Effective Contingency Management - Contractor Management Forum - PD July 2013

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Effective Contingency Management
• Good practice of project contingency assessment
• Risk driven methodology vs. traditional methodology
• Integrated Project Controls
• Joint Confidence Level (JCL)
• Good practice of project contingency management

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Effective Contingency Management - Contractor Management Forum - PD July 2013

  1. 1. Contractor Management Forum 22 & 23 July 2013, Melbourne, Australia P E D R A M D A N E S H - M A N D R E G I O N A L M A N A G E R – P R O J E C T C O N T R O L S
  2. 2. Effective Contingency Management • Good practice of project contingency assessment • Risk driven methodology vs. traditional methodology • Integrated Project Controls R E Q U I R E D T I M E / C O S T C O N T I N G E N C Y 2 • Joint Confidence Level (JCL) • Good practice of project contingency management
  3. 3. Effective Risk Management H O W M U C H I S E N O U G H ? 3
  4. 4. Agenda • Introduction • Industry performance worldwide • Project Based Business Model 4 • Joint Confidence Level (JCL) • Bid Estimating, Scheduling, Risk Assessment • Case Study
  5. 5. Aquenta Consulting A S PA RT O F A M E C G R O U P 5
  6. 6. Aquenta Consulting S E RV I C E S 6 BUILDING & FITOUT TRANSPORT UTILITIES INFRA- STRUCTURE OIL & GAS Estimating, Cost Management, Planning & Controls, Facilities Management, Contracts & Dispute Services, Risk Management
  7. 7. Project Delivery • We have a good project controls in place, don’t worry! • Trust our very experienced planning team. Everything’s fine! • No problem, everything is under control! T Y P I C A L M Y T H S 7 • All performance indicators are green, don’t worry! • Please, we don’t need anything new! • Another new manager, new system, new process, again!
  8. 8. Project Delivery S O M E FA C T S Engineering Projects 42% behind schedule Oil and Gas Projects 81% behind schedule 8 Ref: Managing the Risk of Delayed Completion in the 21st Century, Survey by Chartered Institute of Building (CIOB), 2007
  9. 9. Project Delivery S O M E FA C T S Power Generation Projects 66% behind schedule High-rise Buildings 67% behind schedule 9 Ref: Managing the Risk of Delayed Completion in the 21st Century, Survey by Chartered Institute of Building (CIOB), 2007
  10. 10. Project Delivery • REQUIREMENTS: Unclear, lack of agreement, lack of priority, contradictory, ambiguous, imprecise • RESOURCES: Lack of resources, resource conflicts, turnover of key resources, poor planning T O P 5 C A U S E S O F FA I L U R E 10 resources, poor planning • SCHEDULES: Too tight, unrealistic, overly optimistic • PLANNING: Based on insufficient data, missing items, insufficient details, poor estimate • RISKS & OPPORTUNITIES: Unidentified or assumed, not managed Ref: Strategies for Project Recovery, A PM Solutions Research Report, pmsolutions survey, 2011
  11. 11. Project Based Business Model B I D – E X E C U T I O N – C O R P O R AT E O B J E C T I V E S Bid Estimating 11 Corporate Objectives Project Execution
  12. 12. Joint Confidence Level (JCL) – Bid Phase JCL is: - The probability that cost will be equal or less than the targeted cost AND schedule will be equal or less than the 12 targeted schedule date - A process and product that helps inform management the likelihood of a project’s programmatic success - A process that combines a project’s cost, schedule, and risk into a complete picture. NASA HQ – Office of Program Analysis and Evaluation (PA&E) Cost Analysis Division
  13. 13. Joint Confidence Level (JCL) – Execution Phase JCL is: - The probability that cost will be equal or less than the targeted cost AND schedule will be equal or less than the 13 targeted schedule date - A process and product that helps inform management the likelihood of a project’s programmatic success - A process that combines a project’s cost, schedule, and risk into a complete picture. NASA HQ – Office of Program Analysis and Evaluation (PA&E) Cost Analysis Division
  14. 14. Effective Contingency Management • How to assess optimum contingency allowance (time and cost) for desired JCL during Bid Phase? • How to monitor and maintain the desired JCL during Execution Phase i.e. Contingency Management? C H A L L E N G E S 14 i.e. Contingency Management?
