As a Facilities Management company, could you provide a brief overview of the issues related to cash flow, especially regarding the contracts drawn up for building maintenance purposes?
Cashflow is a core component for the smooth functioning of any industry, whether to survive or to scale. But in HVAC this gets compounded several times over – owing to the complex nature of the industry and the size and the scope of projects. When it comes to post-construction, facilities management companies usually take over the general up-keep and the maintenance of buildings. And needless to add, cashflow is also critical to the efficient functioning of facilities management companies as it allows them to deliver their services promptly, with a focus on quality and efficiency. The FM industry has also been facing cashflow issues, which are sometimes the ripple effect of cashflow concerns during the construction phase or due to market conditions like an economic downturn or recession when holding onto cash is seen as a safety net. While the construction and real estate business does have a higher threshold of acceptance for delayed payments, almost seen as an industry norm, there are instances where these cashflow issues start impacting the business performance, and at times the very existence of suppliers and contractors. At the same time, liquidity and cash flow issues of clients impact the availability of working capital for FM companies, which work on a cash-intensive operating model.
With growing cashflow concerns and a higher focus on ROI in an increasingly competitive space, how can the FM industry and building owners benefit and strive to progress?
Involving FM professionals in the early stages of infrastructure development to provide FM consultancy for better FM service planning can help. Also, having technology interventions like IoT and AI enable a predictive model for FM operations that directly saves money and time, plus it delivers a high ROI owing to continued energy efficiency, sustainability, reduced operating costs, and extended lifecycle of assets, and optimal workforce productivity. The future of the industry will lean heavily on data-driven continuous efficiency in building operations. The intersection of IoT, Smart Buildings and Unified Automation with predictive software-led and real-time FM is already being acknowledged as having the potential to impact 80% of the expense of a building over its life. As far as the maintenance phase, in particular, automation and IoT led BMS not only assists in optimizing process efficiencies, it can completely redefine the entire cost-vs-revenue profile. Added sophistication due to transparency in operations, and a reliable real-time feedback mechanism allows real estate owners the leeway to identify the most cost-beneficial course of action. Over the entire timeline of a project, these savings and optimizations add up very significantly. Contracts drawn with these inputs result in a win-win for owners and FMs, as well as Contractors, and are inherently more stable and profitable.
Where do the issues in cash flow stem from, and how can the issues be addressed?
A significant driver of cash flows, especially in the post-construction maintenance contracts stage, is the lack of strategic planning for FM services and an incomplete consideration of the variables involved. Clients face cashflow issues when the outflow of cash exceeds revenue inflow. By becoming strategic partners with their clients, FMs can help plan their asset acquisition and maintenance better, reducing high-Capex and high-Opex. This, in turn, means greater liquidity that clients can then share with FMs. Therefore, the early inclusion of FMs is a key factor influencing decision-making and projections, and can significantly restrict delays and cashflow issues at every stage of a building’s post-construction lifecycle and across all processes and automation. Drawing contracts on estimates and projections are highly problematic if these are incomplete or inadequate. Such issues are best addressed to the satisfaction of all stakeholders, otherwise, the response has merely been postponed. An Enterprise Platform for Portfolio-wide Facilities O&M can make a significant impact being able to provide reliable predictive projections, avoid wastage of money, time and manpower, and allow ongoing course correction. The resulting predictable model of operations can lead to far greater control over variables and fewer cashflow surprises.
How about countries like India, what are the issues related to cash flow within the scope of contracting in HVAC?
The Indian facilities management market is presently on the brink of a massive revolution. Despite the existence of guidelines, such as ASHRAE and USGBC, most CREs lack the integrated systems to meet them. Legacy building management systems restrict responsive functioning and weigh businesses down. Apart from these limitations, the market has also experienced a slowdown due to oversupply and some decisions made by developers a few years ago, that can be argued should have been more conservative. The banking sector too made some missteps that it is only now cleaning up. So, a significant amount of cash flow issues in the Indian market can be said to be due to the industry not anticipating change and the reforms that have been initiated. However, in the long run, the huge scope for urban renewal, growing purchasing power, government initiatives and the resurge in enthusiasm from international institutional investors should result in an energetic expansion, with some corrective measures having already been set in motion. And the FM industry will be a natural beneficiary of these changes and eased liquidity.
What are the issues concerning contracts drawn up with suppliers/ manufacturers for the replacement, maintenance of HVAC equipment in buildings?
The performance of each component in automation has a significant influence on the overall performance of a built asset. HVAC equipment plays a critical role not only in occupant experience but also in the operating costs of the building as a business asset. Fairly marginal inefficiencies in energy utilization can add up to a significant cost over time. HVAC operating even slightly above or below its recommended range can undermine operational goals. Monitoring the asset in real-time can give real estate owners a predictable model according to which contracts with suppliers and manufacturers can be drawn. In my opinion, both parties stand to gain from the performance expectations and contractual obligations being mapped as identifiable and specific metrics, which take into account consumption, asset performance, and the stage of the lifecycle of the asset.
What are the various techniques that can be used to incentivize timely payments?
Performance-based incentivizing of FM vendors can be a good model, where timely delivery, quality of work, qualified workforce etc. are incentivized. With real estate owners having an O & M technology platform, it will help them acquire, own and derive insights from their collected data over a period to be able to make such decisions. And for FM’s themselves, having an IoT and AI-led automation platform for managing facilities can mean higher workforce productivity, extended asset lifespans and savings in time as well as energy, which all eventually translate into real cash savings for clients. This is sure to incentivize clients to make timely payments to the FM companies.
I believe the answers to most of the cashflow woes plaguing FM’s and owners lie in technology. The predictive real-time ability that an enterprise-level IoT and AI-driven FM system can bring to a building can significantly impact the capex and opex across a building portfolio. Research indicates that nearly 5-6 times more money is spent on Operational Costs than on Construction Costs. The impact on ROI is huge if continuous efficiency can become the default for FM and an AI & IoT enabled approach is crucial to achieving this. A data-led approach can enable cost savings in energy consumption, reduced wastage of resources & consumables, optimal workforce productivity, better supply chain planning, extended asset lifecycle as well as reduced downtime.