Life Cycle Costing with Renewal Annuities

Because the Renewal Annuity (RA) represents the average annual asset consumption of our assets, we now have a ready way to develop a life cycle cost model, i.e. we have all the key ingredients:

• The asset consumption or renewal annuity (RA)
• The annual maintenance costs*
• The annual operational costs*

* Note: these costs need to be annualized. Maintenance needs to include amortized or averaged allowances for major periodic maintenance (if not already included in renewal calculation) and operations need to be for a normal / average production year.

Each of these are, of course, balanced by system performance and the impact of this on customers.

System Performance

Another cost aspect impacts on the overall picture - residual risk. Even asset and system carries some form of “residual risk” and this also needs to be taken into account, however, this is beyond our current capabilities in life cycle costing as it is not warranted from the inputs required for almost all asset owners.

Armed with this information, management can really start to analyze the relative merits of both their capital and O&M investment strategies from a holistic or corporate perspective, i.e:

• If we increase maintenance then we must get a reduction in the AR or improved system performance to balance this
• If we increase our renewal capital investment, then we must get an appropriate reduction in our maintenance costs, or service / system performance
• If we operate the system differently, then savings should appear in one area or another.

This offers a considerable benefit to any mature, infrastructure-rich organization in terms of management efficiency and effectiveness not available through the current accounting standards and practices. It will, however, be a key plank in any management information and reporting system.

With good AM information systems and AMPs the organization (and other interested stakeholders) can also understand the impacts on these indicators as well.

All infrastructure organizations should operate several asset register systems to provide the necessary outputs from accounting, tax and management information/decision making perspectives.

Asset registers should be held for the following purposes:

• Asset accounting and reporting (meeting accounting standards)
• Technical registers providing information on:
• Physical life (how long could it last)
• Economic life* (to optimized renewal or life extension intervention)
• Renewal annuity assessments

* Note: denotes different options may be recorded to meet differing organization drivers, e.g.:

• Lowest life cycle cost or NPV
• Lower capital options with marginal recurrent costs
• Minimalist capital options.

It is only with these advanced asset management processes, appropriate data and good information systems in place that organizations can have confidence in their future investment and operational strategies.