During tough economic times, property developers that hold significant amount of real estate space often explore ways to reduce its maintenance costs and overhead expenditure. Property maintenance is often part of the cost cutting considerations since building infrastructures such as lifts, elevators, building management system, back up power generators etc require periodic maintenance that can be costly and incurred on a recurring basis. During cost cutting exercise, maintenance contracts are often scrutinised by asset managers with the view of finding ways of reducing frequency of maintenance or explore more cost effective alternatives. However these exercise are often futile and has fairly limited cost saving opportunities. The real opportunities are often found way before the maintenance contracts are formed i.e. at the point when these infrastructures are designed, procured and manufactured. In this regard there is a need to review the procurement risks and challenges in respect of maintenance contracts. This article therefore examines some of the inherent commercial characteristics of maintenance contracts.

Infrastructures Within Building That Are Subject To Periodical Maintenance

Whilst most buildings would require regular upkeeping in respect of landscaping, pest control, general cleaning etc, the focus of this article relates to various mechanical and electrical infrastructures installed in a building that commonly require periodical maintenance. Building owners, asset managers of real estate properties or facilities managers therefore would enter into certain maintenance contracts with the relevant service providers. To appreciate what these services actually entail, an overview of maintenance in respect of certain common parts of mechanical and electrical installations are illustrated in the following paragraphs. The concept of periodical maintenance can be broadly divided into two categories namely preventive maintenance and predictive maintenance. As regards the former, it is carried out on a time based or schedule basis, whilst the latter is based on the physical conditions of the assets or on a need basis. The need for maintenance can be identified in turn based on the data measured from those physical assets.

Lift systems or elevators is a classic vertical mechanical transportation system that is subject to periodical maintenance. There are various components in a lift system that must be kept in a working condition for the lift system to continue to be in service. Therefore lift systems maintenance regime would generally require a manual inspection including visual examination of these myriad components and is usually performed by a  team of lift maintenance technicians. The services include amongst others ensuring availability of emergency power supply for lift car lighting and ventilation, ensuring the lift machine and its moveable parts are well lubricated, preventing grease contamination on brakes of lift machine as well as making certain that lift car stops at the permissible tolerance level relative to the landing floor. These maintenance regime are often based on a check list of areas of inspections and are carried out at approximately three months interval. During these inspections, lift components and the associated parts that are found to be worn out will also be replaced.  

Unlike a lift system that is commonly found in buildings which most people can relate to, a building management system or BMS in short plays a critical role but often a lot less conspicuous to the public. As buildings are usually equipped with various systems that are complementary to one another such as air-conditioning system, power control, fire fighting, building access, ventilation etc, the BMS integrates all these systems to facilitate control and monitoring. The BMS usually is equipped with various monitors and sensors placed around the building to measure data that in turn will be transmitted to a central computer system. If the measurements exceed a certain threshold or when trigger events are detected, the building manager will be alerted so as to attend to the detected issue. BMS too requires periodical maintenance often in conjunction with the complementary systems connected to it. A BMS can often be described as an electrical network connected to a software and therefore is quite different from a mechanical system such as an elevator. This difference in turn affects the way in which maintenance is carried out. As regards BMS maintenance, given that it involves a central computer powered by software, part of the maintenance can be done off site as various data pertaining to the performance of the system is available on cloud computing. The physical aspect of maintenance involves occasional software updates, calibrating and checking of sensors installed on site as well as general cleaning of equipment or replacement of worn parts. As BMS monitors and controls various specialised systems, the interfacing with these systems are also regularly examined to ensure continuous and seamless integration. 

Original Equipment Manufacturer (OEM) vs Third Party Vendor

The original equipment manufacturer or OEM in short of any systems installed in building is perceived as being more familiar with the system in hand and therefore makes a compelling choice as the maintenance service provider. Apart from the perception of familiarity with the system, the OEM is likely to be in the position to readily supply relevant parts and accessories for the system as and when these components are worn out with the passage of time. From the OEM’s perspective, there is a clear financial motivation of positioning itself as the maintenance service provider of choice. This is because maintenance expenses are typically incurred on a recurring basis which therefore provides a steady stream of income for the OEM. This can be contrasted with the supply and installation of the system which are considered capital expenditure which fluctuates based on market condition. Capital expenditures being substantive investments are often avoided during market downturn.

