Arriving at Depreciated
Replacement Cost
Supported by HAMFIG
What is DRC?
• “…a method of valuation which provides
the current cost of replacing an asset with
its modern equivalent asset less
deductions for all physical deterioration
and all relevant forms of obsolescence
and optimisation.”
Key terminology
• Depreciation: Systematic allocation of the
depreciable amount over the useful life.
Each significant component should be
depreciated separately
• Depreciable Amount: Asset cost less
residual value
• Useful Life: Period that the asset is
expected to be available for use by the
authority
What is a “significant component”?
•
•
•
Does NOT mean breaking an asset down to
the smallest element
DOES mean breaking asset down into
sensible and significant parts, so that they can
be depreciated separately
Two types of component:
1. Finite life
(Typically 20-40 yrs, but some shorter, and some longer)
2. Infinite life
a.Those requiring capital maintenance to achieve
expected life
b.Those NOT requiring capital maintenance to achieve
expected life
Components with a Finite Life
•
Lighting
•
TMS
•
Street Furniture
•
Surface layers of Carriageway, Footways and
Cycleways
•
Some occasions – underlying layers of the above
•
Some components of Structures
Components with a Indefinite Life
•
Majority of underlying road layers
•
Some components to structures
Calculating Depreciation
•
•
“…the aggregate cost of all the capital
replacements/treatments needed to
maintain/restore its service potential over the
life cycle, spread over the estimated number of
years in the cycle”
This requires 2 things:
1. Capital costs
2. Estimated lives
•
•
Rates generated by applying the financial
model (Chapter 5) should provide these figures
as they are net of residual value
Depreciation is calculated on a straight line
basis over the Estimated Service Life (ESL)
Service Life of Surface
Treatments
ADEPT and RSTA
May 2011
• Work undertaken by a joint working group of ADEPT
and RSTA
• Agreed baseline of values
• Definitive values to use unless specific performance
data is available to justify alternative figures:
Principal Calculations
GRC – Accumulated Depreciation = DRC
DRC ⁄ Years of Life Remaining = Annual Depreciation
Principal Calculations
STEP 1:
Calculate Accumulated Depreciation
STEP 2:
Deduct Accumulated Depreciation from GRC to give DRC
STEP 3:
Divide DRC by # years remaining life to give Annual
Depreciation figure
What will you need to get started?
What is needed to calculate the DRC?
• Good quality inventory data
• Condition data
• Age of each component
• Where each component is in its life cycle
Asset Classification
Level 1
1.
2.
3.
4.
5.
6.
7.
Carriageways
Footways
Linear items
Structures
Highway lighting
Street Furniture
Traffic Management Systems
Source: Table 2.1 The Code
Calculating DRC
Let’s look at the ‘simple’ examples first…
5.
6.
7.
Highway Lighting
Street Furniture
Traffic Management Systems
Why these first?
• Less complex
• Componentisation more straightforward
• All assets and components have finite lives
• Generally Authorities have good inventory data – at least
for lighting and TMS!
Annual Depreciation
• On a straight line basis
• See Chapter 7 for general approach to calculating
annual depreciation
• See Chapter 5 for how this fits within the financial model
Initial DRC
• Relies on availability of:
– Inventory
– Asset / component age
• If you do not have age data then best estimate
will be needed
• ESL should be based on YOUR experience,
rather than industry standards
• Rule of Thumb for checking out estimates (see
11.2.2.3)
Lighting/TMS & Street Furniture
• The graph below is representative of typical lighting/TMS
renewal cycle i.e. end of life systematic renewal
• This form of lifecycle renewal and deterioration leads to
a straight line relationship over a given ESL.
• AD = Cost / Time
Source: Figure 10.2 The Code
Lighting/TMS & Street Furniture
• Age profile is limited and based upon bulk
installation assumed by material type
– provides a crude and simplistic platform where gaps
can be overcome with time
• To calculate DRC
–
–
–
–
Age profile
Straight line deprecation
Agreed ESL of asset
Unit rate for capital replacement / maintenance
Lighting Network Example
Principal Calculations
STEP 1:
Calculate Accumulated Depreciation
STEP 2:
Deduct Accumulated Depreciation from GRC to give DRC
STEP 3:
Divide DRC by # years remaining life to give Annual
Depreciation figure
STEP 1: Unit Rate Calculation
Cost Element
Column
Luminaire
Cabling / Ducting
Surface reinstatement
Removal of old column
GRC
DRC
3
3
3
2
2
3
3
?
