W14_OAN_Project Management Organization

  1. Problem Definition

A project organization is a structure that facilitates the coordination and implementation of project activities. As function foucus on project, thus the right decisions to form the organizational structure of project management will be prioritized.

  1. Development of Feasible Alternatives

Most organization structure arrangements are structured in 3 ways:

  • Functional
  • Project based
  • Matrix

3. Possible Solution

The principles requirement of forming the EPC organization chart described as bellows:

  • Optimizing the resource
  • Power and authority
  • Unity of command and direction
  • Increase productivity

4. Selection Criteria

The selection criteria will be organization chart with many plusses and mitigated as many negatives as possible, also focus and fit characteristic most of our project which is need a long-term focus and commitment.

  1. Analysis and Comparison of the Alternatives
  • Functional organizational structure

The programmatic focus refers to a traditional structure in which program sector managers have formal authority over most resources.

Figure 1: Functional Organizational Structure

  • Project-based organizational structure

Independent project team that separated from the parent organizations, with their own technical staff and management.

Figure 2: Project-Based Organizational Structure

  • Matrix organizational structure

Matrix organizational structure is a hybrid form, it loads a level of project management structure on the functional hierarchical structure.

Figure 3: Matrix Organizational Structure

  1. Selection and Preferred Alternatives

Table 1 show us Organization Type analysis. Project-based organization type has come out as the appropriate design in forming the incoming EPC project organization chart. It has more advantages and we can mitigate negative aspect. There will be hard time for serving more than two managers at the same time. Team member tend to focus on their main manager, because usually performance evaluation is done by main manager, not by project manager.

Table 1: Organization Type Analysis

  1. Performance Monitoring and the Post Evaluation of Result

All of these, project-based organizational structure is the most suite type considering the complexity of EPC Project. However, further evaluation on the implementation is subjected to review.

Refrences

  1. Benefits & Disadvantages of Functional Organizational Structure.
    Retrieved from: http://smallbusiness.chron.com/benefits-disadvantages-functional-organizational-structure-11944.html
  2. Project-Based Organizational Structure.
    Retrieved from: https://yourbusiness.azcentral.com/projectbased-organizational-structure-17237.html
  3. Challenges and Benefits of Matrix Management in the Workplace from: https://www.thebalance.com/matrix-management-2276122
  4. 1_Shinta_Project Management Organization
    Retrieved from https://kristalaace2014.wordpress.com/2014/03/23/w4-1_shinta_project-management-organization/

 

 

W13_OAN_Pareto Priority Index

  1. Problem Definition

In this week Blog Posting, Author will analyze alternative method of tank repair. As we now, Storage tank is our critical facilities.  As Oil and Gas price now struggling, company has cost reduction campaign. Define the alternatives for project cost reduction and specify the priority of project that will be execute. Therefore, we must find the best alternative method to maintain reliability of our storage tank, especially old storage tank.

  1. Development of Feasible Alternatives

Feasible alternative project to maintain old storage tanks are:

Glass Fiber Reinforced Polymer (GFRP) Lining

Re-bottoming include cathodic protection

Plate doubling include cathodic protection

3.Possible Solution

Generate estimate cost, estimate saving and probability of success.

Estimate Saving based on fuel throughput per day, compare to construction for new tank (12 months project duration) and operation live of new tank (20 years).

  1. Glass Fiber Reinforced Polymer (GFRP) Lining (90 days project Duration – 5 years life time)
  • Total Cost                             : Rp. 400 Million
    Tank Cleaning
    Sand Blasting
    Fiber Reinforced
    Lining
  • Estimate Saving : Rp. Rp. 27 Billion
    Project duration
    Operation live

2. Re-bottoming include cathodic protection (180 days project duration – 5 years life time)

  • Total Cost : Rp. 1 Billion
    Tank Cleaning
    Repair all bottom plate
    Sand Blasting
    Cathodic Protection
  • Estimate Saving : Rp. 18 Billion
    Project duration
    Operation live

