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Optimal Replacement Cycles of Highway Operations Equipment (2018)

Chapter: Chapter 5 - Equipment Replacement Factors

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Suggested Citation:"Chapter 5 - Equipment Replacement Factors." National Academies of Sciences, Engineering, and Medicine. 2018. Optimal Replacement Cycles of Highway Operations Equipment. Washington, DC: The National Academies Press. doi: 10.17226/25036.
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Suggested Citation:"Chapter 5 - Equipment Replacement Factors." National Academies of Sciences, Engineering, and Medicine. 2018. Optimal Replacement Cycles of Highway Operations Equipment. Washington, DC: The National Academies Press. doi: 10.17226/25036.
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Suggested Citation:"Chapter 5 - Equipment Replacement Factors." National Academies of Sciences, Engineering, and Medicine. 2018. Optimal Replacement Cycles of Highway Operations Equipment. Washington, DC: The National Academies Press. doi: 10.17226/25036.
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Suggested Citation:"Chapter 5 - Equipment Replacement Factors." National Academies of Sciences, Engineering, and Medicine. 2018. Optimal Replacement Cycles of Highway Operations Equipment. Washington, DC: The National Academies Press. doi: 10.17226/25036.
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Suggested Citation:"Chapter 5 - Equipment Replacement Factors." National Academies of Sciences, Engineering, and Medicine. 2018. Optimal Replacement Cycles of Highway Operations Equipment. Washington, DC: The National Academies Press. doi: 10.17226/25036.
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Suggested Citation:"Chapter 5 - Equipment Replacement Factors." National Academies of Sciences, Engineering, and Medicine. 2018. Optimal Replacement Cycles of Highway Operations Equipment. Washington, DC: The National Academies Press. doi: 10.17226/25036.
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Suggested Citation:"Chapter 5 - Equipment Replacement Factors." National Academies of Sciences, Engineering, and Medicine. 2018. Optimal Replacement Cycles of Highway Operations Equipment. Washington, DC: The National Academies Press. doi: 10.17226/25036.
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Suggested Citation:"Chapter 5 - Equipment Replacement Factors." National Academies of Sciences, Engineering, and Medicine. 2018. Optimal Replacement Cycles of Highway Operations Equipment. Washington, DC: The National Academies Press. doi: 10.17226/25036.
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Suggested Citation:"Chapter 5 - Equipment Replacement Factors." National Academies of Sciences, Engineering, and Medicine. 2018. Optimal Replacement Cycles of Highway Operations Equipment. Washington, DC: The National Academies Press. doi: 10.17226/25036.
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Suggested Citation:"Chapter 5 - Equipment Replacement Factors." National Academies of Sciences, Engineering, and Medicine. 2018. Optimal Replacement Cycles of Highway Operations Equipment. Washington, DC: The National Academies Press. doi: 10.17226/25036.
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Suggested Citation:"Chapter 5 - Equipment Replacement Factors." National Academies of Sciences, Engineering, and Medicine. 2018. Optimal Replacement Cycles of Highway Operations Equipment. Washington, DC: The National Academies Press. doi: 10.17226/25036.
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Suggested Citation:"Chapter 5 - Equipment Replacement Factors." National Academies of Sciences, Engineering, and Medicine. 2018. Optimal Replacement Cycles of Highway Operations Equipment. Washington, DC: The National Academies Press. doi: 10.17226/25036.
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59 Equipment Replacement Factors Several factors are used to perform LCCA and as inputs in the fleet replacement processes. Table 6 provides a summary of these factors. The table shows how the factors are used and displays the data sources for developing factors specific to an agency. The replacement factors have two purposes: (1) as cost factors used in calculating costs in LCCA and (2) as plan- ning values in the replacement process to identify potential replacement targets and establish replacement priorities. The following sections describe these factors. 5.1 Age Equipment replacement decisions should not be made solely based on age. However, equipment age is a primary factor in the replacement process and is used (1) to express optimal replacement cycles in years and (2) in long-range planning to project when a unit potentially will be due for replacement. A specific equipment unit may be evaluated at any time in its life but should be analyzed for replacement when it approaches its target age. The optimization tool has default values for the replacement planning targets, as shown in Table 7. During initial tool setup, the preloaded default val- ues should be reviewed and replaced as needed with agency specific values. After the optimization tool has determined the optimal life cycles, the user can update and fine-tune the replacement planning values. It may be best to use the tool over two or three planning cycles before deciding to change the existing replacement planning targets. 5.2 Utilization Utilization normally goes hand in hand with age, that is, the older the equipment, the higher its LTD utilization. How- ever, this is not always the case. Utilization can vary signifi- C H A P T E R 5 cantly between equipment classes and from year to year for individual units. Older units tend to be used less on an annual basis, as operators prefer to operate new equipment if it is available. Annual utilization also decreases with age because of higher downtime. Utilization is used in three ways in equipment replace- ment: (1) in LCCA to calculate LTD cost per mile/hour, (2) as a planning value to identify potential replacement candidates, and (3) to express optimal replacement cycles by miles/hours. The optimization tool contains default replacement plan- ning targets for miles or hours for each equipment class (see Table 7). For example, Equipment Class 2513, 1-Ton Crew Cab, has default targets of 10 years and 120,000 miles. Any unit exceeding 120,000 miles is identified as a potential replacement candidate. 5.3 Depreciation Depreciation is a very important factor in equipment LCCA. It generally comprises 30% to 40% of the total cost to own and operate equipment over its lifetime. Depreciation is defined in accounting terms and is used to determine an asset’s book value based on age. The LCCA approach in this guide calculates depreciation as the true cost of ownership, which is not necessarily the same as the depreciation amount computed by accounting methods. The optimization tool computes the ownership cost com- ponent of LCCA based on a unit’s utilization, which is a bet- ter indication of a unit’s true depreciation than age. As an example, consider two units of the same age, 6 years, one with 70,000 miles and one with 110,000 miles. Although they have the same age, the unit with 110,000 miles will likely have a significantly lower salvage value, meaning that it has depreci- ated more. The optimization tool contains a default depreciation sched- ule for each equipment class. Table 8 shows an example for

