# W12_TH_Contract Risk Mitigation for Tug Boat Rental

##### 1. Problem Definition

Author has been conducting bidding for tug boat rental as part of LNG supply chain to PLN power plant on Kupang area. Duration for the contract is one year period, start from January-December 2018. This contract is very vulnerable to weather conditions because if the weather is bad then the tug boat could not be used. So that, during negotiation meeting, the prospective winner bidder proposed 2 options for its offer. First option is IDR 7,800,000,000 without condition; or second option is IDR 7,500,000,000 + IDR 22,000,000/day stand by rate if tug boat could not be used due to a bad weather.

##### 2. Identify the Possible Alternative

Facing to this case, we have to decide which proposal option is accepted, IDR 7,800,000,000 without condition (option 1); or IDR 7,500,000,000 + IDR 22,000,000/day stand by rate (option 2).

##### 3. Development of The Outcome for Alternative

It is clearly that if we accept first option, then contract price will be IDR 7,800,000,000.

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. Occurrences of Bad Weather (In Days)

By using Monte Carlo simulation, it is forecasted the total bad weather days for each month in 2018, at P70 as follows:

Table 2. Occurrences of Bad Weather in 2018

Therefore, stand by cost is estimated as 20 days * IDR 22,000,000 = IDR 440,000,000,

so that the price for second option is IDR 7,500,000,000 + IDR 440,000,000 = IDR 7,940,000,000.

##### 4. Selection 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 8,000,000,000.

##### 5. Analysis & Comparison of Alternative

Below table contains total cost for both options:

Table 3. Total Cost for Both Options

From the table 3, option 1 is cheaper IDR 140,000,000 than option 2

##### 6. Selection of the Preferred Alternative

Based on comparison table above, we decided to proceed with option 1, IDR 7,800,000,000

##### 7. 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, G. W. (2014). Engineering Economy 16th Chapter 12 – Probabilistic Risk Analysis, pp. 526-562. Pearson. Sixteenth Edition.
3. Asro, Yoseph. (2014). W4_YAW_Contract Risk Mitigation|Kristal AACE 2018. Retrieved from https://kristalaace2014.wordpress.com/2014/03/17/w4_yaw_contract-risk-mitigation/