1. Total Cost Management Dr. Nick J. Lavingia, P.E. Chevron
Project Management Consultant
APEGGA Annual Conference, Calgary
April 26-27, 2007
Nick Lavingia

2. Dr. Nick J. Lavingia, P.E. Project Management Consultant Chevron
Nick has over 30 years of Global Project Engineering, Management, Consulting and Training experience in the Energy industry. As a Project Management Consultant at Chevron, he provides Consultation and Training to Project Professionals worldwide.
Nick has a B.S. and M.S. in Chemical & Petroleum-Refining Engineering and a Ph.D. in Engineering Economics & Management from the Colorado School of Mines. He is a registered Professional Chemical Engineer in the State of California.
Nick is a member of Project Management subcommittee for Athabasca Oil Sands expansion project. He has published and presented many papers at technical organizations and is a recipient of industry award from Pathfinder for outstanding Contribution to the advancement of Project Management Technology and Chevron Chairman’s award for implementing Value Engineering throughout the corporation.
Nick Lavingia

3. Agenda Total Cost Management: Economic Analysis Cost Estimating
Planning / Scheduling
Benchmarking
Contracting / Procurement
Performance Measurement
Cost Control / Forecasting
Progress Reporting
Finance / Audit
Nick Lavingia

4. DEVELOP Preferred Alternative
Total Cost Management
Phase 1
IDENTIFY & Assess
Opportunities
Phase 2
SELECT from
Alternatives
Phase 3
DEVELOP Preferred Alternative
Phase 4
EXECUTE
(Detail EPC)
Phase 5
OPERATE & Evaluate
Economic Analysis
(NPV, ROR, Payout)
Cost Estimating
(Conceptual)
Planning/Scheduling
(Milestone)
Benchmarking
(Cost / Capacity)
(Funding +/- 10% Accuracy)
(Definitive)
(Cost Collection / Analysis)
(CPM Bar Chart)
(CPM Resource Loaded)
(Monitor & Update)
(Set Pacesetter Target)
(Pre-Funding Assessment)
(Post-Project Assessment)
Contracting/Procurement
(Strategy)
Cost Control/Forecasting
(WBS)
Progress reporting
Finance/Audit
(Pre-Qualification)
(Award / Monitor)
(Closeout)
Performance Measurement
(Establish Progress Payments)
(Earned Value)
(Establish Cost Accounts & Budgets)
(Trend / Forecast)
(Capital versus Expense)
(Asset Accounting)
P&ID $
EST
AFE
PFD D
Legend: AFE = Appropriation for Expenditure NPV = Net Present Value PFD = Process Flow Diagram
D = Decision Point ROR = Rate of Return P&ID = Piping & Instrumentation Diagram
EPC = Engineer, Procure & Construct CPM = Critical Path Method WBS = Work Breakdown Structure
Nick Lavingia

5. Tradeoff Between Cost, Schedule & Quality
Safety is an underlying value!
Safety is the foundation on which we build projects & conduct our business:
Technology selection
Facility layout
Detailed design / procurement
Construction
Commissioning & start-up
Ongoing operation
We manage safety as a fundamental part of conducting our business
Cost
Schedule
Quality
Safety
Project management council – wants to see an improvement
Projects bigger, more of them, competitive advantage
Nick Lavingia

6. Economic Analysis
Nick Lavingia

7. Profitability Criteria
Net Present Value (NPV)… “Show Me The Money”
Definition:
Sum of the Net Cash Flow discounted to time zero using a discount rate
Benefits:
Incorporates time value of money ; easy to understand; recognizes magnitude of profit
Can be used for screening and ranking
Disadvantages:
Independent of the size of the cash flows
Nick Lavingia

8. Profitability Criteria
Rate Of Return (ROR)…“Interest Rate”
Definition:
Discount rate which equates the sum of the Net Cash Flow after tax to zero
Benefits:
Incorporates time value of money
Easy to understand
Easy to compare with the cost of capital
Disadvantages:
Independent of the size of the cash flows
Can be difficult to determine
Assumes reinvestment at same rate
Nick Lavingia

9. Profitability Criteria
Payout… “Time The Money Is Hanging Out There”
Definition:
Time for Cumulative Net Cash Flow after tax = Investment
Benefits:
Simple
Indicator of investment risk
Disadvantages:
Ignores time value of money
No indication of what happens after payout
Nick Lavingia

10. Profitability Criteria
Discounted Profitability Index (DPI)…“Bang For The Buck”
Definition:
DPI = 1 + (NPV of Net Cash Flow / NPV of Investment)
Benefits:
Accounts for the relative size of the cash flows
Used for screening / ranking
Recognizes magnitude of profits
Disadvantages:
Does not give as good an indication of sensitivity to additional investment as NPV
Nick Lavingia

11. Cost Estimating
Nick Lavingia

12. } What is a Cost Estimate?
Realistic representation of final project cost at any stage of project development to meet a specific project objective
Basic Components:
Base Estimate +
Contingency
Total Cost Estimate
Accuracy around the total }
Nick Lavingia

