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Value Engineering Replacing Capital Assets

 During the 1940s, Willie Sutton developed a lucrative niche of robbing banks.  During his unapproved withdrawals, he sometimes made use of ingenious  disguises. Those were the days when grand larceny took place in a bank lobby  rather than the corporate boardroom. When a reporter asked him why he robbed  banks, Sutton is said to have replied, "That's where the money is."  

 That naturally leads us to the subject of managing the replacement of  condominium capital assets—that’s where the money is. Operating expenses, being repetitive and fairly  predictable, tend to be in the forefront of things. A reserve account can lurk  in the background, and if not managed properly, can cause all sorts of  unpleasant difficulties arising out of any cash shortfalls. “Well”, you might say, “that’s the job of our reserve study.” Truth be told, capital reserve studies, despite the best intentions of all  involved, are a notoriously underutilized resource.  

 When was the last time you compared your budgeted reserve expense for the last  two to three years against the actual? Why were some roofs not re-shingled and  the money used instead to resurface a parking lot? Did it come out of an  analysis of reserve study assumptions in the light of new information gained  from inspections? If so, what was the rationale behind that decision? Was it  documented?  

 The point here is that while we might all agree that it’s nice to take the reserve study off the shelf and review it regularly, there  seems to be little recognition of its true potential for being a proactive tool  for controlling, even reducing costs. Our experience has been that too many  association boards are, understandably in these times, focused on keeping  things going as they are. But replacing in kind may not always be the best  economic or technical solution.  

 Early during World War Il, the General Electric Company was faced with loss of  its overseas sources of raw materials. Substitute materials and new techniques  were desperately needed to produce more quality electrical products at reduced  costs. Enter Larry Miles, one of GE’s management engineers. Miles’ group asked four questions along the production line:  

 • What is it? (isolate the component)

 • What is its function?

 • What does it cost?

 • What else will do the job equally well?

 • What does that cost?

 Miles called the technique “value engineering.” Postwar, GE applied the same process to its domestic products, becoming an  industry leader. Miles’ challenge, of course, was to get management to question the way things had  always been done. If the technical function can be delivered equally well in a  different way at less cost, then make the change. We can probably assume Mr.  Toyota was listening.  

 When you think about it, doesn’t the capital reserve study provide just the framework for applying the  techniques of value engineering to managing the capital assets of condominium  associations? The components and their costs have already been identified. Why not ask the  remaining questions and extend the capital reserve fund study into a systematic  methodology that responds to the unique physical demands of the property that  sustains its market value?  

 Here are some possible scenarios. The annual reviews of the reserve study keep  sending up two red flags–the high cost of replacing and painting siding and seemingly continuous pavement  overlayment. A value engineering study might conclude that the return on  investment of replacing the wood siding with fiber cement material will be  realized after six years. The curb appeal of the siding is improved and the  exterior envelope sealed at reduced cost.  

 Another study might find that a less costly asphalt skim coating between  pavement overlayments will significantly extend the length of serviceability of  the roadway with no reduction in function. The cost per year for owning the  roadway has been reduced. The point is that continuing past practices,  replacing in kind, would have missed some opportunities.  

 The bottom line for the requisite revisiting of the capital reserve study is the  computation of the amount to plug into the coming year’s budget—the annual contribution to the reserve fund. In a perfect world, your  association has an asset management system that documents all maintenance,  inspections, repairs, and replacements. That kind of data will be used to  redefine the recommended annual contribution.  

 There are vendors who offer web-based asset management systems. For a fee, you  send your data to their server and they crunch the numbers for you. Frankly,  that seems like overkill for the condominium associations we work with. A more  straightforward methodology developed by a fellow engineer tests the level of  past contribution and actual funding over three year periods in reference to  the 20-30 projection of the capital reserve. It is a more results-directed approach to the comparison of budgeted versus  actual reserve expenses mentioned above. More easily recognized by the  condominium community, it is one that we will be adopting.  

 So the reserve study then can be just the first step. With the addition of some  proven techniques, it can become an ongoing tool to maintain a value sustaining  reserve fund. 

 

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