Issue Identification and Appraisal
Last week blog was the first part in a series of three where the development of the Total Contractors Construction Costs was put forward last week. Figure 1 below comes from the GPCCAR Module 08-7 and as mentioned last week, is based on the US Department of Transportation, Federal Highway Agency’s document “Work Zone Road User Costs Concepts and Applications” figure 15.
Figure 1 – Relationship between project cost and duration
This week’s Blog is going determine the costs the cumulative owners engineering, project overhead and lost opportunity cost curve (black line). Therefore, the problem statement for this week’s blog is, “How is the Cumulative owners curve developed?”
As this is a three-blog posting, each one is examining a different curve on the chart:
- 1. Total Contractor’s Construction Costs
- 2. Cumulative Owners Engineering, Project Overhead and Lost Opportunity Costs
- 3. Total Cumulative Project Costs
The first curve (Blog 18) had many alternatives, however this week’s curve is straightforward so there are no feasible alternatives, the same list of items would appear on this line each time, costs may be different but the list remains static, these are:
- • Owner’s Project Management Team (PMT) monthly costs
- • Owner’s Project Office monthly costs
- • Auxiliary Costs, in this instance there is a cost for land purchases
- • Owner’s opportunity costs.
There is no fancy formula this time, just develop the cost estimates values for each item and determine the period and cumulative monthly costs from month 1 to the last month.
Develop the Outcomes for each
The cost estimate has already been developed and the following figure 2 shows the build-up of figures.
Figure 2 – Development of Owners Overhead Costs & Opportunity Cost
The Overheads costs come from the estimate, while the opportunity costs are derived from the perceived crude oil throughput (in barrels) with a production ramp-up, production month-01 averaging 50,000bbl/day, month-02 100,000bbl/day and month-03 onwards 200,000bbl/day. These quantities are costed at the nett revenue of a barrel of oil $35.00 (basis: Market value = $50.00 – All-in Production costs $15.00 = $35.00).
A conceptual project is being used to model the Owner and Contractor curves, the following is the project criteria:
An Oil and Gas facility Project consisting of 200,000 barrel per day processing plant, a fifty-kilometre pipeline, a near-shore storage tank to hold twenty days’ inventory along with a tanker loading facility. The project is based on a tie-in at the ‘fence-line’ where the feed-stock for the processing facility is delivered, therefor the cost estimate excludes any well-pad facility and transit flowlines. Each project facility is based on an Engineering, Procurement and Construction (EPC) philosophy for design, procure and construct of each portion. Also, included in the estimate along with the EPC portion, are costs for land purchase for the facilities, and all the associated owner’s costs for the Project Management Team (PMT) and offices. Overall Cost Estimate is $2.5B (Billion) with $1.8B being the Contractors portion.
The criteria selection is based on the develop outcomes section above, and as there are 50 data-points too large to show on one line in the blog, so the key months are shown; the start of the project, the point where the opportunity costs kick in, and the costs after the project completion month passes to show that the costs keep increasing.
Figure 3 – Selected Cumulative Owners Overhead Costs & Opportunity Cost Data-points
Analysis and Comparison of the Alternatives
Using the criteria information, the following curve is generated.
Figure 4 – Owners Cumulative O/H and Opportunity Curve
The curve starts with a nice steady slope until month-37 when the first opportunity cost appears (50,000 bbl/day), then (100,000bbl/day), and finally the full through-put of 200,000bbl/day from month-39 onward, all costs then go through until month-50 in this model.
Selection of Preferred Alternative
For this curve/line there is no alternative available, and as it’s part of a three-blog posting which ends with the development of the Total Cumulative Project Costs along with analysis and proposed incentive/disincentives.
Monitoring Post Evaluation Performance
As this is part of a series of three blogs, until blog 20 is complete, the post evaluation performance cannot be performed until the full model is completed.
- • Mallela, J., & Sadasivam, S. (2011). Figure 15 – Work zone road user costs: Concepts and applications : final report. U.S. Department of Transportation, Federal Highway Administration Office of Operations (HOP).
- • Guild of Project Controls. (n.d.). 08.7.3 – Cost vs Time Trade Offs (Optimization) – Guild of project controls compendium and reference (CaR) | Project controls – planning, scheduling, cost management and forensic analysis (Planning Planet). Retrieved September 5, 2017 from http://www.planningplanet.com/guild/gpccar/validate-the-time-and-cost-trade-offs
- • Investopedia. (2017). Opportunity cost. Retrieved from http://www.investopedia.com/terms/o/opportunitycost.asp