May 2016 — When managing real estate, the most controllable portion of cash outflow is the day-to-day or variable operating expense of the property. Managing variable operations of the property is generally the chief concern of the property or facilities manager. Maintaining and managing real estate involves spending a lot of time dealing with vendors and contractors. The property or facilities manager’s concerns include identifying maintenance needs; negotiating vendor contracts; managing maintenance jobs, remodeling and tenant build-out of space; ensuring proper payment to vendors; and reporting all of these activities to ownership. These responsibilities comprise the expenditure cycle.
Although most of a property or facilities manager’s time is spent in facilitating actions of the expenditure cycle, the knowledge of the actual process and mechanics involved are often taken for granted. Efficient methods for carrying out expenditures will not only simplify and speed up the process, they will also ensure that cost-effective decisions are made in the long run, which, in return, can lead to lower operating costs.
From the accounting standpoint, the ultimate goal in the expenditure cycle is the timely and accurate reporting of maintenance and repair activity to ownership. The accounting and reporting system in the expenditure cycle ties in closely with actual hands-on management of normal real estate operations. As vendors are identified and approved, they are included in a master file of vendors, or on a preferred vendor list, and assigned a unique coding number. Purchase orders (POs) and monthly contracts are followed by vendor invoices. To ensure that vendors properly invoice according to the contract or PO, accounting systems establish procedures to track contract payment and verify PO compliance. Accounting systems provide the property or facilities manager with information to ensure that vendors are paid promptly and accurately, which helps promote good relationships with vendors and contractors.
Requesting Vendor Services
Expenditure cycle activity begins with a request for services. Vendor services can arise from a variety of reasons, including:
- Tenant requests
- Preventive maintenance requirements
- Requests from engineering/operations staff
- Routine cleaning, repairs, and maintenance
- Emergency repairs
- Budgeted or unbudgeted capital items
Services are generally negotiated through contracts or POs. In the past, both forms were paper based and required several copies. While paper is still used, more and more electronic versions are replacing both documents, especially as part of the approval process. Contracts are typically drawn up with a term of one to three years. Some contracts, like those for elevator maintenance or items involving large capital expenses, may be for longer terms, but rarely exceed ten years. Five years is considered a long-term contract for most property owners.
Establishing Contracts for Routine Goods and Services
Vendors supplying goods or services on a monthly basis are generally empowered to do so via a contract for a year or longer. The following services usually fall under a term contract with monthly pricing for the services outlined in the contract:
- Janitorial
- Security
- Landscaping
- Elevator/escalator
- HVAC maintenance
- Pest control
- Metal maintenance
- Waste removal/recycling
The process of finding and selecting a vendor may start with a request for information (RFI) or request for qualifications (RFQ), which are broad searches to help property managers determine who is qualified to bid on their projects. These are sent to a broad group of companies, which respond with a listing of qualifications that enable property managers to determine who will be allowed to bid on the actual project. As a building professional, if you already have a good understanding of the potential bidders and the scope of your project, you may choose to go directly to the request for proposal (RFP) stage.
An RFP from the property manager is the beginning of the contract negotiations for the services to be acquired. The RFP should be as specific and detailed as possible in outlining the requirements of the contract. The quality of bids will reflect how well the need has been articulated. When writing an RFP, it is important that you have fully thought through what you are trying to achieve. Open-ended questions on an RFP may be of value, but a baseline will be needed to enable objective comparison of vendor proposals. Asking for or being open to alternate means of completing a project than those initially considered is a good way to get a baseline while allowing the vendors to show you what they think is the best way to perform the service.
Vendors will then submit proposals that include bids for comparative purposes. The RFP usually includes a given deadline with sufficient time for the vendor to respond. RFPs should be delivered to three to five vendors. Usually, the greater the dollar value, the more proposals will be required. A property or facilities manager would request more proposals for an elevator contract, for example, than for a one-time purchase of a minor piece of equipment. It becomes difficult to effectively evaluate proposals and bids of six or more vendors because of the time required to thoroughly evaluate all of them.
While the easiest proposal criterion is price, other factors must be considered. The assumption that the lowest price is the best does not reflect due diligence, nor is it necessarily true. Obtaining the requested service with the required degree of quality may cost more than the lowest bid.
Often property and facilities managers will use a comparison matrix, which ensures that all proposals are assessed fairly. This matrix will weigh different parts of the RFP based on the importance of each part.
If as a building professional you are contracting for a service, compare hourly rates or productivity rates. Also consider each vendor’s experience and reputation in the industry. Conduct reference checks on companies you have not done business with in the past. Review the actual appearance and presentation of each proposal. Asking questions like, “Is the grammar correct?” or “Is the math correct?” is important in the review as these facts may reveal a great deal about the way each vendor conducts business. Does the bid look reasonable and achievable? A low bid with a great productivity rate compared to industry standards may not actually be feasible.
Other factors you should consider when evaluating contracts include insurance, employee benefits, and whether or not uniforms and other costs are included in the price estimate. For simplicity it is recommended that as part of the bid package a spreadsheet be provided outlining the exact information you require, so you know you are comparing the proposals properly.
Tracking Vendor Information
Once the bid is accepted and the contract negotiated, vendor information should be added to the vendor database. A unique number is assigned to each vendor. Vendor information fields in the database are filled to include each vendor’s legal name, remittance address, federal tax I.D. number, minority status, and entity type (corporation, partnership, sole proprietor). When checks are written to pay a vendor, an accounts payable employee will access the vendor database file, extract the vendor name and remittance address, and print it on the check.
This information must be correct in the vendor database to facilitate the timely and accurate payment of vendors. In addition, in the United States, the IRS requires all payors to report amounts in excess of $600 paid to unincorporated entities. This information is reported annually to the IRS and the vendor by referencing the vendor’s federal tax I.D. number.
This article is adapted from BOMI International’s course Budgeting and Accounting, part of the RPA designation program. More information regarding this course or the new High-Performance certificate courses is available by calling 1-800-235-2664. Visit BOMI International’s website, www.bomi.org.