60 the ½-Ton Pickup class. The default factors were determined based on salvage value data obtained from several highway agency information sources (see Part I in this report). When needed, the optimization tool approximates depreciation between mileage intervals using the midpoint of the two values. The following example shows how the ownership cost component (depreciation) of LCCA is developed. Equipment type: ½-Ton Pickup LTD utilization: 45,500 miles Replacement cost: $25,000   ( )= = accumulated depreciation accumulated depreciation % replacement value = 43.5% $25,000 $10,875 The LCCA ownership cost component is based on LTD cost per mile: = =LTD cost per mile $10,875 45,500 miles $0.24 mile When setting up the optimization tool for the first time, the default depreciation values can be used or customized to an agency’s needs. 5.3.1 Depreciation for Agencies Receiving no Proceeds from Equipment Sales Some fleet agencies receive no returns on equipment sales because the sale proceeds are not returned to the fleet agency. The optimization tool accounts for this by allowing the user to override the default values and to set salvage values at zero at a selected age or utilization level. 5.4 Maintenance and Repair Cost Maintenance and repair (M&R) cost is a major compo- nent of the total cost to own and operate equipment, typically making up to 40% to 50% of a unit’s total cost over its life; it is a necessary factor required for performing LCCA. When used in LCCA, M&R costs are included in the operating cost component of the total life cycle cost. To provide reliable outcomes from LCCA, it is impor- tant to accurately and fully define M&R costs. M&R cost can fluctuate widely from year to year, as illustrated in Figure 4. The annual fluctuations of M&R costs naturally occur over a unit’s life. Units may go a year or two with only preventive maintenance and minor repairs, followed by a year with a sharp rise in cost due to a major repair or service such as tire or brake replacement and then experience low M&R costs in Replacement Factor How It Is Used Source Age Project future replacement needs. Express optimal replacement cycle in years. Downloaded from the agency’s equipment data source. Utilization Identify potential replacement targets. Express optimal replacement cycle in miles/hours. Compute LTD cost per mile or hour. Downloaded from the agency’s equipment data source. Depreciation Calculate ownership cost component in LCCA. Replacement cost input by user. Depreciation schedules in the optimization tool. Maintenance and Repair Cost Calculate operating cost component in LCCA. Downloaded from the agency’s equipment data source. Fuel Cost Calculate operating cost component in LCCA. Downloaded from the agency’s equipment data source. Downtime Cost Calculate operating cost component in LCCA. Downtime hours downloaded from the agency’s equipment data source. Downtime hourly rate input by user. Condition and Mission Criticality Develop priority ranking of equipment replacements. From physical condition assessment of equipment unit. Overhead Cost Calculate operating cost component in LCCA. Overhead cost factors in the optimization tool. Obsolescence Cost Calculate operating cost component in LCCA. Obsolescence cost factor in the optimization tool. Replacement Cost Calculate depreciation. Project future replacement budget needs. From the agency’s equipment data source, or input a value specific to each unit. Table 6. Equipment replacement factors.

