Repair or replace? How to decide with life cycle cost analysis

Repair or replace? The soundest way to decide is on life cycle cost (LCC): all the costs each option will still incur from now on, from investment, energy and maintenance to downtime, disposal and residual value. On today's invoice, repair usually looks cheaper. Only a comparison over the same period shows which option really costs least, and which assumption drives the outcome.

When the repair-or-replace question comes up

The question rarely arrives at a convenient moment. Usually there is a broken machine, a repair quote on the table and a decision needed within a day. It is better to know the candidates in advance and have the analysis ready. Signs that an installation belongs on that list:

• Rising maintenance costs. The cost per asset goes up year after year. It is one of the maintenance KPIs you can track per asset.
• More frequent failures. A falling MTBF means the installation fails more often; a rising MTTR means repairs take longer. See MTBF and MTTR.
• Parts no longer available. Once the manufacturer ends support, every repair becomes a hunt for parts. A last-time buy gains time but does not solve the problem; how to weigh that up is covered in which spare parts to keep in stock.
• Energy use. A worn pump, an old motor or an oversized installation uses more than it needs to.
• Safety and legislation. New requirements the existing installation does not meet, or only meets after major modifications.
• Capacity. The process has changed and the installation is now too small, or too large.
• Condition. Inspections show wear, corrosion or cracking that a repair can no longer fix for good, such as boiler tubes that keep getting thinner in a waste-to-energy plant.

What life cycle cost (LCC) includes

Life cycle cost is the total cost to purchase, install, operate, maintain and dispose of an installation. That definition comes from the pump life cycle cost guide by the Hydraulic Institute and Europump, published with the US Department of Energy, and the breakdown works for most installations. The international standard IEC 60300-3-3 gives a general introduction to life cycle costing and describes the complete analysis process. For a replacement decision, you only count what is still to come:

Which items weigh most depends on the installation. According to the pump guide, energy may dominate the life cycle cost when a pump runs more than 2,000 hours a year, and depending on the process, downtime can weigh even more than energy and maintenance. How to express downtime in money terms is explained in how to calculate the cost of downtime.

Two rules keep the comparison clean. Money already spent does not count: last year's overhaul has been paid for, whatever you choose now. And costs that are identical in both options can be left out, as long as you do so deliberately and write it down.

Economic life: the cheapest moment to replace

Every installation has a technical life, how long it can keep running, and an economic life, how long it pays to keep it running. The economic life is never longer than the technical life and usually shorter, because maintenance and failures increase with age. This is standard engineering economics: capital recovery falls the longer you keep an asset, while operating and maintenance costs usually rise, so the sum has a minimum (lecture notes on replacement analysis, Simon Fraser University).

Take a conveyor costing €50,000 with no residual value as an example. The capital cost per year is the purchase price divided by the number of years you use the belt: €10,000 a year after 5 years, €5,000 after 10. Maintenance and failure costs start at €2,000 in the first year and rise by €1,000 every year; over 10 years that averages €6,500 a year. Add the two together and you get a U-shaped curve. The chart below shows that the total cost per year is lowest if you replace after 10 years: €11,500 a year. That is the economic life.

Two things stand out. The bottom of the curve is flat: replacing after 9 or 11 years costs less than €60 a year extra in this example, whereas replacing after 6 years costs €1,333 a year more. The exact year matters less than staying away from the steep parts. And costs that are the same every year, such as energy at constant consumption, lift the curve without moving the minimum. The replacement point depends on how quickly costs rise with age, and on what a new alternative costs and consumes.

Over a horizon of ten years or more, the time value of money counts too: a euro in ten years is worth less than a euro today. So you discount future costs back to today, the net present value, and convert that into a fixed amount per year: the equivalent annual cost. At a 6% discount rate the minimum in this example moves one year, to year 11. If the current installation and the alternative have different lives, compare their equivalent annual costs.

