Categories: Lease Accounting

Charging Back Occupancy Costs: Why It’s a Good Idea

There’s always a dispute within the organization aboutthe issue of chargebacks, particularly facility occupancy costs. Department heads typically question the need for charging back occupancy costs, since they don ‘t feel they have any direct control over these overhead costs. But occupancy costs are directly linked to staffing, so it’s logical to burden a department with its share of occupancy costs relative to staffing levels. The argument for chargebacks centers on the need for reinforcing cost containment, as well as maintaining a level of fairness in the organization.

What are the typical costs included in the chargeback? Certainly rental is a primary cost along with utilities, maintenance, insurance, leasehold improvement amortization, and capital depreciation related to furniture and equipment. These costs should be accessible from the lease management system, and department P&L statement. Usually, staffing numbers are available from the department operating statement. In my experience, the finance department would develop a cost per person, and then charge a department P&L with the product of number of employees times the chargeback rate. In my opinion it’s unnecessary to differentiate space allocations based on different office sizes. A standard cost per person is sufficient for the purposes of chargebacks and avoids arguments over space per person differences.

Some years ago our group worked with the Institute of Management Accounting in an effort to develop a broader chargeback metric that was called “workpoint accounting.” This metric included both occupancy costs and fully loaded IT costs such as network costs, prorata share of equipment costs, etc. The idea behind this broader metric would be to account for cost per person regardless ofwhether employees were assigned a workstation or whether they worked on a mobile basis. The effects of this chargeback were quite compelling and made a strong financial case for telecommuting primarily as a result of reduced occupancy cost per person. At the time, the Agile Workplace project at Gartner did several case studies using the Workpoint accounting metric. I recall that in the case of Gartner’s headquarters in Stamford, several scenarios assuming different levels of desk sharing and telecommuting reduced the cost per person dramatically from $19 K per employee down to $15 K per employee. (Total occupancy plus IT costs)

Charging back occupancy costs has several benefits:

·      Provides incentives to conserve space.

·      Provides metrics to analyze desk sharing and telecommuting strategies

·      Provides benchmarks to analyze occupancy costs across the portfolio.

·      Provides a tool to plan new facilities based on headcount projections

·      Identifies disparities across different department occupancies; and exposes space inefficiencies.

Conclusion: Occupancy cost chargeback, is an effective tool for allocating overhead costs to different staff groups. Some organizations strive to develop a P&L statement by department, and having a cost component for occupancy insures a complete picture of profitability. But chargebacks assume that the organization has a robust lease management systemto identify space, and associated leasing costs. It also assumes the organization has an effective human resource system that tracks staffing levels by location.

 

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