulation to giye knowledge on
how to handle emergencies and accidents in the workplace.
D. The Contractor shall give a guarantee to the Owner that all work will be in accordance
with the Contract Documents. Any issues caused by defective materials or equipment for a
period of ten years shall be remedied by the Contractor.
E. The Contractor shall provide skilled and competent staff suitable to do the work and
should maintain discipline and order at the Property.
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F. The Contractor shall be responsible for maintaining the Property clean and keeping it free
from waste and hazardous materials. If hazardous materials or substance are noticed in
the Property such as dangerous chemicals, contaminants or any toxic substances, the
Contractor shall be responsible for notifying the Owner immediately. The Contractor is
also responsible for training its employees about handling hazardous materials and
substances in a correct and safe manner. Any sickness, damages, loss of employees
caused by these hazardous materials shall be handled by the Contractor.
IX. INSURANCE
A. The Contractor shall be responsible for purchasing and maintaining an appropriate

insurance policy for the construction.
B. The Owner shall maintain to maintain insurance covering the replacement cost in the
event of loss through fire, casualty, an act of nature and theft.
X. TERMINATION
This Contract can be terminated by either party:

A. If the Contractor or Owner breaches any of the obligations specified in this Agreement.
B. A written n<ptification identifying the breach should be issued by the Contractor or Owner.
XI. INDEMNIFICATION
A. The Contractor shall indemnify and hold harmless owners and employees against all
liability, claims, demands, expenses, on account of any loss, damage or injury.
B. The Contractor agrees to be responsible for providing defense against such liability claims
or demands.
XII. AMENDMENT
This Contract can only be changed or modified through writing and shall be signed by the
parties involved.
XIII. GOVERNING LAW
This Contract shall be governed under the laws of {State/Country}.
XIV. SIGNATURES
We, the undersigned, hereby agreed that we have read and acknowledged this contract
bounded by its terms and conditions.
Date: {DateOf}

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Contract Classifications
Contract Classifications
.
(:~~ ~*
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Contracts are classified in a variety of ways.

• Express and implied- an express contract is one in which all elements are
specifically agreed upon. They are stated either orally or in writing. In an implied
contract, the existence of the contract is assumed by the circumstances, which
means that the agreement of the parties is indicated by their conduct or
performance.
• Bilateral and unilateral- a bilateral contract is most common and is one in which
both parties make a promise and have balanced obligations. In unilateral contracts,
one party makes a promise and takes the mostof obligations, such as an insurance
contract.
• Void, voidable and unenforceable- void contracts are considered never to have
come into existence, such as being based on an illegal purpose. A voidable contract
is one in which at least one of the parties has the option to terminate the contract,
such as a contract with a minor. An unenforceable contract is one in which neither
party may enforce the other's obligations, for example, if it violates the statute of
frauds.
An informal verbal agreement can be as binding and legally valid as a written contract. lt is
possible to bind your organization to a contract through e-mail, either deliberately or
inadvertently. For example, if an e-mail or chain of e-mails clearly states an offer for
entering into a deal with all of the material terms and the other side responds bye-mail
accepting the terms, there is a high probability that a valid c_ontract has been formed even
though no signatures have been exchanged up to that point.
When the intent is solely to negotiate the issues through e-mail leading to a formal written
and signed contract that should be clearly stated in thee-mail correspondence. During
contract negotiations, "subject to contract" wording should be included in any document
exchanged by parties, e-mails or hard copy. The expression "without prejudice" is often
used when "subject to contract" is meant. This denotes that the document is not an offer or
acceptance and negotiations are ongoing.

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Discussion Question
!t!entity the·f~:i:lwt"9slatemen:ao!S truf! 0( false

Ail !n farmai>~~<rbal .<~!Jr~ment ~:.an be as-bif\Cing .;n(f"iegaliyvaJid
~S" s w<'i'tten eott!~·a;:;t
You: canoo! birid yOurself 10 :a conUact_Ulrougll \!-mail.

The te:~m:nology~Wlthnut prejudicii' !l'f'l)l;es -th :n tlu:• confmd
<~_dheteac \Q .aU applio;;ableliJ~'S: and regull:di('fls..
Discussion Question
Prest:rip:tiv lle!T'nl that rei ale to ;Hped~ic pr<x:urt'r.nent

ee oritr<~~ ·
Pclrlormanc· 011mne the ~>:act :.pcclfcatior1se:xpeeoted or socce:plable ran9CS.
e-based
Genel'ili Pre,e-s!ablislwd aerns:lhat pr-o>J!OO the te-;,~al frotne".'l<lf~ fot ihe

e"o~ltiOns n:ilafur:s!'lip be!weet11he ci(t:~imii.:~tico and the vern:ior.
Spec RI;! Ora:se..SOO ~;u~c:~ ro~u;tJ!ts. bl..d w~v~ rtaxi!>il>!ly f(ir ~M ~nctor
c:ondiliaflt. r~g.a.rding achicvemoot Of th:OS.o msults.
Scope of Work
Sli:ltement of Work, SOW
- SOVo/t.~ll\dln<:.t<}de·
• GlosS9!Y
• Problen1 S!lltemei'it
• Goa!s & Obje';tr.~
• Oefiveiatle:s.
• Admhii~lrii:~Dtl
The Scope of Work (SOW) is the section of an agreement where the work to be completed
is described. The SOW should contain, milestones, reports, deliverables and end products
that are expected to be provided by FM. The SOW should also contain a timeline for all
deliverables.
The statement of work in an RFP or RFQ defines a project's goals, deliverables

and performance criteria. Statement of work was discussed previously in
Chapter five: Procurement in the Facility Organization.
The scope of work, included in the statement of work, describes the specific
tasks the contractor will perform to meet objectives.
An issue with most scope of work is a lack of specifics, namely when the two parties
disagree on what should have been delivered and a review of the SOW does not support
one interpretation over the other. This problem is common in agreements and is often
where disputes arise. The best way to avoid this problem is to avoid any and all ambiguity.
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A Scope of Work should include the following components:
• Glossary
• Problem Statement
• Goals of the Agreement
• Objectives of the Agreernent/Deliverables
• Administration
• Timeline
Glossary- spell out each acronym used in the SOW. Include definitions of odd or unusual
terms.
Problem Statement- succinctly describe the problem to be addressed. Describe the

scientific and technological baseline which is the current state-of-the-art or developmental
status of the field to be advanced.
Goals of the Agreement- at the beginning of this section, complete the following
sentence: "The goal of this project is to ... " Complete the sentence with a brief description of
the goal(s) and how the goal(s) will be met. Goals can be technical, economic or social.
Objective of the Agreement/Deliverables- this section must contain the objectives of

the project, what are the quantifiable elements at the end of this agreement-this is where
the deliverables should be listed. Deliverables are comprised of a task and an end product.
Example:
Poor Task: Assess employee needs for public health awareness L
Example:
Deliverable: Write survey to address needs.
The problem with the example is that nothing is specified. The task should be measurable and
the deliverable must be quantifiable.
Good Task: Survey four departments of ten employees in health and safety awareness.
example: Each employee will answer a 25-question survey that as:;esses their general
knowledge of health and safety as they relate to public health. One reviewer
should take about one hour with each department to take the survey and
another two hours per department to assess the data.
Deliverable: A 10-hour curriculum for employees of up to ten that add resses

issues of deficiencies in public health awareness.

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By reading the task and deliverables, the administrative personnel should be able to construct
the budget associated with the SOW. More importantly, in reviewing the deliverables, there
should be no question about what is expected of the facility manager. A SOW may contain
many deliverables, but each should be broken down into tasks and end products to specify
what is expected.
Administration- if there are meetings, calls, conferences or other "soft" deliverables,

they should be outlined in the administration portion of the SOW. Any requirement that is
not an end product of a specific task but is required of FM needs to be described in the
administration section of the SOW.
· Example:
Poor The facility manager will be required to give weekly reports of progress during .
Example: the implementation of sustainable practices with more. frequent reports while the
wastewater is drained.
The problem with the example is that it does not specify what needs to be in the reports, what
"more frequent".means and when the "wastewater is drained".
Good The facility manager will be required to give weekly reports consisting of water
Example: usage, installation of new sustainable products and potential risk areas. Bi-weekly
reports will be required during wastewater drainage which takes place during,
May 15 to July 15.
Timeline- this section lays out all dates for the project. lt states dates for the tasks and
deliverables. lt also covers the dates for the administration portion of the SOW.
The glossary, problem statement, goals of the agreement, objectives/deliverables and

administration components of the SOW should not have any ambiguity as to what is
expected of the FM department. Together, these elements should explain what is expected,
when and in what form, while noting any special requirements.
Contracting M
Types of Contracting Mechanisms <i •f~\!L •
• P:res1;ript_<w <:omracttef.s hOW to 00.tfle·..-mrt<

• PtortooMru::e Bar.tod conkactdsscrlbe eJ:Pect~ result~

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Facility managers may be involved with the administration, management and oversight of
contracts in different areas. Contracts may be performance-based or prescriptive.
Prescriptive contracts tell the contractor how to do the work; they are less flexible than
performance-based contracts. While prescriptive contracts are appropriate for some
situations, experience has shown that they can sometimes stifle innovation and morale.
Contractors may have little incentive or motivation to do anything beyond what is
specified.
Performance-based contracts describe expected results but leave flexibility for the vendor
regarding achievement of those results. With a responsible contractor, performance-based
contracts have the potential for cost efficiencies and improvements. The contractor may
take more pride in work and look for ways to increase effectiveness and efficiencies and
add value.
The amount of flexibility that is afforded to a contractor will depend on the trust and
experience with the contractor; contract scope and monetary value are often
considerations. The prescriptive and performance-based categories of contracts will be
discussed further in the explanation of service specifications in Lesson two of this chapter.
Contract documents specify the following information to potential suppliers:
• The scope of services
• The conditions of delivery or detailed specifications
• Terms and time frame of delivery and/or performance
• Basis for compensation
• General and special conditions and/orJclauses

Individual contract terms will be covered in more detail later General and special conditions
are defined here:
• General conditions- are defined by the demand organization and its legal
counsel. These terms and conditions provide the legal framework forthe
relationship between the demand organization and the vendor. Purchasing drafts
them and legal counsel reviews them. These pre-established terms and conditions
are incorporated directly in the contracting document and general conditions do
not usually change.
• Special conditions- as the name implies, these terms and conditions relate to a
specific procurement. They define items such as working hours, security
requirements, special access and safety rules. Purchasing drafts special conditions
based on requirements defined by FM. In simple contracts, special conditions may
be incorporated directly in the contract. For complex procurements, special
conditions may be putin a performance work statement.

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In FM, materials, supplies, labor and services may be obtained through a variety of
agreements. lt is not possible to explain in depth all the different types of contracts
possible in FM. The content that follows is an overview of some of most widely used types.
Discussion Question
Match each c<>ntrm:::lterrn with·lffi de.s~riptiofl.
?tGSC!ip\Wc Hmns lh~ relutltto 9 Sf10Cirlc"pr~u!ti!Tlnn:.
COiltr.w:t
Perkl!m~nee- (lOUine the·Q~et $;:~ecinc~wn$ eilpetted Of ~~ore i"arJil~s
b!Jsed
Gener;,J Pt'l'!-Eslabl-ished.ifems.th<1i pro.ide thelegall'rH!J!aWOdr fer ttl.a

etindi!i~ tl;llat><~~s.hipbf:!~en tt_
'le ot~ni:ta!i04 ~nd !h9 vtrnfut:
Special Oe:;cnbe expoecled fe-st>lts bui. ~fte:citl!!lty Y.x- ~hoe ven001
..cotJditions ~~rding m::hie<Jementof'tll6;;e-le~_tiis.,
Purchase Orders
Purchase Orders
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A purchase order (PO) is a written contract between an organization and a vendor using a
standard form or e-purchases (paperless). One-time purchase orders and blanket purchase
orders are common practice in FM.
One-time Purchase Order

A one-time purchase order expires with the individual delivery of a finite good or service.
Example: Provide 1,500 reams of 80 gsm* white copier paper
*Weight of paper is measured by the amount that a ·square meter weighs. Here is a value given
in wams per square meter or QSm. lt may be measured, in pounds per ream or lb.

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A one-time purchase order should state:

• The quantity and quality of the items being ordered, as above
• The agreed unit price
• Any discount from list price, if agreed
• The agreed total price net of any sales taxes
• The total price, including taxes
• A reference purchase number to be quoted on the invoice for the sale
• Date of the purchase order
• The name, signature and contact details of the person initiating the PO
Errors and Omissions Excepted (E&OE) is usually included in the United Kingdom.
There may be additional details such as:
• Earliest/latest day for delivery
• Delivery address
• Instructions on packaging or access
• Reference to standard terms and conditions of contract
• Reference to payment term
• Statement that substitution is not acceptable
Blanket Purchase Order (BPO)

A blanket purchase order allows a stream of procurements over a length of time and/or
within a dollar ceiling. When the duration for a BPO is a year, it may be called an annual
PO, which must be reviewed and edited as required. BPOs should contain all the same
information as a one-time PO.
Fixed Price Contracts

Fixed Price Contracts
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A fixed price contract, also called a fixed sum or lump sum contract, requires a contractor
to successfully perform the contract and deliver supplies or services for a price agreed to
up-front. The risk is on the contractor to provide the services or goods with no additional

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cost. A firm fixed price contract is appropriate for supplies and services that can be
described in sufficient detail to ensure that both parties fully understand the contract
requirements and the inherent risks associated with performing the contract as written.
Fixed price contracts often include: ·

• Economic price adjustment factors to allow for situations where costs fluctuate
frequently.
• Various incentives that can be used to reward good performance or impose
provisions to deduct for poor performance.
• Repricing provisions that permit issuing an order on a fixed price basis and allow for
revisiting the feasibility of that pricing later during the contract performance.
• A specified level of effort.
Cost-Reimbursement Contracts
Cost-Reimbursement Contracts
l(o 1'11,';)1: ~'P "«')<. """' ~~ ~"""""'""' ~

':"lk·<;)ol'<>o:lo>o
A cost-reimbursement contract is also referred to as a reimbursable or variable price

contract. This contract allows for the payment of all incurred costs up to a predetermined
amount that can be allocated to the contract and is allowable within reasonable cost
parameters. This type of contract places the least cost and performance risk on the
contractor. lt is applied when there are uncertainties of the expected performance and a
feasible fixed price cannot be established with accuracy. The risk and monitoring of the
contractor is the FM organization's responsibility and the demand organization must verify
that the completed work has been carried out as defined.
The following are cost-reimbursement contracts:

• Cost type- involves payment of all incurred costs within a predetermined total
estimated cost.
• Cost sharing -the demand organization and the contractor agree to split the cost
of performance in a predetermined manner. No fee is given.
• Cost plus fixed fee- allows for payment of all incurred costs within a
predetermined amount plus an agreed-upon fee that will not change.

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• Cost plus incentive fee- provides for adjustment of the fee using a
predetermined formula based on the total allowable costs in relation to total
targeted costs.
• Cost plus award fee - provides for negotiation of a base fee with an award fee
that can be given based on an evaluation by the demand organization of the
contractor's performance and cost control.
The last two cost-reimbursement contract types require considerable monitoring and are
usually reserved for the larger dollar value, more visible procurements.
Other Contracting Mechan lndefin

Delivery Quantity, National Buy Contracts, Open
Book, & labor Hour/Time & Materials
Other Contracting Mech~nisms
Indefinite delivery quantity, line item contracting, known as IDQLI or indefinite delivery;
indefinite quantity (IDIQ), is one way to deliver certain FM services and also significantly
reduce procurement time. They are actually very similar to BPOs.
The IDQLI contract system is composed of small, separate, trade-specific contracts that can
be called upon by the facility manager over and over again as needed. Distinct line item
services and tasks are precisely specified, but delivery times and quantities are left
unspecified at the time of award of the base contract.
TypicaiiDQLI contracts can cover such FM services as:
• Painting and plastering
• Floor covering
• Systems furniture disassembly, relocation and reassembly
• Furniture. repair and cleaning
• Interior electrical work
• Plumbing
• Carpentry

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• Paving, concrete and asphalt

• Roofing repair and replacement, all types
• Fencing
• Railroad track repair and replacement
The most essential element of the IDQLI contract is the line item menu of FM goods and
services to be provided. Very specific component tasks that are normally required to
complete common, trade-oriented work requests are listed individually. Each of these line
item tasks is then unit-costed according to an accepted measure of quantity such as:
• Dollars per linear foot, conduit, wire
• Dollars per square foot, painting, floor covering
• Dollars per item, receptacle, valve
• Dollars per service, clean restroom, assemble workstation
Whenever possible, the line item cost is a complete cost. lt includes labor, material,
overhead, profit and so forth. Execution delivery times and required quantities for these
line item tasks remain indefinite or on call. They are contracted for by purchase order on an
as-needed basis only and at the discretion of the facility manager. Only the overall IDQLI
base contract itself has a specific start and expiration date.
A key point to understand about the IDQLI contract system is that it is more than just a
contract document. In administering IDQLI contracts, the FM function acts as a general
contractor to execute single trade tasks or to coordinate multi-trade projects requiring
more than one IDQLI contractor. A fully operational system includes a full-time, in-house
contract management staff to provide dedicated contractor control.
National Buy Contracts

National buy contracts, also known as national standing offers, are specialized procurement
contracts, primarily applicable to large organizations. They may also be called national
purchasing contracts, or they may be referred to as framework contracting.
National buy contracts can provide favorable, below-retail costs in exchange for an
extended agreement to purchase from a sole source provider. Systems furniture vendors
commonly provide national buy contract options to large customers with distant and
dispersed regional offices.
Advantages from such procurement contracts include:
• Decreased administrative costs through simplified procurement and remittance

cycles

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• Faster product selection

• Elimination of unnecessary purchases and inventories
• Control over local purchasing and delivery
• Consistent quality throughout the FM organization
• Streamlined reporting
National buy contracts have two significant cautions:
• A national contract may lock FM into a bad deal if market prices drop below the
negotiated prices.
• There can be additional charges for extras not included in the initial, pre-priced,
itemized list of goods and/or services.
Additional Contract Types

There are still other types of contracts, such as the following:
• Open book contract- the cost of the delivery is passed on in the price, with a
profit margin, percentage, agreed on top.
• Labor hour/time and materials- pay for services rendered at fixed rates and for
materials at cost plus a handling fee.
Appropriate contracts help to ensure that the demand organization successfully meets its
strategic objectives and FM fulfills departmental objectives. Furthermore, contracts may
avoid the risks associated with excessive costs, project delays, quality issues and similar
problems. Evaluating the soundness of the contracts is an important aspect of a facility
manager's job.
rrns
Notwithstanding legal constraints that make a contract valid, the form and substance of an
FM contract will vary. Exhibit 6-1 provides a checklist of customary terms found in FM
contracts. Not all of these provisions will be included in every contract and some contracts
will have additional inclusions that relate specifically to the particular subject matter. A
facility manager must review all terms of a contract, understand what they mean and be
able to execute the various terms.

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Exhibit 6-1: Checklist of Facility Management Contract Terms
Date of agreement
Identity of the parties • Individuals or business entities?