Repair or replace: a seven-step decision process

1. 1Gather the asset's history. Work orders, maintenance costs, failures, downtime, running hours and condition assessments over recent years. Without an asset register with history per asset, this becomes guesswork. How to track service life, cost and history per asset is shown under asset management software.
2. 2Estimate the future if you repair. Look at the trend, not the average: if costs rise every year, they will probably keep rising after the repair, unless the repair removes the cause.
3. 3Estimate the alternative. A quote including installation and modifications, energy use at your duty point rather than the best point in the brochure, maintenance, new spare parts and training.
4. 4Use the same period and the same discount rate. Choose a horizon, for example 10 years, and include the residual value at the end, or compare equivalent annual costs. Finance supplies the discount rate.
5. 5Weigh risks and non-financial factors. Safety, legislation, availability of parts, knowledge in the team and standardisation with other installations.
6. 6Run a sensitivity analysis. Vary the assumptions you are least sure of, such as running hours, energy price, failure rate and discount rate, and find the break-even point.
7. 7Decide and record it. Assumptions, outcome, decision and a review date. That way the decision fits your asset management plan (see ISO 55000) and you learn from what actually happened.

A note for the Netherlands on step 5: saving energy can be a legal obligation. Business locations covered by the energy saving obligation (among other criteria, those using 50,000 kWh of electricity or 25,000 m³ of natural gas equivalent or more per year) must take energy-saving measures with a payback period of five years or less (Netherlands Enterprise Agency (RVO): energy saving obligation). According to RVO, a device such as an electric motor that breaks down and has to be replaced counts as a "natural moment", when recognised measures can apply with no or lower requirements, for example for operating hours.

Worked example: overhaul or replace a pump

An example with fictitious figures. A circulation pump in a process plant is 22 years old, runs 6,000 hours a year and has a worn impeller. Two options, compared over 10 years at an electricity price of €0.15 per kWh and a discount rate of 6%:

• Overhaul costs €15,000 now. Afterwards the pump draws 38 kW on average. Planned maintenance costs €1,500 a year, failures and downtime an expected €2,500 a year. After 10 years the pump is worn out.
• Replace with a pump that better matches the duty point, with a more efficient motor, for €45,000 including installation. Power draw 33 kW, planned maintenance €1,000 a year, failures and downtime €1,000 a year. After 10 years the pump still has a residual value of €8,000.

On purchase price, overhauling wins by €30,000. Over 10 years, replacing wins by €43,000, and after discounting €22,000 of that remains: just over €3,000 a year in equivalent annual cost. Most of the difference is energy: 5 kW less at 6,000 hours a year is €4,500 a year.

The outcome is most sensitive to running hours. With maintenance and failure costs unchanged, the break-even point in this example is around 1,960 running hours a year: if the pump runs less, overhauling wins. The electricity price would have to fall below 5 cents per kWh before overhauling wins, and even at a 10% discount rate replacing remains more than €13,000 cheaper. So measure running hours rather than estimating them; how that can be done automatically is shown under running hours and monitoring.

In-between options: overhaul, refurbish or upgrade

Repair or replace is rarely a choice between two extremes. In between are options that often cost less than replacement and deliver more than a repair:

• Overhaul: returning the installation to its original condition, with new wear parts and checked clearances. That restores condition, not design.
• Refurbishment: a thorough overhaul by the manufacturer or a specialist company, often with a warranty.
• Upgrade or retrofit: replacing only the parts that make the difference, such as a more efficient motor, a variable speed drive or an impeller better matched to the duty point. In the worked example in the pump guide, trimming the impeller of an oversized pump gave the lowest life cycle cost, lower than a new control valve, a variable speed drive or repairing the valve every year.
• Partial replacement: renewing the drive and keeping the pump casing, or replacing one section of a conveyor.
• Defer with monitoring: keeping the installation running with extra condition monitoring until a planned replacement in the next shutdown.

Cost each of these options in the same way as the two extremes.

Common pitfalls in the decision

• Counting sunk costs. "We spent €20,000 on it only last year" is no reason to carry on: that money is gone, whatever you choose now.
• Comparing purchase prices only. In the worked example, overhauling wins by €30,000 on price and loses over ten years.
• Forgetting energy and downtime. The items that are not on the quote are often the ones that make the difference.
• Using an average where there is a trend. Averaging the last five years of costs hides the fact that they rise every year.
• Comparing unequal periods. A new pump that will run for years after the ten-year horizon needs a residual value or an equivalent annual cost, not a plain sum.
• Not tackling the cause. If a pump keeps failing because of cavitation, a wrong duty point or poor alignment, the new one will too. Find the cause first with a root cause analysis.
• Letting the breakdown decide. If you only start calculating once the machine has stopped, time pressure pushes you towards whatever can be delivered fastest.