Contents n BASIC DEFINITIONS n COST PRICE MODULE

Contents n BASIC DEFINITIONS n COST PRICE MODULE (FOR CONSTRUCTION CONTRACTS) n COST ESTIMATING PROCESS & PROCEDURE n COST ESTIMATING CLASSIFICATION n COST ESTIMATING METHODOLOGIES n FACTORS AFFECTING COST ESTIMATING ACCURACY n CASE STUDIES 1

Basic Definitions CAPITAL COST ESTIMATE (CAPEX) n REPRESENTS THE TOTAL CAPITAL COST OF THE PROJECT, INCLUDING ENGINEERING, MATERIAL, CONSTRUCTION, AND MANAGEMENT COSTS. ALLOWANCES n USED TO REDUCE THE RISK OF OVERRUN DUE TO “KNOWN” UNCERTAINTIES = DESIGN GROWTH / DESIGN DEVELOPMENT = EXTRAORDINARY FREIGHT COST (AIR FREIGHT, SPECIAL CARGO. . . etc) = FORWARD ESCALATION = CUT / WASTE (BULK MATERIALS) CONTINGENCIES n USED TO REDUCE THE RISK OF OVERRUN DUE TO “POTENTIAL” UNCERTAINTIES = INCOMPLETE PROJECT DEFINITION = CURRENCY FLUCTUATION = ERRORS = DOES NOT COVER FORCE MAJEURE, SCOPE CHANGES, CLAIMS ETC. 2

Basic Definitions DIRECT COSTS n COSTS DIRECTLY ATTRIBUTED TO A JOB OR A PIECE OF PROJECT EQUIPMENT 3

Basic Definitions INDIRECT COSTS n THESE ARE OFTEN REFERRED TO AS “OVERHEAD” COSTS AND CANNOT EASILY BE ALLOCATED TO ONE JOB OR PROJECTS. n THE PROCESS OF RECOVERING OVERHEADS IS KNOWN AS “ ABSORPTION COSTING”. CLIENTS FOR LARGE CAPITAL PROJECTS ARE VERY INTERESTED IN PROPOSED OVERHEAD RATES, CHARGEABLE TO PROJECTS AND REQUIRED DETAILED OF HOW THE OVERHEADS ARE TO BE ALLOCATED. 4

Basic Definitions FIXED COSTS n COSTS ARE SAID TO BE FIXED WHEN THEY REMAIN UNCHANGED AND MUST CONTINUE TO BE INCURRED, EVEN THOUGH THE WORKLOAD FLUCTUATES, (EG. MANAGEMENT SALARIES , RENT INSURANCE…. ETC. 5

Basic Definitions VARIABLE COST n THESE ARE COSTS WHICH ARE INCURRED AT A RATE DEPENDING ON THE LEVEL OF THE WORK ACTIVITY. E. G - MATERIAL CONSUMABLES SPARE PARTS UTILITIES (POWER, WATER, SYSTEM) 6

Cost Price Modle COST DIRECT • • LABOUR MATERIAL COMPONENTS TOOLING + INDIRECT • • • + DESIGN MARKETING SALES ACCOUNTING PURCHASING MANAGEMENT WARRANTY LIABILITY ADMINISTRATION PROFIT • = PRICE MATCH INVESTMENT 7

Cost - Price Modle CONSTRUCTION EQUIP. DURATION (HOURS) X RATE $/HR X CONSUMABLE FACTOR + LABOR COST LABOR (MHRS) X $/HR X SUPERVISION FACTOR + MATERIAL COST = DIRECT COST = INDIRECT COST = TOTAL COST MATERIAL COST + DELIVERY COST + PURCHASING & INSPECTION COST TOTAL DIRECT COST OVERHEAD MOB. & DEMOB. , TEMPORARY FACILITIES , INSURANCE ADMINISTRATION, MANAGEMENT, ENGINEERING, …ETC COST X PROFIT FACTOR PRICE 8