3. Plate Doubling include cathodic protection (135 days project duration – 2 years life time)

  • Total Cost : Rp. 300 Million
    Tank Cleaning
    Bottom plate assessment
    Plate doubling
    Sand Blasting
    Cathodic Protection
  • Estimate Saving : 16 Billion
    Project duration
    Operation live

Calculate Pareto Priority Index (PPI), Equation that will be use is as follow

Table 1: PPI Calculation Result

  1. Selection Criteria

Cost reducing project that have biggest PPI will be selected

  1. Analysis and Comparison of the Alternatives

Glass Fiber Reinforced Polymer (GFRP) Lining project has the biggest PPI value among other, according table 2 the project ranking as follow:

Table 2: Project Priority

  1. Selection and Preferred Alternatives

Based on above analysis, Glass Fiber Reinforced Polymer (GFRP) Lining project is selected due to has biggest PPI (216)

  1. Performance Monitoring and the Post Evaluation of Result

To select project more accurately, if it is available historical information can be use to estimate standard times and resources. Whenever update data is available, calculation should be re-run to validate selection.

Refrences

  1. Six sigma daily (2014). The Six Sigma Approach to Project Selection. Retrieved from: http://www.sixsigmadaily.com/implementation/the-six-sigma-approach-to-project-selection
  2. Selecting Projects where Six-Sigma can add value (2014). Retrieved from: http://unpan1.un.org/intradoc/groups/public/documents/arado/unpan020936.pdf
  3. W13_AL_Pareto Priority Index
    Retrieved from https://kristalaace2014.wordpress.com/2014/05/21/w13_al_pareto-priority-index/

 

 

W12_OAN_Car Selection using AHP

  1. Problem Definition

In this week blog posting, Author would like analyze choosing a car, using Analytic Hierarchy Process.

  1. Development of Feasible Alternatives

There are 2 alternatives car to choose, using 5 criteria which are Safety, Design, After Sales Service, Fuel Consumption, and Performance. Price will be set aside until the benefits of the alternatives are evaluated.

  1. Car A: Rp. 380 Milion
  2. Car B: Rp. 410 Milion
  3. Car C: Rp. 360 Milion
  4. Car D: Rp. 390 Milion

 

  1. Possible Solution

The information above is arranged in a hierarchical tree as below:

Figure 1: Hierarchical tree

  1. Selection Criteria

Table 1 will be the relative score:

Table 1: Relative Score

Car with the highest benefit – Cost Ratio will be selected.

  1. Analysis and Comparison of the Alternatives

Based on table 2, the relative score will be:

Table 2: Score – for alternative solution

Table 3: Average Value

Table 4: Weighted Matrix Comparison

Table 5: Consistency Vector

Table 6: CI Table

For Matrix 5 is 1.12.

We do same steps for each criteria.

Table 7: Rank based on Criteria

The alternative ranking is the product between alternative ranking matrix and criteria ranking.

Table 8: Alternative vs Criteria Matrix

  1. Selection and Preferred Alternatives

After alternative ranking has been defined, we have to compare between benefits and costs (price) using benefit – cost ratio.

Table 9: Cost Normalized

Table 10: Benefit – Cost Ratio

Based on Benefit – Cost Ratio, Car B has the highest ratio. Therefore, Car B will be Author choice.

  1. Performance Monitoring and the Post Evaluation of Result

In order to have more accurate result, pairwise comparison matrix can be done by surveying the experts or anyone who has good understanding of the problems.

Refrences

  1. Using AHP in Decision Making in Engineering Applications : Some Challenge
    Retrived from http://bit.csc.lsu.edu/trianta/Journal_PAPERS1/AHPapls1.pdf
  2. AHP Tutorial.
    Retrieved from https://pdfs.semanticscholar.org/7e27/b5a124c2e6829e1ff0d3e1279c2dbc9ebe2a.pdf
  3. W5_WW_Analytical Hierarchy Process
    Retrieved from https://garudaaace2015.wordpress.com/2015/03/28/w5_ww_-analytical-hierarchy-process-2/

 

 

W11_OAN_WBS Selection

  1. Problem Definition

This Week objective is to select optimum WBS that could facilitate the future Fuel Terminal Development Project.

