PowerPoint Presentation

Contract Maintenance ModelsTrends and OptionsPresented by:Walter RafinDTZ#0Good morning everyone and welcome.

I am really excited about being part of this panel and session. I am excited for two reasons, firstly because of the fact that I have been asked to be part of this great conference, but secondly, because as Chair of the NSW Branch of the FMA, I am so pleased to be partnering with TEFMA on this fantastic initiative.

Thank you for having me.

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Presentation Roadmap

Facilities Managementversus Facilities MaintenanceMaintenance Contract Model OptionsSummary#1Frequently, facility owners and managers outsource most if not all of the Operation and Maintenance (O&M) services for their buildings and systems. Even large institutions such as universities with in-house O&M staff, at some stage during their evolution, will often utilise outside service contractors to supplement their work. Many universities still have a service provider list of many hundreds of suppliers and others have evolved significantly since the era of in-sourcing services and have already moved to a consolidated group of suppliers or even single source fully outsourced models.The research required to design and obtain a good O&M service contract however, is often too confusing and time-consuming for the typical owner or manager to pursue. Facilities Maintenance and Facilities Management are two terms and models often bandied around without a true understanding of the underlying differences and model variations within each definition.In addition, within the service industry, believe it or not, there is no known standard or set of guidelines that clearly define the various service contract models available. My presentation today provides a high level overview of some not all, of the various trends and options available, including:Preventative Maintenance; Inspection;End-use or end-results contract.Full-coverage (Comprehensive); Full or Part-Labour or Full or Part Labour/Materials (Semi-Comprehensive); Repair Work Limit

I know that for many of you, I am preaching to the educated and/or the converted, but I am surprised how often many basic principles are not clear, especially if a Contract Manager comes from a non-technical background. So I trust that if nothing else, I can provide a service providers view of the pros and cons of each model.

Facilities Management versus Facilities MaintenanceFacilitiesManagementFacilitiesMaintenanceversusFacilities Management integrates all organisational processes, people and workplace. Includes property | space management, infrastructure, support services, administration and asset management

Facilities Maintenance sustains building and asset performance to design intent, to increase reliability, reduce equipment degradation, and sustain energy efficiency, whilst maintaining mandatory compliance requirements. #2So what I wanted to do firstly, is quickly dispel a common myth that Facilities Management and Facilities Maintenance are one in the same. The reason why I wanted to do this first up is because all of the models I will discuss today relate to facilities maintenance contracts and whilst there are many similarities, I will not talk about white collar FM contract solutions or models.Lets start with Facilities Management.Many industry associations such as the Facilities Management Association of Australia and The British Institute of Facilities Management (BIFM) have formally adopted the definition of Facilities Management (FM) provided by CEN the European Committee for Standardisation and ratified by BSI British Standards: Facilities management is the integration of processes within an organisation to maintain and develop the agreed services which support and improve the effectiveness of its primary activities. Facilities management encompasses multi-disciplinary activities within the built environment and the management of their impact upon people and the workplace.Effective facilities management, combining resources and activities, is vital to the success of any organisation. At a corporate level, it contributes to the delivery of strategic and operational objectives. On a day-to day level, effective facilities management provides a safe and efficient working environment, which is essential to the performance of any business whatever its size and scope. Within this discipline, facilities managers have extensive responsibilities for providing, maintaining and developing a myriad of services. These range from property strategy, space management and communications infrastructure to building maintenance, administration and contract management.Facilities Maintenance on the other hand, or Building Operation and Maintenance (O&M) is the ongoing process of sustaining the performance of building systems according to design intent, the owners or occupants changing needs and optimum efficiency levels. The O&M process helps sustain a buildings overall profitability by addressing tenant comfort, equipment reliability, efficient operation and regulatory compliance.Efficient operation, in the context of O&M, refers to activities such as scheduling equipment and optimising energy, comfort-control strategies and essential services inspection, testing, maintenance and certification, etc so that equipment operates only to the degree needed to fulfil its intended function. Maintenance activities involve physically inspecting and caring for equipment and assets. These O&M tasks, when performed systematically, increase reliability, reduce equipment degradation, and sustain energy efficiency, whilst maintaining mandatory compliance requirements.Facilities Maintenance as distinct to Facilities Management, is the delivery of technical services, utilising high level management techniques, systems and processes, providing advice to the client on lifecycle strategies, however not undertaking space planning, masterplanning, facility functional usage and strategic planning activities.These activities are left with the clients in-house FM intellectual teams.So whilst Facilities Maintenance is an obvious core element of Facilities Management, the contract models I discuss today are provided from the Maintenance perspective.