  15. 15. Bid Phase – Traditional Approach E P C C O N T R A C T Estimating Scheduling R&O’s 15 PROJECT INFORM AT ION % o f Cos t % o f Sell V AL UE RECOV ERY TENDER NO: TC-3218 T otal m an Hou rs Man Hours PROJECT TITLE: We dd ell Un it 3 Civil 3,364 CONSULTA NT/CLIENT: Po w e r & Wate r Co rpo ratio n, NT Mec h 11,854 POST TENDER NEGOTIA TION DA TE: 16- Jan -12 Elec t 6,164 CONSTRUCTION PROGRA MME DURATION (Weeks ) 34 8 Months M an ning A ver age Peak CONSTRUCTION SITE DURATION (Weeks ) 34 8 Months Civil 10 16 DEFECTS LIABILITY PERIOD ( Weeks ) 104 24 Months Mec h 28 45 REVISION A ND ISSUE REVA0-1 Elec t 17 28 V alue Re co ver y (1-4) T OT AL DIRECT JOB COST S (ite m s 1-4) TOTAL COST DJC ( ite ms 1- 5) 51.17% 44.85% $6,338,802.81 ( 1) PROJECT EL EM ENTS, DIRECT COSTS T otal f or se ctio n (1) 40.79% 35.75% $5,053,352.81 1.1 Civil Works Input from File 07- Jun-11 9.13% 8.00% $1,131,041.30 1.2 Mec hanic al Input from File 30-May -11 18.16% 15.92% $2,249,906.72 1.3 Elec tric al Input from File 01- Jun-11 12.79% 11.21% $1,584,404.79 1.4 Rec ruitment 1.4 Final Negotiation figur e generally for w et w eather incr eas e 0.71% 0.62% $88,000.00 1.5 File ( 2) ENGINEERING ( Re fer SHT- 2) T otal f or se ctio n (2) 8.12% 7.12% $1,005,350.00 2.1 UGL Engineering Engineering 09-May -11 7.62% 6.68% $943,522.00 2.2 Geotec hnical Report & O&M Manuals 09-May -11 0.50% 0.44% $61,828.00 ( 3) Gen er al Sp ecification Re qu ire me nt s (Re fe r SHT -3) T otal f or se ctio n (3) 0.81% 0.71% $100,100.00 3.1 Preliminar y Cos ts UGLi Prelims File 0.81% 0.71% $100,100.00 3.2 Preliminar y Cos ts other File ( 4) COMM ISSIONING (Refe r SHT -4) T otal f or se ctio n (4) 1.45% 1.27% $180,000.00 4.1 Commissioning cos ts UGLi Admin Included in A dmin below 4.2 Commissioning Materials Comis sioning File 1.45% 1.27% $180,000.00 4.3 Commissioning cos ts other File (5-9) T OT AL INDIRECT JOB COST S ( item s 5- 9) TOTAL COST INDIRECT S (ite m s 5-9) 42.79% 37.49% $5,302,192.18 ( 5) ADM INISTRAT ION ( Re fer SHT- 5) T otal f or se ctio n (6) 28.90% 25.33% $3,580,535.30 5.1 Site Admin and Site Superv ision Cos ts Admin 10.92% 9.57% $1,352,868.94 5.2 Site Engineering and Site Support Staff Admin 7.44% 6.52% $921,581.16 5.3 Site Commiss ioning labour Cos ts Admin 7.71% 6.76% $955,220.13 5.4 Head Office Support Admin 2.44% 2.14% $302,654.86 5.5 Other admin costs Rec rui tment Cos ts 0.39% 0.34% $48,210.20 ( 6) M OBIL ISAT ION Plan t & Buildin gs (Refe r SHT -6) T otal f or se ctio n (7) 12.75% 11.16% $1,579,350.00 6.1 ( 7a) MOBILISA TION & DEMOBILSATION Mob & Demob 8.04% 7.05% $996,060.00 6.2 ( 7bi) SITE BUILDINGS 0.69% 0.60% $85,010.00 6.3 ( 7bii) SITE CONNECTIONS 1.00% 0.87% $123,550.00 6.4 ( 7biii) PLA