Chargeback Systems

A well-designed chargeback system can help a company become more fiscally responsible. Facilities management uses standard commercial real estate industry practices to charge back facility-related services to internal customers.

A chargeback system should fairly allocate facilities costs to the end users. The underlying principle of this system must be commercial comparability—to provide and bill services in a manner that closely approximates how tenants are addressed in the private sector.

By implementing a fair, equitable chargeback system, you will recognize two primary benefits: cost awareness and the elimination of the cookie jar mentality.

Cost Awareness. The more your customer departments know about what their service requests cost, the more prudent they will be about requesting them. Cost awareness can benefit the company as a whole by reducing costs, and can help the facilities department avoid unnecessary work by allocating resources more closely in line with their original, budgeted purpose.

Eliminating the Cookie Jar Mentality. In the early stages of typical corporate growth, most facilities departments are set up as an overhead (expensed) cost center, and costs are not allocated to users. This sets up a cookie jar mentality among end users, who will continue to ask for services until they are turned away by the facilities department, usually due to a lack of funds. Shifting from this mode of operation to a fee-for-service posture is usually difficult because corporate attitudes about facilities services must change at every level of the organization. However, once the shift is made, the facilities department will be perceived more as a service provider than as a necessary burden.

Most facility managers organize chargeback systems into four levels of service. A fifth level has been added to reflect additional costs frequently borne by facilities departments. This breakdown roughly reflects the structure of standard lease packages.

Basic Rental Cost. The basic rental rate may be a standard for all departments, or it can be adjusted to reflect the capital asset value of space. It is usually based on an appraisal of the type of construction. The baseline for cost comparisons is standard finished office space. Any alterations above building standard are billed as a separate, one-time charge. Basic rental costs include the following:

  • Rental per square foot, including amortization of base building construction, loan interest, reasonable profit, insurance, and taxes
  • Amortization of the cost to construct the space to the building standard, specified in the tenant work letter in commercial practice
  • Amortization cost of the initial space layout and working drawings for standard alterations

Operating Costs Associated with the Space. Most facilities departments set a single rate for all user departments, unless they have sophisticated space accounting and tracking systems that break out costs by department. Commercial practice operates much the same way, but surcharges are levied for anything other than normal business day/week operation. This "management by exception" procedure is established during lease negotiations. Space-associated operating costs typically include such items as:

  • Energy
  • Utilities
  • Uninterruptible power supply
  • Facility administration
  • Site management

Ongoing Services Rendered. As with operating expenses, setting a baseline is important if some departments require unusually heavy service (such as day maid service for executive areas). Either some means of tracking these differences or a schedule of above-standard charges is needed. Examples of ongoing services include:

  • Routine responsive maintenance
  • Preventive maintenance, tours, and watches
  • Security service
  • Landscaping maintenance
  • Housekeeping service
  • Technology services

Other Facility-Related One-Time Costs. Expenses associated with rearranging facilities to support a change in the basic operation of the user constitute a facility-related one-time cost. Such costs contrast with ongoing services, which maintain the status quo. One-time costs are usually tracked by work orders for specific jobs and can include the following:

  • Moving
  • Furniture rearrangement
  • Space redesign
  • Above-building-standard alterations to prepare the space for occupancy (especially remodeling for a current occupant who intends to stay)
  • Extra design services for above-standard alterations (extra detailing, millwork shop drawings, installation drawings, and specification of systems furniture)

Ancillary Services Provided by Facilities Departments. Many facilities departments experience demand for a wide range of odds and ends that consume substantial time and money. These services are commonly provided by corporate facilities departments, but are almost never provided by commercial landlords for their tenants. If they are provided, extra charges are levied. The list below presents some typical ancillary services.

  • Catering for special meetings
  • Chauffeur service
  • Picture framing
  • Setting up and cleaning up conference rooms

Change in an organization can be difficult, and implementing a chargeback system is certainly no exception to this rule. As you implement a chargeback system, you will likely have to hurdle some obstacles. The most likely of these you will encounter are:

Additional Staff Requirements. To operate properly, chargeback systems must be administered by the same facilities staff that is usually already overworked. The facilities department has four options:

  • Allocate more staff to manage the system
  • Hire part-time or temporary help
  • Eliminate other tasks
  • Gamble that the chargeback system will reduce unnecessary work so that existing staff will have time to manage the system

Compatibility with Existing Policies. Before procedures can be implemented, any existing policies, manual procedures, and automated sequences must be dovetailed so that data can be tracked smoothly across organizational lines, even within the facilities department. If existing accounting cost centers are diverse, some means of collecting or estimating all the real costs must be developed. It is also important to present a consistent image to users. Bills from all affected facilities components must either be grouped together or sent separately in the same format. This creates an accounting burden that the facilities department must be prepared to meet.

Consumer Education. Any system of charging for facilities services will be complex. Consequently, facilities department staff must educate the building users about how the system works and why certain items are charged. Without this, suspicions of unfairness can develop, and end users will become less cooperative. Consumer education is a key ingredient to successful facilities management.

Once the hurdles of implementing a chargeback system are overcome, and a system is in place, the challenges often continue. Some of these ongoing challenges include:

Imbalance of Supply and Demand. Users may demand services in relation to the health of their budget. Some users hoard money all year and then overload departments with funds in a year-end rush to "use it or lose it." Other companies do the reverse, ordering items and then trying to renege on the commitments after the items have been ordered. The old maxim "No money, no work" is essential. This will help the facilities department anticipate seasonal variations in workload and coordinate its outside contracting programs.

Definition of Major Project versus Minor Improvements. A comprehensive chargeback system covers the life cycle cost of operating and amortizing a building. It does not cover costs of major replacement or renovations that will extend a building's useful life. This "rainy day" cost is factored into some chargeback systems to develop a general fund from which all major projects will be funded. History has shown that almost all such systems have experienced greater ongoing costs than anticipated, prompting raids on the replacement fund and compromising the capital improvement plan. This leaves users disgruntled for having allocated resources to a long-term investment that did not pay off.

Questions of Fairness. Inevitably, when users become conscious of costs, they also become conscious of which peer groups are demanding an unusually high share of services. Across-the-board charges are simple to administer but will cause cries of inconsistency (for around-the-clock computer users, for example).

A chargeback system—one designed with commercial comparability in mind—can help facility managers fairly allocate facilities costs to their end users. There are challenges to implementing and maintaining such as system, but you will find that the benefits outweigh any difficulties.

This article is adapted from BOMI International's course Real Estate Investment and Finance. More information regarding this course is available by calling 1-800-235-2664. Visit BOMI International's website, www.bomi.org.

 

on May 15, 2013