## 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.
2. AACE International Recommended Practice No. 17R-97
3. AACE International Recommended Practice No. 59R-10
4. W22_RM_Equipment Factored Cost Estimates (2016)

## 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.
3. Publication 946 : How to Depreciate Property (2016)
4. W18_RM_Comparison of Depreciation Methods (2016)

## W4_OAN_Time Evaluation for Submitting Bidding Proposal

1. Problem Definition

As function who specialized in project management and procurement, one of our main job is to organize tender for EPC project.  In this week blog posting, Author will running an analysis related to time and cost, to prepare ideal proposal in bid process for contractor.

The result is estimate time for contractor to prepare the bidding. Then we will compare the results with company regulation, which is 3 to 7 working days to submit bidding proposal.

Table 1 shown Project size is measured in the overall investment.

Tabel 1: Project Classification

1. Development of feasible alternatives

This Matrix provides an estimate classification for process industries.

Tabel 2: Cost Estimate Classification

1. Possible Solution / Alternative

Based on Table 2, cost estimate can be classified as follow :

• Class 5 estimates are generally prepared base on very limited information.
• Class 4 estimates are typically used for project screening, determination of feasibility, concept evaluation, and preliminary budget approval.
• Class 3 estimates are used as the project budget until replaced by more detailed estimates.
• Class 2 estimates are often used as the “bid” estimate to establish contract value for contractors.
• Class 1 estimates are typically prepared to form a current control estimate to be used as the final control baseline.
1. Selection of Criteria

Level 2 estimate are ideal for contractor to use in tender. Based on table 1, level 2 estimate effort ranges from 0.025% to 0.1% of project cost.

1. Analysis and Comparison of the Alternatives

We use rate for cost estimator \$ 29.71/hour for bachelor’s degree and work time productivity chart as shown in table 3. For ideal condition 100% productivity (5 days a week, 8 hours per day), and for worst condition productivity 72% (7 days a week, 12 hours per day).

Tabel 3 : Work Time Productivity Chart

Table 4 describe preparation effort based on the project value.

Tabel 4: Estimate Bid Effort

1. Selection and Preferred Alternatives

Since most of our project cost more than \$5.000.000, then project in this range will be considered as normal project. Based on company regulation, contractor should submit their proposal 3 to 7 working days in normal project, instead of 11 days to 43 days and 15 days to 59 days for 72% productivity as shown at table 4. Therefore, company should revised their bidding rule.

By using range from 11 to 43 days, contractor will have better estimate and minimize possibility of change order during project execution. This is win-win solution for both parties, company will get competitive bidding and lower the risk for change order or breach in the middle of project, while contractor have more time to prepare their proposal and avoid “buying” the project.

1. Performance Monitoring and the Post Evaluation of Result

The cost and time to prepare bidding document should be monitor not exceed the budget range and time allowance, or contractor will at risk of bankruptcy.

References

1. Module 08-4 Creating the Owners Cost Estimate (Top Down) (2015).
2. AACE International Recommended Practice No. 17R-97
3. Occupational Outlook Handbook – Cost Estimator (2015)
4. W20_RM_Estimate Preparation Effort for a bid
5. Effects of Extended Work Time on Productivity (2017)
6. Project Classification (Jan, 2008)

## W3_OAN_Investing vs Renting vs Leasing Studies

1. Problem Definition

Reliability of equipment in oil and gas industry has been main concern in our company, storage tank to be specific. As main equipment it needs special attention, since we are taking care hydrocarbon product, which is highly flammable. Our goals are to asses reliability of storage tank such as corrosion rate and remaining plate thickness. To achieve our goals, it is important to determine the most economical method to asses reliability or conduct inspection of storage tank.

1. Development of feasible alternatives

As commented in the blog for Week 2, to asses corrosion rate and remaining plate thickness alternatives :

1. Investing an Ultrasonic Thickness (UT) Crawler as inspection tools
2. Hire third party specialize on storage tank inspection
3. Leasing UT Crawler as inspection tools

It is important to choose which most efficient way to conduct inspection, especially with numerous number of storage tank.

1. Possible Solution / Alternative

Calculation of investment, maintenance cost, operating cost and rent cost based on inquiry from UT Crawler Vendor for new equipment or leasing and Third Party specialize in this field.

1. Selection of Criteria

The Acceptance criteria is the option with lowest total net worth.

1. Analysis and Comparison of the Alternatives

Table 1: Summary result of investing, renting, and leasing (Operating Lease Scenario) data

The scenario for leasing is “Operating Lease”, with lease rental payment is 75% of investment price.

Table 2: Useful life and Total Number of Inspection in 1 year

Table 3: Book Value at the end of life time, using Straight Line Depreciation

Calculation summary :

Table 4 : Present Worth for Purchasing

Table 5 : Present Worth for Renting

Table 6 : Present Worth for Leasing

Table 6 : Calculation Net Worth Purchase, With i : 7% (Bank Indonesia Rate – 2016)

1. Selection and Preferred Alternatives

Table 6 show that total cost of leasing UT Crawler is the lowest. For long term inspection with numerous number of tank, leasing UT Crawler is the most efficient way.