• If businesses, what type, for example, partnership,
corporation, other?
• Name of person signing on behalf of the business and
indication he or she has authority to bind the business
• Signer's official t itle
Addresses of the parti~s
Purpose(s) of the contract Locations to be serviced

and relevant definitions
Underlying assumptions
Respective roles and • Duties of each party

re.sponsibilities • Rights of each party
Description of the work Reports (types and frequency)

involved, and outcomes
expected
Performance levels and how • Service specifications and service level agreements
quality will be judged • Monitoring
Terms for incentives and

penalties
Staffing levels
Personnel requirements, The demand organization's right to check qualifications and

certifications, bonding, competencies of contractor personnel and approve the use in
insurance, security advance
clearances, criminal record
checks and so forth
Schedule • Timelines and deadlines

• Other relevant dates
Duration Term of the contract
Rights of access to locations
Protocols when on location • Hours of operation, dress, badges, where to eat and so

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forth
• Use of physical property, for example, computers and
office space
Communication • How communication with facility staff and occupants is to

be done
• Reports and liaison meetings
Restrictions on
subcontracting
Novation/contract transfer Provisions regarding the substitution of a new contract in place

provisions of the original
Payment terms and pricing • Lump sum, COD, installments?

mechanisms • Payment due dates
• Length of period from invoice issue to due date
• Taxes
• Interest
• Late fees
Termination options Default, bankruptcy, escape clause and other dissolution

procedures
Service suspensions What disruptions in service, not excused by a force majeure

clause, are allowable, such as server failures, software glitches,
disputes with copyright owners, licensor labor disputes
Force majeure provisions What unforeseen or unplanned events suspend contract time
limits, such as:
• Natural disasters; earthquakes, hurricanes, floods

• Wars, riots or other major upheaval
• Performance failures of parties outside the control of the
contracting party, for example, disruptions in telephone
service attributable to the telephone company or labor
actions
Dates by which performance

obligations are scheduled to
be met will be extended for
a period of time equal to the
time lost due to any delays

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. Item Provisions to be Covered
Contract variations • The handling of changes in the demand organization's

requirements
• Change order request/change proposal process
• Contract amendments
Severability of individual
provisions
Audit rights
Dispute resolution clause Mechanisms for dispute resolution and how disagreements or
disputes are to be handled
Ownership Copyright issues, patents and intellectual property

specifications
Confidentiality and
restrictions on information
obtained/learned
Arrangements for transfer of

assets at start/end of
contract
Arrangements for handover

to s4cceeding contractor at
end of contract
Contingency arrangements
Liquidated damages Also referred to as liquidated ·and ascertained damages, the

specified monetary amount the parties designate during the
formation of a contract should one of the parties breach the
contract, for example, late performance
Indemnification agreement Documentation of who is liable for what and to what extent in
the liability clauses, for example, which party agrees to pay for
any losses that arise, limitations on liability
Safe,ty • Safety gear

• Special health and safety hazards
• Accidents to contractor personnel
• Reporting requirements
• Contracters safety manuals and protocols
Anti-discrimination policy

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Drug-free workplace policy
Quality assurance Provisions related to quality management systems/continuous

improvement
Statement that contract

constitutes entire
agreement
Signatures of authorized
signatories
Notarization If required by applicable law
Governing law Which country or regional laws apply to the contract
Request For Proposal (RFP) A collection of formal documents that includes a description of
the desired form of response from a potential supplier, the
relevant statement of work for the supplier and required
provisions in the supplier agreement.
A form of procurement document used to request proposals

from prospective sellers of products and services. (ISO
Definition)
International System of Based on the seven base quantities: length, mass, time, electric
Quantities (ISQ) current, thermodynamic temperature, amount of substance and
luminous intensity. (ISO Definition)
Invitation To Tender {ITT) The initial step in competitive tendering, in which suppliers and
contractors are invited to provide offers for supply or service
contracts. Invitations to tender are also known as calls for bids
or calls for tenders. An ITT is an Invitation to Bid and is a formal
separate sol!citation
Contracts may require translation into multiple languages.
Additional information is often put in appendices to the contract. Request for proposals
(RFPs) usually require the staff and company resumes, additionally whether they have
completed similar size and type of projects along with references/tender documentation,
invitations to bid, prequalification questionnaires, contracting party's responses and similar
documents are all possible inclusions in appendices.

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. lntomatlonoi ForllltvM•n•i•m•niM•ocladon
When reviewing contracts to ensure that they are complete and clear and comply with
legal requirements, some commonsense principles also apply. In Exhibit 6-2, a simple list of
contract do's and don'ts is shown.

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lnternatl onai F;w:llltyMana~ementAuorlatlon IFMA 's Finance and Business Course
Exhibit 6-2: Facility Management Contract Do and Don't
• Title the document "Contract" so that • Include legalese or archaic phrases s.uch
there can be no mistake as to its intent. as "the party of the first part" or
• Include the date in the first paragraph for "heretofore" as they generally add little
easy reference after contract execution, so in term~ of clarity.
the contract can later be identified by • Include overly long sentences; break
date., such as "the January 4, 20XX, sentences down into easily digestible
Contract for Property Snow Removal." thoughts.
• Make sure the parties are properly • Be repetitive unless it is absolutely
identified in the fi~st paragraph, names are necessary. lt is preferable to refer to a
spelled correctly and addresses are previous provision according to its
accurate. number or heading rather than to repeat
• Use common sense headings to make it it verbatim.
easier to find particular contract • Assume the other party defines terms
provisions. the same way. If there is any doubt,
• Number the paragraphs for ease of include a definition in the contract.
reference. • Accept the other party's oral explanation
• Pay attention to punctuation and of a confusing term; include everything
conjunctions; especially ''and" and ''or", in writing.
since grammar errors and words chosen • Start acting according to the terms of
can change meaning. the contract until both parties have
• Use plain language whenever possible. executed it.
• Make sure the contra'ct addresses all • Assume that use of a standard or form
possible contingencies and that nothing is contract eliminates the need for legal
left to chance. review. Even if a standard contract
worked well in the past, a change of
• Have an attorney review every contract
circumstances, date or party can change
before signing.
the whole equation.
• Sign in blue or other colored ink to make
• Agree to a contract modification without
the original easily distinguishable from
documenting it in writing.
photocopies.
• Rush reading the contract. lt take~ time
• Initial every page of the contract and
to understand all of the possible
make sure the other party does the same
nuances of the language used.
so that nothing is missed
• Sign any contract unless it is fully
• Retain a copy of the contract for the
understood what it aims to do and what
records.
the terminology means. Clarify any
questions with legal counsel.

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A guiding principle in FM contract management is that payment is dependent upon

performance. A facility manager must ensure that service providers and contractors
perform according to their commitments. Contracts should clearly specify how payments
will be adjusted when performance deviates. Service specifications and service level
agreements are two mechanisms that help to achieve required results. They will be covered
in more detail in the next lesson of this chapter.
D iscussion Question
iOOfl!i.f>J the foilowing FM cotltrar::t tonns.

Ouli.~:o a nd righ:s qfe~clt pariy·
Ho~ of.opero.ltion al\d l!!>i!=Vf P.hysil;:a!ptoperty
Ptavl$rom> rt:-g;wfing lhe sub:r.li:ofkm of .a new
(l(>(l\t~Gl i!1pl~'()ftfm«iginal
Unforeseen or unpfanned t'\'«lts- thal .suspend

GOO!t'act time t(mits
Oacument::~Jionof who i..$ li;lhte. ror •lih.at aM t(.>
Yotla t extent lrr. !tie ll'abillt't clauses
Prevention of Fraud nd Irregularities in

Contra ,:ts
Contract Fraud
l="raudl& gcmer<~lly"d.~fifiet;l r.l$ ~ .i>i~lll'll:kll'lal.d~~'Ott ~l() g~ir. an

anv.,nt\1;!!' ar dii!ll')a{l£l an. ~iW;fuat
~ ~!Y of il~iiiUt:.f~. dec:eil, conc~~tment-.viotallotl Cl Uu!i{
1\0 To ob!ttin i1lonfl~. proP«l.y .tl~ $~Nk:e$
~ TO a\'QOd _payttl~lteil'f9!i!'.Q! Si>l\'iCi!5
Ill- Tosec~pcrs'ona!tlrbusirn~ss.~ruaga
Fraud is defined as an intentional deception made to gain an advantage or damage

another individual. lt encompasses illegal acts characterized by deceit, concealment or
violation of trust. These acts are not dependent upon the application of a threat of violence
or physical force. Fraudulent activities are perpetrated by parties and organizations to
obtain money, property or services; to avoid payment or loss of services; or to secure
personal or business advantage.
Miami Dade Airport Fraud - Scenario:
Four eo-conspirators have pleaded guilty to their roles in a $5 million fraud and k'ickback
scheme involving LED lights at Miami International Airport.
Miami residents Roy Jesus Bustillo, Rolando Perez and Jose Barroso all pleaded guilty to one
count of conspiracy to commit mail fraud and wire fraud. Miami resident Ygn~cio Valdez, a
former employee in the procurement section of the M iami ~ Dade County Aviation Department,
pleaded guilty to concealment of a felony, the U.S. Attorney's Office for the Southern District

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~tl~ ,~"E.~~8~. , ,.
r Em~rt"'FO< I It¥PnohulonoiJ Woo1dwlde
of Florida announced Tuesday.
The scheme involved a complex system of kickbacks and bids for millions of dollars in LED
lights. Valdez, as the division director of terminal maintenance, was responsible for preparing
and administering the annual operational budget for terminals and airports, including lighting
for Ml.A., according to the information.
Around 2010, Valdez allegedly requested that the Aviation Department begin a bid process for
lighting at M lA. According to the information, Valdez and his eo-conspirators orchestrated a
scheme in which Global Lighting Supplies, which was owned by Perez, submitted bids and won
the contracts.
Over the course of the scheme, the Aviation Department was defrauded out of about $5.25
million.
Barroso and Valdez split about $2.2 million. Bustillo, through his companies, received about
$764,000. Perez received about $1 .8 million, according to the U.S. Attorney's Office.
Best procurement practices, valid contracts, che.ck points and prevention control help to
deter collusion, conspiracy or complicity and corruption, the money exchange, goods or
services and prevent contract fraud .
Types of Contract Fraud

;lli- Colltiaion
~ Pri-::e-fi~::ing
'-"' Nof'lco-mpetit!vePrk:ing
~ lrregulari!.\es .iurng e x_octt1lor1
*- Payrnen«; for~nott<~IT~nut
~>'- CaM:s
Fraud as it relates to contracts can take many forms. The primary ones are described below.
Collusion Between Personnel or Agents

I
Collusion encompasses a variety of behaviors that would not reflect the application of care
or skills expected of a prudent, competent and honest individual. Examples include:
• Acceptance of bribes or kickbacks.
• Diversion to an outsider of a potentially profitable transaction that would generate
profits for the demand organization.
A prudent person is alert to the possibility of intentional wrongdoing, errors or omissions,
inefficiencies, waste, ineffectiveness and conflicts of interest. To ignore such things is
construed as collusion. In particular, discretion and care need to be taken regarding the

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acceptance of gifts, hospitality and other perquisites to prevent any conflict of interest in
the awarding of contracts.
Price Fixing
Price fixing in contracting describes an agreement among competitors to raise, fix or
otherwise maintain the prices at a specified level. lt is not necessary that the competitors
agree to charge exactly the same price.
Price fixing can take many forms, such as, but not limited to:
• Establishing or adhering to price discounts
• Holding prices firm
• Eliminating or reducing discounts
• Adopting a standard formula for computing prices
• Maintaining certain price differentials between different types, sizes or quantities of
products
• Adhering to a minimum fee or price schedule
• Fixing credit terms
• Not advertising prices
If price fixing is suspected between suppliers, the legal department should be contacted to
ask for direction. Price fixing and any related topics should be included as part of regular
ethics training for FM staff.
Noncompetitive Pricing of Contracts

Noncompetitive pricing or bid rigging, describes how conspiring competitors raise prices
when the demand organization acquiring goods or services solicits competing bids.
Competitors agree in advance who will submit the winning bid on a contract being let
through the competitive bidding process; even the lowest bid or tender is overpriced.
Bid rigging, like price fixing, takes many forms, but bid rigging conspiracies usually fall into
one or more of the following categories.
• Bid suppression- in this scheme, one or more competitors who otherwise would
be expected to bid or who have previously bid, agree to refrain from bidding or
withdraw a previously submitted bid so that the designated winning competitor's
bid will be accepted.
• Complementary bidding - also known as cover or courtesy bidding, occurs when

some competitors agree to submit bids that either are too high to be accepted or
contain special terms that will not be acceptable to the buyer. Such bids are
designed merely to give the appearance of genuine competitive bidding.

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Complementary bidding schemes create the appearance of competition to conceal

secretly inflated prices.
• Bid rotation- in bid rotation, all conspirators submit bids but take turns being the
low bidder. The terms of the rotation may vary; for example, competitors may take
turns on contracts according to the size of the contract, allocating equal amounts to
each conspirator or allocating volumes that correspond to the size of each
conspirator company.
• Subcontracting ~ subcontracting arrangements can be part of a bid rigging
scheme. Competitors who agree not to bid or submit a losing bid, receive
subcontracts or supply contracts, in exchange from the successful low bidder. In
·some schemes, a low bidder will agree to withdraw its bid in favor of the next low
bidder in exchange for a lucrative subcontract that divides the illegally obtained
higher price between them.
Almost all forms of bid rigging schemes have one thing in common: an agreement among
some or all of the bidders that predetermines the winning bidder and limits or eliminates
competition among the conspiring vendors. The goal is to win a contract and share in the
award.
Irregularities During Execution of Contracts

Fraud may be perpetrated in several ways during the execution of contracts. These range
from failure to perform to specifications, deliberate falsification of records and invoices, to
overstatement of work completed. These activities can lead to overpayments. The
unauthorized or illegal use of confidential or proprietary information is another type of
fraud possible during contract execution.
Payments for Work not Carried Out

Sometimes called phantom charges. This type of fraud is commonly perpetrated through
charges for expenses not incurred or work not performed and may involve the
misrepresentation of status and/or progress in order to continue receiving funds.
Cartels
A cartel is a formal, explicit, agreement among suppliers, producers or other organizations
that agree to coordinate prices and/or production. Cartelsare typically found in markets
that are dominated by a small number of sellers and usually involve homogeneous
products. Cartel activities may include price fixing, allocation of customers, allocation of
territories, reducing competition, bid rigging and more. Some trade organizations,
especially in industries dominated by only a few major players, may serve as fronts for

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lntomatlonaiF~!IItvM•n•!l•m..,tAnodiltlon
Ent~""&FxllltyPI'afu<l...,ai•WCN'Idwld•
cartels. In some countries; labor unions have been labeled a form of cartel, as they try to
raise the price of labor and wages and attempt to block competition.
Most countries have laws meant to repress cartels and promote competition among
entities but identifying and proving the existence of a cartel even with such regulations can
be difficult. The enforcement of cartel regulations, antitrust laws, assessment of fines and
penalties for cartel activity, is challenging. If a facility manager suspects and/or must deal
with known cartel activity, the demand organization's legal department or counsel should
become involved.
Fraud Indicators
Fraud Indicators
Signs·tha( in&.<:alebeth: ~ in&<~eqw.aey <:1f oootf<>!iif'Hiace lo·OO.ter ft(u.u.l aM

th~ pcssibililylh.oit sam~ p~(pey;;atorhas ;lkflady Q'((!(com~ tr..ese Wt!akor
a~em.cootro!s to comrm! fl:aud: .often ieftorred:ta a:o red flag!<.
Red r..ag; !'MYc.i~oPJ:>eaT b'l:

l"· Sid.pattoms -
~ Pnce pstt_
erns
J.c Su~piciQusdoouments.st.:lt.emer~tscr~
Fiaud ~ ~ur. 'h almosial'l)' cooiracting l'ih..oati®; same sc~~ias are.m«t!
~JkeiytMnothmr•.
Facility managers should be able to recognize fraud indicators in the bidding/tendering

process and the award of contracts. These indicators are referred to as red flags and are
signs that highlight an inadequacy of controls in place to deter fraud. The appearance of
these indicators could be a warning that a perpetrator has already overcome these weak or
absent controls to commit fraud.
If there are patterns of bidding or pricing conduct that seem at odds with a competitive
process, there is a possibility of collusion and fraud. Several are listed in Exhibit 6-3.
lt is important to realize that while these indicators may arouse suspicion, they are not
definitive proof. Red flag indicators are only warning signs; they are not proof that fraud
has been committed. Consider the following examples.
Examples: Bids that come in well above the estimate may indicate collusion or they may
simply be an incorrect estimate. A bidder can lawfully submit an intentionally high bid,
suspecting that it will net be successful for business reasons, such as being too busy to handle
the work but wanting to stay on the bidders' list.
Fraud is perpetrated only when a company submits an intentionally high bid because of an
agreement with a competitor. Red flag indicators signal caution and the potential need for
further evaluation to determine whether fraud exists or whether there is an innocent
explanation for the events in question.

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~ lntem•t!on• IFacllltv M•n•t•morn .O.nocl•tlon
Exhibit 6-3: Common Fraud Indicators in Facility Management Contracts
Red flags in bid patterns
./ The same company keeps winning a particular procurement. This may be more suspicious
if one or more companies continually submit unsuccessful bids .
./ The same ~uppliers submit bids and each company seems to take a turn being the
successful bidder .
./ Some bids are much higher than published price lists, previous bids by the same firms or
organizational cost estimates .
./ Fewer than the normal numbers of competitors submit bids .
./ A company appears to be bidding substantially higher on some bids than on other bids,
with no ~pparent cost differences to account for the disparity.
./ Bid prices drop whenever a new or infrequent bidder submits a bid.
./ A successful bidder subcontracts work to competitors that submitted unsuccessful bids on
the same project.
./ A company withdraws its successful bid and subsequently is subcontracted work by the
new winning contractor.
Red flags in price patterns
Identical prices may indicate a price fixing conspiracy, especially when:

./ Prices stay identical for long periods of time .
./ Prices previously were different.
./ Price increases do not appear to be supported by increased costs .
./ Discounts are eliminated, especially when discounts were historically given .
./ There is a wide spread of prices for the same work package that is not explained by
resource levels.
Red flags related to suspicious documents. statements or behavior
./ The proposals or bid forms submitted by different vendors contain irregularities, su'ch as
identical calculations or spelling errors or similar handwriting, typeface or s~ationery. This
may indicate that the designated low bidder may have been involved in preparing the
losing vendor's bid .
./ Bid or price documents contain whiteouts or other physical alterations indicating last-
minute price changes .
./ A company requests a bid package for itself and a competitor or submits both its and
another's bids. '
./ A company subrnits a bid when it is incapable of successfully performing the contract,
likely a complementary bid .
./ A company brings multiple bids to a bid opening and submits its bid only after

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determining or trying to determine, who else is bidding.

-/ A member of the internal, or buyer, team consistently favors one bidder with no clear
rationale or puts hurdles in the way of other bidders or of effective mobilization.
A bidder or salesperson makes:

-/ Any reference to industry wide or trade association price schedules.
-/ Any statement indicating advance, nonpublic, knowledge of competitors' pricing.
-/ Statements to t he effect that a particular customer or contract ;'belongs" to a certain
vendor.
-/ Statements that a bid was a "courtesy," "complementary," "token" or "cover" bid.
-/ Any statement indicating that vendors have discussed prices among themselves or have
reached an understanding about prices.
Fraud can occur in almost any contracting situation, but it is more likely to occur in some
scenarios than in others.
• Few providers- the fewer the contractors, the easier it is for them to get together
and agree on prices, bids and the like.
• ·: Little product differentiation- if other products cannot easily be substituted for
the product in question or if there are restrictive specifications for the product
being procured, the probability of collusion increases.
• Standardized products- the more standardized a product is, the easier it is for
competing firms to reach agreement on a common price structure. lt is more
difficult to agree on other forms of competition, such as design, features, quality or
service.
• Repetitive purchases- repetitive purchases may increase the chance of collusion.
As vendors become familiar with other bidders, future contracts could provide the
opportunity for competitors to share the work.
• Strong ties- collusion is more likely if the competitors know each other well
through social connections, trade associations, legitimate business contacts or
shifting employment from one company to another.
Organizations stand to derive many benefits from recognizing where fraud may occur
during bidding and award of contracts. Awareness and preventive controls are not enough
to ensure the successful execution of a contract. Facility managers need to provide ongoing
assurance, which is the next topic for discussion.

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Princi of Contract Fraud Control

Principles of Contract Fraud Control
F!~:.id $hr;uJld h£> tlEoiMl'E!d; j.'\Ut>.'tlnlion ;~ pr"01mal:!e tD dM$tlio<l: ~u<:ong

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The following are points about fraud and control:

• Fraud should be deterred
• Prevention is preferable to detection
• Strong preventive controls should be applied
Controls generally describe procedures designed to promote sound management
practices. Internal controls are used in most areas of an organization to promote effective
management. The focus is on preventive controls, proactive controls that can deter and
prevent fraud risks in FM contracting .
Effective fraud controls:

• Increase the likelihood that all financial information in contracting isreliable.
• Promote adherence to organizational policies and procedures.
• Help to protect an organization's assets from misuse.
• Lessen the opportunity for dishonesty, fraud and collusion.
Segregation of Duties
Segregation of duties, or separation of duties, means that no single person has sole
responsibility over the procurement process, award and execution of a contract. The
contracting process should not be handled by one person from start to finish.
Example: One individual orders the work, another person is responsible for the certification
and authorization of payments.
Proper Authorization
Before any transaction or specific activity is undertaken, it should be approved by the
appropriate manager or responsible person. Across organizations limits are set as to what
an employee can approve. Authorization helps to ensure that proper responsibility is taken
for all activities and transactions and that delegated limits are complied with.

