Forecasting Capital Expenditures in Volatile Markets

Forecasting Capital Expenditures in Volatile Markets

By Mark Altmayer
Chief Financial Officer, Treasurer 
Huntley Community School District 158

Alison Andrews
Principal in Charge/Educational Planner 
Wold Architects and Engineers 

Tim Farquer

Williamsfield Schools 
Bus2Grid Initiative Administrative Lead 

From the disruptive impact of the pandemic to supply chain shortages and economic fluctuations, school districts have been compelled to seek innovative solutions to maintain financial stability while prioritizing student well-being and education excellence. Against this backdrop, sustainability and energy-saving initiatives have emerged as powerful cost saving strategies that districts have embraced to combat the increasing costs. In this article, you will follow the journey of two districts that transitioned to electric buses and learn the best strategies to employ when approaching capital improvements.

Going Green to Save Green in Volatile Markets by Using Electric Buses
During the past several years, school districts faced numerous challenges, starting with the pandemic, compounded by supply chain shortages and a raging economy, all impacting our ability to manage resources, forecast capital and provide for our students. It’s for that reason that Williamsfield Schools and Huntley Community School District 158, among many others, have focused on energy savings and sustainability opportunities to benefit our school districts. Every dollar saved is a dollar that we can keep and/or inject into the classroom. At Huntley 158 we like to say, “We choose learning over burning!”

The Districts
The vision of sustainability and environmental awareness that has come to define Huntley Community School District 158 began nearly 14 years ago with a need to enhance the district’s financial position and find room for savings wherever possible, most notably through energy cost saving practices. As a PreK-12 district with nine buildings, over 1,200 employees and approximately 8,600 students, this work took time, dedicated staff, a supportive community and invaluable partnerships. 

Today, Huntley maintains a low operational spending per pupil at 20 percent below the state average. As a result, the district has prioritized energy efficiency, operational improvements and explored ways to cut costs and energy consumption in tandem. Since 2009, the district has seen a reduction in annual energy costs from $2.4 million to $900 thousand in energy costs, resulting in $1.5 million in 
annual savings.

In January 2022, Huntley 158 was awarded $1,042,611 million from the Illinois EPA in grant funding to purchase four all-electric buses. As it relates to the electric buses, the district has engaged and contracted with one of its energy partners to implement and construct a $1.4 million electrical vehicle infrastructure that will support the charging of up to 12 electric buses; notably, this infrastructure will be entirely fueled by a ground mounted solar array within our transportation facility, all providing for positive cash flow after six years.  

Williamsfield Schools, a small rural PK-12 single building school district in central Illinois, has followed a similar trajectory as Huntley. Our vision started eight years ago with a model of a community microgrid constructed by the students on our STEM team. This led to a ground mount solar array and an immediate 20 percent savings on the cost of electricity. Fast forward to today, with the help of $2,675,000 million in federal EPA Clean School Bus rebates, our district is poised for full school bus fleet electrification, with one diesel bus on hand as a spare. We anticipate saving 90 percent in energy costs next year by leveraging solar energy produced onsite to fuel our school buses and power our building.

To this degree, over the last ten years, we have experienced an 8.6% annual average increase in the price of diesel fuel. If we had remained with diesel, it would cost us approximately $8,300 per route to fuel our buses in the coming year. In contrast, our new electric school buses will be able to run those same routes for about $900 in electricity, mainly solar energy produced onsite. That’s an overall fuel savings of 89 percent in year one of fleet electrification.

Looking forward, our solar power purchase agreement has us locked into a one percent annual escalator for the next 12 years. The only guarantee with the price of diesel fuel is that it will fluctuate significantly from one year to the next and, on average, increase at a rate of 8.6% per year. Like Huntley, Williamsfield Schools works hard to streamline operational spending and keep as much money as possible targeted directly on their kids, teachers and classrooms.

Students at both Huntley and Williamsfield are taught the importance of long-term energy sustainability. At the district level, our operations are committed to walk the walk. We recognize the global transition to electric vehicles has begun. With the cost of battery production in decline, several auto industry CEOs expect at least half of all vehicles manufactured will be electric by the end of the decade. Add to the equation a one-time influx of government incentives specifically for electric school buses, and the time to begin school bus fleet electrification is now. 

