Estimating the money for commissioning spares allowance of a capital project using the maintenance cost in the RAV ratio is probably wrong, but it is often done. The allowance also depends on the life cycle asset management processes and practices in use.
The Question
If it is proposed to procure commissioning consumables for an upcoming project, can the commissioning spares allowance be estimated using the RAV benchmark value?
The consumables which need to be considered are: Electrical consumables, instrumentation consumables, mechanical consumables—like lube oils, structural steel, valves, piping items, gaskets, tools & tackle, etc.
The Response
Dear Shashank,
A commissioning spares allowance is for the parts and materials you need during the commissioning of new plant and equipment. These items are consumed during commissioning activities and then discarded if no longer required, or replaced before the item goes permanently into operation. Examples include replacement oil for machinery gearboxes following their running-in during commissioning, cleaning and flushing chemicals, replacement strainers in pipelines after flushing the circuit, replacement filters and water separators in air compressor piping after commissioning the system, replacement gaskets on pipelines that will be flushed clean, strainers in steam lines that will be blocked by debris, etc. In the allowance for commissioning materials you would include consumables and disposables, like tools and tackle, nuts and bolts, rags, gloves, welding consumables, personal protective equipment and safety items needed to do the commissioning, structural steel for temporary access structures and weather covers, etc.
Added to the intentionally replaced commissioning items are components and assemblies expected to be broken during commissioning. Examples are parts for control valves and manual valves destroyed by rubbish, sand and loose materials inside pipelines, instrument probes and sensors likely to be damaged during commissioning activities, mechanical seals on pumps that may be run dry, etc. If you have a particularly bad construction and installation crew you would provide extra money to buy more commissioning spares.
The commissioning spares are not the same as the maintenance spares and the emergency spares to be stocked and used during the production phase of the operation—though companies have been known to buy emergency spares and call them commissioning spares. In reality emergency spares should not break during commissioning because the plant is new, but there are taxation and depreciation benefits you get with capital expenditure that you do not get with operating expenditure. Buying emergency spares as commissioning spares is done because it delivers both commissioning risk reduction and financial investment benefits. Unused commissioning spares typically default to become maintenance spares once the plant is handed over to Operations. Left over commissioning spares will often be unused years after start-up because they are generally not the correct parts, or are in grossly excess quantities, needed for maintaining an operating plant.
The full list of commissioning parts and commissioning work should come from the Capital Project Manager in consultation with the Plant Designer and Commissioning Engineer. Once you have the list you can then get the cost of those parts. At the feasibility and justification phase of capital projects there is no commissioning parts list, so you have to make an allowance in your project capital provision for the cost of project commissioning parts and labour.
In my years as project engineer in process plant operations we used a figure of 3% of capital costs for the project commissioning allowance. That figure was told to me by senior engineers, but I never knew where that proportion actually derived from. Maybe you are right and the maintenance cost to Replacement Asset Value (RAV) ratio was the means used to arrive at the proportion of money to spend on commissioning work, spares and consumables in capital projects. Three percent of RAV for maintenance costs is about what you expect for a mediocre processing plant operation.
The maintenance cost to RAV ratio might be reasonable thing to use if you have to estimate commissioning expenditure and you have nothing from the Project Manager. It is an appealing concept because RAV links maintenance costs to capital costs. But is there really a justifiable relationship between project capital costs and the size of the allowance for commissioning spares based on maintenance costs? Commissioning spares are used rapidly, in a matter of days and weeks, unlike maintenance spares, which are used over years. This difference in spares usage rate, and the particularly skewed nature of commissioning materials and parts, challenges the validity of a relationship between commissioning spares use and normal maintenance spares usage. This brings into question whether the use of the maintenance cost to RAV ratio for commissioning spares allowance is sufficiently accurate.
Maintenance costs result from an operation’s capital project design choices, the degradation rate from how equipment is operated, the size of the material-of-construction stresses within the equipment parts, and the properties of the raw materials used and the product produced. Maintenance cost as a proportion of RAV is a lagging indicator—it is based on historic total maintenance expenditure for an operation. Change industries or operations and the maintenance costs change. Mining operation maintenance costs are very much higher than those for a fully automated brewery. This makes their maintenance cost to RAV ratios higher. But does this also mean commissioning costs for a new mining project will be so much more expensive (in the proportion of their maintenance cost to RAV ratios) than commissioning a new brewery?
You could argue a case that within an industry the use of the maintenance cost/RAV ratio to set commissioning spares allowance is a reasonable thing to do if no more accurate means exist. But you could not make such a case across industries and say that the maintenance cost/RAV ratio for a new brewery also applies to a new mining project.
Even though making a commissioning spares cost allowance for a project in a particular industry using a believable maintenance to RAV ratio will likely be incorrect, it is not totally crazy to do so when you have nothing better to use for estimating a value. It then follows the commissioning spares and labour allowance depends on what maintenance/RAV cost ratio you should expect. A world class operation will have a lower maintenance/RAV cost ratio than the ‘average’ operation within its own industry. Do not expect your particular operation will be world class unless its owners have other operations that are already world class. It is much more likely your operation will be ‘average’ if there is no solid history of best practice maintenance and operational performance within the company concerned.
Your query is specific to parts and consumables, whereas the maintenance cost to Replacement Asset Value ratio includes all maintenance costs. To get just the estimate for spares and consumables you’ll need to sub-divide the total maintenance costs into materials, labor and overheads components and proportion them each to the RAV. Whether this is valid to do and will give sufficient accuracy is another project cost estimating practice fraught with questionable assumptions.
I hope these thoughts and opinions provide you with some guidance to resolving your question on using maintenance/RAV cost ratio for setting the commissioning spares allowance.
All the best to you,
Mike Sondalini
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