61 Code Description Year Miles Hours 1300 Sedan 6 90,000 1600 SUV 6 90,000 1348 Police Cruiser 5 80,000 1521 -Ton Pickup 8 110,000 1531 -Ton Pickup 8 110,000 1523 -Ton Crew Cab 8 110,000 1533 -Ton Crew Cab 8 110,000 1424 Vans 8 110,000 3514 Mechanic Shop Truck 10 120,000 2513 1-Ton Crew Cab 10 120,000 3711 Flat Bed Truck 10 120,000 3744 Scissor-Bed Truck 10 120,000 6712 Single-Axle Dump 12 120,000 8712 Tandem Dump 12 120,000 8785 Tri-axle Dump 12 120,000 8786 Bottom Dump 12 120,000 8810 Tractor/Trailer 12 120,000 8743 Bucket Truck 15 120,000 8744 Bridge Snooper Truck 20 250,000 8771 Roadway Sweeper Truck 12 120,000 8741 Mobile Crane 15 120,000 8773 Culvert Cleaner/Vacuum Truck 12 120,000 8778 Asphalt Distributor 12 120,000 8731 Wrecker Truck 12 250,000 9452 Striping/Paint Truck 12 250,000 9132 End Loader, Wheeled 12 5,000 9220 End Loader, Track 12 3,000 9110 Loader, Skid Steer 12 3,000 9160 Motor Grader 15 5,000 9440 Roller, Pneumatic 12 5,000 9441 Roller, Steel Wheel 12 5,000 9150 Excavator, Wheeled 12 8,000 9250 Excavator, Track 12 8,000 9230 Dozer 12 5,000 9290 Dragline 15 5,000 9142 Backhoe 12 8,000 9431 Asphalt Paver 15 8,000 9426 Pavement Profiler 15 8,000 9623 Tractor, Mower 12 5,000 0110 Salt Spreader 8 5,000 Passenger Vehicles Replacement Planning Targets Heavy/Off-Road Equipment Equipment Class Maintenance Equipment Light Trucks Medium Duty Trucks Large Trucks Specialty Trucks Equipment Group Table 7. Replacement planning targets for age and utilization. Depreciation Schedule Miles 10,000 20,000 30,000 40,000 50,000 60,000 80,000 Accumulated Depreciation 15% 24% 32% 40% 47% 53% 59% Table 8. Example of a depreciation schedule, ½-ton pickups. the following years. Although these annual cost fluctuations occur, Figure 4 shows that M&R costs progress on an upward trajectory over a unit’s life. High costs in the first year are common with highway oper- ations equipment because most units require some degree of preparation and outfitting when they are received. Addition- ally, average utilization in the first year is low because many units are received in the middle of the year. This presents a potential problem when performing LCCA. As illustrated in Figure 5, using the same M&R cost for the unit in Fig- ure 4 the LTD cost/mile in the first year is very high because maintenance costs are high and the utilization is low. In this example, the accumulated M&R cost in Year 1 is $0.65/mile and drops to $0.30/mile in Year 2.