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Example: If a vendor is pushy; an employee who does not have authorization within the
pricing/cost level, may give a false impression that they have the authority to order items and
bind the company for payment.
Competitive Bidding/Tendering
Contracts should normally be awarded through a competitive process.
Example: Controls for a competitive renovation bid include specifying a date and time when
bids are due. Since there are multiple bids, all bids should be opened and logged at the time
they are due. A minimum of three employees should be present at the bid opening and at
least one person should represent an area other than procurement or purchasing. This ensures
fairness in the bidding and evaluation process.
A decision to not use competitive bidding should require a higher level of authority.
Documentation and Record Keeping

Standard, uniform and consistent documentation ensures conformity with organizational
policies, practices and compliance with laws and regulations. Appropriate records enable
decisions and transactions to be traced through organizational systems.
Example: Documentation and record keeping related to the contract for a large capital
construction project prevents loss of resources and supports accurate financial reporting. lt
provides compliance with laws and regulations, avoids damage to the demand organization's
reputation and other negative consequences.
Controlling the Change Order Process

Change orders represent a high fraud risk on contracts. The demand organization's
objective is to pay a reasonable price for products and services provided. This is dictated by
a competitive bid process or by paying the contractor for costs as they occur. Change
orders do not meet those requirements; while they include the price of the changed work
and estimates, the change order is usually negotiated. The contract should indicate who in
the demand organization is authorized to review and approve change orders to ensure that
they are both valid and reasonable.

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Example: An organization has a sloppy change order process that neither validates costs, nor
determines whether the costs were included in the original bid. A subsequent audit of records
shows that a piece of equipment was paid for three times --'-once in the original. bid and twice
through change orders. '
lt is essential to review or audit significant change orders. The change order process should
be done in a manner that does not delay schedules or impact the quality of services.
Budgetary Controls
Budgets should be aligned to organizational strategies and objectives, to help ensure that
expenditures are warranted. Costs must be monitored on a regular basis appropriate to the
contract. lt is imperative to immediately identify costs that will exceed budget projections.
Co
Access needs for contractors must be considered by FM to minimize a negative impact on
timing and completion of the work.
Facility Managers contract suppliers based on the rate a contractor charges and assume
normal Monday-Friday business hours. Contractors do work outside of normal business
hours, a second shift might need to be considered, as well as overtime rates and the impact
on contracting.
Process of getting a contracted service:

• The facility manager and contractor must have an agreement of what is required.
• Determine the impact of collective agreements that the contractor may already
have in place.
• Revise the agreement with the contractor; ensure that any additional reductions
that have been added to the contract meet FM's requirements.
• Once a contractor has been selected, determine who is responsible for providing
direction.
If the contractor is responsible for direction, they may have to be paid for this
service.
• Consider staffing needs to manage or monitor a contractor.
• . If there is a change order determine the financial impact. Consider the effect on
other business units of decisions made as far as contracted services.

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When an outside provider/contractor is required the FM contracts with the provider in a

manner so that:
• Situations or requests that violate the terms of the agreement are identified and
prevented.
• Situations or requests that may increase costs due to unplanned time, usage or
additional services, are identified and either avoided or negotiated, to minimize any
impact on the budget.
• Situations or requests which may reduce costs are reviewed to determine that all
contracted services have been met satisfactorily and that a reduction in billed
services is appropriate.
• Situations where the contractor requires unanticipated support or access to

buildings, structures or grounds can be arranged to minimize negative delivery
impact.

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Cont ract Administration

Lesson Int roduction
Contract Adrninlstnt;on
On completion of this lesson you will be able to:
• Outline the requirements for administering contracts and monitoring their

performance

• Contract Administration Review
• Contract Monitoring
• Contract Closeout
Contract Administration
Con'fnlct admiliistr~tton is aJ'Iy <~clioo ·lf(!m thot U~ <1 cont.-a.r.-t to. a;~.<llfd6d until
:.t~< ch~tJt:: thl1- pte<;~s$ {)( '!l:ns..ning !h;o.i.t::le inmr.t , reqt•i(.-~!'!WI')l$ <V!d tf<ftflli:
and coml.iiicnsof~ contract are rn.::l
Ptlt'!"•al)lgoal!i irl c(}rd!-<.!<:1 impl~meJ\talfot\.aM mohiloiir>.g t t.etl.lde~
i-- Assessif)Q'con-lradct oot~ormance
• E.\<aiua!in_g; whether the J:«iVVder 1s co~liif19-Wnh ihe !erml and tcOfldiiions
ottim<:antr.act
·j> Dm::utr,Milnglhe. m.itconw$
*": Er.suiing the t:.ontiriuf,g fa\eo.~nc.e to org."lon~z.a!klMI. needs.
Contract administration is any action from the time a contract is awarded until its closeout.
lt is the process of ensuring that the intent, requirements and terms and conditions of the
contract are monitored and met. The facility manager is involved with the bidding process
and has hands-on knowledge of the contract terms. Once a contract is signed and in place
and work has started, the facility manager will have some level of responsibility for contract
administration, implementation and monitoring.
If the facility manager is not involved from the outset, familiarization with the terms and
conditions of the contract is essential. Collaborating with purchasing will ensure that the

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facility manager is aware of any major issues that occurred during the procurement and
negotiation process of the contract award. The relationship and requirements for the
completion of a successful contract can be identified in these discussions.
If the terms of a contract are complete and clear, contract administration should be
relatively straightforward. The primary goals in contract implementation and monitoring
are to:
• Assess contractor performance
• Evaluate whether the provider is complying with the terms and conditions of the
contract
• Document the outcomes
·· • Ensure the continuing relevance to organizational needs
Contract oversight increases the probability that expectations associated with a project,
product or service are fulfilled in a responsible manner. Monitoring helps ensure successful
completion of a contract and should uncover difficulties which, if left unaddressed, could
lead to failure of product or project delivery or to unsatisfactory service.
According to the National Institute of Governmental Purchasing (NIGP) and

The Institute for Public Procurement, the Contract Administration Review will
include an evaluation of the entire contract administration process.
This process includes analysis of:

• Existing contract administration policies and procedures
• Contract administration training programs
• Roles and responsibilities of procurement, accounts payable and departmental
contract administration staff
• . Various position descriptions
• Special processes for revenue generating contracts
• Requisition and contract development processes
• Contract administrator delegation process and documentation
• Payment processes
• Contract violation notice & dispute resolution process
• Blanket, term and time & materials contracts
• Agency's primary goods and services contracts

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Em~ri"' f..:UityPYafuslonoto Woridwld•
• Applicable audits
Contract Monitoring
G&r<er~i facton>itl.flu13~¥Zlfl01~ d~ttree of (.Oflttat:t t~<knioiwat!O!' iftcitlde'

t-· Th(o o$tt1t~ ..,, U'14:WI)<'k !)l(li:IUCl "I OU<Niee.
io TM .iypeQf(;on\rac:i.
l- The e~::l)enence ·and ~.;onuniitrteoll~ of ~hit COi'llrootor Jlfl'i"$0Mel in~ved
.A.~acili!y rnan«QE!I ito !ypic:ally ln\.'olvnn in C-Q11!fa(:~ ptnfO!~,~ monf.or¥!g.;J!'llf
c:ontt~l ws.t ftl<)nitaflng
The specific nature and extent of contract administration varies from contract to contract,
as does a facility manager's involvement. lt ranges from the acceptance of a delivery and
payment to the contractor, to extensive involvement throughout the contract term.
General factors influencing the degree of contract administration include the nature of the
work, produ~t or service, the type of contract and the experience and commitment of the
contractor personnel involved.
Contract performance monitoring and contract cost monitoring are the two areas for which
a facility manager has some level of responsibility. Collectively, implementation and
monitoring activities in these areas effectively measure the contractor's performance and
provide documentation to pay accordingly.
Contract Performance Monitoring

Contract Performance Monitoring
l(o Actual ptogteS$ againstwot~ Seh(!du1es

ll" F_ulf,tlm§lri!Uflit.n~ ft~itte-:&: and adll~r(,';lce:o to mlle~~
11: Fuflillmen{ of quality ar::d QU<l!llrt)' o!>jec&res
.- CanfOfmS~nt:e 10 specifiwtions
• C::mf<:«manc&IO b.oJse!!M.opaf;;l:liOmf. perfonMnt:e
!'l'Witics
t- C~IOfril<ll)(;l}l\> !J(!Nicef(loli;iiitJ.kwels Q!.<!linll'dwit."lln
tlieCOIItf'iCt
P. Conformance-to standards
To assess compliance with contract performance provisions, common criteria include

monitoring of items such as, but not limited to:
• Actual progress against work schedules
• Fulfillment of time frames and adherence to milestones
• Fulfillment of quality and quantity objectives
• Scope of work

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• Conformance to specifications
• Conformance to baseline operational performance metrics
• Conformance to service/quality levels outlined within the contract
• Conformance to standards
Ways to obtain vendor performance information vary but may include any combination of:
• Inspections
• Observations
• Solicited feedback, for example, customer satisfaction surveys
• Unsolicited feedback from end users, for example, complaints or suggestions
• · Work management center call reports, if services provided have call center support
• Vendor reports
• Tests
• Audits
• Regularly scheduled vendor meetings
• FM reports
• Performance score sheets
• Vendor scorecards
Useful tools for monitoring activities include:
• Project software, for example, Microsoft Office Project programs
• Spread sheets and data bases, for example, Microsoft Excel and Microsoft Access
• Custom applications
• Work management center management information systems
• Computer-aided facility management (CAFM), where computer aided design is
integrated with work management, project management and asset management
data bases
Executed correctly, contract performance monitoring:
• Facilitates early resolution of any vendor performance issues
• Identifies planned and unplanned modifications that may arise throughout the
contract term
• Facilitates negotiating and processing contract change orders
Documentation formal ity and format also vary.

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Discussion Question
Cor'llrac ! pw!~>tm<~HC(.> mooi~oring•1<ui~~' bul. QQne prope-~!y, whlC"tltlf Uv.>-

!o!lowing ate likely OOnclh~? {SE?~i twa)
A. Simpltfie& and s:ream!ines:reportlng
B. ~&:i!itates.e.oriy resolution o1 any \lef'!dor pedorman.:;ejssues
C. KiE:J\tilies p i"Med .and unplanned mOOikations.
C . Pr{l'.,;i,;:t~&.twatvak.l"' fotHl.,riX!t>~Y
Service Contracts, Specifications and SlA

A facility manager has management and oversight responsibilities for services provided to
occupants. This, of course, is true whether the service is outsourced or performed by
internal FM staff. All services must be fulfilled according to expected performance and time
standards. The inclusion of service specifications and service level agreements in a service
contract or as an addendum is extremely helpful in contract administration.
What is a Service Contract?

What is a Service Contract?
A &ervi~. con~t is .;m -agt$i!:.tmmt.!or tiw ~l'f()~t:e ()( >JW!ous l<lbot-

Otieri1ed s&rv"!ca.s, fur.ded en a ~riodit ba$k>< AU s~ice eonttact~ s'-'lo.rld be in
witif'IQ.
"!rrlpoffi:lrrt !~rfi'>IO ~ri<'lw.le,
l-' ldenmy (.~· !he. pa1t'*
:1> ~* ription -of 1t\e ~er-.'iCE to be pertotmed. -..1'!ere ~nd how often
1> Pl.>tfcnmante si.art<t.aa:l$ und !!wasur~n-el'lime:trk:s-
~ Costs: specifying hourly. wee~, monthi.y and annual
·:- Contr>Jct inili.aticm .aM larminalior.;. Mart ·~nrl ~r.d d<JI~
:-- Spocial pfcr-Jisbns.
~ T~mination.p~ovis\of\S.
Service Specification Contents
"' ~bjE<::tf;t11:$ e>rtt'Je MN~e ~ De~\l"$otaeys.ps-cifi(;E<~Qf>1i!".>f'l~

;... General df!SCO'lption or ihc s.~Jri..;e -Ofe.tclus.it;>ns.to1he~l\'k:tt
~ SE!!"JiC.€< outputs reqwroo requiremen:., for e~<:ample,
io Servrc(< it1pu\ requl!err,ents. if ~ny f!eo:QI";~o_phlcai m ·items i_
hat wou1d
~ Arrj p!\tHities W1d .c<:",utf~.i>.it:!o.lm. rmrma(lrbe Jru:lude;j bOt me ncll. h
exa.mp!e. deh-ery tiroo!t t~;X;rtitll1.,r .spet<ifmation
A service contract is an agreement for the performance of various services, funded on a

periodic basis.
All service contracts should be in writing. Customary contract terms were covered in detail
in Exhibit 6-1. Even in the simplest service contracts, the following are important contract
terms to include:
• Identity of the parties
• Description of the service to be performed, where and how often
• Performance standards and measurement metrics

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• Costs; specifying hourly, weekly, monthly and annual

• Contract initiation and termination, start and end dates
• Special provisions, such as insurance coverage, safety gear, emergency response
and overtime
• Termination provisions
• Signatures of authorized parties
Inclusions of additional terms are contract-specific. Typical considerations are:
• Escalation clauses for contracts that involve substantial labor
• Acceptable limits to offset cost increases in labor and materials
• Right to audit the contractor's records regarding labor and material costs
• Copies of the contractor's licenses, liability and workers' compensation insurance
certificates, company safety manual and bonds.
Types of bonds:
• Bid bond- is a debt secured by a bidder for a construction job, or similar type of
bid-based selection process, for the purpose of providing a guarantee to the
project owner that the bidder will take on the job if selected.
• Performance bond -also known as a contract bond, is issued to one party of a
contract as a guarantee against the failure of the other party to meet obligations
specified in the contract.
• Fidelity bond - a form of business insurance that covers any loss of money or
property incurred due to fraudulent or dishonest behavior.
Additional considerations:
• Include a dispute-resolution clause- draft a dispute-resolution agreement.
Specify that mediation should be used to attempt to resolve straightforward
misunderstandings. A neutral third party will need to mediate in order for
disputants to come to a consensus.
• Negotiate liquidated damages- a liquidated damages clause is included in an
agreement so that if the agreement is breached, a specified amount will need to be
paid.
• Include a dispute prevention clause- all parties involved with the contract agree
to meet and communicate regularly, monitor progress together and consult with
mediators to resolve minor disagreements promptly.
• Contingency agreement - is a contract provision that requires a specific event or
action to take place in order for the contract to be considered valid.
• Combine dispute prevention and a contingent agreement- this combination
approach can be an effective remedy. This clause allows for both sides to have

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incentive to stay in touch throughout the implementation stage and involve a

mediator at the first sign of trouble.
• Use Performance Metrics- Performance metrics provide the standards that the
service provider and FM can evaluate the conduct and outcome of the work. Based
on measures agreed-upon befor.ehand, they must reflect the demand organization's
goals, they must be key to its success and they must be quantifiable. To be useful,
performance metrics must be written in a clear, concise manner, promoted and
given to employees so that they can translate all performance metrics into precise,
actionable steps.
Scenario:
Lovely Landscapes has been contracted by the facility manager to do a make-over of the front
garden/grounds area of Affiliate Accounting office block.
What do you think are ~ome items that you will need to monitor the performance of the
contractor?
How would you obtain vendor performance information?
What tools do you think would be useful in monitoring the activities?
What KPis would you build for this scenario?
Discussion Question - Scenario '1 WML
lo-Jely lat1dtU::-9pi>-S ~s. ~M ctffl'lt·f!CIMI.ry you tM f.M tO do;:.-fll\J~fflf Vf

U',12 fr~nt {»ld~orgr~I.JM~ a!'('l!lt:~f.'\ffil'aU•Auountin~ of[oe.;:.b{ocl(
Wha_lis req1,ired o!'~ou t<; M sure lhal t~e -cor.!>acl.ls adminlsteredtttld
monitorad wt!n~tly7
What is a Service Specification?

W hat is a Service Specification?
A s~rVice s~c:mcatiQ,n i~ a part ol - tOOs.~rvi-cE! wotract ly;lical!y. it i~•<t

separate (!ocun-wnla.o~lop&tj attd aw-e£•d ~po~· il"l (}tder to c!afi!y a~ gi~
1urtn~r detail Of! /j~C~~d s~wle>•l! ls il['IO~U~ity; The tevel ol de!Jnl ~Me!>
de~ndi'ng ®On the" corntle~ily and lmpailillnre of the se Nice orasset i:lem.
The wr.+ee :mecl~"liOI"'.
!I< EstablisJ:Ies lhe mi-'li:num!~<el of geJVice acceptable la moot c~:<Siomer
.re'!uireme:r<ts
~ Pr<WiMs ll fr<!rnewotk fot nmrjiltlrjt:.o<actm~l s~as.
;,;. Often used as tsenctlrnaJi<:<Scffi a:s~:5i s. ihe s.tomda;d and qua.U~ of .$etvk:e
providEd.
lo· Includes ;ntwn&l standards, e::darnal standards and prooedun1s.

;:~..::."·~"'""-'""'""
Service specifications are part of the service contract and are included in a separate
document developed and agreed upon to clarify expected service levels and quality. A
service specification is a precursor for a service level agreement.

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A service specification establishes the minimum level of service acceptable to meet

customer requirements. Service specifications are used as benchmarks to assess the
standard and quality of service provided.
Service specifications include:

• Internal standards- organizational or FM standards and/or standards that may
have been part of previous contracts.
• External standards- conformance to regulatory requirements, international
standards, health and safety laws and regulations, industry standards and
manufacturers' recommendations.
• Procedures- specifications stating what the contractor must do to fulfill any

required technical standards.
The level of detail in a service specification can vary, depending upon the complexity and
importance of the service or asset item. For example, specifications included in a parking
lot maintenance contract regarding surface smoothness, pothole patching and crack
sealing would most likely be much more technical and involved than cleaning specifications
for an office area.
A primary consideration when developing a service specification is the choice between a

prescriptive and a performance-based specification. A prescriptive specification is one that
includes clauses for means and methods. This type of specification dictates exactly what
will be done, and how the tasks will be performed as well as the frequency. A performance-
based specification sets quality related targets that allow the service provider some
flexibility in determining the most appropriate response.
• Performance SOW/specifications- determines the work to be accomplished and
the target or requirements to be met.
Compared to prescriptive specifications - specifying inputs and how the targets will
be met, performance specifications are focused more on outputs.
Example: Ensure that rubbish containers and recycle bins are emptied regularly before they
are full and contents are deposited in the appropriate disposal dumpsters. The containers and
bins should be kept clean so they do not pose a health concern or result in tenant
dissatisfaction.
A risk in developing prescriptive specifications is that they can become overly prescriptive
and regimented. The challenge in performance-based specification is being able to convey
the quality expectation in terms the contractor comprehends and can execute in practice
and which can be measured.
lt is a best practice in procurement to focus on describing required outputs rather than

inputs. Prescriptive specifications should only be used when there is a clear risk-related

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reason to do so. Prescriptive specifications that limit a vendor's ability to apply the best
solution and that impose resource requirements or rigid methodology should be avoided.
Metrics on how the contractor's performance will be rated should:

• Describe the objectives of the service
• Provide a general description of the service
• Explain the service outputs required
• Explain the service input requirements
• Explain any priorities and constraints, such as, delivery times
• Provide details of any specific exceptions or exclusions to the service requirement,
for example, geographical or regularly included items which have been excluded.
Exhibit 6-4 illustrates the contents of a service specification for a work management center.
Discussion Question
True or.ta!se? Key peffOI'I'I'l&nc~ ir.-dic;'I.IOr$ (K~S:l 111at ove mc.!l)dee ln a wf\.'ite
specmcatkmralat~ ID ih\1 ~(!Vf!! or tOO service
Exhibit 6-4: Sample Service Specification for a Work Management Center
Overall Service Objective

Provide a help desk service using the CAFM system to coordinate and manage all fault reports
and provide a primary source of management information.

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General Service Description

The help desk will operate on a full 24/7 basis so as to provide emergency response for
critical infrastructure. lt will:
• Provide a single point of contact for the reporting of building and equipment faults,
service problems and requests and incidents requiring a response
• Assess priorities and issue work orders or purchase orders to resolve the problem in
line with the time scales set out for those priorities
• Track work progress and completion
• Manage and report on work completion and exceptions
Service Outputs Required

The contractor will:
• Ensure that systems and processes are in JJiace to:
Log each request
Prioritize those requests in line with the priorities below
Place orders for remedial actions with the correct person or contractor, with
budget estimates if appropriate
Track and report on work progress
Report expected and actual delays to service users
Manage orders to ensure on-schedule completion
Flag non-complete works
Flag additional works or expenditure required and manage the approval
process
Escalate seri0us faults or delays as necessary; approve completed work for
payment in accordance with process
Ensure that repairs to items scheduled for maintenance in short term are
deferred where possible
• Provide means to back up data and retrieve it when required

• Provide backup systems to operate the service in the event of any failure of IT or
power in the building
• Maintain records and report on help desk activities in line with best practice
• Maintain a log of customer complaints, special requests and instructions. Items
recorded in this log will be dealt with in line with published processes
• Provide a mechanism to receive and take action on fault reports in the event of
software, telephone or other sx-stem failure
Priorities
• The contractor will assess each request for breakdown or incident response service and

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~ l n tem~l...,al
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categorize and manage ·it on the following basis:
Priority Classification Condition Response Time

(During Normal Working
Hours)
1A Emergency (high Failures or conditions of Investigate and make safe or

priority) installation that constitute an compliant within four hours
immediate danger to people or or, if not remediable in four
•
Sites with no risk immediate operational hours, invoke business
resident client staff failure in critical systems or that continuity planning .response
threaten the integrity of to minimize impact.
security.
1B Emergency (high Failures or cond itions of Investigate within one hour

priority) installation that constitute an and make safe or compliant
immediate danger to people or within two hours or, if not
Sites with resident risk immediate operational remediable in two hours,
client staff only failure in critical systems or that invoke business continuity
threaten the integrity of planning response to
security. minimize impact.
2 Urgent Failures or conditions of Investigate within four hours

installation that constitute a and make compliant within
potential danger to people or one working day.
risk negative operational impact
or that weaken the integrity of
security.
3 Routine Failure or conditions that affect Investigate within one

the amenity but do not pose a working day and make
risk to people, operations or compliant within seven
security. working days.
4 Service visit/no call- Any reactive work that can be Investigate within 28 days
out required deferred until the next and/or notify maintenance
scheduled service visit by a supplier to rectify at next
supplier. scheduled visit.
5 Parts order Work required to develop Assess request within seven

or services or improve cost- working days and provide
request for effectiveness for which a parts or quotation within 28
quotation preliminary quotation is working days thereafter.
required to ensure that a cost-
benefit case is supported.