  1. Development of Feasible Alternatives

There are 4 WBS that being considered :

A. Current WBS

Built on non-standard WBS that potentially will have a problem during the execution.

B. OmniClass

OmniClass is use faceted classification. Each table can be used separately or combined with other tables to construct a more complex subject.

Figure 1:OmniClass Tables

These 15 tables  can be simplified to the 4 main dimensions.

Figure 2:OmniClass tables–Grouping within family

C. Norsok Z-014

The system comprises of:

C.1. PBS (physical breakdown structure)

Hierarchical structure which defines the physical/functional components.

C.2. SAB (standard activity breakdown)

Defines all resources necessary for the planning and execution.

C.3. COR (code of resources)

Identifies the individual records/items/lines/components/elements of estimates.

Figure 3:Illustration of NORSOK Standard Z-014

D. 3D WBS

Jean-Yves Moine concept of 3D Work Breakdown Structure (3D WBS) with 3 tree structures that compose the WBS:

D.1. ZBS (Zone Breakdown Structure).

In EPC project, ZBS is  for the design and the commissioning phases. For construction phase, ZBS is geographical area.

D.2. PBS (Product Breakdown Structure).

Generally, PBS is equipment, material, deliverables, civil works components.

D.3. ABS (Activity Breakdown Structure)

Activities are deployed on products. It is the processes that build products.

Figure 4:Illustration of 3D WBS

  1. Possible Solution

There are three (3) criteria that have been selected as parameters to analyze and compare the above alternatives:

  • Level of details of Offshore facilities, this will explain how detail each alternative in facilitating Offshore facilities requirement
  • Complexity, how complex the structures will be
  • Work flow of activities, is how the activities work together from the project scope development to the final design.

Lexicography, one of non-compensatory models for multi attributes decision making technique.

  1. Selection Criteria

Each WBS comparison of the attributes is expressed below:

Table 1 : Summary Information of Engineering Design Stage WBS

Rank in order of importance as shown on table 2.

Table 2:Ordinal Ranking of Attributes

  1. Analysis and Comparison of the Alternatives

Based on table 2, the ranking is found to be:

WBS Level of details > Complexity > Future optimization > Work flow of activities

Table 3:Ordinal Ranking of Attributes

Note:

(a) Rank of 3 = Most Important, Rank of 0 = Least Important

(b) Selection is based on the highest ranked attribute

  1. Selection and Preferred Alternatives

Considering the above ranking, the Omni Class Table 21  is typically the solution for the Fuel Terminal Project, current WBS need to be adjusted to accommodate the standard.

  1. Performance Monitoring and the Post Evaluation of Result

Periodically, consistency of utilizing designed WBS need to be review. When further goal is gain the standardization and optimization, then by refer to the second highest rank combination between 3D WBS will give a greater advantage for the Fuel Terminal Project.

Refrences

  1. Planning Planet (2017). Creating Work Breakdown Structure. Retrieved from http://www.planningplanet.com/guild/gpccar/creating-work-breakdown-structure
  2. OmniClass (2017), OmniClass Table 21 – Elements (includes design elements). Retrieved from omniclass.org/tables/OmniClass_21_2012-05-16.zip
  3. Norsok Standard Z-014 (2017), Norsok Standard Z-014. Retrieved from http://www.standard.no/pagefiles/951/z-014.pdf
  4. Moine, J. Y. (2013). Retrieved from http://pmworldlibrary.net/wp-content/uploads/2013/04/pmwj9-apr2013-Moine-3D-Work-Breakdown-Structure-FeaturedPaper.pdf
  5. W4_RD_WBS Selection
    Retrieved from https://garudaaace2015.wordpress.com/2015/03/23/w4_rd_wbs-selection/
 

W10_OAN_Company Estimating Template vs NPS Template

  1. Problem Definition

In this week blog posting, Author want to compare company cost estimating template with US National Park services (NPS). Author will use Likert Scale / Compensatory method to compare both process.

