How to Balance Replacement Asset Value with Maintenance Cost Percentage
Our top-of-the-head analysis reveals that US companies alone spend upwards of $100 billion a year in the repair and maintenance of facilities and key equipment. There are a number of ways these companies track annual costs accurately for better planning and forecasting purposes. One common method is to calculate the maintenance cost percentage of your Replacement Asset Value (RAV), a well-understood and universal benchmark for measuring asset performance success.
So what exactly is RAV and why should you care? While 90% of facility managers surveyed in a study commissioned by Schneider Electric believe that data-driven technology systems would improve their productivity and profitable operations, only 32% of respondents currently use analytics to guide business decisions. This means a majority of facility decisions are based on gut instinct, which can have a huge financial impact on the organization. It is no wonder why we estimate that of the $100 billion spent each year, companies are probably wasting a good 20% of that in unnecessary costs.
For facilities managers who strive to be more efficient and analytical, using a metric such as RAV helps answer the question: What would the cost be today to replace existing assets with brand new, identical equipment? This has to be balanced against your annual maintenance cost, or the total cost of all expenditures for materials, labor, and services expected to be used annually.
Let’s dive in to learn how these two work together in helping the facility team and their companies take the best path forward when faced with the age-old replace-or-repair decisions for their buildings and equipment.
What Does This Percentage Mean And Why Does it Matter?
One of the primary responsibilities of the finance department is to cut down on unnecessary costs. Calculating your maintenance cost percentage allows you to compare and track any given set of metrics and gain insight into how well their expenditure on equipment is being looked after.
You should look at equipment the same way anyone would look at a family car. No one wants to go on a family vacation feeling like their car could break down along the way. So why should it be any different with company assets? You should always feel confident that in the coming week, equipment will run at maximum capacity and not stall operations. Running a business based on luck is never a good idea, and looking at the maintenance cost percentage of your RAV provides insight into how long your assets will last before needing repair or replacement.
Let’s look at an example. At 20% of RAV, the business is spending so much on maintenance each year that they could buy a new plant for their company every five years. At 2% of RAV, a company could be in operation for 50 years before maintenance spend is worth the cost of buying a new plant.
The MC/RAV percentage measures the annual cost of maintaining a piece of equipment against the value of the equipment. Basically, the lower the percentage, the more valuable a maintenance program is to an organization.
Most facilities departments are advised to keep their maintenance cost/RAV percentage at 3% or lower.
How to Measure your Maintenance Cost Percentage
Determine maintenance cost as a percentage of RAV by calculating the amount of money spent annually on maintaining assets divided by the RAV of the assets being maintained, expressed as a percentage. Or, simply use this equation:
Total Maintenance Cost/RAV (%) = (Annual Maintenance Cost ($) x 100) / RAV ($)
This calculation is used to decide whether assets should be repaired/maintained, or whether they should be replaced. Lowering maintenance cost percentage may seem like a daunting test, but facilities management software makes it relatively easy. With a number of exciting capabilities, your team can keep costs in check and spend your budget in areas where you’ll receive the most ROI. Let’s take a closer look:
3 Ways to Balance RAV and Maintenance Cost Percentage
1. Practice Regularly Scheduled Maintenance
Regularly scheduled maintenance is an important component in keeping maintenance costs low. By consistently tending to facility assets, you keep them in working order, avoid potential downtime, and reduce the likelihood of facing a costly emergency repair.
Facilities management software such as service automation makes scheduling preventive maintenance an easy process. It uses a single dashboard where you can track all service requests and complete proposals and invoices with ease. With features like spend analysis, you can read and analyze all facility spend data in one place and ensure financial goals are being met.
All of these features make balancing maintenance cost and RAV feasible. Not only does regular upkeep improve the value of assets, but a streamlined process keeps costs in check.
2. Maintain Visibility For All Cost-Related Activity
Another way to keep maintenance cost/RAV balanced is by having greater visibility into an operation’s spending activity. Facilities software features like equipment tracking make it simple to spot trends and adjust your maintenance strategy accordingly. You can store detailed records about assets including how often they are being used and how often they need to be repaired. Specific insights like these help one budget appropriately and decide whether it is worth it to repair or replace depending on what their current MC/RAV percentage is.
3. Utilize Analytics
FM software with analytic capabilities is critical for discovering areas of improvement in the repair and maintenance process, such as reducing costs or improving efficiency. When you use analytics to analyze your spending habits from prior years there are some key questions to ask:
- Did you go over or stay under your budget?
- How did spend break-down – were there assets, locations, or contractors that used more of your budget than originally intended?
- Did you implement practices that significantly changed how you spent?
All of these questions provoke critical thinking about how money is being spent to maintain your facilities. When you utilize these analytics capabilities, not only can you gain deeper insights into how costs are being allocated, but can begin to strategize best practices that will help to improve their future MC/RAV percentage.
If you have not calculated what your maintenance cost percentage is for your RAV, it is worth the time. Not only will it give you a better understanding of how well you are budgeting as a company, but can help with forecasting future spending habits. With this ratio in mind, you can strategize when to repair and when to replace, and continue to make sound financial decisions.