3
3
STEP 1: Age Profiling
• Best estimate of age profile, using age bands
• You can decide your own age bands
• Top of the age bands determined by your local ESLs
• Recommend you work on average age basis
• A column by column basis would take much longer!
STEP 1: Assumptions
• ESL is 45 years for all column types
• GRC rate (MEA basis) is £800 per column
• Unit rate cost of replacement is £1,000 per
column, on average
• The above are purely assumptions not
default figures
STEP 1: Accumulated Depreciation
Average Age
Unit Rate
(assumed
£1,000
average)
ESL
Accumulated
(assumed 45 Depreciation
per column
years for all
columns)
(£1,000 /
ESL x
Average
Age)
Number of
Units
Accumulated
Depreciation
per age band
5
£1,000
45 yrs
£111.11
7,350
£816,659
25
£1,000
45 yrs
£555.56
76,018
£42,232,560
32.5
£1,000
45 yrs
£722.22
9,893
£7,144,922
42.5
£1,000
45 yrs
£944.44
9,893
£9,343,344
45
£1,000
45 yrs
£1,000.00
9,893
£9,893,000
STEP 2: DRC
Average Age
Number of
Units
GRC Unit Rate
(assumed £800
per column)
Accumulated
Depreciation
per age band
DRC
5
7,350
£5,880,000
£816,659
£5,063,341
25
76,018
£60,814,400
£42,232,560
£18,581,840
32.5
9,893
£7,914,400
£7,144,922
£769,478
42.5
9,893
£7,914,400
£9,343,344
£0
45
9,893
£7,914,400
£9,893,000
£0
STEP 3: Annual Depreciation
Average Age
DRC
ESL remaining
Annual
Depreciation
5
£5,063,341
40
£126,584
25
£18,581,840
20
£929,092
32.5
£769,478
7.5
£102,597
42.5
£0
2.5
£0
45
£0
0
£0
The ESL issue
• Can we have lighting columns still in
working order and providing a service, that
in terms of the Code have reached the end
of their ESL?
DISCUSS…..
The ESL issue
• Surely if the lighting columns are providing
a service, then they have a value
• Maybe we should re-visit our ESL?
Graphic Outputs from Detailed Model
Component Approach
• If you have the data, you might consider
breaking down into components and
depreciating these separately
• For example…
Source: Table 4.1 The Code
4.
Structures
Structures
• Atkins have been commissioned to
produce a new specific toolkit
• The Toolkit will be available in time for
2011 / 2012 returns
Carriageways
Carriageways DRC
• DRC represents the net current value of
the asset …
• i.e. GRC less depreciation and impairment
• Annual Depreciation is the aggregated
cost of all capital replacement/treatments
needed to maintain/restore the assets
service potential over the life cycle, spread
over the estimated number of years of the
cycle.
Carriageways DRC
• Carriageways have two main components
– Pavement (top 100mm)
• Requires maintenance treatments and is classed
as having a finite life.
– Underlying layers (base – construction layers)
• No maintenance required and is (generally)
defined as having an indefinite life and therefore it
does not depreciate.
• An allowance is made for small repairs to these
underlying layers within the C/W renewal rate.
Carriageways DRC
• How is DRC calculated?
– Condition data is taken from CVI, DVI and
scanner surveys and is ran through UKPMS
– Inventory breakdown is still required for DRC
and is based upon the same break down as
per the GRC calculation.
– Road hierarchy, Speed, U/R split, Road type
Carriageways DRC
• Example breakdown based upon the GRC
C/W road classification:
Road Classification
•M Urban
•A Urban
•A Rural
•B Urban
•B Rural
•C Urban
•C Rural
•U/C Urban
•U/C Rural
Each of these road classifications have
similar treatment options and therefore
DRC can be calculated for each sub-group.
