1

Maintenance engineers are finding themselves

competing more and more for financial resources.
Until recently, sound engineering analysis alone
was adequate to convince management that
maintenance expenditures were necessary.
However, corporate resources in many industries
have tightened, and engineering analysis alone
can no longer justify maintenance resources.
Increasingly, the control of maintenance resources
in many industries is in the hands of financial
decision-makers using quantitative financial and
decision analyses. Traditionally, engineers are ill
equipped to convincingly tell their story in these
terms. Structural Integrity (SI) offers a process
that aids in this communication and guides
maintenance resources into financially viable
repair/replacement strategies.
Equipment Aging
The pressure on maintenance budgets comes from
equipment that is in the aging period of its life
cycle. A typical life cycle curve, Figure 1, shows
the classic shape of the Weibull life cycle curve.
1,2
To the left is the decreasing failure rate of the
curve, usually called infant mortality. It is
dominated by failures from initial defects, either
in manufacture or design. The center section is a
period when minimum prudent maintenance keeps
the failure rate relatively constant. The right
section is the aging phase and has an
exponentially increasing failure rate because of
the dominance of age-related failure mechanisms.
This curve is classic and predictable.
In most industries, the original plan was to replace
equipment at the end of its 30 to 50 year life
cycle. The advent of improved worldwide
transportation, reduced single country market
domination and multi-national corporate
ownership have resulted in extraordinary
downward pressure on unit product pricing. This
competitive pressure is limiting maintenance
resources at the time in equipment life cycles
when failure rates are increasing. As a
consequence, many corporations are faced with
the challenge of keeping aged equipment
operating with limited maintenance resources.
The limitation on maintenance resources due to
lower prices, and the increased need for
maintenance resources because of aging, has
placed maintenance decision-makers in a
dilemma. Quantitative financial and decision
analyses techniques are now needed to properly
select maintenance actions.
Basic Decision/Financial Model
Decision analysis, supported with financial
analysis and optimization techniques, is routinely
used for large investment decisions. This
decision-making method was developed almost 30
years ago
3
to account for conditions of
uncertainty. It is well suited for maintenance
decision-making because of the uncertainties in
maintaining equipment during its aging phase.
0
5
10
15
20
0 5 10 15 20 25 30 35 40
Unit Age (Years)
U
n
i
t

