The maintenance budget, in particular, is not always arranged intelligently. All too often, maintenance budgets are drawn up as an extrapolation of the budgets of previous years (historical budgeting). When this happens, there is no relationship with the planned maintenance activities necessary to achieve the agreed performance in terms of uptime (asset utilization) and safety, health and environment (SHE). This makes it difficult to predict and rectify variances from the maintenance budget. As a result, the maintenance budget has no control function and is used purely as a readily available “pocketful of money.”

ASSET-BASED BUDGETING

A more accurate way of budgeting is asset-based budgeting. With this approach, maintenance costs are controlled at the asset level and not (or not only) at the maintenance department level. After all, maintenance costs are generated by the asset, not by the department. For each part of the asset, there is an examination of the expected types of costs (worked hours, materials and services) for each kind of work (inspections, preventive maintenance, breakdowns, etc.). In this methodology, the cost budget is built from the bottom-up.

Figure 1: The process of asset-based budgeting

There are six steps in producing an asset-based budget (see Figure 1).

The first step is to determine whether the required performance levels for asset utilization (uptime) and SHE are attainable using the present preventive maintenance program. This step is particularly important if performance requirements change from year to year, or if it proved impossible the year before to fulfill the promised performance requirements. A reliability centered maintenance (RCM) analysis is performed to evaluate the maintenance program and modify it where necessary. Subsequently, it is possible to extract the individual maintenance activities from the maintenance program that need to be carried out in the coming year. Besides the proactive and preventive tasks (periodic overhauls, component replacements and inspections), there are also default actions (modifications, complete replacements and breakdown repairs). In the steps that follow, these activities are budgeted according to type. Each type of activity is allocated a separate budget code.

Step two of the budgeting process consists of budgeting preventive maintenance activities according to the preventive maintenance (PM) work order forecast. The forecast simulates all preventive maintenance work orders (PM work orders) that will be carried out on the asset in the coming budget year. The basis for doing this is the (forecast) counter readings and stated values at January 1 of the budget year and the defined maintenance intervals (for calendar-driven maintenance) or expected maintenance intervals (for counter and condition-driven maintenance). As the RCM analysis determines for each PM activity which assets (engineers, spares and contractors) will be necessary for its performance, it is simple to turn the forecast into a financial budget. If the preventive maintenance program has been entered into a modern enterprise asset management (EAM) system, this step can be carried out automatically to a large extent.

Step three involves drawing up a budget for the project-driven default actions, such as modifications and complete replacements. The budgets for these activities stem from the related project calculations. If calculations are not yet available, the costs will have to be estimated. Note that the RCM analysis only yields modifications that influence maintenance behavior. Modifications for adjusting or expanding the asset’s functionality are usually reported directly by the production department. These modifications also must be budgeted based on a project calculation, but they are assigned a different budget code. This is because these costs must remain visible separately, as they do not form part of the maintenance costs and frequently have to be capitalized financially. The same applies to complete replacements of assets.

In step four are breakdown repairs, the final activities requiring budgeting. While the RCM analysis provides a good picture of the likelihood of a breakdown occurring, it is obviously impossible to schedule breakdown repairs at the start of the year. So there is no point in forecasting for breakdowns with work orders. The budget will be based on a forecast of the expected costs of repair2. This often takes place using an extrapolation of the historical cost level, possibly adjusted if the preventive maintenance program has been modified.

Before the asset-based budget can be drawn up, there first must be a clear picture of which maintenance costs will be incurred during the shutdown. This takes place in step five. In various industries, a large proportion of maintenance is clustered and carried out in a short period of time. A good example is the turnarounds (outage, shutdown) in the chemical industry. Others are the multi-year shipyard repairs in the marine sector and depot maintenance in the aircraft industry. It is important to make these costs visible separately because of the often large scale of these shutdowns (typically amounting in the chemical industry to 80 percent of total maintenance costs in a year) and the shutdowns may not occur every year. Both preventive and corrective maintenances are carried out during the shutdown, as are modifications and replacements. These activities will already have been budgeted in the previous steps, but will be assigned an extra budget code. Another advantage of making the total shutdown costs visible separately is it avoids unnecessary internal wrangling about sudden increases in the maintenance budget.

The final step in the budgeting process is preparation of the asset budget. All items from the previous steps are gathered together and consolidated. Besides the subdivision into types of activities, the budget is broken down according to cost types (hours, materials, services). It also is wise to itemize the labor costs according to specialist group (e.g., mechanical, electrical, instrumentation and civil) to obtain insight for each specialist group into the expected workload for each asset. In the case of autonomous maintenance, production is also regarded as a specialist group.

