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Cost of Creating Winning Proposals

for Oil and Gas

 

STUDENT PAPER

By Abhinav Sharma

SKEMA Business School

Lille, France

 



ABSTRACT

Cash flows from projects are the lifeline for all contractors, in this age of competition and reverse auction processes across contracting increases the pressure on contractors to keep margins lower and costing as close to reality as possible. There are multiple approaches which can be used for the estimation of project cost, but with so many options to choose from it becomes difficult to select only one estimation and just rely on it. Some methods just take the historical input which are not time consuming and can be automated to come up with estimation whereas there are other methods which need more effort from the side of the contractor but give results which are close to real costs if something extraordinary event does not take place. As per AACE guidelines 0.005% of the total cost of project is the optimum cost of estimation for the project, this number comes up to be very low for the second kind of estimation which includes all the plausible scenarios for the project. This paper is an attempt to evaluate multiple methods on this criterion and come up with the probability of winning a project based on the estimation, an imaginary scenario with real numbers as possible are used but a real project is more complex and need more input for evaluation. The probability of winning a bid is the highest in the Definite Estimate as per the analysis. Further, comprehensive research is required to come up with exact time and cost parameters which is out of scope of this research paper.

Keywords:      Bidding, Oil and Gas, Construction, Proposals, Cost, EPC, Outsourcing, Optimum bidding, Cost of Bidding, Winning Bids

  1. Introduction

Energy need of the world is growing immensely with each passing year[1]. Oil and Gas are still among the key energy resources of the world[2]. Each O&G project involves resources and capabilities of people from multiple disciplines. Many different companies across the globe come together to make these projects successful. Engineering Procurement and Construction companies are the first to carry out the estimations for these megaprojects. Many small vendors and contractors are used to carry out the last leg construction of these projects.

With such scale of projects, there is always the possibility of miscommunication and misinterpretation of expectations. The stakeholder to suffer the most because of these issues is the contractor because the livelihood of these contractors is based only on the cash flows from projects. A small misjudgment in bid calculation may lead to the death of such contractors.

A question arises from complexities of these projects; How long should be given to these contractors to make an optimum bid which keeps every stakeholder happy?

There are many assumptions during bid phase of the project[3], which results in contractors using different ways of tackling with uncertainties. Some contractors use the “Magic Number”[4] technique, where they multiply an arbitrary number based on experience with each calculated cost to come up with the final bid price. On the other hand, some contractors dig down to each activity and price the bid based on the calculated cost of each of these activities. The first kind of estimation is quick but may result in very wage bid for large projects whereas the second kind of estimation takes more time but is close to actual cost + profit for the project. There is also a question of the Cost of drafting the bid proposal; these proposals may take hours or months to draft depending on the complexity of projects and type of proposal.

This paper is an attempt at understanding the reasonable time frame and cost which is optimum for all the stakeholders of projects. A study of the type of proposals, the complexity of projects and historical bid errors would help in shedding light on these complex questions.

  • Objective statement

What is optimum time and cost associated with a winning proposal?

  1. Firstly, evaluating present types of methods used for making proposals based on guidelines given in AACE Education Board Skills and Knowledge document.
  2. Secondly, understanding the cost associated with each method.
  3. Thirdly, assessing the cost to benefit ratio for each method and present optimum time and cost associated with a winning proposal.

More…

To read entire paper, click here

 

Editor’s note: Student papers are authored by graduate or undergraduate students based on coursework at accredited universities or training programs.  This paper was prepared as a deliverable for the course “International Contract Management” facilitated by Dr Paul D. Giammalvo of PT Mitratata Citragraha, Jakarta, Indonesia as an Adjunct Professor under contract to SKEMA Business School for the program Master of Science in Project and Programme Management and Business Development.  http://www.skema.edu/programmes/masters-of-science. For more information on this global program (Lille and Paris in France; Belo Horizonte in Brazil), contact Dr Paul Gardiner, Global Programme Director [email protected].

How to cite this paper: Sharma, A. (2018). Cost of Creating Winning Proposals for Oil and Gas, PM World Journal, Vol. VII, Issue XII (December).  Available online at https://pmworldjournal.net/wp-content/uploads/2018/12/pmwj77-Dec2018-Sharma-cost-of-creating-winning-proposals-for-oil-and-gas.pdf



About the Author


Abhinav Sharma

Lille, France

 

 

Abhinav Sharma is a student of Post Graduate Program in Management offered by Indian Institute of Management, Trichy. He was an exchange student at Skema Business School, Lille in 2017. He has 38 months’ work experience with Weir Minerals India in Mining Equipment design and Oil and Gas piping design. He finished his internship with Deloitte USI where he worked on implementation of ERP systems for High-Tech industry. Abhinav can be contacted at [email protected]

 

[1] See EY publication on Spotlight on Oil and Gas Megaprojects http://www.ey.com/Publication/vwLUAssets/EY-spotlight-on-oil-and-gas-megaprojects/$FILE/EY-spotlight-on-oil-and-gas-megaprojects.pdf

[2] See EY publication on Spotlight on Oil and Gas Megaprojects http://www.ey.com/Publication/vwLUAssets/EY-spotlight-on-oil-and-gas-megaprojects/$FILE/EY-spotlight-on-oil-and-gas-megaprojects.pdf

[3] See EY publication on Joint Ventures for Oil and Gas Megaprojects http://www.ey.com/Publication/vwLUAssets/ey-joint-ventures-for-oil-and-gas-megaprojects/$FILE/ey-joint-ventures-for-oil-and-gas-megaprojects.pdf

[4] See Guide to bidding by Steven E Moore http://www.irrisoft.net/news/newsletters/january2010/Guide to Bidding.pdf