W1_Thuraiya_Leadership Styles analysis Using Tuckman model

W10__Hamda__ Determining the amount of Incentives and Disincentives for Power and Water Projects__Part4

1-     Problem Definition

Any project in the world example Industrial Projects such as: Power Generation plants, Water Desalination plants, Power and Water Plants, Refineries, and any other industrial projects have 3 main stages. The first stage is the Bidding stage, where all the project details, and all specifications refer to the design of the plant and the technologies to be used, the site selected for the project are set in such documents- Project Definition Documents. The second stage which is the main important stage in the project life cycle since the third stage depends on it is the Implementation stage or in other word is the Construction stage. In this stage, the construction of the project will be started, so any fault or any delay in this stage will cause a delay in the whole project which will cause a delay in the production of the project which will put the different parties of the projects in troubles. So, to avoid the construction delays or other difficulties during the Construction Stage, the proper planning and scheduling of the project tasks and activities will be very useful. Moreover, there is another way that can be implemented to avoid any delays in the construction side, which can be implemented contractually in the Contract. This way is to applied Incentive Contracts or it can be Incentive Clause in the such Agreements. This blog and the coming blogs will discuss the way of determining the amount of incentives and disincentives. 

2-     Identify the Feasible Alternative

FHWA’s Contract Administration Core Curriculum (CACC) Manual defines I/D for early completion as “A contract provision which compensates the contractor for each day that identified critical work is completed ahead of schedule and assesses a deduction for each day that completion of the critical work is delayed.

In order to establish the amount of Incentives to be paid from the Owner Company to the Contractor and when to be paid, important to have a specific curve known as Total Cumulative Project Cost (Owner and Contractor) which is a combination of

·         Total Contractor’s Cost Curve

·         Total Cumulative Owner Overhead and Lost Opportunity Cost.

·         Total Cumulative Project Cost (Owner and Contractor).

These curves will be determined separately, each one in each blog. 

3-     Development of the outcome of Alternative

In this blog, a project with 500 MW will be studied and analyzed. This project will take 30 months to be duly completed.  The Cost Estimate for this project (the cumulative cost of contractor and owner) is ($2.85 Billion). As shown in table 1.

Contractor Estimates	US $ Billion
Engineering	0.250
Procurement	0.900
Construction	0.750
Total	1.90
Owner’s Costs	US $ Billion
PMT & Support	0.650
Office Cost	0.150
Others	0.150
Total	0.950
Overall Total	2.85

4-     Selection Criteria

According to the previous blogs (part 1, 2, 3), and the regarding the three curves were developed for the above described project, the last curve shows the combination of the two curves (part 1 & part 2), and shows the area of incentives and disincentives to be paid and when. Figure 1 explained that. 

5-     Analysis and comparison of the Alternative

The process to determine the Incentive Zone is by trending the data-points from the Contractor’s optimum duration, and the Owner’s optimum duration on the Total Cumulative Cost curve across to the ‘Y-axis’. In this case and referring to Figure 10 which shows the model’s results, the upper value is $ 4.00B and the lower value is $ 3.2B. In addition, the amount of incentive is ($ 4.00B- $ 3.2B = $ 0.8B). and to be calculated in daily basis. The amount of incentive will be used by the contractor to cover their expenses/inefficiencies associated with acceleration to complete the project earlier, and the main advantage to the contractor to complete the project early which in turn would reduce their overheads. By using equation 1 as shown below, the amount of Incentive in daily basis will be calculated and determined and this this will be added and included in the Contract.  

For the above described project, there are 4 months and the number of days in each month is equal to 30 days (365 days in 1 year/12months= 30days in a month). By using the number of days in 1 month, the number of days in 4 months are 120 days. From that calculation and by using equation 2, the amount of Incentive in daily basis is ($ 800,000,000/120 days= $ 6.67M/Day). However, the process to determine the Disincentive Zone is by using the difference between the two points shown in figure 10, the upper point of the duration overrun, which is in this project is month-33 intersection with the owner’s O.H & Opportunity line which is $ 2.8 B, and the Contractor’s optimum cost as shown in the above figures is $ 1.9B. the amount of the Disincentive is equal to $ 0.9B. this amount should be converted to daily basis, and in this case, there are 3 months for this project. The number of days in 3 months are 90 days and by applying equation 2, the amount of Disincentive in daily basis is $ 10.0 M/Day for any delay in project after month 30. 

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-       Stephen J.C. Paterson (2017), Incentivizing Early Completion of Major Oil and Gas Projects, from http://pmworldjournal.net/wp-content/uploads/2017/11/pmwj64-Nov2017-Paterson-incentivizing-early-completion-of-oil-and-gas-projects.pdf

2-       Hamda Al Malki (2017), Incentive Contracts and its effects on Power and Water projects, Retrieved on 8 January 2018. 

3-       Incentive Contracting - Incentives, Award Fee, Award Term, from https://www.dau.mil/acquipedia/Pages/ArticleDetails.aspx?aid=1c0fe484-43f8-4149-97bf-63bafefdf8ae