62 5.4.1 Maintenance and Repair Cost Data Consistency To ensure that consistent and complete maintenance data are used to compute optimal life cycles, the following rules should be adopted for tracking and allocating M&R costs. • Include all repair types. All types of maintenance and repairs performed on a vehicle should be included in the unit’s oper- ating cost. These include preventive maintenance, scheduled and unscheduled repairs, accident repairs and body work, and rebuilds and overhauls. • Assign initial outfitting cost to capital. When new vehicles are received, most agencies perform some degree of setup on the units before deploying them to the field. The setup may include decals, safety striping, light bars, and radios. If the agency purchases a chassis only, the setup may also include installation of truck beds. These initial preparation and outfitting costs should not be charged as M&R; rather the costs should be accounted for in the equipment’s replacement cost and depreciation. An exception would be for separate beds installed on a chassis. If the agency intends to remove the bed at resale and use it again, the bed is considered a separate asset and should not be included in the life cycle cost of the unit. • Use a shop work order system. An effective system for report- ing M&R cost to specific equipment units is needed to ensure that M&R costs are properly accounted for in LCCA. A shop work order system is the best practice to capture equipment maintenance costs. The shop work order should capture all labor and parts costs for all work performed on an equipment unit. To capture all M&R costs, a shop work order should be used no matter how small the repair job and all types of M&R activities should be reported. The shop work order should categorize costs by labor, parts, and commercial repairs. Most fleet agencies already have these procedures in place; however, a review of existing practices would be ben- eficial as part of implementing the replacement processes outlined in the guide. • Report only actual mechanic time worked. Only actual mechanic work hours involved in completing an M&R job Figure 4. Illustration of yearly M&R cost fluctuations for a dump truck. Figure 5. Accumulated M&R costs for a dump truck.

63 should be charged to a shop work order. For nonrepair activities, such as shop cleanup, training, or safety meet- ings, a nonmaintenance activity code should be used to report mechanic time. These types of activities are nec- essary and important and are part of the overall cost of equipment operations. However, if a repair work order incorporates the hours, M&R cost can be overstated for a specific repair. The mechanic’s nonrepair hours are treated as a direct overhead expense and are allocated proportionately across all equipment classes, as discussed in Section 5.8, Overhead Cost. • Report all parts costs. All parts and fluids used to perform M&R on a specific equipment unit should be captured on the shop work order. Expendable items—such as nuts, bolts, and washers whose costs are too small to allocate by work order—should be treated as part of the shop over- head costs. Lubricants, grease, and other fluids may be reported on the work order if the agency can accurately measure quantities, but when dispensed in small quanti- ties, they may just as effectively be treated as a shop over- head expense. 5.5 Fuel Cost Fuel cost generally comprises 20% to 40% of total equip- ment cost. In a unit’s early years, fuel costs often exceed M&R costs. Fuel prices are volatile and vary from year to year based on market conditions. Market cost must be considered when calculating costs in LCCA. The optimization tool performs LCCA using average annual fuel cost per mile for all equip- ment units in a class. 5.6 Downtime Cost Downtime is an important and significant cost factor. Downtime does not result in additional cash outlays from the fleet budget but does have a direct and significant cost impact on highway operations. If equipment is not available due to downtime, vital services suffer, and ultimately the cost of highway operations increases. Equipment downtime is an often-overlooked cost factor. If it is not captured and reported, the true cost of equipment operating cost will be understated. Factoring in downtime could add as much as 50% to equipment operating costs (see Part I in this report). The optimization tool includes downtime in the operat- ing cost component of LCCA. It is not necessary to include downtime to perform LCCA; however, it is highly recom- mended. If an agency does not track downtime, the optimi- zation tool will ignore this factor and the resulting operating cost component of the LCCA will be lower than it would be if downtime had been included. 5.6.1 Tracking Downtime Hours While downtime costs can be significant, tracking down- time hours can be challenging in a highway operations envi- ronment. As a rule, downtime is the time that a unit is out of service during normal working hours. To ensure accurate and complete downtime tracking, the following rules should be adopted: • For preventive maintenance and scheduled repairs, down- time should account for the total hours the unit is not avail- able for use. If, for example, the unit were out of service for an entire day during normal working hours, downtime would be 8 hours. If preventive maintenance were per- formed at night, on weekends, or during other nonworking hours, there would be no downtime. • If scheduled maintenance were performed in the off sea- son, when the unit is not normally needed, there would be no downtime hours reported. Examples include refur- bishing salt spreaders during the summer or refurbishing mowers during winter. • For breakdowns and unscheduled repairs, downtime begins when a unit initially goes out of service, regardless of when it is repaired by field mechanics or brought into the shop. For example, if a vehicle breaks down while in the field, downtime would begin at the time of the breakdown. Even though the field mechanic might not arrive to make repairs or the unit might not be transported to the shop until later, downtime should be tracked from the time the unit goes out of service. • Downtime ends when a unit is ready to go back into service. As part of implementing the replacement processes out- lined in this guide, review of the agency’s downtime reporting procedures and initiating a reporting process that is consis- tent with these rules is required. 5.6.2 Determining Downtime Costs for LCCA To determine the downtime costs for LCCA, the optimiza- tion tool uses downtime hours downloaded from the agency’s data source. Multiply the downtime hours by the hourly downtime rate for each equipment class. If the agency has established equipment rental rates, the hourly downtime rate is the same as the hourly rental rate. The optimization tool contains default values for down- time rates for each of the 40 equipment classes. The default downtime rates were developed from industry data. Dur- ing tool setup, the user can either adopt the default rates or replace them with hourly rates specific to the agency.