Reconstruction
Rehabilitation
Partial Depth Reconstruction
Inlay
Overlay
Micro surfacing
Surface Dressing
Carriageways DRC – Simple Life Cycle Plan
• Total Useful Life (TTUL)
– Renewal outweighs maintenance (economic sense)
• Renewal Rate £/m2
– Local rates based on works (includes an allowance for lower layer
works)
• Deterioration Initiation point (TINI)
– Measurable deterioration point. C/W may not show deterioration for a
period of time even though it is not in an ‘as new’ condition
• Width data
– UKPMS can calculate average width from your inventory data and/or
standard UKPMS default values
– You can override these with the HAMFIG default values used for GRC
calculation
– Use of default values not allowed from 2011 / 2012
Carriageways DRC – Simple Life Cycle Plan
Source: Table 8.1 The Code
This is an example only and does not represent default values!
DRC - Carriageways
• Calculation
– UKPMS calculates the overall condition for each section
– UKPMS converts condition value into depreciation value
– Depreciation value is shown via a depreciation curve and line
(See Technical Note 46 for detailed explanation of methodology)
Source: Figure 8.1 The Code
Carriageways DRC: The Future
• Use of default Carriageway width
values not allowed from 2011 / 2012
• Authorities expected to start collecting
carriageway age data as a basis for
calculating DRC – need to start
recording this as and when capital
work is undertaken
• However, long life surface treatments
for many unclassified roads means
that condition will remain a proxy “for
some considerable time to come”
Annual Depreciation – Carriageways
• Two levels:
– Interim version (8.5) using data inputs (other
than deterioration initiation)
– Aspirational version (8.7) using deterioration
modelling and UKPMS data to refine inputs
Annual Depreciation – Carriageways
• Interim version for section data within UKPMS
and based upon standard attribute data such as:
–
–
–
–
–
Road Hierarchy
Urban or Rural
Speed Limit
Road Type
Classification with “Well Maintained Highways”
Annual Depreciation =
Total network area (m2) x renewal unit rate
Total Useful Life
Annual Depreciation – Carriageways
• Annual Depreciation is calculated by creating a
life cycle plan for the asset
–
–
–
–
Expected life of maintenance cycle/treatment lives
Trigger points
Condition data and deterioration modelling
Cost
• There should be some allowance for sub layer
works arising from external factors, such as:
– Utility company openings
– Poor underlying ground conditions
– Heavy goods vehicle traffic
• This might be a simple % addition based on
historic trends?
Carriageway Life Cycle Planning
Detailed Approach
• Will need a substantial amount of data to
be workable and useful
• You need to develop a data strategy in
order to move towards detailed life cycle
planning, identifying:
– What you need to collect
– Critical gaps in current data
Footways
Footway DRC: What’s in and what’s out?
• Includes:
– Footpaths part of the highway network
– Cyclepaths
– Paved highway verges
• Excludes:
– Cycle lanes (within carriageway calculations)
• Grey areas:
– Shared surfaces: You could include these within
carriageways?
– Pedestrian areas: Could include this within footway?
Footway DRC
• Footways are very similar to carriageways
and there is scope for calculating the DRC
using UKPMS
• A new Footway Network Survey (FNS)
technique is being introduced to UKPMS
Footway DRC
• For demonstration purposes DVI information
already obtained will be aggregated across the
footway network to demonstrate the DRC
calculation.
• Primarily concerns Footway surface bound
layers that are depreciable i.e. top 70-100mm
• There should be some allowance for sub layer
works arising from external factors, such as:
– Utility company openings
– Tree roots
– Vehicle over-running
Footway DRC
• Steps for calculating the accumulated depreciation
– Divide the footway network into sub categories i.e. hierarchy
– Further sub-divide by construction type as to group footways that
require similar treatment types and can be assumed to have
similar deterioration assumptions made.
– Calculate a square meterage for each sub group made
– Evaluate %age for each network sub-group in relation to
condition banding; red, amber, yellow and green.
