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Towards a Rational Cost Model
Presenter: Tom Lenahan Tom Lenahan Limited
•Total business impact
•The rational cost model
•Cost breakdown structure
•Cost Mapping
•Estimating for the future
What I’ll Cover
Slide 3
Defining the Term
What do we mean by “Turnaround Costs”?
•Only the direct cost of doing the Turnaround?
•The direct cost plus the penalty of lost production?
•Do we include incidental costs?
How about this definition?
“Every dollar we spend or lose in planning and executing the event compared with what we would have saved or kept if we had not performed the Turnaround”
Slide 4
•Includes all cost generators
-Preparation-Manpower-Material-Equipment-Services
-Loss of Production
-Downtime salaries
-On costs
-Disposal costs
-Interaction costs
-Emergent work-Overrun-Overspend-Throughput-Product Quality
-Loss of Profit
-Loss of Market share
-Loss of customers
-Loss of reputation
-Legal action
EVENT COSTS POTENTIAL COSTS PRODUCTION COSTS
BUSINESS COSTS
Event cost $3.44 ($2.6)Potential costs $0.75Production Costs $0.37Business Costs: $5.80Total Business Impact $10.36
Actual Example:Figure in brackets represents what thecompany would have calculated as the“cost” of the Turnaround in the past,before they began to use this model.
The Bottom Line – Total business impact
+
Slide 5
• Shutdowns are task driven events and each task incurs a cost:
TASK
Loss ofproduction
Emergent work
Generates
-Preventive-Corrective-Process driven-Inspection-Improvement
3 Types of cost -Indirect -Direct -Contingency
Incurs
• You do not control cost because cost is an output• What you need to control is the input - people’s spending behaviour
How costs are generated
Elements• Manpower • Materials• Equipment• Services• Facilities• Utilities
Slide 6
The limits of control
• Requests for planned work are generated by others
• Requests for emergent work is generated by the situation
• Once the workscope is agreed, material costs are fixed
•The Turnaround manager controls only labor costs
• These can represent as little as 30% of the total cost
Slide 7
Costs accrued for the Whole event
Planning phase.Relatively smallteam and lowexpenditure
Build up of pre-shutdown workand remainderof planning
Execution phasePlant shut down,scheduled workand start up
Terminationphase - bringingplant back up tofull production
10%
8%
80%
2%
Volume – where you spend the money
Slide 8
• Don’t confuse volume with value
Highest valuederived from lowest revenuespend
Highest valueFirst 1% - (Strategy)
Determinesplanning
Next 9% - (Planning)DeterminesExecution
Next 8% - (Pre-shut)InfluencesExecution
Lowest valueExecution
%Value
Value – the leverage you get from the money you spend
Slide 9
Generate a single event cost code for the Turnaround
Don’t book Turnaround costs to any other cost code
Don’t book non Turnaround costs to the event cost code
Book all Turnaround costs to the event cost code
Employ a cost breakdown structure to differentiate costs
Employ cost mapping detail the differentiated costs
Use a qualified cost coordinator to operate the cost model
Build the cost model in your finance system (SAP etc.)
Basic Rules – If you honestly want to know the real cost of a Turnaround
The rational cost model Stage 1 - Differentiate Costs
This takes discipline and determination
Worklist Closure Event Start Date End Date
Planned Work Late Work Emergent Work
- Measure performance against this figure
- Investigate and eliminated them
- Extra & Additional work (+ late work)
Event Initiated
Control estimate
- Agreed workscope for the event
Late work Costs
- Measures control of work (+ defects)
Contingency Cost
- Analyse to improve prediction
Slide 11
Turnaround Costs
Compression Unit Processing UnitFractionation
Scheduled Work Scheduled Work Scheduled Work
Emergent Work Emergent Work Emergent Work
Late Work Late Work Late Work
CapitalProject
ModificationProject
Preparation Preparation Preparation
Emergent WorkEmergent Work
GeneralContingency
Fund
Stage 2 - Create a cost breakdown (Example)
Slide 12
Turnaround Costs
Compression Unit Processing UnitFractionation
Scheduled Work Scheduled Work Scheduled Work
Emergent Work Emergent Work Emergent Work
Late Work Late Work Late Work
CapitalProject
ModificationProject
Preparation Preparation Preparation
Emergent WorkEmergent Work
GeneralContingency
Fund
Stage 3 - General Cost Mapping Cost Mapping Costs are allocated to individual jobs
For each job, cost are further broken down into:
Manpower (hours, %overtime)
Equipment (purchase, hire costs & servicing
Materials (proprietary items, raw materials & consumables
Services (scaffold, insulation, cleaning etc.)
