Maintenance Cost control and EUL

One of the most fundamental requirements of business operations is the ability to budget and control cost. This is especially so for the big-ticket functions in a plant’s total cost.

Maintenance, in many operations, is a cost well in excess of a million dollars every month. The complex nature of this function, however, typically has prevented practices from taking form that would meet basic standards for cost budgeting and control. By bringing accounting, internal audit, and database mining skills to the problem, the ability to budget and control maintenance cost can finally match the complexity of the maintenance function.

Building the system to do so is one of a plant’s most attractive alternatives for increasing its total profitability. In the process, a plant quantifies the gap in cost defined as “what is the total cost and why, and what should it be?”

The process then refines and expands the plant’s previously installed best practices as is necessary to close the cost gap. Closing this gap is accomplished through a method known in accounting as “activity-based costing.”

Ways you can reduce your maintenance costs without decreasing your operational efficiencies, are

• Examine what’s necessary, what’s not – When first purchasing your equipment, ensure you review its preventive maintenance requirements with the manufacturers and your subject matter experts, whether those are engineers or senior maintenance professionals. You should confirm that all of the suggested preventive maintenance is actually needed, as unnecessary preventive maintenance can actually induce equipment failure.
• Select a suitable measurement system – Take a compressor, for example. Some companies may think they need to rebuild a compressor every three years. But what if that compressor runs only one month out of every four months? You’re basing your preventive maintenance on a calendar year, not on the compressor’s running hours. Preventive maintenance should be performed based on the most applicable measurement system for the equipment.
• Pick the optimal time to perform maintenance – Preventive maintenance should be scheduled maintenance, tuned to the specific needs of your production schedule. This way, your food processing plant can take assets out of service at a time that allows you to maximize your uptime or your efficiency. Most companies complete their preventive maintenance in the cooler months of the year. Compressor and evaporator rebuilds are easier to perform in the winter because the temperatures are not as hot, requiring less of a refrigeration load. This offsets labor costs, too.
• Maximize the efficiency of your staff – By training production workers to provide preventive maintenance assistance on a daily or weekly basis, you maximize the efficiency of your food processing plant staff and take the preventive maintenance burden off of your senior professionals.
• Develop an overall maintenance strategy – If you use preventive maintenance in conjunction with a predictive and reactive maintenance strategy, you can control costs while managing downtime and maximizing uptime. While a reactive case is unplanned, you should be able to plan your work and work your plan for preventive maintenance. If you know you have a contract with a service provider and have scheduled maintenance, you can ensure the provider shows up on time and that you have the parts ready to go (plan for parts to be delivered a day ahead of time). Then, you can maximize the service provider’s time on the equipment, avoid wait time and get your equipment back in service more quickly.

Activity-based costing

Activity-based costing (ABC) is a costing methodology that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each. This model assigns more indirect costs (overhead) into direct costs compared to conventional costing.

Methodology of ABC focuses on cost allocation in operational management. ABC helps to segregate

• Fixed cost
• Variable cost
• Overhead cost

The split of cost helps to identify cost drivers, if achieved. Direct labour and materials are relatively easy to trace directly to products, but it is more difficult to directly allocate indirect costs to products. Where products use common resources differently, some sort of weighting is needed in the cost allocation process. The cost driver is a factor that creates or drives the cost of the activity. For example, the cost of the activity of bank tellers can be ascribed to each product by measuring how long each product’s transactions (cost driver) takes at the counter and then by measuring the number of each type of transaction. For the activity of running machinery, the driver is likely to be machine operating hours. That is, machine operating hours drive labor, maintenance, and power cost during the running machinery activity.

Activity-based costing must be implemented in the following ways:

• Identify and assess ABC needs – Determine viability of ABC method within an organization.
• Training requirements – Basic training for all employees and workshop sessions for senior managers.
• Define the project scope – Evaluate mission and objectives for the project.
• Identify activities and drivers – Determine what drives what activity.
• Create a cost and operational flow diagram – How resources and activities are related to products and services.
• Collect data – Collecting data where the diagram shows operational relationship.
• Build a software model, validate and reconcile.
• Interpret results and prepare management reports.
• Integrate data collection and reporting.

EUL

Determining how long a building component will last before it requires repair or replacement is one of the primary tasks in performing a Property Condition Assessment (PCA). Other professions rely on existing tables to render such opinions. For the engineer, the assessment is much more subjective.

The terms Useful Life (UL), Estimated Useful Life (EUL), and Remaining Useful Life (RUL) are commonly used in business. In the appraisal world, the term Useful Life is defined as the economic period during which a positive cash flow is expected for the improvements. For accountants and tax advisors, the term means the period to depreciate the asset.

Generally, the Useful Life of most assets is defined by statute. Many states publish lists of depreciable assets including personal property, land, buildings, and infrastructure. The National Association of State Comptrollers has even published a survey of Useful Life ranges by state.

There is varying specificity as well as varying values among the states. However, the practitioner, whether he or she is an accountant or appraiser, does not have much leeway in making the determination. As we will see, in engineering, the definition may not be as clear-cut.

ASTM E-2018-01, the Standard Guide for Property Condition Assessments, defines the terms as follows:

• Expected Useful Life (EUL) – The average amount of time in years that an item, component, or system is estimated to function when installed new and assuming routine maintenance is practiced.
• Remaining Useful Life (RUL) – A subjective estimate based on observations, or average estimates of similar items, components, or systems, or a combination thereof, of the number of remaining years that an item, component or system is estimated to be able to function in accordance with its intended purpose before warranting replacement. Such period of time is affected by the initial quality of an item, component or system, the quality of initial installation, the quality and amount of preventive maintenance exercised, climatic conditions, extent of use, etc.

These values are used to calculate estimated capital expenditures and reserve requirements for properties while performing a PCA.

In recent years, the line between engineering and accounting and appraisal has blurred slightly by the addition of several new services. Cost Segregation Studies seek to “segregate” the costs attributed to the non-permanent building systems from the building itself so that they can be placed on a more aggressive depreciation schedule. In doing so, the owner is able to recover more cash in the early stages of building ownership that can best be put to use elsewhere. This process combines the estimating skills of the engineer with the tax skills of the accountant. Building components are placed in different categories (5-year, 7-year, 15-year) for depreciation purposes. There is little room for interpretation here but the IRS requires engineering expertise to accurately reflect cost.

So how long will it last? The answer is: it depends. The experience and judgment of the engineer are critical factors in coming up with a reasonable answer to this very important question.