Moving targets are the hardest to hit, which is why traditionally it’s been hard to know when to stop repairing an asset and replace it. Calculating the right time involves a lot of different numbers, from the cost of ongoing maintenance and future repairs to removal and disposal. Moving too early means you’re throwing away value, giving up some of your return on investment. But waiting too long might be worse, costing you time and money.
And for larger, enterprise-level organizations, the stakes are even higher. The more assets you have, the better you must be at managing them.
When to repair or replace assets
The concept is straightforward. When the cost of maintaining or repairing an asset is more than its value, you replace it. When the cost of the repairs is less than the value, you repair it. And the rule generally applies across all asset types.
Fleet management is a good example, because repair-or-replace decisions come up all the time. When there’s an accident, you look at the vehicle’s value before approving the repairs. For a smaller economy sedan near the end of its useful life, it might be better to write it off. For something newer, where the value of the vehicle is still much more than the cost of the repairs, you fix it.
There are three important elements of the equation to remember. The cost of the repairs is not the deciding factor. It’s the repairs in relation to the value of the vehicle. And it’s not what you paid for the vehicle. Instead, it’s the vehicle’s current value.
Why repair or replace is important for asset management
Asset management is about getting the highest possible return on your investments. When you replace assets too early, you’re throwing away value. That asset could have delivered more, but you lost the opportunity to benefit.
When you replace too late, there are negative impacts, including increased:
- Downtime
- Risk of accidents
- Labor costs
- Production delays
On top of that, having more on-demand work orders means more pressure to reschedule and reallocate resources. You’re adding more uncertainty to the schedule, which always drives down effectiveness and efficiency.
How to calculate cost to repair using asset management software
To make data-driven repair-or-replace decisions, you need three numbers:
- Cost to repair
- Cost to replace
- Current asset value
The challenge is that you can’t simply find these numbers. Instead, you need to calculate them.
For the total cost to repair, you need to both one-time and ongoing costs.
One-time costs can include:
- Labor
- Associated materials and spare parts
- Lost productivity
- Environmental cleanup and abatement
It’s possible for the cost of a one-time repair to be so high that it’s better to replace an asset. But there are also cases where ongoing costs over the remaining useful life of an asset are predicted to be so high that it’s better to replace than repair. Ongoing costs can include lost production quality and capacity as well as maintenance costs.
How to calculate cost to replace
It’s not just the cost of the new asset, because replacement starts with removal. Before you can install your new asset, you must retire, remove, and properly dispose of the old one. Depending on the type of asset and when it was originally manufactured, this can be an expensive process due to restrictions on asbestos disposal and other once-common, now-controlled materials.
There are then the costs connected with choosing the replacement, and these usually include time spent doing online research and working with different sales departments. New assets also mean investing in a new inventory of associated materials and spare parts. Technicians then need to be trained in the proper maintenance workflows and best practices. When the new asset is being installed, there’s the cost of lost productivity.
To calculate the cost to replace, add up all those numbers.
How to calculate an asset’s current value
The easiest way is to use the straight-line method, which tells you how much value your asset loses each year. It’s called the straight-line method because your asset loses the same amount each year.
Start with:
- What you paid for it when you first bought it
- What you can get for it when you’re selling it for scrap, the salvage value
- How many years it’s predicted to be useful
Then use a basic formula to find the annual depreciation.
(ORIGINAL PRICE – SALVAGE VALUE) / YEARS OF PREDICTED USEFUL LIFE
So, if an asset cost $10,000, later you can sell it as scrap for $1000, and it should last ten years, it loses $900 a year. When it’s 4 years old, it’s lost $3,600, (which is $900 X 4 years). So, at four years, it’s worth $6,400, (which is $10,000 – $3,600).
How to make data-driven repair-or-replace decisions using facility maintenance management software
By automating your workflows, you create reliable data capture on programs and processes. And because modern platforms are cloud-based, everything is in one place, ensuring your data is always up to date. You’re not wasting time working with a ton of different versions of the data floating around on slips of paper or stuck in spreadsheet email attachments. As soon as something changes, a new work order gets assigned or an existing one gets closed out, the one master set of data gets updated.
And because everyone is working off the same data, everyone is in the loop, no matter how big that loop might be. For larger enterprise-level organizations, the benefits multiple across facilities, buildings, and teams. The maintenance manager at one location can quickly share a newly discovered efficiency with the managers at all the other locations. Time spent fine-tuning a preventive maintenance schedule for an asset at Location A can be copied for a similar asset at Location B.
Specifically for repair-or-replace decisions, a modern software solution not only collects and protects your data, but it also empowers you to run reports that show you the big picture, right down to the smallest data detail. Because you have reliable data, you can leverage it into better decision-making.
In fact, the numbers you need to get the most value from your assets are inside the solution. For example, the techs’ hourly rates are there because you’re already using that to track labor costs. Why is that number useful for calculating the cost to replace? If you want to know how much the training is going to cost, you need to know how much you pay for each tech per hour of training. Looking at historic work orders can also give you a sense of the cost of lost productivity.
By Jonathan Davis
Jonathan writes about asset management, maintenance software, and SaaS solutions in his role as a digital content creator at Eptura. He covers trends across industries, including fleet, manufacturing, healthcare, and hospitality, with a focus on delivering thought leadership with actionable insights. Earlier in his career, he wrote textbooks, edited NPC dialogue for video games, and taught English as a foreign language. He holds a master's degree in journalism.
