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Total Cost Management. Dr. Nick J. Lavingia, P.E. Chevron Project Management Consultant APEGGA Annual Conference, Calgary April 26-27, 2007. Dr. Nick J. Lavingia, P.E. Project Management Consultant Chevron.

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total cost management

Total Cost Management

Dr. Nick J. Lavingia, P.E.

Chevron

Project Management Consultant

APEGGA Annual Conference, Calgary

April 26-27, 2007

Nick Lavingia

dr nick j lavingia p e project management consultant chevron
Dr. Nick J. Lavingia, P.E.Project Management ConsultantChevron

Nick has over 30 years of Global Project Engineering, Management, Consulting and Training experience in the Energy industry. As a Project Management Consultant at Chevron, he provides Consultation and Training to Project Professionals worldwide.

Nick has a B.S. and M.S. in Chemical & Petroleum-Refining Engineering and a Ph.D. in Engineering Economics & Management from the Colorado School of Mines. He is a registered Professional Chemical Engineer in the State of California.

Nick is a member of Project Management subcommittee for Athabasca Oil Sands expansion project. He has published and presented many papers at technical organizations and is a recipient of industry award from Pathfinder for outstanding Contribution to the advancement of Project Management Technology and Chevron Chairman’s award for implementing Value Engineering throughout the corporation.

Nick Lavingia

agenda
Agenda

Total Cost Management:

  • Economic Analysis
  • Cost Estimating
  • Planning / Scheduling
  • Benchmarking
  • Contracting / Procurement
  • Performance Measurement
  • Cost Control / Forecasting
  • Progress Reporting
  • Finance / Audit

Nick Lavingia

slide4

$

$

D

AFE

D

D

PFD

D

P&ID

D

EST

EST

Total Cost Management

Phase 1

IDENTIFY & Assess

Opportunities

Phase 2

SELECT from

Alternatives

Phase 3

DEVELOP Preferred Alternative

Phase 4

EXECUTE

(Detail EPC)

Phase 5

OPERATE & Evaluate

  • Economic Analysis
  • (NPV, ROR, Payout)
  • Cost Estimating
  • (Conceptual)
  • Planning/Scheduling
  • (Milestone)
  • Benchmarking
  • (Cost / Capacity)

(Definitive)

(Cost Collection / Analysis)

(Funding +/- 10% Accuracy)

(CPM Bar Chart)

(CPM Resource Loaded)

(Monitor & Update)

(Pre-Funding Assessment)

(Post-Project Assessment)

(Set Pacesetter Target)

  • Contracting/Procurement
  • (Strategy)
  • Cost Control/Forecasting
  • (WBS)
  • Progress reporting
  • Finance/Audit

(Pre-Qualification)

(Award / Monitor)

(Closeout)

Performance Measurement

(Establish Progress Payments)

(Earned Value)

(Establish Cost Accounts & Budgets)

(Trend / Forecast)

(Capital versus Expense)

(Asset Accounting)

Legend: AFE = Appropriation for Expenditure NPV = Net Present Value PFD = Process Flow Diagram

D = Decision Point ROR = Rate of Return P&ID = Piping & Instrumentation Diagram

EPC = Engineer, Procure & Construct CPM = Critical Path Method WBS = Work Breakdown Structure

Nick Lavingia

slide5

Safety is an underlying value!

  • Safety is the foundation on which we build projects & conduct our business:
    • Technology selection
    • Facility layout
    • Detailed design / procurement
    • Construction
    • Commissioning & start-up
    • Ongoing operation
  • We manage safety as a fundamental part of conducting our business

Cost

Schedule

Quality

Safety

Tradeoff Between Cost, Schedule & Quality

Nick Lavingia

economic analysis

Economic Analysis

Nick Lavingia

profitability criteria
Profitability Criteria

Net Present Value (NPV)…“Show Me The Money”

Definition:

  • Sum of the Net Cash Flow discounted to time zero using a discount rate

Benefits:

  • Incorporates time value of money ; easy to understand; recognizes magnitude of profit
  • Can be used for screening and ranking

Disadvantages:

  • Independent of the size of the cash flows

Nick Lavingia

profitability criteria8
Profitability Criteria

Rate Of Return (ROR)…“Interest Rate”

Definition:

  • Discount rate which equates the sum of the Net Cash Flow after tax to zero

Benefits:

  • Incorporates time value of money
  • Easy to understand
  • Easy to compare with the cost of capital

Disadvantages:

  • Independent of the size of the cash flows
  • Can be difficult to determine
  • Assumes reinvestment at same rate

Nick Lavingia

profitability criteria9
Profitability Criteria

Payout… “Time The Money Is Hanging Out There”

Definition:

  • Time for Cumulative Net Cash Flow after tax = Investment

Benefits:

  • Simple
  • Indicator of investment risk

Disadvantages:

