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Revealing True Cost

I received some good feedback from last week’s article but I had a number of queries about what I meant by ‘whole of life cost’. In life, when we make
13 Sep 2014 10:04

I received some good feedback from last week’s article but I had a number of queries about what I meant by ‘whole of life cost’.

In life, when we make an investment we expect to gain maximum returns.  Whether it is our cars, our houses, our furniture, we invest because we need them and in some cases because of the comfort it provides.

Neil Cook

Neil Cook

Upon purchasing, an owner will have to forecast the recurring costs associated with the purchase. Let’s use the example of a car.

Having all these options before you; would you make the initial commitment upfront to pay a little bit more for a vehicle with better performance features that is still within your budget or would you opt to save the difference and buy a cheaper vehicle with possibly  higher fuel consumption and maintenance cost.

We are all different in the decisions we make but the underlying factors are still the same. How so?

This underlying factor takes into account all costs associated with owning an asset for the period of its design life and includes the maintenance and all associated expenses.

This total cost of ownership is called the Whole of life cost or Life cycle cost. Making that commitment to buy a car and maintain it is no different to building a road and maintaining it.

In which proportion you choose to spend more money could mean the difference between an upfront investment with cheaper running costs or a cheaper investment with higher running costs.

A lot of work is being put into the designs of our roads and bridges and proper construction upfront that maximises its life cycle but the initial investment is just the tip of the iceberg.

A newly-constructed road in Fiji is built to have a design life of 25-30 years without requiring full rehabilitation.

This does not mean that a road is built and left for 25 years before being receiving attention. The lack of regular attention at the right time is one of the reasons that Fiji’s roads are failing before time.

Lessons from past

Learning from past experience, the solution to get ahead is to schedule periodic maintenance over the design life period.

For instance this road may require a new coat of tarseal seal in its 15th year just like a car may need its battery replaced after five years if it had a good quality battery installed (or only 2 years if a cheaper battery was chosen).

Whole of life costing is important to the FRA because of our large asset portfolio and our long term interest in the key infrastructure that keeps Fiji connected and moving.

$5.2 billion is the current value of our assets and the reality is that most parts of the network have finite lives, they won’t last forever and at some point they need to be replaced.

At the current investment rate on renewals (replacing roads and bridges that currently exist) it will take Fiji about 10 years to get over the current $1 Billion backlog.

Delaying the work would cost more money, in fact research from around the world tells us it can cost up to five times as much to do the work later compared with the cost of doing it at the optimum time in its lifecycle.

Back to the car example; you’ve purchased your car and 5 years later discover a leaking radiator. The sensible thing to do with this additional cost would be to replace it there and then.

Consider the implications of prolonging that replacement, a delay could result in damage to your engine which is far more expensive to replace.

Thinking about this a bit deeper, perhaps the radiator would not have been leaking at all if you had corrosion inhibitor in the water instead of just tap water – this may have cost a little more in regular maintenance costs but would have saved the cost of a radiator replacement.

No matter what the asset is the underlying concept is the same and the owner of that asset has similar decisions to make about the best time to invest to get the greatest possible value from the asset over the whole of its life.

Learning from the failures of past practice here and around the world and how this is changing with the existence of the FRA

Effective Management of Fiji’s roading network. What does that mean to you?

For FRA it means ensuring we get the best value for money for every contract handed out, ensuring that suppliers comply to the right quality standards and deliver to expectations.

Our suppliers are slowly but surely beginning to understand our requirements around whole of life costs and as this understanding grows and long term thinking becomes the norm it will be a win win situation for everyone.

We are all decision makers in our own way, even as a parent we need to be responsible forward thinkers anticipating situations around future spending and safe guarding returns on our investment.

Capital investment at the time of purchase really is just the tip of the iceberg.

– Neil Cook is the CEO of the Fiji Roads Authority. This is his regular column be published by the Fiji Sun on Saturdays.

 



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