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Repair-Replace-Refurbish Options Require Complete Analysis

Issue 8 and Volume 14.

Almost any firefighter can tell you of one truck in a fleet that lasted well beyond any expected useful life. You know the truck – it just always worked great, never went down and was still working well even as it was retired.

Unfortunately, not all trucks are that great. They start to fail at some point and all departments are faced with the decision to repair, replace or refurbish the apparatus.

Hidden Costs

A common problem is that most repair/replace/refurbish assessments fail to include some hidden yet significant costs. The department provides an incomplete analysis to whoever approves the expense to purchase a new apparatus or refurbish the truck. Lacking complete information, most municipal finance officials gravitate to the lowest apparent cost, which is usually repairing the truck. Then, fire departments are left with undesirable or, worse, unsafe vehicles.

Three main factors must be analyzed to have a complete and accurate financial analysis of the repair/replace/refurbish decision.

The first factor is operational cost. This is a simple cost to measure and is included in almost every analysis. It takes into account the costs to keep and maintain the existing apparatus, including repairs, parts, excess fuel (older vehicles are less fuel efficient) and insurance. It can also include such other costs as apparatus rental during out-of-service time.

These operational costs are easy to measure because you see them. You know what you spend on fuel or insurance or repairs each year.

The second factor to include in a complete analysis is much harder to determine – intangible costs. They are not necessarily something for which anyone writes a check. Yet, it’s essential to include them in a complete analysis.

Most departments overlook the hidden costs of having older apparatus. The primary intangible cost is safety. How much do injuries on an old or undependable apparatus cost you? This cost is usually assessed in one big bill. In other words, you don’t pay an annual safety cost. When something bad happens, you may get hit with one big lawsuit, insurance premium hike or other cost.  

It’s also important to assign a value to the intangible costs of recruitment or morale by having an older apparatus. Does it cost more to recruit volunteers or retain firefighters because they are not proud of the apparatus they are using?

It’s important to justify these costs. You just can’t pull a number out of the air and expect your municipal finance official to accept that number as gospel. Have examples to support the amount you use in the analysis.  

Here’s how that works.

Suppose you have a truck without rollover protection, and national statistics show that a firefighter is four times more likely to be injured in an accident in an apparatus without rollover protection (this statistic is only used to support this example and is not an accurate statistic to be used). Then, the cost of simply repairing the truck (or refurbishing it if you are not adding rollover protection) will be four times higher than buying a new truck.

Lost Buying Power

Let’s say that your safety costs in a new, ultra-safe truck are $500 per year (in other words, over 10 years, you’ll incur $5,000 of safety-related expenses for this truck). Then, repairing the older truck will have a safety cost of $2,000 each year (four times higher). That’s a supportable claim in a quality analysis.

Finally, the third factor is the financial cost related to keeping an older truck, refurbishing the truck, or buying a new truck.

The financial cost factor is also hard to judge for most departments, but is essential to have an accurate financial analysis of the repair/replace/refurbish decision. You need to consider whether you still owe loan payments on the apparatus under consideration for replacement, whether you have to finance the refurbishment of the older truck and whether you will have loan payments on a new truck? This is an easy way to measure the financial cost of each option you have.

A bigger and rarely considered financial cost is the lost buying power of waiting to replace. On an average truck price of $300,000, this cost exceeds $20,000 a year if annual price increases are seven percent. Apparatus costs have risen dramatically over the past few years and significantly affect this calculation. These costs must be netted against new apparatus loan payments or lost savings earnings if you pay cash for the new apparatus.

After compiling all these costs, compare the totals of the options.  

Let’s create a sample situation to show what a comprehensive analysis looks like. The Anytown Fire Department has a 13-year-old apparatus in need of significant work and the options are:
•  Repair the truck for $15,000 and extend its useful life by two years.
•  Refurbish the truck for $45,000, improve safety and extend its life by 10 years.
•  Replace the truck with a new one for $350,000 by borrowing money while assuming a useful front line life of 10 years.

From the accompanying chart, we learn a repair that extends the useful life by two years has the lowest upfront cost ($15,000), but incurs a major financial cost of lost buying power over those two years.

Most Economical
Refurbishment has the highest upfront costs. This option will reduce safety costs, but because it extends the useful life similar to a new, replacement apparatus, there is no lost buying power.

A replacement apparatus will have the highest financial costs, but reduces fuel and has slightly higher insurance costs due to its value.

It appears that refurbishing the truck may be the most economical answer.  However, in this example, the refurbishment is expected to provide like-new vehicle safety and provide 10 years of service. For your situation, you may or may not achieve those results.

The goal of an analytical process like this is to have a complete and side-by-side measurement of the costs and benefits of each option. With comprehensive data that includes all the apparent and non-apparent factors, your department will have the information necessary to make the best decision.

Editor’s Note: John R. Hill, an apparatus budgeting consultant, is president of ENVIZION Financial and a nationally-recognized speaker and author regarding the issues of buying and financing fire apparatus. He lives in Indianapolis and is working on a book about how fire departments can strengthen their financial condition.
 

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