The third party vendor provides an alternative option to the OEM as the maintenance service provider. What makes the third party vendor a viable alternative as it is often argued, is that there is no reason for building owners to pay a cost premium over the market rate to OEM when the scope of maintenance services are considered standard, regular and non proprietary. Further, having a third party vendor for maintenance ensures the OEM’s feet are held to the fire in that any defects in the quality of the systems supplied are addressed as part of the warranty rather than being suppressed as a maintenance issue. Therefore for building owners who desire for cost efficiency and having the relevant independence to execute the maintenance regime would potentially favour third party vendors.

However the third party vendors are dependent on the OEM in terms of supply of accessories and spare parts if the systems are designed in a bespoke manner. This puts third party vendors in an awkward situation of both competing against the OEM and relying on the OEM simultaneously. In the next section of this article relating to regulatory framework, it is clear that there are legislations in place to address these situations especially if it give rise to monopolistic behaviour. Legislative solutions however well intentioned are often a reactive rather than proactive in respect of these issues. As mechanical and electrical building system invariably becomes technologically more advance, which incorporates computing capabilities that allows sending and receiving of data through a proprietary walled garden, the third party vendors’ ability to compete with OEM will be significantly compromised. 

Relevant Regulatory Frameworks

As alluded to earlier in the preceding section of this article, OEMs have a natural advantage as the vendor of choice for maintenance services due to its perceived familiarity with the systems in hand as well as its ability to supply certain parts of the system that may be designed in a bespoke manner, such as the motherboard for the lift systems. Third party vendors may from time to time face obstacles in getting supply of these bespoke parts from the OEM, compromising its ability to compete in open tender for maintenance services. This situation is envisaged under Section 47 of Competition Act 2004 in Singapore which deals with the issue of abuse of dominant position. Under this section, an abuse of dominant position is prohibited where the conduct in question amounts to, amongst others predatory behaviour towards competitors, limiting production, markets or technical development to the prejudice of customers etc. Whilst the state may assist through the enactment of such legislation which criminalises anti competitive behaviours, building owners should also be aware that they have a role to play too. This is because the manner in which building owners decides to procure any of its mechanical and electrical systems prior to construction directly impacts its ability to gain access to cost effective maintenance services down the road.  Even if building owners are able to secure the spare parts from the OEM and have it supplied to its third party vendors, there is a concern of whether the manner in which the third party vendor carrying out maintenance works could compromise the warranty or guarantee provided by the OEM. Separately, the OEM may also be concern whether they will be unfairly implicated for supplying the parts if the workmanship of third party vendors are not up to mark.

Another example of legislation that relates to the issue of maintenance is the Regulations 2016 under Building Maintenance and Strata Management Act in Singapore. This legislation governs private apartments and condominiums amongst others in which there are regulations which pertain to periodic maintenance of lifts and escalators. It is stipulated that such systems shall be maintained either once every three months or at the intervals recommended by the OEM, whichever is more frequent. Therefore the OEMs could not only affect the level of competition for maintenance works but also the nature of the maintenance regime. In view of this, when assessing the procurement risks and challenges of maintenance contracts, one should take cognisance of the level of influence that can potentially be exerted by the OEMs.

Procuring Through Integrated Facilities Management (IFM) and Managing Agents

Building owners and asset managers of properties would typically have a dedicated facilities management or FM department to deal with the myriad of maintenance issues. These issues ranges from overseeing the maintenance regime of various mechanical and electrical installations, to handling complaints from tenants or building occupants, to facilitating any interactions with the authorities on matters pertaining to inspections and certifications. In a bid to streamline the significant FM related workload, building owners commonly outsource such functions to a single entity which is an integrated facilities manager or an IFM. Depending on the specific commercial agreement between building owners and its IFM, there are occasions where the wide variety of maintenance service providers are engaged and paid directly by the IFM, that in turn recovers these expenses from the building owner, in addition to its service fee. These contracting practices whilst effectively streamlines workload and enable outsourcing of non core functions, distances the building owner from certain critical details of its maintenance regime. 

In the case of private apartments and condominiums in Singapore which is under the strata management model, the common facilities also require maintenance. The management council made up of elected subsidiary proprietors of these residential developments would usually engage a managing agent to deal with the wide variety of maintenance issues. Consequently, the regular subsidiary proprietor or home owner is less likely to be familiar with the critical details of the maintenance regime even though they are paying for these services through contribution to management fund and sinking fund. 

The contracting practice of bundling all maintenance services contract under a single outsourced entity no doubt provides a certain measure of convenience to building owners, but often at a cost. This cost is not merely the service fee paid to the IFM or managing agent, but also in the form of relinquishment of knowledge and agency over the manner in which the maintenance funds are utilised.