1. Performance Monitoring and the Post Evaluation of Result

It is recommended to review feasible leasing alternatives, and conduct performance equipment monitoring. For example Net lease scenario, where the payment not include maintenance and insurance, or Capital Lease scenario, where we can buy the asset at the end of lease term. Regard, the maintenance cost is very low and almost need no maintenance, also we can calibrate UT Crawler by our self.

References

1. Sullivan, William G., Wicks, Elin M. & Koelling, C. Patrick. (2014). Engineering Economy 16th edition page 71-73, page 213 – 215, and page 332 – 337, England: Pearson Education Limited.
2. Module 10-3 Managing Change The Owner’s Perspective (2015).
3. Module 06-5 – Acquiring Equipment for The Project (2016)
4. Press Release (2016)

## W2_OAN_Investing vs Renting Studies

1. Problem Definition

Reliability of equipment in oil and gas industry has been main concern in our company, storage tank to be specific. As main equipment it needs special attention, since we are taking care hydrocarbon product, which is highly flammable. Our goals are to assess reliability of storage tank such as corrosion rate and remaining plate thickness. To achieve our goals, it is important to determine the most economical method to asses reliability or conduct inspection of storage tank.

1. Development of feasible alternatives

To asses corrosion rate and remaining plate thickness alternatives :

1. Investing an Ultrasonic Thickness (UT) Crawler as inspection tools
2. Hire third party specialize on storage tank inspection

It is important to choose which most efficient way to conduct inspection, especially with numerous number of storage tank.

1. Possible Solution / Alternative

Calculation of investment, maintenance cost, operating cost and rent cost based on inquiry from UT Crawler Vendor and Third Party specialize in this field.

1. Selection of Criteria

Summary result of investing and renting data :

Table 1: Investing vs Renting from Third Party

As shown on the table 1, if we rent from 3rd party company we dont have to deal with maintenance cost, while if we purchase we must consider maintenance cost, operating cost beside investment cost.

1. Analysis and Comparison of the Alternatives

Total number of inspection based on our work plan and KPI. In 1 month we must performed at least 2 storage tank inspection, therefore in 1 year we have target at least 24 storage tank to be inspected. We assume that our equipment have 5 years life expectancy. This will be our baseline for calculation.

Table 2: Useful life and Total Number of Inspection in 1 year

Calculation summary :

Table 3 : Summary total cost inspection 24 storage tank/year for 5 years inspection

1. Selection and Preferred Alternatives

Table 3 show that total cost of invest UT Crawler is lower thant rent from 3rd party. The biggest difference in operational cost, this cost reduction more than balance the extra \$53.383 in investment. In short run, one year or less, we can consider outsourced inspection activity. But for this case, long term inspection with numerous number of tank, investment on UT crawler will be economically feasible.

1. Performance Monitoring and the Post Evaluation of Result

Periodic monitoring and maintenance is needed to conduct, for company to make sure equipment in the best condition. Review shall be conducted to reveal uncertainty parameter such as overhead and cost of run.

References

1. Sullivan, William G., Wicks, Elin M. & Koelling, C. Patrick. (2014). Engineering Economy 16th edition page 71-73, England: Pearson Education Limited.
2. W2_AL_Sleeping Field Development (2013, March).
3. W02.1_SJP_Bamboo Scaffolding ((2017, June)

## W1_nunug_Tuckman Analysis Assessment

1. Problem Definition

Emerald Team 2017 has been formed during five days class, consist people from different culture, background and experience. Now, we enter long distance learning as the second stage to achieve our main goals ; Pass AACE certification on first attempt and generate Return on Training Investment (RoTI).  To achieve project goal, it is important to establish strategy of leadership to keep Team solid and to achieve main goal efficiently.

2. Development of feasible alternatives

According Professor Bruce Tuckman in 1970, there are 4 stages for teamwork development :

1. Forming
2. Storming
3. Norming
4. Performing

Those five stages seem to be sequence that Team must be passed to build cohesive team. From Forming stages, where Team members must deal with interpersonal issues, to Performing stages, where team members already comfortable with each other and group normed have been accepted.

3. Possible Solution / Alternative

Survey was conducted for  each team member by filling 32 question. Using Tuckman’s model we can understand and identify what stage of team work Emerald Team is operating in. The group can be either in Forming phase, Storming Phase, Norming Phase or Performing Phase. Delphi technique with P70 used to analysis the data.

4. Selection of Criteria

Summary result of the survey data using Delphi technique with P70 as follow :

Tabel 1: Team Survey Result

Tabel 2: P70 Result with Delphi Technique

As shown on the table 2, the team position is in Performing Stage.

5. Analysis and Comparison of the Alternatives

As shown on the table 2, Final result is in Performing Stage. The reason behind this stage because most of the member come from same Company, they already have same code of conduct, working environment and working ethic. Another reason structural issues have been settled by making project charter.

6. Selection and Preferred Alternatives

Table 2 show that the Team has the highest score at Performing Stage. In this stage, Team is performing at high level, and the matching leadership style for this stage is Delegating. Leader will able to focus more of energy on leadership activities and less on supervisory.

7. Performance Monitoring and the Post Evaluation of Result

Periodic monitoring and survey is needed to conduct, for the leader to monitor team performance and check the team member perception change over time.

References

1. Team Work Theory : Stage of Group Development (2017, August).