Fears of a looming recession and rising inflation are placing more pressure on nonprofit finances, which may already be strained from the lingering effects of the pandemic. While deferring some projects — such as preventative building maintenance — may be appealing, failing to perform needed repairs can lead to asset deterioration and market devaluation.

Deferred maintenance also can be a significant expense. Facilities experts estimate that for every $1 retained by deferring maintenance, an organization can expect to pay $4 in the future in repair or replacement costs.¹ In the education sector, it’s estimated that colleges and universities have deferred more than $112 billion of maintenance that’s now coming due.²

Facilities in disrepair create safety hazards, breach civic codes and bylaws, waste energy, pose reputational risk and increase insurance costs. Despite these consequences, deferred maintenance continues to plague nonprofit institutions due to competing leadership priorities, internal resource allocation demands, inflation and other economic variables.

While funding a long-term maintenance plan may be uncomfortable in the short-term, this disciplined capital funding will preserve an organization’s physical assets for future generations. This approach also brings additional benefits, including reduced losses, more favorable underwriting treatment and a stronger management liability profile.

To ensure the long-term sustainability of facilities, organizations need to create a multi-part strategic plan. Here’s how:

Audit facilities and prepare an engineering report. Nonprofits should complete a projection of all maintenance costs every three to five years, taking a 30-year view of projected maintenance with cost estimates for each year. Bring together stakeholders and take the time to ask questions of facility users to identify areas for improvement.

Ensure the action plan created from the report prioritizes areas of infrastructure that could present a safety concern and includes key performance indicators to inform maintenance priorities.

Establish target annual contribution to facilities maintenance reserve. After conducting the audit, determine how much the nonprofit should ideally contribute each year to its maintenance reserves.

The National Association of Independent Schools (NAIS) recommends funding a facilities maintenance reserve at an annual rate equal to 3% of a structure’s replacement value. But target metrics can vary by organization. If the insurable value of an organization’s buildings is $80 million, aim for an annual reserve contribution up to $2.4 million.

Reserve balances will naturally fluctuate as capital projects conclude but setting targets and tracking this metric over time enables boards to fulfill their fiduciary obligations. A skilled strategic risk advisor can help evaluate the impact of the reserve to the organization.

Create an investment policy statement and plan for facilities reserves. Over the lifecycle of an organization’s infrastructure, maintenance reserves grow and then are drawn down commensurate with the maintenance burden in aging facilities. A risk-appropriate investment strategy and asset allocation model should guide fund management in tandem with the growth and drawdown schedule.

The investment plan should have adequate diversity and include a schedule for review to make sure the risk profile and asset allocation continue to meet the needs of the organization.

Contact HUB International’s nonprofit or education insurance experts learn more about funding preventative facility maintenance.

¹ Compliant Healthcare Technologies, “11 (Costly) Dangers of Deferred Maintenance in Facilities,” November 15, 2018.
² Facilities Manager, “Changing the Facilities Backlog Conversation in Higher Education,” July/August 2021.