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Exclusions
The contractor does not require the following, if the system is based in the client's
premises:
• Computer hardware
• Telephones or.telephone lines _
• Call management software
• Telephone software
• Any service outside the current specified hours
Service specifications describe performance requirements in terms of factors that are

critical to the successful provision of the service. These are known as key performance
indicators (KPis). Exhibit 6-5 illustrates examples of KPis.
Exhibit 6-5: Example of KPis for a CAFM System and Work Management Center
KPI: CAFM System

Service Output Method of ·Target Measure
Summary* Required Measurement Required Frequency**
CAFM system Data complete Chec;k audit 90% A

and up-to-date
All PPMs logged Check audit 98% Q
CAFM system Annual review Positive report A

meets service
needs
System and Annual review Pesitive report A

proc;esses
comply with
evidenced best
practice
KPI: Work Management Center
Service Output Method of T-arget Measure

Summary* Required Measurement Required Frequency**
Event legging Effective help Systems in place 100% cempliant A
and fellow desk available at and oper·ated uptime

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Empowtri~t~FodlltyPrDfusk>n.aiJWorllhirld•
through required times effectively
Events Activity reports 98% completion M

completed in on schedule
line with priority
time stales
Availability of Agreed 100% M

activity reports reporting
and data provided
Customer No complaints Zero complaints M

satisfaction
• *Related back to specification and cross-referenced

• **Frequency key:
A= Annual
Q = Quarterly
M= Monthly
What is a service level agreement?
Wha.t is a Service Level Agreemer1t

(SLA)?
A 'MrViei:! !~vet agreQfn&llt i$ "" P<ilt Qf ~ _
$ii>J'fw-c.or,Jr<!ic1 )Vhe:rq U'l~ 1~>'1:!1 ·~>! .
sel'lfil:e is-lol'mai1y .jeflne<.f. SLAs ar« a negotiated agreementOO!V~n lhe
service pf!Mde>. io-horn.itor o~rei.<d and lhe .cus:om"!r.
!na .Wt':<lkoe~l;!lgi'~met'lt:
~ n.e serv>ce p~o~loor eommJts tc <::lt!l!\'et an ;;~greetHJpoo le-.•el of se Nice.
li<- Tl-,.., · le~it-J o! st!ifllice time may-~ 5Pedfled as Ja~get5 and mitdmu,.-ns.
;.. . Orte.l! cit~fi l'1t~d, ihe !evt.lh> can W:1"<ro ~$ bcrl.chm <lrl(s
~» fxpe:ctations should be rea:scnable and fe.<litS;tic .
A service level agreement (SLA) is a negotiated agreement between the service provider,
in-house or outsourced and the customer.
As discussed in depth in Operations and Maintenance, chapter five.
In an SLA, the service provider commits to deliver an agreed-upon level of service. The
degree of availability, serviceability, performance, operation or other attributes may be
included as formal requirements and targets. Time is a common SLA metric.

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Example: An SLA commitment to respond to replace fluorescent lights might specify a range
of four to eight hours. A snow removal SLA commitment might be to complete all plowing,
sheveling and sanding by 5:00 a.m. on standard business days ef operation.
What Do SLAs Include?

~ Agte"tl'l()!lo~datallto ,. M!leting!f-·CiiS!omm:~>~Njc~~
iP· O(!tinllior;s: j:)rdlidOf&Ol'Yl!tllm=eatr.m
10- Ocscr;ptioo ofthe. &a~pe.o1 I'· Subconfrac!ing provision&
serviCes-to t~e pro·>'ld&d ,.. _incenli\oes _and pens!ties
,. Oualityand perr•Jrrn:aflll~felate-a t- Pfooe.:Joresiottevis:inQ tfleSLA
~s "'Ot'$I0!11iHtafingaridfe~back
"" nme largcts:- S(>f'.ict:J pOority r)'Jt!(;haniSttK
e~iegbriefi and-lln;e~ "- Di5pute resotu!)<>n
~*> .Pric1~- f~!. and. payment temu ._ Def;ult
l>' Mtmlt0:1ng - ~rumat~re- "' 'li'ans~_.o:f tespolit,ibilit.Y
me.asures~{id performsnce-tef!Ms
_& As ~~kf ~ ~iQ~-~ botn pa1fas..
The key in SLAs is to define the level of service that the provider should deliver. SLAs may
also specify incentives and financial penalties. Once defined, the levels can serve as
benchmarks across multiple locations. They may also be used to compare service delivery
between an in-house department and a contracted service provider.
Service level expectations should be reasonable and realistic If, for example, the building
security system breaks down, a facility manager would have a greater sense of urgency for
a service provider to respond than for a photocopier malfunction. When developing SLA
targets for outsourcing, it is prudent for a facility manager to solicit input from the service
provider to ensure that the expectations are practical.
The service contract may involve the right to terminate if SLA targets are missed.
Termination is normally only against specific failures to achieve the agreed target KPis,
which is implied by the inclusion of the word "key" in"key performance indicators." SLAs
should also retain flexibility to accommodate changes in customer requirements. In
outsourcing, they are utilized as one of the primary tools for contract governance.
Service level agreements are formal documents. Increasingly it is best practice to split SLA
issues between the specification and the performance targets as shown previously in
Exhibits 6-4 and 6-5.
Service level agreement terms mirror aspects of contracts. Typical inclusions in an SLA are:
• Agreement details, identification of the parties, effective date of the agreement and
duration
• Definitions
• Description of the scope of services to be provided
• Quality and performance-related targets

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ElllpowuiltiFac:YltyProhulon311Worldlwld•
• Time targets- service priority categories and times

• Pricing- fees and payment terms
• Monitoring -performance measures and performance reports
• Meetings- customer/service provider communication
• Subcontracting provisions
• Incentives and penalties
• Procedures for revising the SLA
• Customer rating and feedback mechanisms
• Dispute resolution
• Default
• Transfer of responsibility
Both parties should sign the SLA.
Example of a Service Level Agreement Template Facilities Operation
CUSTOMER NAME SERVICE LEVEL AGREEMENT
DOCUMENT INFORMATION AND APPROVALS
VERSION HISTORY
Version# Date Revised by Reason for Change
DOCUMENT APPROVALS
Approver Name Project Role Signature/ Date

Electronic J:\pproval
TABLE OF CONTENTS
1.0 Service Level Agreement Overview 1

2.0 Description of Services 1
3.0 Service Performance 1

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EmpliWNrlntFMHtryP'r<rfusl,...foW""""""•
4.0 Service Costs 2

5.0 Service Provider and Customer Responsibilities
6.0 Problem Management and Disaster Recovery 3

7.0 Periodic Review Process 4
8.0 Termination of Agreement 5

9.0 Signatures 5
1.0 SERVICE LEVEL AGREEEMENT OVERVIEW
This is a Service Level Agreement (SLA) between Service Provider (Facilities) and Demand
Organization. The purpose of this Service Level Agreement (SLA) is to identify the basic
services and any agreed upon optional services, to be provided by Facilities regarding building
and grounds maintenance for Demand Organization.
This SLA covers the period from Date to Date and will be reviewed and revised at the end of
this period.
Include a orief description ef what the service or application does.
2.0 DESCRIPTION OF SERVICES
Services Description
What services are included in this SLA?
How will service be delivered?
What are the hours of operation (regular

business hours and after~hours support)?
When will regularly schedule maintenance be

performed?
3.0 SERVICE PERFORMANCE
3.1 PERFORMANCE METRIC AND SERVICE COMMITMENT
Performance Metric Service Measurement

Commitment
Customer Relations

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Resource Availability
Response Time
Resource Utilization
Work Prioritization
.....
Work Quality
3.21NCIDENT/PROBLEM MANAGEMENT
Incident/Problem Management
Severity Level Description Response Resolution/ Status Metric/

time to Mitigation Updates Measure
begin
working
issue
Severity 1 The entire

Incidents depar:tment's ability to
perform mission critical
business functions is in
jeopardy or
unavailable. For
example: Power Failure
Severity 2 A department or
Incidents individual's ability to
perform mission critical
function is in jeopardy
or unavailable but a
workaround is or can
be established with a
reasonable time.
For example:
Emergency repai r for a
water leak.
Severity 3 A department or
Incidents individual's ability to
perform a job function
may be impacted or
inconvenienced but

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can continue business

as normal operations.
For example: Broken
door/cracked window
4.0 SERVICE COSTS
List any costs for services described in t hi.s SLA (if applicable).
Determine what costs should be centrally managed on a year to year

basis versus costs that need to be individually billed to the customer.
Ensure service, administrative and material costs are accounted for.
Consider overtime costs, costs of outsourcing and emergency and/or
catastrophic occurrences.
5.0 SERVICE PROVIDER AND CUSTOMER RESPONSIBILITIES
5.1 SERVICE PROVIDER DUTIES AND RESPONSIBILITIES (WHAT YOU ARE

ACCOUNTABLE FOR DOING/PROVIDING)
• Duties and responsibilities

• Duties ~nd responsibilities
• DUties and responsibilities
5.2 CUSTOMER DUTIES AND RESPONSIBILITIES (WHAT THE CUSTOMER IS

ACCOUNTABLE FOR DOING/PROVIDING)

6.0 PROBLEM MANAGEMENT AND DISASTER RECOVERY
List any problems and how they will be managed; contingency plans.
Be specific
.
using- a table or flow chart.

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Empowttri"'facUltyPnohulonoiiW...tdoride
Facility managers' roles in service specifications and SLAs
L Facility Managers' Roles in Service

i Specifications and SLAs
'- JOerMy and clarity $~~;ei'lokle_t -;.. .COO<;.ider ctlwr e<l(rit)tortts, such: a$;
inlems.!s. ~ 50rvk:eaffe-clivenG:s."&.
lo Delinecrilka< wc£e&s focton :and - Resohliion of di5.ag1et<men"r-s.
KP!& - ReYi.ew.ollmodifieaiOOSto
spe-eilfcl.\UUI'IJagreeroont.
~ Se<V.:: a~ ihe polt',l of ;;ootaet rm

pt-ubl~m!ie>rcun.c~ml!,
,._ Coordinate and imp!emeni 1>- R$9ul;~rly .il"SS.e~s Lh~ •u~;:~tkmg
modif!calioos rela!lor.ships.
J.- Penodiea!lyt~sses$ effecti·o~e.nes::; • F ac~ itale rx patilcipa!~ in o::o<:~fhcl
· .~;•.-oft>M~~ta tr~r;Kill!J and feJXUti!lg. HIM!ullon~esself.
During the development of service specifications and SLAs, a facility manager's

responsibilities may include, but are not limited to:
• Identification and clarification of stakeholder interests relative to the types of

services required and the levels of performance considered acceptable.
• Definition of critical success factors and KPis.
• Consideration of other elements, such as:
How service effectiveness will be tracked.
How information about service effectiveness will be reported and addressed.
How service-related disagreements will be resolved.
How the parties involved will review and modify the specification or
agreement as necessary.
Once service specifications and SLAs are in place and operational, a facility manager's
responsibilities may include, but are not limited to:
• Serving as the point of contact for problems or concerns.
• Coordinating and implementing modifications.
• Periodically assessing the effectiveness of mechanisms selected for service tracking

and reporting .
• Planning and coordinating service reviews.
• Regularly assessing and reporting on how the two parties can further strengthen
their working relationship and extend it to other areas.
• Facilitating or participating in conflict resolution processes.
Prescriptive and Performance

Specifications

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EIR~rillf FKU ityPnrfuslonatJWorldwid•
Prescriptive and Performance

Specifications, continued
~ usus!lyca!lOOt b.e,n-1(0i f;etl ,. Cor"llio!1)ie~tatioos·ln 1e!'fi~$ U16

Ql'\Cij! ~~ (;Ofll.tll.d 1$..:Ui\i\ing. W)ti"i!etc( can uM&rsta~ M'-<1 t"x(N;li~
h i~ ~tPiaciliC.eoln r.r«urerrumtti fOCus ctn oescn~teqUite:d W1put's t&trie'f
lM:r!dn~ots
Earlier in the chapter we discuss prescriptive and performance-based contracts. The same
is true about prescriptive and performance-based specifications. Remember the
definitions? Prescriptive specifications dictate exactly what will be done and how the tasks
will be performed and the frequency. They are very restrictive. Prescriptive specifications
usually cannot be modified once the contract is running. Performance-based
specifications typically set quality related targets that allow the service provider flexibility in
determining the most appropriate response. Performance specifications convey
expectations in terms the contractor can understand and execute.
Contract Cost Monitoring

Contract Cost Monitoring
~~> El\sure that there are :suffieienttui'\ds·to.pwt ror·an aerw~ees: ~e.r.der~d :a:s:
reqUired by cQf'tlfaet
tr<- Er)Suf;, Urat itl>rolces are ~ld -coi~s!~tem\v'dhmost t.rvonrble con!ta<..\1'
~yn:u!nt 1t!r-rm..
!"" ldet~ify· loV{ S'l)l.>ndit~!l'!\ltlls 'W\<f fflMSign {!,!MS, i1 ~!)ptop4jaitt.
)to tnsure thal vend~ pa)'menl~ afe COfllfT'Einsuratewitb the 1e.ve!_ of gOOds
af!Q ·$eN{ee$r.e:ce_Ned.
~ Re\.~-~ irwoit;nK;tnd-foJJowll'la org~_ng;a·~..-J llrn:f ~t<\,>Ofl~f
staMtird·procooums fO{-prbC~SirigW!tidOr p~::ml&
Monitoring of contract expenditures includes activities, such as, but not limited to:
• Ensuring that there are sufficient funds to pay for all services rendered as required
by contract.
• Ensuring that invoices are paid consistent with the most favorable contract payment
terms.
• Identifying low spending levels and reassignment of funds, if appropriate.
• Ensuring that vendor payments are commensurate with the level of goods and
services received.
• Reviewing vendor invoices and following the organizational and departmental

standard procedures for processing vendor payments.

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Em~ll"'fKIIItyPntasionoioWgrt<fwi!l.
Frequency of Performance and Cost Monitoring

How Often to Monitor?
~;~:£~~:;~~1~:~:::~~::~:-~::::•:r:·
• j:.
~
6alis11eo and actual cos~s ore tracked
So ·U~t any disc!epai)tJesm lit-e q\lahty Of hrtle~!n~!>!iOf
t~ wll~k <:.an be ~u;c!ily atklte!is.t!d and !'ISOIVeci.
So tl~tsi!uatiMsWI'Ie!e lli!l CotliJaCbHfM;lVifoe$
o.ura:1ti~lpai!ld $1lpf!OI1 ur ac<:~ !>e;an be >lrral'..g!W 10
mm•m~e negall'le 1mpac.\.
Contract work is checked and monitored frequently enough to confirm that the conditions
of the contract are satisfied and actual costs are tracked. Activity levels are dictated by
terms of the commitments and responsibilities as laid out within the contract agreement.
The driving factors in frequency are the complexity and value of the contract.
Budgets should be aligned to organizational strategies and objectives, to help ensure that
expenditures are warranted. Costs must be monitored on a regular basis appropriate to the
contract. lt is imperative to immediately identify costs that will exceed budget projections.
Monitoring should be undertaken so that:

• Any discrepancies in the quality or timeliness of the work can be quickly addressed
and resolved.
• Situations where the contractor requires unanticipated support, utilities, space or
access to buildings, structures or grounds can be arranged to minimize negative
impact.
As circumstances warrant, monitoring may be daily, weekly, monthly, quarterly or annually.
Special monitoring activities may be appropriate as well as site visits and audits.
Organizations customarily prepare reports to ensure that performance and costs are
monitored and controlled systematically. Exhibit 6-6 is a sample of a simple performance
scorecard. Exhibit 6-7 shows an example of a cost control report. There are many ways to
compile performance and cost information. These are shown for illustrative purposes.

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Sample FM Cost Control Report
Exhibit 6-7: Sample Facility Management Cost Control Report
Property XYX Monthly Performance Service Scorecard
Vendor: ABC Elevator Repair Month: March 20XX
A B 'D
Annual Changes Anticipated Spent to

Service Contract Expense Date Comments
Sum (A+B)
Preventive €20,000 €5,000 €25,000 €12,000 PM program

maintenance ahead of
schedule
Response €10,000 €10,000 No reactive

time to repairs to
breakdowns date
Total Score €30,000 €5,000 €35,000 €12,000
*Amounts given in euros
The overall score found in the Exhibit 6-6 performance scorecard could be used in
conjunction with a performance payment scale to reward the service provider for scores
that exceed expectations. Conversely, low scores might be tied to penalties for not meeting
minimum requirements. lt should be clear whattriggers any adverse actions.
Exhibit 6-6: Sample Facility Management Service Scorecard
Property XYX Monthly Performance Service Scorecard

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~tl~ tf.M.8~. ·"·"·
E,.poworlftt:FadlltyProfauion•loWorlchride
Vendor: ABC Elevator Repair Month: March 20XX
Service Criteria Priority Weighting Monthly Rating* Score

(Weight x Rating)
Preventive 5 2 10
maintenance
Response time to 5 N/A N/A

breakdowns
Total Score 10
Performance rating % 100%

(Actual total/maximum x 100)
* 0 = Below expectation
1 = Meets expectation
2 = Exceeds expectation
An organization's accounting system and the various spreadsheets and database

management programs can be used to prepare cost monitoring reports such as the Exhibit
6-7 sample.
Numerous performance and financial measures are possible. The specific ones
implemented must be appropriate for the contract being managed. They should be
realistic, flexible and aligned to internal financial controls.
Facility managers should own the performance aspects of FM contracts and the supplier
relationships. Specific responsibilities may vary, depending on the contract and the
demand organization's norms and policies. Facility managers should also have at least
some level of involvement in managing and overseeing the legal and financial aspects of a
contract.
Closeout
Contract Closeout
Contract clo!>eout ocet~rs; wi'>E:!nlhtri~Mmimati<l(lcohdition~ !:X lhQ al:'lt!:ad ha>Xl

!:wen m~ ~:'ld l"l(')liC& a1 t~umination'litN"'<'Cd. !t inw~htes. lhr~ romp!elion o1 aU
arlro~riistrative. ac::ilor;s, oottlemMI of any disputes a!'ld reso~u!ion ol .any ~id:o..ral
<iabllilies, armngemer.ts rna.:!e-fo~ tr-t~ns'lef of aoy "C.OOtinuingresponslbi<itiesand
awoo~~nd ~pp,-ov"tl:l kK fw•t~l payment

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Closeout is an important aspect of contract administration. Contract closeout occurs when

the termination conditions of the contract have been met and notice of termination served.
This involves the completion of all administrative actions, dispute settlements, resolution of
residual liabilities, arrangements for transferring of continuing responsibilities, actions and
approval for final payment.
Closeout represents the complete settlement of a contract. As with other aspects of

contract administration, the specific nature of the contract and organizational norms will
dictate the formality of the closeout and the facility manager's level of involvement.
During closeout, the contract terms should be reviewed to identify closeout actions and
any requirements for specialized activities, for example, special property issues, special
payment issues, transfer of routine services. A facility manager might well have
responsibility for certification that all milestones have been satisfactorily completed and
that ,all deliverable items/reports have been accepted. Review of expenditures and
verification of the amounts as appropriate is another typical responsibility. Closeout
responsibilities will vary from contract to contract.
Whatever the organizational and contract specifics, it is essential that a facility manager
have a clear understanding of requirements and responsibilities and correctly execute any
assigned closeout tasks. A simple checklist of required tasks can help. Exhibit 6-8 shows a
sample that is generally applicable to contracts for project work. Outsourced contracts
would have some variations and a different process involving transfer of, for example,
equipment, data, records and in some cases, staff carrying out the service. Transfer
requirements occur routinely in the European Union under the Acquired Rights Directive.
Sample FM Contract Closeout
Exhibit 6-8: Sample Facility Management Contract Closeout Checklist
Closeout Checklist
Contract: Elevator Maintenance
Recipient: ABC Elevator Repair
Performance. period: January 1, 20XX, to December 31, 20XX
Task
I Description I Date Completed

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~t1il~
~
IF MM~n~;:emont
lntern~tlon~l
Am
htlllty Assod•tlon
Em,...._riiiJF•dlltyProfusloniiiWortdwida
1 Final technical report

received/accepted
2 All milestones satisfactorily

completed
3 Disposition of classified material
4 Final voucher submitted
5 Method for verifying costs

determined
6 Cost verification process completed
7 Final payment completed
8 Other requirements completed

(Specify these)
9 Issuance of completion statement
10 Contract funds review completed and

excess funds de-obligated

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Analyzing and Interpreting Financial

Contract Elements
Lesson Introduction
Upon completion of this lesson students will be able to:
• Analyze and interpret financial contract elements to manage risk.

