If you’re a commercial property manager, odds are that you’ve encountered months when your property’s expenses came in higher or lower than your operating budget. This state of affairs - known as budget variance - often leads to protracted back-and-forths with engineering and asset management as everyone seeks to understand what went wrong.
Is this a frustrating place to find yourself in? Most definitely - especially when the information at your disposal may or may not be sufficient to adequately explain the reason for the variance. But with the right approach and tools, you can tackle variance head on - and be a rockstar for your organization.
Keep reading to learn more about budget variance, why it occurs, how utilities contribute, and what to do when it happens in your building.
It may sound obvious, but variance truly begins and ends with your property’s budget. And to really understand the budget, it is often necessary to go back to the initial acquisition of the property, when your ownership group most likely analyzed the property’s pro forma statement to determine what standards it would need to meet to remain or become profitable.
This analysis represents the first baseline for your property’s operating budget, though over the years your budget has likely evolved; budgets are reestablished annually through the prolonged process often referred to as “Budget Season.” Many organizations begin budgeting in earnest as early as July or August, gathering information on the financial and operational performance of their properties and going through multiple rounds of reviews until - at last - budgets for the coming year are finalized in December.
At this point, the budget is the budget. Though midyear reforecasting sometimes occurs, your December budget truly represents what you’re able to spend in the eyes of your asset management team.
And herein lies the first problem: this process requires everyone to predict a year in advance what the conditions in the property will be. If occupancy fluctuates unexpectedly, or the building undergoes an unplanned modification or state-change, or major equipment breaks down, it is likely that operating costs will start to diverge as well. This leads to - you guessed it - variance.
Utilities are among the top 5 line items in your budget. Along with things like taxes and payroll, they represent a large share of your property’s operating costs. Utilities are traditionally considered to be one of the most volatile and hard-to-predict expenses - and thus one of the biggest contributors to variance - but with the proper tools they can also be the most controllable.
Why do utilities present a unique challenge? Unlike taxes and payroll, spend on utilities is contingent upon conditions that are difficult to plan for and can vary from month to month. And in the absence of technology that collects real-time utility data, utility consumption itself can be a black box, with property teams relying on their bills to gauge usage and make projections for the future. This works to a point but is ultimately an imperfect methodology.
For one thing, utility billing periods rarely line up with the calendar month, which adds a layer of accounting complexity to an already challenging process. Property managers must run calculations and accruals to align utility spend with budget periods, work that can be labor intensive and error-prone. Another problem is that utility bills simply don’t arrive in time to explain current conditions in your property.
And here’s the kicker: many ownership groups require their property teams to submit monthly budget forecasts. If the forecasts aren’t within 5-10% of the budget, the property team must explain why. But since the utility bill reflecting current usage in the building won’t have arrived when you’re making (and justifying) your projections, your only options are to look to past utility bills (which may or may not line up with present conditions), or - in many cases - make an educated guess.
Is it any wonder that variance occurs?
Many things can contribute to variance, but one of the most common is occupancy. A space that gets leased earlier or later than projected will almost always lead to variance.
State-changes to your building can also contribute to variance. Whether a data center moved in, construction on a new wing was completed, or solar panels were installed, planned or unplanned initiatives that permanently impact your building’s infrastructure will have ramifications for utility consumption - and thus, for spend against budget.
These are straightforward examples, however; what’s less straightforward is when your utility consumption spikes and creates a budget overage in the absence of a clear-cut scenario like the ones mentioned above, and now you have to explain why. In these situations, you’ll probably turn to your engineering team for more insights, but if your building isn’t enabled with the proper technology, you might wind up hearing one of the oldest rationales for variable utilities in the book: “it must be the weather.” While weather can indeed be the reason for utility-related variance, it can just as often not be the reason - even if it’s the reason provided.
This can be frustrating for all parties. If onsite teams are unable to provide more context when claiming weather as the cause for variance, they will typically wind up in tough conversations with their asset managers, who ultimately want to know if there are issues with the building that need attention and whether there will be further implications for the budget down the road.
This is where the right technology can make a big difference.
At this point, it should be clear that budget variance is an unavoidable part of managing a property. The best way to address it is to ensure that you have access to as much information as possible, so that you can hone in on the root cause for the variance, diagnose potential issues with your building, keep all stakeholders informed, and plan for the future with greater accuracy.
Best-in-class utility budget management tools are designed to help with this by shedding light on that large, volatile, often mysterious but ultimately controllable line item in your operating budget: utilities. These solutions centralize your utility data, automatically document unusual occurrences, and correlate them with your budget. They will also help you determine if weather was truly a factor that contributed to variance, and will show consumption and spend in the context of occupancy. In months with budget variance, these features can help you quickly and accurately identify the cause and report up the chain.
These solutions can also help with accruals and forecasting. You won’t have to run time-consuming calculations to get consumption and spend to match up with budget periods; that information will be readily available whenever you need it. And perhaps best of all, you won’t have to guess when sending monthly forecasts to asset management, or rely on data from the same period last year: the most advanced solutions will use machine learning to predict your building’s future utility usage, automatically generating projections for consumption and spend that you can incorporate into your forecasts.
In the long run, the level of transparency this technology affords will lead to greater team accountability and better practices for your organization.
Here’s an example of the kind of detailed variance statements you can provide to your stakeholders when you have a tool that gives you the complete picture of conditions in your building:
June 2019 Variance: Aquicore caught an overtime HVAC request
6% over budget in June because a tenant requested an overtime HVAC run. Due to the age of the building automation system, it was unable to revert back to its original settings. The engineering team caught this mistake and was able to correct it with support from the BMS contractor within 2 business days. Forecasted savings: $372.80. Suggested action: review and reevaluate BMS upgrade.
If building staff and payroll, taxes, and building infrastructure all remained constant, but spend still deviated from budget because of a spike in utility consumption, here are some sample questions you can ask to help identify the cause with your engineering team:
Knowledge is power - especially when it comes to variance. It can be tricky to diagnose variance, but when you’re armed with the right information, variance becomes less of a headache and more of a growth opportunity for you and your team. With the proper tools, a strategic mindset, and enough information about the conditions in your building, you will be well on your way to avoiding those tricky conversations and navigating budget variance like a pro.