The adoption of electric buses in Illinois is still in its early stages. However, there has been an increasing interest and momentum toward transitioning to electric vehicles throughout the state. Several school districts and transit agencies in Illinois have begun exploring or implementing electric bus programs as a result of Federal funding and the push toward energy savings and sustainability. Under the EPA’s Clean School Bus Program approximately 15 districts, in Illinois, are receiving funding to purchase over 105 electric buses. With funding from the bipartisan infrastructure law, EPA’s new Clean School Bus Program will provide $5 billion from fiscal years 2022 - 2026 to replace existing school buses with zero-emission and low-emission models.

Electric buses offer several benefits for school districts:
Environmental Impact: Electric buses produce zero tailpipe emissions, helping to improve air quality around schools and reduce greenhouse gas emissions. By transitioning to electric buses, school districts can demonstrate their commitment to sustainability and contribute to a cleaner and healthier environment for students and the community.

Health and Safety: Electric buses produce significantly less noise compared to conventional buses, creating a quieter and more peaceful environment for students, especially during pick-up and drop-off times. If you have ever stood at a bus stop, you know the smell of diesel and the related impact this may have on our students! Since electric buses do not emit harmful pollutants, students are not exposed to harmful exhaust fumes, which can have adverse health effects.

Cost Savings: Although electric buses typically have higher upfront costs than traditional buses, after additional available funding, they offer potential long-term cost savings. Electric buses have lower operating and maintenance costs due to the reduced need for fuel and fewer mechanical components. School districts can save money on fuel expenses and benefit from longer-lasting batteries and fewer maintenance requirements.

Funding Opportunities: There are currently several funding opportunities available for electric buses and their related infrastructure to support the adoption of electric buses in school districts. These funding opportunities can help alleviate the initial investment costs associated with transitioning to electric buses, making them more financially feasible for school districts.

Educational Opportunities: Electric buses present a unique educational opportunity for students. By simply riding on an electric school bus and incorporating electric bus technology into the curriculum, school districts can teach students about renewable energy, sustainability and the importance of environmental stewardship. Students can learn about electric vehicle technology, energy efficiency and the benefits of clean transportation, fostering a sense of environmental awareness and responsibility.

Community Engagement: Transitioning to electric buses can be a positive public relations move for school districts, demonstrating their commitment to sustainability and community well-being. It can help foster positive relationships with parents, community members and local organizations, generating support and engagement within the community.

Overall, electric buses offer school districts environmental benefits, cost savings, funding opportunities, educational value and community engagement. These advantages make electric buses a compelling choice for school districts looking to prioritize sustainability, student well-being and long-term financial efficiency.

Forecasting Expenditures when Approaching Capital Improvements
During the past several years, school districts and industry partners have seen firsthand how inflation, higher construction costs, labor and material shortages have impacted the built environment by creating challenges with scheduling and feasibility for capital projects. With student well-being and the educational experience being the primary priority for improving facilities, it is important to discuss and strategize how best to continue navigating these challenges and ensure project success. 

There are many variables that impact each situation and make each district unique. For example, is your project in a rural area? How large is the project? What is the scope and complexity of your initiative? The project delivery strategy and required schedule constraints must be understood and aligned with each unique situation. However, we can utilize the following four strategies to forecast capital expenditures.

Master Plan Your Future Needs
Master planning future work sets your district up for success when approaching capital improvements each year. The cost of delaying projects has become more expensive. While we cannot predict what will happen exactly, costs are not projected to go down any time soon and projects will not get less expensive. Now, more than ever, planning ahead can save your district serious time and money. Being forward-thinking with your projects and having a plan for your entire facility’s needs will allow you to be nimbler and start the design process quickly. A master plan outlines the overall needs, reflects the district’s prioritization of those needs, and considers how each initiative can be implemented with respect to the larger picture. Engaging with your architectural partner will allow you to define solutions, including the scope, timing, phasing and associated budget.

Districts are saving valuable time and money by having the scope, or program requirements, defined and prioritized needs understood. A successful master plan reflects the stakeholder needs and community values. If completed proactively, this process can save months of time during design to gather community support and feedback in order to move forward on an initiative. The budget established during the master planning process will need to be updated to reflect the changes in material and labor costs annually, but facility master plans are intended to be living documents, providing a solid foundation for forecasting your funding needs before starting a project. 