Cost Estimating Process 1. 0 Cost Estimation Purposes n INITIAL COST INPUT FOR PROJECT IDENTIFICATION DOC. (PID) n INDICATIVE COST ESTIMATE FOR PLANNING ITEMS FOR BUSINESS PLAN n PERFORMANCE INDICATORS n BUDGET UPDATING/ REVISION n NEW BUDGET PROPOSALS n COUNTER CHECKING CONSULTANT COST ESTIMATE n REVIEW BIDDERS RATES n EVALUATE ALTERNATIVES / OPTIONS n n PROVIDE DATA FOR PROJECT SCHEDULING (ACTIVITY WEIGHTS, RESOURCE LEVELLING) 9

Cost Estimating Process 2. 0 Capital Cost Major Component DIRECT COST ENGINEERING • • Screening Studies Basic Engineering (FEED) Detailed Engineering Procurement Services MATERIAL • • • Major Equipment Bulk Material Freight & Transportation • • • Preliminaries (Mobilisation, Site Facilities, Site Running Costs) Civil, Mechanical, E&I Works etc. Pre-commissioning / Commissioning • • Owner Management Housing/Camp Fees Services INDIRECT COST CONSTRUCTION OWNER COST 10

Cost Estimating Process 3. 0 In-House Cost Estimate Customer Input / Request Review / Discuss • Scope of Work • Basis / Strategy • Exclusions • Estimate Methodology • Required Accuracy Develop Cost Estimate Review & Check Output Issue Estimate • Quality • Risks • Contingency Cost Data • • • Purchase Order Vendor Quotes Completed Projects Escalation Rates Construction Unit Rates • Cost Est. Software • Excel Worksheet Computer Tools 11

Cost Estimating Process 4. 0 Estimating Procedure 2 PREPARE ESTIMATING REQUIREMENTS 2 PLANNING THE ESTIMATE 2 STRUCTURE THE ESTIMATE 2 DEVELOPING CONTINGENCY 2 DOCUMENTING 2 REVIEW / ISSUE ESTIMATE 12

Cost Estimate Classification International Classification Practices AACE Classification Standard ANSI Standard Z 94. 0 AACE Pre-1972 Association Norwegian of Cost Project Engineers (UK) Management ACost. E Association (NFP) American Society of Professional Estimators (ASPE) INCREASING PROJECT DEFINITION Concession Estimate Class 5 Order of Magnitude Estimate -30/+50 Class 4 Class 3 Class 2 Class 1 Budget Estimate -15/+30 Definitive Estimate -5/+15 Order of Magnitude Estimate Order of Magnitude Exploration Estimate Class IV-30/+30 Feasibility Estimate Study Estimate Class III -20/+20 Authorization Estimate Preliminary Estimate Budget Estimate Class II-10/+10 Master Control Estimate Definitive Estimate Detailed Estimate Level 1 Level 2 Level 3 ADCO EMPD Classification Class 4 +40/-20% Screening / Feasibility Class 3 +30/-15% Conceptual / Prelim. Budget Class 2 +20/-10% Master Budget Level 4 Definitive Estimate Class I-5/+5 Current Control Estimate Level 5 Level 6 Class 1 +10/-5% Definitive / Control Budget Extracted from “AACE International Recommended Practices and Standards” 13

Estimating Classification 1. 0 Order of Magnitude 2 PREPARED BEFORE PROJECT STARTS 2 HAZY INFORMATION 2 DETAILS OF PROJECT YET TO BE DEVELOPED 2 USEFUL FOR QUICK SCREENING AND PLANNING DECISIONS O INTENDED ACCURACY + 35% 14

Estimating Classification 2. 0 Study Estimate 2 PREPARED DURING PROJECT STUDY AND SCREENING PHASE 2 BASED ON A GOOD OUTLINE PROJECT DEFINITION ë ë MAJOR PROJECT ELEMENTS SIZE / CAPACITY /VOLUME /AREA 2 USEFUL FOR: SCREENING ALTERNATIVES /OPTIONS ë ë PRELIMINARY FEASIBILITY STUDY MANAGEMENT DECISION O INTENDED ACCURACY + 20% 15