NT A ND TOOLS 2.09% 1.83% $258,880.00 6.5 ( 7biv) VEHICLES 0.23% 0.20% $28,900.00 6.6 ( 7bv) SITE RUNNING COSTS 0.44% 0.38% $54,150.00 6.6 Other - Pr inc ipal's Site Offic e + Utility Pow er & Water Connec tions (PWC Mtg Darw in Addition) 0.26% 0.23% $32,800.00 ( 7) COMM UNIT Y & ENV IRONM ENT (Re fe r SHT -7) Comm & Env T otal f or se ctio n (8) 0.09% 0.08% $11,700.00 ( 8) HEALT H & SAFET Y EQUIPMENT (Refe r SHT -8) Health & Saf ety T otal f or se ctio n (9) 1.05% 0.92% $130,606.88 ( 9) HEDGING (re fe r t o SHT -9) BG & Hedge T otal f or se ctio n (10) Hedg in g No t Con sid er ed (10-13) T OT AL ALL OWANCES (ite m s 10- 13) TOTAL COST AL LOWANCES (item s 10-13) 4.33% 3.79% $535,918.23 (10) ESCAL AT ION ( re fer to SHT- 10) Esc alation T otal f or se ctio n (11) 0.76% 0.66% $93,861.25 10.1 Esc allation for Project Management and Supervis ion 0.57% 0.50% $70,900.00 10.2 Esc allation for Engineering 0.19% 0.16% $22,961.25 10.3 Esc allation for Labour (Not req'd - Mid Point calc) 10.4 Esc allation for Materials (Not req'd) (11) Con tin ge ncy R&O T otal f or se ctio n (12) 3.07% 2.69% $379,643.29 (12) We t Weathe r Allo w an ce (Re fe r t o SHT -12) Wet Weather T otal f or se ctio n (13) 0.50% 0.44% $62,413.69 12.1 CIV IL WET WEA THER ALLOWA NCE 0.20% 0.18% $25,358.59 12.2 ELECTRICAL WET WEATHER A LLOWA NCE 0.08% 0.07% $10,323.82 12.3 MECHA NICA L WET WEA THER ALLOWA NCE 0.15% 0.13% $18,006.91 12.4 SUPERVISION WET WEA THER ALLOWA NCE 0.07% 0.06% $8,724.38 12.5 OTHER WET WEATHER A LLOWA NCE (13) PROV ISIONAL SUMS T otal f or se ctio n (14) (14) M ISC COST S ( LSL, BONDS, INSURANCES ETC) TOTAL COST MISC ITEM (14) 1.69% 1.49% $209,427.60 14.1 A 0.57% 0.50% $70,160.00 14.2 14.3 Long Serv ice Levy (LSL) .35 % on contr act value (inc GST) 0.50% 0.62% 0.55% $77,176.00 14.4 Sec urities Bonds Ins ert Final Total Selling Pric e $14,032,000 0.22% 0.19% $27,011.60 14.5 Warranty Provis ion .25 % on contr act value (inc GST) 0.25% 0.28% 0.25% $35,080.00 14.6 14.7 Other cos ts T OT AL COST (ite m s 1-14) PROJECT T OT AL COST IT EM S 1 T O 14 100% 87.62% $12,386,340.82 (15) OV ER- HEADS & M ar gin (it em 15) 12.00% TOTAL O-H an d M argin ITEM ( 15) 12.35% $1,745,046.48 15.1 UGLi Overheads 54.17% 6.50% of Se llin g Mark up 7.39% 6.47% $914,900.17 $914,900.17 15.2 UGLi Prof it 45.83% 5.50% of Se llin g Mark up 6.25% 5.48% $774,146.30 $774,146.30 15.3 A dditional Recover y FX Rate 0.45% 0.40% $56,000.00 $56,000.00 15.4 Mark up 15.5 Par tner 3 Profit & O/H Mark up (16) T OT AL SEL LING (ite m s 1-15) (16) T OT AL SELL ING PRICE EXCL UDING GST 100% $14,131,387.30 $1,745,046.48 GST V alu e $1,413,138.73 PRICE APPROV ED BY : DA TE : 16-Jan-12 RECOVERY TO COST : 14.09% Tender No : TC-3218 Estimator :GRG / RS RECOVERY TO SELLING : 12.35% Insurances exc luding construc tion risk / cons truction w orks "A" .45% of CV, Inc luding cons truction r isk / c onstr uction w orks "B" .9% of CV ( Worn by Busines s) Mo nd ay, 16 Janu ar y 2012 Liability Char ges "U" unc apped Liability (1%), "A" Contract s um Liability (.5%) "B".5 of c ontract s um liability ( .25%)
