Perhaps the biggest asset related challenge facing us in the current economic climate is presenting to our customers a compelling argument for adequate funding for life cycle works.
by Donald MacDonald
Making a robust business case for funding for life cycle works can be difficult. Reasons for this include:
- The consequences of under-spending is unlikely to be immediately apparent to the customer.
- Non-core business requirements tend to be not as highly valued as core business needs.
- If the assets appear to be performing within the parameters that the customer expects of them, it can be difficult for these customers to perceive a need for major expenditure.
- Assets that are performing inefficiently, either due to inadequate maintenance or from having been retained in service beyond their economic life, often deteriorate gradually.
- Ill-informed clients can be inclined to allocate a consistent sum each year for the funding of life cycle works. However, as is illustrated in the diagram below, the cost of such projects when appropriately timed varies significantly from year to year.
One of the keys to successful asset management is the managing of expectations. It is down to the asset management professional to communicate effectively to his/her stakeholders the value of appropriate strategies including:
- Articulating to financial professionals the true costs and benefits of timely capital replacement expenditure e.g. the cost of deferred works includes the future cost of capital, increasing repair costs and business risk.
- Publishing a long term forward program of asset replacement works, reviewed and re- prioritized on an annual basis.
- The establishment of an adequate sinking fund to finance this program of works, reviewed annually.
- The implementation of a maintenance strategy appropriately split between reactive repairs and planned maintenance to optimise the design life of assets.
- The implementation of effective procurement strategies.
The business case for adequate and appropriate spending on capital replacement works is the same in all economic climates. Best practice strategies are based upon the optimising of spend over the design life of the assets and throughout the life of the organisation that they support. The real challenge for the asset management professional is communicating the benefits of these strategies to our customers in a compelling manner.