Estimating Classification 3. 0 Study Estimate 2 DEVELOPED DURING ENGINEERING PHASE 10 -20% OF ENGINEERING 2 BASED ON - WELL DEFINED DESIGN CRITERIA. O INTENDED ACCURACY + 15% 16

Estimating Classification 4. 0 Definitive Estimate 2 MOST DESIGN WORK COMPLETED. 2 ALL MAJOR CONTRACTS / PURCHASE ORDER HAVE BEEN PLACED. 2 USED TO UPDATE BUDGET FOR THE PURPOSE OF COST CONTROL. O INTENDED ACCURACY + 5 -10% 17

Cost Estimating Methodology Example: (Process Equipment) 18

Cost Estimating Methodology What is Process Equipment Engineered Equipment • • PROCESS EQUIPMENT Columns Vessels Reactors Tanks Package Units • • • chemical Dosing Water Treatment HVAC Equipment Standard Equipment • Pumps • Compressors • Fans 19

Estimating Equipment Cost Methodologies (Direct Cost) 2 BUDGET PRICE 2 PRICE TABLES 2 PURCHASE ORDERS (FROM PREVIOUS JOBS) 2 PRICE CURVES 2 CALCULATION BASED 2 EXPONENTIAL METHODS (COSTS SCALING) 20

Estimating Methodologies Equipment Cost (Direct Cost) ADJUSTMENT TO THE NEW CONDITIONS SOURCE OF DATA • • BUDGET PRICE PURCHASE ORDER BUDGET QUOTATION COST CURVES • • • Cost of Spare Parts Freight, Insurance, Transportation Cost Currency & Exchange Rate Exclusions Escalation Formula Scaling Factor 21

Estimating Methodologies Estimating Equipment (Scaling Factor) COST E 2 E 1 x COST E 2 = COST E 1 X (size E 2/ size E 1) SIZE 22

Material Selection Impact on Equipment FOB-COST VS WEIGHT CURVE - PRESS. VESSEL FOB-VALUE E TE V 1 L S. S E. ST C EL V 2 W WEIGHT Kg 23

Estimating Methodologies Estimating Equipment Cost Calculation MANHOLE VESSEL WIGHT Shell weight = x D x L x t x s. g. NOZZLES = W 1 Kg Heads weight = 2 x 1. 3 x D x t x s. g. = W 2 Kg HEAD D Others: SHELL • Internals • Supports • Nozzles • Manhole = W 3 Kg = W 4 Kg = W 5 Kg = W 6 Kg Total Weight L -------W Kg Estimated Cost = W (Kg) X Unit Cost (Cost/Kg) 24

Factors Affecting Project Final Cost n 1. 0 SCOPE OF WORK n n CLARITY OF SCOPE DEFINITION CHANGES IN SCOPE n 2. 0 TECHNICAL FACTORS n n DESIGN STANDARDS & PRACTICES n SAFETY & ENVIRONMENT REQUIREMENTS n SKILLS/COMPETENCIES 3. 0 OTHERS n n n PROJECT TIME FRAME/SCHEDULE INTERFACES WITH OTHER OPCOS PROJECT ORGANIZATION CURRENCY EXCHANGE RATES MARKET CONDITIONS 25

Case Study 1 + 7. 00 mtr T- 1001 + 5. 0 mtr + 0. 00 mtr n TANK T-1001 NEEDS TO BE RE-PAINTED (EXTERNAL). n MAINTENANCE RECEIVED A QUOTATION FOR BLAST-CLEANING AND PAINTING OF THE TANK. THE QUOTE EXCLUDES THE PROVISION OF THE SCAFFOLDING, ASSUMED TO BE PROVIDED BY THE OWNER. THE JOB IS PLANNED TO START ON MONDAY 1 ST MAY AND WILL TAKE 10 WORKING DAYS. n THE MAINTENANCE DEPARTMENT REQUESTED YOU TO PROVIDE AN ESTIMATE OF THE COST FOR THE SCAFFOLDING. 26

