Successful capital renewal programs

Capital renewal refers to a holistic facility investment program aimed at sustaining the real estate portfolio through remedying facility condition deficiencies, considering the environmental priorities of the organization and ensuring facilities remain mission capable.

Apart from brand-new construction, a standard facility of any type will have a current backlog of deficiencies that have yet to be remedied through some iteration of capital investment.

A successful capital renewal program will aim to be proactive; it has been proven empirically and anecdotally that the absence of targeted capital planning leads to negative outcomes for facility performance.

Capital planning tools

This is not to say that capital renewal planning is a simple process. Many times, health facilities professionals must juggle organizational priorities, deficiencies that are “cosmetic” in nature versus functional, costly environmental initiatives and, even worse, less-than-ideal funding. 

This phenomenon has created the need and utility for capital planning tools that bring predictive capabilities to the fight. With these tools in hand, facilities professionals can use expected funding levels to pivot from tactical planning to strategic planning and lessen the impact and occurrence of unforeseen and costly facility equipment failures.

A capital renewal program is a systematic management process to plan and budget for known cyclic repair and replacement requirements that extend the life and retain the usable condition of facilities and systems and are not typically contained in the annual operating budget. Capital renewal is a planned investment program that ensures that facilities will function at levels commensurate with the priorities and missions of an institution. Included are major building and infrastructure systems and components that have a maintenance cycle in excess of one year.

Capital renewal and major maintenance or major repairs and replacements are synonymous. They are funded by the capital funds budget(s) or capital expenditure (capex) and not from standard maintenance resources received in the operating budget cycle. However, major maintenance, in some cases, is included as a routine part of current fund operations and maintenance and included as an operating expenditure (opex) in the category of noncapitalized work. In other cases, an accounting decision can categorize a project as capital renewal and treat it as capitalized work. 

The need to fix rules, typically by a minimum dollar threshold for capital renewal, avoids this confusion between operations and maintenance, and capital renewal funding.

Banner case study

Banner Health’s assessed portfolio includes 32 medical centers, encompassing 476 buildings with approximately 23 million square feet and operating in six states. Thus, Banner Health’s size provides a tremendous amount of data to help drive results. 

This leveraging of data has been a mindset that has led to tremendous success throughout the organization in many avenues, and that is especially so in how Banner Health manages its facilities. This tremendous success is what allows Banner Health to adjust quickly in varying situations to respond and act appropriately. 

This mindset and some practices Banner Health has adopted have allowed it to maintain (and even improve) its facilities condition index to 11%, compared to the industry average of 14%. It has allowed Banner Health to drive its percentage of deferred equipment down to 38% as opposed to the industry average of 45%. 

In 2022, Banner Health started with a plan of spending over $75 million on renewal capital. Times changed, and by the end of the year, the facilities renewal budget was less than $24 million. Quick and decisive action was needed to respond appropriately to this significant reduction. The organization was able to leverage tremendous data analytics to identify what to focus on, and that allowed Banner Health to transition from a typical industry average of $3.50 per square foot to $1 per square foot. 

But this ability has not always existed; it has been a journey. Like many organizations, capital infrastructure renewal and planning were performed at the facility level for a long time. Each individual facility would decide how to manage its own capital. The local senior leadership of each facility typically managed the process. This led to challenges where large needs at a smaller facility would be placed on a back burner until they had reached a critical point or finishes being favored over infrastructure needs because of a misunderstanding of priorities between senior leadership and local facilities teams.

It became apparent that a more cohesive plan with collaboration and accountability as a system was needed. This began with exploring ways to bring consistency and equity to the process. The first step in working with the finance team was to ensure a documented policy appropriately regarding what classifies as capital. This included establishing a set of rules that clearly defined capital expenses versus operational expenses. The team also looked at ways to consistently apply capital to the highest and best use throughout the organization. 

In 2009, Banner Health’s facilities management began the oversight of facilities services renewal at a corporate level and with a small budget of slightly under $11 million. The department soon realized it needed a way to better understand all its infrastructure risks throughout the system and the associated needs. 

A third-party vendor was contracted to assess the existing infrastructure at each facility. This one-time snapshot was then used as a planning tool for many years. The valuable data acquired through the assessments helped increase the $11-million budget into an ask of over $50 million per year in the next nine years. 