  • Ignores time value of money
  • No indication of what happens after payout

Nick Lavingia

profitability criteria10
Profitability Criteria

Discounted Profitability Index (DPI)…“Bang For The Buck”

Definition:

  • DPI = 1 + (NPV of Net Cash Flow / NPV of Investment)

Benefits:

  • Accounts for the relative size of the cash flows
  • Used for screening / ranking
  • Recognizes magnitude of profits

Disadvantages:

  • Does not give as good an indication of sensitivity to additional investment as NPV

Nick Lavingia

cost estimating

Cost Estimating

Nick Lavingia

what is a cost estimate

}

  • Base Estimate
        • +
  • Contingency

Total Cost Estimate

  • Accuracy around the total
What is a Cost Estimate?
  • Realistic representation of final project cost at any stage of project development to meet a specific project objective
  • Basic Components:

Nick Lavingia

quality of estimate
Quality of Estimate

Nick Lavingia

estimate methods
Estimate Methods
  • Phase 1 Estimate--Cost/Capacity curves
  • Phase 2 Estimate--Factored estimate based on major equipment costs
  • Phase 3 Estimate--Detail estimate based on bids for major equipment and bulk takeoffs

Nick Lavingia

estimating contingency determination

Evaluate Alternative

Develop Detailed Design Construction Startup

Conceptual

Variance

Contingency

Base Estimate

Estimating & Contingency Determination

Phase Phase Phase

1 2 3

+/- 50% +/- 25% +/-10%

Estimated Cost

Final Actual Cost

1.0

Nick Lavingia

slide16

Contingency

C

O

N

T

Frequency

I

N

of

G

E

Occurrence

N

C

Y

Minimum

Maximum

$0.8

$1.4

$1.0Million

Cost

Cost

(-20%)

(+40%)

50/50 Value

Most

MEDIAN

Likely

Value

MODE

Nick Lavingia

cost estimate confidence

90 % Chance that

cost will not be exceeded

90/10

Equal Chance of cost

exceeding or being lower

50/50

Contingency

Base

Allowances

90 % Chance that

cost will be exceeded

10/90

Identified

Scope

Cost Estimate Confidence

Nick Lavingia

slide18

50%

10%

90%

COST

50%

10%

90%

COST

50%

10%

90%

COST

Evolution of Estimate Accuracy

  • PHASE 1
  • IDENTIFY
  • Minimal Engineering
  • Low definition detail
  • Wide accuracy
  • PHASE 2
  • SELECT
  • More Engineering
  • More Definition
  • Moderate accuracy
  • PHASE 3
  • DEVELOP (AFE)
  • Adequate FEL (15-30% Engineering)
  • Well defined
  • +/- 10% accuracy

Nick Lavingia

project time management scheduling
Project Time Management - Scheduling

Project Time Management includes the processes required to ensure timely completion of the project:

  • Activity Definition - identifying the specific activities that must be performed to produce the various project deliverables
  • Activity Sequencing - identifying and documenting interactivity dependencies
  • Activity Duration Estimating - estimating the number of work periods which will be needed
  • Schedule Development - analyzing activity sequences, activity duration and resource requirements to create the project schedule
  • Schedule Control - controlling changes to the project schedule

Nick Lavingia

what is a plan
What Is A Plan?

METHODS

MEANS

LOGIC

IDEAS

A Plan Defines Activities Involved in a Project, Their Logical Sequence, and Their Inter-Relationship

Nick Lavingia

slide23

Appropriated

Value

Contingency or Float is Added to Estimates to Reduce the Risk of Overrun.

Estimates are inaccurate because they are predictions of future events and the amount of variation that will actually occur is unknown.

Cost Estimate Probability Analysis

150

145

140

135

130

Cost ($millions)

125

120

115

Cost w/o contingency

110

Schedule Probability Analysis

105

28

100

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

27

Appropriated

Value

26

Probability

25

Schedule (months)

24

23

Base Schedule

22

21

20

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Probability

Nick Lavingia

current trends in contracting procurement
Current Trends in Contracting & Procurement
  • Services
  • Contractor capacity is decreasing
  • Craft workforce shortage
  • Labor rates increasing
  • Materials & Equipment
  • Lead times are increasing
  • Prices are increasing
  • Inventories are decreasing
  • Material shortages
  • Marketplace
  • Marketplace is strong
  • Global mega projects
  • Suppliers have choices
  • Fabrication
  • Shop loading is high
  • Pricing is volatile

Nick Lavingia

what can buyers do
What Can Buyers Do?
  • Demand Planning
  • Plan requirements well in advance
  • Aggregate demand
  • Leverage volume
  • Market Intelligence
  • Use market data to mitigate cost increases
  • Monitor supply/demand
  • Investigate new market entrants
  • Commercial Considerations
  • Have and stick to Strategy
  • Tie cost increases (future decreases) to major underlying cost components
  • Leverage volume & spend
  • Lengthen term of agreement
  • Define work scope & manage contractors
  • Supplier Relationships
  • Exploit long term relationships
  • Qualify additional suppliers
  • Don’t let supplier know you are desperate

