Maintenance budgets and cost reporting

One of the more important KPI’s in Maintenance is how much it costs. While many would argue that this is the most important measure of Maintenance, I would suggest that it is the second most important, after reliability which is, after all, the “product” of Maintenance.

In the Maintenance “cost-control loop” the budget provides the set point, or target, and cost statements provide the measure of actual spending that must be compared to the budget. These comparisons can be made at a very high level, as normally shown on financial statements, but for the best control budgets must also be established and reported at the “decision-making” level so that those with the responsibility to decide what work should be done on a daily basis can ensure that the cost of that work will be within budget.

The “decision-making” level depends on the type of work to be done as follows:

– routine non-shutdown and shutdown maintenance work – this is normally decided by the area Maintenance Supervisor and the area Operations Supervisor, with input from engineers and others as appropriate.

– major maintenance work (e.g. expensive replacements, such as boiler internals, sewer lines, etc). Such work may be a maintenance expense or a capital replacement and may not be managed by Maintenance. Other expensive maintenance “projects” include activities such as renaming stock items or setting up a preventive maintenance system. The decision-makers are normally senior technical managers.

– maintenance work that does not affect reliability (e.g. work to improve plant appearance or community relations, such as building cladding, road signage, etc). The decision-makers are normally plant managers.

In a large operation that is divided into logical departments (see “Organization Principles“) all work in each of these three categories should be charged to the operating department in which it will be done, and should appear in that department’s maintenance budget. So department budgets should have a sub-budget for each of these three types of work and the decision-makers should be responsible for their sub-budget. The overall “Maintenance” budget is the sum of the maintenance budgets established for each department.

 

Budget preparation

Most major repairs and replacements and plant appearance improvements, for example, are known well in advance. Major annual (or less frequent) plant shutdowns should have a primary purpose of determining, through inspections, the work that must be done on the following similar shutdown, (see “Managing Major Plant Shutdowns“) and this work must be included in the budget for the year in which it will be done. In some cases (e.g. major steam turbine rebuilds, boiler superheater replacements, etc) work can be forecast several years in advance and should form part of a 5- or 10-year rolling plan that becomes the first step in the annual budget preparation for large maintenance projects.

For routine non-shutdown maintenance work, the budget is normally based on the anticipated number of tradespeople employed plus an allowance for the materials they will use. “Zero-based” budgeting is not practical for this part of the budget so a historical labour:material ratio is a good base for forecasting material costs. Include an allowance for overtime if necessary, making sure that the measurements of “good” and “bad” overtime are not combined (see “Measuring Maintenance Performance – the hazards in KPI’s” for more on this).

The portion of the major shutdown budget involving plant inspections should be reasonably consistent each year, to which must be added the special cost of the repairs that are identified during those inspections.

 

Reporting

The collection of cost data used for reporting actual vs budget costs must be carefully planned and consistently followed. Some basic principles include:

  1. Use the work order system for all maintenance and capital work, including routine shutdown and non-shutdown work, major maintenance rebuilds and new capital, whether it is done by your own tradespeople or contractors. Its not uncommon to find that the work order history in a plant’s maintenance computer system does not include some of the most expensive and important work, because it was managed by Engineering, not Maintenance, and the engineering project system was used. For work of this nature, there should always be a maintenance work order, that may simply state the project description and the cost with little other detail (e.g. “Replace the centre section of the lime kiln – see project file E17-4453 for details”). Recording the expense and capital spending for such projects in the work order system enables the maintenance computer to be used to provide a complete history of all work done and its cost.
  2. Clearly define, in writing, what’s “Maintenance” and what’s “Production”. If the definition of “Maintenance” is “To ensure that physical assets continue to do what they were designed to do in their present operating context” then some actions taken by operating people are “maintenance”. These actions may include inspections, cleaning, replacing components that are in contact with the process (paper machine clothing, filter media, etc), lubrication, etc., and if they are performed by operators they are usually considered to be a production cost. If this work is shared between Production and Maintenance the budget should reflect this.
  3. Report frequently and promptly on actual vs budget spending at the “decision-making level”, as described above. Ideally, reporting should be at least monthly, with the report available to the decision-makers for their action no later than one week after the end of the reporting period. During major shutdowns reporting may be as frequent as daily, based on transactions, time cards and daily force accounts for labour.
  4. Regard the Maintenance budget as one component of the Operating budget, and allow sufficient flexibility to ensure that spending decisions always put the overall value to the company above departmental interests.

Example – A Maintenance Manager refused to approve the rental of a large crane for a shutdown because the cost would put Maintenance over budget for the reporting period. The crane would have reduced the shutdown time by half a day and the resulting additional revenue would have exceeded the cost of the crane rental by several times. The “right” thing to do was to rent the crane, but the Maintenance Manager would have been penalized for the extra maintenance cost and would receive no “credit” for the increased production, so he denied the request.

Similarly, the Maintenance Manager should ensure that Maintenance is always focused on the most important work, plant-wide. Unexpected problems will occur, and if these significantly increase spending in one area, then re-allocating some of the budget from other areas to the one that is in trouble may be the most prudent thing to do. Good record-keeping and reporting will enable the Maintenance Manager and his/her staff to show that all spending decisions were in the company’s best interests.

  1. Avoid surprises. Good preventive maintenance, of all kinds, provides the best information for budgeting at all levels.

While the Accounting Department should assist with budget preparation and provide prompt and accurate reports, the Maintenance budget should belong to the Operating department and should be approved by both the Maintenance and Production managers.

 

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Don Armstrong, P. Eng

President

Veleda Services Ltd

250-655-8267 (Pacific Time)

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