Toward the end of this nine-year period in 2018, it became apparent that the data was becoming obsolete and inaccurate. It was discovered that as the list of annual priorities would be reviewed with each facility, year over year, things would change. 

As the years went on, priorities shifted, and the valuable data that was provided initially from the one-time snapshot began to diminish. 

Ultimately, the process became one in which the manager of the list was forced to use subjective opinions to identify the true system priorities. Banner Health had to find a better way to keep an active and current list of priorities, rooted in understanding the system’s priorities at any given moment, and justify the needs appropriately. The system must utilize data to substantiate subjective opinions. It needed to follow a model used throughout facilities management of measurement, benchmarking and continuous improvement.

In 2018, Banner Health found the opportunity to better manage its priorities with digital asset management of its infrastructure needs using nameplate data, individual assessment data and real-time data from its computerized maintenance management system (CMMS), allowing data to drive decisions. The organization began working with Brightly, a Siemens company based in Cary, N.C., that was formerly known as Facility Health Inc., and its origin capital planning product. 

To get the system’s asset information gathered and assess each piece of equipment, the company conducted facility condition assessments at each of the predetermined facilities. It worked through many organizational hurdles, but both sides collaborated to accomplish the goal of creating the best systemwide facilities asset management program that could be used to drive the appropriate justification of need throughout the organization. 

Now that the system is implemented and in use, the hospital lets the strategic asset management and asset health solution decide what is needed and when it is needed, right? It could, but then the organization would be missing a key ingredient: the voice of its facilities teams. 

Although data-based decisions are substantial, an organization must ensure that it capitalizes on its most valuable resource: the voice of the facilities teams that work on the equipment and are ultimately responsible for keeping these facilities running. To further drive collaboration, Banner Health’s development and construction project managers meet with the facilities services teams to review needs and accurately scope the work. 

One of the biggest challenges with maintaining accurate and current system data is to make sure changes, as well as new, retired and upgraded assets, are loaded into the system. To ensure that this continues, the best path is to make sure that there is a systemwide understanding of the importance of the data and to create standardized workflows and processes for data to be loaded, changed or removed. 

To measure the impact of investments, the strategic asset management and asset health solution develops a facility health index (FHI) score. This score is based on a number of factors, such as asset useful life, installation date, asset condition, tracking preventive maintenance (PM) and repair work, and opex and capex investments. 

The FHI score allows the organization to measure the current state of the asset portfolio, determine asset portfolio performance goals and establish SMART (specific, measurable, achievable, realistic and timely) goals to validate the investment in the system’s asset portfolio. To aid in the tracking and performance of the asset portfolio data, Banner Health has created a process whereby its facilities and construction teams worked together to develop what has been titled the facilities information transfer (FIT) process. 

Equipped with the FIT process and the FHI score, Banner Health’s teams have a common language and goals, allowing the data to decide when it replaces or refreshes an asset. These processes maintain asset integrity in the database, and prevent the corruption or obsolesce of information that would eventually lead to the same challenges of inaccurate data previously experienced. (Banner Health will be presenting on the FIT process at this month’s International Summit & Exhibition on Health Facility Planning, Design & Construction in Phoenix.)

Currently, armed with the feedback from its staff and the data from its systems, Banner Health’s next step is to expand this process further by placing its “planned needs” into levels of prioritization that allow the system to pivot and make responsive decisions as needed. All initiatives are carried out while ensuring the team can keep its facilities running. 

In fact, Banner Health is committed to working with its organization’s partners to innovate and refine their practices.

Vital to success

Creating a plan is vital to organizational success. One of the first considerations is change management. Embracing a model and mindset of change management will significantly improve the success of an organization’s project goals. 

Facilities professionals must commit to a reliability-centered maintenance strategy, understand the cultural and operational impacts, and communicate the intended outcomes with the maintenance staff and the C-suite. They should create the vision and share it often. It is imperative to tie together the organization’s mission, vision and values in the capital plan presentation and discussions. 

Second is ensuring the asset data in the CMMS is accurate. Facilities professionals should conduct a complete review of CMMS data standards and the processes for tracking reactive, preventive and compliance-related tasks. Does it have the correct inventory, asset condition, installation date, PM and break/fix history? Additionally, facilities professionals should verify and understand the definition of a capital asset with the organization. Any deficiencies should be corrected before moving on. 

