JLL calculates preventive maintenance ROI

At a 545% ROI and with cost reductions totaling $0.33 a square foot, preventive maintenance savings are worth the investment.

Preventive Maintenance (PM) is vital for the effective functioning of all equipment across many industries.

While preventative maintenance has been a priority for most companies, there is less clarity on what kind of value it has with regard to returns. A better approach is to streamline a process for assessing how preventive maintenance software provides value through the lens of financial ratios. The lack of concrete statistics and evidence-based examinations point to the need for evaluating preventive maintenance with reference to mitigating risks and protecting assets.

A perfect example of quantifying the preventive maintenance ROI can be seen in an analysis carried out by a company to create a financial model, in partnership with Jones Lang LaSalle (JLL). The analysis explored the current value and investment returns gained upon funding preventive maintenance for portfolio of buildings.

preventive maintenance ROI JLL
1. NPV of preventive maintenance is calculated by comparing repair, energy and replacement costs for PM and non-PM scenarios and bringing the costs to a present value using an assumed discount rate. 2. EUL refers to estimated useful life.

Criteria used for assessing the utility of preventive maintenance included the equipment’s actual costs, costs involving repairs, costs involving replacements, the expected life cycle and effects of preventive maintenance on life cycle. It also comprised of the frequency of repairs required when the equipment is in poor condition and the consequences of preventive maintenance on energy usage.

To start out, 12% of the company’s portfolio was surveyed – approximately 14 million square feet. For every property, the type of equipment, the number of equipment, size and age of equipment as well as expenditures incurred for preventive maintenance was calculated.

The financial model was compiled using the following assumptions: discount rate of 10%, inflation rate of 3%, time horizon of 25 years, non-productive lead time of 10% and lost revenue due to downtime at zero (i.e. this could not be quantified due to downtime). Based on this model, the team could pinpoint the effectiveness of preventative maintenance on specific equipment.

For example, if a company has an air compressor of 7 horsepower that is 10 years old, will it make sense to invest in replacing the compressor at $32,900 or utilize preventive maintenance? According to the model, the compressor would last 20 years with preventive maintenance versus 16 years without it. The preventive maintenance costs would amount to only $472 per year.

In addition, the team explored three possible scenarios related to preventative maintenance programs. The first one assumed that a company is having zero spending on preventive maintenance. The second one assumes that the cost of preventive maintenance is the actual amount spent at the time of analysis. The third scenario assumes that the company spends what is known as the industry benchmark on preventative maintenance measures. The results when comparing scenario 1 to 3 showed that preventative maintenance brings huge returns in investment. Returns are chiefly due to maximising on the full life potential of equipment.

 


References: Determining the Economic Value of
Preventive Maintenance, a study by JLL