Finance and Budgeting For Maintenance

Aryana Group - IPAMC - 2006
Finance and Budgeting for Maintenance
Ben Stevens
ben@ omdec.com
www.omdec.com
www.ipamc.org
Ben Stevens, OMDEC – “Finance and Budgeting for Maintenance” 1
Today’s Agenda
• Understanding Accountants and ROI

• Basic Cost Reports
• Building your Budget
• Project Proposals – Financial aspects
• Life Cycle Costing
www.ipamc.org
Accountants are…..
Predictable Tick where
Negative applicable
Conservative
Narrow-minded
One track minds
Unloveable
Boring Add your
own helpful
Suggestions
www.ipamc.org
Which Image fits your Accounting Department?
www.ipamc.org
If all that is true….
Where do little accountants come from……

www.ipamc.org
The Real Image…..
Off to another party…..

www.ipamc.org
What do accountants really do?
• --- the guardian of the company’s money
• Responsible for the integrity of the financial

decisions
• Have to sit in judgement on whether this

project is more “worthy” that that one
• They have to apply their rules

www.ipamc.org
Remember…
• You can’t change the rules

• They can’t change the rules
• They need to understand
• They need to trust you
• ….so you need them on your team
www.ipamc.org
Rules for Getting to Know Accountants
• Ask them for help ahead of time
• Understand their rules
• Help them to understand what maintenance is all
about (impact on bottom line)
• Seek their advice on what numbers, how to
present them
• Include financial measures in your operational
and project planning
• Have them along to your presentation and give
them credit
• Build in numbers, present in pictures
www.ipamc.org
ROI
Total Total
Total time - Downtime Stores cost Labour Cost
Total Total
Run-time X Throughput Contractor Cost Tools Cost
Total Production Total
Production Volume X Price Cost + Maintenance Cost +
Total
Revenue Cost Admin Cost
ROI =
Investment
Total Equipment Equipment
Value = Equipment Cost
Deterioration Directly affected
Total Building Building By Maintenance
Value = Building Cost
Deterioration
Total Land Value Land Indirectly affected
= Land Cost
Deterioration By Maintenance
Total Inventory Total Raw Total Stores Total Finished
Value = Materials Value
+ Value
+ www.ipamc.org
Goods Value
What Happens IF????
Show the impact as +++ to ---
Revenue Cost Invest ROI
ment
1 You install new production equipment
2 You install new environmental

protection equipment
3 You prevent a breakdown
4 You incur a breakdown
5 You increase your PM Program

6 You decide to outsource your
maintenance
7 You improve your Spare Parts
Management
www.ipamc.org
List areas where you are
involved in ROI
Impact – High,
Medium, Low
www.ipamc.org
Question….
• What if you are a Service organization?

• How does this work if Revenue and Profit
are not drivers for your organization?
- Cost Reduction?
- Asset Efficiency
- Customer Satisfaction?
- Social Benefit?
www.ipamc.org
Today’s Agenda

www.ipamc.org
This should be your starting point
– Monthly and Annual Spending on: 1. Regular Maintenance
2. PM’s
3. Emergency Repairs
4. Special projects
Equipment Labour Materials Contract Tools Total Comments
$ $ $ $ $
#5 Boiler Another breakdown last
- Regular 15,250 12,440 Nil 300 27,990 month! Should be solved by
- PM’s 3,240 4,500 nil nil 7,740 the major refurbishment
- Emergency 5,200 4,500 nil Nil 9,700
- Special 3,500 2,550 45,000 Nil 51,050
Total 27,190 23,990 45,000 300 96,480
Hot Press
Indirect and
Overhead
Total www.ipamc.org
Monthly and Annual Breakdown cost report
Equipment Breakdowns Breakdown B/D cost B/D cost Emergency Total B/D
# - Hrs per hour $ $ Repair $ cost $
#5 Boiler 4 16 500 8,000 2,400 10,400
Primary 2 6 15,000 90,000 12,000 102,000

Circulation
Pump
1. Get accounting to give you a breakdown cost per hour

(= total value of lost production)
2. Get Production to agree on how to define “downtime”
(not related to who is to blame)
3. Do a Root cause Analysis for EACH Significant failure
www.ipamc.org
Pareto Chart: Breakdowns
Brick Manufacturing Company
60 120,000
Number of Cost of
break- Breakdowns
50 100,000
downs 2003
40 2003 80,000
30 Series1 60,000 Series1
20 40,000
10 20,000
0 0
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21
Slurry Pump Kiln Kiln Slurry Pump
www.ipamc.org
What is downtime?
T1 T2 T3 T4 T5 T6 T7 T8 T9
Production
rate 12
10
0
1
11
16
21
26
31
36
41
46
51
56
61
66
71
76
81
86
91
96
Get parts,
start repair Full production rate
Diagnose
Complete test,
Equipment available handover to production
Maintenance arrives
Complete repair, start test
Call to Maintenance
First sign of performance degradation www.ipamc.org
List your Main Costs of Downtime
Item Data Source Impact (VH
– H – M - L)
1
2
3
4
5
6
www.ipamc.org
Today’s Agenda

www.ipamc.org
Sources of Budget data
• Your CMMS data from last • Must have….

