The Case for Preventive Maintenance – A 545% ROI
While most would agree that proper preventive maintenance will help extend the life of equipment and reduce downtime, what isn’t always so clear to many companies is how the cost of preventive maintenance will benefit a company’s bottom line. What is the ROI of preventive maintenance and how can it be measured? Jones Lang LaSalle partnered with a large telecommunications firm to answer these questions, and the results from the study were shocking. Preventive maintenance resulted in an astounding 545% return on investment. The following article explains how this study was conducted and the details of its findings.
Establishing a Baseline
The research team first needed to establish a baseline of how much is spent on preventive maintenance. They found that the BOMA Experience Exchange Report shows repair and maintenance account for about 15 percent of total expenses. The report does not distinguish between repairs and maintenance costs. However, data suggest that preventive maintenance accounts for about 30 to 50 percent of the total repair and maintenance costs, or between 4.5 to 7.5 percent of the annual operating costs. This may not seem like an overwhelming number at first glance, but the cost can really add up over time.
The Financial Model
To accurately determine the value of preventive maintenance, the team needed to identify the following:
- The actual cost of preventive maintenance
- The cost of any repairs or corrective maintenance necessary
- The cost of replacing equipment
- The expected life of the equipment
- How PM affects expected life
- How often required repairs need to take place if the equipment isn’t maintained
- How PM affects energy consumption
The team surveyed 14 million square feet of the telecommunication company’s mixed property types to determine the following:
- The type of equipment in each building
- The quantity of each piece of equipment
- The age of the equipment
- The annual expense of preventive maintenance for this equipment
The study included the 15 pieces of equipment listed below.
With this information, the team was able to build the financial model. The basic assumptions of the financial model are shown below, and because it is difficult to quantify lost revenue due to equipment downtime, the most conservative assumption (zero downtime) was used for the financial model.
As a simple illustration of the type of analysis that was performed for this study, suppose the company owns a 10-year-old, 7-horsepower air compressor. The replacement costs for this compressor is estimated at $32,900. Based on the procedures developed by the team, it was determined that the air compressor would last 20 years with proper preventive maintenance and 16 years without. The cost of preventive maintenance was estimated at $472 per year for this compressor, and repairing the compressor costs $944 on average per incident. With proper preventive maintenance, the compressor will need to be repaired every four years at a cost of $944 or $236 per year. Without proper maintenance, however, it will need to be repaired every three years for the same $944 for an annual cost of $315. With PM, the compressor will need to be replaced in year 10. Without PM, it will need to be replaced twice – in years 6 and 20. The preventive maintenance scenario results in a net present value of $6,359. If the life of the equipment extends to 30 years, the compressor will need to be replaced twice in the preventive maintenance scenario resulting in a NPV of $4,338. In either scenario, preventive maintenance on the 10-year-old compressor is undeniably worth it.
After careful research and analysis, the team concluded that preventive maintenance not only pays for itself, but results in an average 545% return on investment – an almost unheard return in the business world today. If a 545% return seems like a lot, that’s because it is. Take an example of a 350-ton chiller, which would cost about $350,000 to replace. Maintenance on a chiller costs $5,500 per year, and as already indicated, proper maintenance will add years to the equipment’s life. This delays the need for replacement of the chiller, and the longer you can go without replacing such an expensive piece of equipment, the higher your ROI. When proper preventive maintenance is implemented for all relevant equipment, the savings can be dramatic for any company. Plain and simple, preventive maintenance saves money and produces an amazing ROI. Our industry leading CMMS software can help you manage all of your preventive maintenance better.
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