Funding for capital replacements must be set aside, usually in a Capital Reserve Account, for planned future work to either extend (renew) the life of an existing asset beyond its initial service life or to replace it with a new asset of the same capacity to perform the same function. How much funding will be needed?
Is your capital replacement budget time-based or risk-based?
In other words, do you budget funds formulaically using the useful service life of each fixed asset? For example, when the RTU reaches the end of its 15-year life is the year budgeted to replace it; and thus, to accumulate the necessary funds between now and then, the estimated replacement cost will be divided by the remaining years. But what if the RTU should fail or what if two-compressors have to be replaced before the budgeted replacement year? Will there be adequate funding? Will you have to charge some or all of the early replacement costs to annual repairs and maintenance?
Or, do you conduct risk-based studies such as a Capital Reserve Assessments or Capital Needs Analysis to ascertain the current conditions of systems and equipment to predict future deficiencies and failures?
Budgeting methods can be a bit uncertain for many organizations because the technical details and assumptions may not be fully understood. Consequently, the shifting of funds sometimes becomes a relentless challenge for operations because of unexpected costs incurred earlier than were budgeted. Juggling replacement costs and repair expenses as they increase with equipment age is a difficult decision.
Supporting your team with the appropriate assessments and analyses we have the technical and financial acumen to help you develop a planned replacements program balanced with your repair and maintenance program to help better control your NOI.
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