Asset Management Concepts Notes

Asset Management Concepts
by
Dr. H. T. Evdorides, EurIng
The University of Birmingham - School of Engineering– Dept Civil Engineering - MSc Road Management & Engineering 1
1
Contents
• Introduction
• Techniques
– Customers, Levels of Service and Performance Measures
– Demand Forecasting
– Condition Assessment and Monitoring
– Failure Mode Analysis
– Risk Assessment
– Maintenance
– Demand Management
– Valuation and Financial Issues
– Life-Cycle Analysis
2
Road Asset Management
• What is Asset Management ?
• What are Assets ?
• Why Asset Management ?
• Benefits from AM
• Asset Management Process
– Policy Making
– Strategy Network
– Programming
– Project Level Project
– Operations
3
What is Asset Management ?
Road Asset Management is a set of
procedures, projects and tools aimed to
provide for present and future customers a
required level of road transport services in
the most cost-effective way through the
creation, acquisition, maintenance,
operation, rehabilitation and disposal of
assets.
The goal of infrastructure asset management is to meet a required level of

service in the most cost-effective way through the creation, acquisition,
maintenance, operation, rehabilitation and disposal of assets to provide for
present and future customers.
4
What are AM’s key elements ?
• Taking a life-cycle approach
• Log-term planning
• Performance monitoring (service and
assets)
• Consideration of failure and risks
• Sustainability
• Continuous improvement in practices
(feedback)
The key elements of infrastructure asset management are:

•taking a life cycle approach
•developing cost-effective management strategies for the long-term
•providing a defined level of service and monitoring performance
•managing risks associated with asset failures sustainable use of physical
resources
•continuous improvement in asset management practices.
A formal approach to the management of infrastructure assets is essential in

order to provide services in the most cost-effective manner, and to
demonstrate this to customers, investors and other stakeholders.
5
What are Infrastructure Assets ?
• Stationary systems that serve defined communities
and that are intended to be maintained indefinitely
as a desired level of service by the continuing
replacement and refurbishment of its components.
• One of the most important features of
infrastructure networks is the degree of inter-
dependency not only within a particular asset
network but also from another network to another.
A failure of one component within a network may
undermine the ability of other networks to
perform.
6
Why Road Infrastructure AM ?
• Road Infrastructure provides the platform for
economic and social development
• Good quality road infrastructure is necessary for
public services and safety
• Risk management practices safeguard long-term
returns to shareholders
• Infrastructure assets meet the needs of society
• Benchmarking condition and performance
promotes innovation and efficiencies.
Infrastructure networks provide the platform for economic and social development.
Before developing countries' economies can flourish they need a basic infrastructure to
provide the foundation for efficient distribution of services, particularly transportation,
telecommunications, energy, property, water supply and sanitation.
Good quality infrastructure is the cornerstone of public health and safety. It is
generally acknowledged that the development of safe drinking water supply, and waste
collection and treatment, has been the biggest factor in advancing the overall health of the
community and increasing individual longevity. Communication networks have become
fundamental to public safety because of their use in emergency response.
Risk management practices safeguard long-term returns to shareholders. Short-term
gains need to be balanced against longer-term security. Therefore understanding and
quantifying risk costs is necessary for informed decision making by stakeholders.
Infrastructure and property assets increasingly meet recreational and other needs of
the community.
Traditionally parks and open spaces have provided recreation opportunities to the
community. Buildings have provided communities with places to meet and celebrate, to
obtain information and access to community resources, and to enjoy the arts and cultural
activities. Other infrastructure such as telecommunication networks have become a medium
(through the Internet) for interaction, hobby pursuits and general recreation.
Benchmarking condition and performance promotes innovation and efficiencies.
By benchmarking the asset management activities of network organisations and developing
clear asset management plans linking current and future network condition and
performance, organisations have a basis for promoting innovation through
performance-based facilities management contracts.
7
Benefits from RAM
• Accountability to owners, customers, stakeholders
that services are being delivered efficiently and
effectively
• Value for money from investments, taxes, charges
etc.
• Improved communication with users
– Understanding of service requirements
– Consultation and agreement with users about level of
service
– Customer satisfaction, organisation’s image
Asset management benefits relate to accountability, service mana gement,

risk management and financial efficiency.
1. Improved stewardship and accountability by