Utilize Project Budgets for Planning
A common point of confusion during capital projects is differentiating the construction budget from the project budget. The construction budget, which also could be referred to as the anticipated bid day value, is the estimated cost of materials and labor to construct the project (hard costs). In addition to the work to be performed by contractors, this budget also includes site supervision, general conditions, insurance, overhead and profit. The project budget includes the anticipated construction budget, but also accounts for anticipated Owner costs (soft costs). Soft costs are necessary expenses to the project, including design and permitting fees, surveying and geotechnical investigation, construction testing and inspections, third-party commissioning, furniture, equipment and technology to outfit final spaces.

Construction and escalation contingency are two critical components of the project budget that are both typically percentages of the overall hard costs. Historically, districts have used the construction contingency to account for unknown conditions, omissions and/or scope revisions during construction. Today, this contingency is being used to offset increased costs in labor and materials or avoid supply chain impacts on the overall schedule by allowing added value through material selection revisions after contracts have been awarded. The escalation contingency formerly accounted for an annual inflation increase of three to four percent on construction costs. This year, escalation on construction projects will be between eight and twelve percent, and these rates have been even higher on select materials and trades. In many cases, an increase is being applied quarterly by manufacturers and suppliers. Work with your partners to determine the appropriate value of these contingencies for your specific project.

Plan for the Unknown
Due to inflation, labor and material shortages, it is even more vital to engage all of your partners, such as designers, engineers, specialty consultants, construction managers (CM) and owner’s representatives early on to ensure project success. Early partnerships and engagement allow for proactive identification of potential project risks. These risks can affect schedule, cost and quality, so engagement can influence the design and mitigate the risk of increasing costs while still meeting your district’s expectations for schedule and quality. When preparing for capital projects, the team can build in mechanisms and flexibility for unknowns that may arise throughout the design, bidding and construction process.

One of the challenges our industry provides is that the products used for capital improvements are made up of raw materials sourced both domestically and internationally, and there continues to be uncertainty with the global economy. Work with design partners that are in contact with subcontractors and vendors for up-to-date information on material costs and potential lead times based on your project specifics and quantities. Having a partner that understands the sourcing of the materials being specified can offer recommendations for utilizing locally sourced materials or readily available products
– for example, masonry units or “quick ship” flooring – and limit exposure to scheduling risks during construction. Leveraging learnings and cost data from similar projects in your area is a valuable insight that your design partners can provide to foresee potential issues with contractor availability and labor shortages. Local experience by your industry partners allows them the ability to update the project budget at various milestones during design and better forecast the bid day value. 

Flexibility on bid day is important to have when you are faced with unexpected increases in construction value. Developing bid alternates is one strategy to better manage the contracted sum and start your construction project on budget. However, this strategy should not be used if an alternate will compromise the intended functionality or intention of the project. In the case that you have limited opportunity for alternative designs and material selections, utilizing early bid packages or owner-purchased materials can allow you to procure materials ahead of an industry cost increase and also prevent schedule conflicts that would otherwise arise from long lead-time items. These strategies can be used alone or in combination to best align with your needs, but all of them can better prepare your district for the unknowns of the current market conditions.

Extend your Construction Schedule
A well thought out and realistic construction schedule is a critical part of your construction documents. However, with schools commonly completing capital projects during the summer months, the overheated construction market can increase your challenges. Many of these projects require overtime and weekend pay for contractors to meet deadlines. With an oversaturated market, the material and labor demands are higher, leading to one more reason for increased construction costs. Develop a clear understanding of the construction phasing for your project and be proactive with determining the availability of your facilities to complete the work. With graduation, summer school, athletics, professional development and move-ins, the summer timeline is typically two and a half months or less. Consider if you have flexible space in your building to begin renovations in an area of the building prior to the last day of the spring semester. If adding space, consider if your schedule can extend into the fall to allow a contractor to utilize additional labor forces as they complete tighter summer schedules. Prepare your staff in advance to move out of their spaces quickly. Submit your bids early. Bidding as early as September in the previous year for a summer project is advisable but be aware of off-site storage costs for items that arrive prior to contractors being onsite. Remain engaged during construction in order to be proactive, transparent and collaborative in adjusting activities that may be disrupted by construction activities. 

Overall, a successful capital project relies on the collaborative planning and open dialogue between the district, the architect and construction partners. With a volatile market, there is no crystal ball to foresee the potential risks and challenges you may face throughout the process. The best strategy you can employ is to have a plan for the ways you can address the unknown, whatever it may be when it arises. Leveraging your industry partners’ experience and resources to carefully develop that plan is the best approach to prepare yourself, your administrative team, your Board and your community.

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