Legal Corner: Are Your Assets Protected? A Multi-Pronged Approach to Asset Preservation

treatment plant
By Teno A. West & Jillian Jagling

A method for public water system asset preservation is a multi-pronged approach, backed by the goal of ensuring that the assets are returned to the owner in good condition, working order and repair, such that the owner is not required to undertake a significant overhaul or make immediate replacements in order to continue to provide reasonably priced and efficient services.

Long-term operation, maintenance, repair and replacement agreements are a means to establish such a multi-pronged approach and achieve that goal, by ensuring that money will be spent on asset preservation over the course of 20-plus years and that all required maintenance, repairs and replacements are appropriately performed and monitored.

Water system assets must be regularly maintained, repaired and replaced in order to preserve their long-term reliability, durability and efficiency. If a long-term agreement is appropriately performed, monitored and administered, those maintenance, repairs and replacements will be kept up to date and the owner will not have to pay the next contractor to complete the work it has already paid the incumbent to do.

One key to asset preservation is the development of a repair and replacement budget that can be modified throughout the term, as necessary. The operator will be required to report on the budget monthly, which allows for real-time monitoring of required maintenance, repair and replacement obligations. If money is not being spent, the owner can spot it early and determine why.

In addition to the budget, another aspect of asset preservation is a maintenance, repair and replacement plan that establishes the minimum standards for ongoing maintenance, repair, and replacement obligations. The plan assures that no material deferred or substandard maintenance, repair, and replacement occurs. The plan also establishes clarity amongst the parties with regard to what is expected. The plan is oftentimes presented as part of the proposal during the procurement process, further developed as any new assets come on line, and monitored throughout the term. In addition to adhering to the plan, the operator must perform its obligations in compliance with applicable law, prudent industry practice, and specific agreed upon performance standards.

Reporting and auditing are also crucial to asset preservation. However, it is not only reporting that is crucial – the owner’s review and analysis of the reports is equally crucial. The operator will provide monthly and annual operations and maintenance reports that include a comprehensive performance evaluation of the assets, enabling the owner to evaluate the administrative, operational, and maintenance practices employed by the operator. Additionally, in long-term contracts, it is also important to conduct a full-scale review every full third contract year to audit/inspect the state of repair, working condition, and performance capability of the assets.

Finally, owners can also implement an objective measurement to test whether the operator is performing its obligations and properly preserving the assets. To do this, the owner must evaluate the condition of the assets at commencement, periodically check on that condition throughout the term, evaluate the condition upon termination of the agreement and compare the condition from the beginning to the current condition.

To evaluate the condition at the beginning and end of the term, the owner can calculate and utilize the weighted average rebuild/replacement useful life. For example, a formula may indicate that the actual weighted average rebuild/replacement useful life of the assets at the end of the term must be equal to or greater than [some percentage – e.g., 92.5 percent] of the projected weighted average rebuild/replacement useful life at the beginning of the term. While this can allow for an objective assessment, such formulas can also be complicated and therefore must be clear to all parties, using example calculations where necessary for clarification.

Upon termination of the long-term agreement, the assets and structures must meet certain standards. For example, assets must be returned to the owner at the end of the term in a condition which does not require the owner to undertake a significant overhaul or make immediate replacements in order to continue to provide reasonably priced and efficient water treatment services. And, structures must be returned in good condition, working order and repair, taking into account their condition and state of repair on the commencement and with ordinary wear and tear excepted.

In sum, best practices in water system asset preservation may consist of utilizing a long-term operation, maintenance, repair and replacement agreement to establish a multi-pronged approach which includes, a repair and replacement budget; an operation, maintenance, repair and replacement plan; reporting, monitoring and auditing; and a formula for objectively measuring the condition of assets. This multi-pronged approach can help owners ensure that money is spent on their assets, but that the owner does not pay for the same repairs more than once.

Teno West is the managing partner of West Group Law PLLC. He practices in the areas of public contracts; government law and procurement; project planning, financing and delivery; infrastructure development; intergovernmental relations; and water, wastewater and solid waste law.

Jillian Jagling is senior counsel with West Group Law PLLC. She represents public entities in connection with general municipal law and the construction, improvement and operation of all types of public facilities, including water and wastewater facilities, solid waste management facilities and other public projects and facilities.

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