Financial Risk Analysis and Cost Reductions Alternatives for Dredging Projects

Karim El Kheiashy PhD MBA PMP PE Technical Manager; Bechtel Oil, Gas & Chemicals.

Maurice "Zickie" Allgrove C.Eng.Director; Ports and Marine Terminals, Worley Parsons

Outline

˃ Introduction

˃ Cost Breakdown

˃ Risk Analysis

˃ Contingency Determination

˃ Cost Reduction Alternatives

Introduction

˃ Land cost

˃ Energy Exploration

˃ Maritime Infrastructure

˃ Industry Capacity

˃ Funding Limitations

The cost to replace the present system of locks is estimated at more than $125 billion. - ASCE

Cost Breakdown

+

BARE COSTS + Markups

(Productivity, Overtime, Taxes, Workmen’s compensation)

DIRECT COSTS PRIME CONTRACTOR’S MARK

UP

(JOOH, Bond, Profit and HOOH)

DIRECT COSTS

+ CONTRACT COST OWNER’S MARK UP

(Engineering & Design Supervision, Inspection and Overhead)

PROJECT COST

CONTRACT COST

Cost Breakdown

Bare CostsBare costs are defined as cost in a project that have no markups included. This excludes productivity, overtime, any tax adjustments, any direct cost markups, contractor markups, special markups or owner cost markup.

Direct CostsDirect cost equal bare cost plus all direct cost adjustments (Direct Labor, Direct Equipment and Direct Sub Bid) which includes overtime and productivity, but does not included contractor payroll taxes and insurance (PTI).

Contract Cost The Contract Cost includes the Cost to Prime plus the performing contractor’s markups, subcontractor markups, sub-subcontractor markups, etc. Contractor markups are already included in the Cost to Prime. PTI and any allowances, such as small tools, are applied to the contractor’s own work and then any indirect markups, such as job office overhead (JOOH), home office overhead (HOOH), profit, bond, excise tax, etc., are applied to the total. Special markups are included in the cost; however, they are only included as an additional cost that is not subject to further compounding by markups at higher levels.

Project CostThe Project Cost includes the cost to owner plus any owner markups, such as escalation, contingencies, SIOH (owner’s supervision, inspection and overhead) and/or other costs as defined.

Cost to Prime The Cost to Prime includes the direct cost plus all contractor markups that apply, up to the item/folder that is being viewed. That is, the cost to prime is the cost to the performing contractor, not including his own PTI and indirect markups. The cost to prime does include any sub or sub-subcontractor's PTI and indirect costs, but not the performing contractor’s PTI and indirect markups. For example, the cost to prime includes the direct cost of the prime contractor’s own work, the direct cost of their subcontractor’s work and the subcontractor’s PTI and indirect markups on their work. PTI and any allowances, such as small tools, are applied to the subcontractor's own work and then any indirect markups, such as JOOH, HOOH, profit, bond, excise tax, etc., are applied as defined by the estimator. Any subcontractor, sub-subcontractor, etc., special markups are also included in the cost to prime; however, they are only included as an additional cost that is not subject to further compounding by markups at higher levels.

Mark-upsMarkups may include direct cost markups, contractor markups, special markups and owner markups. Direct cost markups can include adjustments to the direct cost for productivity, overtime, taxes and/or other adjustments as defined by the estimator. Contractor markups can include PTI; allowances, such as small tools; indirect costs, such as JOOH and HOOH; profit; bonds; and/or other costs as defined by the estimator. Contractor markups are defined for each contractor, subcontractor, sub-subcontractor, etc. A special markup can also be defined by the estimator and applied by the contractor, subcontractor, etc. Owner cost markups can include escalation, contingencies, SIOH (owner's supervision, inspection and overhead) and/or other costs as defined by the estimator.

Risk Analysis

Risk factors Size of the job;

Portion of the work to be done by subcontractors;

Nature of work;

Where the work is to be performed and period of performance;

Relative difficulty of work, the reasonableness of negotiated costs;

Amount of labor included in the costs;

Environmental issues

Contingency

A contingency value to account for project risks and unknowns.

Contingency in estimates is not additional profit or fee; it represents an actual construction cost.

Monte-Carlo Simulation for risk quantification / possible cost outcomes.

Contingencies, as defined in the Cost Narrative of the USACE Cost Engineering Report, provide “allowances to cover unknowns, uncertainties and/or unanticipated conditions that are not possible to adequately evaluate from the data on hand at the time the cost estimate is prepared but must be represented by a sufficient cost to cover the identified risks”

Costs

Bare cost Direct cost Contract cost Project cost Contingency

Operation & Maintenance

Benefits to Cost Ratio (BCR)

Bare cost Direct cost Contract cost Project cost Contingency

Operation & Maintenance

Cost Reduction

Engineering Procurement Construction Contracts For large and long term dredging projects, it is better to devise a programmatic

management approach to help control costs and reduce some of the indirect costs to projects.

A program management approach that would seek to reduce overall indirect costs would employ large engineering/design-procurement-construction (EPC) contracts for the project.

These large contracts that are program oriented would replace the numerous separate design and construction contracts.

Reduction of scheduled construction calendar time that requires the presence of construction companies with their management structures and other overhead costs that are charged directly to the construction project.

Fewer mobilizations and work location changes that reduce the total distances that materials, equipment, and people must travel.

Reduced prices of labor, materials, and transportation.

Reduced indirect project costs and general direct project costs.

Owner – administer contract management

EPC Contractor – Single point of responsibility,

communication and coordination

Sub-contractor

VendorSpecial consultants

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Cost Reduction

Public Private Partnership

Government control (participation and ownership) with private efficiency and capital

Access to a broader range of financing

Access to additional capital

Fewer constraints on accessing capital (e.g. annual appropriation)

Risk sharing (specificity, complexity, uncertainty)

Lower costs of service through specialization

Cost Reduction

Public Role Establishing infrastructure Establish a regulatory framework Establish a business environment Encourage economic opportunity Encourage private investment Protect labor interest Private Role Generate a rate of return Handle operational aspects Manage commercial risks Propose and implement investment policy Incentives for high performance and competitive tariffs Play a crucial role in fostering efficient logistics development

Cost Reduction

Government Vs. Private Clients Labor Laws Taxes Fuel Cost Schedule (delivery dates / investment returns) Location (intracoastal / navigation) Environmental Reclamation / Disposal Project Size (Economy of Scale) Negotiate / Industry Competition