Costs not usually broken down per job
Utilities (electricity, gas, water)
Facilities (stores, cabins, canteens, washrooms etc)
Temporary Infrastructure (cables, plumbing, barriers, signs etc)
Slide 13
Turnaround Costs
Compression Unit Processing UnitFractionation
Scheduled Work Scheduled Work Scheduled Work
Emergent Work Emergent Work Emergent Work
Late Work Late Work Late Work
CapitalProject
ModificationProject
Preparation Preparation Preparation
Emergent WorkEmergent Work
GeneralContingency
Fund
Stage 4 - Detailed Cost Mapping Cost Mapping Costs are allocated to individual jobs
For each job, cost are further broken down into:
Manpower (hours, %overtime)
Equipment (purchase, hire costs & servicing
Materials (proprietary items, raw materials & consumables
Services (scaffold, insulation, cleaning etc.)
Costs not usually broken down per job
Utilities (electricity, gas, water)
Facilities (stores, cabins, canteens, washrooms etc)
Temporary Infrastructure (cables, plumbing, barriers, signs etc)
Rolled up into preparation and execution costs for client, contractor and sub-contractor resources • Management• Engineering• Supervision • Inspection• Technicians (tradesmen)• Semi skilled • Unskilled
•Mechanical•Electrical•Instrument•Fabrication•Civil
Slide 14
Fragment of a Cost Estimate/ Report - Detailed Materials
Client –Area 1
Proprietary
Fabrications
Consumables
Common stock
Raw materials
Gaskets
Capital
Equipment
Client –Area 1
Cranes
Lifting
Weld sets
Generators
Transport
Compressors
Tenders
Safety
Services
Client –Area 1
NDT
Scaffolding
Water wash
Cleaning
Painting
Insulation
Hi-torque
Manpower
Client –Area 1
Engineering
Inspection
Electrical
Instrument
Fabrication
Supervision
Mechanical
Civil
Riggers
Unskilled
Management11500
10300
29300
44000
54600
17000
8200
11600
3100
10900
8900
11500
10300
27200
40200
49400
14000
7100
13600
3200
9200
19200
Execution Cost Estimate/ Report (roll-up)
l
Client Area 1 Client Area 2 Contractor 1 Contractor 2
Planned Planned Planned PlannedActualActualActual Actual
Manpower
Materials
Equipment
Services
Contingency 8%
Contractor 3
Totals
Fixed Price
Contractor 4 Fixed Price
Grand Total Planned Actual Variance + / -
216500
242200
49600
199100
56600
764000 927400 484200 892100
129000
379400
3067700
204900
212800
71600
200200
89300
778800 943400 500 400 884100
129000
402400
3106700 +39000
Slide 16
Estimating for the future • Detailed comparison highlights critical cost issues
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1,800,000
Main Cont. Management Workshops Miscellaneous
Estimated Actual Model
Main Contractor
Sub-Contractor
Client Resource
Spares/ Materia
ls
Workshops
Hire charges
Safety costs
Miscellaneous
Use money as the ultimate control mechanismo Calculate the total business impacto Use a rational cost modelo Don’t confuse volume with valueo Control people’s spending behavioro Map out your costs in great detail
Key Points to Take Home
Slide 18
Thank you – any questions