  1. Development of Feasible Alternatives

To make an estimate, the company already has a cost estimation template. But, most of our estimate are inaccurate, so there needs to be an improvement on the template.

Figure 1: Company Cost Estimating Template

The best fit with Company estimating process regarding to National Park Services is Class A estimating. The accuracy of Class A estimate is -5% to +15% as shown on figure 2.

Figure 2: NPS Template – Class A

  1. Possible Solution

Based on both cost estimating template, author will compare NPS templates and compensatory method. For compensatory method, author determine the Likert scale using criteria on table 1.

Table 1: Likert Scale Criteria

After determine the likert scale and refer NPS cost estimation template, we can put each task with Likert value who meet with current condition of company in estimation process as shown on table 2.

Table 2: Company Estimating Template Using Likert Scale

  1. Selection Criteria

We will perform a checklist of each stage proposed by NPS approach in the estimation template. If there are gap from the checklist and potentially to be fixed, it will be recommended to management to improve the estimation process.

  1. Analysis and Comparison of the Alternatives

Based on the assessment of checklists in table 2, the authors calculate the average Likert value and we will see which attributes meet the NPS requirements and which have not.

Table 3: Calculation Result

Refer to table-3, only attribute – 3, 4 and 8 which already meet with NPS, the other step still reminds to consider highly and very highly implemented.

  1. Selection and Preferred Alternatives

Based on above assessment and analysis, company must consider unimplemented step for a better and reliable estimating process, because 11 attribute purposed by NPS as one of best practice in estimating template.

  1. Performance Monitoring and the Post Evaluation of Result

From Table 4, we can conclude which attribute has the biggest gap against NPS template.

Table 4: Gap

Using Pareto Diagram as shown on figure 3, Management can prioritize the improvement to meet NPS criteria on attribute 5, 7, and 10. By doing that, we can solve ± 60% of gap. After that, we can continue to improve next attribute. By using NPS Estimating Process as part of Company template, we can avoid under or over estimate, and make sure all the requirements are met.

Figure 3: Pareto Diagram

 

Refrences

  1. Sullivan, William G., Wicks, Elin M. & Koelling, C. Patrick. (2014). Engineering Economy 16th edition Chapter 14 page 559- 617, England: Pearson Education Limited.
  2. Cost Estimating Requirements Handbook National Park Service.
    Retrieved from https://www.nps.gov/dscw/upload/CostEstimatingHandbook_2-3-11.pdf
  3. Module 08-1 Managing Cost Estimating & Budgeting
    Retrieved from http://www.planningplanet.com/guild/gpccar/introduction-to-managing-cost-estimating-budgeting
  4. W9_MFO_Benchmark of Company Cost Estimating Template Process against NPS Template
    Retrieved from http://emeraldaace2017.com/2017/09/26/w9_mfo_-benchmark-of-company-cost-estimating-template-against-nps-template/
 

W9_OAN_Company Estimate Process vs GAO Estimate Process

  1. Problem Definition

In this week blog posting, Author want to compare estimate process in Author’s company with Government Accountability Office (GAO). Author will use Likert Scale / Compensatory method to compare both process

  1. Development of Feasible Alternatives

To make estimate, there are 5 steps to follow for Author company. Those steps are :

  • Define the estimating elements
  • Find the OE element price data
  • Check the validity of price data
  • Make estimates using predefined format
  • Request approval from the competent authority

While GAO estimating process consist of 12 steps. Each steps are important to ensuring that high-quality estimates are meet the criteria. Figure 1 show GAO’s estimate process.

Figure 1: GAO’s Process Estimate

  1. Possible Solution

Base on both alternatives, Author will compare using the 12 steps GAO estimating process and using compensatory model. For compensatory model, Author will use Likert scale as shown at table 1.

Table 1: Likert Scale Criteria

After determine the likert scale and refer to 12 steps GAO estimate process, we can put each task with Likert value who meet with current condition of company in estimation process like on table 2.

