Maintenance Q&As

Is maintenance cost to asset value ratio a good maintenance metric?

Answered May 06 2019

The short answer to the question is generally “no” with a few caveats. However, asking the question sets into motion the bigger issue of how to evaluate any metric or KPI in facilities management. Measuring the “wrong thing” leads to a host of other systemic issues. Let’s take a look at some of the potential issues of using the ratio of maintenance cost to asset value (MC/AV) as a metric.

Technology Affects Maintenance Cost

Everyone knows that technology is developing at amazing speeds, and in the area of facilities management, better technology can significantly reduce maintenance costs. This affect carries over into calculating that MC/AV ratio. For example, as microprocessors and integrated circuits have replaced vacuum tubes in the last several decades, maintenance of related equipment has completely changed.

Unrelated Factors Play Role

In many cases, MC/AV is not an isolated enough ratio to provide the data needed to make better decisions. For example, one study was conducted comparing teaching hospitals to community hospitals. It stands to reason that a teaching hospital would have a higher maintenance cost because of the type of equipment required for educational purposes, their proximity to more expensive metropolitan areas, and their higher skilled staff.

Defining Asset Value is Tricky

Unfortunately, setting a value for a particular asset is not as easy as looking at the price tag. Most industrial equipment does not have a set price. Larger facilities that purchase a great deal of equipment from a particular supplier will get volume discounts. Negotiations related to additional accessories, referral promises, extended warranties, and shipping or installation can skew the actual asset value.

It is also difficult to use replacement cost as an accurate measure because of these factors as well. In addition, new models and improvements are often valued higher in just a few years, making it nearly impossible to “replace” the exact same older model you have. Industry standard prices are difficult to set and agree upon.

Correlation Doesn’t Equal Causation

The bottom line is that facilities managers have to consider these and other similar factors to accurately select KPIs and other benchmarkingtools. In general, the more benchmarks you have, the more accurate your data will be. For example, if you can look at the specifics of your internal labor costs, outside contractor charges, and material costs separately, you’ll have a better picture of your overall costs than simply looking at an aggregate number.

In this case, there is no direct, consistent connection between maintenance cost and asset value. Too many other factors play a significant role, making this ratio unreliable as a sole benchmark.

Asset Management Questions & Answers