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Preventative Maintenance

Usually fixed PM feeNormally includes some corrective elements (e.g. coil cleaning)Not usually inclusive of repair or reactive works Asset owner takes on almost all riskResults in too little or too much maintenance unclear requirementsBudgeting & cost control difficultToo LittleToo much#3The commonly used and well known preventative maintenance (PM) contract is generally purchased for a fixed fee and includes a number of scheduled and rigorous activities such as changing belts and filters, cleaning indoor and outdoor coils, lubricating motors and bearings, cleaning and maintaining cooling towers, testing control functions and calibration, painting for corrosion control or in the case of fire and essential services, may also include the full Inspection, Testing, Maintenance and Survey (ITMS) process with replacement of tubes in exit and emergency lighting, pressure testing and recharging of portable appliances etc. Generally the contractor provides the materials as part of the contract. This type of contract is popular with owners and is widely sold. The contract may or may not include arrangements regarding repairs or emergency calls. The main advantage of this type of contract is that it is initially less expensive than either the full-service or full-labour contract and provides the owner with an agreement that focuses on quality preventative maintenance. A good PM contract can increase the lifecycle of assets, will normally reduce the frequency of equipment failure, should provide an opportunity to develop an asset database inclusive of asset condition, and can be used to monitor energy usage.However, budgeting and cost control regarding emergencies, repairs, and replacements is more difficult because these activities are often done on a time-and-materials basis. With this type of contract the owner takes on most of the risk. Without a clear understanding of PM requirements, an owner could end up with a contract that provides either too much or too little. For example, if the building is in a particularly dirty environment, outdoor cooling coils may need to be cleaned two or three times during the cooling season instead of just once at the beginning of the season. Another great example I often marvel at, is when an asset owner insists on a rigorous maintenance schedule being adopted for low risk, low cost items such as toilet exhaust fans. More often than not, most toilet exhaust fans pose little risk to an organisation if they fail. They normally have a shelf life of around 5 years, are a couple of hundred bucks to replace and are found on the shelf a half an hour down the road. Why would you pay several hundreds of dollars a year to maintain that items? Why not run to fail?It is important to understand how much preventative maintenance is enough to realise the full benefit of this type of contract.

Inspection (or Reactive) Based

Fly-by inspectionsUsually fixed inspection feeExcludes any corrective elements (e.g. cleaning filters)Reporting of issues onlyNot inclusive of repair or reactive works Usually least expensive optionLeast effectiveLeast effective?#4An inspection contract, also known in the industry as a fly-by contract, is purchased by the owner for a fixed annual fee and includes a fixed number of periodic inspections. Inspection activities are much less rigorous than preventative maintenance. Simple tasks such as changing a dirty filter or replacing a broken belt are not performed routinely, and for the most part inspection means looking to see if anything is broken or is about to break and reporting it to the owner.

The contract usually does not require provision of materials (belts, grease, filters, etc.) by the contractor, and usually does not include an agreement regarding other service or emergency calls.

In the short-term perspective, this is the least expensive type of contract. It may also be the least effective its not always a money-maker for the contractor but is viewed as a way to maintain a relationship with the customer.

A contractor who has this foot in the door arrangement is more likely to be called when a breakdown or emergency arises. They can then bill on a time-and-materials basis.

Whilst low cost is the main advantage to this contract, which is most appropriate for smaller buildings with simple systems or new assets, it does mean that the owners risk profile is substantially increased with reduced asset lifecycle, higher costs to repair and/or replace assets, higher administrative and transactional costs and certainly higher energy costs with little if any focus on energy efficiency.

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End Results (or Reliability)

Not yet widely usedAll or part risk transferRisk based on defined end result requirement (e.g. comfort)Payment based on resultsUsually tied to Guaranteed Maximum Price (GMP)Difficult to define parametersEND#5End-results or end-use contracting is the newest concept in service contracting and is not yet widely utilised. This maintenance model is based on the criticality of the asset to the operation of the facility, whilst considering factors such as equipment function, conditions, etc.