year – All maintenance work
• Expected changes this year recorded on work orders
• Gut feel backed up by – Work orders by line or
hunches, guesses and equipment or area
(maybe even) predictions – Labour Hours, Materials
used, contractors and tools
• Demands of management to per job
reduce costs – Ability to convert these into $
• Inflation rates – Accurate data collection
www.ipamc.org
Maintenance Budgeting Techniques
• Historical Budgeting
• Standard Costing
• Zero-based
• Activity-based
• Activity-centre based
www.ipamc.org
1. Historical Budgeting*
• Last year’s costs by maintenance
cost centre and/or class of expense
• Remove major one-off expenses
• Add major new projects
• Multiply by an inflation factor
…..then the dreaded “cut by 10%”
*easily the easiest and therefore the most popular (and easily the worst!)
www.ipamc.org
Here’s the familiar Historical Budget
Line/Area Generation $ Water Purification Distribution $ Total $
$
Mtce Labour 170,090 140,100 53,960 364,150
Mtce Materials 123… 234… 234… 385,450
Mtce Overhead 446… 456… 546… 124,620
Contractor 345… 235… 789… 77,000
Tools 14,000 5,250 3,000 22,250
Total 425,650 385,050 142,770 953,470
- Special Proj -48,000 nil -22,000 -70,000
+ New Projects 28,000 15,000 6,300 49,300
Total 405,650 400,050 127,070 932,770
X inflation 1.02 413,750 408,050 129,600 951,400

www.ipamc.org
2. Standard Costing*
• Each product is assigned unit costs based on:
– Expected costs
– Expected volumes
– Expected product mix
• Through the year, cost volume and mix changes
are calculated as Variances
• Net result – you are always being asked to explain
variances that you don’t understand!
*The accountants dream

www.ipamc.org
Standard Cost – Budget vs Actual
Production Total Cost per Cost per Cost Comments
cost item $ mgal $ mgal $ Variance
Budget Actual
Production 20,000 0.16 0.14 0.02
Labour
Production 18,000 0.14 0.14 0
Materials
Utilities and 10,000 0.08 0.07 0.01
services
Maintenance 14,000 0.11 0.11 0
labour
Maintenance 12,000 0.10 0.12 -0.02
materials
Total 74,000 0.59 0.58 0.01
Based on Production of 125,000;

Question – if actual is 137,000 – so what? www.ipamc.org
3. Zero-based Budgeting
• Popular in the 70’s – especially in

Government.
• Based on the principle of building from scratch
(the zero base), then adding the various
programs or levels of service
• Level of service is prioritised and determined
by the cash available
• Largely discredited as impractical in industry
www.ipamc.org
Zero-based budget sample
Generation Water Pur- Packing Total
$ ification $ $ $
Zero service 0 0 0 0
Breakdown response 105833 175100 29613 310545
only
Add Planned 275165 455260 79663 807417
Corrective
Add PM’s 317498 525300 88838 931635
Add Predictive Mtce 380997 630360 106605 1117962
Total 423330 700400 118450 1242180
Problems: - who decides priorities

- long term versus short term
- recipe for wrangling over the wrong issues
www.ipamc.org
4. Activity-based Budgeting
• Based on bundles of activities or

functions
• Focuses on what we actually do, not
buckets of resources:
– Hence “Planned Maintenance on Pumps”
– Rather than “total labour $”
www.ipamc.org
Sample of Activity-based Budgeting
Labour Materials Contract Tools Cap Total
$ $ $ $ Projs $
$
Planned Maintenance 1500 2000 15,000 800 10,000 29,300
on well-head equipment
Planned Maintenance 8500 18,000 25,000 1000 25,000 77,500
on Drills
Emergency repairs
Planning and
Scheduling
Staff Mgmt and
Supervision
Safety Meetings
www.ipamc.org
5. Activity-Centre based Budgeting
• Modification of the previous one to reflect the
way we actually do business:
– Select logical groups of equipment (use the
CMMS hierarchy for this)
– Examine past costs
– Forecast based on what we expect to happen
– Last Year’s costs from the CMMS
– Adjust for known factors such as labour rate
changes
www.ipamc.org
Example of Activity
-centre based Budget
Actual This year Budget Next Year
Equipment Lab Mats Contr Tools Total Comments Change Total

