OAN_W8_Contingency Estimation in Fuel Terminal Project

  1. Problem Definition

Downstream Oil & Gas Business Unit in a company plan to make a new Fuel Terminal, The Project Management Division asked to make a cost estimation for the Project.

Most of our contract, has cost overrun. Therefore, it is necessary to prepare cost contingency for the Project to anticipate the additional cost.

  1. Development of Feasible Alternatives

There are 4 methods to estimate cost (also time) contingency:

  • Expert Judgment
  • Predetermined Guidelines
  • Simulation Analysis
    • Range Estimation
    • Expected Value
  • Parametric Modeling

For this case, Author uses Simulation Analysis with Range Estimation method.

Range estimating is a risk analysis technology that combines Monte Carlo sampling, a focus on the few critical items, and heuristics (rules of thumb) to rank critical risks and opportunities. This approach is used to establish the range of the total project estimate and to define how contingency should be allocated among the critical items.

 

  1. Possible Solution

The following steps will be used to determine cost contingency using range estimating:

  • Determines of ranges for each cost items.
  • Determines the probability that each item can be completed within the estimate.
  • Running Monte Carlo simulation for the cost range.
  • Determines of critical items based on result of Monte Carlo simulation.
  • Determine of contingency with reference to critical items only.

Following are base estimates for each cost items:

Table 1: Base Estimates for Fuel Terminal

Through a risk analysis and based on historical information, range of each cost items was determined, as shown on table 2. Table 2 also contains the desired probability for each item, which come from management policy.

Table 2: Range and Desired Probability

After determining range and desired probability of cost items, further step is to conduct Monte Carlo simulation with the result as shown on Table 3.

Table 3: Monte Carlo Simulation

  1. Selection Criteria

Determines of critical items are conducted by using the following criteria.

Table 4: Bottom Line Critical Variances

  1. Analysis and Comparison of the Alternatives

By using above criteria (for Classes 3, 4, 5), critical items were determined as shown in Table 5.

Table 5: Data

  1. Selection and Preferred Alternatives

The last step is to determine the cost contingency, as shown in table 6.

Table 6: Proposed Solution

  1. Performance Monitoring and the Post Evaluation of Result

It is necessary to conduct strict monitoring during implementation of the Project, to prevent the cost overrun exceed the cost contingency.

 

Refrences

  1. Sullivan, William G., Wicks, Elin M. & Koelling, C. Patrick. (2014). Engineering Economy 16th edition Chapter 12 page 546- 554, England: Pearson Education Limited.
  2. AACE International Recommended Practice No. 41R-08
    Retrieved from https://www.yumpu.com/en/document/view/50838191/41r-08-risk-analysis-and-contingency-determination-using-range-
  3. AACE International Recommended Practice No. 44R-08
    Retrieved from http://nebula.wsimg.com/ab1871cc797714d7bf4dc2bfc4f5c243?AccessKeyId=593FFA6B20F5002887D7&disposition=0&alloworigin=1
  4. W10_RM_Contingency Estimation in Gas Station Project
    Retrieved from https://goldenaace2015.wordpress.com/2016/03/08/w10_rm_contingency-estimation-in-gas-station-project/

 

 

1 thought on “OAN_W8_Contingency Estimation in Fuel Terminal Project”

  1. Great job, Pak Nunug!!! Perfect case study and you did a great job of following our 7 step process very well.

    What would have been really impressive if in Step 7, you explained a bit more HOW you were going to “strictly monitor” any cost over-runs. Do you know how to do that? The best way is to add to your “dashboard” a “drawdown chart” that contains two gauges- one showing physical % complete and the one next to it showing what % of contingency has been used up. As long as the physical % complete and contingency drawdown is about even, that is great. But what happens if the physical % complete and the drawdown don’t match? Go look at Module 9.5 http://www.planningplanet.com/guild/gpccar/project-performance-forecasting and scroll down to the case study from Freeport to see how Danny Dangdua applied Step 7. He actually got a commendation letter from his VP for having managed his contingency so well.

    Keep up the good work but let’s get your paper wrapped up….. Also you need to help get the Weekly Report completed? Very strange that I was on line off and on all day and not a single question or request for help from ANYONE? Does that mean I can expect to see a PERFECT Weekly Report on Monday when I wake up? I surely hope so!!!!

    BR,
    Dr. PDG, Jakarta

     

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