Nick Lavingia

the contracting process
The Contracting Process

Assess Contracting Opportunities

Develop & Review Alternative Contracting Strategies

Pre-qualification

Bidding/Negotiating

Evaluation and Agreement

Execution of Contract

Administration

Nick Lavingia

types of contracts

Cost

Reimbursable

Guaranteed

Maximum

Unit

Owner’s

Price

Fixed

Cost

Price

Risk

Owner’s Control

Types of Contracts

Nick Lavingia

selection of contracting strategy
Selection of Contracting Strategy

Item

Lump Sum

Reimbursable

Scope Definition*

Market Condition

Owner Participation

Owner Control

Owner Risk

Poor

Busy

High

Tight

High

Good

Slow

Low

Minimum

Low

* Do not award lump sum contracts without good scope definition.

Nick Lavingia

preferred contracting strategy

Utilities

Work Facilities

Process Units

Offsites

No. 1

No. 2

No. 3

Project Management

Owner

Management Support

Consultants or Contractors

Proprietary Technology

Owner / Licensor

Basic Engineering Package

Detailed Engineering

Procurement

Reimbursable Cost

Construction Management

Construction

Construction Contractors--Lump Sum

Commissioning/Start-up

Owner

Preferred Contracting Strategy

Nick Lavingia

project control cycle establish plan

Physical

Progress

Cost Variance

Actual Hours

Schedule

Variance

Actual Costs

Productivity

Cost Summary

Forecasts

Correct

Deviations

Performance Curves

Schedule Status

Trends

Project Control Cycle - Establish Plan

Project Objectives

Scope

Establish Plan

Definition

AFE

Contracting Plan

Estimate

Control Budgets

Work to Plan

WBS

Schedules

Measure

Performance

Evaluate vs.

Plan

Nick Lavingia

performance measurement33

EARNED HOURS

PERFORMANCE =

ACTUAL HOURS

P

E

R

F

O

R

M

A

N

C

E

GOOD

TIME

1.0

POOR

Performance Measurement

Nick Lavingia

cost and schedule performance curves
Cost and Schedule Performance Curves

Budgeted

SV = Scheduled Variance

CV = Cost Variance

DT = Time Variance

}

SV

$ or Work Hours

}

CV

Earned

Actual

DT

Time

Nick Lavingia

costing system to support cost control

Breakdown of Estimated Costs Using the Standard Code of Accounts

Do Some Work

Take Corrective Action

Account for Workhours

Account for Costs

Measure Progress

Summarize Actual Costs Vs. Progress and Compare to Budget

Identify Accounts With Major Variance

Accumulate Cost at Project Completion

Include in Historical Estimating Data Base If Appropriate

Costing System to Support Cost Control

Nick Lavingia

cost control system
Cost Control System
  • COMMITMENTS
  • Purchase Orders and Supplements
  • Contracts and Change Orders
  • Owner Costs

EXPENDITURES

TRENDS

BUDGETS

Spreadsheet

or

Database

  • COST REPORTS
  • Summary
  • Detail

TREND LOG

Purchase Order Log CONTRACTS

  • Status Summary
  • Change Log

Nick Lavingia

progress reporting

Progress Reporting

Nick Lavingia

slide41

3000 – Budget at Completion (BAC)

Date Now

2000 – Actual Cost (AC)

1600 – Planned Value (PV)

1200 – Earned Value (EV)

Nick Lavingia

progress report no 3
Progress Report No. 3

1. Cost Variance (CV) = Earned Value (EV) – Actual Cost (AC)

CV = 1200 - 2000 = - 800

2. Schedule Variance (SV) = Earned Value (EV) – Planned Value (PV)

SV = 1200 - 1600= - 400

3. Cost Performance Index (CPI) = Earned Value (EV) / Actual Cost (AC)

CPI = 1200 / 2000 = 0.6

4. Schedule Performance Index (SPI) = Earned Value (EV) / Planned Value (PV)

SPI = 1200 / 1600 = 0.75

5. Estimate To Complete (ETC) = [Budget At Completion (BAC) – Earned Value (EV)] / Cost Performance Index (CPI)

ETC = (3000 - 1200) / 0.6 = 3000

6. Estimate At Completion (EAC) = Actual Cost (AC) + Estimate To Complete (ETC)

EAC = 2000 + 3000 = 5000

Nick Lavingia

summary
Summary

Structured Project Development & Execution Process and Total Cost Management can help achieve World-Class Project Performance:

  • Better
  • Cheaper
  • Faster
  • Safer

PROJECTS

Nick Lavingia