The contractor takes over all or part of the operational risk for a particular end result, as an example, such as comfort. In the case of say a HVAC contract, where comfort is the product being bought and sold. The owner and contractor agree on a definition for comfort and a way to measure the results. For example, comfort might be defined as maintaining the space temperature throughout the building from 210C to 230C for 95% of the annual occupied hours.

The contract payment schedule is based on how well the contractor achieves the agreed-upon objectives. This type of contract may be appropriate for owners who have sensitive customers or critical operational needs that depend on maintaining a certain level of comfort or environmental quality for optimum productivity. How risk is shared between the owner and contractor depends on the type or number of end results purchased. If comfort defined by dry-bulb temperature is the only end result required, then the owner takes on the risk for ameliorating other problems such as indoor air quality, humidity, and energy use issues.

Maximum contract price is sometimes tied to the amount and complexity of the end results purchased.

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Comprehensive

Fixed Fee all inclusive budget certainty Full risk transfer to contractorUsually subject to condition assessment and latent conditionsExcludes capital replacement, refurbishment and/or rehabilitationContractor manages risk via rigorous PM or not enough PMRISKLabourPartsSignificant administration savings#6A full-coverage service contract provides 100% coverage of labour, parts, and materials as well as emergency services. Owners may purchase this type of contract for all of their building equipment or for only the most critical equipment, depending on their needs. This type of contract should always include comprehensive preventative maintenance for the covered equipment and systems.

If it is not already included in the contract, for an additional fee the owner can purchase repair and replacement coverage for the covered equipment. This makes the contractor completely responsible for the equipment. When repair and replacement coverage is part of the agreement, it is to the contractors advantage to perform rigorous preventative maintenance on schedule, since they must replace the equipment if it fails prematurely. This is rare however as it is very difficult for a service provider to estimate how much to allow and normally results in a very costly proposition.

Fully comprehensive parts and/or parts and labour maintenance agreements were once popular amongst asset owners and service providers. These arrangements were used by asset owners to novate as much of the financial risk associated with their plant and equipment, over to the service provider maintaining the equipment. During the times when machinery loss insurance for contractors maintaining equipment on behalf of asset owners was readily available, this arrangement was quite successful for both parties and whilst this option is still a possibility, a service provider would have to factor a significant risk level into the preventative maintenance charges and potentially negate any benefit of this model in the process. In other words, whilst it is true that a significant risk is passed over to the contractor, there is no guarantee that the contractor does not retain a significant financial benefit if the risks are not realised in terms of financial cost exposure.

It is certain, that service providers are given additional motivation to over-maintain some equipment to minimise this exposure, thus in theory returning a plant reliability and lifecycle extension benefit to the asset owner. However, conversely, the ability to critically appraise the true impact of maintenance strategies, including the possible reduction in maintenance tasks, frequencies and strategies, can become somewhat diluted in this process as the contractor strives to over-maintain equipment sometimes, unnecessarily.

Full-coverage contracts are usually the most comprehensive and the most expensive type of agreement in the short term. In the long term, however, such a contract may prove to be the most cost-effective, depending on the owners overall O&M objectives. Major advantages of full-coverage contracts are ease of budgeting and the fact that most if not all of the risk is carried by the contractor. However, if the contractor is not reputable or underestimates the requirements of the equipment to be insured, they may do only enough preventative maintenance to keep the equipment barely running until the end of the contract period. Also, if a company underbids the work in order to win the contract, they may attempt to break the contract early if they foresee a high probability of one or more catastrophic failures occurring before the end of the contract.

Semi-Comprehensive

Inclusive of all labour onlyNormally excludes parts and materialsFixed labour fee2nd most expensive modelWorks best for large sites or portfoliosBudgeting can be difficultLess risk transferred to contractorLabouronly#7A full-labour service contract covers part of full amounts of the labour to repair, replace, and maintain most mechanical equipment. The owner is required to purchase all equipment and parts. Although preventative maintenance and operation may be part of the agreement, actual installation of major plant equipment such as a centrifugal chillers, boilers, and large air compressors is typically excluded from the contract.

Risk and warranty issues usually preclude anyone but the manufacturer installing these types of equipment. Methods of dealing with emergency calls may also vary. The cost of emergency calls may be factored into the original contract, or the contractor may agree to respond to an emergency within a set number of hours with the owner paying for the emergency labour as a separate item.