$ $ $ $ $ %* $
#5 Boiler Completed a
- Regular 15,250 12,440 Nil 300 27,990 major refurb this -15% 23,790
- PM’s 3,240 4,500 nil nil 7,740 year; will save on +10% 8,500
Reg Mtce $ and
- 5,200 4,500 nil Nil 9,700 Em $ next year; -90% 970
Emergency 3,500 2,550 45,000 Nil 51,050 need to boost -100% Nil
- Special 96,480 PMs 33,260
Total
Hot Press
Indirects + 21,300 2,500

Overheads
Total
•Rate increases: - Labour rate 3%

- Materials and Commodities prices 4%
- Contractor rates 3% www.ipamc.org
Advantages
• Can add new categories for Health and
Safety, Environmental etc
• And can separate individual contractor
• If you have to cut your budget, you can see
exactly where the $ will come from
• And you can assess the risk
• Which strengthens your ability to negotiate
with the accountants….
www.ipamc.org
Today’s Agenda

www.ipamc.org
But what is a Project?
• Anything that:
– Is not “normal operations”
– Requires special planning
– And special approval
• Generally a one-off
• Above $xxx
• Size and complexity will determine the
level of detail
www.ipamc.org
Project Objectives
• Be specific – especially when it comes to the numbers…
– Not “reduce costs and increase reliability”
– But “reduce maintenance repair costs annually by : $xxx Labour,
$yyy Materials, $zzz Contractors”
– And “reduce downtime from an annual x% to y%” or “reduce # of
breakdowns from x annually to y”
• Be credible – consistent, not exaggerated, supportable.
•“To replace the main shaft and bearings on the Primary Circulation
Pump; this will reduce the number of breakdowns from 2 this year
and an expected 4 next year to zero (saving a net $120,000 in lost
production in year 1), and eliminate emergency repair work (saving
about $24,000). Costs for the project are estimated at $48,000, for a
year 1 payback of 2 times. Benefits will continue beyond year 1 at an
increased level”
www.ipamc.org
Project justification
- benefits
“… Based on this year’s data (below), our Primary Circulation Pump is losing us
$90,000 in lost production, plus an additional $12,000. This is based on a total of
6 breakdown hours (verified with Production), at $15,000 per breakdown hour
(verified by Accounting). With no investment, and based on the machine
condition (see foot note), we predict at least 4 breakdowns next year for a total
loss of $200,000.”
Equipment Breakdo Breakdow B/D cost B/D cost Emergency Total B/D
wns - # n - Hrs per hour $ Repair $ cost $
#5 winder 4 16 500 8,000 2,400 10,400
Primary 2 6 15,000 90,000 12,000 102,000

CirculationP
ump
Footnote: our analysis results show the main shaft alignment deteriorates by 1%
each operating day – functional failure occurs at 50%; hence 4 breakdowns are
predicted www.ipamc.org
Project justification – benefits (2)
This year Year 1 Year 2 Year 3
Actual
Number of Breakdowns 2 4 4 4
Breakdown hours 6 12 12 12
Lost Production cost/hr 15,000 15,000 15,000 15,000
Total Lost Production cost avoided 90,000 180,000 180,000 180,000
Lost Production during Project Nil -60,000 Nil -30,000

Implementation
Total Emergency repair costs 12,000 24,000 24,000 24,000
avoided
Total 102,000 144,000 204,000 174,000
www.ipamc.org
Project Justification - Costs
Year 1 Year 2 Year 3
Materials Costs
- New shaft 28,000 Nil Nil
- New bearings 8,000 Nil 8,000
- Miscellaneous 1,000 Nil 500
Labour costs
- Installation 4,000 Nil 1,000
- Alignment 3,000 3,000 3,000
- Commission & Test 4,000 Nil 1,000
Contractor costs Nil Nil Nil
Total 48,000 3,000 13,500
www.ipamc.org
Project Financial Summary
(and questions)
Year 1 Year 2 Year 3
Total Project Cost 48,000 3,000 13,500
Total Project Benefits 144,000 204,000 174,000
Net Project Return 96,000 201,000 160,500
What’s missing? These are the

- effect of inflation areas where
- cost of capital you’ll need help
- return on investment from your new
friends in
- project planning horizon Accounting
- risk/contingency
- more detail on background numbers
www.ipamc.org
Today’s Agenda

www.ipamc.org
Life Cycle Costing
Life cycle costing is designed to include all
costs of a piece of equipment:
Who Leads? Best Practice Role Current Role of
of Maintenance Maintenance???
Engineering Advisory
Designing and
planning
Procurement Advisory
Acquisition
Engineering and Joint Lead
Installation Maintenance
Maintenance Lead
Maintenance
Operations Support
Operations
Maintenance Lead
Disposal www.ipamc.org
ARC 2001
- Best Practices Targets
Typical Best Practices

