All Member Open Forum

Irete,

You have stepped on the elephant-in-the-room of asset management. Many like the idea of setting a budget for maintenance as a percent of asset replacement value (RAV). However, the elephant in the room is where is the determination to come from as it is different from the depreciated value of an asset that can be extracted from the accounting books. RAV data  is not a standard practice that we can expect to be lurking in a plant's records.

What you're trying to do is not really any different than purchasing a house. The market value is established as a baseline and then the appraiser notes the roof has five years remaining life, and so on. Another view is a cash flow basis with respect to net revenue value of the asset: revenue minus operating and maintenance cost.

The latter requires a maintenance budget. The simplest is a percent RAV, but we are back to the elephant in the room. Another is to build a dual dimensional budget of workload and resources to do the work and then net present value against the net present value of the revenue stream. The workload-based budget can reach into the plant data to determine the budget for a group type of equipment and convert to an expected value for budget. The granularity of dual dimensions allows the history to be inspected and adjusted for rare events in history.

However, ultimately you should set an optimistic value based on analysis you can defend in a negotiation. Otherwise, in negotiation you will not do as well because you will not have a basis to justify what you're asking for. In other words, do your evaluation with the recognition that you are building a negotiating position.

Richard G. Lamb, PE, CPA

Irete,

You have stepped on the elephant-in-the-room of asset management. Many like the idea of setting a budget for maintenance as a percent of asset replacement value (RAV). However, the elephant in the room is where is the determination to come from as it is different from the depreciated value of an asset that can be extracted from the accounting books. RAV data  is not a standard practice that we can expect to be lurking in a plant's records.

What you're trying to do is not really any different than purchasing a house. The market value is established as a baseline and then the appraiser notes the roof has five years remaining life, and so on. Another view is a cash flow basis with respect to net revenue value of the asset: revenue minus operating and maintenance cost.

The latter requires a maintenance budget. The simplest is a percent RAV, but we are back to the elephant in the room. Another is to build a dual dimensional budget of workload and resources to do the work and then net present value against the net present value of the revenue stream. The workload-based budget can reach into the plant data to determine the budget for a group type of equipment and convert to an expected value for budget. The granularity of dual dimensions allows the history to be inspected and adjusted for rare events in history.

However, ultimately you should set an optimistic value based on analysis you can defend in a negotiation. Otherwise, in negotiation you will not do as well because you will not have a basis to justify what you're asking for. In other words, do your evaluation with the recognition that you are building a negotiating position.

Richard G. Lamb, PE, CPA

In response to Rene's comment on budget, there must be a clarification.

By workload-based budget I am not specifically speaking of method by which workload is defined. Zero-based budgeting began in the 1970s, but the important point is that it is largely impossible for maintained assets. This is because it requires prescience; we must foresee all and exactly what is to happen in the budget period.

For almost all types of assets, it is only statistically possible to forecast the number of work events and the resources to conduct the work of the events. This is good enough to will enable the maintenance operation to fulfill its mission to sustain the plant's productive capability and stay abreast of deterioration, and do so cost effectively.

To formulate a budget statistically, begin with breaking the workload down by statistically homogeneous groups of assets, maintenance types and craft types. Thence, use history in the CMMS and other sources to forecast the workload and resources into the budget period. Each month, the variance is determined with respect to due to difference in completed work and due to difference in resources.

Some but only few of the homogeneous budget groups will allow us to do zero-based budgeting.

Irete,

You have stepped on the elephant-in-the-room of asset management. Many like the idea of setting a budget for maintenance as a percent of asset replacement value (RAV). However, the elephant in the room is where is the determination to come from as it is different from the depreciated value of an asset that can be extracted from the accounting books. RAV data  is not a standard practice that we can expect to be lurking in a plant's records.

What you're trying to do is not really any different than purchasing a house. The market value is established as a baseline and then the appraiser notes the roof has five years remaining life, and so on. Another view is a cash flow basis with respect to net revenue value of the asset: revenue minus operating and maintenance cost.

The latter requires a maintenance budget. The simplest is a percent RAV, but we are back to the elephant in the room. Another is to build a dual dimensional budget of workload and resources to do the work and then net present value against the net present value of the revenue stream. The workload-based budget can reach into the plant data to determine the budget for a group type of equipment and convert to an expected value for budget. The granularity of dual dimensions allows the history to be inspected and adjusted for rare events in history.

However, ultimately you should set an optimistic value based on analysis you can defend in a negotiation. Otherwise, in negotiation you will not do as well because you will not have a basis to justify what you're asking for. In other words, do your evaluation with the recognition that you are building a negotiating position.

Richard G. Lamb, PE, CPA