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Topics: Energy
How to prevent the unseen cost?
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How to manage and prevent the unseen cost of Engineering / Procurement and Construction in Power Plant Business?
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An effective and proper and consistent Risk Assessment and Analysis, a systematic process of evaluating the potential risks that may be involved in a projected activity or undertaking even before budget is base-lined.

Unseen costs cannot be prevented though your Contingency Pan and Mitigation plan in the budget have a way of coming up with that extra cash that was not prepared for. You must always ask for more than the estimated actual cost if your earned value is going to come out at par.

As a rule of thumb, I ask for 25% - 50% more. The surplus cash will be returned at the close of the project. Good Luck
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1 reply by Eduard Hernandez
Apr 24, 2017 7:29 AM
Eduard Hernandez
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Stanley, good comment. I find remarkable that you can get granted a 25% to 50% more, even if then this cash is not used at all. Is it because the projects you manage have a lot of unknowns or are very new to the performing organization?
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I agree with Stanley. Just one comment: today is dificult to not detect unseen cost if you make research based on project risk management. There are lot of information outside there. But I agree that always something unexpected could happend.
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Apr 23, 2017 5:03 AM
Replying to Stanley Oranika
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An effective and proper and consistent Risk Assessment and Analysis, a systematic process of evaluating the potential risks that may be involved in a projected activity or undertaking even before budget is base-lined.

Unseen costs cannot be prevented though your Contingency Pan and Mitigation plan in the budget have a way of coming up with that extra cash that was not prepared for. You must always ask for more than the estimated actual cost if your earned value is going to come out at par.

As a rule of thumb, I ask for 25% - 50% more. The surplus cash will be returned at the close of the project. Good Luck
Stanley, good comment. I find remarkable that you can get granted a 25% to 50% more, even if then this cash is not used at all. Is it because the projects you manage have a lot of unknowns or are very new to the performing organization?
Network:244



I do agree with Stanley and Sergio that even though the initial estimates have been well prepared. there are always unexpected events causing extra costs and time during the project life cycle. But I can't agree at all on Stanley's comment that you ask for extra cash of 25% ~ 50% with simply surplus returning to the performing organization at the closing, because it is not practically possible to ask such huge amount of money (at least a half of hundred million dollars) in any EPC project without proper planning for risks and responses, because regardless of size of amount of money it is a padding which might be considered unethical unless it is generally used under the limited conditions in your country, and because it will eventually do harm your reputation and quality of project management community as a whole in the long run.

The successful cost control of the EPC project generally relies mainly on the organization's previous lessons learned from similar projects ( experiences) and project team's capabilities to communicate well between all participants and to effectively collaborate the different deliverables from the relevant departments or organizations (onshore and / or offshore) in a timely manner throughout the project life cycle.

Cost control from such different sources need to apply a certain forms of adaptive (or iterative) and integrative approaches by all participants, especially managers or engineers. Some common senses for effective cost control for EPC project might be introduced as below:

1 Direct cost : Decomposition of the work to level of activities or work package(some might be practically possible only up to deliverable of work package level) as per the project BOQ(bills of quantities, payment schedule), Specifications, Drawings, previous records in your organization etc., Sufficiently detailed decomposition will help prepare more flexibly accurate estimates and effective tracking of the performances, and will allow you to do in-depth monitoring of cost case by case in a timely manner.

2. Indirect cost : Instead of putting lump sum or percentage against overall direct cost, prepare list of individual indirect/ overhead costs as detailed as possible based on project / contract requirements, records and policies in your organization etc,

3. Contingencies : Based on risk analysis and response planning,

4. Management Reserve: For unforeseeable risks as per the organization's polices ( in general a certain percentage against overall cost less contingencies, and,

5. Revisit and update all your plans including all cost estimates periodically or as needed.

Hardly possible to prevent all extra costs from the unexpected events and cost fluctuations of market but adaptive (or iterative) and integrative approaches actively participated by key stakeholders will help reduce possibility of cost overrun because they might provide you with chances for finding and/ or dealing with not only new threats but also new opportunities as project situations vary.
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Event the best estimate/planning will leave some surprise, has mention by Stanley, Sergio and Sungjoon.

Like Sungjoon I can't agree with the proportion suggested by Stanley. To have such a difference it would be a very fist projects and event then. I don't know the exact number use here but anything bigger than 15% would not pass I'm sure. If change occurs during execution a revision will be ask with proper documentations. I know of case where big revision where granted, for very special unforeseen soil conditions.

Use the 5 steps provided by Sungjoon.

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