% of cycle % of* % of cycle % of* Savings
time TCO $ time TCO $ %
Plan 2 10 1 7 50%
Acquire 1 40 1 51 10%
Install 2 10 1 7 50%
Operate 90 20 95 21 25%
Maintain 3 15 1 7 65%
Dispose 1 5 1 6 10%
Total 30%
* TCO = Total Cost of Ownership = Life Cycle Cost

www.ipamc.org
Life Cycle Costing - Example
Pump 1 Pump 2
Cost to Buy 10,000 20,000
Cost to Install 1,000 2,000
Cost to Run/year 3,000 4,000
Cost to Maintain/year 5,000 8,000
Cost to Dispose 1,000 500
Pump Life 10 year 12 Years
Total Life Cycle cost 92,000 167,000
Annual Cost 9,200 13,900
So which pump do we buy??????

www.ipamc.org
..... add Performance
Pump 1 Pump 2
Lifetime throughput
– gals/hour 100 175
- m gals 8.76 18.4
Life time costs $/gal 0.0105 0.0091
NOW WHICH DO WE BUY???

www.ipamc.org
..... add Reliability
Pump 1 Pump 2
Lifetime throughput
– gals/hour 100 175
- m gals 8.76 18.4
Life time costs $/gal 0.0105 0.0091
Breakdown – frequency 1/year 2/year
- duration 1 day 1 day
Down time cost - $/hr $1000 $1000
- Total $ $240,000 $576,000
- $ per gal 0.0274 0.0313
Total Lifetime operating cost $/gal 0.0379 0.0404
So are we clear on which one to buy??

www.ipamc.org
NOT YET!!
How much throughput do we need?
If we chose Pump 1, can we achieve enough

capacity?
What’s the cost of losing a customer because of

non-delivery?
www.ipamc.org
WHOEVER SAID....
....this stuff was easy.....??
www.ipamc.org
Summary
• Accountants do have their value – but we
must learn to speak their language
• Budgets are built in different ways – all
need solid data and careful analysis to be
useful
• Project Finances also depend on good
data and analysis, but can work for us
• Life Cycle Costing – a coming view of the
Maintenance world – get used to it!!
www.ipamc.org
Workshop
• Compare your current Project Costing
approach with that in slides 36 to 40.
• Identify the advantages and
disadvantages of your current
approach versus the one presented
• List the steps needed to improve your
current project costing process
www.ipamc.org
Thank you for your attention
• Any questions….
• >>> email me ---- ben@ omdec.com
www.ipamc.org

Finance and Budgeting For Maintenance

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Finance and Budgeting For Maintenance

Uploaded by

Copyright:

Available Formats

Aryana Group - IPAMC - 2006

Finance and Budgeting for Maintenance

• Understanding Accountants and ROI

Where do little accountants come from……

Off to another party…..

• --- the guardian of the company’s money

• Responsible for the integrity of the financial

• Have to sit in judgement on whether this

• They have to apply their rules

• You can’t change the rules

2 You install new environmental

5 You increase your PM Program

• What if you are a Service organization?

• Understanding Accountants and ROI

Primary 2 6 15,000 90,000 12,000 102,000

1. Get accounting to give you a breakdown cost per hour

30 Series1 60,000 Series1

Slurry Pump Kiln Kiln Slurry Pump

• Understanding Accountants and ROI

• Your CMMS data from last • Must have….

Mtce Materials 123… 234… 234… 385,450

Mtce Overhead 446… 456… 546… 124,620

Contractor 345… 235… 789… 77,000

Tools 14,000 5,250 3,000 22,250

Total 425,650 385,050 142,770 953,470

- Special Proj -48,000 nil -22,000 -70,000

+ New Projects 28,000 15,000 6,300 49,300

Total 405,650 400,050 127,070 932,770

X inflation 1.02 413,750 408,050 129,600 951,400

*The accountants dream

Based on Production of 125,000;

• Popular in the 70’s – especially in

Total 423330 700400 118450 1242180

Problems: - who decides priorities

• Based on bundles of activities or

Equipment Lab Mats Contr Tools Total Comments Change Total

Indirects + 21,300 2,500

•Rate increases: - Labour rate 3%

• Understanding Accountants and ROI

Primary 2 6 15,000 90,000 12,000 102,000

Lost Production cost/hr 15,000 15,000 15,000 15,000

Total Lost Production cost avoided 90,000 180,000 180,000 180,000

Lost Production during Project Nil -60,000 Nil -30,000

What’s missing? These are the

• Understanding Accountants and ROI

Typical Best Practices

* TCO = Total Cost of Ownership = Life Cycle Cost

So which pump do we buy??????

NOW WHICH DO WE BUY???

Total Lifetime operating cost $/gal 0.0379 0.0404

So are we clear on which one to buy??

If we chose Pump 1, can we achieve enough

What’s the cost of losing a customer because of

• >>> email me ---- ben@ omdec.com

You might also like