64 5.7 Physical Condition and Mission Criticality Physical condition and mission criticality are not mon- etary factors used in performing LCCA. However, they are important factors to be considered in replacement decisions. Condition assessments for equipment are similar to condi- tion assessments used in other asset management processes. The optimization tool uses the condition score and LTD cost to determine replacement priorities; mission criticality is fac- tored into the condition score. Condition assessments are completed by using the vehicle condition assessment form shown in Figure 6. The form is an Excel spreadsheet in the optimization tool; it can be used either as a paper document or by working in the spreadsheet and is highly customizable by the user. The following instructions describe how to complete the form. 1. Equipment Number and Description Use these fields to identify the specific piece of equip- ment, identify the date of the inspection, and identify who is performing the assessment. These are free-form fields and any combination of text may be entered (Figure 7). 2. Equipment Criticality This drop-down box allows the user to select a level of mission criticality for the unit under assessment (Figure 8). Five levels of criticality are defined and assigned weight values: – Very High – High – Moderate – Low – Very Low Select the criticality level that best fits the unit under evaluation. The mission criticality level is discretion- ary; however, guidelines specific to the agency should be adopted to ensure consistency among evaluators. The selected criticality level affects the condition score of each vehicle component and ultimately affects the overall condition score for the unit. For example, if a Very High mission criticality level is selected, the overall condition score is lowered and the unit is given a higher priority for replacement in the replacement process. 3. Equipment Components When the optimization tool is opened, the form is broken into six major vehicle components (Figure 9): – Body – Engine – Transmission – Steering/Suspension – Electrical – Frame These components can be changed to fit the agency’s preferred description. They can also be tailored to the spe- cific equipment classes. For example, the components for front end loaders will likely be different from those for sedans or pickups. 4. Component Weight Values Each of the six components has an assigned weight value based on the relative importance of each component. In the example shown in Figure 10, the Body and Engine compo- nents have weight values of 15 and 20, respectively, indicat- ing that the condition of the engine is more important than the condition of the body. The weight values are preloaded in the tool and can be changed to fit the agency’s needs by simply changing the electronic form. Any weight value can be assigned, but once the weight is assigned, it should not be altered by individual evaluators. 5. Condition Ratings A rating of Good, Fair, Poor, or Very Poor is assigned to each component by the mechanic or technician who is performing the evaluation, based on the rating descrip- tions in the right column (see Figure 11). – If using the electronic version of the form, click on the appropriate condition level. The score will automati- cally populate for each component. In the example in Figure 11, a Fair rating was assigned to the body com- ponent, which resulted in a component score of 12.8, and a Very Poor rating was assigned to the engine, which resulted in a component score of 5.0. The spreadsheet automatically calculates the compo- nent score based on three inputs: 1. The rating selected by the evaluator; 2. The criticality level selected at the top of the form; and 3. The weight values assigned to each component. – If using a paper copy of the form, mark the appropri- ate condition for each component. The scores from the paper forms must then be input into the spreadsheet in the tool to calculate an overall condition score for the unit. 6. Overall Condition Score The overall condition score is derived by adding the individual component scores (Figure 12). The lower the score, the worse the condition of the unit. The mission criticality is factored into the overall condition score. 7. Notes The bottom of the form provides space to make appro- priate notes about the unit under assessment. Notes may be written in any free-form style.

