Buying into the big picture
An overview and commentary, by ITT Flygt’s group consultant Bob Went, on the adoption of life cycle costs for the procurement of pumping equipment in the UK’s water industry
Electrically-driven plant accounts for the vast majority of power consumed within industry and nowhere more so than in the water and wastewater industry. Here the power consumed by pumps, for example, typically accounts for approximately half the energy budget, making the efficient and reliable operation of such plant of paramount importance to ensure economic and reliable service. The Kyoto summit in 1997 focussed attention on the need for all consumers worldwide to improve their efficiency in the use of energy. This initiative was supported by the environmental lobby to reduce carbon emissions and the UK government has taken its part in introducing the Climate Change Levy, Enhanced Capital Allowances and formation of the Carbon Trust.
There are many approaches to reducing energy consumption but perhaps the most effective means is by considering the design of installations at the outset to increase their efficiency and reliability. To be able to reduce the cost of maintenance and repairs at the same time is obviously highly desirable. A methodology for achieving the latter objectives is to consider the whole-life cost of plant during design and procurement. This approach is more commonly termed the life cycle cost (LCC) approach.
An LCC approach to purchasing is actually nothing new. Without perhaps realising it all of us apply the principles of the LCC approach to purchasing products in our every day lives. If one considers a domestic product, for example a television set, the vast majority of us do not purchase the cheapest, most basic model available but neither do we purchase the most expensive model. We consider the models available comparing their features and quality to their cost. The decision taken will be based upon a balance of the cost with the features and quality offered. In other words, an LCC approach is taken whereby the product is judged to offer the right balance between initial capital cost and the maintenance and repair costs that will be incurred during its service life. We go through a process of judging the additional capital cost of the selected model compared with the cheapest and justify this in terms of the savings expected because of the better reliability and features. Our expectation is that over the life of the product its depreciation will be significantly less than the cheapest model because of the savings in repair bills and longer service life. The savings will be considerably more than the additional capital cost. In essence, this is exactly what the LCC approach is all about.
The LCC for an item of plant may be defined as the summation of every cost that will be incurred during its life. The more obvious ones are procurement, capital, energy, increased costs due to wear, maintenance, repair and disposal costs. This list is not exhaustive and will clearly require additional items dependent upon the type of plant in question. However, the principle is the same. In many cases when carrying out LCC comparisons of plant offered by different suppliers some costs will be a constant for each option. Procurement costs, for example, will be the same when purchasing similar types of pumps from different suppliers. Many practitioners of the LCC approach will make assumptions such as the latter when comparing offers which, whilst not delivering an exact LCC figure, will nonetheless give a true comparative figure upon which to select the best LCC based offer.
LCC as a means of specification and purchasing plant was first applied in 1994 when I was responsible for a framework agreement for the purchase of pumps. Experience of specifying pumps on a least-cost basis over many years culminated in the early 1990s with the realisation that an approach to procuring pumps on the basis of their life-cycle cost was necessary. A number of installations were exhibiting issues with reliability, maintenance and efficiency. It became evident a more appropriate means of obtaining higher installed efficiency together with a lower maintenance cost was required.
Furthermore, for many years user specifications and procurement practices did not require or encourage the supply of plant or pumps on an LCC basis, indeed they positively discouraged it. The practice was based upon procurement at lowest capital cost of a pump that complied with a technical specification that did not mention LCC requirements. The pump suppliers were therefore left with no option but to quote for the cheapest product. The stage was set for the supply of plant with no consideration to LCC requirements.
The opportunity to consider the first application of LCC principles to the purchase of pumps arose in 1993 when I was responsible for formulating technical requirements for a framework agreement. The agreement invited pump suppliers to bid for the supply of different categories of pumps with the opportunity to be the sole supplier for the individual categories.
A formula equating the LCC of a pump to the capital, electrical, maintenance and overhaul costs was prepared and applied to the purchase of pumps under the agreement. This was the first attempt in the UK to relate pump LCC cost elements to an overall cost that could then be used to compare one bid with another. The formula was a good start in adopting the LCC approach to pump procurement but the need for improvements to the process became evident during use. Although it was simple to compare the capital cost from each supplier it was less easy to compare the other cost elements such as maintenance and repair. Another issue related to the need to be able to independently verify the other costs to gain the level of confidence required when making tender comparisons. There was scope for improvement and with the end of the first agreement in 1999 the opportunity arose to look at improved ways of implementing the LCC approach.
To this end attention was directed to experience in other industries, one of which was defence which clearly relies upon product reliability and cost considerations. It seemed appropriate to look at expertise deployed within that industry and following discussions with a number of parties, the decision was taken to develop an LCC model for pumps. The model was to be generic, easily used and understood. An LCC model was commissioned and prepared which allowed the user to select the type of pump, the utilisation (or load factor), flow and head. The manufacturer entered details of the pump offered (power, efficiency and wear rate), price and delivery period, maintenance requirements (in terms of routine inspection, service, maintenance and overhaul) including frequency of requirement, materials cost and whether the activity would return the pump to as-new efficiency. The model also provides a facility for the manufacturer to substantiate the data entered. For each activity the model outputs current and net present costs including the proportion of the latter to the total net present cost. The model was used to assess offers and has been used ever since for the purchase of all pumps.
