PSE Consulting, Design & Engineering

JUSTIFY COSTS AND VALUE ENGINEERING

TECHNICAL BULLETIN #4

In the first two Technical Bulletins we recommended addressing the physical security elements by making a tabulation of real property assets, current and possible physical security assets, and existing electronic and possible future assets. This provided a tabulation from which to base the second step, Threat and Vulnerability Analysis, in order to match needs as described in Technical Bulletin 2. Substations can then be tiered into most likely targets of attack and most vulnerable.

Benefits

In Technical Bulletin 3, Benefits and Features, for each technology, system, feature, design aspect, or promoted convenience, a direct benefit to the transmission operator can be associated on either a direct basis or a weighted basis as a measure of its performance. Each physical security attribute, electronic security attribute, or social attribute (as in deterrence or other social modes) can be directly listed as benefits that are associated with gaining a rung up the ladder of security with its associated investment. In no particular order are listed benefits of good security systems and their ability to monitor, reduce risk, or provide/communicate threatening activities in real time:

• Detection

• Environmental

• Delay

• Infrastructure

• Energy Consumption

• Sustainability

• Deterrence

• Integration Capability

• Protection from Attack

• Communications (two-way)

Once a tabular formulation matching Threat and Vulnerability with the needed benefits, including possible future technology of systems is completed, cost and value engineering must both be applied to the possible solutions. Cost of installation, testing, and ability to efficiently maintain are clear and sustainable benefits. Cost has several elements and will now be reviewed. Costs include upfront capital costs, the cost of borrowing or investing money itself, operational cost, installation cost, and sustainability costs such as monitoring costs, communication transmission cost, daily testing, licensing fees, maintenance, and overhaul life cycle cost (the cost to remove).

Likewise, value engineering will be reviewed to associate less expensive or less esoteric technologies; ones which are sustainable and provide long‑term remedies to protection of assets for transmission operators.

As any security executive well knows, asking for millions can be a considerable corporate endeavor. Showing Return on Investment (ROI) is especially important. The security team needs to have confidence, perhaps supported by third-party efforts, to substantiate the performance benefits and lowest cost per security dollar spent over the life of the system; all while providing the anticipated deterrence and prevention measures acceptable based on threats and risk.

Are you a Security Entrepreneur?

Today, in the spirit of the c-suite, there is no greater emphasis on the security department being entrepreneurial than at any time in the past. While manufacturing departments, logistics departments, human resources, and accounting have all become entrepreneurial over decades with respect to the framework of the organization and their profit-centered mandate, the past ten years have shown remarkable expansion of the entrepreneurial theme within the security department.

Important in a security program‑managed operation is cost accounting; understanding the benefit to cost ratio, life cycle costs, maintenance costs, and more important concepts such as break-even points regarding proprietary versus outsourced alarm monitoring – when it will cost more to outsource services.

An entrepreneurial-based security program responsible to the shareholders and executives at large implements the concept of Risk of Interruption versus Return on Investment. Why? Because sustainability at the lowest continued responsible maintenance and operation cost should be your targeted goal.

This will not be an ordinary Technical Bulletin. These concepts reflect engineering economics in direct relation to security engineering and detailed security program requirements.

ROI versus ROI

A better concept in the security world is to think of Return on Investment as an offsetting value – what you will do to offset a possible occurrence. For that reason, we have modeled Return on Investment as an inverse function of Risk of Interruption, also known as ROI. The concept is simple.

For the smallest investment in protection, whether operations or equipment, the Risk of Interruption will be high. Thus, for a high Risk of Interruption, you need a low Return on Investment. Mathematically, it is shown as follows:

Conversely, the highest Return on Investment reflects the smallest risk associated with the likelihood of interruption. For the highest Return on Investment, you require the lowest Risk of Interruption.

Benefit to Cost Ratio

The Benefit to Cost Ratio identifies that for increased costs you will assume increased benefit. But, as anyone who has ever bought a toaster oven, a coffee maker, a refrigerator, a washing machine, a dryer, or especially an automobile, “It ain’t necessarily so.”

There are three benefit rules to Benefit to Cost Ratio. The first is that as a given cost is increased, the benefit will ideally reach to infinity; as the best benefits reflect lower than expected costs. This is not realistic. This can be seen in Graph 2 below, as are the next two examples.

What is expected is at least that the Benefit to Cost Ratio will be linear in that for a given cost there will be an equal increase in benefit. The emphasis is on the word expected. In actuality, for any given cost to increase, there is a lessening of the potential benefit, flattening out as costs increase. For certain systems this occurs faster, requiring much greater cost for the actual benefit. Think of radar versus vibration detectors. It all depends on what you’re searching for and how much money you’ve budgeted, while balancing the predicted obsolescence.

