The Connection Between Space Allocation Programs & Chargebacks

To understand what office space chargebacks are, let’s start with understanding space allocation.  Space Allocation is the process of categorizing distinct areas of the workplace as one of two types.  As either team-assigned space or common area.

Space Cost Allocation is the process of divvying up the expenses related to occupying team-assigned space and common area spaces amongst the various business units with the right to use those areas.  

Chargebacks, consequently, are the actual invoices between the company and/or business units. They show up as expenses in the budget for access to office space.  These transactions are internal only and have no direct impact on external customers, clients, or partners.

Why Do Companies Use Chargebacks?

There are many reasons, but the primary reasons are to properly manage finances. Space allocation and chargeback programs “help organizations provide an equitable way to allocate the total cost of occupancy (TCO) back to their businesses that occupy the space.”1

As a result, chargebacks are supposed to provide transparency around occupation cost and make sure that these are accounted for in pricing. “Some organizations strive to develop a P&L statement by department, and having a cost component for occupancy ensures a complete picture of profitability.”²

When companies know how much it costs for each of their departments to occupy space, they are, then, able to use that as one indicator of how profitable that department or business line is and bolster decision making.  

Another reason companies use chargebacks is to discourage space hoarding and promote workplace efficiency.³  Here are the specific benefits charging back occupancy costs provide and identify:

• Incentives to conserve space.
• Metrics to analyze desk-sharing and [hybrid or remote work] strategies.
• Benchmarks to analyze occupancy costs across the portfolio.
• A tool to plan new facilities based on headcount projections.
• Disparities across different department occupancies; and exposes space inefficiencies.²

Typical costs included in chargebacks?

“[R]ental is a primary cost along with utilities, maintenance, insurance, leasehold improvement amortization, and capital depreciation related to furniture and equipment.”²

Program Flaws 

In theory, space allocation and chargeback programs support workplace efficiency, but in practice this isn’t always so.  

• Chargebacks end up creating a lot of internal workload despite the goal of reducing inefficiency.  Allocating space cost is a left pocket-right pocket booking for the company as a whole.  It can lead to a lot of bureaucracy and discussions internally that sometimes lead to formal lease negotiations between business units.  Is the tradeoff worth it when the net change of company-wide productivity is slim to none?

• Charging back space creates a misalignment of incentives that hurts workplace experience.  When space chargebacks are calculated proportionately to rentable square feet (RSF), department heads are incentivized to reduce TCO as much as possible as it comes out of their budget.  However, workplace decision makers are not the only ones using the workplace.  Chargeback programs do not intrinsically take into account workplace user needs and preferences.  While a department head may succeed at reducing their chargebacks, they may leave their workplace users feeling less valued.  How to Measure Employee Experience in the Workplace.

• There are easier ways to calculate TCO for accounting purposes.  Calculating cost based on overall business line headcount–would be an effective alternative to chargebacks. Also easier, as pricing wouldn’t require any more granularity than this.  Because space allocations and chargebacks are traditionally complex calculations, many workplace managers don’t have the time or expertise to complete proper accountings.  Philip Lehrman, a former CAFM professional, wrote an article³ about numbers being fudged and fabricated just to get the report to accounting on time.  Managers seemed to lack the time, training, or willpower to push back against the ways things had always been done.

Opportunities for Change

There have already been iterations of the methodologies behind space allocation and chargebacks. Such as the use of headcount instead of rentable square feet as a basis for proration. But improvements in technology have fueled another iteration.  Cost allocations will now be based on automated utilization data.

Cost allocation based on RSF does not take the number of office space users into account. Leaving TCO inaccurate.  Cost allocation based on headcount assumes all people use the office the exact same way.  So again TCO is flawed. On the other hand, cost allocation based on utilization data, or data on how office space is used, gives a more accurate and automated perspective of departmental occupancy costs.  As cost allocation programs become less complicated and more insightful, more focus can be spent on workplace experience. 

Now that you have a better idea of what space allocation and chargeback programs are, read the 6 Ways Hybrid Work Will Change Chargebacks & Space Allocation.

Citations

¹CBRE Global Occupancy Report [2021] 

²VisualLease.com, “Charging Back Occupancy Costs: Why It’s a Good Idea” [October 4, 2016] 

³LinkedIn Article by Philip Lehrman, “Space Allocation Chargeback” [April 4, 2014]