• F,acility Management Contracts
• Risk Management
• Risks in Facility Management Contracts
• Importance of Examining Financial Contract Elements
Facili M nagement Contracts

Facility management contracts involve legal documents which have financial implications.
Managing the financial elements in procurement contracts presents both risks and
opportunities.
Terms of a contract are intended to frame a contract relationship and poise it for success. A
contract alone cannot guarantee performance accountability or the success of an
outsourcing relationship. Relationship management skills and understanding of the terms
underlying th~ agreement is important. lt is key to achieve the outputs the buyer requires
while allowing the vendor to make a profit.
To a greater or lesser degree, every facility manager is a risk manager.
Most organizations have risk management departments or an individual with assigned risk
management responsibilities. A facility manager supports the process by analyzing and
interpreting financial contract elements, lease agreements, service contracts and cost

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Em~llnrFxllllyProfaulonaiJWorlllwld•
statements. To do so, the facility manager needs to develop a clear picture of potential
contract risks.
This topic first explores the basic elements of risk management- how to assess the
likelihood that potential financial risks and other risk exposures have been identified.
Applying a systematic risk management approach can help to identify and prioritize
financial contract risks while improving the collaboration between the demand
organization and contractors.
Risk Management
Ritk l!l$ it >)pph~'S \1) e{lntt~t$1$ tM pt:tosibili!yo:sf fll'l ~~1 <X<.:Wtifl!):ti)W.:wi!!

Aave a negative tmp~tonthe aehi.wemet~t o~ (:QTi\l'<l:;:t.<::!)jiH;~,
Risk m."}rmgerr.em.:an help .an orgo:mtz:rt!iQr\:

l>· S3>.:& rrmney,
li<- hllflf()Vf.l~cisjonm;~ktng
'-' Prote-ct & slr&ngthcti itS r<eputoofion
;. R,p,d~ce Ihe poss.ib~it)IOrpe_rsona; Z~ccid'E!nls.
~ R~etneehanct'i~-aflit>gatton .
~ E(!-J>we that W\>ir1i'h ~;onttn~tri\>.nmhita!mW ,..,h~lWtof p(h">:ible.
Risk as it applies to contracts is the possibility of an event occurring that will have a
negative impact on the achievement of contract objectives. Just as no two organizations
are identical, individual contracts have different types of risk.
Risk does not present a single point estimate; it represents a range of possibilities. Without
a single outcome, the range is what creates uncertainty when understanding and
evaluating risk. Risk may relate to preventing bad things from happening or failing to
ensure that good things happen. Risks may present threats to an organization or be the
failure to achieve positive outcomes.
Facility managers need to recognize contract elements that warrant attention as a potential
risk or a real shortcoming. Risk management provides a process to identify, assess, manage
and control potential events or situations that threaten the achievement of contract
objectives.
When applied correctly, risk management provides a structured approach that can help an
organization:
• Save money
• Improve decision-making
• Protect or strengthen its reputation
• Reduce the possibility of personal accidents
• Reduce the chances of litigation

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IFMA 's Finance and Business Course ~~~~ .H:.Ml~:_.~.
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• Ensure that business continuity is maintained whenever possible

• Understand environmental impacts
Applied to contracts, risk management facilitates the bidding and award process. lt gives
service providers and suppliers a clearer picture of potential risks and allows the FM
organization to select the prospective service provider or supplier that represents the best
value to the demand organization. During contract implementation and monitoring, risk
management provides better control. lt increases the likelihood that contract objectives
and goals will be achieved and projects delivered on time.
Risk management approaches can vary. In addition to internal risk management

departments or personnel, there are many consultants and organizations that offer risk
management services as well as a variety of risk management software applications.
Invariably, risk management approaches all have the same elements. While a facility
manager is not directly involved in or responsible for the entire risk management process,
it is beneficial to understand the principles of risk identification, categorization, assessment
and response.
Risk Identification
Sample R(sk Rating
Risk identification answers the question, "What are the contract risks?" The objective of risk
identification is to search for and capture those risks that, if they occurred, could threaten
the business or specific projects or simply where uncertainty of outcome exists.
Risk identification starts before contracting begins with analyses of desired contract
outcomes, likely costs and risk vulnerabilities. The identification of risks is ongoing and can
occur at any point during contract execution.
Risk Categorization
Categorization groups the identified FM contract risks into categories such as, but not
limited to:
• Scope of services and nature of work
• Subcontracting

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Em~ri"'fao:illtyProfuslon~loWortdwlde
• Geography and vendor delivery capability

• Pricing and costing options
• Contract duration and renewal options
• . Service and resource flexibility
• Vendor company failure
• Service failure
• Reputational risk
• Change and transition
Categorizing risks in this manner facilitates subsequent assessment and response.
Risk Assessment
Risk assessment or risk analysis is the identification and measurement of risk and the
process of prioritizing it.
Risk is often assessed in terms of probability and impact:

• Probability- is the likelihood that a given event will occur
• Impact- is the result or effect of an event; it relates to the magnitude of risk, such
as the materiality and potential dollar loss, potential reputation or brand damage or
the importance of the related contract objective
Risk events are rated in terms of the probability and impact using:
• Qualitative terms- continuums such as high to low or almost certain to
improbable and catastrophic to negligible
• Quantitative measures- such as numerical scales of 1 to 5, percentages,
frequency of occurrence or other metrics
Ratings may combine words and numbers in a risk rating as shown in Exhibit 6-9.

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Exhibit 6-9: Sample Risk Rating
Probability Score Impact score
Almost certain 5 Catastrophic 5

Likely 4 Critical 4
Moderate 3 Serious 3
Unlikely 2 Marginal 2
Improbable Negligible
Sometimes organizations portray the risk factors in a graphical representation such as the
four-quadrant matrix shown in Exhibit 6-70.
High
High impact High impact
Low probability High probability
Impact
j
Low impact Low impact
Low probability High probability
Low
Probability High
Exhibit 6-10: Risk Map for Probability and Impact
Variations of the risk rating scales or the risk map are possible. Format and specific
terminology are not as important as developing a.n effective risk assessment to evaluate
risk events pertaining to contracts.
Contract risk assessment should answer three important questions:
• To which party does the contract assign the risk of extra costs or time for a
particular event?
• What is the likelihood of the event occurring?
• What is the economic exposure to the risk-bearing party if the event occurs?

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ttlj~IFMA'"
~ lnremathma l Fo<l llty M• n• ge menl Association
Em~ri"'FadlltyProfus.....,I• Worldwldo
Estimating likelihood and impact can be challenging; the process involves professional
judgment and the consistent application of rating factors. No matter how risk assessment is
done, the key is to objectively assess risks in order to identify those that require
management focus.
Risk Response
Customary Risk Responses
HI# dE 1'-:C_.:.:.~ ""'...:.."''~~ r.,;,.,;o ~r:~(<.'>':'\1 *'::" 'X >~*~

~Wt. ~~-~~«:'1;1:;;.~~~~~~~;,
i'idliW
~JH!>$' loS<< t.>l'l«<!.'t' O<~<".<;ot<:<~ <l ;osi. ~"' "'"'""'

if"''>'"'"-'"t>i ';,_;
Once risks are identified and prioritized, the next step is to consider the best response to
manage the risk. Risk response, sometimes called risk mitigation, refers to the measures
taken to avoid or reduce the impact of a risk or to control the effects of a risk.
Risk can be managed in different ways. Customary risk responses are:

• Acceptance- accept and absorb the risk by identifying ways to manage it such as
establishing contingency plans
• Control or reduce- reduce the likelihood and potential negative impact of the
risk
• Transfer- share or transfer the risk to insurance/bonds or to other parties, such as
service providers or suppliers through a contractual arrangement. Applicable bonds
would include bid bonds, performance bonds and more
• Avoidance- identify ways to prevent risk exposure or exit the activities giving rise
to the risk
Risk management can help to address a broad range of risks that a contractual
arrangement can create for the demand organization. The more diverse and complex an
organization's contracts, the more challenging risk management becomes. Following a
structured approach like the one previously presented will usually identify many
commonalities.
Discussion Question
M<1tt:h ~h ri;;k man«~g~mrmttt1tm wUh i!:s df.l&ttiplion

1. Groupt1he -~ntif"~ F.M con!Jtt~l ri"S.ks tog....tMr
Z. AnS;'_iets the qtie's:loh 'Wiiiltlli"tdhe.ctlfltract
ri5ks?•
3< Sonwtime,~ca!!e-d 1h>k .<111aiyW£.. ~ht! imintifiealion
and mea:s.ur!tmentof risk and !tte 1xoces5 c-1
pt"iotj'izlng H

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EmpGWftlnf FKII!tyProfaulona!J Workhold•
Risks in Facili IV~anag 1n ent Contracts

Risks in FM Contracts
In an outsourcing relationship, a facility manager must have knowledge of the nature of the
contract risks in order to ensure that the vendor relationship is successful.
Scope of Services and Nature of Work

Scope of Services and Nature of work
~lMf$ $'!ll'lic.,. ~W!:tioM~ith 1'!1UltipiQl'ndl~.i4llill e<mtt~h,r.• ~~!)«<MUQ11y

it'lcreolse.po!anual.m..k s.::enarlo1l..Fu!l-se.r<I!Ce conUacls ted\lco tt~-e. fM'interf~e
r.siqu>:red bat pn;:to:ent other contract concerns, l>U(;haS;·potential loss.of cor~irot
E:;mmple: An FM ~::uganil.iiltiem $ho~ld r&q!.ilre ;ipproprl<rie thir<:i-p<.31():' proooc'tiQR
Th;$ ff,ightim'~ {l:l~r<!ffieeS. pe:rtoiin~r;c'l".borti%..-ood !'A'i<!O:WC.$1 ofi\ppropri;~.1e
ifll)U~t.elfm".'l!}e
If a contract is for a single service or full service, the scope of services and nature of work
must be well-defined at the outset. These terms and conditions specify what the contractor
will do by, when and for how much. The terms and conditions should specify the measures
and indicators to be used to monitor the contractor's performance. Contractors should
have sufficient time and information to assimilate the detail in the bid phase.
Single service situations with multiple individual contractors exponentially increase

potential risk scenarios. Full-service contracts reduce the FM interface required but present
other contract concerns, such as potential loss of control.
Example: An FM organization should require appropriate third-party protection. This might

involve guarantees, performance bonds and evidence of appropriate insurance coverage.

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~~ij~IFMAN
~ lntematlon• l Facility ManagementAnodnlon
Subcontracting
Subcontracting
Th~ ton!t"QCI .shotllda!s.l'l $PI!C\!y that l~ pri'11My r.ontr<tcti1'19 Mflo<i.:Cf, pf'tMOOt ;&
~u:opons.lh!'Q lo! file St:!N!C~ Dt;IJjned in !lw. :::ontrac! rtlgll<'11!0:;;~, of whic.ll e-nt~i
acuJally cmldU'(:!~~hfJ: operations.. FM shou!datso c,c.ns~r inch.Jd(ng I'IC!ti!l~HC:!'l
and Approval requiremen:.s ragartl;ng any changes to tl'le S€!VIOce provider's
signifteantsubeolltr<tctors.
Exampl e: A ccmtmct s hould "cm1al!yres~rve fue of;:;aniz.ation· s <tght to
terminate 11 lll ttte event ofil eh.ilnge ln the c:cntrolling lr.1e:e~i oH he r.;onlraelor
~w-the:. ll shol.lld erwme that the r;ontr.oc,!or ca1not maign any part of lf1e
conlr.lct to anot,.'l.;r party wit~OIJJ th& Ofgnni.tat!OO. s <1\Jfeilm&r'lt
Some service providers may contract with third parties. FM can benefit from the
specialization of subcontractors, but there are risks associated with subcontracting when
services are distributed among parties with whom FM has no direct relationship.
FM should be aware of and approve all subcontractors. To provide accountability and

reduce contract risk, the primary contracting service provider should be designated in the
contract. The contract should also specify that the primary contracting service provider is
responsible for the services outlined in the contract regardless of which entity actually
conducts the operations. FM should also consider including notification and approval
requirements regarding any changes to the service provider's significant subcontractors.
Example: A contract should normally reserve the demand organizatioi)'S right to terminate it
in the event of a change in the controlling interest of the contractor. Further, it should ensure
that the contractor cannot assign any part of the contract to another party without the
demand organization's agreement.
The fundamental objective is to hold the primary service provider to the same standard
regardless of who performs the work. The primary service provider contract should require
their subcontractors to meet the same obligations they are required to meet. Some of this
risk may be mitigated by requiring the contractor and any subcontractor to have integrated
quality assurance or quality management systems in place.
Geography and Vendor Delivery Capability

Geography and Vendor Delivery
Capability
Cornpl'iaflt:e with. load laws and reg~ouons and EM!fl polit<ca! alxi sodal utull st
{n >Son~ are• s..(ll !h~ w<Xi-d ft1€00 $_h<lpeo ~md influence vt~l}(:i(;lr oefu•e!y. t:~pab<tity,
-Example: If 11 fooillty m<~r..agsri1\1he lmi1ed Sl.<it9S deckles W pultha$.6 f>ab1fn
.;"J r.d i;:h<l:[f$ hO<'!i -i1 C<tlli!ldi<'~i'l WifldQJ', lhiii f~ll ity 1"/lllcMi:J~ Il!llM \.ltldl?-f'Ma1ld th"!
-'flht< 11'2odor goe"S bank.rvpt. any flJ>'N:l$ PfiWio\J~l)o - pald and il'l(< !egal stahJoe. k>r
histtwr c!alm will ntosi !ik~ oo the last in ane in th~ ca!tt~9illn Baniuuplc~·
Cilurl Any O:>wn paymenl ();' r-e-kneel- paynli!'ntfunds fri{IY ~ l ost and the sgtus
cl1i!!e tc !he !Umlture slt!l"'J rn lhe velidOi"'s warehou!e may never be de3fed.

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E,.powarlnfFacYityProfuslorulsW<IridN!d•
The nature of this risk can vary significantly in cross-border situations, as vendors and their
employees may have different attitudes and potential cultural conflicts, for example,
clothing requirements. Compliance with local laws and regulations and even political and
social unrest in some areas of the world also shape and influence vendor delivery
capability.
Example: If a facility manager in the United States decides to purchase tables and chairs from
a Canadian vendor, the facility manager must understand that if the vendor goes bankrupt,
any funds previously paid and the legal status for his/her claim will most likely be the last in
line in the Canadian Bankruptcy Court. Any down payment or related payment funds may be
lost and the status of title to the furniture sitting in the vendor's warehouse may never be
cleared.
Pricing and Costing Options

When an organization procures services from a contractor, the type of contract and the
basis for payment influence the allocation of risks. Recall the two broad categories of
contracts: fixed price contracts, which are for items or tasks that can be defined fully and
cost-reimbursement contracts, which are for those that cannot.
Within the fixed price and cost-reimbursement categories, specific contract types range
from firm fixed price to cost plus fixed fee. Along this continuum:
·• In firm fixed price contracts, the contractor has full responsibility for the
performance costs and the resulting profit or loss.
• In cost plus fixed fee contracts, the contractor has minimal responsibility for the
performance costs and the negotiated fee, the contractor's profit, is fixed.
• Various incentive contracts, such as fixed price incentive and fee cost plus, are
based on the contractor's responsibility for the performance costs. The profit or fee
incentives offered are tailored to the uncertainties involved in contract performance.
Contract type reflects:

• The degree and timing of the responsibility assumed by the contractor for the costs
of performance.
• The amount and nature of the profit incentive offered to the contractor for
achieving or exceeding specified standards or goals.
Exhibit 6-7 7 is a graphic representation of contract types and the risks associated with
pricing and costing options.

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~ lntemarlon• I Faclllty Man•gement Anodatlon
Empow• ri"'FadlltyPrefaulonalsWorllholde
High risk
Contract Risks
(Technical and
Other
Perfonnance
Uncertainties)
Low risk
Lump sum Contract Tvoes Reimbursable
Exhibit 6-7 7: Contract Types and Risks
The contract type and price or estimated cost and fee, results in reasonable contractor risk
and provides the contractor with the greatest incentive for efficient and economical
performance.
Contract Duration and Renewal Options

!i Contract Duration and Renewal 'f •J:tlL
Options
M$i~y· tlsl< c.Q4~idw~~:tio~!!l ~i), a Pfllt or t.o:'>fl'itll<: t d~liQ/'1, i!~Kh lik~ v.;;o..i<v
~aming1:ur.:es, capUal il'l'..-estmems and amortiz:ati::m,
exmnp!e: Cons ide1_.., c:antrm:t life .::;y<:::ie. in a c!eanlng stwices/jtmitodal
C:W<lr.M:t U takM..fun&for 11 ~W -MJ'l)plieHo failtu00ea;1and how a buil<i!ng is
us-03<::1 at)(! how and whQ:n ba!il ta d$~ •·.-i{: This loafning WIVQ JTI<tY b11 .,P_to s.lx
A'IOottl$.AHhD e.:::.ntract Nld, reprocumma!ltOOgi>lO.Ulnrumi 12 rrwntrn.·ahead at
. tho-cont"'<Jct renc.val date, so that \<endors and 1tl-eiT man~mentwil!tew.: to
i! conCEnt<ttte lll&i_rsf~Q11 e-ontmet bH:klingin that lt~lS112 monthS. The eNootof
1. ~hiS is that in a :36cm<lNh oo-nttael. i:lf!IY 18 !"il()(!!tls. ~t~lf l h~.<iUratk>l), m!W'lt tre
]1 a~ 1!"le-Qptirfl!lmlt:!Vet~ Qf ~mane,e.. FatUity lN~oa_~~ wmtl\erert.H'e·$eek: to
j! .exiend this per:OO iri vatiou!. wa·,-s !or e-~ ><~mple, ·oy -g~tl!odin:Q ~ length ofthe-
{i co~Ji:rac! !e.-m io fuur o-r liw yea..-s, b>(in--':'tuding sp&!!ic-pt~rformance-tel ated
exter;sloo -c.;1ticn~ Of Oy ameru:l<og lhe repr.ocurement pmce!';s _to reduc;e the
···-~-~/~~!~.?-~-~!~~~g-~r. ..'.~-~ . ~~-~~-~~-~~.r.~~~-~:~..~~~~~-~~...... .
This type of contract risk involves grasping the specifics about the contract term-whether
it has a specific end date and termination, automatic renewal provisions or continuance
contingent on performance, as evaluated by the demand organization. Many risk
considerations are a part of contract duration, such as vendor learning curves, capital
investments and amortization.
Example: Consider a contract life cycle, in a cleaning services/janitorial contract. lt takes time
for a new supplier to fully understand how a building is used and how and when best to clean
it. This learning curve may be up to six months. At the contract end, reprocurement begins
around 12 months ahead of the contract renewal date, so that vendors and their management

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IFMA 'sFinahce and Business Course ~tl~ ~. E.M.B~-··~·
Empowttrlnt: FxUityProfu.lionalsW.-4dwiQ
will tend to concentrate their efforts on contract bidding in that last 12 months. The effect of
this is that in a 36-month contract, only 18 months, half the duration, might be at the optimum
levels of performance. Facility managers will therefore seek to extend this period in various
ways for example, by extending the length of the e:;ontract term to four or five years, by
including specific performance~ related extension options or by amending the reprocurement
process to reduce ttie time spent on bidding by the incumbent provider's management.
Example: A vendor mntract may have a statement that the contract will be automatically
renewed if the facility manager does not notify the vendor within a specific time frame before
the initial contract te.rmination date. A contract may add an automatic increase percentage to
the cost of products or services at the automatic renewal of the contract-again, unless the
facility manager makes timely notification to the contractor pursuant to contract "opt-out"
language. A facility manager should not agree to automatic renewals unless he or she sees a
specific benefit to the organization.
Service and Resource Flexibility

Service and Resource Flexioility
F.M nood!! io tcr.s:id~.wll~1 ihin~ might c:h~Hl~duri-lg coo!.rattduratiOI'l-.

