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Incentivizing Early Completion of Major Oil and Gas Projects

FEATURED PAPER

By Stephen J.C. Paterson

HuaHin, Thailand

 



Abstract

Incentives, the carrot that an Owner dangles in front of a Contractor when the project starts to drift off track in an attempt to bring things back in line. More often than not a system is quickly cobbled together as a quick fix, usually leaving both sets of management teams who are administering it with differing views with regards achievement of the financial recompense.  The US Department of Transportation’s document “Work Zone Road User Costs Concepts and Applications” addresses the concepts of incentives and disincentives for their traffic projects. It is this concept that this paper addresses by substituting “Lost Opportunity costs” in place of the “Road User Costs Concept” and testing against a simplistic conceptual Oil and Gas project. It explores the initial concept, applies this to a similar model developed specifically for project and arrives at an incentive/disincentive scheme for acceleration or lost opportunities which can be implemented during the contract development stage outlining the “daily bonuses or penalties” to be applied.

Keywords: Accuracy, Budgets, Cost Estimates, Duration, Guild of Project Controls, Lost Opportunities, Opportunities, Precision, Reliability

Introduction

Lost Opportunities and their associated costs, what are they? In all forms of business there are opportunities and most are overlooked when the decision-making process kicks in. Be it a small home project or a multi-billion-dollar industrial project one of the items that rarely draws attention is the cost of opportunities as the focus is on the main issue, how to fund the project.

Setting aside the project for a moment, the topic of ‘Opportunity Cost’ and what is the formula to calculate it? Before discussing in detail, the formula in business investment is; [Equation 1] Return of the most lucrative option minus the Return of the chosen option. That is in a business environment but does opportunity cost appear in our daily routines? The direct answer is “Yes”, almost everything we do be it, a house purchase, car purchase, decision to going to university, buying clothes, buying a takeaway meal, all encompass some form of opportunity, although we might not recognize it does.

For example; purchasing a home, most people will research the pros and cons before making the final decision, but not all the potential opportunities will be explored. Another example: many people purchase a fast food meal occasionally, however if they purchased a meal every day for the rest of their working life (30 years), they would miss several cost opportunities. Aside for the weight gain and the unhealthy side effects of fast food meals, had the money spent each day $72,000 (assuming $10/day) been invested it would have made a decent return. This is just two of many examples in our daily routine.

This subject raised itself during review of the GPCCAR’s “Module 08-7 Validate the Time and Cost Trade-offs” and was immediately drawn to the interesting illustration (figure 6) which depicted the schedule vs time optimization, the source of which came from the US Department of Transportation (DoT), Federal Highway Agency’s document “Work Zone Road User Costs Concepts and Applications”.  Refer to figure 1.

Figure 1 – Relationship between project cost and duration

Figure 1 depicts how the contractor’s cost to complete the project, which is represented by the cost curve for construction is at its lowest at the baseline duration (point CL), and any deviation to the baseline schedule results in increased costs. Be it incentives to advance the schedule or penalties due to a delayed schedule the costs of construction increase if the schedule deviates from the baseline schedule. The document, “Work Zone Road User Costs Concepts and Applications” was produced by two consultants under sponsorship of the government agency which in turn, disseminated the document for information exchange.

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To read entire paper (with footnotes and references), click here

 



About the Author


Stephen J.C. Paterson

HuaHin, Thailand





Stephen Paterson
is an Oil and Gas professional with 35+ years of experience in project controls and construction management. Born in the Highlands of Scotland, he served an apprenticeship and gained a Higher National Certificate in Civil Engineering in the UK, before embarking on the adventure of expat living, working worldwide; Middle East, North & South America, Russia, Middle East, Far East, South East Asia, China and Australia. He just completed his last assignment in February of 2017, and currently, furthering his education by way of a distance learning mentoring course, under the tutorage of Dr Paul D. Giammalvo, CDT, CCE, MScPM, MRICS, GPM-m Senior Technical Advisor, PT Mitrata Citragraha, to attain Guild of Project Controls certification.

Stephen lives in HuaHin, Thailand and can be contacted at [email protected]

To view other works by Stephen Paterson, visit his author showcase in the PM World Library at https://pmworldlibrary.net/authors/stephen-j-c-paterson/