  16. 16. Risk Driven Approach QUALITY 16 QUALITY TIME SCOPE COST
  17. 17. COST
  18. 18. Cost Management • Cost Estimating – developing an approximation of the costs of the resources needed to complete project activities. • Cost Budgeting – aggregating the estimated costs of individual activities or work packages to establish a cost baseline. P R O C E S S 18 or work packages to establish a cost baseline. • Cost Control – influencing the factors that create cost variances and controlling changes to the project budget.
  19. 19. Cost Management • Available organisational process assets • Available quantities, resources and productivity rates I N P U T S All these assumptions add UNCERTAINTIES which reduce the cost confidence 19 and productivity rates • Available work/scope statements • Work Breakdown Structure (WBS), and • Other assumptions/documents e.g. PMP, etc. cost confidence level. What about other R&O’s and events?
  20. 20. Cost Management • (Deterministic) Activity Cost Estimate • (Deterministic) Total Project Cost O U T P U T S What is your CONFIDENCE LEVEL in such a deterministic cost estimate? 20 • (Deterministic) Cost Model Data • (Deterministic) Cost Baseline • (Deterministic) Resource Requirements estimate?
  21. 21. TIME
  22. 22. Time Management S C H E D U L I N G 22
  23. 23. Time Management • Logic-based Scheduling Methods (LSM) • Deterministic Techniques e.g. CPM, Critical Chain, etc. S C H E D U L E D E V E L O P M E N T M E T H O D S Which method and tool will suit your project requirements the most 23 • Stochastic Techniques e.g. PERT, PNET, Monte Carlo Simulation, etc. • Repetitive Scheduling Methods (RSM) • Line of Balance (LOB) • Flowline Method most
  24. 24. Scheduling • Available templates • Available quantities, resources and productivity rates I N P U T S All these assumptions add UNCERTAINTIES which reduce the schedule 24 • Available work/scope statements • Available construction logic, and • Other assumptions e.g. calendars, PMP, etc. schedule confidence level. What about other R&O’s and events?
  25. 25. Scheduling • (Deterministic) Project Schedule • (Deterministic) Schedule Model Data O U T P U T S What is your CONFIDENCE LEVEL in such a deterministic schedule? 25 • (Deterministic) Schedule Baseline • (Deterministic) Resource Requirements schedule?
