As facilities engineers and managers, are we expected to be experts in finance? Should we understand as much as our financial officer or chief executive?

We know a lot about how to operate a plant, build something, repair equipment, contract for services and the plethora of work and detail that accompanies our job. We have memorized a lot of esoteric information, jargon and acronyms — we incorporate them into our daily conversations to the point where nonfacilities folks would have no idea what we're talking about; it's like a foreign language to them.

The question is, when dealing with our finance office, board or senior decision-makers, can we make a "business case" for a specific initiative? Can we speak their language? A well-written business case can help us move a project or initiative to "Yes, approved."

Our finance officers and CEOs also speak a language that is not necessarily familiar to us — the language of finance. They talk a lot about the time value of money (TVM), the net present value or worth of things (NPV or NPW), cost-benefit-analysis, return on investment (ROI) or an expected internal rate of return (IRR). They also speak of the discount rate or the risk free investment rate, basis points, cash flows and more.

On a day-to-day basis when facilities managers are concerned with pressure differentials, supply and return air temperatures, duty-cycles, safe operating temperatures, plant efficiency, personnel safety and too many other variables to list here, you might wonder: "Why do I need to understand the language of finance?"

If you are a facilities professional who is looking to make your move to a new management level or one that is expected to make presentations to senior management, investors or board members, then you need to be fluent in the language of finance.

I have presented to facilities professionals on multiple occasions to cover the topic of engineering economics for capital investing or what I like to call "engineering economics 101." In many cases my presentation is a review of what many of us already studied in college but never applied. However, in some cases it's something that facilities professionals know nothing about.

The modern facilities executive needs more than gumption to get an initiative approved. It’s also no longer acceptable to adapt the "sour grapes" approach and wait to say, "I told you so." We must be able to explain our projects and work in terms of dollars and cents.

A business case, as defined by the Business Dictionary, is:

"A type of decision-making tool used to determine the effects a particular decision will have on profitability. A business case should show how the decision will alter cash flows over a period of time, and how costs and revenue will change. Specific attention is paid to internal rate of return (IRR), cash flow and payback period. Analyzing the financial outcomes stemming from choosing a different vendor to sell a company's product is an example of a business case."

Let's break this down a bit to put it in the facilities context.

You might think that as a necessary cost center that plant-related expenses are just part of doing business. The necessary costs of running the plant are not like making a decision to simply lower everyone's budget by some arbitrary percentage or cut employees, etc. We have to turn on the lights, heat or A/C, manufacturing line and all the associated equipment every day, right?

It's the business office's responsibility to assure that these costs are baked into our product cost, right? Yes, but these all have bottom-line consequences. The savings you might be able to garner due to a more efficient piece of equipment or building will roll to the bottom line, and you need to be able to show these savings as either a profit or cost avoidance.

Remember, a cost avoidance is like a profit because you are helping your organization to lower its operating costs. So, as facilities managers we do contribute to profitability — sometimes directly.

Can you put together a spreadsheet showing the net present value (NPV) or worth for a given plant-related project? Have you ever done a full life-cycle cost analysis (LCCA)? These two things (NPV and LCCA) help you to put some expense from the future in terms of today's dollars. That's what senior decision-makers need to understand one of your proposals.

I'm not saying that you necessarily need to fully understand how to do this, but I do suggest that you should be conversant enough to know how to ask for one of these to be prepared by your consultants. You should also be knowledgeable enough to know if the results are sound.

You can partner with your business or finance office to conduct these financial analysis, but you need to be able to get the right information together to assure that the analysis is worthwhile. If partnering with your own finance office, you also need to review the analysis for accuracy and clarity. Remember, it's your business case they're preparing.

A good business case will benefit you most when you've either been presented with multiple options for the same output with various componentry of different value and operational efficiency or a simple low-cost/first-cost alternative.

LCCA for manufacturing equipment is usually provided by the vendor, where you can get one competitor to show you the company's LCCA for a piece of equipment and simply compare it to another. However, you need to assure that the vendor has used the correct associated rates/costs (usually utility). If multiple vendors are conducting an LCCA, this assures that you are looking at apples-to-apples — another reason why you, as the facilities expert, need to be conversant in this area of finance.

This becomes more difficult when you are constructing a new building or replacing an energy plant comprised of various components. In this case it will fall on you to assure that someone is helping you to decide on which component is the best one based on LCCA vs. first-cost. You will then take these various LCCAs and information and construct your own business case.

I've been defeated by first-cost too many times to give up easily anymore. Early in my career I would constantly lose to first-cost. As a young owner's representative construction project manager, I thought I was doing my company a favor by delivering a low-cost project.

I then moved into positions of greater authority where I was now overseeing the folks who inherited the completed project and were trying to figure out how the company could have, knowingly, bought such cheap and shoddy materials and equipment. That was when I started to do my research on LCCA and blew the dust off my old engineering economics textbook.

