The Asset and Infrastructure Management (AIM) Committee, a joint committee of Michigan AWWA and MWEA, has as its first goal to provide information and training related to development of Asset Management Programs. In accordance with MDEQ guidance, Asset Management is comprised of five core components:
- Asset Inventory
- Level of Service
- Critical Assets
- Revenue Structure
- Capital Improvement Planning
As part of its goal to provide education in Asset Management, the committee is preparing a series of articles on each of these five core components. This article will discuss the fifth component – Capital Improvement Planning.
A capital improvement plan (CIP) is a planning tool used to coordinate the timing and financing of capital improvements over a multi-year period. While many utilities generate 5 to 10-year CIPs, SRF/DWRF and State guidance for asset management requires a 20-year planning period. Capital improvements refer to major, non-recurring physical expenditures for items such as equipment, tankage, structures, buildings, and collection system infrastructure. The CIP includes a brief description of proposed improvement projects, a year-by-year schedule of project costs, and funding sources.
Most municipalities identify a capital project as a new construction, expansion, renovation, or replacement project with a total cost of at least a certain amount. The amount of $10,000 is a common threshold for small and medium municipalities, with higher thresholds for larger municipalities. The projects typically have a useful life of greater than one year.
Capital Improvement Planning is a process that can be done at any time, but typically occurs in earnest prior to updating the annual budget. Plans typically identify specific projects that are anticipated in the short-term (i.e., next 5 years). For example, “Replace Pumps 1 and 2 at Pump Station A” may be a CIP based on the known, current condition of the pumps.
CIPs can also include major projects 10 to 20 years into the future. Projects in this timeframe will be more general in nature and typically rely on ballpark cost estimates. For example, “Pump Station A Rehabilitation,” may be based on the fact that in 15 years, most of the equipment will be near the end of its useful and require a major renovation.
To ensure adequate funding at the time of the project, it is important to include factors for contractor installation (if a contractor is required), contingency, and inflation. Contingency (10 to 30%) can be used to cover costs that would likely be incurred, but are not yet defined. Inflation for construction projects and equipment is currently about 2.5% per year. With compounding interest, the cost of a project five years in the future will be 13% greater than today’s cost. Check with your financial department to make sure they are not also accounting for inflation!
If your WWRF is meeting permit and your community has a stable population, CIP projects typically consist of in-kind replacement projects. Improvements, such as a more energy efficient model or replacing with the latest technology, can be included in the project when the equipment will be at the end of its useful life or based on its anticipated condition.
If your community is experiencing growth, or major portions of the plant require renovation, or you are anticipating new regulations (i.e., lower effluent nutrient level, biosolids disposal, etc.), a study or master plan should be conducted to evaluate a range of alternatives. A master plan is a more in-depth study of anticipated future conditions, evaluation and comparison of multiple alternatives and their impact on the rest of the system, and selection of the best alternative. The CIP will include projects based on the best alternative from the Master Plan.
With all the competing capital improvement needs in a wastewater collection system and WWRF, it can become overwhelming to prioritize and schedule projects within a 5-year CIP. Asset management planning provides an approach for assigning criticality to each asset using a data-driven method based on both the Probability of Failure and Consequence of Failure. A previous article by the AIM Committee in MWEA Matters (Winter 2016) described how to assign a value to the criticality, or “Business Risk” of each asset. This approach provides a more defensible and consistent approach for prioritizing projects each year.
Capital improvements can be financed in a variety of ways. Lower cost improvements will be paid off on an annual basis. Larger capital improvements will require some form of debt service (bonds, State Revolving Fund loan, etc.).
The AIM Committee’s goal is to build upon the guidance of the MDEQ with the Asset Management Guidance for Water and Wastewater Systems which can be found on their website at: http://www.michigan.gov/deq/0,4561,7-135-3307_3515_4143-10784–,00.html.
This article was originally published by MWEA Matters.