F
o
r
c
e
d

O
u
t
a
g
e

R
a
t
e
,

%
Fig. 1 NERC-GADS Data for Forced Outage Rate for
Coat Fired Units from 50MW to 200MW.
March 2000 SIM-00-001
Financially Based Inspection and Repair Planning
2
Many companies are already addressing financial
decisions on a fully quantitative basis using
classical methods. It is reasonable, therefore, to
use the same techniques for maintenance
decisions since maintenance is competing for the
same resources.
Decision Criteria
In decision analysis, the first step is to select the
criterion to be optimized. Textbooks used in
MBA corporate finance courses typically
recommend Net Present Value (NPV).
4
This
criterion insures there is maximum return for the
invested corporate dollar when decisions have
impact over multiple years. This makes NPV the
most robust of the financial criteria used for
optimization.
In the case of maintenance, the Net of Net
Present Value can be defined by addressing a
choice between two fundamental maintenance
options - one to do nothing, i.e. run the equipment
as is, performing only routine maintenance, and
the other to take a mitigating (non-routine)
maintenance action.
5,6
A diagrammatic representation of this decision is
shown in Figure 2. The decision criterion to be
optimized is shown at the right of the figure. The
consequential cost of failure without the
mitigating maintenance action is the potential
Benefit of the decision, i.e. the consequences
avoided by taking action. The cost of the
mitigating maintenance action plus the
consequential cost of failure with the action (less
drastic, or later, than the failure without action) is
the potential Cost of the decision, i.e. the
consequences incurred by taking action. The
difference between the Benefit and the Cost is
the Net of Net Present Value.
The Present Value of Net Present Value
considers the effect of taxes, time value of money,
and required rate of return on investments. In
taxed corporations, the tax effects on maintenance
expenditures, as well as losses declared from
shutdowns or deratings, are significant and must
be considered. Because maintenance decisions on
aging equipment include timing, the time value of
money is an important consideration in any
maintenance decision analysis. And finally, the
expected return from the invested maintenance
dollar must meet or exceed the minimum desired
return to the shareholder over time.
The Link Between Engineering and Finance
Perhaps one of the most important steps in the
fully quantitative decision analysis process is the
conversion of engineering analysis results into
financial consequences. The engineer usually
speaks in engineering units, such as time to failure
or probability of failure. He must quantify not
only the probability of the occurrence, but the
consequence of the occurrence as well. Financial
decision-makers are not concerned with whether
or not a component will fail (i.e. the
occurrence). They are concerned only with what
the failure will mean to the financial health of the
company (i.e. the consequence). A widely used
term for this is risk.
6
Risk is defined as the
product of probability of occurrence and
consequence of occurrence. In the financial
community, this same formulation is termed the
expected value of the consequence.
5
Because of
this similarity in definitions, we now have a link
between the engineering world and the financial
world. Risk or expected value of consequence of
failure is key to the formulation of a model for
fully quantitative maintenance decision making.
This key can be illustrated by enhancement of the
Figure 2 Maintenance Action Decision Influence
Diagram. Note in Figure 3 the addition of the
Probability of Failure, Year to Perform
Maintenance Action, and Consequential Cost of
Failure nodes, and conversion of the
Consequential Cost of Failure nodes into the
Expected Consequential Cost of Failure
nodes. The with and without maintenance
Decisi on
No Maintenance
Action
vs
Perform
Maintenance
Action
Net Present
Value
Consequential
Cost
of Failure
With Action
Consequential
Cost
of Failure
Without Action
Cost of
Maintenance
Action
Benefit
Cost
Outcome
Fig. 2 Maintenance Action Decision Influence Diagram
3
action cash flow streams create the Net value of
the decision criterion.
The arrows pointing from Year to Perform
Maintenance Action to Probability of Failure
Without Action, and from Probability of Failure
Without Action to Expected Consequential
Cost of Failure With Action require explanation.
These arrows establish the relationship for the
expected consequence of failure if the
maintenance action is delayed. During the delay
to the year in which maintenance action is
performed, the expected consequence of failure
will be the same as if the action had not been
taken. After the year to perform the maintenance
action, the probability of failure with action is
used to determine the expected consequential cost
of failure with the action.
Probability of Failure with Time
The use of probability of failure with time is an
all-inclusive expression of the engineering
condition of the equipment. For many years,
worst case analyses were performed, with
probability of failure set to an absolute certainty,
the value of one. The advent of sophisticated
inspection techniques and probabilistic fracture
makes it possible to express the complete
engineering state of equipment in terms of a
probability of failure versus time curve. It is clear
from the discussions above that an expression of
equipment condition in this form directly
integrates into established classical probabilistic,
decision, and financial analysis methods.
Optimizing the Decision/Financial Model
The objective in optimizing the model is to
determine a maintenance action year that
maximizes NPV, while not exceeding constraints
such as maintenance budget limits or forced
outage rate limits. In other words, the goal is to
optimize NPV by maintenance action timing.
5,6
SI
utilizes an MS Excel workbook version of this
model, with an operations research type optimizer
incorporated as a visual basic macro.
5,6,7
Financial Inputs
The financial assumptions used in this type of
analysis are usually well established in the
financial organization of a corporation, and
available to the engineer. These assumptions must
be included because they have significant effect
on the impact of maintenance action timing.
The first set of financial assumptions affect the
time value of money and include the projected
inflation rate, to account for the eroding value of
the dollar with time, and the corporate discount
rate used to set required return on investment.
The second set of financial assumptions has to do
with the composite income tax and the property
tax rates. Of these two, the composite income tax
rate is the most significant and has a large effect
on a maintenance actions benefit. Financial loss
consequences can be viewed as a business loss,
and a significant portion can be written off. The
impact of the maintenance cost itself can be
greatly reduced for the same reason, if the
maintenance cost is classified in an expense
category. If the maintenance cost is capitalized, it
still can be written off, but at a lower rate, over
time.
Engineering Inputs
A prudent, fully quantitative engineering
probabilistic analysis or assessment, and
appropriately justified financial failure
consequences, lend added credibility to risk or