13. Quality of Estimate Nick Lavingia
Contingency column is illustrative only, should evaluate contingency for a specific project based on that project’s status and risks.
Include a copy of the full table in the handout package for the training session
Chevron makes Class 1-3 estimates, contractors make Class 2-5 estimates
Reference: CEM, Section 103, Figure (extract only)
Nick Lavingia

14. Estimate Methods Phase 1 Estimate--Cost/Capacity curves
Phase 2 Estimate--Factored estimate based on major equipment costs
Phase 3 Estimate--Detail estimate based on bids for major equipment and bulk takeoffs
Nick Lavingia

15. Estimating & Contingency Determination
Phase Phase Phase
+/- 50% /- 25% /-10%
Estimated Cost
Final Actual Cost
1.0
Evaluate Alternative
Develop Detailed Design Construction Startup
Conceptual
Contingency
Variance
Base Estimate
Nick Lavingia

16. Contingency Frequency of Occurrence Minimum $0.8 $1.4 Maximum
$1.0Million
Cost
(-20%)
(+40%)
Cost
Most
50/50 Value
Likely
MEDIAN
Value
MODE
Nick Lavingia

17. Cost Estimate Confidence
90 % Chance that
cost will not be exceeded
cost will be exceeded
Equal Chance of cost
exceeding or being lower
90/10
50/50
Base
10/90
Contingency
Allowances
Identified
Scope
Nick Lavingia

18. Evolution of Estimate Accuracy
COST
50%
10%
90%
PHASE 1
IDENTIFY
Minimal Engineering
Low definition detail
Wide accuracy
PHASE 2
SELECT
More Engineering
More Definition
Moderate accuracy
PHASE 3
DEVELOP (AFE)
Adequate FEL (15-30% Engineering)
Well defined
+/- 10% accuracy
Nick Lavingia

19. Planning / Scheduling
Nick Lavingia

20. Project Time Management - Scheduling
Project Time Management includes the processes required to ensure timely completion of the project:
Activity Definition - identifying the specific activities that must be performed to produce the various project deliverables
Activity Sequencing - identifying and documenting interactivity dependencies
Activity Duration Estimating - estimating the number of work periods which will be needed
Schedule Development - analyzing activity sequences, activity duration and resource requirements to create the project schedule
Schedule Control - controlling changes to the project schedule
Nick Lavingia

21. Schedule Level Definitions
Nick Lavingia

22. What Is A Plan? METHODS MEANS LOGIC IDEAS
A Plan Defines Activities Involved in a Project, Their Logical Sequence, and Their Inter-Relationship
Nick Lavingia

23. Contingency or Float is Added to Estimates to Reduce the Risk of Overrun.
Estimates are inaccurate because they are predictions of future events and the amount of variation that will actually occur is unknown.
Cost Estimate Probability Analysis
150
145
140
Appropriated
Value
135
130
Cost ($millions)
125
120
115
Cost w/o contingency
110
Schedule Probability Analysis
105 28
100 0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100% 27
Appropriated
Value
Probability 26 25
Schedule (months) 24 23
Base Schedule 22 21 20 0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Probability
Nick Lavingia

24. Contracting / Procurement
Nick Lavingia

25. Current Trends in Contracting & Procurement
Materials & Equipment
Lead times are increasing
Prices are increasing
Inventories are decreasing
Material shortages
Services
Contractor capacity is decreasing
Craft workforce shortage
Labor rates increasing
Fabrication
Shop loading is high
Pricing is volatile
Marketplace
Marketplace is strong
Global mega projects
Suppliers have choices
Nick Lavingia

26. What Can Buyers Do? Demand Planning Market Intelligence
Plan requirements well in advance
Aggregate demand
Leverage volume
Market Intelligence
Use market data to mitigate cost increases
Monitor supply/demand
Investigate new market entrants
Commercial Considerations
Have and stick to Strategy
Tie cost increases (future decreases) to major underlying cost components
Leverage volume & spend
Lengthen term of agreement
Define work scope & manage contractors
Supplier Relationships
Exploit long term relationships
Qualify additional suppliers
Don’t let supplier know you are desperate
Nick Lavingia

27. The Contracting Process
Assess Contracting Opportunities
Develop & Review Alternative Contracting Strategies
Pre-qualification
Bidding/Negotiating
Evaluation and Agreement
Execution of Contract
Administration
Nick Lavingia

28. Types of Contracts Cost Reimbursable Guaranteed Maximum Unit Owner’s
Owner’s Control
Cost
Reimbursable
Fixed
Price
Owner’s
Risk
Unit
Guaranteed
Maximum
In addition to deciding how many contractors we need, we must also decide what is the most
effective type of contract to use. There are a variety of contracting methods available.
Nick Lavingia

29. Selection of Contracting Strategy
Item
Lump Sum
Reimbursable
Scope Definition*
Market Condition
Owner Participation
Owner Control
Owner Risk
Good
Slow
Low
Minimum
Poor
Busy
High
Tight
* Do not award lump sum contracts without good scope definition.
Nick Lavingia