Cost Valuation Guidelines

U.S. Army’s Field Manual 3-19.30 reflects on cost considerations for a CCTV system. Subsection 6‑158 under Cost Considerations, states:

“The cost of a CCTV system is usually quoted as cost-per-assessment zone. When estimating the total system cost, video-processor equipment costs, and the video transmission system’s costs must be included. Other potentially significant costs are outdoor lighting system upgrades and the site preparation required to support the CCTV cameras. The CCTV systems are expensive compared to other electronic security subsystems and should be specified with discretion.”

Considering this Field Manual was updated in 2001, it is reflective of the situation with video surveillance today, only more so with unexpected life cycle costs and contingencies. Let’s break down today’s video system in a remote location from a cost basis as our sample to understand a few more economic and budgetary philosophies for predicting five-year costs.

First, let’s think about the equipment that will be required for remote surveillance. Special cameras that are sensitive to IR and can withstand a wide variety of environmental threats from snow, ice, hail, wind, rain, sleet, fog, and other associated hazards, not to mention heat and sunlight – while requiring sensitivity for the lowest level light even from a distance. These are not your $492 cameras.

These cameras installed range from $1,500 to $15,000 each, depending on distance and whether it’s far field or near field (identified in past Technical Bulletins). Associated with the camera are licensing costs that may be per year or per analytic function. They may be individually licensed on a per year subscription basis or may be bulk licensed for all cameras on all the sites, depending on the system.

Licensing costs are determined by whether it’s hardware-based, software-based, or a hybrid, perhaps using the cameras themselves as servers using intelligence to demand downloads only as a reference file.

You can also have a balance between Wide Area Network broadband charges for downloads of high video bandwidth images in lieu of continuous frame recovery and added costs. Considering that over 99.95% of the time there are no alarms that need assessment, it may be wasteful to continuously send video that is unwarranted, but have it available if needed.

So, life cycle costs involve installation cost, camera cost, monitoring cost, initial software cost, and perhaps licensing cost – to keep the camera up‑to‑date in perpetuity. The ideal cost to maintain a system within generally acceptable accounting practice values is between 5% and 10% of the system’s value per year. Thus, for a $1 million system, it may cost between $50,000 and $100,000 per year on the lower end in the beginning years and on the upper end in more advanced years.

What is interesting in the surveillance marketplace in particular have been the licensing costs of software-driven, high-bandwidth solutions that provide remote accessibility. These systems have as much as an 18% licensing fee for the storage and software based on the number of cameras involved. In five years, you’ve basically paid for a new system. Because it is software-based, the proprietary nature of the systems themselves and the integration requires you, in perpetuity, to maintain a contractual relationship.

In a sense, you don’t own the equipment anymore. It’s as if you purchased a car complete with tires, engine, and body, but do not have the key to operate it. If you do not pay the licensing charges you risk potential program issues by not upgrading; being forced into “freezing the software.”

Intrusion Detection Costs

Referring back to the Army Field Manual in Section 6-7 under Item 6-22, the Manual states:

“The intrusion detection systems are normally deployed in a series of concentric layers.” (The Field Manual is referring to the PSP concept of layered security.)

The overall Pd (Probability of Detection) improves with each added layer of sensors. The layers (interior and exterior) should be functionally uniform; however, their overall effectiveness and cost are different. The exterior zones significantly differ from the interior zones due to the following considerations:

• The consistency of the probability of detection

• The probability of detection

• The cost per detection zone

• The number of zones

• The overall sensor coverage (on the site)

The Army Manual’s Table 6-3 (shown below) has been modified and updated to reflect newer technologies and more experience regarding costs. Note that newer technologies such as video with IR and heat detection, fence mounted fiber, buried fiber, and RF buried cable have all been added.

It is important to note that both ported cable and buried cable are systems that have abnormally high nuisance alarm rates and are generally not recommended in existing sites.

Life Cycle Cost

With our last example of the true cost of video surveillance, we can now model what a life cycle cost is – basically what costs the Department will incur over the lifetime of the system. Referring to the Life Cycle Cost graph at the bottom of this Technical Bulletin, you’ll see that the initial payment is either zero, if there is no bill until after mobilization, or up to one-third payment depending on the size of the project and the contractor involved. By the time 90% of the project payment has been completed, there is a general linear relationship of payments or a bump at the final payment.

At this point, payments steeply reduce, ideally to 5% to 10%. However, it is important to note two elements which conspire to increase life cycle cost. We discussed licensing costs. If the cost is at half per year the cost of the 90% bump, this will be indicative of paying for the original system cost once every two years. The cost of a “failure” is enormous and is identified in the graph as “runaway” life cycle cost. How does this occur?

Selecting systems, whether they be buried, fence mounted, ground mounted, image sensor type, 3‑dimensional volumetric, line of sight (LOS), or any other system, needs expert evaluation and experience that often only comes with a third party consultant who, after one year, may have seen a dozen installation types, perhaps 11 more than in‑house personnel.