expected value of the consequence estimates. It is
prudent to use all possible technologies in
assessing equipment condition.
Probabilistic fracture mechanics (PFM) is such a
technology. PFM establishes a damage
propagation mechanism mathematical model with
a failure criterion. This model is then integrated
over the range of input distributions with a
Decision
No Maintenance
Action
vs
Perform
Maintenance
Action
Expected
Consequential
Cost
of Failure
Without Action
Expected
Consequential
Cost of
Failure
With Action
Uncertainty
Net Present
Value
Outcome
Consequential
Cost of Failure
Cost of
Maintenance
Action
Probability
of Failure
With Action
Year to
Perform
Maintenance
Action
Probability
of Failure
Without Action
Decision
Fig. 3 Maintenance Action Decision Influence
Diagram with Expected Consequential Cost or Risk.
4
Monte Carlo program. This integration
produces a probability of failure verses time
curve.
5,6
Less rigorous, but fully quantitative, methods are
available for obtaining probability of failure versus
time. These methods are useful in obtaining
preliminary engineering inputs for the maintenance
decision analysis allowing a first level look at
possible allocation of resources. One such method
is trending failure history data using standard linear
regression analysis and the Weibull distribution
function. This function was derived to express
equipment reliability as a function of time. Another
method is structured interviews with plant
personnel regarding potential future equipment
failures. This method is referred to as probabilistic
assessment interviewing or expert opinion
elicitation. It was developed by cognitive
psychologists in the decision analysis community
over the last 15 years, and has been extensively
used with senior corporate executives for large
corporate decisions.
5,6,7
The Bayesian-like update analysis is a classical
method of combining failure history projections
with plant personnel structured interviews. The
Bayesian method, developed several hundred years
ago,
8
combines current probabilistic information of
an event with newly found information for the same
event, resulting in updated information.
9
This
technique provides better projections of the future
failure probability because of the use of both data
sources. In addition, these techniques allow the
decision to be assessed inexpensively as a first
iteration to assess the need for a more expensive,
fully quantitative engineering analysis.
Combustion Turbine Blade Refurbishment
Example
The Situation
Because of the high capital cost, it is prudent to
delay blade refurbishment or replacement until a
turbine wreck is a real possibility, but not a real
threat. Replacing too soon will result in a large
expense when there is no real threat. Replacing too
late could result in a very costly turbine wreck and
forced outage.
The Model
Measurement of blade coating and temperature
state, coupled with a remaining life engineering
model, provides the projected probability of
failure. The decision analysis model, Figure 4,
serves as a bridge between engineering analysis
and financial analysis. The model illustrates use
of measurement data, life prediction analysis,
turbine wreck costs, and forced outage costs.
The model also includes the competing
refurbishment and replacement costs that must be
held within the operators budget limit.
The workbook constructed for this model is
exercised not only for each candidate year of
action, but also for each candidate type of action.
The goal is to find the action/year combination
that maximizes NPV and remains within specified
constraints.
Turbine Overhaul Timing Decision Example
This example deals with the delay of a turbine
overhaul beyond the OEM recommendation. The
objective is to determine the optimum timing for
the overhaul. The model for this decision, Figure
5, is constructed in the same manner as above. In
this case, however, we are dealing only with the
timing of a maintenance decision. The upper half
of the diagram represents the benefits from timing
the overhaul to avoid the consequence of a
shutdown and its associated damage.
The overhaul is estimated to be $350,000. If there
were a failure in the hot section, the down time
Fig. 4 Decision Model for Timing Refurbishment or
Repair of Gas Turbine Blades
Outcome
Net
Pr esent
Val ue
Forced
Out age
Cost Estimated
Pr obabili ty
of Failure
Turbine
Wreck
Cost
Forced
Out age
Hours
Constraint
Forced Outage
Rate Limit
Uncertainty
Coating
Degradat ion
Model
Coating
Degradat ion
Measur ement
Temper ature
Measur ement
Remai ning
Life
Model
Year of
Action
Decision
R e f u r b i s h m e n t
C o s t
M a i n t e n e n c e
C o s t
Te m p e r a t u r e
M e a s u r e m e n t /
I n s p e c t i o n
C o s t
Run vs
Inspect -Refurbi shment/
Inspect -Replace
Blades
Decision
Blade
Replacement
Cost
Budget
Limit
Constraint
5
costs are expected to be $1,000,000 for repairs
and 500 hours of lost revenue (due to the
shutdown) at $2,000 per hour, weighted by a
utilization factor of 60%. The probability of hot
section failure is represented by the cumulative
probability of failure versus time curve in Figure
6. The Net Present Value versus Maintenance
Action Year curve is shown Figure 7 with a peak
in 1998 of $79,495. This is the optimum time to
perform the overhaul. The curve is fairly flat for
another year, indicating that the overhaul could be
delayed until 1999 with essentially the same
positive value result. From 1999, however, the
curve drastically decreases with a negative net
value being created after 2001. This curve
provides an indication of the sensitivity of value
with time. It particularly highlights the impact on
the corporation of delaying the overhaul too long.
Boiler Tube Component Replacement Example
This example addresses a boiler tube component
of the superheater or reheater type. The concern
is if, and when, to spend $1,000,000 for
replacement of the entire component. The failure
risk in this example is the burst of any tube
segment, resulting in the shutdown of the entire
power unit. It is assumed that the unit will be
down for 24 hours for repair of each tube burst.
The unit has a 150MW maximum dependable
capacity, with a projected capacity factor
increasing from 25% to 55%, with replacement
power cost increasing from 20$/MWH to 55$/
MWH over the next twenty years.
The probability of failure versus time is based on
a remaining life analysis, shown in Figure 8
as Base Case. This is the expected probability of
tube burst versus time curve, given no
replacement and given that the unit continues to
operate, causing the next less efficient unit in the
dispatch to be operated upon tube burst. The
Alternative Case curve assumes that the boiler
tube component is replaced. Here, the probability
of failure curve is lowered due to the replacement
action. NPV is generated by decreasing the
probability of failure by replacement of the boiler
tube component.
Note from Figure 9 that the highest NPV is
created by replacement of the component in 1998.
Note, also, that the highest NPV is positive, which
means that the boiler tube component should be
replaced, creating the highest value, if performed
in 1998.
Figure 6 Gas Turbine Hot Section Component
Probability of Failure Vs. Time
0.00
0.10
0.20
0.30
0.40
0.50
0.60
1
9
9
7
1
9
9
9
2
0
0
1
2
0
0
3
2
0
0
5
2
0
0
7
2
0
0
9
2
0
1
1
2
0
1
3
2
0
1
5
Years
P
r
o
b
a
b
i
l
i
t
y

