We were regularly asked “What is the right level of reactive maintenance to allow for in the annual property budget?”

The automatic response tends to be “as little as possible”; but given the range and use of property types it is not necessarily a simple answer.

What can reactive maintenance tell us about asset management maturity?

The Nature of Reactive Maintenance

Reactive / unforeseen / unscheduled / corrective maintenance (RM) has as many definitions as it has names but in essence it involves repairing an asset or component back to the appropriate level of performance after it has failed (or in worse case replacing it altogether). Because a failure it generally not planned it follows that reactive maintenance is also something that is not planned.

Because of its spontaneous nature the cost of RM, which considering the criticality of the part, the timing of the infraction or the disposition of the client, will attract a premium. It typically involves the repairer changing priorities, unscheduled trips to site etc. An industry convention (yet to see a valid proof) is that RM cost is about 3 times the cost of an equivalent scheduled repair. That is not really allowing for the consequential impact or disruption caused to other parts of the business.

Another issue associated with definition is that there is a tendency for “other” types of costs to end up in the RM bucket…I suspect most will be familiar with this.

So, apart from being unplanned, disruptive, more expensive, and often ambiguous in nature is there any justification for RM? …well yes.

• There will always be some measure of failure risk associated with asset and their components. There is a point where there is an economic and functional trade-off between proactive risk management and just hold a risk contingency (or reactive maintenance contingency …see another term).
• You may have short-lived assets with little critical impact where a repair when fail strategy is the most appropriate strategy – it’s unlikely you’d perform planned maintenance on the aluminium garden shed for example.
• There is a point where if the level of maintenance funding is so low that planned maintenance is un-affordable, and the only available strategy is to react to breakdowns as they occur.
• You’re not sure exactly what you have to manage (less come back to that)

RM and Asset Management

More frequently we hear the term data-driven / data-enabled regarding asset management. This is reality – you need to know and understand your assets to accurately cost and strategize. It follows that the operational plans for a portfolio based on data-driven asset management will be less dependent on RM.

Consequently, it should be easy to extract an indicator from the annual accounts namely Total Reactive Maintenance Spend as a % of Total Property Budget which can be used as an indicator of asset management maturity. Conceptually this relationship may look as follows:

Conclusion

• Clearly define RM for your portfolio in terms of what’s in and what’s out.
• Measure Total RM Spend as a % of Total Property Budget pa as a key indicator of progress and asset management maturity.
• The best strategy for RM should be to minimise or apply sparingly.

To the question “What is the right level of RM?”, we would say it really depends on circumstances such as age, criticality etc…but in our opinion anything over 20% of Total Property Budget pa, if not a nominated strategy, would be a concern or a sign of lower asset management maturity.

What do we know about our costs?

Most industry sectors treat cost planning as an important management technique in understanding limitations and opportunities into the future. Ask a builder to embark on a building project without having a cost estimate and it will not end well.

Interestingly, understanding of future costs is not held in the same regard in the management of property.

Allocation for annual operational budgets are often based on pseudoscientific methods such as % of capital replacement costs, indexing last year’s budget or a combination of both. Alternative approaches which involve greater diligence tend to be exceptional. Management strategies reliant on contingencies as a central response to reactive maintenance are symptomatic of this.

What do we mean by Operational Costs?

Strictly speaking operational costs are liabilities which arise over the operational period, but we really should think in terms of whole-of-life costs, including initial capital, maintenance, compliance, energy, capital replacement and, in some instances, disposal costs. From an accountant’s point of view, the ‘operational cost’ definition is about capital and recurrent costs.

Why is it important to understand operational costs?

In property asset management, the focus is to optimise the value that an asset provides to the organisation over its term under ownership. This requires finding and maintaining the best balance between the performance, risk and cost.

Asset management recognises that the asset contributes to the goal of the organisation and the nature of that contribution can change. The ability for an organisation to adapt to change and ensure its properties maintain a valuable contribution, is an important role for management. Measurements sensitive to the change have the potential to highlight imbalance so that actions are quickly taken to restore optimum value.

