The document discusses the benefits of establishing a major maintenance and capital replacement reserve fund for facilities management budgets. Such funds set aside money annually to cover future maintenance and replacement costs for capital assets. This helps address issues that arise under traditional budgeting where the FM department may run short if unexpected costs occur. A reserve fund levels out funding needs rather than causing large spikes. It also ensures the FM manager has resources to draw from for capital needs rather than having to constantly appeal for replacement funds. Overall, a reserve fund is presented as an excellent way for FM managers to properly maintain organizational assets into the future.

1. Do you need a major maintenance and capital replacement reserve fund?
By Nirvani Singh, Principal Consultant: TeamFM (Pty) Ltd
The budgeting process has progressed from a modest annual event to a multifaceted
assessment of an organisation’s plans and priorities. As globalisation becomes a norm, the
economy expands and the business environment is hypercompetitive, priorities and
forecasts become hard to define within planned time frames. Since budgeting in the current
economy involves working with less than ideal financial resources, priorities, compromises
and project deferments become part of the budgeting process. Facilities projects often
require high operating and capital costs and long-term financial commitments that go against
the organisation’s drive to retain as much financial flexibility as possible.
Against this backdrop it is very likely that when facilities managers are developing their
budget allocations, the priorities that drive their decisions are unlikely to be those of the
facilities management department, but rather those of the organisation as a whole. As a
result budget allocations especially Capital allocation is always a concern in facilities,
especially with Facilities Managers constantly appealing for replacement and renewal budget
allocations for their infrastructure, competing for monies perceived to be better spent
elsewhere within the organisation.
Facilities management budgeting is an intricate and challenging undertaking. Of the strategic
activities that a facilities management (FM) department accomplishes, budgeting is often the
one that requires the most focused and daily attention. Actually, budgeting has more direct,
noticeable, and concrete impact on the existence of the facilities management department
than any other activity. If correctly executed, it provides the backbone that enables the FM
department to function properly as opposed to coming up short at the end of the budget
cycle. Unfortunately the latter is fairly common and with traditional budget processes, the
organisation grants the FM department a fixed budget allocation at the beginning of the
financial year and expects that budget to cover unlimited services. Problems often tend to
arise with this process; for example major equipment fails and must be replaced, compelling
the FM department to set aside planned maintenance to pay for the new purchase. Another
example would be another department requesting an ad hoc request that requires a greater
amount of resources to implement than originally budgeted for. This strategy leaves the FM
department vulnerable to the usual allegations of non-delivery or costing the organisation too
much money. As a Facilities Manager, you cannot meet unrealistic “Russian roulette”

2. expectations and you do not have to if you have a major maintenance and capital
replacement reserve fund.
A major maintenance and capital replacement reserve fund can be typically described as,
“Monies set aside for use in the event of financial FM emergency or in the event of an
unforeseen request.” A major maintenance and capital replacement reserve fund may also
be assign monies to specific projects and improvements in the future. This “rainy day” fund is
specifically designed to keep an organisation’s facilities operational in the event of some
unforeseen circumstances that disrupt the effective running of the facilities or to provide it
with much needed funds when improvements have to be made.
Accounting principles segregates expenses according to different uses (Operating, Capital
Replacement, Capital Improvement, etc.). The concept of a major maintenance and capital
replacement reserve fund is based on the nature of the expense incurred by an organisation,
and is a fundamental principle of an organisation’s financial practice. The key principle is that
the money is collected and segregated, over a period of time, to cover the repair or
replacement cost of existing common elements; that is, capital assets already in existence in
the organisation (for example, the replacement of an existing air conditioning unit or a roof of
the building). This fund would be part of a long-term financial plan, and the idea of pre-
funding major maintenance to reduce spikes in maintenance spending is a fairly new
concept but the principle is very sound. The FM Manager would determine the FM capital
and replacement needs over a long time frame such as 25 or 30 years and then work
backwards to determine how much needs to be set aside every year to have the funds
available when needed. Once the fund is set it up it would start accumulating the required
funding but this should be reviewed every 5 years. The review may recommend increases or
decreases in the funding allocations based on current issues and conditions.
This strategy requires buy-in and support from senior management to put aside the
recommended budget amounts. A major benefit is that it levels out the funding rather than
the large peaks experiences in funding that typically occurs. With a FM reserve fund in
place, the FM Manager is unlikely to have to go begging for funding to deal with capital
replacement as the needs arise, as he or she would now have a fund to draw from. It also
ensures that one of the organisation’s largest assets is properly maintained.
While the idea of developing a major maintenance and capital replacement reserve fund is
still in its infancy, it is an excellent way for the FM Manager, to ensure that he or she has the

3. funding needed to manage and maintain the organisation’s FM assets for safety, reliability
and maintaining the value of the asset.
Next month: Setting up a major maintenance and capital replacement reserve fund