Effective planning is one of the most important ways for facilities maintenance and operations professionals to save time and money for their facility. Mechanical systems maintenance is oft en one of the largest maintenance budget items, but it is also an area where you can identify real, legitimate cost savings. Planning an eff ective mechanical system service strategy provides many benefits, including significant savings in capital, energy and operating costs. As is the case with any kind of expenditure, however, justifying the cost of mechanical services is one of the most common challenges that building owners and operators have to overcome, especially in these challenging economic times. It is important to remember that a successful service strategy contains these three important points:
- Ensure that equipment and components are operating at original design performance levels at all times. Th is presumes that equipment has an expected life equal to that of the original equipment manufacturer’s claims or of an independent industry source, such as the American Society of Heating, Refrigerating and Air Conditioning Engineers (ASHRAE).
- Verify that equipment and system reliability is optimal and that the costs associated with unplanned downtime and failures are minimized.
- Confirm that the costs of services are off set by avoided capital, energy and repair costs. If the projected cost avoidance exceeds the cost of service, the business case for service is more easily justified. Service Cost Justification Takes Multiple
Factors into Account
Accurate service cost justification depends on such factors as average component failure rates, system-wide operational factors and the deterioration of system and component efficiencies. Here are several questions worth asking:
- What is the building owner’s maintenance philosophy?
- Is the equipment/system in question considered mission critical or are there “run-to-failure” components?
- What is the measurable business impact on building occupants? Accurate analysis requires simulation modeling or another means of integrating these and other factors. However, if we look at the financial eff ects of services in applicable situations, there is oft en a way to simplify the process to closely estimate the true economic impact of services.
To make better-informed decisions it is important to start with a thorough understanding of the costs of owning and operating building equipment. By starting with a very simple approach, building owners and operators can establish a sound basis and then add the necessary details required for operational budgeting.
A simple approach looks like this:
- Determine the base objective(s) for cost justification of service.
- Identify the method for estimating operational costs and costs avoided by implementing the services.
- Create some examples for validating assumptions, variables and other factors.
- Look at metrics for operational and capital decision making that can be derived from understanding a lifecycle cost approach.
Establishing a Method to Estimate Service
Costs and Payback
The Risks of Deferring Maintenance
Building owners and operators face enormous financial pressures these days. When it comes time to tighten the purse strings, you may be tempted to defer maintenance on your mechanical equipment. It is a temptation you should resist. Delaying maintenance increases the risk of unplanned breakdowns, which result in unplanned emergency expenditures that can far outpace the cost of regular service. It also boosts the chance of compromising the building’s environment, affecting the health, safety and comfort of building occupants, and systems that break down or run below their peak efficiency also can affect productivity by as much as 15 percent, according to the U.S. Green Buildings Council.
In addition, maintenance delay can degrade the efficiency of your building systems, which increases energy usage and costs. Energy is the single largest operating expense in most buildings, representing as much as 65 percent of an organization’s total operating budget, according to the American Society of Heating, Refrigerating and Air Conditioning Engineers.
In conclusion, it also reduces the lifespan of your equipment, requiring earlier replacement and reducing return on investment. Stakeholders expect uninterrupted services, even in trying economic times. A process that includes these steps will help you ensure that you have effective practices in place for sustaining performance of your critical systems:
Understand the current state by conducting a critical systems audit with the help of an energy services company. Assess overall risk using audit findings and asking yourself “what if” questions, such as “What if the heating system fails on a cold December day?”
Prioritize areas of risk by determining which systems are mission-critical for your building. Analyze critical system requirements and determine which risks you can handle with internal resources and which can be more effectively outsourced to a third party.
Understand stakeholder requirements by taking the time to get feedback from building occupants on system performance, requirements and concerns.
Identify solutions for your most critical risks and challenges. Ask “What can I do now to prevent that component from failing?”
It is common in first-pass decision making to use only the simple payback method. While this is usually insufficient justification and can skew decision making, “simple” calculations can provide a good indication for looking at economic options. Conventional economic tools (e.g., internal rate of return, net present value) can later provide the additional information needed when adding details that would help in the final analysis.
Th e simple payback method excludes the cost of money, discount factors and infl ationary adjustments. Instead, we use current factors to estimate service costs and avoided costs in the same manner that simple payback approximates the period of time over which an investment is recovered.
Th e following example, an eight-year-old, 500-ton electric centrifugal chiller located in a Mid-Atlantic state, uses simple and hand-calculable mathematics to estimate the costs avoided by service program intervention. Th is will require a few assumptions and a few variables that can help with the initial cost basis.
Capital Costs
To relate capital cost avoidance to a service program, the first step is to annualize capital costs to align them with how services are budgeted or included in five-year capital and modernization plans. To estimate annualized simple costs, consider these variables over the projected life of the equipment: installed cost-per-unit of the component and installation (cost-per-ton). For this example, we will estimate the installed cost at $1,200-per-ton. Expected annual life of the component (the ASHRAE estimate is 24 years). Formula for annualized simple capital cost is $/ton X tons / years, or in this case: $1,200 X 500 / 24 = $25,000.