Maintenance Costs

Maintenance cost versus time is relatively simple to model. The ideal versus the actual maintenance costs may significantly vary after a five- to ten-year period. From 10 to 20 years, the actual costs exponentially increase. This is shown in Graph 4 below. While the ideal maintenance costs only vary slightly above the 5% to 10% rule previously discussed, in actuality it can jump to 20% or 30% per year depending on the severity of the problem, the proprietary nature of the installation, or replacement costs for maintenance.

With our assumption of risk as security professionals, we must therefore also take into consideration the built infrastructure; everything we do on the site must be accounted for at disposal time. While project equipment may have a salvage value, salvage value for video surveillance equipment will probably be marginal at best. However, the salvage value of steel, conduit, and copper wire may be more than small. But the removal value could be substantial. Cost of concrete, cost of fence, cost of concertina wire, and cost of layers of perimeter boundary material all add up to substantial removal costs during upgrade, and thus, are part of the life cycle cost of the project.

Software and Communication Support Costs

Software and communication support costs are directly related to the integration complexity of the system. They give us a predicted software support cost family of curves whereupon each layer of technology added adds disproportionately to higher software and communication support costs. This is shown in Graph 5 below. The family of curves show that software and communication support costs for low integration complexity are “ideal or low” while projected costs increase with each curve – the top curve level shows an exponential increase to software and communication support costs for the highest of integration complexity. Thus, the predicted software support costs are much higher for higher integration complexity.

Proprietary versus Contracted Alarm Monitoring

The final discussion of cost and value engineering relates to how to value engineer a project and how to associate unknown conditions with projected costs. This is not magic. We will use an example of value engineering highlighting the cost of outsourced monitoring versus in‑house monitoring. Referring to Graph 6 below, proprietary alarm costs are compared to in-house costs. This mimics the life cycle cost that we saw in Graph 3. It shows minimal cost at the beginning with a bump at the 90% project payment period. At this time, maintenance costs reduce to 5% to 10%.

What if I, as the security director, made a decision to go with a fully contracted alarm monitoring service, paying for all wide-area services equipment and outsourced monitoring for alarm assessment? You will have a family of cost curves representing each competitor’s costs over the years. Depending on the cost of the contracted services, there will be a break-even point for these contracted services when they equal the cost of having the equipment in‑house.

So, at this break-even point, you’re paying more than you would have paid for the services in‑house and you do not own the equipment. Once coverage is stopped, you’re left with zero infrastructure, zero ownership, and zero control. A balance of what is owned versus obtained as a packaged service is the foundation of sustainability.

This is not to say that Video Software as a Service (VSaaS) is an example of poor direction. On the contrary, VSaaS is a complementary product to CCTV artillery that the security program director needs to identify and balance based on the Risk of Interruption of those services and the Return on Investment to the corporation.

The challenges of value engineering a project can only be attained by firms with a reputation for having direct experience with challenging environments, challenging monitoring obstacles, fixed budget opportunities, and appropriations that may be a “one off” investment by the utility for the next ten to 15 years.

Doing the proper Benefit to Cost Ratio, calculating the life cycle cost, and balancing Risk of Interruption with Return on Investment are important aspects of project management, reflecting on quality of project, installation methodologies, installation skills, and monitoring methods. These steps may be more important than any other phase of the project in mapping overall strategic and sustainable success. operators.

This CIP START Technical Bulletin was issued by Professional Systems Engineering, LLC and prepared by Jerry ‘Dutch’ Forstater, PE. Mr. Forstater is a Professional Electrical, Electronics, and Communications Engineer licensed in 12 states. The firm has provided independent consulting and security strategy, design, specification, and construction expertise for almost 30 years. He is a graduate of the ASIS International Security Management Program through University of Pennsylvania’s Wharton School of Business; he is a graduate of Worcester Polytechnic Institute, and has been providing significant corporate, utility, industrial, commercial, and related security and public safety programs since 1986. He is co-chair of ASIS International Philadelphia/Delaware Valley Chapter and Board Member of the International Association of Professional Security Consultants. PSE has provided significant physical security, electronic security, security lighting, and public safety 9-1-1/agency monitoring for law enforcement and corporate clients/agencies throughout the United States on installations that are critical to Homeland Security, infrastructure protection, and the public at large.

PSE

Return on Investment
Benefit to Cost Ratio
Lifecycle Cost
Time
Predicted Software Support Costs
Proprietary vs. Contract Alarm Monitoring
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Technical Bulletins

Technical Bulletin #1 - "Define the Assets"

Technical Bulletin #2 -"Identify Threats and Vulnerabilities"

Technical Bulletin #3 - Analyze Features and Benefits"

Technical Bulletin #4 -"Justify Costs and Value Engineering"

Technical Bulletin #5 -"Specify"

Technical Bulletin #6 -"Implement"

Technical Bulletin #7 -"Test and Confirm"

Technical Bulletin #8 -"Monitor (and Maintain)"

Technical Bulletin #9 -"CIP START Technical Bulletins Compendium"

Security & Communications Engineering