Table 2: Company Estimating using Likert Value

  1. Selection Criteria

We will perform a checklist of each stage proposed by GAO approach in the estimation process. If there are gap from the checklist and potentially to be fixed, it will be recommended to management to improve the estimation process.

  1. Analysis and Comparison of the Alternatives

Based on the assessment of checklists in table 2, the authors calculate the average likert value and we will see which attributes meet the GAO requirements and which have not.

Table 3: Result of GAO vs Company Estimating Process

Refer to table-3, only step-1 or define estimate purpose and step 4 – Determining estimate structure which already meet with GAO, the other step (still remind to consider highly and very highly implemented.  Company need to consider GAO for a better and reliable estimating process, because 12 steps purposed by GAO as one of best practice in process estimation.

  1. Selection and Preferred Alternatives

Based on above assessment and analysis, company must consider unimplemented step for a better and reliable estimating process, because 12 steps purposed by GAO as one of best practice in process estimation.

  1. Performance Monitoring and the Post Evaluation of Result

Management should consider the use of GAO Estimating Process as part of the estimation stage process to avoid Over Budget and Behind Schedule Project and monitoring should be conducted during estimation process to ensure that all requirements are met.

 

Refrences

  1. Sullivan, William G., Wicks, Elin M. & Koelling, C. Patrick. (2014). Engineering Economy 16th edition Chapter 14 page 559- 617, England: Pearson Education Limited.
  2. GAO (March 2009). GAO Cost Estimating and Assessment Guide, A Reliable Process for Developing Credible Cost Estimates pages 8-11.
    Retrieved from http://www.gao.gov/new.items/d093sp.pdf
  3. Module 08-1 Managing Cost Estimating & Budgeting
    Retrieved from http://www.planningplanet.com/guild/gpccar/introduction-to-managing-cost-estimating-budgeting
  4. W8_MFO_Benchmark of Company Cost Estimate Process vs GAO Process
    Retrieved from http://emeraldaace2017.com/2017/09/26/w8_mfo_-benchmark-of-company-cost-estimate-process-vs-gao-process/

 

 

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/

 

 

W7_OAN_Cost Estimation by Ratio and Proportion

  1. Problem Definition

We are evaluating to build new storage tank. One of the critical aspects is development cost of the new storage tank. Since the decision shall be taken early, there is no sufficient time to conduct good and fully complete engineering study. In this stage the research is going to select qualitatively what is the most suitable cost estimation method using historical data.

  1. Development of feasible alternatives

Based on AACE RP No. 17R-97, Author should create class 5 estimate to meet Management requirement.

Table 1: Class Estimate

  1. Possible Solution / Alternative

Based on Table 1, the methodology suggested to produce class 5 estimate are:

  • Capacity Factored
  • Parametric Models
  • Judgement
  • Analogy

In this case, we will use Capacity Factored Estimates (CFE) and Parametric Models, which The cost of a new plant is derived from the cost of a similar plant of a known capacity with a similar production route (such as both are batch processes), but not necessarily the same end products. It relies on the nonlinear relationship between capacity and cost.

Table 2: Process Equipment Size Exponent (N) – N= 0.6 for Tank Vessels, Carbon Steel

We use historical data from our previous contract. Therefore, we use Cost Indices, which are useful when basing the approximated cost on other than current prices.

  1. Selection of Criteria

The Estimation result should meet the Management requirement, at expected accuracy at the end of the project actual cost generated .

  1. Analysis and Comparison of the Alternatives

Table 3: Data

Table 4: Calculation Result using Process Equipment Size Exponent (N)

Since we are using 2015 data, and we want to calculate for 2017 project, we use Cost Indices. For the ratio, we use The Big Mac Ratio.

Tabel 4: The Big Mac Index

Table 5: Current Cost Using The Big Mac Index

  1. Selection and Preferred Alternatives

As shown at table 1, Class 5 estimation range is from -50% to + 100%.

Based on the estimation result in Table 7, the Author proposed a class 5 estimate with the total investment cost is using P70 for preferred capacity of tank.

