Nick Lavingia

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Total Cost Management
Dr. Nick J. Lavingia, P.E.
Chevron
Project Management Consultant

APEGGA Annual Conference, Calgary
April 26-27, 2007


Nick Lavingia
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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 Chairmans award for
implementing Value Engineering throughout the corporation.
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Agenda
Total Cost Management:
Economic Analysis
Cost Estimating
Planning / Scheduling
Benchmarking
Contracting / Procurement
Performance Measurement
Cost Control / Forecasting
Progress Reporting
Finance / Audit





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Contracting/Procurement
(Strategy)





Cost Control/Forecasting
(WBS)

Progress reporting

Finance/Audit



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)






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


P&ID
$
EST
AFE PFD D D D D D
$
EST
(Funding +/- 10% Accuracy)
(Definitive)
(CPM Bar Chart) (CPM Resource Loaded) (Monitor & Update)
(Pre-Funding Assessment) (Post-Project Assessment)

(Pre-Qualification)

(Award / Monitor)


Performance Measurement
(Establish Progress Payments)

(Earned Value)

(Establish Cost Accounts & Budgets)

(Trend / Forecast)

(Closeout)
(Cost Collection / Analysis)
(Set Pacesetter Target)

(Asset Accounting)
(Capital versus Expense)
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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
Tradeoff Between Cost, Schedule & Quality
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Economic Analysis



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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

Profitability Criteria
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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
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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
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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

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Cost Estimating



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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
}
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Quality of Estimate
Estimate PROJECT
PHASE
ENGINEERING CONTINGENCY
Phase 1 Identify < 1 % 30 - 50 %
Phase 2 Select 1 - 5 % 15 - 40 %
Phase 3 Develop 15 - 30 % 5 - 10 %
Phase 4 Detailed
Design
50 - 80 % 5 - 10 %
Phase 4 Construction 90 - 95 % 5 - 15 % of
unexpended funds

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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
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Estimating & Contingency Determination
Contingency Variance Base Estimate
+/- 50% +/- 25% +/-10%
Phase Phase Phase
1 2 3
1.0
Evaluate
Alternative
Develop Detailed Design Construction Startup Conceptual
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Minimum
Cost
Maximum
Cost
$1.0Million
Most
Likely
Value
MODE
Frequency
of
Occurrence
$1.4
(+40%)
$0.8
(-20%)
50/50 Value
MEDIAN
C
O
N
T
I
N
G
E
N
C
Y
Contingency
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Cost Estimate Confidence
90 % Chance that
cost will not be
exceeded
90 % Chance that
cost will be exceeded
Equal Chance of cost
exceeding or being lower
90/10
50/50
Base
10/90
Contingency
Allowances
Identified
Scope
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Evolution of Estimate Accuracy
PHASE 3
DEVELOP (AFE)
Adequate FEL (15-30% Engineering)
Well defined
+/- 10% accuracy
PHASE 2
SELECT
More Engineering
More Definition
Moderate accuracy
PHASE 1
IDENTIFY
Minimal Engineering
Low definition detail
Wide accuracy
COST
50%
COST
50%
COST
50%
10% 90%
10% 90%
10% 90%
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Planning / Scheduling



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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
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Schedule Level Definitions
SCHEDULE LEVELS

PMP
PHASE
OUTPUT
DOCUMENT
KEY INPUTS TYPE OF
SCHEDULE
(Note 1)
LEVEL OF
SCHEDULE
(Note 2)
PHASE 1:
IDENTIFY
OPPORTUNITY
Preliminary Project
Milestone Schedule
Start and completion date
Duration based on job size

BAR
CHART
1
PHASE 2:
SELECT
ALTERNATIVES
Expanded Project
Milestone Schedule
Same as Level 1 plus:
Constraints (permit period, long
lead-time materials, shutdown
dates, etc.)
BAR
CHART
2
PHASE 3:
DEVELOP
ALTERNATIVE
Detailed Integrated
Project Schedule
Same as Level 2 plus:
Detailed schedules for engineering,
procurement, construction and startup
(Resource Loaded)
CPM 3
PHASE 4:
EXECUTE
Updated Integrated
Project Schedule
Expanded detail for design
Actual progress, for comparison with
planned progress
CPM 4
PHASE 4:
EXECUTE
Updated Integrated
Project Schedule
Expanded detail for construction & startup
Actual progress, for comparison with
planned progress
CPM 5

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What Is A Plan?
A Plan Defines Activities Involved in a Project, Their
Logical Sequence, and Their Inter-Relationship
METHODS
IDEAS
LOGIC
MEANS
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Estimates are inaccurate
because they are predictions
of future events and the
amount of variation that will
actually occur is unknown.
Contingency or Float is Added to Estimates to Reduce
the Risk of Overrun.
Cost Estimate Probability Analysis
100
105
110
115
120
125
130
135
140
145
150
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Probability
C
o
s
t

(
$
m
i
l
l
i
o
n
s
)

Appropriated
Value
Cost w/o contingency
Schedule Probability Analysis
20
21
22
23
24
25
26
27
28
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Probability
S
c
h
e
d
u
l
e

(
m
o
n
t
h
s
)

