cost estimating post hurricanes: a review of the challenges karl d. bartholomew, p.e., asa director...

Cost Estimating Post Hurricanes:

A Review of the Challenges

Karl D. Bartholomew, P.E., ASA

Director

September 2006

J ACOBSCONSULTANCYJ ACOBSCONSULTANCY

slide 2

Process Industries Cost Escalation

A review of pre-hurricane construction

How did the hurricanes impact costs?

What’s happening now?

Were Hurricanes Katrina and Rita responsible for cost escalation for onshore process facilities today?

Lessons for the future: levels of cost estimate accuracy


slide 3

What was happening pre-hurricane?

Materials and resources were already being strained– Number of announced projects in pipeline for engineering and

front-end work in refining and petrochemicals ($95 B in North American refining alone)

Rising costs not limited to just U.S. Gulf Coast– Cost overruns in Alberta Oil Sands; Middle East petrochemicals

Refinery construction cost indices up 11% Jan 2004 vs. Jan 2006


slide 4

What was happening pre-hurricane?

Bulk commodities, steel prices were up – In large part to China, India, U.S.

Freight costs much higher due to higher oil prices

Cost escalation pressures were already in place before Katrina and Rita


slide 5

The hurricanes hit – how did that impact costs?

Immediate draw on commodity resources– Lumber, cement, drywall, cleaning materials

Onshore process operations impacted by both water and wind damage

Costs incurred to restore process operations:– Debris cleanup

– Inspection & replacement of damaged rotating equipment, electrical, instrumentation

– Inspection and repair of steel (corrosion)

– Repair of damaged vessels, insulation


slide 6

Cost Impact of hurricanes

Labor market saw biggest change– Quick rise in bare labor rates– Living costs– Added benefits (per diems)

2 stories of hurricane impact:

– Barber quits cutting hair, buys dump truck, contracts with FEMA at 000s/week to haul debris

– Laborers changing job sites if offers catered meals vs. box lunches


slide 7

More hurricane impact

Draw on specialty craft labor from Corpus Christi up to Midwest– Insulators, scaffolding see 2X increase in rates

Contractors throwing $ at the problem trying to fix everything for everyone

Another story – refiner’s concern wasn’t getting scaffolding up, but getting it down if another storm hit


slide 8

Some costs were unexpected

Extended living costs over a long time was something nobody anticipated

Some vendors used warranty issues to force full replacements even if the item worked

– Rotating equipment, control systems

Facilities that didn’t have up to date drawings & specs of what was actually at their plants incurred substantial engineering & design costs

– Some facilities in better shape on this due to OSHA requirements

Some facilities took this as opportune time to improve/upgrade their plants (“urban renewal”)

– Has led to some contract coverage issues


slide 9

Outlook for next year

Most E&C companies have full shops– due to major expansion wave underway in refining

Steel & fabrication shops essentially full

Bidding war for experienced staff

Labor rates continue to escalate but at lower rate


slide 10

Where are we today?

Biggest impact we see is on delivery schedules– Lead times for major forged reactor vessels have gone from 24

months to 40+ months (for high pressure processes)– Engineering front end design schedules increasing by 2X

Hurricanes gave us a new ‘set point’ which appears to be stabilizing at much higher labor rates– Expectation that rate growth will flatten before resuming typical

growth


slide 11

Equipment Lead Time

REFINING PROJECTSLEAD TIME FOR EQUIPMENT

0

20

40

60

80

100

120

140

160

180

200

REACTORS-FR +

V

COKE DRUM

S

REACTORS/SEPARATORS (<

6")

HP S&T X

CHGRS ALLOY/C

LAD

HP S&T X

CHGRS C.S

.

PUMPS (H

YDRAULIC D

ECOKING)

CENT. COM

PRESSOR

API MULTI-S

TAGE CENTRIF

UGAL P

UMPS

HP TOW

ER (KCS)

DELTA VALVES

RECIP. C

OM

PRESSOR

HP PRESSURE V

ESSELS (<3"

)

LARGE DIA

METER P

RESSURE VESSELS

TOW

ER (SS)

FIRED H

EATERS (9 C

HROME)

GENERAL SERVIC

E API C

ENTRIFUG

AL PUM

PS

GENERAL SERVIC

E S&T E

XCHANGERS

AIR C

OOLED HEAT E

XCHANGERS

GENERAL SERVIC

E PRESSURE V

ESSELS

03/05 Delivery (ExWorks)

03/06 Delivery (ExWorks)

WE

EK

S A

RO

42

32

22

12

2

MO

NT

HS

AR

O


slide 12

Equipment Escalation

REFINING PROJECTSPRICE ESCALATION FOR EQUIPMENT

0%

5%

10%

15%

20%

25%

30%

REACTORS-FR +

V

COKE DRUM

S

REACTORS/SEPARATORS (<

6")

HP S&T X

CHGRS ALLOY/C

LAD

HP S&T X

CHGRS C.S

.