There are numerous papers[1] et al, which describe asset management practices achieving over 20% savings to the existing operational costs through:

• Reductions maintenance expenditure particularly expensive reactive maintenance
• Increases in asset performance, utilisation and asset life
• Reduction in equipment failure, labour costs, material costs and downtime
• Improved Return on Investment

We believe that understanding operational costs is a key to achieving asset management benefits because it is sensitive to change and with the right process / structure it can be easily captured. The numeric nature of cost provides the perfect medium for information and as in any business, it provides a scale and urgency we all understand. The level of detail within a cost plan is directly related to the capacity to control.

The challenge with property is to set up a structure which provides baseline cost at a transparent level and which quickly highlight the speed and scale of any change.

Critical Components of Asset Management

We see 4 components of property asset management which establish cost transparency, without which benefits cannot be achieved. They are:

• Agreed Asset Naming Convention (so, metaphorically, everyone is speaking the same language).
• A Detailed Asset Register where assets are clearly defined in terms of detail, location, cost, etc, at a level which is transparent.
• A Life Cycle Model to plan out the types and scale of operational costs into the future, and
• A means of recording actual costs for specific asset transactions.

From a bottom-up perspective these components are fundamental and should be utilised in everyday processes. We would suggest that their establishment and maintenance is of much greater value to the property function and deserve higher priority than, for example, marketing capability through ornamental displays of best practice.

The important of information technology

The asset management components are reliance on data and its conversion to useful information. Ironically property data is abundant, which is an issue for many as there is too much to manage.

Proptech offers the potential means of accelerating collection of cost data and processing information.

Information processing of costs can yield many different views of property with minimal effort as demonstrated in a simple nodal model we refer to as the asset management triangle.

Ideally, we should spend more time considering conclusions and strategy and less time on data collection and information processing. It is our belief that with the right structure and tools, cost information can be easily harvested to achieve this goal.

Achieving transparency in operational costs can provide owners, consultants, investors and operators with access to the valuable information and a level of insight where opportunities become more apparent.

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[1] Maintenance Maven. 2015. “Five Ways CMMS Can Save You Money.” http://www.maintenancemaven.com. Accessed March 2016; O’Brien, J. 2010. “The 19 Reasons to Invest in a CMMS.” Maintenance Assistant Inc; IBM. 2015. “Facilities and Asset Management”.

We see 4 components of property asset management which establish cost transparency, without which benefits cannot be achieved. They are:

• Agreed Asset Naming Convention (so, metaphorically, everyone is speaking the same language).
• A Detailed Asset Register where assets are clearly defined in terms of detail, location, cost, etc, at a level which is transparent.
• A Life Cycle Model to plan out the types and scale of operational costs into the future, and
• A means of recording actual costs for specific asset transactions.

From a bottom-up perspective these components are fundamental and should be utilised in everyday processes.

The theoretical asset life is described as being comprised of 4 phases:

• Acquisition – where an asset is acquired through construction, purchase, gift or lease / loan. It is significant in that this is the time when the asset becomes available to provide service. Investment in acquisition tends to be large in the case of construction or purchase.
• Operations – is where an asset is providing service in accordance with the requirements of the organisation. Costs are recurrent and required to sustain the property and subsequently provision of service.
• Refurbishment – is like the acquisition phase in requires capital investment typically to address change in relation to function, compliance or technology.
• Disposal – is the end of like when the organisation no longer requires the asset or may have greater use for the capital it ties up.

Asset management is about optimizing the benefit over the whole-of-life. Outgoing costs need for property need to generate greater revenues for an investment to be valuable. This info-graphic looks at certain strategies to help achieve this value over the whole life of the property.

A picture tell a thousand words. Here’s how an organisation can use Yardstick to quickly achieve an understanding of their asset base and the associated costs.