• These bandings are mapped to specific treatments
– Evaluate typical treatments for each band together with unit
costs (taken from current contract/maintenance works)
– Green band – assume 50% of yellow banding cost
Footway DRC
Footway Network
Step 1
Step 2
Step 3
Hierarchy Group 1
Hierarchy Group 2
Hierarchy Group 3
Construction
Construction
Construction
Construction
Construction
Construction
Type 1
Type 2
Type 1
Type 2
Type 1
Type 2
m2
m2
m2
m2
m2
m2
% Area Red
% Area Red
% Area Red
% Area Red
% Area Red
% Area Red
% Area Amber
% Area Amber
% Area Amber
% Area Amber
% Area Amber
% Area Amber
% Area Yellow
% Area Yellow
% Area Yellow
% Area Yellow
% Area Yellow
% Area Yellow
% Area Green
% Area Green
% Area Green
% Area Green
% Area Green
% Area Green
Step 4: Evaluate a typical treatment type for each condition band
Step 5: Calculate a typical cost for each treatment type for each condition band
Footway Condition Bands
Condition Band
Required Treatment
RED
Structural
AMBER
Resurfacing
YELLOW
Surface or localised
GREEN
None
Footway DRC
∑ Green x Appropriate Rate
∑ Yellow x Appropriate Rate
∑ Amber x Appropriate Rate
∑ Red x Appropriate Rate
(i.e. applicable treatment cost for band)
(i.e. applicable treatment cost for band)
(i.e. applicable treatment cost for band)
(i.e. applicable treatment cost for band)
∑ = Accumulated Depreciation
i.e. how much of the asset has used up
GRC – Accumulated Depreciation = DRC
Footway DRC
• DRC is calculated by rating each footway section and
applying a set unit cost.
Condition
Total area within
footway category
Cost of Treatment
Cost
Bitmac
Flag
Bitmac
Flag
Bitmac
Flag
Bitmac
Flag
Green
10%
0%
110,000
35,000
£8.10
£4.50
£891k
£158k
Yellow
35%
2%
3,900,000
215,000
£16.20
£9.00
£63.2m
£2m
Amber
25%
3%
2,750,000
283,000
£34.25
£42.00
£94.2m
£11.9m
Red
20%
5%
2,700,000
795,000
£54.00
£60.00
£145.8
m
£47.7
• Total accumulated depreciation for F/W = £366,000,000
• Therefore the DRC = GRC - £366m
F/W Annual Depreciation
• This value is based upon the F/W LCP which is
similar to the C/W example as previously shown.
• The LCP needs to develop a method to
determine the most effective way of maintaining
the footway asset.
[
Unit Rate / m
AD =
for all treatments within the lifecycle]× [ Area ]
Number of years in the lifecycle
2
Footways DRC: The Future?
• Use of default footway width values not
allowed from 2011 / 2012
• Authorities expected to start collecting
carriageway age data as a basis for
calculating DRC – need to start
recording this as and when capital
work is undertaken
Impairment
Impairment: General
• Reduction in net value of an asset due to
sudden or unforeseen decrease in previously
measured condition and/or performance that is
not accounted for through depreciation, e.g.,
– Unanticipated early replacement
– Catastrophic flooding, landslide, earthquake or other
adverse weather events
• If you are undertaking your calculations at year
end anyway, impairment may be limited
• Also includes temporary but long term loss of an
asset, e.g., long term bridge or road closure
Lighting, TMS, Barriers etc
• Experience may tell you to expect a
certain number to be damaged or
destroyed by external events each year
• Could build this into life cycle plans
• If actual experience differs from
expectation then impairment would be
needed
Carriageways
• As depreciation is based on condition, difficult to
distinguish between depreciation and impairment
• Therefore not likely to be a major factor
• If your allowance for damage to underlying layers proved
to be insufficient then could be some impairment here
• You could make allowance with your life cycle plan for a
certain frequency of sever weather events, therefore
allowing for this within your depreciation calculation
• If actual experience differs from expectation then
impairment would be needed
Footways
• As depreciation is based on condition,
difficult to distinguish between
depreciation and impairment
• Therefore not likely to be a major factor
• If your allowance for damage to underlying
layers proved to be insufficient then could
be some impairment here
QUESTIONS?