Next, facilities professionals should conduct a baseline engineering assessment of the facility. This can be as formal as a facility condition assessment by a third party or can involve an assessment utilizing the subject matter experts within the organization’s team. Creating a list of assets in scope and establishing an assessment standard will be critical to normalizing the data.

Additionally, facilities professionals should develop a risk strategy for their assets. Consideration should be given to financial and operational impact, the area served, maintenance strategies, redundancy and Centers for Medicare & Medicaid Services requirements. For instance, an air-handling unit serving an atrium would be of less risk than one serving an operating room, intensive care unit or neonatal intensive care unit. 

Now facilities professionals will have a list of assets and a quantifiable condition of the assets. This information, coupled with a risk assessment of the assets and an understanding of the related magnitude of impact, will provide a prioritized, data-driven starting point for capital investments. 

Lastly, continuous improvement and risk mitigation processes will need to become standardized, established and maintained to preserve this previously completed work. This will entail creating workflows and processes to assess and continuously update asset condition and risk scores over time, modify asset useful life and model capital planning. Facilities professionals should optimize capital investment based on asset risk and performance. This is best accomplished by utilizing the organization’s CMMS as the source of truth. 

Facilities professionals will see investment results, quantify those results through improving index scores, optimize ongoing maintenance strategies and avoid emergent repairs. They should continue to follow the data and celebrate success. 

Finding help

While every system has differing resources and levels of expertise, it is essential to know there is help. The American Society for Health Care Engineering has created resources such as the “Capital Renewal Playbook,” as well as numerous articles and research surrounding this subject. 

In addition to the information in this article, one of the best methods for achieving capital planning success is peer groups. Regardless of organizational size or maturity, one will benefit greatly by developing a peer group, where expertise and experience can be shared and learned.

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Deferred hospital maintenance drives need for capital investment

Research conducted in 2021 by capital planning firm Facility Health Inc., now Brightly, a Siemens company based in Cary, N.C., and commissioned by the American Society for Health Care Engineering (ASHE) shows that the average percentage of deferred maintenance — including exterior and interior architecture as well as life safety, HVAC, mechanical, electrical and plumbing systems — across U.S. health care facilities sits at around 41%.

The current total amount needed to address that deferred maintenance is projected to be $243 billion across the nation.

Mark Mochel, CHFM, PMP, ACABE, strategic account executive at Brightly, explained in a June 2021 Health Facilities Management article that although infrastructure currently in deferred maintenance status does not mean those assets are in imminent failure mode, it does mean that they have exceeded industry expected useful life based on age and/or condition, which increases the probability of failure and risk to patients.

Based on the research, if the average percentage of deferred maintenance continues to increase at its current rate ($12 billion to $18 billion per year), the amount needed to catch assets up will increase to $391 billion over 10 years.

“If we do nothing and things continue to age at this rate without any increase in investment, we’re projecting that up to 68% of the infrastructure will exceed its expected useful life by 2031,” Mochel said. “However, if we increase our infrastructure investment over the next 10 years, we can not only prevent further aging, but reverse the trend.”

Jonathan Flannery, MHSA, CHFM, FASHE, FACHE, senior associate director of advocacy at ASHE, said in the same article that aging infrastructure is an inescapable fact that must be addressed.

“It’s just like your car. No matter how well you take care of it, as it gets older, it increases your chance of a breakdown,” he stated. “And just like there are multiple options to address your car’s maintenance, there are many ways of addressing deferred maintenance in hospitals. Do you build brand new? Upgrade your utilities and infrastructure? Regardless of how much work and effort you put into maintaining a system, they are mechanical and will age, so you have to invest in them.” 

Sidebar by Jamie Morgan, editor at Health Facilities Management magazine.

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About this article 

This is one of a series of monthly articles submitted by members of the American Society for Health Care Engineering’s Member Tools Task Force.

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Scott Mason, CHOP, FRSPH, HCC, is senior manager of strategic asset management for professional services at Brightly, a Siemens company, in Cary, N.C.; and Shawn Mathiesen, CEM, is construction and engineering senior consultant at Banner Health. They can be contacted at scott.mason@brightlysoftware.com and shawn.mathiesen@bannerhealth.com.