Economics and Technology Impact the Decision
By: Herb Brownett
Determining when to hold onto aging equipment and when to replace it is complicated. Uncertainties caused by the pandemic add to the challenge. They also underscore the value of a maintenance management program that drives preventive work and delivers accurate cost data.
Preventative maintenance has always been a core principle of good construction equipment fleet management. Today it is more important than ever. While the U.S. economy appears to be bouncing back, the pace of recovery for specific construction sectors and geographies is never certain. Nor is the amount of government entities will be able to invest in infrastructure projects. Historically, the economics of heavy construction are such that, the industry lags economic recessions and subsequent recoveries by one to two years.
As a result, contractors are careful about conserving capital. Capital is defined here as cash and available debt. While it may be tempting to buy equipment while interest rates are historically low, most contractors have debt restrictions related to bank covenants and bonding company agreements. They must always be conscious of having enough working capital. As a construction financial professional, I clearly agree that conservation of working capital is always paramount. As the saying goes, you only run out of cash once.
Ongoing replacement plans and the tracking of replacement metrics are hallmarks of well-managed fleets. However, the desire to conserve capital can cause delays in planned and metric-driven replacements.
A commonly accepted metric is to replace equipment when annual repair costs exceed five percent of the replacement cost. This is a good guideline in normal times, but these may not be normal times for many companies.
The fact that repairs, maintenance and downtime grow significantly as equipment gets older is well established. The expenses of extending the operating life of a machine not only includes increased maintenance, but also loss of cost recovery resulting from unscheduled downtime. If prudent financial management causes a company to keep equipment longer, it is crucial to have a strong, ongoing preventative maintenance program to mitigate these rising costs. It is also more important than ever to manage preventative maintenance as cost effectively as possible. Scheduling field mechanics efficiently is a big part of this.
Looking at this from another perspective, a company with a good preventive maintenance program can almost always delay reaching the point where repair costs exceed five percent of replacement value a lot longer than a company with a reactive, wait-until-it-breaks approach.
Additionally, easy access to accurate historical maintenance cost data is more critical than ever. This information helps contractors make a data-driven decision on whether to maintain or replace rather than a decision based on sentiment, gut instinct or other unreliable factors. Historical maintenance data is also essential to properly value an asset that is being disposed of.
For a fleet of any size, accomplishing these preventive maintenance and data objectives requires a computerized maintenance management system (CMMS). With this type of software-based solution, contractors can:
- Automated repair requests and work order processing
- Establish and follow user-defined preventive maintenance plans for each piece of equipment
- Schedule field mechanics with maximum efficiency
- Get enterprise-wide visibility of equipment status and repair history
- Control parts inventory
- Recover warranty costs for equipment and components still under warranty
- Store and access accurate historical maintenance cost data for each piece of equipment
Whether a contractor is following a routine replacement plan or conserving capital in uncertain times by extending the operating life of equipment beyond what might be normal, data and strong preventative maintenance performed as cost-effectively as possible are in its best financial interests. The investment in software to accomplish this, which is probably a fraction of the cost of replacing one piece of equipment, will benefit the entire fleet and presents a compelling ROI.