• demonstrating to owners, customers and stakeholders that services are
being delivered effectively and efficiently
• providing the basis for evaluating and balancing service/price/quality
trade-offs
• improving accountability for use of resources through published
performance and financial measures
• providing the ability to benchmark results against similar organisations.
2. Improved communication and relationships with service users by

• improved understanding of service requirements and options
• formal consultation/agreement with users on the service levels
• more holistic approach to asset management within the organisation,
through multi-disciplinary management teams
• improved customer satisfaction and organisation image.
8
Benefits from RAM
• Improved financial management
– Cost-benefit analysis
– Justification for works and funding requirements
– Recognition of all costs of owning and operating assets
over the life-cycle of analysis
• Improved risk management
– Probability and consequences of failure
– Ensuring continuity of service
– Interrelationships between networks
3. Improved risk management by

• assessing probability and consequences of asset failure
• addressing continuity of service
• addressing the inter-relationships between different networks (the chain
is only as good as its weakest link) and risk management strategies
• influencing decisions on non-asset solutions through demand
management.
4. Improved financial efficiency by

• improved decision- making based on costs and benefits of alternatives
• justification for forward works programmes and funding requirements
• recognition of all costs of owning/operating assets over the lifecycle of
the assets
9
Techniques
• Customers, Levels of Service and Performance
Measures
• Demand Forecasting
• Condition Assessment and Monitoring
• Failure Mode Analysis
• Risk Assessment
• Maintenance
• Demand Management
• Valuation and Financial Issues
• Life-Cycle Analysis
10
Customers level of service
Performance measures
• Also known as “Standards”
• Objective: to match level of service with
customers expectations
• Usage:
– Inform customers about level of service
– Enable customers to assess the services offered
– Develop strategies
– Measure performance of the AM process
– Quantify costs & benefits of the services offered
– Enable customers to assess suitability, affordability and
equity of the services offered.
Defined levels of service can then be used to:
•inform customers of the proposed level of service to be offered

•develop AM strategies to deliver the required level of service
•measure performance against these defined levels of service
•identify the costs and benefits of the services offered
•enable customers to assess suitability, affordability and equity of the
services offered.
Before setting target levels of service it is important to assess the current

levels. Initial AM is usually based on the current levels of service being
provided. As further information on customer expectations becomes
available, AM is revised to reflect these findings.
Determining current levels of service also enables the gap between levels of
service currently being provided, and levels of service sought by customers,
to be quantified, and strategies devised to close these gaps.
11
Factors affecting level of service
• Customers expectations and perceptions
• Legislation (environmental standards,
building regulations, health & safety) –
minimum
• The organisation’s mission and objectives
• Economic, financial issues (constraints)
Levels of service reflect the strategic objectives of an organisation and are

usually based on:
•Customer expectations: information gained from customers on expected

quality of service, balanced against the price they are willing/able to pay for
that service.
•Legislative requirements: environmental standards, regulations and
legislation that impact on the way assets are managed (i.e. resource
consents, building regulations, health and safety legislation). These
requirements set the minimum level of service that must be provided
•An organisation's mission and objectives
•Availability of resources, particularly financial constraints.
12
Performance Measures
• Outcome related (technical)
These are related to the service provided by
the physical asset (road)
• Process related (functional)

These are related to how the customer
receives the services
13
Outcome related performance measures
• Quality • Capacity
• Quantity • Environmental
• Availability impacts
• Legislative • Cost/affordability
requirements • Comfort
• Maintainability • Safety
• Asset reliability and
performance
14
Process related performance measures
• Tangibles (appearance of service facilities,
personnel)
• Responsiveness (to customers demands,
ease of communication, prompt service)
• Assurance (knowledge of employees, their
ability to convey trust and confidence)
• Empathy ( caring, individualised attention
to customers)
15
Developing and reporting
performance measures
• Outcome related (tool, e.g. HDM4)
• Process related
– Meaningful and easily understood
– Giving a clear picture of the performance for each
service
– Linked to an activity
– Linked to the objectives of the organisation
1. Qualitative through focus groups
2. Quantitative through surveys
16
Techniques
Measures
• Risk Assessment
• Maintenance
17
Demand forecast
• Objective
To identify factors and trends influencing demand for an
asset and the impact of these on the management and
utilisation of assets.
• Factors:
– Population growth
– Modes of transport
– Vehicle ownership
– Alternative transport
– Location of commercial areas
18
Demand forecast
• Key trends (that affect locality needs) :
– Economic
– Social
– Recreation/leisure
– Environmental
– Customer preferences
– Technological
Consider risk in forecast.
Key trends relevant to the locality need to be considered. The trends

generally can be considered in the following categories:
•Economic such as the advent of weekend trading, tourism growth

