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Capital planning basics - Getting started with capital planning in your utility

Mark Moreau
Sep 7, 2020 3:31:56 PM

Capital planning in a nutshell

We get questions all the time on capital planning: where do we start? How do we put better data behind our capital improvement plans? What information should we be collecting and when? So – here’s a framework for how we think about capital planning how – and how you can get started in your operation. many of our customers are seeing improved success in getting the right capital upgrades approved with good data. 

Capital Planning is a key activity in Asset Management. Among the assets in your operation, you will eventually need to replace all your assets – the question is when? Good capital planning helps you stay on top of this question.

It all starts with collecting the right data on your assets and developing a clear framework for prioritizing what needs to be replaced, repaired, maintained, or ignored. This exercise is less complicated than most would think – there are of course many sophisticated ways of executing your asset management plan, but the basics alone can get you pretty far…

To summarize, the five basic steps are:

  1. Understand the cost and consequences of asset failure
  2. Create a framework for defining asset condition ratings
  3. Apply your conditions consistently across all assets 
  4. Collect and interpret the data
  5. Use the data to inform capital planning decisions

Understanding condition, cost, and the consequence of failure

An effective capital plan doesn’t necessarily say “this is what we need to replace”, it also poses the question to financial decision-makers “given what we know about our failure risks on our assets – how much more should we replace?” This puts ownership back in the court of financial decision-makers. 

If you were to draw a two-dimensional chart with the “worst condition” and “highest consequence of failure” in the top right, an effective capital plan shows what it costs to replace the groups of assets furthest “up and to the right”. Think of it this way:

Capital planning basics for water utilities – cost of failure graph (1)Think of this chart as a way to sensitize your analysis: if we wanted to replace 80% of our super critical and high consequence of failure assets, it would cost $X. If we wanted to replace 90% then it would cost $Y. 


Create a framework to define asset condition ratings and apply it consistently

Develop a consistent definition framework. This exercise falls apart if condition ratings and definitions are applied differently across assets and asset classes. Similarly, your organization must get on the same page on the definitions of consequences of failure. The name of the game is consistency – it doesn’t really matter how you define a “1 vs. 5” or if you even use a “1-5” scale – the takeaway is that the application of your ratings must be universal in your business. 

We also recommend putting together a simple weighting of condition to create an overall score. This allows you to capture multiple factors that can give you a more accurate and comprehensive understanding of overall condition. 


Scoring asset conditions - Capital planning in asset management


Collect the right data

Once you’ve established a framework, it’s time to collect the data. Typically, you should consider collecting data with an asset management application to ensure that data is stored to the assets themselves, ideally geospatially. To collect the data, your team can perform a dedicated survey of assets or can collect condition data as part of everyday work. 

This is where we see many operations get tripped up. “Surveying every asset I have? We don’t have the time / resources for that”. We recommend taking small bites. Start with an area of your operation or a couple asset classes which you think are most critical to continuity of business, are in the worst shape, or both. 

As you collect data – put quality control measures around the data and maintain consistency of definition. Simple measures can make a world of difference. As you administer the survey to the field, put in measures to prevent someone from entering a 6 if you are measuring 1-5, or if you are measuring 1-5, perhaps you define in the survey what a 1 and a 5 are. Simple things.


Interpret the data (risk-based condition scoring)

Now that you’ve collected your data – it’s time to establish parameters on your recommendations.

Your risk-based condition score is a simple calculation: Condition score x consequence of failure. This number is a relative ranking among your assets and should drive the action you take on your assets. Based on this score, you may choose to Replace, Proactively Inspect, Repair, Maintain (as usual), or Ignore. Here's an example of what this could look like.

Risk based condition scoring - Asset management and capital planning for water utilities


Use the data to inform capital planning decisions

From here, your organization may have its own Capital Improvement Plan templates. The good news is that you have the data. You know what assets you have and how you would prioritize replacing them. This prioritization is particularly valuable in making your case and dynamically addressing the question “if you have $X more or $Y less, where would you spend it?”


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