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Asset Management: Why Important Differences in Useful Life and Service Life Matter


Useful life can take several meanings. Ultimately estimating useful life in terms of ranges and using Monte Carlo simulations for forecasting is the most effective and efficient approach.
Useful life can have several meanings. Ultimately, estimating useful life in terms of ranges and using Monte Carlo simulations for forecasting is the most effective and efficient approach.

The purpose of a useful life estimate is to determine how long an asset will remain in useable condition. "Useful life" is not the same as the actual life of an asset. A piece of equipment may last far longer than its estimated useful life, but it will need more and more maintenance as it reaches that point. Accountants also have their own definitions based on depreciation methods and tax purposes. Asset managers and financial forecasters are left sorting through the many definitions of useful life and service life in their trusted advisor role to decision makers.


Useful Life Describes Unacceptability

Useful life refers to the period during which an asset or product can perform its intended function effectively and efficiently. Useful life is often associated with consumer products, machinery, equipment, and infrastructure.


Useful life is typically defined based on the point at which the item can no longer meet its intended purpose due to wear and tear, obsolescence, or a significant decrease in performance.


In reliability, useful life is related to the duration a product can operate without experiencing significant failures or breakdowns. “Useful life is the number of life units from manufacture to when the item has an unrepairable failure or unacceptable failure rate,” according to MIL-STD-721C.


Service Life Captures Cradle to Grave

Service life is a broader term that encompasses the entire time frame during which an asset or product exists, including its useful life and any period after it is no longer considered useful for its original purpose.


Service life may extend beyond the useful life if the item can be repurposed, recycled, or used for secondary functions. For example, a machine that can no longer perform its primary function may still have value as spare parts or be repurposed for a different task.


In terms of reliability, service life considers the entire lifespan of an asset, including its useful life and any subsequent phases when it may still have residual value or utility.


Are There Other Forms of Life?

Yes, several other types of "life" terms are commonly used to describe various aspects related to functions, maintenance, and economic considerations. Some of these terms include:

  1. Economic Life: Economic life refers to the time the asset can generate sufficient revenue or benefits to justify its initial cost. Economic life may be shorter or longer than the physical useful life of the asset.

  2. Technical Life: Technical life is a term that describes an asset or product that can continue to function effectively based on its technical specifications and capabilities. Technical life considers technological obsolescence.

  3. Functional Life: Functional life refers to the period when an asset or product can adequately perform its intended function. It may be shorter than its physical life if the asset becomes outdated or its performance no longer meets the required standards.

  4. Design Life: Design life represents the intended duration for which a product or facility was designed to operate efficiently and safely. It is a specification provided by the designers or manufacturers.

  5. Operational Life: Operational life refers to the period during which a facility or equipment is actively used in day-to-day operations. It encompasses the useful life and any additional time during which the asset remains in service, possibly for secondary purposes or as a backup.

These various "life" terms are used in different contexts and have specific meanings depending on the field, industry, or purpose for which they are applied. They are important for decision-making, maintenance planning, financial analysis, and asset management in various sectors, including engineering, manufacturing, safety, compliance, and real estate.


Accountants Have A Different Definition

Useful life is a key term in accounting and financial reporting because it helps determine an asset's cost allocation over time through depreciation. The depreciation aspect makes it different than how asset managers, engineers, and maintenance professionals refer to useful life or service life.


Depreciation is the process of allocating the cost of a tangible asset (e.g., equipment, buildings) or an intangible asset (e.g., patents, copyrights) over its expected useful life. This allocation helps match the asset's cost with the revenue it generates or the benefits it provides to the business over time. Depreciation methods vary depending on accounting standards and regulations.


Doesn’t Everything Wear Out?

Yes, everything wears out. It is often helpful to consider useful life from this perspective. Reliability engineers define “wearout” as the process which results in an increase of the failure rate or probability of failure with an increasing number of life units.


Reliability engineers also consider that some products improve over time (called reliability growth). In other words, manufacturers learn about different components, improve them, and improve the asset as a whole.


On the other hand, not getting manufacturer replacement parts or services leads some organizations to declare an asset obsolete. Sometimes, we call something obsolete because we simply prefer or have the money to replace it.

Wearout underscores that every organization considers useful life a little differently.


Useful Life Tables Are Inaccurate

Useful life tables are inaccurate because the definition of useful life is not stated, or the values are an amalgamation of different approaches. Nevertheless, we need a place to start if we intend to predict renewal and replacement needs over a 10-, 20-, or 30-year period.


How Can I Determine Useful Life

The best way to determine useful life is to use an industry-specific useful life table and modify it to fit the organization's experience. That is more tricky than simple. First, organizations keep poor records of failures and do few after-action (or root cause analysis) reports. Second, organizations have few of a given type of critical asset, and those are usually different models. And third, we tend not to let the things that matter most fail catastrophically.


The data sets may be small, but most organizations have more data than they think they have. Plus, use the anecdotal experience of front-line staff. Adjust the standard useful life tables accordingly.


How Do You Use Useful Life in Asset Management?

Carefully. Comparing different types of apples (useful lives) to oranges (service lives) will lead to poor predictions and decisions. Get the foundations right before developing forecasts. The effort takes time and resources.

The best way to develop useful life values is to think in ranges and distributions. Then, do the renewal and replacement forecast probabilistically using Monte Carlo simulations. This aspect is buying this brief article, but it is truly amazing how much effort is wasted developing absolute (point) estimates unsupported by hard data.


Moving Forward

“Useful life” is not the same as the actual life of an asset. Asset managers and financial forecasters are left sorting through the many definitions of useful life and service life in their trusted advisor role to decision makers. This article provides observations for sorting through the differences to provide meaningful forecasts of asset renewal and replacement needs. Ultimately, estimating useful life values in ranges and developing forecasts with Monte Carlo simulations is the most efficient and effective approach.


 

JD Solomon Inc provides solutions for program development, asset management, and facilitation solutions at the nexus of facilities, infrastructure, and the environment. Subscribe for monthly updates related to our firm.


 

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