Although the cost of “Emergency Capital” cannot be accurately anticipated – one fact is certain…..Emergency CapEx can be expected! Additionally…..it always happens after the annual CapEx package is “approved and final”!
The dilemma is then……where does the money come from to reconcile these unplanned Emergency Capital Expenditures?
It is advised that hoteliers establish a separate category in their CapEx programs for “Emergency Capital”. This process singles out such expenditures so management has the ability to historically track emergency spends. The following three processes will assist hoteliers in setting up procedures taking Emergency CapEx to a new level of responsibility and organization.
1. Initial Emergency Budgeting – It will be necessary to establish an Emergency CapEx amount for the hotel (or portfolio). If this is a new process, the first year may require a total “guesstimate” without any supporting history. If historical data is available, it should be used to identify a benchmark budget. Younger properties and limited service hotels will generally incur smaller emergency spends; where older, larger full service hotels can naturally expect more capital intense issues to arise.
2. Procedural Strength – Although almost all “major” emergency spends will fall into CapEx, it is very important that the estimated budget not be published within the annual CapEx package. If the dollar amount is circulated among the associates, projects seem to discretely emerge…..that uncontrollably absorb the Emergency monies. It should also be pointed out that most emergency issues will need to be addressed instantly. Because of this, these situations cause the normal Capital Expenditure approval process to be “bent” to meet the urgency. None the less, what is important is that everyone knows the reconciliation details of each emergency spend will have to be addressed immediately with upper management. Policies and procedures must be established and communicated ahead of time to successfully accomplish this.
3. Validation Of Requests – As a warning; non-emergency projects will tend to wander into emergency spends! For an effective Emergency CapEx process to work, all items or projects must truly be “emergency” in nature (ie: Convention Center HVAC failure affecting the attendees comfort and potential revenue disruption, phone system failures, storm damage, etc.). An organization should never be tempted to book project “over-runs” or routine capital to the Emergency category. Doing such defeats the accuracy of historical tracking. Additionally, management will want to single out these emergency expenditures to better understand why they occurred. Such evaluations may identify inferior routine maintenance techniques. Willingness to correct these issues will increase the effectiveness of future Emergency CapEx. Additionally, accurate tracking of Emergency CapEx can be most helpful in anticipating “Emergency” budgets for future planning.
If organizations take the above processes seriously, they will discover that there are important paybacks in establishing a solid Emergency CapEx program.
- Future Savings – During the upper management review various improvements may surface. For this reason, it is important to identify what caused the emergency, what could have prevented it and what can be implemented to avoid similar issues in the future. This review process can contribute to substantial future savings, especially if there are multiple properties in the portfolio.
- Reduction Of Unnecessary Emergency Spending – It can be expected that there will be attempts to replace major items under the cloak of Emergency CapEx….when they can still be repaired. Often not enough analysis has gone into the rush to spend emergency capital. This results in less expensive resolutions having been missed. Worse yet, a specific department may desire to avoid incurring a “repair expense” at the hotel level. Directing the expenditure into Emergency CapEx to avoid a “hit” in departmental expenses. Hoteliers can expect Emergency CapEx to trend downward once all associates understand that they are accountable to a set of guidelines.
- Review Of Maintenance Records – This gives upper management a formal process to identify why items end up in Emergency CapEx. Most are a process of normal wear and tear, but failures to offer proper maintenance may surface. This identifies staff that may need additional training or services. Also it may be found that some maintenance should be “outsourced”….to better meet the more complex nature of today’s hotel systems.
Question: What techniques have you used to master “Emergency CapEx”? Click here.