Produced by:

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

Produced by:

Tom LenahanTom Lenahan Limited

tomlenahan@hotmail.com