Most preventative maintenance services are often included in the agreement along with minor materials such as belts, grease, and filters.

This is the second most expensive contract regarding short-term impact on the maintenance budget. This type of contract is usually advantageous only for owners of very large buildings or multiple properties who can buy in bulk and therefore obtain equipment, parts, and materials at reduced cost. This is particularly effective for large static sites where a service provider can deploy a large team of skilled trades staff.

For owners of small to medium-size buildings, cost control and budgeting becomes more complicated with this type of contract, in which labour is the only constant. And because they are responsible only for providing labour, the contractors risk is less with this type of contract than with a full-coverage contract.

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Repair Work Limit (RWL)

Research shows for M.E.F services: 66% $1000 & chargeableMost reactive calls minor Capped risk at predetermined/agreed threshold or RWLUsually subject to condition assessment and latent conditionsSignificant administration savings

LabourPartsMaterialsRepair Work Limit#8Probably my favourite model, is one where the service provider takes on a limited liability of up to a predetermined value, per incident for materials, equipment and third party services, that has failed within the scope of services. This contract is also subject to a fixed fee.

Over many years, I have accumulated and modelled data gained from many thousands of similar service agreements, which demonstrates as an example, that approximately 66.3% of all reactive service call costs, are less than $1000 (ex GST). The main driver for this is the fact that most reactive calls are relatively minor and quick to resolve. Larger works, approximately 20% of the balance, normally result in system modifications, rectification and/or replacements, of which approximately half would fall into an RWL classification. The rest is made up of works that are charged to the client for the value greater than $1000 or for works that did not fall into the qualifications listed above.

This type of contract combines the benefits of the PM model, caps maintenance expenditure and liability up to a predetermined Repair Work Limited threshold and because the vast majority of transactions fall below $1000, thats if you choose to select this as your RWL threshold, the administrative savings alone, not having to deal with all of these transactions, is quite substantial.

This model is my opinion is a good compromise between fully comprehensive and a stock standard PM model, where risk is actually shared between the asset owner and the service provider. It captures the greatest proportion of activity, providing a level of cost certainty whilst not bargaining away the asset lifecycle or contractors margin.

The potential downside of an RWL Model is similar to fully comprehensive but on a lesser scale, in that there is a risk that the maintenance program may be depleted by the service provider in order to maximise the contractors return. To manage this risk, more complex and very clear contract t&cs are required to manage performance and compliance.

Summary

Choose wisely and do your homeworkConsider:- Economic conditions and what you can afford- Technical advances- Your portfolio condition- Your risk profile- Contract flexibility for change- Performance management and reporting frameworkKeepthe end resultin mind#9So whilst there are many maintenance models available for you to choose from, finding the right one to deploy in the managed context can be a challenge. Maintenance engagements lend themselves well to outcome-based models, but there are several potential alternatives to consider each with its own trade-offs. FM and asset owner professionals should exercise caution in recommending outcome-based maintenance structures until they have addressed the potential for unintended consequences. Without stealing the other presenters thunder, it is absolutely certain that over time, many things change in a contracts lifecycle that impact on the contract outcomes. So my advice to you, albeit short and sweet and a Segway into other presentations, is consider:Your specific economic conditions can you in fact afford a leading edge, highly technology driven reliability outcome based contract?Look at what technical advances have been made in the market since you last went through the procurement exercise do your research and dont wait for contractors to try and sell you on proprietary technology. A good example is what is on offer with mobility solutions.Make sure you understand completely the full profile of your asset portfolio if you expect to transfer risk to a service provider for unknowns such as asset condition etc, you can expect to pay a heavy premium. Invest in your asset register and condition assessment or build in the provision for your service provider to build this for you, before moving to a fully comprehensive, semi comprehensive or RWL model. In any case, no sane contractor will accept the risk without assessment of the asset portfolio prior.In addition to this, do your organisational risk profile homework. Determine what assets are truly critical to the operation of your business and then build a PM program around the risk profile. Dont maintain assets if you dont need to and vice versa dont under-maintain.Ensure the contract is flexible enough to accommodate a growing or shrinking portfolio, andEnsure you have a robust performance management and reporting framework built into the contract to ensure you receive what you are paying for.Thank you for your time and attention today and I look forward to your questions.