Deferred Costs: A More Efficient Option

As the budget season draws near and you need to make decisions on which capital projects make the cut, Scenario Builder using Deferred Costs can help.

Imagine you have two assets X and Y, that require maintenance to keep them in optimal working condition. They are the same size, same type, perform the same level of service and both assets need the same maintenance activity. That activity costs $4 SY but you only have enough money to fix one of them. How would you decide which one to fix?

Now, what if I told you, that asset X could be delayed or deferred till next year at the same cost? No brainer right... That’s a high-level description of how deferred costs in Scenario Builder work. Let’s take a more detailed look.

In the chart below, moving right to left, each of the bars represents an increasingly bigger and more expensive maintenance activity. Notice the condition range below each of the bars. Now let’s pretend we have an asset we allow to naturally deteriorate without maintaining it. It would eventually pass through each of the condition ranges and its maintenance activity. Focus for a moment on the tallest green bar and its $4/SY cost. As our pretend asset enters the condition range at 85 for that activity it will hang out there for 7.9 yrs dropping 1.9 points per year before finally moving into the next activity band. This means our asset can be deferred for 8 years and still have a cost of $4/SY. It would be beneficial if you knew the year you needed to address that asset, just before it falls into the $9/SY activity. Welcome to Deferred Costs in Scenario Builder.

When using deferred costs in a scenario, we calculate the maintenance activity you should perform this year, but we also calculate next year’s activity assuming you don’t do anything this year. In addition, we determine how long this year’s activity can be delayed or deferred. It prioritizes those assets that are about to slip into a more expensive activity the following year. The assets with the biggest cost increase get the highest prioritization. This process is important because it allows you to defer dollars on potentially hundreds of assets each year. In other words, it saves money.

I recently ran scenarios against a customer to see how much of an impact using deferred cost would have. I started with one of their existing scenarios which used asset criticality & lowest estimated overall condition to prioritize the assets. I duplicated it and changed the prioritization to deferred costs & lowest estimated overall condition and ran both scenarios. I think the results speak for themselves but noticeable difference between the total activities as well as the network OCI numbers.

No Deferred Costs

Deferred Costs

This is a simple example to help illustrate how deferred costs work, but there are many levers you can pull allowing you to tweak your scenario to your needs. All the while still leveraging the benefits of deferred costs. So, as you enter budget season, ask yourself if you’re being as efficient as you could be?