65 Equipment Number Description: Date: By: Equipment Criticality Weight 15 Good No rust, no body damage Fair Very little rust, minor body damage Poor Visible rust, some minor body repairs needed Very Poor Major rust or body damage. Requires major work within one year SCORE: 3.8 Weight 20 Good Good mechanical condition Fair Some minor services needed Poor Major repairs and more frequent maintenance needed Very Poor Major repairs needed within one year SCORE: 5.0 Weight 20 Good Good mechanical condition Fair Some minor services needed Poor Major repairs and more frequent maintenance needed Very Poor Major repairs needed within one year SCORE: 5.0 Weight 20 Good Good mechanical condition Fair Some minor services needed Poor Major repairs and more frequent maintenance needed Very Poor Major repairs needed within one year SCORE: 20.0 Weight 10 Good Good mechanical condition Fair Some minor services needed Poor Major repairs and more frequent maintenance needed Very Poor Major repairs needed within one year SCORE: 7.0 Weight 15 Good No rust or frame damage Fair Some minor rust and/or frame damage Poor Moderate rust and/or frame damage but safe to operate Very Poor Major rust and/or frame damage; safety concerns SCORE: 15.0 Overall Condition Score: 55.8 Notes: Steering/Suspension Electrical Frame Vehicle Condition Assessment Transmission Engine Very Low Body Figure 6. Vehicle condition assessment form.

66 5.7.1 Recording and Tracking Condition Scores Condition assessments may be completed by using either a paper copy of the vehicle condition assessment form or the electronic spreadsheet in the optimization tool. If a paper form is used, the condition ratings must be entered into the electronic form so that the spreadsheet can compute an over- all condition score. The electronic vehicle condition assessment form is not linked to any other files or spreadsheets in the opti- mization tool. This requires the implementation of a sys- tematic process for recording and tracking the scores so the scores can be manually entered into the optimization tool during the annual replacement planning process. An agency may develop a recording and tracking process that is best for its needs; recommended processes are described as follows. Using an Electronic Form Laptops or mobile devices with Microsoft Excel are best for completing forms, so evaluators (mechanics or technicians) would need access to these devices in the field. 1. Copy the original blank form from the optimization tool into a new folder on the computer. 2. Make any necessary adjustments to the form for the agency’s fleet, such as component names and weight values. 3. Make separate master forms for each major equipment category. Example categories include transportation equipment, heavy trucks, maintenance equipment, and off-road equipment. Save the original master forms so they cannot be changed. 4. Load the original master forms onto laptops or mobile devices for use in the field by evaluators who will perform the assessments. 5. Using the forms in the laptops and mobile devices, open a blank master form and complete the condition assessment for the unit under evaluation. 6. As each unit is completed, save the completed assessment as a separate Excel file or tab within a spreadsheet. Figure 7. Vehicle condition assessment form headings. Figure 8. Criticality selection. Figure 9. Equipment components. Figure 10. Component weight values.

67 Figure 11. Selecting a condition rating. Figure 12. Overall condition score. 7. Compile all saved condition assessments onto a central computer for ready access by the fleet manager or equip- ment replacement coordinator for later input into the optimization tool. Using a Paper Form If laptops or mobile devices are not available, complete forms on paper. 1. Perform Steps 1 through 3 in the same manner for elec- tronic forms. 2. Make sufficient paper copies of each form to distribute to the evaluators who will perform the assessments. 3. Fill out the top of the form with the necessary information identifying the unit. 4. Manually mark the appropriate condition score for each component. 5. Make appropriate notes at the bottom of the form as needed. 6. Collect the completed paper forms and enter the information into the electronic format using the steps outlined above. Enter the paper forms into the optimization tool to com- pute an overall condition score. During the annual fleet planning process (Chapter 6), the condition assessment scores will be input into the optimiza- tion tool to help determine replacement priorities. 5.8 Overhead Cost The M&R costs downloaded from the agency’s system might not have fully loaded mechanic labor rates. Research has shown that M&R costs are often understated because mechanic hourly rates do not fully account for overhead costs. There are two types of overhead associated with equip- ment repairs: direct and indirect. Table 9 shows examples of cost components associated with each type of overhead. The optimization tool is designed to allow the user to add overhead to the labor costs downloaded from the agency’s equipment cost tracking system. The tool has preloaded default factors for both direct and indirect overhead; review and modify these default factors as needed during initial tool setup. The agency may have some overhead costs already built into labor costs. For example, employee benefits but not many other Direct Overhead Indirect Overhead Payroll Additive/Benefits Training Uniforms Tool Allowance Non-direct Time Shop Management Warehouse Operations Expendable Parts and Supplies Facility Costs Computers/Software Table 9. Overhead cost components.

