Utility management's role in maintaining your budget
- Published January 2016
Utilities are one of the biggest onsite expenses for portfolio owners and operators, and as such, a utility management program can play a huge role in determining whether you meet or miss your budget.
There are several components that make up an efficient utility management program. Resident utility billing, vacant cost recovery, accurate budgeting tools, advanced analytics, and proactive utility management and alerts all play a part in keeping utility costs in line. When utility budget variances occur, you need to quickly know why they happened and what steps to take next.
"You may need to reforecast expenses, accrue for money not yet spent, or reprioritize property objectives and plans," says Kim Kowalski, managing director of Smart-Source operations at NWP Services Corporation. There are key components to an effective utility management program, she says. Here are just a few.
Bill residents for utilities
First, it's best practice to charge residents separately for their utility consumption rather than bundle with rent. Sharing the utility costs with residents puts them directly in charge of their consumption and helps boost conservation.
Separate billing also mitigates the variability of utilities in the overall operating expenses of your property. In addition, vacant cost recovery ensures your properties recapture utility bills that haven't been appropriately transferred to residents. Vacant cost recovery requires you to automatically match up the unit utility bills with occupied and unoccupied units for accurate billing to residents.
Accuracy is critical
Second, it is critical to use accurate tools to create an initial budget. Simply looking at historical expenses does not show the whole picture. A robust utility management program starts the budget creation process by evaluating consumption separate from rates or total expense. Barring unusual weather or efficiency upgrades, consumption often follows seasonal patterns year over year.
The change in usage should be taken into account when changes are expected from one year to the next due to occupancy, added amenities, or infrastructure upgrades.
Take care discerning your data
Third, advanced analytics play an integral part in turning complex data into easy, reliable results. A comprehensive utility management program delivers the historic trends needed to facilitate benchmarking and offer actionable insights to further reduce utility expenditures on your properties. Benchmarking indicates how your properties compare against other similar properties, helping to target potential areas of improvement.
Fourth, proactive management of utility alerts is essential to stay on top of variances in utility bills generated by your properties. Monitoring what's going on, checking and resolving the cause of changes, and then logging the findings for future reference all help to focus on the troubled area and fix it as soon as possible. Unchecked, a usage variance can significantly affect your budget.
Reliable rate data are key to minimizing surprises. Rate data are available from multiple sources of information including government databases, rate cases filed with the public utility commission, and searches of the utility companies' posted rate changes. Having access to future rates is a game changer for the way utility budgets are managed in that it enhances the accuracy of your forecasts. Checking the data regularly and using multiple sources and methods will make your predictions more reliable.
Time is money and variances, costly
Fifth, once all the previously mentioned components are in place, it must all be glued together with the ability to quickly explain and take action on budget variances.
The two main drivers of budget variances are consumption and changes in utility rates. Variances in consumption can be caused by such things as changing billing periods, seasonality, and air leaks on the properties, which will all show up as additional expense or consumption.
If weather is unseasonably warm or cold and your usage is significantly more than planned, then having an alert management program will help alert you to the problem and quickly explain the budget variance. Consumption is far more likely to vary unpredictably than rates are, however, sudden rate changes do happen and the impact of the increase or decrease is generally smaller compared to consumption changes.
Exceptions include emergency drought surcharges or mandatory reductions of usage where higher consumption by properties could result in significant rate increase or heavy fines to the properties. Most often though, utility budget variances are caused by changes in consumption.
Budgeting and forecasting for utility consumption and expenses requires both a diligent team on site and back office personnel who work together to evaluate the data available including rate changes, historical usage and expense, and capital improvements that impact consumption. By leveraging all of the available data from property, accounting, and utility management experts within your organization, budgeting becomes more accurate.
Budgeting is one of the most important aspects of keeping your properties running efficiently, and combining accurate tools, advanced analytics and proactive utility variance management together ensure powerful transparency and visibility into what is really going on with your utilities. With a comprehensive utility management program in place, property managers are equipped to better understand, explain, and control their expenses.