o
f

F
a
i
l
u
r
e
Figure 7 Net Present Value Vs.
Maintenance Action Year
($500,000)
($450,000)
($400,000)
($350,000)
($300,000)
($250,000)
($200,000)
($150,000)
($100,000)
($50,000)
$0
$50,000
$100,000
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
2
0
1
4
2
0
1
5
2
0
1
6
Year
N
e
t

P
r
e
s
e
n
t

V
a
l
u
e
Fig. 8 Boiler Tube Probability of Failure Vs. Time.
Boiler Tube Probability of Failure vs Time
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
45.00%
1
9
9
6
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
2
0
1
2
2
0
1
4
Year
C
u
m
u
l
a
t
i
v
e

P
r
o
b
a
b
i
l
i
t
y
Base Case
Alternative Case
Fig. 5 Decision Model for Timing of an Overhaul
Decision
No Overhaul
vs
Perform
Overhaul
Expected
Consequential
Cost
of Failure
Without
Overhaul
Expected
Consequential
Cost of
Failure
With Overhaul
Uncertainty
Net Present
Value
Outcome
Consequential
Cost of Failure
Cost of
Maintenance
Overhaul
Probability
of Failure
With Overhaul
Year to
Perform
Overhaul
Probability
of Failure
Without
Overhaul
Decision
6
Concept of Multiple Maintenance Decisions
In reality, numerous maintenance projects are
competing for the maintenance budget
simultaneously. Financial risk optimization is the
performance of a decision analysis process that
maximizes NPV for many projects
simultaneously. In a utility, all projects may be
annually constrained by the maintenance budget
limit, which means that financial risk optimization
must be conducted with all individual decision
models linked.
5,6,7
Financial risk optimization has several benefits.
The more maintenance projects there are, and the
larger the portion of the maintenance budget that
is modeled, the larger the expected value benefit
that can be realized. In addition, decision
analyses are performed using a systematic, fully
quantitative and reviewable process.
For optimization of multiple projects, the decision
models previously described would be expanded.
For each additional project, the additional
probabilities of failure and years of maintenance
action nodes would be added to the influence
diagram and the spreadsheet. The multiple
projects optimization then provides a prioritized
list of decision alternatives and years of
maintenance action that creates the maximum
NPV for the integrated group, while staying
within specified constraints. This is accomplished
in the spreadsheet by inserting different
combinations of years of action seeking that
combination that maximizes total NPV. This is
accomplished through an operations research
algorithm approach.
An example of the benefit of this approach was
demonstrated with a PC-based workbook model
applied to 140 forced outage critical fossil plant
tube components across a power system.
5
The
estimated NPV improvement resulting from the
optimization was in the tens of millions of dollars.
Conclusions
A fully quantitative maintenance decision
analysis model can:
1) Be optimized for the timing of the
maintenance actions, maximizing the
value of the maintenance dollar to the
corporation;
2) Create a link between engineering
and the financial decision maker by the
common definition of risk and expected
value of consequence of failure; and
3) Allow engineering to compete for
corporate resources during times of tight
budgets.
For more information regarding financially based
inspection and repair planning or related SI
capabilities, please contact:
Dave Mauney
dmauney@structint.com
6110 Executive Boulevard, Suite 1080
Rockville, MD 20852
Phone: 301-231-7746
Fax: 301-231-7752
www.structint.com
Fig. 9 Net Present Value Vs. Maintenance Action Year
Net Present Value versus Maintenance Action
Year for Boiler Tube Replacement Example
($600,000)
($400,000)
($200,000)
$0
$200,000
$400,000
1
9
9
6
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
2
0
1
2
2
0
1
4
Year
N
e
t

P
r
e
s
e
n
t

V
a
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u
e
,

$
7
References
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ings: Fossil Plant Life Extension Conference and Workshop, Electric Power Research Institute, Palo
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NJ, 1965, pp. 365-367 and 379-380.
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Barnard, Studies in the History of Probability and Statistics: IX, Biometrika, 45, 1958, pp. 293-315.
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Wesley, Reading, MA.