68 overhead expenses may have been added into direct wages. To help establish the correct values, it may be appropriate to con- sult the agency’s accounting department. 5.8.1 Direct Overhead Direct overhead costs are directly associated with mechanic labor. The cost elements included as direct overhead follow. Payroll Additive and Employee Benefits Payroll additives and employee benefits include items such as FICA, worker’s compensation, health insurance, and retirement benefits. These costs are directly associated with mechanic labor costs and can typically amount to 45% to 55% of a mechanic’s hourly wage. Training, Uniforms, and Tool Allowance Training is a major expense in fleet operations because of constant and fast-changing equipment technology. It is a necessary overhead expense to be factored into the cost of M&R. Training costs are those paid for training courses and associated expenses for mechanics to attend train- ing. Training costs do not include the mechanic’s time for attending the training, which is nondirect time, discussed below. Many fleet agencies provide mechanic uniforms and tool allowances. If the agency provides these benefits to mechan- ics, factor them in as direct overhead. Nondirect Time Nondirect time may constitute a significant portion of a mechanic’s total paid hours in a year. Nondirect time is a major cost component in fleet operations that is often overlooked. Nondirect time is the time when a mechanic is not charg- ing directly to a repair work order. This time is necessary and unavoidable and will always be present in a fleet maintenance environment. Examples of nondirect time include • Leave time—annual, sick, and vacation—the largest com- ponent of nondirect time; • Mechanic training hours; • Shop cleanup; and • Safety meetings. Table 10 shows an example of how to determine non- direct time, using actual data from a DOT fleet organization. Use the example as a template to compute chargeable time for the agency. The example shows that 69% of a mechanic’s total paid annual hours are typically chargeable to repair work orders. The remaining 31% is nondirect time and is an operational expense for the fleet agency; it should be included as an over- head factor in the M&R cost. 5.8.2 Indirect Overhead Costs Indirect overhead costs consist of general and administra- tive costs at the fleet enterprise level, including nonmechanic personnel such as warehouse operations, procurement, dis- posal, or warranty management. Other indirect overhead costs include general overhead expenses, facilities operating cost, and shop tools/operations that are not directly charge- able on a repair work order. Not all indirect costs should be allocated to M&R. Some costs, such as procurement, do not affect maintenance costs. Similar to direct overhead expenses, indirect overhead expenses should be prorated to M&R costs based on mechanic hours charged. 5.8.3 Case Example of Overhead Cost Calculation Table 11 shows an example of calculating direct and indirect overhead factors for use in performing LCCA, using data from a DOT agency. The fleet budget data were taken from the agency’s fiscal year 2017 budget. The example shows budgeted expenses specific to the agency but can be used as a template to arrive at overhead cost factors for another agency. The example shows that the direct and indirect overhead rates for this agency are 115% and 93%, respectively. The agency’s average mechanic hourly rate for all mechanic classifications is $17.62. The agency charges mechanic labor cost to work orders at the rate of $35.00 per hour. In real- Mechanic Nondirect Time Component Hours Nominal Hours per Year 2,080 Overtime Hours at 6% per Average Year 125 Total Paid Hours per Year 2,205 Holidays, 12 Days per Year 96 Annual Leave, 15 Days per Year, Average 120 Sick Leave, 10 Days per Year, Average 80 Annual Hours Available for Work Orders 1,909 % Time Charged to Repair Work Orders—80% 1,527 Total Chargeable Time 69% Table 10. Example of mechanic nondirect time.

