W6_Afra_Cost and Time Trade-Off part 3

1.      Problem Recognition

There is a relationship between project’s completion time and its cost. By understanding the time-cost relationship, one is better able to predict the impact of a schedule change on project cost.

The previous two blogs discussed the contractor's curve and the owner's overhead and lost opportunities cost curve as shown in figure 1 below which provides a great illustration that is based on the US Department of Transportation.

This blog is the final blog in a series of three blogs about time and cost trade-off which will answer the question of: How fair is a Bonus/Penalty system and when should it be developed? To answer such question, this blog will develop the final curve of the Total Cumulative cost and finalize the chart of the conceptual project and determine the ‘Bonus/Incentive’ or ‘Penalty/Disincentive’ against the criteria selection.

Figure 1 – Relationship between project cost and duration

2.      Feasible alternatives

There are two alternatives: 

1.      Bonus (Incentive)

2.      Penalty (Disincentive)

And these depend on the Contractor’s performance and what they are doing in order to achieve targets.

As mentioned above, the three blogs represent three different curves which are:

1.      Total Contractor’s Costs

2.      Cumulative Owners Project Overhead and Lost Opportunity Cost

3.      Total Cumulative Project Costs

3.      Development of the outcome of Alternative

OPWP is the purchaser of power and water in the Sultanate and is responsible for securing the demand for electricity and water for every single day for the public. and to do so, the company shall contract with Engineering, Procurement, and Construction (EPC) to build required power and water projects.

The overall cost estimation for power generation includes the auxiliary costs which could be the land cost, gas purchase, and the portion of EPC for design, procure and construct and all the associated owner’s costs for the Project Management Team (PMT) and office.

 The Total Project Cost curve is equal to Contractor’s Cost curve plus Owners project overhead and lost opportunity cost curve, along with the conceptual project. Figure 2 below shows the total cumulative cost from month 30 to month 50.

Figure 2 – Total Cumulative Project Costs Curve

The curve above shows the cumulative sum of the previous two curves. Moreover, it shows the owner’s target duration and owner’s optimum duration, in term of contractor’s, the duration and cost are in the agreed contract which assumed to be 1.5B and 43 months. In addition, The Owner’s optimum costs are where the cost curve is the lowest and at what point it occurs, in the model, this is 4.4B and 38-months.

The figure below shows the Bonus/Penalty zones by putting all three curves in one. The base of duration overrun is 46.

Figure 3 – Schedule vs Time Optimization Model

To conclude, the incentive zone is the trending of contractor's optimum duration and owner's optimum duration in the Y-axis. On the other hand, the disincentive zone is the difference in the Contractor’s optimum cost vs the higher data-point of the Duration overrun (the lost opportunity costs).

4.      Selection Criteria

By analyzing figure 3:

Incentive	disincentive
The upper value = 4B and the lower value = 3.2B, therefore the incentive is 0.8B (4-3.2) which needs to be broken down into a daily basis (0.8/(4*30) = 6.6M/day).	On month-46 intersection with the ‘Owner’s overhead and opportunity’ line equal to 2.9B, and the Contractors optimum cost which is the bid value of $2.4. the disincentive is 0.5B which also needs to be converted into a daily rate (5.5M/day for any delivery after the end of the 43 months).

Table 1 – Incentive vs disincentive

The incentive amount mainly used by contractors to cover the expenses/inefficiencies associated with acceleration to complete the project faster. The benefit for contractors is to reduce their overheads by shortening of the project duration.

5.      Analysis and comparison of the Alternative

As mentioned above, this blog supposes the answer the question of: How fair is a Bonus/Penalty system and when should it be developed?

Finishing the project earlier, sometimes, is significant for the owner. Moreover, contractors always keep in their mind that the project owner may ask them to complete the project earlier by providing a bonus, which is good!  But also keeping in mind failure to achieve the deadline could result in penalties from the Owner, and as mentioned above, the $0.8B incentive value is to purely cover the expenses and inefficiencies associated with the acceleration, likewise, the $0.8B penalty is to cover the lost opportunity costs.

To include such details in the contract, the owner the associated personal should be very careful, likewise the contractor. 

The best time to include Bonus/Penalty at time of developing the contract since it needs a full agreement between all parties prior to implementation.

6.      Selection of the preferred Alternative

It's not a situation to choose the best alternative between Bonus and Penalty. However, the bonus is a very attractive alternative for the contractors which will let them do their best to get it, from the other side, they will start thinking about the penalty from the first day of the project since they will pay a daily amount of money for failure to meet the optimum duration.

7.      Performance Monitoring and the Post Evaluation of result

No one curve fits all approaches or projects. The projects are varying in their nature, size, urgency and have a different way of acceleration, which will always generate different curves with different values. Hence, the concept remains the same.

In future research, it is recommended that, various degrees of confidence levels for example, and various values for the coefficient of variation.

References: 

1.      Mallela, J., & Sadasivam, S. (2011). Figure 15 –Work zone road user costs: Concepts and applications : final report. U.S. Department of Transportation, Federal Highway Administration Office of Operations (HOP).

2.      Guild of Project Controls. (n.d.). 08.7.3 – Cost vs Time Trade Offs (Optimization) – Guild of project controls compendium and reference (CaR) | Project controls – planning, scheduling, cost management and forensic analysis (Planning Planet). Retrieved September 5, 2017 from http://www.planningplanet.com/guild/gpccar/validate-the-time-and-cost-trade-offs

3.      W20_SJP_Cost & Time Trade-off Part 3 - Achieving Guild of Project Controls / AACE Certification BLOG. (2017). Achieving Guild of Project Controls / AACE Certification BLOG. Retrieved 10 December 2017, from https://js-pag-cert-2017.com/w20_sjp_cost-time-trade-off-part-3/

4.      W5_Afra_Cost and Time Trade-Off part 2. (2017). Pmpopwp.blogspot.com. Retrieved 11 December 2017, from http://pmpopwp.blogspot.com/2017/12/w5afracost-and-time-trade-off-part-2.html

5.      W4_Afra_Cost and Time Trade-Off Part 1. (2017). Pmpopwp.blogspot.com. Retrieved 11 December 2017, from http://pmpopwp.blogspot.com/2017/11/w4afracost-and-time-trade-off-part-1.html