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Harnessing the Power of Operational Costs

What do we know about our costs?

Most industry sectors treat cost planning as an important management technique in understanding limitations and opportunities into the future. Ask a builder to embark on a building project without having a cost estimate and it will not end well.

Interestingly, understanding of future costs is not held in the same regard in the management of property.

Allocation for annual operational budgets are often based on pseudoscientific methods such as % of capital replacement costs, indexing last year’s budget or a combination of both. Alternative approaches which involve greater diligence tend to be exceptional. Management strategies reliant on contingencies as a central response to reactive maintenance are symptomatic of this.

What do we mean by Operational Costs?

Strictly speaking operational costs are liabilities which arise over the operational period, but we really should think in terms of whole-of-life costs, including initial capital, maintenance, compliance, energy, capital replacement and, in some instances, disposal costs. From an accountant’s point of view, the ‘operational cost’ definition is about capital and recurrent costs.

Why is it important to understand operational costs?

In property asset management, the focus is to optimise the value that an asset provides to the organisation over its term under ownership. This requires finding and maintaining the best balance between the performance, risk and cost.

Asset management recognises that the asset contributes to the goal of the organisation and the nature of that contribution can change. The ability for an organisation to adapt to change and ensure its properties maintain a valuable contribution, is an important role for management. Measurements sensitive to the change have the potential to highlight imbalance so that actions are quickly taken to restore optimum value.

There are numerous papers[1] et al, which describe asset management practices achieving over 20% savings to the existing operational costs through:

  • Reductions maintenance expenditure particularly expensive reactive maintenance
  • Increases in asset performance, utilisation and asset life
  • Reduction in equipment failure, labour costs, material costs and downtime
  • Improved Return on Investment

We believe that understanding operational costs is a key to achieving asset management benefits because it is sensitive to change and with the right process / structure it can be easily captured. The numeric nature of cost provides the perfect medium for information and as in any business, it provides a scale and urgency we all understand. The level of detail within a cost plan is directly related to the capacity to control.

The challenge with property is to set up a structure which provides baseline cost at a transparent level and which quickly highlight the speed and scale of any change.

Critical Components of Asset Management

We see 4 components of property asset management which establish cost transparency, without which benefits cannot be achieved. They are:

  • Agreed Asset Naming Convention (so, metaphorically, everyone is speaking the same language).
  • A Detailed Asset Register where assets are clearly defined in terms of detail, location, cost, etc, at a level which is transparent.
  • A Life Cycle Model to plan out the types and scale of operational costs into the future, and
  • A means of recording actual costs for specific asset transactions.

From a bottom-up perspective these components are fundamental and should be utilised in everyday processes. We would suggest that their establishment and maintenance is of much greater value to the property function and deserve higher priority than, for example, marketing capability through ornamental displays of best practice.

The important of information technology

The asset management components are reliance on data and its conversion to useful information. Ironically property data is abundant, which is an issue for many as there is too much to manage.

Proptech offers the potential means of accelerating collection of cost data and processing information.

Information processing of costs can yield many different views of property with minimal effort as demonstrated in a simple nodal model we refer to as the asset management triangle.

Ideally, we should spend more time considering conclusions and strategy and less time on data collection and information processing. It is our belief that with the right structure and tools, cost information can be easily harvested to achieve this goal.

Achieving transparency in operational costs can provide owners, consultants, investors and operators with access to the valuable information and a level of insight where opportunities become more apparent.

[1] Maintenance Maven. 2015. “Five Ways CMMS Can Save You Money.” http://www.maintenancemaven.com. Accessed March 2016; O’Brien, J. 2010. “The 19 Reasons to Invest in a CMMS.” Maintenance Assistant Inc; IBM. 2015. “Facilities and Asset Management”.

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