  1. Performance Monitoring and the Post Evaluation of Result

The class 5 estimates purpose is only for the concept screening. If the management approve the concept screening, we can continue to Feasibility Studies until, with class 4 estimates. Then, the Estimators complete the required project scope so that the level 2 or 3 estimate can be produced for bidding process.

 

References

  1. Module 08-4 Creating the Owners Cost Estimate (Top Down) (2015).
    Retrieved from http://www.planningplanet.com/guild/gpccar/creating-the-owners-cost-estimate
  2. AACE International Recommended Practice No. 17R-97
    Retrieved from http://www.anvari.net/Risk%20Analysis/17r-97.pdf
  3. AACE International Recommended Practice No. 59R-10
    Retrieved from https://fenix.tecnico.ulisboa.pt/downloadFile/1126518382175702/DEVELOPMENT%20OF%20FACTORED%20COST%20ESTIMATES_AACE%2059R-10.pdf
  4. W24_HI_Cost Estimating Method
    Retrieved from https://garudaaace2015.wordpress.com/2015/08/22/w24_hi_cost-estimating-method/
  5. Process Equipment Cost Estimating by Ratio and Proportion (2012)
    Retrived from https://www.pdhonline.com/courses/g127/g127content.pdf
  6. Sullivan, G. W., Wicks, M. E., & Koelling, C. P. (2014). Engineering economy 16th Edition. Chapter 3 – Cost-Estimation Techniques., page.91-122.
  7. W6_OAN_Equipment Factored Cost Estimates
    Retrieved from http://emeraldaace2017.com/2017/09/10/w6_oan_equipment-factored-cost-estimates/
  8. The Big Mac Index (2017)
    Retrieved from http://www.economist.com/content/big-mac-index

 

 

 

 

W6_OAN_Equipment Factored Cost Estimates

  1. Problem Definition

This week, Author went to South Borneo, to conduct survey for New Fuel Terminal. After survey, Management asked Author to estimate cost of this facilities based on the limited time and data availability. This estimation will be used to conduct feasibility study

  1. Development of Feasible Alternatives

Based on AACE RP No. 17R-97, Author should create class 4 estimate to meet Management requirement.

Table 1: Class Estimate

The requirement for class 4 estimate are:

Table 2: Maturity Level of Project Deliverables

  1. Possible Solution

Based on Table 1, the methodology suggested to produce class 4 estimate are:

  • Equipment Factored
  • Parametric Models

In this case, we will use Happel’s Method, which estimated purchase for all pieces of equipment (material), labor needed for installation using factors for each class of equipment, extra material and labor for piping, insulation etc. from ratios relative to sum of material and added installed cost of special equipment, overhead, engineering fees, and contingency.

Table 3: Happel’s Method 1

Table 4: Happel’s Method 2

Table 5: Happel’s Method 3

  1. Selection Criteria

The Estimation result should meet the Management requirement, at expected accuracy at the end of the project actual cost generated .

  1. Analysis and Comparison of the Alternatives

Table 6: Data

From Table 6, we can calculate using Happel’s Method as shown in table 7.

  1. Selection and Preferred Alternatives

As shown at table 1, Class 4 estimation range is from -30% to + 50%.

Table 7: Proposed Solution

Based on the estimation result in Table 7, the Author proposed a class 4 estimate with the total investment cost is $ 59.400.000. The total investment cost includes all of the construction cost plus overhead, engineering fees, and contingency.

  1. Performance Monitoring and the Post Evaluation of Result

The class 4 estimates purpose is only for the study or feasibility. If the management approve the FID (Final Investment Decision), the Estimators then should complete the required project scope so that the level 2 or 3 estimate can be produced for bidding process.