  26. 26. Integrated Time/Cost Risk Management JCL is: - The probability that cost will be equal or less than the targeted cost AND schedule will be equal or less than the TIME COST 26 targeted schedule date - A process and product that helps inform management the likelihood of a project’s programmatic success - A process that combines a project’s cost, schedule, and risk into a complete picture. NASA HQ – Office of Program Analysis and Evaluation (PA&E) Cost Analysis Division Joint Confidence Level (JCL) RISK
  27. 27. Joint Confidence Level (JCL) • Step 1 – Identify goals of JCL for specific project • Step 2 – Review built schedule (i.e. Schedule Health Check) • Step 3 – Cost loaded schedule (both Time Dependent / Independent) P R O C E S S 27 • Step 3 – Cost loaded schedule (both Time Dependent / Independent) • Step 4 – Implement Risk Register (through R&O’s Workshop) • Step 5 – Conduct uncertainty analysis • Step 6 – View results • Step 7 – Analyse results
  28. 28. Validation and Health Check • Validation of • Quantities (most likely) • Productivity Rates (most likely) C O S T A N D S C H E D U L E 28 • Durations (most likely) • Resource Cost Rates (most likely) • Constraints (Contractual or Management) • Logic network and Work Statements, and • Reasonable Critical Path
  29. 29. Risk Register • The identified risks & opportunities • Likelihood of the identified risks and opportunities • Impacted activities and/or cost elements K E Y E L E M E N T S 29 • Uncertainties • Existing controls and residual risks • Schedule and/or Cost Consequences and required Contingency • Correlation of risks and opportunities to one another
  30. 30. Case Study 1 – Bid Phase Scope: • Project Management • Engineering & Design • Procurement & Delivery $ 1 0 0 M P O W E R P L A N T E P C C O N T R A C T 30 • Procurement & Delivery • Installation • Earthwork & Civil • Mech, Elec, & Control Systems • Two Gas Turbine Generator Units • Balance of Plant (BOP) • Testing & Commissioning
  31. 31. Effective Contingency Management • How to assess optimum contingency allowance (time and cost) for desired JCL during Bid Phase? • How to monitor and maintain the desired JCL during Execution Phase i.e. Contingency Management? C H A L L E N G E S 31 i.e. Contingency Management?
  32. 32. Case Study 1 – Bid Phase S C H E D U L E H E A LT H C H E C K Confidential 32
  33. 33. Case Study 1 – Bid Phase R I S K C R I T E R I A & R I S K M AT R I X 33 Consequence Table Likelihood Table Escalation Table Risk Matrix
  34. 34. Case Study 1 – Bid Phase R I S K R E G I S T E R 34 Risk Identification Controls Assess w/Controls Treatment Assess w/Treatment Cost Impact Schedule Impact
  35. 35. Case Study 1 – Bid Phase S C H E D U L E C O S T R I S K A N A LY S I S Confidential 35 Confidential
  36. 36. Case Study 1 – Bid Phase S C H E D U L E C O S T R I S K A N A LY S I S 36
  37. 37. Case Study 1 – Bid Phase C O N T I N G E N C Y A S S E S S M E N T 37
  38. 38. Case Study 1 – Bid Phase Scope: • Project Management • Engineering & Design • Procurement & Delivery $ 1 0 0 M P O W E R P L A N T E P C C O N T R A C T 38 • Procurement & Delivery • Installation • Earthwork & Civil • Mech, Elec, & Control Systems • Two Gas Turbine Generator Units • Balance of Plant (BOP) • Testing & Commissioning
  39. 39. Effective Contingency Management • How to assess optimum contingency allowance (time and cost) for desired JCL during Bid Phase? • How to monitor and maintain the desired JCL during Execution Phase i.e. Contingency Management? C H A L L E N G E S 39 i.e. Contingency Management?
  40. 40. Case Study 2 – Execution Phase C O N T I N G E N C Y M A N A G E M E N T 40 CONFIDENTIAL
  41. 41. Case Study 2 – Execution Phase • Updated “Project Execution Plan” • Effective Change Management • Consistent WBS between cost control & scheduling K E Y L E S S O N S L E A R N E D 41 • Independent Schedule Health Check • R&O Workshop every month for both Events and Uncertainties • Desired time/cost Contingency vs. Available time/cost Contingency • Early warning (early bad news is actually a good news!)
  42. 42. Proactive Risk Management What about your projects? Don’t they need a proactive risk management platform in place? THINK again. W H AT I S N E X T F O R Y O U ? 42 Good luck and enjoy your risk management challenges.
  43. 43. Pedram.DaneshMand@aquenta.com.au +61 432 041 560

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