•Social such as growth in inner city living and urban lifestyles, increased
working hours and demand for higher standards for services and facilities
•Recreation/leisure such as adoption of shopping as a recreational activity,
decline in team sports in favour of individual recreational pursuits
•Technological such use of alternative fuels, solar energy and development
of energy efficient products
•Customer preferences such as increasing number of vehicles per
household, reluctance of commuters to use public transport
•Environmental such as relationship of temperature to water consumption
or global climate warming.
Trends are not always obvious and may require some more detailed research
and collection of data over a period of time to establish trends.
19
Techniques
Measures
• Risk Assessment
• Maintenance
20
Condition assessment and monitoring
Condition assessment allows and organisation to
understand the remaining life of its assets. This
understanding drives future expenditure patterns.
• Effective life:
– Design life
– Economic life
– Physical end of life
– Minimum level of acceptable service
– Limit of capacity of an asset
21
Condition assessment and monitoring
• Frequency of condition assessment
– Criticality of asset
– Type of asset
– Relative age of the asset
– Rate of deterioration
– Economic value of the outcomes to the business
22
Condition assessment methodology
• Consider existing practices
• Consider impact on organisation services
• Consider and evaluate available options
• Identify resources
• Identify size of survey (sampling)
• Determine assessment frequency
• Estimate cost
• Estimate benefits
– Tangibles (technical, economic, operational)
– Intangibles ( corporate image)
• Evaluate using investment criteria (and associated
economic parameters)
23
Condition assessment methodology
• Monitoring the overall condition of assets
• Relating suitability to condition of an asset
• Combine functionality (customers) and
condition assessment (engineers)
24
Techniques
Measures
• Risk Assessment
• Maintenance
25
Failure mode analysis
• Define the critical failure mode of the asset
• Performance monitoring (condition
assessment)
• Develop deterioration curve and predict
future timing
• Develop maintenance, rehabilitation and
reconstruction strategies
• Condition monitoring
Understanding the failure mode of an asset is critical to both maintenance

and strategic decision- making for that asset, or similar assets. An
organisation must determine how an asset might fail to deliver required
levels of service, especially if the failure is critical to the organisation.
If the critical failure mode for an asset can be determined, it is possible to
target and refine maintenance plans, capital expenditure plans, and
investigative activities, to address that failure. Condition assessment can be
focused on the critical mode of failure of an asset or its components.
Performance only needs to be measured for the critical aspects.
All decisions about the rehabilitation, replacement or disposal of an asset,
and the timing for such activities, must be based on a sound determination of
what the critical failure mode is. This will ensure an organization focuses on
the assets that will impact on its business.
The stepped process for using failure mode information is:

•Understand the critical failure mode of the asset.
•Monitor the asset performance with respect to the failure mode, e.g.
condition assessment.
•Develop deterioration curves and predict failure timing.
•Develop strategies covering maintenance and capital expenditure.
•Continue to monitor the performance of the asset.
26
Failure mode analysis
Failure Modes Analysis Types
• Cause of failure Condition based

• Mode of failure failure assessment
• Consequence of failure
• Probability of failure Risk
• Risk cost of exposure Optimised

• Risk cost reduction treatment options decision
• Option evaluation process making
27
Techniques
Measures
• Risk Assessment
• Maintenance
28
Risk assessment and management
• Core functions of risk management
– Set the framework
• Objectives
• Stakeholders
• Criteria against which can be evaluated
• Key issues
– Risk identification
– Risk evaluation and analysis
– Risk treatment
– Monitor and review
The processes of risk assessment and management are well-documented in

specialised publications.
The major elements of risk assessment and management are:

•Risk management context: establishes critieria against which risk can be
evaluated.
•Risk identification: identifies the risks an organisation may encounter and
helps explain the impact of those risks on the organisation.
•Risk analysis: establishes a risk rating for all assets or asset groups, and
describes which assets represent the greatest risk for the organisation.
•Risk treatment: identifies what actions to take to minimise risk at asset or
asset group level.
•Monitor and review: the ongoing process for ensuring risk levels remain
acceptable even if risks change.
29
Risk identification
• Types of risks that may be encountered
– Safety
– Competition for services
– Corporate and asset level issues
– Financial and investment risks
– Public and general liability (negligence, third party damage)
• Cause of risks
– Natural events
– External impacts (other organisation, materials)
– Physical failure risks
– Operational risks
• Impact of failure
It is necessary to determine what types of risk events might impact on assets.