30. Preferred Contracting Strategy
Work Facilities
Process Units
Utilities
Offsites
No. 1
No. 2
No. 3
Project Management
Owner
Management Support
Consultants or Contractors
Proprietary Technology
Owner / Licensor
Basic Engineering Package
Detailed Engineering
Procurement
Reimbursable Cost
Construction Management
Construction
Construction Contractors--Lump Sum
Commissioning/Start-up
Four design categories which range from low cost, relatively simple, short lived plants to high cost, complex facilities.
Category 1 = Volkswagen
Category 2 = Chevy
Category 3 = Mercedes
Category 4 = Rolls Royce
There is typically a 25% cost increase between Category 1 and 4.
Watch example: Casio Seiko Bulova Rolex
Category
Capacity 12 hr 24 hr 24 hr 24 hr
Day-date Day-date Alarm
Life 1 yr 3 yr 5 year 10 yr
alkaline lithium solar
Environment Water 10m 30m 100m
Resist
Nick Lavingia

31. Performance Measurement
Nick Lavingia

32. Project Control Cycle - Establish Plan
Project Objectives
Scope
Definition
Establish Plan
AFE
Contracting Plan
Estimate
Control Budgets
WBS
Work to Plan
Schedules
Physical
Progress
Actual Hours
Actual Costs
Measure
Cost Variance
Schedule
Variance
Productivity
Performance
Identify the scope and develop a project plan
as the first steps of any project.
Evaluate vs.
1. Example inputs for developing a project plan are:
Project objectives.
Scope definition.
WBS template structure.
Cost estimate.
2. Using the plan inputs, the engineer or project manager will establish a plan which includes:
Expenditure request (E/R) and Appropriation Requests (A/R).
Contracting Plan.
Contracting Budget.
Project Schedules.
3. The project objectives and scope identifies the purpose and goals of the project. The project plan will usually break these goals into smaller, measurable, and executable pieces.
Plan
Cost Summary
Forecasts
Performance Curves
Schedule Status
Trends
Correct
Deviations
Nick Lavingia

33. Performance Measurement
EARNED HOURS
ACTUAL HOURS
POOR P E R F O M A N C
GOOD
TIME
1.0
The Downstream Operability Index is the product of two things:
1) Utilization ratio - Average production, in the second six months of operation, divided by the maximum demonstrated production.
2) One minus the percentage of unplanned downtime (divided by 100)
Nick Lavingia

34. Cost and Schedule Performance Curves
Budgeted
SV = Scheduled Variance
CV = Cost Variance
DT = Time Variance } SV
$ or Work Hours } CV
Earned
Actual DT
Time
Nick Lavingia

35. Cost Control / Forecasting
Nick Lavingia

36. Costing System to Support Cost Control
Summarize Actual Costs Vs. Progress and Compare to Budget
Identify Accounts With Major Variance
Accumulate Cost at Project Completion
Include in Historical Estimating Data Base If Appropriate
Breakdown of Estimated Costs Using the Standard Code of Accounts
Do Some Work
Account for Costs
Account for Workhours
Measure Progress
Take Corrective Action
Nick Lavingia

37. Cost Control System Spreadsheet or Database
COMMITMENTS
Purchase Orders and Supplements
Contracts and Change Orders
Owner Costs
EXPENDITURES
TRENDS
BUDGETS
Spreadsheet or
Database
COST REPORTS
Summary
Detail
TREND LOG
Purchase Order Log CONTRACTS
Status Summary
Change Log
Nick Lavingia

38. Progress Reporting
Nick Lavingia

39. Progress Report No. 1
Nick Lavingia

40. Progress Report No. 2
Nick Lavingia

41. 3000 – Budget at Completion (BAC)
Date Now
2000 – Actual Cost (AC)
1600 – Planned Value (PV)
1200 – Earned Value (EV)
Nick Lavingia

42. Progress Report No. 3
1. Cost Variance (CV) = Earned Value (EV) – Actual Cost (AC)
CV = = - 800
2. Schedule Variance (SV) = Earned Value (EV) – Planned Value (PV)
SV = = - 400
3. Cost Performance Index (CPI) = Earned Value (EV) / Actual Cost (AC)
CPI = 1200 / 2000 = 0.6
4. Schedule Performance Index (SPI) = Earned Value (EV) / Planned Value (PV)
SPI = 1200 / 1600 = 0.75
5. Estimate To Complete (ETC) = [Budget At Completion (BAC) – Earned Value (EV)] / Cost Performance Index (CPI)
ETC = ( ) / 0.6 = 3000
6. Estimate At Completion (EAC) = Actual Cost (AC) + Estimate To Complete (ETC)
EAC = = 5000
Nick Lavingia

43. Summary
Structured Project Development & Execution Process and Total Cost Management can help achieve World-Class Project Performance:
Better
Cheaper
Faster
Safer
PROJECTS
Nick Lavingia