# W4_MFO_Contract Risk Mitigation For Topographic Survey

1. Problem Definition.

We have been conducting bidding for topographic survey of gas pipeline project in North Sumatera. We plan to start this work in August 2017 until December 2017 (5 months duration). This work is very vulnerable to weather conditions because if the weather is rainy then the survey could not be conducted. So that, during negotiation meeting, the prospective winner bidder proposed 2 options for its offer. First option is IDR 4,500,000,000 without condition; or second option is IDR 4,350,000,000 + IDR 10,000,000/day stand by rate if topographic survey could not be conducted due to a bad weather.

1. Identify the Feasible Alternative.

Facing to this case, we have to decide which proposal option is accepted, IDR 4,500,000,000 without condition (option 1);  or   IDR 4,350,000,000 + IDR 10,000,000/day stand by rate (option 2).

1. Development of the Outcome for Alternative.

It is clearly that if we accept first option, then contract price will be IDR 4,500,000,000.

But, for the second option, we must to ensure the stand cost that might be happened. For calculating the standby cost, we need to know the number of bad weather days during period of work. This number may be estimated by using historical weather data. The following table contains weather data for past five years from Indonesian Agency for Meteorological, Climatological and Geophysics :

Table 1. Occurance of Bad Weather (In Days)

By using Monte Carlo simulation, it is forecasted the total bad weather days for each month in 2017, at P70 as follows:

Table 2. Occurance of Bad Weather in 2017

Therefore, stand by cost is estimated as 11 days * IDR 10,000,000 = IDR 110,000,000,

so that the price for second option is IDR 4,350,000,000 + IDR 110,000,000 = IDR 4,460,000,000.

1. Selection of Criteria.

Of course, the main criterion is the lower cost. Another criteria is comes from our bidding procedure, namely the price should be lower than our owner’s estimation (OE) of IDR 5,000,000,000.

1. Analysis and Comparison of the Alternative.

Below table contains total cost for both options:

Table 3. Total cost for both options

From the table 3, Option 2 is cheaper IDR 40,000,000 than option 1

1. Selection of the Preferred Alternative.

Based on comparison table above, we decided to proceed with option 2, IDR 4,350,000,000 + IDR 10,000,000/day stand by rate.

1. Performance Monitoring and the Post Evaluation of Result.

Monitoring and supervision should be conducted strictly during the execution of the work, especially in relation to the determination of whether a day is bad weather or not.

References:

1. Sullivan, W.G., Wicks, E. M., Koelling, C. P. (2014). Engineering Economy, Chapter 12, page 526 to 562. Pearson. Sixteenth Edition.
2. Bidding Document. (2017). Topographic survey. PT. ABCD. (Disguised).