Operating Costs
To calculate variables for the annualized simple operating costs consider the chiller’s yearly operating hours. For this case, let us assume a 24-week cooling season and 96 hours per week. Th e average capacity delivered, measured or estimated. To approximate the full-load ton hours for this simple calculation we will assume 325 tons average load over the 96-hour period and 24-week season. (Full-load hours = 325 / 500 X 24 X 96 = approx 1,500.)
The average efficiency of the component (measured or estimated). We will use 0.6 kW-per-ton based upon this chiller model. Th e average blended power rate, which we will estimate at $0.10/kWh aft er reviewing recent utility statements. Th e formula for annualized simple operating costs is the number of full load ton hours X number of operating weeks X number of operating hours per week X average efficiency X average $/kWh. So in this example that is: 1,500 X 500 X 0.6 X $0.10 = $45,000.
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Repair Costs
Th ere are a number of resources for estimating annual repair costs. Th e best would be a history of repairs. Useful tools include RSMeans guide for repairs; papers and reports from associations such as AFE, Building Owners and Management Association International (BOMA), Mechanical Services Contractors of America (MSCA) and the International Facilities Management Association (IFMA). For this example, we will use an MSCA paper that approximates the cost of repairs at $15 per-installed-tonper- year. So the annualized simple repair costs formula is installed tons X $/ton, or 500 X $15= $7,500.
Simple Cost of Ownership
With these annual capital, operating and repair costs estimates we can calculate the simple cost of ownership for this component by adding the three estimates: $25,000 + $45,000 + $7,500 = $77,500 per year. So with an expected life of 24 years, our approximate simple life cycle cost for this component is $77,500 X 24, or $1,860,000.
Cost Avoidance Capture : True Value of Service
Moving beyond simple cost of ownership, we also can calculate cost avoidance in each of these areas to more comprehensively determine the economic value of a service program.
Avoided Capital Costs
A service program can deliver avoided capital costs by preventing the premature degradation of mechanical components. While much depends on the component, its operating conditions and exposure/location, it is reasonable to assume that a typical component will have a shorter lifespan in the absence of maintenance service.
Third-party resources such as the Federal Energy Management Program (FEMP) Operations and Maintenance (O&M) Best Practices guidelines (2002) provide data that can help estimate the impact of service on performance and energy use. FEMP publishes an estimate of operating cost per horsepower when operators use one of four predominant maintenance methods: reactive (run-to-fail and repair), preventive (conventional maintenance tasking), predictive (diagnostics and testing) and other (reliabil-itycentered, etc.). Using this data we can assume that, in the absence of maintenance (the reactive method), equipment life will deteriorate between 10 and 50 percent. To be conservative, we will anticipate that a full-maintenance program would prevent life deterioration by 20 percent. We will not assume that maintenance services will extend life beyond the expected life, as is commonly claimed. If equipment life deteriorates by 20 percent, the expected life for a marginally maintained component will be reduced from 24 years to 19.2 years. In our example, the annualized capital cost increases to $1,200 X 500 / 19.2 = $31,250. Using the $25,000 figure from our early calculation, the estimated annual simple capital cost avoidance attributable to a service program is $6,250 ($31,250 $25,000). Th is is our first cost avoidance component.
Avoided Annual Operating Energy Costs
Continuing with FEMP O&M as a resource, regular maintenance will result in energy savings of 5-20 percent in an average building. Th is gives us a basis to approximate the annual energy impact and determine simple annual energy cost avoidance attributable to a service program. We will use a conservative 12 percent potential energy savings for this example.
In the absence of maintenance services, system and component efficiencies would deteriorate from original design performance. Efficiencies would be restored with service intervention. In this case, 12 percent deterioration in efficiency increases the annual simple energy operating costs by: $5,400 ($50,400; without PM) $45,000; original design performance).
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Avoided Annual Repair Costs
Finally, one needs to estimate the cost avoidance for repairs attributable to a service program. Again, using a conservative approach, we will assume a service program annual repair cost reduction of 50 percent. Th e formula for annual simple repair cost performance is $7,500 X 0.5 = $3,750. One last step is to total the annual avoided costs attributable to service: $6,250 + $5,400 + $3,750 = $15,400. If we are considering a maintenance agreement at a cost of $10,000, the net economic benefit of this agreement is $5,400 per year or $129,600 over the life of the component.
Lifecycle Costs Key Factor in Decision making
While this approach is not a substitution for computer simulation or the use of more complex financial tools, this simple methodology can be used to calculate the costs and potential cost avoidance for pumps, fans, cooling towers and other HVAC components. Calculating lifecycle costs is a final step in our financial analysis. Simple annual costs can be carried forward for the full 24-year expected life of the system. Th is example assumes a $10,000 annual service agreement to create the ideal cost profile of our lifecycle costs, including the percentages of overall lifecycle costs are: With total lifecycle costs exceeding $2 million in this example, it is important for building owners and operators to consider these key questions:
What is the most likely cost element to increase over the years? What is the most reasonable approach to future capital decision making? What should be the role of first-cost in capital decision making? How can an eff ective service strategy reduce costs? Th e economic value of service as a means of reducing and avoiding costs is obvious. Building owners and operators need to consider service in any credible decision making process. Deferring service may be tempting in this or any economic climate, but that approach is short-sighted.
If we can approximate the economic value of service, we can provide a financial context for decision making and it is less likely that the idea of servicing critical equipment will become a victim of deferred maintenance and early replacement. FEJ