Procurement Challenges for Maintenance Contracts

Based on the preceding sections of this article it is clear that the choice of brand of systems installed in the building will influence the choice of maintenance service provider. This in turn will have an influence on the frequency of maintenance performed on that system. Once the procurement decision is made by the building owner on the brand of systems installed, it loses considerable of its negotiation power on the maintenance costs to be expended for many years down the road, in so far as the lifespan of that system. The practice of contracting through an IFM entity for all the maintenance services further distances the building owner from the critical details to enable effective management of its maintenance cost. It would therefore appear that the critical window of opportunity for the building owner is at the upstream stage of the building lifecycle i.e. during design development and procurement of the building in its entirety.

It does not help that the team engaged by the building owner to design and construct its building is usually different from the team that subsequently manages the operation and maintenance of the completed building. Teams in question are usually different because the skillsets required are different, and likewise their priorities are different too. The maintenance team may not even be in place during the construction phase of the building. By way of example, the property developer of a residential building will relinquish much of its initial maintenance responsibility once the development is sold and the apartment owners will in turn form its management council to oversee the maintenance. The realities of the manner in which teams are structured and how handover is executed present very real procurement risks and challenges in respect of maintenance contracts. Therefore building owners should not be surprise when they face difficulties in cost cutting exercise as it relates to maintenance expenses. 

Most would argue that the solution to problems illustrated above can be approached by a “mindset shift”. In reality however a construction director responsible for completing the construction project on time and within budget will hardly advocate for a particular brand if it has a longer delivery time even though it results in lower maintenance cost down the road. Most astute vendor supplying building system understands these realities and would therefore offer an appealing proposition from a construction delivery perspective in the spirit of deferred gratification. 

One way to overcome these differing priorities between construction and maintenance is to assess various brands during procurement not merely based on the immediate cost and delivery time frame but also total cost of ownership of the systems. In other words, the costs considered for any system should take into account the initial supply and installation costs as well as future maintenance cost. Clearly, there are limitations to this approach as well because it presumes the OEMs shall also be the maintenance service provider. This effectively eliminates any possibility for third party vendor for the provision of future maintenance. For this total cost of ownership method to be meaningful, the OEM is required to provide an offer based on a set of figures in respect of future maintenance expenses that becomes binding upon acceptance by the building owner. Parties would have to work through some nitty gritty detail such as how those maintenance figures would be impacted if it can be established that there is an increased wear and tear due to problems or mishandling on the part of the end user.  Also, parties would have to agree on any price adjustments based on price inflation in future especially if such maintenance agreement spans over a considerable period of time. 

There is also another school of thought that the cost competitiveness of engaging third party vendors is likely to exceed any financial benefits arising from upfront negotiation on total cost of ownership with the OEMs. Building owners who subscribe to this approach would be wise to ensure that such third party vendors are able to secure bespoke spare parts and accessories from the OEM by some form of tripartite agreement. If this fails, building owners should at least make the effort to ensure during design development that the systems procured are not excessively specified based on bespoke components with exclusive supply. 

Building owners that still prefers OEMs over third party vendors may consider making a projection of future additions and alterations works to its building as part of its continuous asset enhancement plans. This is particularly relevant in the case of commercial buildings, retail malls and hospitality development. This projection of future enhancement initiatives can be a good bargaining chip to negotiate for a more competitive maintenance fee as the OEMs are likely to be required to perform upgrade works to its system in addition to the regular maintenance regime. These enhancement works could mean additional income for the OEM that will provide extra commercial heft and scale to the business relationship.

Apart from effective management of maintenance costs, one area that is particularly challenging is the form of contract agreed between the building owners and the maintenance service provider. Construction industry in which damages arising from disputes commonly runs into millions of dollars has created an awareness of the importance to having access to fair and equitable forms of contract. This in turn contributed to the creation of a range of standard forms of contract which caters to varying needs. Unfortunately the maintenance services industry does not enjoy the same level of maturity and sophistication in terms of availability of standard forms of contract. Whilst it is common for firms within construction industry to have an in-house contracts and commercial department that specialises in issues pertaining to claims and disputes, this is not the case within the maintenance service industry. It is therefore not uncommon for building owners to enter into agreements with maintenance service provider based on the latter’s standard form of contract with either very minimal or no contractual negotiation. Occasionally the “form of agreement” is merely a purchase order. This phenomena presents both a procurement risk and opportunity for the maintenance service industry.

Conclusion

The maintenance team should work in conjunction with the construction team during the upstream phase of a construction project. Apart from facilitating a better handover and sense of ownership of the completed building, it also opens up various commercial opportunities down the road.



Koon Tak Hong Consulting Private Limited