69 ity, as shown in the example, the true cost for fully loaded mechanic labor should be $53.01 per hour. This means that the agency’s equipment M&R costs are being significantly underestimated and most likely will have a significant impact on determining optimal life cycles. To perform LCCA accurately, it is important that a true hourly rate be established for mechanic labor based on the overhead factors specific to each agency. The optimization tool provides default values for direct and indirect overhead of 45% and 90%, respectively. For LCCA operating cost calculations, these overhead factors are applied to the M&R costs downloaded from the Cost Item Factors Direct Salaries ($) Direct OH ($) Indirect OH ($) Salaries Charged to Work Orders 562,815 Mechanic Non-WO Time 249,799 Shop Management Pro-rated 57,000 FICA 6.20% 50,382 3,534 Worker's Comp 7.24% 58,833 4,127 Retirement 12.20% 96,706 6,954 Health Insurance 19.00% 150,608 10,830 Parts 23,142 Mechanic General 70,800 Paint Shop - General 24,000 Welding Shop - General 24,000 Shop Tools 35,150 IT - Software License 13,000 IT - Computers, every 5 years 1,500 Building Maintenance 29,000 Hazardous Material Disposal 15,000 Utilities 25,600 Uniforms 8,400 800 Training 29,500 - Tool Allowance $150 3,000 150 Supplies, Postage and Freight 7,040 Telephone 16,500 Office Furniture 3,900 Fuel/Oil 23,471 Small Equipment 44,000 Shop Vehicles 34,375 Warehouse Operations 48,000 Totals 562,815 647,228 521,873 115% 93% 1,731,916$ 32,674 $ 53.01 Total Budget for Maintenance and Repair Total Shop Hours Charged to WO Loaded Labor Rate for Mechanic Overhead as a % of Direct Salaries Note: WO designates work order; OH designates overhead. Table 11. Case example for calculating overhead rates. agency’s equipment system. If the agency’s M&R costs already include some overhead in the labor cost, that amount should be considered when setting up the overhead factors in the optimization tool’s configuration file. 5.9 Obsolescence Equipment obsolescence is a factor that considers equip- ment safety, efficiency, and dependability. While it is difficult to quantify obsolescence cost for vehicle safety and produc- tivity, it is possible to determine how newer vehicles compare with older vehicles for fuel economy.

70 To account for obsolescence, the LCCA measures obsoles- cence based on fuel utilization. Based on the corporate aver- age fuel economy data, fuel economy for passenger vehicles and light trucks has been 1.6% and 1.8%, respectively, over the recent 15-year period. The optimization tool has a default obsolescence rate of 2.0%, which is applied to the vehicle’s fuel cost to calculate obsolescence cost. 5.10 Replacement Cost Replacement cost is used in two ways for equipment replacement: to calculate depreciation in LCCA and to pro- ject long-range replacement budget needs. Replacement cost is the original price paid for the unit plus the cost of outfitting the unit before deploying it to the field. Update the replacement costs in the optimization tool annu- ally before beginning the equipment replacement process. Use the average replacement cost for all units in a class. For example, Class Code 1521, ½-Ton Pickup, includes 2WD Reg- ular Cab gas pickups, 4WD Extended Cab diesel pickups, and other pickup truck configurations. Use the average replacement cost for all ½-Ton Pickup types in the 1521 class. If analyzing a sub group within a general class, for example, 2WD Regular Cab gas pickups, then use the replacement cost only for that subgroup. The agency may choose the replacement cost that repre- sents the majority of unit types within the class.

Next: Chapter 6 - Equipment Replacement Processes »
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TRB's National Cooperative Highway Research Program (NCHRP) Research Report 879: Optimal Replacement Cycles of Highway Operations Equipment acts as a handbook on equipment replacement concepts and an instruction manual for making cost-effective replacement decisions. The research report presents a process for determining replacement needs for highway operations equipment, identifying candidate equipment units for replacement, and preparing an annual equipment replacement program. The products include a guidance document and an Excel-based replacement optimization tool to support the equipment replacement process and facilitate its implementation.

Disclaimer - This software is offered as is, without warranty or promise of support of any kind either expressed or implied. Under no circumstance will the National Academy of Sciences, Engineering, and Medicine or the Transportation Research Board (collectively "TRB") be liable for any loss or damage caused by the installation or operation of this product. TRB makes no representation or warranty of any kind, expressed or implied, in fact or in law, including without limitation, the warranty of merchantability or the warranty of fitness for a particular purpose, and shall not in any case be liable for any consequential or special damages.

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