These risk events can be grouped into:
•natural events, where there is no real control over the timing or the extent
of the event, although the probabilities may be understood, e.g. floods,
lightning strikes, high winds;
•external impacts, for example other organisations not providing services
that impact on the organisation or individuals, such as power supply failures,
material supply failures;
•physical failure risks, where condition or performance of the asset could
lead to failure;
•operational risks, where management of the asset or asset manage ment
activities might impact adversely on an asset.
Understanding risk event types will allow an organisation to understand and

plan for the impacts of an event. As well as direct impacts on assets, the
events will usually pose a risk by impacting directly or indirectly on
customers and possibly others. The legal liability for nuisance, negligence
and third party damage needs to be recognised.
30
Risk evaluation, analysis and treatment
• Risk evaluation and analysis
– Probability
– Consequences (repair costs, loss of income, loss of
life/injuries, failure to meet statutory requirements, loss
of image)
– Risk ranking
• Risk treatment
– Identify risk treatment options
– Select the optimum (cost/benefit analysis)
– Develop and implement future improvement plan
– Monitor and review
31
Emergency response planning
Management of risk within an organisation should
include development and maintenance of:
• Emergency response plans for disasters or natural

events.
• Contingency plans for externally generated events
e.g. damage to assets by a third party.
• Failure management plans related to physical
failure of assets.
Management of risk within an organisation will include development and

maintenance of:
•emergency response plans for disasters or natural events
•contingency plans for externally generated events, e.g. damage to assets by
a third party
•failure management plans related to physical failure of assets.
32
Management of natural hazard events
• Risk
define natural hazards, asset vulnerability and mitigation measures
• Reliability
minimum technical standards, service levels, asset performance risks,
long-term maintenance, renewals and upgrading needs that provide an
acceptable level of assurance to the community
• Response
emergency response plans including disaster recovery and business
continuance that will show how the asset manager will respond to
disaster situations and manage service and business recovery
• Resilience
using the above the asset manager adds to the resilience of the
community to withstand and react to the hazard event
33
Emergency response plan
• Defines :
– the physical sequences to be followed in the event of a
significant disaster
– Roles, responsibilities and authorities of personnel
involved
– actions to be undertaken or considered
• Addresses :
– Organisational issues
– Operational issues
34
Phases of emergency response planning
• Immediate response
to secure hazardous conditions, establish the control
organisation and provide initial status report (likely to last
24-48 hours)
• Service and business continuity
to restore basic, partial or limited services, review
effectiveness of initial response, begin to plan for full
recovery (up to several weeks)
• Disaster recovery
to provide an ordered programme for full restoration (6
months or longer)
Consider interdependency of infrastructure services.
35
Techniques
Measures
• Risk Assessment
• Maintenance
36
Maintenance Analysis & Management
• Types of Maintenance
• Frequency
• Works
• Planning
• Scheduling
37
Techniques
Measures
• Risk Assessment
• Maintenance
38
Demand management
• “non-asset solutions”
• Objective: to seek to modify customer demands
for services in order to
– Optimise utilization and performance of existing assets
– Reduce or defer the need for new assets
– Meet the organisation’s strategic objectives (including
social, environmental and political)
– Deliver a more sustainable service
– Respond to customer needs
39
Demand management methods
• Operation • Educational
– Traffic signal control – Travel blending
– Local area management – Change public attitude to using
(encourage use of alternative cars at peek hours (bus lanes,
routes) cycle paths)
• Regulation • Demand Distribution
– Road use restriction (heavy – Promote or provide alternative
vehicles in urban areas) transport modes (trains)
– Speed control – Working at home
– Parking restrictions – Freight substitution (shift to off-
• Incentives road modes)
– Subsidies for free travel on
public transport
– Parking levies
40
Demand management strategies
• Focus planning on maximising customers
benefits
• Do not compromise the quality of service
• Broad demand management techniques are
best
• Encourage and enable customers to
participate in the process of selecting
services and standards
Some tips to achieve demand management results are:

•Focus planning on maximising benefits to customers, rather than on
maximising outputs from the assets themselves, to avoid the never-ending
cycle of automatically trying to meet increasing customer demand.
•Usually there will be more than one way to satisfy a customer need without
compromising the quality of service. Consider the validity of the service
demand and all options for delivering it.
•Broad demand management strategies are best.
•Encourage and enable customers to participate in the processes relating to
the selection of services and standards.
41
Techniques
Measures
• Risk Assessment
• Maintenance
42
Valuation and financial issues
• Asset valuation
• Methods and approaches used
• Useful life
• Life cycle analysis
43
Asset Valuation
• Is a management tool that assists in the
determination and allocation of costs and supports
performance/rate of return reporting, resource
allocation, shareholder equity and accountability.
• Is associated with
– Earnings potential (return on investment) for open
markets.
– Provision of services (emphasis on management and
maintenance).
44
Asset Valuation
• Necessitates the development of asset
management plans that detail the forecast
maintenance, enhancement or deterioration of
infrastructure assets.
• Expenditure types considered:
– Operational
– Maintenance
– Renewal
– Capital works
– Disposal
45
Reasons for Asset Valuation
• Financial reporting
• Measuring changes in service potential
• Determining appropriate pricing and funding
levels
• Determine shareholder equity
• Risk management (insurance)
• Taxation
• Decision making
• Benchmarking
46
Asset Valuation Methods
• Two approaches:
– Historical cost less depreciation
– An appropriate valuation method
• Asset related techniques
– Replacement cost
– Depreciated replacement cost
• Future earnings/cash flow
Replacement Cost
The replacement cost of an asset may be calculated by using the prevailing
market costs for supply and installation of similar assets in similar
conditions.
This is the most common method of valuation for non-commercial
infrastructure assets and requires detailed information on asset components.
Where there is commonality of components (e.g. pavement structures),
standard unit rates for replacement may be derived and applied to all the
asset components. These should take into account the location of the assets,
ground conditions and other factors affecting replacement costs. For
example, unit rates for replacing underground services will differ between
built- up urban areas and rural locations, between flat or hilly terrain, and
between sandy and rocky soils.
Future earnings/cash flow
This approach can be applied only to assets with a defined futur e revenue
stream. The value of the asset is assessed as the net present va lue of the
future net cash flows (revenues less the future upkeep costs).
47
Replacement cost
It is based on the prevailing market cost for
supply and installation of similar assets in
similar conditions.
• The most common method for non-

commercial infrastructure assets.
• It requires detailed information on asset
components.
48
Depreciated replacement cost
• Depreciation is the allocation of the cost of
an asset over its useful (economic) life.
• Depreciation is as much an expense as
repairs and maintenance.
• It has no impact on cash flows
• It is used to allocate costs over the useful
life
Depreciation is the allocation of the cost of an asset over its useful

(economic) life. Depreciation is as much an expense as repairs and
maintenance.
It is important to allocate all costs to obtain a true view of the costs of asset
use. If depreciation is not charged then the real costs will be understated.
Depreciation has no impact on cashflow so there has been a reluctance to

recognise it. In some cases there will be increased pressure to ensure
depreciation is disclosed correctly, particularly where infrastructure
organisations are required to produce a statement of financial performance
(profit and loss account) and statements of financial position (balance sheet).
Depreciation is not charged to provide for replacement of assets but rather to

allocate the cost (less any residual value) over the useful life. Revaluation
affects the depreciation, but that reflects the increased replacement cost.
Depreciation is important to reflect the appropriate carrying va lue in the

fixed asset register and statement of financial position.
49
Depreciated replacement cost
• Methods
– Traditional depreciation :
asset cost less residual value/useful life
– Condition based
DRC = new cost – cost of bringing up to new
100% Reproduction value