., ~mp.l~ Sil!JSiQns O'i~gM flr!pq<:tseNiCE" n.ef!;d$ tan b:~ ~rst~orMerm,
tboding or olht>t 00'-«qaricy, s:.~dden change~Soiri productiOn patt(lms to.."'100t
~_dditi~l deman~s-oc klnger-~rrt:l, an_.~em!'.ed ~omic_recesslon._ Effective
fM_coli!_raCI~~de;,J wilh Jhe$e _c;-ont~r~ndes by ha'\lcng _tl!ear_pricmg: s'l!uctures
tl'lal ba!nrite !il{rne$5 f01 Coth ti'lll! denruiM org:al'iUilitll'l" ®d ..er>dor_
, wilh the
;.tbi6ty-lo p!M&tt.nd rtwde! prlttfehun~5 b~$Cd:Oil fue Gi~d
-:::kcurn~ws,
Regarding the product or service provided, FM needs to consider what things might
change during contract duration. Are there foreseeable external events that may warrant
additional people on standby? Will there be extra associated costs? Can there be
substitutions in labor categories? Or do labor regulations prohibit substitutions?
Examples: 8ituations might impact service needs e:an be either short~term, flooding or other
emergency, sudden changes in production patterns to meet additional demands or longer-
term, an extended economic recession. Effective FM contracts deal with these contingencies by
having clear pricing structures that balance fairness for both the demand organization and
vendor, with the ability to predict and model price changes based on the changed
circumstances.

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Empoweri"'fKQlty~IDMIIWooidwlde
Vendor Company Failure

Vendor Company Failure
i! r,c'n!taclor~ hw.'e c~nsisti"llltl~<!o\V<J.r M98:ti'&"p!'Offt n-mmi~:So a~Jor

~r.{:umtJ\a~kl~0$. the !BB<ilt iro a v~ab<JJty-th;e:;t:~l)ing sii<Uiti<m
Exanrple-:A eon.tr~ct shoukl ~ritm!fie 3n-ar1o;1err;ent~ that wotfd folc~l1<~le
.another ttl'llrador io tak&O"t!r <1 -set\<i<.;~ 1;1!_ :S.!\011 notit:-e in the ~n.t o! \h(!
cc.-ntrilctats- fir\;~nc:i~l foiii<Jt<a- such a~ mi!Jhl 00 cac&l!tl b:J an 4!C<>t1omie
If contractors have consistently low or negative profit margins and/or accumulated losses,
the result is a viability-threatening situation.
Example: A contract should describe the arrangements that would facilitate another
contractor to take over a service at short notice in the event of the contractor's financial failure
such as might be caused by an economic recession.
An effective prequalification process can help to establish a vendor's financial solvency and
mitigate this risk.
Service lure
Minor mistakes or problems can and do happen in service execution. For example, an
individual piece of equipment, such as a single printer or desktop computer, may break
down. These do not necessarily constitute a service failure. The consistent inability to
manage a contract; repeated poor performance versus the contractual intent or an entire
service becoming unavailable, may be a service failure that poses potential serious risks.
Vendors should have a process with defined goals for response to service failures.
Contingency plans should be in place. For some situations, an organization may need
business interruption and continuity insurance.
Reputational Risk
Reputational Risk
Cor'ltt'ac.ls ~;tal!31lmr'lt~t:houW "&;ntcify th~t an .f.11!ies are !o OO·pet1otmad ir;

COrt\pl>omoowith yO>.<eotni!liJ !;~ws am:l ~~la\k>n!>
..EX<!mple: Jn Me.»ie.o, ~~~ Me)l:tC~n federai Li~;bor Law (FLL/ $\':p~l~(ts ~~nimum
\•¥QJ!<ing~O!lcli\ior.s U)a:l.c..;;:~r1r~C-t t>e wal~ed try ert't(JIQyM$., "l'bi'.> <~whe(< to bolh
io<IM<bJl)I WOf~;lqJ ~.:! col!e<:tl<:l't, -Qf931'llZtKt t>y iJ l<lc<;r t.Jf.iOi'l. UoOet ;>:ro-t iSit>!'l$
of tnef"t.L. ma:Wmllll'NP!);il\9 t:m& i$ se! to !.\X day&, 45 ho«~s per wook.
Genernl coilirru:l pl"ll\lisk>ns should.s\Me that the conll"actof'.:md a!!
s.u.tn:onltactorsmusl:DE:' in complianeetlurir>{j '\he fui t~m ol the agreement

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Empoworfnt Fadllty PmusiOMls WDrlclwtd•
Bad press and a tarnished organizational image can result from inappropriat e vendor
actions and noncompliance, or from failures in sourcing or contracting failures. There are
many reputation risks such as, but not limited to:
• Discrimination against minorities.
• Unequal treatment of men and women.
• Violations of a drug-free workplace policy.
• Noncompliance with immigration laws.
• Occupational health and safety violations and/or inappropriate corrective actions.
Contract statements should specify that all duties are to be performed in compliance with
governing laws and regulations.
Example: In Mexico, the Mexican Federal Labor Law (FLL) stipulates minimum working
conditions that cannot be waived by employees. This applies to both individual working and
collective, organized by a labor union. Under provisions of the FLL, maximum working time is
set to six days, 48 hours per week. General contract provisions should state that the contractor
and all subcontractors must be in compliance during the full term of the agreement
Change and Transition

(;hange and Transition
~ · Some t;..,n!>ilicxls~r~ ~ubj.~a~uo. regu!aiOtyl~~munfs.
Example-; In lhe. Uni!ed Kinijdorn ..ii"_CP!Itractmu:.taccanmOdatePtovi$1orl:. oJ

t he Ttahsfer Of U!!dlt~kill';Jft (P~otci:ticin ~fErilP:!Oyment)R~·u!ation!i, whu;h
prd.ect the rights. ofemplo-,.-ee!:.~n rele.¥ao! transful. sltualloos. Ge~lly
refmed to as TUPE., lhe reguJalibns·prese-:ve the c<mllnu!lyof emplcymentfo:;
!t,iJnsfer~ .ampjQY9% wilh -~ sam:eter;ns attd C(l(l<fjliOI'\S.as. ~!'lei~f-otmer job$,
To oomp(y wilt! Tt.IPE', :reot~raet M(l~,;:td·~tlpult~tfi tkat Ut<a ~!)'fstillg ·cof1U"actor
W::II IHNi!l lQ ptO'IidtJ Olhlldll-~; t:ild~rs.•...~th il)fl)?lllafi(jj'j 8bolrt $1$-ffWM_
~Ld~traosler !o \Mm~
TUPE is:~. U.i<. app<lcalior~ of.ttle European Unic."lACG.uifOO Righl~ O!recwe.

Memberstales ill the EU are.bound to "tr3.11sf~m .EU directi<.~~· l!!fo r:mtltinal
ta\v:~s: s1itl\. a!herEU ~w~·rl1bet'$.t~te:s ma)' na~ BJltion.ali>M'SgtMmilt9
~!~-~V!"$Av.
Some transitions are subject to regulatory requirements.
Example: In the United Kingdom, a contract must accommodate provisions of the Transfer of
Undertakings (Protection of Employment) Regulations, which protect the rights of employees
in relevant transfer situations. Generally re.ferred to as TUPE, the regulations preserve the
continuity of employment for transferred employees with the same terms and conditions as
their former jobs. To comply with TUPE, a contract should stipulate that the existing contractor
will have to provide other tenders, b,idders, with information about staff who would transfer to
them.
TUPE is the U.K. application of the European Union Acquired Rights Directive. Member states
in the EU are bound to transform EU directives into national law. As such, other EU member
states may have national laws governing t ransfers.

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~tlj~IFMAm
~ lntern~th>nal
Fadllty Man•goment Assod•tlon
Em~rlntFadlltyProfuslonai•Wortclwlde
Good transition management should provide for a seamless implementation with minimal
disruption. Considerations to facilitate a smooth transition to a new contract commence
during the planning stage of the procurement and continue throughout the procurement
process. The process continues following the awarding of the contract.
Large, complex contracts, with significant transitional issues or where major change is
involved, may necessitate a contract transition plan to identify key issues, risks, tasks,
responsibilities, resources, time frames, policies and procedures and so forth.
A contract should be flexible enough to accommodate client-approved changes. lt should

also describe what will happen should the vendor default on any terms of sufficient
magnitude that require the demand organization to change from that vendor to another.
The contract should plan for an exit and transition process, for example the change and
transition procedures for poor performance.
Example: lt is not unusual for a janitorial contractor to begin its work with great effort and
care. Over time, this effort and care may decline to the point where the facility manager
observes performance problems and may start receiving complaints from internal customers.
The contract must provide a notice period for the vendor to improve and provide the level of
service agreed to. If improvement is not made, the facility manager must have the ability to
quickly and formally replace this vendor with a change and transition process that does not
disrupt his or her customers.
Communication is also important in any contract change and transition. A facility manager
should be prepared to facilitate communications regarding new contract arrangements
with all stakeholders, including:
• The new contractor
• The previous contractor, if relevant
• Staff impacted by the change
• Occupants impacted by the new contract arrangements
The demand organization's finance and legal personnel should be involved to ensure that
appropriate details are in place. Communication helps to ensure that all stakeholders are
aware of the changes, that any issues are identified early and that the new arrangements
are implemented as smoothly as possible.

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IFMA 's Finance and Business Course ~rl~ tE.~.8:. .,.
Elil~rlltfFaclllryPn>fud.,...I<Warldorid•
importance of Examining Con·t

Importance of Examining Financial
Contract Elements
A.IICJm:
!" The lmtn& tA ~ne agmer(lant&Mbel:lellt.yllndefstood in reffJ"enc.e-1o ~i(
rlnallGteL~~ and seel.ltity implt-C9.tlons
it> M ~.~nder&laflding ofth2 ccmtfOtlil.b!e a.:d va.riab!e ite-ms. '1'1 ih0 coritract l.o
ate c:astaod resource lle!l..ibl!ity: ·
~ ~niilitll!ion.<Md P!-e'iMth)t\ of RifuaUO!:Ul or feql.~itf. lhQ! ...,i(:;~te. the lafffi$
OfUle~Gmef\t,
AJ!QtRft~~i¥,(> d.·b.-$1"f<!l'!ifl~· ~~;(>,':l'<(i,:/(.":)i'M{lf.l i')~>iJA!.:;. ;'::%)!~1::;~:-j
~ ldotti!I:Ji:..;11ia;l and lmptO'ie:tfconlft!l M .t·{or·a<.'Oidanceoll situ<~llansor

requeSts that may.impacttlle ~dget th.rcug~ increased cos\$ due to
ur,planned tlme: vsage m addtlional ser.1ces..
11> A~'<'optiate- ti:Mt:WI of $,ituationsot' reQool>ts ihat n1ay rodu<:~ J;O!Ils In
detem1ine ll1at--aq canlrm::ted se:vices- llavl!:' be«! met sa!is.fru;tod~t l.lnd lhat
a.rec'\ic!ioo in billed se!Yit;es- i~.appropOate
The establishment of any contract creates a range of issues and potential risks that need to
be managed. A facility manager needs to review contracts to understand the conditions,
what potential risks exist and how much risk the demand organization can accept.
Wryen facility managers analyze and interpret financial contract elements, lease
agreements, service contracts, cost statements and so forth, it allows:
• The terms of the agreements to be clearly understood in reference to their financial,

risk and security implications.
• An understanding of the controllable and variable items in the contract to aid cost
and resource flexibility.
• Identification and prevention of situations or requests that violate the terms of the
agreement.
• Identification and improved control over or avoidance of, situations or requests that
may impact the budget through increased costs due to unplanned time, usage or
additional services.
• Appropriate review of situations or requests t hat may reduce costs to determine
that all contracted services have been met satisfactorily and that a reduction in
billed services is appropriate.

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ErapowerlnrF•ItltyPnrfuslonoi•W...tclwhl•
Systematic Risk Management
I'W-Ax<U<.:,-;;:.M.·
.... ~~~l'ii:' ' ''W>
'i'<· ;""'"l""'"'""'""""""' IOi'<l""~

~:<Jr""ot.~
Analyzing and interpreting financial contract elements in the context of a systematic risk
management strategy helps to address a broad range of issues and risks in contract
relationships. Good risk management facilitates collaboration rather than "policing."
There is great potential for many mutual benefits through systematic risk management.
Among the possibilities are:
• Reduced contract risks
• Increased revenues
• Reduced costs and fewer cost overruns
• Improved contract performance
• Improved compliance
• Strong communication and trust between all parties

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Resolving Vendor Conflicts

lesson Introduction
Upon completion of this lesson the learner should be able to:
• Resolve conflicts that arise with vendors in the facility organization

• Nature of Vendor Conflicts
• Contract Dispute Resolution
Nature of Ve r Confl
In FM vendor conflict management, prevention is better than cure. lt is better to try to
avoid problems in the first place rather than to try to fix them once they arise.
A facility manager may have a variety of administrative, management and oversight

responsibilities associated with contracts. it's certainly in the best interest of all parties
involved -the demand organization, the contractor and the facility manager- if conflicts
can be prevented.
Conflict can generally be described as the perceived absence of a prominent alternative.

When two or more parties are in conflict, they tend to believe that what each want is
fundamentally incompatible with what the other wants. From this belief stems a common
misunderstanding, that conflict is inherent ly negative. This is not necessarily the case.

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Constructive and Dysfunctional Conflict with

Vendors
Vendor Conflicts
Conflict is an inevitable part of interactions with vendors. Resolving conflict is seldom easy.
The way conflict is handled distinguishes between constructive experiences from
dysfunctional ones for both parties.
As the name implies, constructive conflict or positive conflict, leads to beneficial results.
Constructive conflict can transform the ways in which individuals interact and improve the
quality of conflict outcomes. Examples of such positive outcomes include:
• Surfacing important problems during contract execution so they can be addressed.
• Thorough problem analysis and decision making.
• More effective collaboration and partnering, leading to more positive contract
outcomes.
Conversely, dysfunctional conflict or destructive conflict, leads to experiences that erode
relationships and derail progress toward goals. lt is detrimental to both parties and
ultimately has a negative impact on contract execution and outcomes. In situations where
dysfunctional conflict surfaces, a facility manager needs to take quick action to diffuse the
situation and minimize the impact and any negative consequences that can result.
Some organizations may try a partnering process such as a conflict dispute avoidance
strategy to minimize conflict occurrences. Through partnering, a neutral individual
facilitates exchanges to help parties anticipate likely sources of potential disputes in order
to prevent them.
Unfortunately, in practice, avoiding issues that lead to conflict and contract disputes is
often easier said than done. Even very carefully drafted contracts do not always succeed in
preventing contract disputes. The key is to proactively manage conflict when it arises and
mitigate escalation. Discussion of the issues at hand and negotiation can sometimes help
the parties resolve the matter and achieve an agreeable outcome. If not, there is contract
dispute resolution.

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Contract Dispute Resolu·t ion

Common Alternative Dispute
Resolution (ADR) Techniques
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The contract dispute resolution should be contained in the contract document, usually in
the general conditions. lt must be in the contract so that each party knows the procedure.
The potential scope of disagreements involving some aspect of a vendor contract can
range from small claims to large litigious situations and appeals. ~ost organizations and
vendors do not want to become involved in lawsuits. Litigation can entail lengthy delays,
high costs, unwanted publicity and ill will. Reflecting on the earlier content explaining
contract terms, vendor contracts should have a dispute resolution claus~a specified
protocol for handling any claims that may arise during the contract term.
Alternative dispute resolution (ADR) is a term encompassing a variety of techniques for

resolving disputes without litigation. Common ADR procedures found in facility
management vendor contracts include management escalation, mediation, arbitration or
some combination.
-• Management escalation - it is generally thought that the quality of the contract
management is often the difference between issues being quickly and easily
resolved and issues swirling and turning into a major dispute. The contract itself
should make it clear who is responsible for contract management on both sides and
by allowing for appropriate management escalation of issues.
Throughout contract execution, the parties should clearly document all changes and
address problems. The first action is for the facility manager and the contractor to
discuss and try to reach understanding and agreement on how to resolve possible
problems. Only if these two main players cannot reach agreement should it be
escalated to the next level of management. Resolving issues through private
management discussions is preferable to allowing them to grow into something
larger.
• Mediation - is a method in which the parties to a dispute reach a voluntary
settlement with the help of a skilled facilitator. Mediation proceedings are
confidential and private. Mediation may be binding or not.
In nonbinding mediation, the mediator's role is advisory. The mediator may offer
suggestions, but resolution of the dispute rests with the parties themselves.
© 2020 IFMA Edition 2020, Version V2017PAFB_1 ,1

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A binding mediation process can often achieve a final resolution to a dispute in one
session. This method allows the parties to directly participate in the mediation
process from beginning to end with the assistance of a trained mediator. If at the
end of the mediation session, any issues remain unresolved, the mediator makes
the final and binding decision(s). An advantage of binding mediation is that it is
carried out without the formality, extra expense and extra time needed for
arbitration.
• Arbitration- is submission of a dispute to one or more qualified and impartial
persons for a final and binding decision. Arbitrators may be attorneys or persons
with expertise in a particular field. In arbitration, the parties control the range of
issues to be resolved by arbitration, the scope of the relief to be awarded and many
of the procedural aspects of the process.
Arbitration is less formal than a court trial. The hearing is private. Few awards are
reviewed by the courts because the parties have agreed to be bound by the
decision of their arbitrator. In some cases, it is prearranged that the award will be
only advisory.
There needs to be a conflict resolution clause and process in the contract documents. lt
needs to be very specific and must specify graduated terms and certain processes for
specified dollar amounts. A graduated clause might specify binding mediation to settle all
disputes under a specified dollar amount and arbitration for all disputes over a specified
dollar amount. The goal of all of these alternatives is to address the needs of parties
involved in contract disputes and avoid court proceeding.
An additional caveat about the dispute resolution clause in the contract deals with the
selection of the mediator and arbitrator. There is a definite advantage to having a mediator
or arbitrator who has extensive experience in the particular field. As an example, if the
dispute is of a specialized nature such as green building/remodeling, it would be wise to
have a mediator or arbitrator who has experience in the construction industry and
sustainability.
Dispute resolution is often described as a continuum:

• At one end of the continuum, although not very common, disputes never arise.
• At the other end of the continuum, a solution is imposed upon the parties to a
dispute by the public courts.
• The various dispute resolution alternatives are found in between.
In Exhibit 6-72 common dispute resolution clauses are listed.