PUMPS (H

YDRAULIC D

ECOKING)

CENT. COM

PRESSOR

API MULTI-S

TAGE CENTRIF

UGAL P

UMPS

HP TOW

ER (KCS)

DELTA VALVES

RECIP. C

OM

PRESSOR

HP PRESSURE V

ESSELS (<3"

)

LARGE D

IAM

ETER PRESSURE V

ESSELS

TOW

ER (SS)

FIRED H

EATERS (9 C

HROME)

GENERAL SERVIC

E API C

ENTRIFUG

AL PUM

PS

GENERAL SERVIC

E S&T E

XCHANGERS

AIR C

OOLED HEAT E

XCHANGERS

GENERAL SERVIC

E PRESSURE V

ESSELS

03/05 Price Escalation

03/06 Price Escalation

WE

EK

S A

RO


slide 13

Were the hurricanes the main culprits?

For the onshore process industry – NO

Cost pressures already building up

Katrina/Rita kicked down the door of building escalation not only in the Gulf Coast but has created impacts around the world, particularly for experienced engineering, construction and operating resources.

Cost pressures will continue for next several years, but not at the extreme post-hurricane growth


slide 14

Accuracy of Cost Estimates

Accuracy of estimate is directly related to level of effort (time) spent

Association of Advancement of Cost Engineering (AACE) provides guidelines for accuracy vs. work effort

Estimate Class V Class IV Class III Class II Class IType (Order of Magnitude) (Study Estimate) (Early Phase III Estimate) (Control Estimate) (Construction Estimate)

EstimateQuality > or = to +/- 50% +/- 30% to 40% +/- 20% to 30% +/- 10% to 15% +/- 5%Range

EngineeringDesign > or = to 1 % 1% to 5% 5% to 10% 25% to 30% 80% to 95%

Complete

Use Long Range Capital Budgets, Concept Studies, Prelim. Appropriations, Final Appropriations, Change Evaluation,for Feasibility Studies, Feasibility Studies, Evaluation of Alternates, Detailed Project Sub Pkg. Check Estimate,

Estimates Screening Studies Scope Decisions and Prelim. Controls Control Estimate Lump Sum Bid Tender

$ $$ $$$ $$$$ $$$$$$$$


slide 15

Level of Work for Cost Estimates

Estimate Class V Class IV Class III Class II Class IType (Order of Magnitude) (Study Estimate) (Early Phase III Estimate) (Control Estimate) (Construction Estimate)

EstimateQuality > or = to +/- 50% +/- 30% to 40% +/- 20% to 30% +/- 10% to 15% +/- 5%Range

EngineeringDesign > or = to 1 % 1% to 5% 5% to 10% 25% to 30% 80% to 95%

CompleteNew Construction - ISBL

Method Factor TIC from Historical Factor ISBL TIC from verbal Factor Direct Costs for Detail take-offs on all scope Detail take-offs on all project

Relationship factors such or historical Major Equipment each piece of Major Equipment that can be quantified. scope. Use small amount of

as " Capacity Ratios ". costs based on " As-built " based on vendor verified equipment Design Allowance for remaining

or " Definitive Estimate " prices. Historical percentages (%) for engineering work.

Percentage (%) other plant cost history. Revamp Construction - ISBL minor scope items not being

costs such as: Develop preliminary quantity quantified. Bid tab quotations for Major

- Utilities Rough T/O of OSBL w/ gross take-offs for calculating equipment Equipment, Bulk materials and

- Environmental TIC unit prices. bulk materials, labor and subcontracts. Subcontract costs.

- General Offsites Use historical $ & mhs per major

account. Use heavy Design

Allowances with these take-offs.


slide 16

Work effort for +/- 20%-30%

5%-10% of engineering design is complete– For $100 million project ~ $0.8-1.5 million

Factored estimate based on major equipment

Vendor verified major equipment prices

Preliminary allowances for offsites (utilities, infrastructure)

Historical % for professional services, indirects


slide 17

Cost Estimate Deliverables

The AACE International Recommended Practice for Cost Estimate Classification, Joint Cost Management Societies Proceedings, Larry R. Dysert, CCC

S = StartedP = PreliminaryC = Complete

cost estimating post hurricanes: a review of the challenges karl d. bartholomew, p.e., asa director...

Documents

rita slide

insulation slide

lower rate slide

hurricanes impact costs

rising costs

freight costs

hurricane impact draw

biggest impact