Condition
Condition based depreciation
Cost of bringing up to new

0%
0% Life 100%
Traditional Depreciation
The traditional depreciation method allocates the asset cost (less residual
value) over the useful life of the asset.
Condition-Based Depreciation
Unlike traditional depreciation, which is based on a predetermined formula
(approximating the rate of value decline), condition-based depreciation is a
direct measure of the run down in asset value. Asset condition is measured
by its deviation from 'as new'. If the cost of bringing an asset up to as new or
fair working order is, say $200 million, and its new cost is $800 million,
then its written down value is $600 million.
By measuring the condition at periodic intervals, the change in value can be
ascertained and this change is the depreciation over the period. Importantly,
this change can be positive if major maintenance has just taken place.
Condition-based depreciation will also identify the loss of value resulting
from deferred maintenance.
When applied to infrastructure assets where annual condition measurement
is not cost-effective, e.g. underground assets, the depreciation calculations
will be forward- looking, i.e. a renewal depreciation approach. That is, a cash
flow profile of renewal over the planning period will be determined by
examining the residual life of components, and an estimate made of the net
present value of the renewal costs over the period. This estimate of renewal
costs is converted to an annual sum over that period (annuity) which is the
figure used for depreciation under the condition-based depreciation or
renewal annuities approach. If this approach is used, it is essential that the
renewal cost profiles are based on a cost-justified AM plan.
. 50
Useful life
• the period of time over which the future benefits embodied
in an asset are expected to be consumed
• the lesser of the physical and economic life
– Physical life: the period of time until an asset ceases to provide
the required service because of physical deterioration of the asset.
– Economic life: the period of time until the asset ceases to be the
lowest cost alternative to satisfy a particular level of service due to
other factors (demand, operational cost, renewal, replacement cost,
maintenance cost, regulatory restrictions)
• Design life
• Remaining/residual life
51
Useful life of road assets
Asset Type Life (years)
Pavement substructure 50-100

Wearing course 10-20
Kerb 50-80
Footpaths 15-50
Bridges 30-80
Culverts 50-80
Road furniture 10
Bus shelters 20
52
Useful life of road assets
Asset Type Life (years)
Cycle ways 50
Street lighting 20
Traffic signals 10
Unsealed roads -
Drainage
Drains (underground) 50-80
Culverts 50-80
Manholes/pits 20-50
53
Techniques
Measures
• Risk Assessment
• Maintenance
54
Life cycle costing
• A procedure to determine the total cost of
ownership over the life of an asset for the
purpose of:
– Building of new assets
– On-going management decision making
– Benchmarking of the actual cost performance
of roads.
• HDM4
55
Techniques
Measures
• Risk Assessment
• Maintenance
56
Road Asset Management
• What is Asset Management ?
• What are Assets ?
• Why Asset Management ?
• Benefits from AM
• Asset Management Process
– Policy Making
– Strategy Network
– Programming
– Project Level Project
– Operations
57
Questions
58

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Asset Management Concepts

The goal of infrastructure asset management is to meet a required level of

The key elements of infrastructure asset management are:

A formal approach to the management of infrastructure assets is essential in

Asset management benefits relate to accountability, service mana gement,

1. Improved stewardship and accountability by

2. Improved communication and relationships with service users by

3. Improved risk management by

4. Improved financial efficiency by

Defined levels of service can then be used to:

•inform customers of the proposed level of service to be offered

Before setting target levels of service it is important to assess the current

Levels of service reflect the strategic objectives of an organisation and are

•Customer expectations: information gained from customers on expected

• Process related (functional)

Consider risk in forecast.

Key trends relevant to the locality need to be considered. The trends

•Economic such as the advent of weekend trading, tourism growth

Understanding the failure mode of an asset is critical to both maintenance

The stepped process for using failure mode information is:

• Cause of failure Condition based

• Risk cost of exposure Optimised

The processes of risk assessment and management are well-documented in

The major elements of risk assessment and management are:

It is necessary to determine what types of risk events might impact on assets.

Understanding risk event types will allow an organisation to understand and

• Emergency response plans for disasters or natural

Management of risk within an organisation will include development and

Some tips to achieve demand management results are:

• The most common method for non-

Depreciation is the allocation of the cost of an asset over its useful

Depreciation has no impact on cashflow so there has been a reluctance to

Depreciation is not charged to provide for replacement of assets but rather to

Depreciation is important to reflect the appropriate carrying va lue in the

100% Reproduction value

Condition based depreciation

Cost of bringing up to new

Pavement substructure 50-100

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