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Exhibit 6-12: Common Types of Dispute Resolution Clauses for FM Contracts
• Management escalation
• Mediat ion (non-binding)
• Binding mediation
• Mediation, premeditation, binding mediation or arbitration elective; parties share
expenses
• Mediation, premeditation, binding mediation or arbitration elective; parties share
expenses up to the binding mediation or arbitration award
• Arbitration, split fees and costs
• Arbitration, prevailing party receives fees and costs
• Arbitration, three arbitrators, for anticipated large disputes
• Performance. guidelines and arbitration
• Performance. guidelines and binding mediation
• Binding mediation or arbitration, graduated processes
Provisions for:
Disputes less than (amount)
Disputes over (amount) but less than (amount)
Disputes over {amount)
As displayed, the types are self-explanatory. What is drafted in the actual clause is key. In
the United States and many other countries, when parties agree to an ADR process to
settle all disputes they give up their right to a trial by a judge or jury. All contract dispute
clauses generally include verbiage acknowledging that the parties are knowingly forfeiting
their right to use the court system.
Example: Mindful of the high cost of litigation, not only in dollars but also in time and energy,
the parties intend to and do hereby establish the following out.-of~court alternate dispute
resolution procedure to be followed in the event any controversy or dispute should arise out
of or relating to this contract or relating to any change orders or other changes or addendums
to this contract.
This verbiage should not be construed as legal advice. lt is shown here merely as an
example. Given the significance of including a statement like this in a contract
organizational legal counsel should always review and approve a dispute resolution clause
before a contract is signed.
Alternative dispute resolution allows parties to customize the process. A facility manager
needs to understand the specific terms of the dispute resolution clause in a vendor

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contract. Should the situation arise that a contract disagreement necessitates dispute
resolution, the facility manager should work to ensure that
• The resolution process complies with the terms in the agreement.
• The cause of the dispute is clarified and confirmed.
• The dispute is resolved with little or no negative impact on the work schedule or
inconvenience to occupants.
• The dispute does not negatively impact other work being done.
Dispute resolution provides the potential for a simpler, more expeditious and less
expensive process than litigation through the court system. Well executed, it has the
potential to yield a more fair and equitable decision or award than would be rendered
through litigation.
Scenario:
Lovely Landscapes has been contracted by you the facility manager to do a make-over pf the
front garden and grounds area of Affiliate Accounting's offic:e block.
Three conflict situations have arisen:

1. Lovely Landscapes cannot provide the plants that were specified in the original signed
contract. They now inform the facility manager that the plants that they can source are
more expensive. This change has not been authorized by anyone.
2. Due to rain, Lovely Landscapes is running behind schedule and won 't be finished in time
for the executive management visit. You agreed that under no circumstances could the
date of completion be moved out.
3. Lovely Landscapes has brpken a large picture window at the front of the building, but is
denying that it was thern.
Which ADR wou ld you use to address each situation and why?
Discussion Question
SW<>tofio: t ~!Y l¥!d~-~o<$rn.So OO~n <;.O.r;~ie<_1 P~· :;o1.1 (tiE!"facWty <lW~ge~

to 00 a malo:.e-·O'Wf ot iM lfOllt-!)atden af!.d wou-nd~ <~ret~ <>!Affl1iatcAccc•IJI'i~ng's
Office!i.ot:j{
Th!mtt:O!'I!Iict s lt(lll.{lM$ have arisen:
A. l~mly ~nd!ic.aP~ ~as· o01 pt<:Md~C th£l ·p~M$1ha>wer~ · ag·re~d to:lh~{
h~ \M!«med )'0<.1 t.!\011 th~ pla!:'ts are moree-.:p~ns;ve thari the origr_ r.al
cfmiceand rnattru-s \...,;11 be fur your cc;,;;.t
:S. o.ue·to rain, Lovely landscapesis<ufwi!Jg 0011\Mscheilule-arrd won't be
ti~lj~IJM lfllir'r!"" lOt" IM~J:~CU!llle mar'Jape-r!lrell \'lSit Yooilglt~ed !hi!:II.Jtrder
no citCl!Ol'Stanc&S tWJ:k! the cl•*~ ot .-::~:>rnjiletiW!be m~ed 001
C. Lo-mly Lan-~..+sc apes ha.-e brok(lfl a. targe Pit:tura ll,irido>Nat the lroot.ot'!ht!
buHding. tan at~ d~.nying lhal ii. 11/a:s.ihem

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1. Responsibility for contracts requires knowledge of contract terminologies. What does
the term competent party mean?
a. A responsible minor, who fully understands the nature and consequences of their
actions in the contract.
b. A colleague who can sign a contract on behalf of the facility manager who is not
available at the time.
c. An individual who has the legal authority to sign on behalf of an organization or
another person.
d. A facility manager who doesn't fully understand the legalese, but has successfully
used the same contractor numerous times.
2. What type of contract requires a contractor to successfully perform the contract and
deliver supplies or services for an agreed price?
a. Cost-Reimbursement Contract
b,'• IDQLI Contract
c. Fixed Price Contract
d~ Open Book Contract
3. What is NOT a typical element of a contract?
a. Mutual agreement
b. Consideration
c. Competent parties ·
d. Security services
4. What does a service specification establish?
a. The minimum level of service acceptable to meet requirements

b. The maximum level of service acceptable to meet the customer requirements
c. Agreement details, identification of parties and effective date
d. Dispute resolution guidelines
· 5. What is NOT typically included in service level agreements?
a. The formal requirements and targets

b. The right to terminate if KPis are not achieved
c. Description of the scope of services to be provided
d. RFP response procedures and deadlines

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6. Which statement best describes risk assessment?
a. Ongoing management activities that set the basis for how risk is viewed
b. The identification and measurement of risks, considering likelihood and impact
c. The identification and measurement of risks, considering likelihood and impact
d. Defining ways to transfer ownership of a risk to a third party
7. What is included in Reputational Risk?
a. Discrimination against minorities

b. Categorization of risks
c. Risk probability and impact
d. Correct risk response plan
8. Dispute resolution is often described as a continuum. Which statement does NOT

apply to this description?
a. At one end of the continuum, disputes never arise

b. At one end of the continuum, a solution is imposed upon the parties to a dispute
by the public courts
c. The various dispute resolution alternatives are found in between
d. Conflict is not an inevitable part of interactions with vendors. lt can and should be
prevented.
9. What is the submission of a dispute to one or more qualified and impartial persons for
a final and binding decision known as?
a. Arbitration
b. Graduated process
c. Management escalation
d. Binding mediation
10. What is it called when the final resolution process allows the parties to work together
with the assistance of a trained facilitator?
a. Arbitration
b. Mediation
c. Management escalation
d. Graduated process

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Progress Check Question Answer Key
Chapter 1: Finance and Business in the FM

Organization
Finance and Business Overview
1. d
2. b
3. a
4. c
5. 'c
Fundamental Accounting Concepts

1. c
2. c
3. a
4. c
5. c
Chapter 2: Financial Management of the

FM Organization
Budgets and Budgeting Basks
1. a
2. c
3. b
4. a
5. a
Financial Statements
1. c
2. a

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3. a
4. b
5. a
Chapter 3: Fundamental Cost Concepts,

Containment Strategies and Chargebacks
in the FM Organization
Fundamental Cost Concepts
1. b
2. d
3. c
4. a
Cost-Containment Strategies
1. b
2. b
Chargebacks
1. b
2. a
3. c
4. b
Chapter 4: Business Cases, Support ing

Documentation and Financial Reports
Developing a Business Case
1. a
2. ' d
3. a
4. a
5. c

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Business Case Finandal Data

1. c
2. b
3. a
4. d
5. c
Chapter 5: Procurement in the FM

Organization
Procurement Procedures
1. c
2. b
3. a
4. a
5. a
Procurement and Fadlity Management Outsourdng

1. c
2. a
3. b
4. b
5. b
Chapter 6: Contracts in the FM

Organization
Contract Development, Management and Oversight
1. c
2. c
3. d

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Contract Administration
1. a
2. d
Analyzing and Interpreting Finandal Contract Elements

1. c
2. d
Resolving Vendor Conflicts

1. d
2. a
3. b

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ENpooHri.. Fxlllty~lfWDIIdwid•
Appendix

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Ilntematlon• l Farllltv M• nagement ,o\nMiatlon
Bibliography
30 Ready-to-use Scope of Work Templates & Examples. (2019, May 03).
Retrieved from http://templatelab.com/scope-of-work-templates
Wright, T. C. (2018, April 13). Scope of Work vs. Statement of Work.

Retrieved from https://yourbusiness.azcentral.com/scope-work-vs-statement-
work-17353.html
Anderson, D. Brent, Jeffrey L. Campbell, Carol E. Farren, Christopher P. Hodges, Jon
Hosford, Scott Hulick, Diane H. MacKnight, Jon Martens, Anne M. Moser and
James P. Whittaker. The Business of FM. Houston, Texas: International Facility
Management Association (IFMA), 2006.
Ansari, Shahid and Carol Lawrence. Cost Measurement Systems: Traditional and
Contemporary Approaches. New York: lrwin/McGraw Hill, 1999.
Anthony, Robert N. and Vijay Govindarajan. Management Control Systems, 11th
edition. New York: lrwin/McGraw Hill, 2004.

"Asset Lifecycle Model for Total Cost of Ownership Management-Framework,
Glossary and Definitions," www.ifma.org/l<now-base/fm-knowledge-

base/knowledge-base-details/asset-lifecycle-model-for-total-cost-of-
ownership-management.
Atkin, Brian and Adrian Brooks. Total Facilities Management, 3rd edition. Chichester,
United Kingdom: Wiley-Biackwell, 2009.
Baker, H. Kent and Gary E. Powell. Understanding Financial Management: A Practical

Guide. Malden,Massachusetts: Blackwell Publishing, 2005.
Barringer,H. Paul. "A Life Cycle Cost Summary,"Barringer & Associates, Inc., 2003,
www.barringer1.com/pdf/LifeCycleCostSummary.pdf.
Blocher, Edward J., Kung H. Chen and Thomas W. Lin. Cost Management: A Strategic
Emphasis, 2nd edition. New York: lrwin/McGraw Hill, 2002.
"Business Contracts Legal Terms and Definitions Glossary,"

www.businessballs.com/ businesscontractsternisdefinitionsglossary.htm.
Clayton, John. "Crafting a Powerful Executive Summary." Harvard Business School
Working Knowledge, hbswk.hbs.edu/archive/3660.html.
Cotts, David and Edmond P. Rondeau. The Facility Manager's Guide to Finance and
Budgeting. New York: AMACOM, 2003.

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IFMA 's Finance and Business Course ~tl~ ,. E.~.8~.~.,.
~m~ri.. FKIIItyPnotusionai&Wotllhold•
Cotts, David G., Kathy 0 . Roper and Richard P. Payant. Facility Management
Handbook, 3rd edition. New York: AMACOM, 2010.

Epstein, Shari F. Benchmarks V, Annual Facility Costs-Research Report #30.
Houston, Texas:
International Facility Management Association (IFMA), 2008.
Fuller, Sieglinde. "Life-Cycle Cost Analysis (LCCA)," National Institute of Standards

and Technology (NIST), www.wbdg.orgjresources/lcca.php.
Garrison, Ray H. and Eric W. Noreen., 1Oth edition. Boston: McGraw Hill/lrwin, 2003.
Harvard Business Essentials. Finance for Managers. Boston, Massachusetts: Harvard

Business School Press, 2002.
Hoots, Michael L. Finance for Facility Managers: An IFMA Competency-Based Course.

Houston, Texas: International Facility Management Association (IFMA), 2006.
Horngren, Charles T., George Foster and Srikant M. Datar. Cost Accounting, 12th
edition. Upper Saddle River, New Jersey: Pearson Prentice Hall, 2006.
Kieso, Donald E., Jerry J. Weygandt and Terry D. Warfield. Intermediate Accounting,
10th edition. New York: Wiley, 2001.

Legal HelpMate. "Legal Dictionary,"
www.legalhelpmate.com/legal-dictionary-result.aspx?legai=Contract-Law.
"Life-Cycle Cost Analysis Primer," Office of Asset Management, U.S. Department of
Transportation, August 2002, isddc.dot.gov/OLPFiles/FHWA/01 0621 .pdf.

Martin, David M. The A-Z of Facilities and Property Management. London:
Thorogood Publishing, 2006.

McWatters, Cheryl S., Dale C. Morse and Jerold L. Zimmerman. Management
Accounting: Analysis and Interpretation. Boston: McGraw-Hilllrwin, 2001.
Melaver, Martin and Phyllis Mueller, editors. The Green Building Bottom Line: The
Real Cost of Sustainable Building. New York: McGraw Hill, 2009.
Mowen, Maryanne M. and Don R. Hansen. Management Accounting: The

Cornerstone for Business Decisions. Mason, Ohio: Thomson/South-Western,
2006.
Nutt, Bev and Peter McLennan, editors. Facility Management: Risks and
Opportunities. London: Blackwell Science, 2000.
©2020 IFMA Ed ition 2020, Version V2017PAFB_1.1

All rights reserved
Record Information Services. "Glossary of Legal Terms,"
www.public-record.com/ content/general/legalterms.asp.
Rondeau, Edmond P~, Robert Kevin Brown and Paul D. Lapides. Facility
Management, 2nd edition. Hoboken: New Jersey: John Wiley andSons, 2006.
Raper, Kathy 0., Jun Ha Kim and Sang-Hoon Lee. Strategic Facility Planning: A
White Paper on Strategic Facility Planning, Houston, Texas: International

Facility Management Association (IFMA), 2009.
Schmidt, Marty J. Business Case Essentials, 3rd edition. Boston: Solution Matrix Ltd.,
2009.
Theriault, Michel. "Sparring Partners." Building Operating Management, May 2010.
United States Department of Justice Antitrust Division. "Price Fixing, Bid Rigging,
and Market Allocation Schemes: What They Are and What to Look For,"
www.justice.gov/atr/public/ guidelines/211578.pdf.
Van Horne, James C. and John M. Wachowicz, Jr. Fundamentals of Financial
Management, 11th edition. Englewood Cliffs, New Jersey: Prentice-Hall Inc.,

2004.
Wright, T. C. (2018, April 13). Scope of Work vs. Statement of Work. Retrieved from
https://yourbusiness.azcentral.com/scope-work-vs-statement-work-
17353.html
Zechnich, David and Chris Lee. "Contract Risk and Compliance For All (Economic)
"Seasons." Financial Executive, September 2009,
www.deloitte.com/assets/Dcom-UnitedStates/
Locai%20Assets/Documents/AERS/us_aers_foct_crc_FEireprint.pdf.

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Glossary
AcceJerated depreciation
accelerated depreciation methods have a steadily decreasing charge so that assets

are depreciated quickly in early years, which can better match the usage patterns of
many assets. Items that have increasing maintenance costs will have more balanced
total costs if accelerated depreciation is applied. Accelerated methods include the
sum-of-the-years'- digits method and the declining balance method.
Accounting
A monetary reporting system used to inform interested parties about a firm's

business transactions.
Accrual basis accounting
Revenues recorded when earned and expenses recorded when incurred .
Activity method
Unlike the straight-line method, the activity method is not based on the passage of
time but on a measure of productivity relative to the total expected productivity for
the asset.
Amortization
The systematic reduction of a lump-sum amount; the expense applies to intangible

assets, such as patents, franchises, leaseholds and goodwill, just as depreciation
applies to physical assets.
Asset
An object that retains value for a period of time after purchase such as a building or
a piece of equipment.
Balance sheet
A "snapshot" of a firm's financial position at a specific point in time.

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Benefit-cost ratio
Ratio in which the present value of an investment or project is divided by the
investment's or project's initial cost; a ratio of greater than one indicates that the
investment or project is viable.
Budget
A formal, numerical expression of how an organization expects to operate for a
defined period of time. Identifies the resources and commitments needed to set
and achieve specific goals over a period, as well as the sources of the funding to
provide those resources.
Budget closeout
Budget closeout coincides with the end of the fiscal year. As with many aspects of
budgeting, budget closeout can be simple or complex. Some organizations may
have formal authorization requests to close; others may have a more informal
closeout process, signaled when all administrative actions have been completed
and expenses have been posted to accounts. Simple or complex, the process
typically requires coordination between the facility manager and the finance
department.
Capital asset
A depreciable item whose cost is significant to the company, who's expected life-
cycle exceeds one accounting period and is typically much longer.
Capital budget
Shows financial impacts resulting from major, long-term, non-routine expenditures
for items like property, plant and equipment.
Cash basis accounting

Recording accounting transactions for revenue and expenses when corresponding
cash is received or payments made. Cash basis differs from accrual in that, accrual
focuses on anticipated revenue and expenses. The main difference is the timing of
when revenue and expenses are recognized.

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Cash flow
Net cash before financing, including acquisitions.
Chart of accounts
Numerical list of all standard items that an accounting system tracks: assets,
liabilities, net assets, revenues, expenses.
Closing fiscal period
Process of transferring account balances from sub-ledgers to trial ba.lance account

at the end of an accounting period. lt is typically associated with income statement
accounts.
Cost
The amount paid or charged for the acquisition, maintenance, production or use of
materials or services.
Cost center
An organizational unit in which budgetary funding is used to sustain operations.
Cost of operation
The total costs associated with the daily operation of a facility. lt includes all
maintenance and repair costs, both fixed and variable, administrative costs such as,
clerical and timekeeping, general supervision such as, labor costs, janitorial,
housekeeping and other cleaning costs, utility costs and indirect costs for example,
all costs associated with roadways and grounds. Could also include the amortized
or depreciation costs of capital assets.
Cost of ownership
The cost to the owner of owning the building, servicing the existing debt and
receiving a return on equity. This also includes the cost of capital improvements,
maintenance and repair, operations and disposal.
Credit

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Em~II"'FadlltyProhsllonalsWorhlwid•
A financial accounting term, not to be confused with debt. Credit is a positive cash
entry in a bank account; an amount due to be paid to or already residing in an
account. The opposite of debit.
Creditor
A lender of money or one to whom funds are owed.
Currency conversion factor
The net rate at which the demand organization converts revenues and expenses
from one currency into another. Often an internally agreed rate set at the start of
the budget year so as to remove the effect of currency fluctuations from
operational budgets; almost never the same as the nominal exchange rate.
Debit
An amount due to be paid from or already paid from an account. The opposite of
credit.
Debtor
An individual, company or other organization that owes debt to another individual,

company or organization, the creditor. Almost always compensates a creditor with a
certain amount of interest, representing the time value of money.
Depreciation
A noncash charge against assets, such as cost of property, plant and equipment
over the asset's useful life. An expense associated with spreading or allocating the
cost of a physical asset over its useful life.
Discount rate
The rate at which future cash flows are discounted because of the time value of
money; the interest rate used to compute a present value amount.
Double-entry accounting
©2020 IFMA Edition 2020, Version V2017PAFB~ 1.1

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IFMA 's Finance and Business Course tt~-lj~ IFMAm
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An accounting system in which each transaction is recorded in at least two places: a

debit to one account and a credit to another account. Also known as dual-entry
accounting.
Earnings before interest and taxes (EBIT)
A measure of an organization's earning power from ongoing operations, equal to

earnings before deduction of interest payments and income taxes.
Earnings before interest. tax. depreciation and amortization (EBITDA)
An approximate measure of an organization's operating cash flow based on data

from the demand organization's income statement. Calculated by looking at
earnings before the deduction of interest expenses, taxes, depreciation and
amortization.
Equity
The ownership interest in an organization's assets after deducting all of its liabilities
or the difference between the assets and the liabilities or net worth. Also referred to
as shareholder's equity or net assets.
Equivalent annual cost (EAC)
The cost per year of owning and operating an asset over its entire life span. This
measure facilitates comparisons of the cost-effectiveness of various assets.
Expenses
Money outflow that represents goods and services consumed in the course of
business operations.
Feasibility study
Study of a planned scheme or development, the practicality of its achievement and

its projected financial outcome.
Fiancial leverage
Refers to the use of borrowed money in acquiring an asset.

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Fiancial statements
Documents, for example, balance sheet, income statement, statement of cash flows,
statement of retained earnings, which report financial information about an
organization.
Financial accounting
Relates to the preparation of financial statements for the demand organization as a

whole. May be used by owners and other internal parties but primarily intended for
external parties such as creditors, investors, government agencies, unions and
suppliers. Information is developed according to specific accounting standards.
Financial Accounting Standards Board (FASB)
The primary financial reporting standards-setting body in the United States; an

independent, non profit group under the authority of the U.S. Securities and
Exchange Commission (SEC).
Financial ratios
Analytical tools examining the relationship of one quantity to another. Used to

show underlying financial conditions and to help judge the financial health of an
organization.
Financial reporting
The process of presenting information about an entity's financial position,

operating performance and cash flow for a specified period.
Fixed asset
An asset, such as property, plant or equipment, which has a long life and cannot be
expensed in a single year or cannot be easily converted into cash.
Fixed costs
Costs that remain unchanged in total for a given time period, despite wide changes
in the related level of total activity, for example, a licensing fee or taxes.
Fixed expenses

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En.pow.rlnt:FacllltyProfusioruloWoofdwld•
Expenses over which a company has little control.
Forecast
Comprehension of and the ability to display, how a unit will affect the cash flow of
an organization.
Generally accepted accounting principles (GAAP)
In the United States, rules, procedures and conventions used to help govern an
organization's accounting operations and the preparation of financial statements.
Gross profit
A company's profit before operating expenses, interest payments and taxes. Gross
profit is also referred to as gross margiri.
Income statement
Accounting document that represents the company's revenue and expense

transactions for the reporting period.
Incremental budgeting
A budget method that extrapolates from historical data; next year's,budget is

constructed by starting with the current year's budget as a baseline and then
adjusting each line iterri for expected changes.
Insurance
A system to protect persons, groups or businesses against large financial loss by

transferring the risks to an insurance company or other large group who agrees to
share the financial losses in exchange for premium payments.
Intangible assets
Assets that have no physical substance. Intellectual property, items such as patents,
trademarks, copyrights, business methodologies, goodwill and brand recognition
are all common intangible assets.
Internal rate of return (IRR)

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~tD~ ~. E.~.8~. " ""
EmpotoNriiiJFadlltyProfusl~l s Wooidwldl
The interest rate at which lifetime dollar savings equal lifetime dollar costs, after the
time value of money is taken into account. This rate is then compared to the
minimum acceptable corporate rate of return to determine if the investment is
desirable. This is one of the most important tools for facility managers as it is used
frequently to compare competing investment proposals.
International Financial
Reporting Standards (IFRS)
A set of international accounting and reporting guidelines and rules that

organizations can follow when compiling financial statements.
Journal
A daily, chronological record of business transactions.
Journal entry
An entry to the journal, recording a financial transaction, as a debit and then as a

credit, by date. Journal entries are eventually posted to a ledger.
Lease
A contract between the owner of real property, the lessor and another party, the
lessee, for the possession and use of the property for a specified term in return for
rent or other valuable consideration.
Ledger
Accounting book of final entry, recording journal transactions under separate

accounts. Sub-ledgers provide detailed information about individual accounts.
Liabilities
Debts a business incurs that are expected to result in future negative cash flows to
the firm, for example, salaries and tax liabilities. Can also include an assessment of
net risk items, for example bad debts.
License

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Distinguished from a lease, a license is the degree of real property interest the
signer has in a property. A lease provides a higher level of legal interest in a
property than a license.
Life-cycle
The useable life span of a product, process, facility, tool, system, technology, natural
resource and the like. lt is based on the presumption that all things go through a
continuous cycle beginning with creation, use and disposal and then ideally start all
over again.
Life-cycle costing
Process of determining, in present-value terms, all costs incident to the planning,

design, construction, operation and maintenance and disposition of a structure over
time.
Liquid assets
Cash or assets that can be immediately converted to cash or are easily convertible
to cash.
Management accounting
Relates to the provision of accounting information for an organization's internal

users; designed to support the information needs of managers. Unlike financial
accounting, management accounting is not bound by any specific accounting
standards. Also referred to as managerial accounting.
Net assets
An organization? final worth. They are value that remains from the assets minus the
liabilities.
Net present value (NPV)
The difference between the present value of cash inflows and the present value of
cash outflows over a period of time that occur as a result of undertaking an
investment project.