 

Refrences

  1. Module 08-4 Creating The Owners Cost Estimate Top Down.
    Retrieved from http://www.planningplanet.com/guild/gpccar/creating-the-owners-cost-estimate
  2. AACE International Recommended Practice No. 17R-97
    Retrieved from http://www.anvari.net/Risk%20Analysis/17r-97.pdf
  3. AACE International Recommended Practice No. 59R-10
    Retrieved from https://fenix.tecnico.ulisboa.pt/downloadFile/1126518382175702/DEVELOPMENT%20OF%20FACTORED%20COST%20ESTIMATES_AACE%2059R-10.pdf
  4. W22_RM_Equipment Factored Cost Estimates (2016)
    Retrieved from https://goldenaace2015.wordpress.com/2016/05/26/w22_rm_equipment-factored-cost-estimates/

 

 

 

W5_OAN_Comparison of Depreciation Methods

  1. Problem Definition

As NOC, storage tank is our main asset. We plan to build a 10.000 Kl storage tank, it will cost $ 1.300.000. The asset will be used for 20 years, and the SV at the end of useful life is $ 65.000.

In this week blog posting, Author wants to know the best depreciation method for the company, in order to reduce our income tax.

  1. Development of Feasible Alternatives

Alternatives for depreciation method are:

  1. Option 1 : Straight Line (SL) method
  2. Option 2 : Declining-Balance (DB) method
  3. Option 3 : DB with Switchover to SL Depreciation
  4. Option 4 : Sum of the Year Digits (SYD) method
  5. Option 5 : Modified Accelerated Cost Recovery System (MACRS)

3. Possible Solution

Option 1: SL Method

In this method, we assumes a constant amount is depreciated each year over the useful life of the asset.

Table 1 : SL Method

Option 2: DB Method Using 150% DB Equations

 

DB Method assumes the annual cost of depreciation is fix percentage of the BV at the beginning of the year.

Table 2: DB Method

Option 3: DB with Switchover to SL Depreciation

DB with Switch over to SL Depreciation assumes that the DB Method never reaches a BV of zero; it is permissible to switch from DB to the SL method so that an asset’s BV will be zero (or some other determined amount such as its SV at year k).

Table 3: DB with Switchover to SL

Option 4: Sum of the Year Digits (SYD) method

SYD methods assume that assets are generally more productive when they are new and their productivity decreases as they become old.

Table 4: SYD Method

Option 5: MACRS Method

MACRS is unique to the United States Tax Code. Depreciation rates are set by percentages allowed under the U.S. Tax Code.

Based on IRS Publication 946 table B-2, Storage Tank class life is 14 years, and GDS 7 years.

Table 5: MACRS Method

  1. Selection Criteria

Our selection criteria will be the depreciation method that have the biggest impact on reduce taxable income for company.

  1. Analysis and Comparison of the Alternatives

Table 6: Comparison of Depreciation Method

Table 6 shows that the MACRS Method results in a larger share of the depreciation being charged during the earlier years of the asset’s life than others depreciation method.

  1. Selection and Preferred Alternatives

Figure 1: Depreciation Comparison

Depreciation expense will reduce company’s taxable earnings. The larger depreciation expense, the lower taxable income. Those will lower company’s tax payment.

As shown in figure 1, MACRS method generate the biggest depreciation in early years. Therefore, this method will generate the lower taxable income for company.

  1. Performance Monitoring and the Post Evaluation of Result

MACRS method is unique to US Tax code. For Indonesian company, we must exclude MACRS method from our analysis, and use the acceptable depreciation method that follow Tax system in Indonesia.

Refrences

  1. Sullivan, William G., Wicks, Elin M. & Koelling, C. Patrick. (2014). Engineering Economy 16th edition Chapter 7 page 332 – 354, England: Pearson Education Limited.
  2. Module 06-5 Acquiring Equipment for the Project.
    Retrieved from http://www.planningplanet.com/guild/gpccar/acquiring-equipment-for-the-project
  3. Publication 946 : How to Depreciate Property (2016)
    Retrieved from https://www.irs.gov/pub/irs-pdf/p946.pdf
  4. W18_RM_Comparison of Depreciation Methods (2016)
    Retrieved from https://goldenaace2015.wordpress.com/2016/05/13/w18_rm_comparison-of-depreciation-methods/