I had to re-educate myself on the value of additionally showing the opportunity cost along with some of my business cases. The Business Dictionary states that an opportunity cost is a fundamental cost in economics and should be used to make decisions in all cost-benefit analysis: "A benefit, profit, or value of something that must be given up to acquire or achieve something else. Since every resource (land, money, time, etc.) can be put to alternative uses, every action, choice or decision has an associated opportunity cost."

As an example; let's say that your largest boiler plant is at the end of its service life and requires replacement. The existing boilers are archaic, inefficient and fired with No. 2 fuel oil. Additionally, much of the area served by these boilers utilizes archaic steam radiators to deliver the heat to the space. All of the equipment dates to 1928 with various ad-hoc improvements over the years, to the point where the system is a total hodgepodge.

You have two options in front of you:

1. You can replace the existing boilers with new state-of-the-art, fuel oil-fired guns and also be sure to get the highest efficiency boilers available. This will be replete with new automated controls. You will, however, leave the steam radiation in place. Let's assume that this is the base case for this example, as this is the simplest solution to meet the minimal brief for updating the plant with new equipment — absolutely the lowest first-cost alternative acceptable to you and your organization. The new equipment will last for an average of 20 years.

2. You can replace the existing boilers with new natural gas-fired, condensing, modular boilers because you've already confirmed that there's natural gas available in the street and you've done an initial load analysis to determine the infrastructure can support the new demand with no additional utility work or fees. Additionally, you can take two more boiler plants offline in other, adjoining buildings by centralizing the hot-water distribution. Finally, you can convert the existing archaic steam radiation over to hydronic in the primary building.

It doesn't take a lot of intuition to know the savings projected here. Let's look at them in both a quantitative and qualitative way (I've probably left some out that you will identify).

• The efficiency of high performing No. 2 fuel oil-fired boiler can get close to 85 percent. A high-performing, gas-fired, condensing, modular boiler can reach efficiencies of almost 98 percent. The savings by converting to natural gas is 13-15 percent more efficient on the annual fuel utilization (AFU) side.
• By taking two additional plants offline, also fired with No. 2 fuel oil, you will relieve the maintenance staff or service contractor of boiler maintenance and support — you have two fewer large assets to manage, service and maintain. You are getting rid of two more pesky fuel oil storage tanks.
• By replacing one building's archaic steam heat distribution with new hydronic hot-water radiation you will not only reduce the total amount of energy required to warm a space to the same level, but you will also deliver it at a more uniform and higher level of personal thermal comfort for the occupants.
• You will greatly reduce your company's carbon footprint by converting to natural gas over No. 2 fuel oil. There is a marked difference between the heat content per unit volume of natural gas than fuel oil, thus one burns less gas than fuel oil for the same BTUs.
• By switching to all hydronic heat, you will have a greater opportunity to enhance and improve the building automation and control system for the new equipment.
• You also have the option to put the two other buildings on your BAS for greater comfort and control.

To keep things simple, for this example, let's say you've worked with your consulting engineers and commissioning agent to confirm that a conservative projected savings for the first year will be $500,000 in energy. You haven't yet accounted for labor and contracted savings for the reduction in equipment, but you will include this in your first three years of measurement and verification for savings — over the base-case.

Your business case should reflect an agreed-upon escalation rate for both types of fossil fuel — remember, you have to run an LCCA for both designs. You will include the not-yet-documented savings in the business case and state that it will be quantified by M&V. Your business case needs to be transparent, no tricky "mathemagic" in this document — somebody in finance will catch the sketchy assumptions.

I work for a privately owned corporation and I am the executive in charge of the facilities and real property, so on occasion I include an analysis for opportunity cost — showing the amount of money we will be losing if we either decide to wait or take the lowest cost alternative.

I would recommend being judicious with opportunity cost analysis because it can be seen as aggressive or negative in some cases. As consultants or vendors, unless expressly asked to complete one by the owner's representative, they can be viewed as self-serving, meant to show how naive the decision-makers are if they don't scoop up this marvelous opportunity.

It's all in the presentation when showing the opportunity forfeited, be respectful of the decision-makers' position and personalities (if you know them). I've had many consultants (Fortune 500 companies) who have flatly refused to prepare the opportunity cost for energy saving projects I've worked on, and they've had bad experiences in presenting them.

In the case where your vendor will not prepare an opportunity cost analysis, you might consider conducting one yourself. There is an abundance of free information about LCCA and Opportunity Cost on the internet, Energy.gov is a great place to start.

The topic of engineering economics goes well beyond the breadth of this article, but I implore you to take some time to become savvy in the language of finance. The concept of how to talk to the "C" suite (CEO, CFO, COO, etc.) for success will enhance your career and also give you an advantage to get more of your projects and initiatives approved.

There is a tremendous amount of additional reading and information gathering you can do on this subject, and it's not rocket science.