Experience has shown there are a number of significant benefits to adopting the LCC methodology for purchasing plant. The first is that it actually saves money by reducing the cost of energy, operation and maintenance over the life of the plant. Using pumps as an example, previous work carried out by the author shows the capital cost, as a proportion of the LCC, varies between approximately 5-10% of the LCC with energy being the largest at approximately 75%. The figures quoted obviously vary with the duty of the pump but the proportions are about the same. The initial purchase price is actually the lowest LCC item. Figure 1 clearly shows the cost savings to be achieved via improved efficiency, and hence lower power consumption, for a range of motor sizes.
Another benefit of the LCC approach is the requirement to ensure all of the costs associated with owning and operating plant are considered. All too often the hidden costs of increased maintenance and clearing blockages are not recognised at the design/procurement stage. These costs can be significant and dwarf all other costs if a pump blocks frequently. It is not unknown for some installations to require clearing on a regular basis at a cost of several hundred pounds. Work carried out on analysing costs of operational incidents has shown the highest costs are incurred with clearing soft and hard pump blockages, see Figure 2.
Adoption of the LCC principle delivers plant that is more reliable and hence the consequential operational costs of plant failure may also be reduced. The nature of these varies and can include hire of temporary plant, additional resources, overtime and compensation. Another possible consequential cost is fines following treatment stream failure. Due to the urgent nature of the work following failure these costs may also attract a premium. The LCC approach will mitigate the risk of incurring the latter costs due to failure. It is therefore important at the design stage to consider all the potential costs of ownership and to select plant that has been designed with LCC in mind. There are products on the market that have been designed with LCC in mind, for example see Figure 3.
The LCC approach considers all costs of ownership over an asset life and will ensure this overall cost is kept to a minimum. Specifications for plant using the LCC approach will also be consistent and can easily be adopted by a wide variety of users. The tenders submitted can, using a standard assessment procedure, be fairly and accurately assessed which will ensure the energy consumed by the plant is reduced. Although mention has been made of the increased reliability and lower maintenance requirements for LCC plant it should also be noted there are significant advantages to be gained in respect of the lower risk to the company of prosecution and brand damage by procuring plant that is more reliable. Plant failures can lead to local flooding and/or unauthorised overflows to adjacent watercourses of raw sewage, for example. The cost of potential fines is difficult enough to predict but the cost of resultant damage to company brand is almost impossible to forecast. LCC plant is not the most expensive: it offers value for money and will be the cheapest over the asset life.
At the UN Conference on Climate Change at Kyoto, Japan the UN Intergovernmental Panel on Climate Change forecast the need for a reduction of greenhouse gases by 60% of 1990 emissions by 2050 to avoid global warming. In contrast the United States recommended scaling back emissions to 1990 levels by the year 2010, Japan wanted a 5% reduction by then and the European Union called for 15%.
The UK government subsequently took up the challenge by introducing several measures to encourage the use of low carbon technologies and products. This initiative was aimed at reducing power consumption by providing incentives to end-users to procure energy efficient technologies and products.
The Climate Change Levy was introduced on April 1, 2001, and is essentially a tax on the energy used by industry. The scheme was designed to be cost neutral to government by imposing a levy on the fuel used by industrial consumers whilst granting tax benefits to those who adopted low carbon technologies and products. The levies applied on fuel at introduction were 0.43 p/kWh for electricity, 0.15 p/kWh gas, 0.15 p/kWh (1.17 p/kg) for coal and 0.07 p/kWh (0.96 p/kg) for LPG. Discounts were offered to energy intensive sectors.
Industrial users could mitigate the levy by using low carbon technologies and products that are listed on the Energy Technology Product list (see www.eca.gov.uk for more information). This list comprises technologies and products that have been submitted and approved as being those which are efficient in the use of energy. Any company from any country may make a submission and the list is updated monthly. Companies using such technologies and products are on the list can qualify for 100% first year capital allowances, known as Enhanced Capital Allowances (ECAs). All business users can claim ECAs except on leased assets and the full cost of the investment in qualifying technologies qualifies for tax relief. Products and technologies may be submitted for approval by anyone but have to meet defined energy saving criteria. There are no territorial restrictions on manufacturers wishing to place their products on the list and no restrictions on the source of the products. Only investments in new products qualify. The Carbon Trust is a body established by government to promote the reduction of UK carbon emissions and administer the ECA scheme.
The selection of LCC plant offers an opportunity to reduce energy consumption and claim ECAs when using technologies and products on the Energy Technology Product list.
The challenge for all organisations in adopting the LCC approach to procurement is recognising the marginal extra cost for an LCC item of plant compared with the cheapest available. This is especially true when there is pressure on capital budgets and when those responsible for implementing projects are targeted to achieve capex savings on the programme budget. These factors explain the approach taken by some to the implementation of an LCC approach. There are also cultural challenges to be overcome in implementing an LCC approach especially when there is pressure on capital availability. There may also be external targets or regulatory targets
However, the facts are there for all to see. The adoption of an LCC approach to procurement not only saves money over the life of the plant but may also qualify for ECAs. It will also be environmentally friendly in reducing carbon emissions. Surely there can be no more compelling reasons to adopt the LCC approach?
l Until recently Bob Went was principal mechanical engineer for Thames Water and prior to that design manager for the Thames Water Ring Main. Bob is now group consultant for ITT Flygt. Bob pioneered the introduction of the Life Cycle Cost (LCC) approach to pump
procurement in the UK water industry and latterly introduced a model for the specification and purchase. He chaired the UK launch conference for the Europump and Hydraulics Institute ‘Pump Life Cycle Costs’ guide and was one of the Europump users who commented upon the draft document.