Case Study 1 n THERE IS A CURRENT ‘SCHEDULE OF RATES’ CONTRACT WITH A SPECIALIZE COMPANY FOR PROVIDING OF SCAFFOLDING 27

Case Study 1 28

Case Study 1 n STEPS TO BE TAKEN 1. 0 MAKE A (SIMPLE) WORK PLAN 2. 0 DEVELOP SCOPE OF WORK 3. 0 CALCULATE QUANTITY OF EACH ACTIVITY 4. 0 APPLY APPLICABLE UNIT RATES 5. 0 CALCULATE TOTAL COST 29

Case Study 1 WORKPLAN: SCAFFOLDING FOR BLASTING/PAINTING T-1001. Dia 5 Mtr H =7 Mtr 1. 0 ERECT STANDARD SCAFFOLDING (NO HEAVY EQT. ETC. INVOLVED) AROUND TANK. 2. 0 PROVIDE WORKING FLOORS. FOR EASY WORKING AT VERTICAL CENTERS OF 2. 0 Mtr. 3. 0 FOR ENVIRONMENTAL REASONS PROVIDE FLEXIBLE SHEETING AROUND SCAFFOLDING. 4. 0 PROVIDE 3 LADDERS 5. 0 APPROVAL SAFETY ADVISER 6. 0 SCAFFOLDING SHOULD BE READY BEFORE START OF THE WORK ON MONDAY 1 ST MAY (WK 18). 30

Case Study 1 WORK SCHEDULE: WK 17 START 1/5 WK 18 W/E WK 19 W/E WK 20 Blasting/painting Scaffolding Ready Start Dismantling Scaffolding Renting Period Scaffolding (16 Calendar Days ) 31

Case Study 1 D (=d+4) d Volume Scaffolding: Õ/4 (D 2 - d 2) x H 1 Õ/4(92 - 52) x 7 = 307 m 3 (S 400) Work Floor: each: Õ/4(D 2 - d 2) Õ/4(92 - 52)= 44 m 2 Total 3 x 44 m 2 = 132 m 2 (WFR) +9 +6 Work Floor +4 Flexible Sheeting ÕD x H Õ x 9 - 254 m 2 (ZR) Ladder: 3 x 6 m 1 = 18 m 1 (LA) +2 32

Case Study 1 POINTERS 2 UNDERSTAND PROJECT REQUIREMENTS BEFORE DEFINING SCOPE. 2 UNDERSTAND METHOD OF MEASUREMENT OF A ‘SCHEDULE OF RATE CONTRACT. 2 SELECT OPTIMUM IMPLEMENTATION PLAN. 33

Case Study 1 Cost Estimate Details 34

Case Study 2 THE FOLLOWING COST INFORMATION IS AVAILABLE OF A SPECIFIC EQUIPMENT ITEM: SIZE F. O. B COST 100 M 3/hr 200 M 3/hr US$ 50, 000 US$ 80, 000 QUESTION: WHAT IS THE ESTIMATED COST FOR THE EQUIPMENT ITEM WITH A CAPACITY OF 300 M 3/HR? 35

Direct Cost Estimating Equipment Cost Calculation COST E 2 E 1 x COST E 2 = COST E 1 X (size E 2/ size E 1) SIZE 36

Case Study 2 THE SOLUTION: (X) 1) = 80, 000 50, 000 (X) 2) 2 3) LOG 2 x (X) = LOG 1. 60 4) 0. 301 x (X) = 0. 204 5) (X) =0. 678 Estimated Cost: = 1. 60 (0. 678) X US$80, 000 = US$105, 000 37