Appropriated
Value
Base Schedule
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Contracting / Procurement



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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
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What Can Buyers Do?
Demand Planning
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
Supplier Relationships
Exploit long term relationships
Qualify additional suppliers
Dont let supplier know you are desperate

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
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The Contracting Process
Assess Contracting Opportunities
Evaluation and Agreement
Bidding/Negotiating
Pre-qualification
Develop & Review Alternative Contracting Strategies
Administration
Execution of Contract
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Owners Control
Cost
Reimbursable
Fixed
Price
Owners
Cost
Risk
Unit
Price
Guaranteed
Maximum
Types of Contracts
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Selection of Contracting Strategy
Item Lump Sum Reimbursable
Scope Definition*

Market Condition

Owner Participation

Owner Control

Owner Risk
Good

Slow

Low

Minimum

Low
Poor

Busy

High

Tight

High
* Do not award lump sum contracts without good scope definition.
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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 Owner
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Performance Measurement



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Project Objectives
Definition
Estimate
WBS
Project Control Cycle - Establish Plan
Physical
Progress
Actual Hours
Actual Costs
Cost Summary
Forecasts
Performance Curves
Schedule Status
Trends
Scope
Work to Plan
Evaluate vs.
Plan
Establish Plan
Measure
Performance
Correct
Deviations
AFE
Contracting Plan
Control Budgets
Schedules
Cost Variance
Schedule
Variance
Productivity
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Performance Measurement
PERFORMANCE =
EARNED HOURS
ACTUAL HOURS
POOR
P
E
R
F
O
R
M
A
N
C
E
GOOD
TIME
1.0
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Cost and Schedule Performance Curves




















SV
}
CV
}
DT
Time
SV = Scheduled Variance
CV = Cost Variance
DT = Time Variance
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Cost Control / Forecasting




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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
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Cost Control System
Spreadsheet
or
Database
COMMITMENTS
Purchase Orders and Supplements
Contracts and Change Orders
Owner Costs
BUDGETS
COST REPORTS
Summary
Detail
EXPENDITURES
Purchase Order Log CONTRACTS

TREND LOG
TRENDS
Status Summary
Change Log
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Progress Reporting

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The calculations you just performed for Project ABC are reflected in the graph below. This set of
curves shows how well the project is performing against schedule (Earned versus Planned) and
also how well its performing against budget (Spent versus Earned).
0
500
1000
1500
2000
2500
3000
3500
0 1 2 3 4 5 6 7 8
Months from Start of Project
C
u
m
u
l
a
t
i
v
e


W
o
r
k
h
o
u
r
s
Planned
Earned
Spent
900 Workhours Actually Spent
1200 Workhours Earned Value
1600 Workhours Planned
Progress Report No. 1
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Sierra Tank Expansion Project
0
5000
10000
6000
8000
0
2000
4000
6000
8000
10000
12000
14000
0 1 2 3 4 5 6 7
Months from Start
C
u
m
u
l
a
t
i
v
e

W
o
r
k
h
o
u
r
s
Planned Earned Spent
Total Planned Earned Actual
Budget Workhrs Workhrs Workhrs
Activity Workhrs To Date % To Date % To Date % To Complete @Completion
Site Survey 500 500 100% 500 100% 600 120% 0 600
Prepare P&ID's 1,500 1,100 73% 1,200 80% 1,500 100% 200 1,700
Civil Design 1,000 800 80% 900 90% 1,000 100% 50 1,050
Piping Design 3,000 1,700 57% 2,200 73% 2,600 87% 750 3,350
Electrical Design 2,500 900 36% 1,100 44% 1,900 76% 300 2,200
Inst & Controls 1,000 0 0% 100 10% 350 35% 450 800
Const Bid Package 500 0 0% 0 0% 50 10% 250 300
TOTALS 10,000 5,000 50% 6,000 60% 8,000 80% 2,000 10,000
Forecasted
Workhrs
Monthly Workhour Report for End of Month 3
Project: Sierra Tank Expansion Project for Chevron
Progress Report No. 2
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Progress Report No. 3
0
500
1000
1500
2000
2500
3000
3500
1 2 3 4 5 6 7 8
Months from Start of Project
C
u
m
a
l
a
t
i
v
e

W
o
r
k
h
o
u
r
s
Actual Cost (AC)
Earned Value (EV)
Planned Value (PV)
3000 Budget at Completion (BAC)
2000 Actual Cost (AC)
1600 Planned Value (PV)
1200 Earned Value (EV)
Date Now
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Progress Report No. 3
1. Cost Variance (CV) = Earned Value (EV) Actual Cost (AC)
CV = 1200 - 2000 = - 800
2. Schedule Variance (SV) = Earned Value (EV) Planned Value (PV)
SV = 1200 - 1600= - 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 = (3000 - 1200) / 0.6 = 3000
6. Estimate At Completion (EAC) = Actual Cost (AC) + Estimate To
Complete (ETC)
EAC = 2000 + 3000 = 5000




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Summary
Structured Project Development & Execution
Process and Total Cost Management can help
achieve World-Class Project Performance:

Better
Cheaper
Faster
Safer

PROJECTS