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Cost Estimating Post Hurricanes: A Review of the Challenges Karl D. Bartholomew, P.E., ASA

Cost Estimating Post Hurricanes: A Review of the Challenges Karl D. Bartholomew, P.E., ASA Director. September 2006. Process Industries Cost Escalation. A review of pre-hurricane construction How did the hurricanes impact costs? What’s happening now?

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Cost Estimating Post Hurricanes: A Review of the Challenges Karl D. Bartholomew, P.E., ASA

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  1. Cost Estimating Post Hurricanes: A Review of the Challenges Karl D. Bartholomew, P.E., ASA Director September 2006

  2. Process Industries Cost Escalation • A review of pre-hurricane construction • How did the hurricanes impact costs? • What’s happening now? • Were Hurricanes Katrina and Rita responsible for cost escalation for onshore process facilities today? • Lessons for the future: levels of cost estimate accuracy

  3. What was happening pre-hurricane? • Materials and resources were already being strained • Number of announced projects in pipeline for engineering and front-end work in refining and petrochemicals ($95 B in North American refining alone) • Rising costs not limited to just U.S. Gulf Coast • Cost overruns in Alberta Oil Sands; Middle East petrochemicals • Refinery construction cost indices up 11% Jan 2004 vs. Jan 2006

  4. What was happening pre-hurricane? • Bulk commodities, steel prices were up • In large part to China, India, U.S. • Freight costs much higher due to higher oil prices • Cost escalation pressures were already in place before Katrina and Rita

  5. The hurricanes hit – how did that impact costs? • Immediate draw on commodity resources • Lumber, cement, drywall, cleaning materials • Onshore process operations impacted by both water and wind damage • Costs incurred to restore process operations: • Debris cleanup • Inspection & replacement of damaged rotating equipment, electrical, instrumentation • Inspection and repair of steel (corrosion) • Repair of damaged vessels, insulation

  6. Cost Impact of hurricanes • Labor market saw biggest change • Quick rise in bare labor rates • Living costs • Added benefits (per diems) • 2 stories of hurricane impact: • Barber quits cutting hair, buys dump truck, contracts with FEMA at 000s/week to haul debris • Laborers changing job sites if offers catered meals vs. box lunches

  7. More hurricane impact • Draw on specialty craft labor from Corpus Christi up to Midwest • Insulators, scaffolding see 2X increase in rates • Contractors throwing $ at the problem trying to fix everything for everyone • Another story – refiner’s concern wasn’t getting scaffolding up, but getting it down if another storm hit

  8. Some costs were unexpected • Extended living costs over a long time was something nobody anticipated • Some vendors used warranty issues to force full replacements even if the item worked • Rotating equipment, control systems • Facilities that didn’t have up to date drawings & specs of what was actually at their plants incurred substantial engineering & design costs • Some facilities in better shape on this due to OSHA requirements • Some facilities took this as opportune time to improve/upgrade their plants (“urban renewal”) • Has led to some contract coverage issues

  9. Outlook for next year • Most E&C companies have full shops • due to major expansion wave underway in refining • Steel & fabrication shops essentially full • Bidding war for experienced staff • Labor rates continue to escalate but at lower rate

  10. Where are we today? • Biggest impact we see is on delivery schedules • Lead times for major forged reactor vessels have gone from 24 months to 40+ months (for high pressure processes) • Engineering front end design schedules increasing by 2X • Hurricanes gave us a new ‘set point’ which appears to be stabilizing at much higher labor rates • Expectation that rate growth will flatten before resuming typical growth

  11. Equipment Lead Time

  12. Equipment Escalation

  13. Were the hurricanes the main culprits? • For the onshore process industry – NO • Cost pressures already building up • Katrina/Rita kicked down the door of building escalation not only in the Gulf Coast but has created impacts around the world, particularly for experienced engineering, construction and operating resources. • Cost pressures will continue for next several years, but not at the extreme post-hurricane growth

  14. Accuracy of Cost Estimates • Accuracy of estimate is directly related to level of effort (time) spent • Association of Advancement of Cost Engineering (AACE) provides guidelines for accuracy vs. work effort $ $$ $$$ $$$$ $$$$$$$$

  15. Level of Work for Cost Estimates

  16. Work effort for +/- 20%-30% • 5%-10% of engineering design is complete • For $100 million project ~ $0.8-1.5 million • Factored estimate based on major equipment • Vendor verified major equipment prices • Preliminary allowances for offsites (utilities, infrastructure) • Historical % for professional services, indirects

  17. Cost Estimate Deliverables S = Started P = Preliminary C = Complete The AACE International Recommended Practice for Cost Estimate Classification, Joint Cost Management Societies Proceedings, Larry R. Dysert, CCC

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