Figure 2: Example of an asset-based budget

As soon as all order information has been collected from the previous five steps for each asset, the asset-based budget can be drawn up and entered into the EAM system. This complete forecast for each asset must be established at the start of the budget period in order to carefully monitor its achievement during the period. An example of an asset-based budget is shown in Figure 2.

DEPTH OF AN ASSET-BASED BUDGET

The depth of an asset-based budget is often the subject of debate, particularly when a computerized preventive maintenance work order forecast is used. With such a forecast, it is possible to prepare budgets at a low asset level. But there are two reasons why this is not wise. First, the budget is used as a financial translation of the wishes of the production department. These wishes are formulated in service level agreements (SLA) at the level of the plant, production line, or critical function within the production line. In negotiations regarding the SLA, the production department will be interested only in the asset level at which asset utilization arrangements will be agreed. While budgets can be drawn up at lower asset levels, they should be used only for internal control purposes.

The second reason is controllability. Each year, the budgeting process passes through several cycles in which various changes must be made to the budgets. These will be difficult to maintain if budgeting occurs at an asset level that is too low. A rule of thumb is to keep the asset budget at the level of the SLA, possibly supplemented by sub-budgets at the level directly below (for internal control purposes). These sub-budgets are often prepared only for the cost drivers within the asset family.

ENTERING ALL TYPES OF COSTS

Figure 3: Relationship between work orders, cost types, projects and assets (equipments)

The asset budget is divided into sub-budgets for each type of cost, e.g., hours, materials and services. To monitor the budget, all these cost types must be entered on the work order (see Figure 3). So it is necessary not only to state hours on the work order, but also for an hourly rate for each craft to be located in the EAM system. Otherwise, the wage costs will not be visible. The same applies to spares, which must be entered on the work order after being used for a job.

Spares and services purchased directly for a work order (the "direct charge items") also must be entered on the work order as costs. It must be possible to link a work order to the purchase order and, in some cases, also to the invoice of the purchase order. This will be the case, for example, when outsourcing maintenance on an as-needed basis, where the true costs become known only when the invoice is received.

USE OF WORK ORDER TYPE

Besides the subdivisions in cost types, the asset budget also can be broken down into sub-budgets for each type of activity. For that purpose, the work order costs must be identified by means of an activity type code. In EAM systems, this has been solved by means of the "work order type" (e.g., inspection, breakdown, etc.). A work order is for one work order type only, so logically, it can concern only one type of activity.

SUPPORT BY EAM SYSTEMS

Obviously, some preconditions are also attached to the introduction of asset-based budgeting. For example, the information about the maintenance history of the assets will need to be reliable to a certain extent. Another precondition is the availability of properly completed preventive maintenance work orders, including costs. Furthermore, the EAM or computerized maintenance management system (CMMS) must provide the right kind of basic functionality. This means hours, materials and services must be bookable against the assets via work orders and a budget must be allocated to the assets concerned. This functionality is provided in almost all EAM systems or CMMSs.

Adequate support in setting up budgeting is a different story. It might involve simulating the total preventive maintenance plan, showing the breakdown history of each asset in terms of problem causes, distribution of budgets over periods and assets/sub-assets, recording of several budget versions and the handling of approvals. By no means are all EAM systems or CMMSs able to provide good support for these functionalities. Some provide a standard module to support it, but oftentimes these solutions are very labor intensive.

GETTING A GRIP ON COSTS THROUGH SOLID MONITORING

Figure 4: Monitoring an asset-based budget in Datastream 7i with the VDM control panel

To get a real grip on the actual costs, a good reporting function is essential. By correctly using the basic functionality, the maintenance costs can be entered on work orders, making it possible to actively monitor the asset based budget (and its sub-budgets). In practical terms, this means insight exists in the current (cumulative) costs in each period of time (Figure 4, left) and for each period of time, insight is provided in the actual costs per asset and how those costs are divided over the different types of work (Figure 4, right).

This can become even more proactive if you include the outstanding costs of already planned work orders, materials reservations and purchase orders (commitments). At an early stage, this enables you to identify impending budget overshoots and respond accordingly. We know from experience that this makes it easier to control maintenance costs and the "pocketful of money" changes into a tool for exercising control.

References:

1. According to the VDM philosophy, the RCM analysis will be performed only for assets with value potential. It is assumed that the current maintenance program will suffice for the other assets. After all, analyses will already have shown that modifying the maintenance program will not generate any significant value.
2. The repair costs also include the costs of repairs identified through inspections. In some cases, it may be useful to create a separate budget code for this to enable these costs to be reported separately.