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Operating budget
A short-term budget projecting all estimated income and expenses during a given
period, usually one year. Excludes capital expenditures, they are long-term costs.
Opportunity costs
Represent "lost" opportunities, measured in monetary units, which could have

accrued to the entity by pursuing an alternate course of action.
Payback period
Refers to the length of time it will take to recoup the initial investment cost. In other
words, how long it takes to earn back the funds spent on a project.
Period
Time interval covered by a financial statement; typically, one year for external
statements but can be less, month or quarter, for internal statements.
Present value (PV)
This method is used to compare costs; all cash flows are converted to their present
value or the value of past and future dollars corresponding to today's value.
Profitability index (PI)
The ratio of the present value of the cash inflows to the initial investment cost.
Proforma
A document provided in advance of shipment, showing the description and

quantity of items without terms of payment, in order to initiate a purchase order.
Proforma statement
A financial statement prepared as a projection of the future. Attempts to present a

reasonably accurate idea of a financial situation if present trends continue or certain
assumptions hold true.
Property loss

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The loss in the book, balance sheet, capital value of an asset due to changes in
market conditions, requiring a devaluation in the asset values and thus a reduction
in the value of the balancing equity value.
Property tax
A tax levied against owner, lessor or occupier of any property based on an

assessment of the value of the property, its public infrastructure requirements or
some other determining factor.
Revenues
Cash or properties received in exchange for goods or services.
Statement of cash flows
A financial statement used to show cash levels across the operating period so as to
ensure that predicted liabilities due to be paid at any given time do not exceed the
ability to pay.
Statement of shareholders' equity
A financial statement that starts with t he balances from the end of the prior period
and shows changes due to net income, loss and dividends for the period or any
new issuances or repurchases of stock.
Straight-line depreciation
Straight line depreciation is the default method used to recognize the carrying
amouht of a fixed asset evenly over its useful life. lt is employed when there is no
particular pattern to the manner in which an asset is to be utilized over time. Use of
the straight-line method is highly recommended, since it is the easiest depreciation
method to calculate, and so results in few calculation errors.
Time value of money principle
A dollar in hand is worth more than a dollar to be received in the future because it
can either be consumed immediately or put to work to earn a return.
Trial balance

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Total of all debits and credits; if debits do not equal credits, an error has occurred
for example, mistake in entry, omission, double posting.
Variable costs
Costs that change in total in proportion to changes in the related level of total
activity. For example, fuel costs depend on mileage driven.
Variable expenses
Expenses that fluctuate and may be influenced by factors such as occupancy levels.
Working capital
The funds required to service the worst cash flow position plus any contingency
provision deemed necessary.
Zero-based budgeting
A budget method in which the continued existence of items must be justified both
financially and operationally before they are included in the new budget.

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IFMA's Finance and Business Course ~tl~ ~. E.~~:. .,.
~..piiONrlntFXIllly~<OioWoridwhl•
Index
accelerated depreciation, 120
accounting, 9
accounting cash basis, 9
accounting cycle, 38
accounting double-entry, 11
accounting principles for financial statements, 42
accounting records, 25
accounting standards, 23
accounting, accrual basis, 9
accounting, financial, 11
accounting, goals of accounting system, 16
accounting, management, 13
accounts payable journal, 31
accounts receivable journal, 31
accrual basis accounting, 9
acid-test ratio, 130, 139
activity method, 119
activity-based budgeting (ABB), 79
activity-based costing (ABC), 164
activity-based costing advantages/disadvantages, 167
activity-based costing allocation, 166
activity-based costing apportionment, 167
agreement to enter into the contract, 269
allocation base, 156
alternative dispute resolution (ADR), 343
Amortization, 9
annual budget analysis, 85
annual work plan (AWP), 62
arbitration, 344
Asset, 9
asset management ratios, 131, 140
assets in chart of accounts, 26
audited financial statements, 99
authoritative budget approach, 54
average inventory turnover, 131, 140

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balance sheet, 9, 106

balance sheet assets, 106
benchmarking, 223
benchmarking, and business case, 223
Benefit-cost ratio, 9
benefits/costs, quantifying in business case, 210
best value, 221
bid rigging, 291
bid rotation, 292
bid suppression, 291
bilateral contract, 272
blanket purchase order (BPO), 278
budget, 9
budget analysis, 84
budget approaches, 54
budget assumptions, 57
budget closeout, 86
budget methods, 78
budget monitoring, 84
budget periods, 77
budget types, 61
budgetary controls in fraud control, 298, 320
budgeting, 52
budgets, expense projections, 75
budgets, revenue projections, 74
Business, 7
business case components, 200
business case sample, 201
business case, costs/benefits, 210
capital asset, 68
capital assets, 9
capital budget, 9, 68
capital expenditure, 68
capital investments, 211
capital investments and capital rationing, 215
capital investments and cash flow, 215
. capital investments and risk, 215

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IFMA 's Finance and Business Course ttlj~IFMAN
~ lntemationai F<><IIIty"4.,~ementAssoclatiGII
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capital investments and t ime value of money, 211

capital investments, independent vs. mutually exclusive, 214
capital rationing, 215
capitalization vs. expense, 121
cartel, 292
cash basis accounting, 9
cash disbursement journal, 31
cash flow, 9
cash flows, forecasting, 123
cash receipts journal, 31
change and transition, in facility management contracts, 337
change order controls, 297
chargeback systes, 186
chargebacks, 184
chargebacks, advantages and disadvantages, 185
chargebacks, facility manager's role, 191
chart of accounts, 9, 26
collusion, 290
combined budget approach, 55
combined budgeting, 56
combined iterative budget approach, 56
comparability, and generally accepted accounting principles, 24
competent parties, in contracts, 268
competitive bidding/tendering, 297
complementary bidding, 291
consideration, in contracts, 268
consistency, and generally accepted accounting principles, 24
contract administration, 300
contract closeout, 323
contract consideration, 268
contract considerations, 298
contract cost monitoring, 319
contract dispute resolution, 343
contract duration, 334
contract monitoring, 302
contract performance monitoring, 302
contract renewal options, 334

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~
IFMAN
lntftmatlonai FKIIItyManagementAss oclatlon
contract terms, 282

contracting mechanisms, 276
contracts, 267
contracts and e-mail, 272
contracts, agreement to enter into, 269
contracts, bilateral, 272
contracts, competent parties, 268
contracts, express, 272
contracts, fixed price, 278
contracts, fraud, 290
contracts, implied, 272
contracts, indefinite delivery
.
quantity,
)
line item, 280
contracts, labor hour/time and materials, 282
contracts, mutual agreement, 268
contracts, mutual right to remedy, 269
contracts, national buy, 281
contracts, open book, 282
contracts, performance-based, 276
contracts, prescriptive, 216
contracts, prevention of fraud and irregularities, 289
contracts, price fixing, 291
contracts, proper subject matter, 268
contracts, purchase orders, 277
contracts, risk management, 325, 326
contracts, service level agreements, 312
contracts, service specifications, 306
contracts, unenforceable, 272
contracts, unilateral, 272
contracts, void, 272
contracts, voidable, 272
cost, 10
cost accumulation, 160
cost allocation, 160
cost assignment, 160
cost containment, 172
cost drivers, 156
cost measurement systems, 159

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IFMA 's Finance and Business Course ttl~ ~.E.~.8:.~.,.
E,.,.._ri"'F•dfty~IJWorldwld•
cost monitoring, 319

cost object, 157
cost tracing, 160
cost, unit, 160
costing, job order, 162
costing, process, 163
costs, assigning to cost objects, 158
costs, differential, 169
costs, direct, 158
costs, fixed, 157
costs, indirect, 159
costs, mixed, 158
costs, opportunity, 169
costs, sunk, 170
costs, total, 158
costs, use in decision making, 169
credit, 10
cross-charging, 185
current ratio, 129, 139
debit, 10
depreciation, 10, 116
depreciation and tax rules, 120
differential costs, 169
direct costs, 158
dispute resolution, 343
documentation and record keeping in fraud control, 297
double-entryaccounting, 11
due diligence, and capital projects, 210
earned, in accrual basis accounting, 44
earnings before interest and taxes (EBIT), 11
earnings before interest, tax, depreciation and amortization (EBITDA), 11
equity, 11
European Committee for Standardization (CEN), 89
expense projections, 75
expenses, 11
expenses in chart of accounts, 27
express contracts, 272

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external financial statements, 99

facility management and cost containment opportunities, 173
facility management metrics, 137, 146
facility manager's role in finance/business, 7
facility manager's role in service specifications/service level agreements, 318
finance, 7
financial accounting, 11, 17
financial leverage, 11, 107
financial statement ratio analysis, 128, 138
financial statement, income statement, 103
· financial statements, 12
financial statements, balance sheet, 106
financial statements, notes, 115
financial statements, pro forma statements, 122
financial terminology, 8
fixed budgeting, 75
fixed costs, 12, 75, 157
fixed price contracts, 278
fixed price/fixed sum/lump sum contract, 278
forecasting, 52
forecasting cash flows, 123
fraud indicators, 293
fraud, bid rigging, 291
fraud, bid rotation, 292
fraud, bid suppression, 291
fraud, budgetary controls, 298, 320
fraud, cartels, 292
fraud, change order controls, 297
fraud, collusion, 290
fraud, competitive bidding/tendering, 297
fraud, complementary bidding, 291
fraud, documentation and record keeping, 297
fraud, irregularities during execution, 292
fraud, noncompetitive pricing, 291
fraud, payment for work not carried out, 292
fraud, phantom charges, 292
fraud, proper authorization, 296

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fraud, segregation of duties, 296

fraud, subcontracting, 292
full disclosure, 44
future value (FV), 210
generally accepted accounting principles (GAAP), 12
Generally Accepted Accounting Principles (GAAP), 23
geography and vendor delivery capability, in facility management contracts, 333
gross profit margin, 132, 141
hard costs, 156
historical cost, 43
IFMA FMP Credential Program, 1
implied contracts, 272
income statement, 12, 103
incremental budgeting, 12, 78
indefinite delivery quantity, line item contract (IDQLI), 280
independent vs. mutually exclusive capital investments, 214
indirect costs, 159
informal verbal agreement, 272
internal financial statements, 98
internal rate of return (IRR), 12, 217
International Financial Reporting Standards (IFRS), 13, 23
inventory purchases journal, 31
invitation to tender (ITT), 240
irregularities during execution, 292
job costing, 162
job order costing, 162
journal, 13, 31
journal entry, 13,31
journal, accounts payable, 31
journal, accounts receivable, 31
journal, cash disbursement, 31
journal, cash receipts, 31
journal, inventory purchases, 31
key performance indicators (KPis), 311
lease or purchase considerations, for capital assets, 121
ledgers, 33
liabilities; 13

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~~~~~IFMAm
~ lnternatlonaiFacllltyMan•~•mffttASsoc:tatlon IFMA 's Finance and Business Course
liabilities, in balance sheet, 106

liabilities, in chart of accounts, 27
life-cycle, 13
life-cycle costing, 13
liquidity/short-term debt ratios, 129, 139
management accounting, 13, 17, 18
management escalation, 343
matching principle, 119
mediation, 343
midyear budget analysis, 85
mixed costs, 158
Modified Accelerated Cost Recovery System (MACRS), 120
monthly budget analysis, 84
multinational budget considerations, 88
mutual agreement, in contracts, 268
mutual right to remedy, in contracts, 269
mutually exclusive vs. independent capital investments, 214
national buy contracts, 281
national buy/national standing offers, 281
nature of work, in facility management contracts, 331
net assets, in chart of accounts, 27
net present value .(NPV), 14, 216
net profit margin, 133, 142
noncompetitive pricing, 291
notes to financial statements, 115
one-time purchase order, 277
open book contract, 282
operating budget, 61
operating profit margin, 132, 142
operational expenses, 211
operational vs. capital budget, 70
opportunity costs, 169
outsourcing advantages and disadvantages, 257
outsourcing reasons, 256
outsourcing, facility management, 252
participative budget approach, 55
payback method, 217

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/Ff\1A 's Finance and Business Course ~tl~ ~.E.M.8~.-&.
Em""""'rlft1 Fao:Y1tyPnokulon.als Worldwlcl•
payment for work not carried out, 292

performance SOW, 307
performance specifications, 307
performance-based contracts, 276
phantom charges, 292
prescriptive contracts, 276
prescriptive specifications, 307
present value (PV), 14, 210
prevention of fraud and irregularities in contracts, 289
price fixing in contracts, 291
pricing and costing options, in facility management contracts, 333
pro forma statements, 122
process costing, 163
procurement, 232
procurement and facility management outsourcing, 252
procurement principles, 234
procurement process, 240
procurement, sustainable practices, 235
profitability ratios, 132, 141
profitability ratios, gross profit margin, 132, 141
profitability ratios, net profit margin, 133, 142
profitability ratios, operating profit margin, 132, 142
proper authorization, 296
proper subject matter, in contracts, 268
purchase order (PO), 277
quarterly budget analysis, 85
quick ratio, 130, 139
ratio analysis, 128, 138
ratio analysis, and facility management metrics, 137, 146
ratio analysis, asset management ratios, 131, 140
ratio analysis, liquidity/short-term debt ratios, 129, 139
ratio analysis, profitability ratios, 132, 141
ratio analysis, return-on-investment ratios, 134, 142
realizable, in accrual basis accounting, 43
realized, in accrual basis accounting, 43
recharging, 185
recognition, revenue, 43

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Em~ri ... FocllltyProfossiOIIIIIWCII'Idwld•
relevance, and generally accepted accounting principles, 24

relevant range, 157
reliability, and generally accepted accounting principles, 24
reputational risk, 337
request for proposal (RFP), 240
request for quotation (RFQ), 241
return on assets (ROA), 134, 143
return on capital employed (ROCE), 135, 144
return on equity (ROE), 134, 143
Return on investment (ROI), 134, 142
return-on-investment ratios, 134, 142
revenue, 14
revenue projections, 74
revenue recognition, 43
revenues in chart of accounts, 27
risk and capital investments, 215
risk assessment, 328
risk categorization, 327
riskidentffication,327
risk management, 325, 326
risk response, 330
risk, reputational, 337
risks in facility management contracts, 331
Sarbanes-Oxley Act (SOX), 98
scenario analysis, 226
scope of services, in facility management contracts, 331
sensitivity analysis, 225
service and resource flexibility, in facility management contracts, 335
service contracts, 304
. service failure, 336
service level agreements (SLA), 312
service specifications, 306
short-term debt ratio, 129, 139
soft costs, 156
state/cross-border benchmarking/budgeting, 89
statement of cash flows, 14, 112
statement of shareholders' equity, 15

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IFMA 's Finance and Business Course ttl~ ,.E.M.8~...,.
E,.poonririiFWIItyl'nlfuslonaloWorkholda
straight-line depreciation method, 119

strategic planning, 51
subcontracting, 292, 332
sunkcosts, 170
time value of money, 15, 212
total costs, 158
traditional cost measurement systems, 162
traditional costing, 162
Transfer of Undertakings (Protection of Employment) Regulations (TUPE), 337
trial balance, 15, 39
types of bonds, 305
unenforceable contracts, 272
unilateral contract, 272
unit costs, 160
variable budgeting, 75
variable costs, 15, 76
vendor company failure, 336
vendor conflicts, 341
void contracts, 272
voidable contracts, 272
weekly budget analysis, 84
working capital, 15
year-over-year analysis, 84
year-to-date analysis, 84
zero-based budgeting, 15, 78

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Acknowledgements

Gerard C. Dicola, CFM, SFP, FMP, Green Assoc

Alana F. Dunoff, FMP, IFMA Fellow

John Hickey, CFM

Christopher Hodges, PE, CFM, LEED AP, IFMA Fellow, FRICS

Cal Littlejohn, CFM

Jon Eldon Martens, FMP, SFP, CFM, CFMJ, IFMA Fellow

Aykean Matthews, MBA, CFM, FMP

Phyllis J. Meng, CFM, SFP, IFMA Fellow

Anthony Miele, CFM, FMP

Joel Orton, CFM, FMP

Osama Othman, MBA, BSc, FMP, PMP

Samantha Rosenthal, MA, BA

Mark R. Sekula, CFM, FMP, SFP, LEED AP, IFMA Fellow

Guy Thatcher, CMC, FMP, IFMA Fellow

Brenda J. Varner, RCFM

©2020 IFMA Edition 2020, Version V2017PAFB_1.1

© 2020 International Facility Management Association

© 2020 IFMA Edit ion 2020, Version V2017PAFB_1.1

IFMA Credentials •.•.•••....••••.••...•••..•••••.••••..•••....•••••••••••..••..•••••.•.••.•••.••••••••••••••••••.•••••.•.•.• 1

© 2020 IFMA Edition 2020, Version V2017PAFB_1.1

© 2020 IFMA Edition 2020, Version V2017PAFB_1.1

Index ••••••••••••••.••••••••••.•••••••••.........................•.••••••••••.•••••••••••••••.•••••••••••••••• 369

About IFMA Credentials

1. The FMP is the

Facility Management Professional (FMP)

© 2020 IFMA Edition 2020, Version V2017PAFB_1.1

• Finance and Business in the Facility Organization

• Financial Management of the Facility Organization

• Fundamental Cost Concepts, Containment Strategies and Chargeback in the Facility

• Business Cases, Supporting Documentation and Financial Reports

• Procurement in the Facility Organization

• Contracts in t he Facility Organization

©2020 IFMA Edition 2020, Version V2017PAFB_1.1

Tht$ cotase eonsisls of the touo.,..·it-.g eltaptct'$:

,;;: ~!op :Ousln8sscases. that afe: ~ppof1adli•.roor~vanl .doeum~!=11~\0~ and

Facility Management (FM)

©2020 IFMA Edition 2020, Version V2017PAFB_1.1

Role of Facility Managers as Related to

According to the IFMA GJTA:

©2020 IFMA Edition 2020, Version V2017PAFB_1 .1

Chapter 1: Finance and Business in the

On completion of this chapter, you will be able to:

Finance and Business

~ eompi~OO~ t:1f t-"'i!"; chapti!r, ~o~1 ONitl b~ o:Jbll'!o 10~

The term demand organization is referenced throughout this document. ISO

© 2020 IFMA Edition 2020, Version V2017PAFB_1.1

©2020 IFMA Edition 2020, Version V2017PAFB_1.1

Finance and Business Overview

On completion of this lesson you will be able to:

This lesson contains the following topics:

'The ln1portartce o·f Berng Finance and Business

Financial data provides information to and interprets information from, the

©2020 IFMA Edit ion 2020, Version V2017PAFB_1.1

In organizations namely, public, not-for-profit, government, non-government organization

Finance and Business

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©2020 IFMA Edition 2020, Version V2017PAFB_1 .1

Accounting A monetary reporting system used to inform interested parties about

Amortization The systematic reduction of a lump-sum amount; the expense applies

Balance sheet A "snapshot" of a firm's financial position at a specific point in time.

Benefit-,Cos.t Ratio Ratio in which the present value of an investment or project is

Budget A formal, numerical expression of how an organization expects to

Cash flow Net cash before financing, including acquisitions.

Finance & Business Course

Finance & Business Course