Friday, November 16, 2012

W18_TRI_ Cost Analysis using Simulation Approach


1.      Problem recognition, definition and evaluation

After last tender was failed, it will be conducted next tender to obtain EPCI’s contractor of gas field project. The tender was considered as successful tender of the bidder submitted price wouldn’t exceed maximum 10% of owner estimate (OE). Using cost inputs from last tender and third consultant, the existing OE needs to be updated. Analysis shall be done prior to submitting new OE to Bid committee.

2.      Development of the feasible alternative

The cost analysis using simulation approach was selected to develop the cost estimation.

3.      Development of the outcome

There were 4 project heads needed to be completed as project schedule of 30 months. The three-point estimate for each cost item was categorized in Project Heads as shown in Table 1.
Triangular distribution was used since it more closely reflects the variation in typical project data. In the triangular distribution, a straight line relationship is assumed between the minimum value, up to the most likely/moderate value, and from the moderate value down to the maximum value.
• Minimum is the value based on analysis of the best case scenario, which means the lowest budget (at which the probability is almost zero)
• Moderate is the value based on realistic expectations for cost element (at which the probability is greatest)
• Maximum is the value based on analysis of the worst case scenario, which means the highest budget (at which the probability is zero)
Table 1. Breakdown Project Head Cost

4.      Selection of criteria

The analysis was done using Software Simulation of Crystal Ball. Monte Carlo simulation was generated with total 10,000 iterations and 5% limiter of two tails.

5.      Analysis

The range of cost distribution was resulted from simulation as presented in Figure 1, and the simulated cost using cumulative probability was shown in Figure 2.
 
Figure 2. Simulated EPCI Cost
Figure 2. Simulated EPCI Cost (Cummulative)

6.      Selection of alternative

According to Figure 1 and Figure 2 above, USD 200 million was selected as the optimized result since it represented the 75% confidence level that was used as a threshold to determine the baseline cost.

7.      Performance monitoring and post-evaluation of results

Although the confidence level was not so high, the baseline cost as new owner estimate could be proposed to management to get approval. However, a 75% confidence level should be informed to them and might be upgraded to higher confidence level to leverage the possibility of successful tender if there were no economic constraints in this project. Otherwise, a negotiation with prospective bidders must be held prior to next tender to avoid the failed tender.
 

References:
·         Oracle. (2008). Documentation for Oracle® Crystal Ball, Fusion Edition. Oracle Corporation
·         Asmoro, Trian H. and Autie, M.P. (2012, May 16). Balancing Project Schedule & Cost on Sour Gas Development Project Case Study (pp. 9). Doha, Qatar: the SPE International Production and Operations Conference and Exhibition
·         Asmoro, Trian H. (2012, Oct 1). W7_TRI_ EPCI Payment Term & Tender Price. Retrieved from: http://aacemahakam.blogspot.com/2012/10/w7tri-epc-payment-term.html
·         Asmoro, Trian H. (2012, Nov 16). Negotiation: Your Starting Points. Retrieved from: http://3an.blogspot.com/2012/11/negotiation-your-starting-points.html
 

1 comment:

  1. Another AWESOME posting, Trian!!! Wonderful case study and very impressive use of simulation.

    Not sure if you have seen it or not, but take the time to download the scathing assessment of NASA's cost estimating by Glenn Butts? http://www.build-project-management-competency.com/wp-content/uploads/2010/09/Glenn.Butts-Mega-Projects-Estimates.pdf

    Read over his Joint Confidence Level Probabilistic Calculator (JCL-PC) You may want to consider taking his approach and experimenting to see if that will give you more realistic cost estimates?

    BR,
    Dr. PDG, back in Jakarta

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