For property managers and others in the commercial real estate space, it’s already time to look ahead to 2019 and begin the energy budgeting process. Because energy is a significant – but unpredictable – cost driver, this process can be difficult. The more properties, the more complexity in energy budgets.
All annual energy budgets should possess three key characteristics. Last week, Ben Mason and Ben Manna – two of Schneider Electric’s Client Managers and energy experts in commercial real estate – chatted about the first of the three A’s of budgeting: the importance of budget accuracy. Part II of their conversation looks at budget accountability and budget adaptability.
Last week we talked about the importance of budget accuracy. Let’s shift gears today and start with budgeting as an enabler of the second A of budgeting: greater accountability. How important is that aspect of the process?
It’s HUGE because it’s not just tenants we’re talking about. Property managers have to answer to their ownership groups and investors, too. If the budget comes in short, they have to go back and ask for additional funding. I don’t imagine that’s a pleasant conversation. So, that’s another reason it’s so important to minimize any variances.
And don’t you think those are two sides of the same coin – accuracy and accountability? It’s an exchange of information that occurs between a client and the person creating the budget estimates, yes, but that relationship is really dependent on both sides having the right information as often as possible.
No question about it. All the data has to be clean: square footage, occupancy, etc. Otherwise, you’re going to run into inaccurate estimates and large variances.
And that brings us to our third A: adaptability. Personally, I think that comes into play when we can talk about the need to build energy budgets that accommodate different types of tenants and different types of power loads, right?
Exactly. Property managers need to see beyond just tenant move-ins and move-outs into the type of tenant that is moving in. Replacing a nine-to-five office with a 24/7 call center has real implications for energy use, obviously, especially when you get into different rate classes, different demand peaks and different seasonal trends.
As you try to consider how the budgeting process accounts for those kinds of variables, what about be some questions you’d need to answer?
Asking the Right Questions
Let’s see. This isn’t an exhaustive list by any means, but its important to ask things like:
- What’s the best way to track our performance?
- How do we separate the cost drivers of the bills from what factors we used in the budget?
- Is our budget occupancy tracking with actual occupancy throughout the year?
- Is the load factor different than it was last year?
- What are my variances for supplier commodity costs and utility delivery rates?
- Is weather a factor?
- What does our usage look like compared to our trend over 5 to 10 years?
- What kind of impact are our energy efficiency programs having on utility costs?
That’s a great list because I think understanding these kinds of variables is really vital.
Reminds me of a recent example where one of our largest clients had several new buildings that started out with low load factors. Load factor calculation tells us how “loaded” the building is as defined by the relationship of peak demand to total consumption over a given month. But, as they filled the buildings up, their loads became a little bit more consistent. Now they’re able to get a break on their demand charges. Anticipating those kinds of changes is where we often find savings opportunities.
Reforecasting & Budget Seasonality
Ok, so what about budget adaptability throughout the year? What do you do when you realize your budget is off by quite a bit?
I think a reforecast is in order in those cases, but carefully. Energy budgets really shouldn’t change during the year without a true reforecast. We’d want to look at the factors that have changed since the initial budget and make accommodations and updates for any cost factors that have changed in the meantime.
Last question, then: when does budget season end? Essentially, when is it too late?
For us, I’m not sure it ever ends or is ever too late since we live in budget mode year-round. We not only cover calendar year energy budgets, we also accommodate unique fiscal years, as well. After finishing reconciliations in the first quarter we start to get requests for the next budget estimates. Then, there’s a slight lull in May. By July/August, we’re moving full speed ahead with client energy budgets.
And honestly, I think budgeting is just too critical to “set it and forget it.” It requires constant oversight because the quality of an energy budget has real-world implications in all those areas we’ve discussed.
If you have any questions on how to drive energy budgeting for 2019, we can help. Whether you need budgeting advice or you want to take advantage of our budgeting services, drop Ben and Ben a note to get started.