W1_Thuraiya_Leadership Styles analysis Using Tuckman model

W7.1__Hamda__ Determining the amount of Incentives and Disincentives for Power and Water Projects__Part1

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.

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

The first alternative to be developed in this blog is The Total Contractor’s Cost Curve. It can be determined by using Learning Curve method. And for this above project, different learning curve ratios are selected and at the end of this blog. One learning curve will be selected. By using this method, the contractor curve will consist of 3 main points. The right- hand side point represents the delay costs and consists only of the contractors extended overhead costs. However, the left-hand side point represents the accelerate costs. The mid-point should be the Contractor’s optimum duration. And as shown in table 1 and the description of Learning Rate curve, the specified project which is an exponential decay curve that reaches a point at 30-month which is $1.90B, then climbs upwards with the contractor delay costs due to the contractor’s delay in submitting the project. Different learning curves will be developed with different efficiency factor and learning curve ratio, and the suitable one for this project will be selected considering that the acceleration of the project is from month 1 to month 30 (month of completing the project) and the delay of the project is starting after month 30.

4- Selection Criteria

Table 2: Learning Curve development of values

                                                                 Figure 1: Comparison of Evaluating Learning Curve

5-     Analysis and comparison of the Alternative

In order to select the suitable learning curve for this project, we should consider the concept that explained that the higher the learning curve the lower the inefficiency/the acceleration cost and via versa. From the above figure, there are 4 curves that meets this criteria, 90% EF/10% LCR, 91% EF/9% LCR, 92% EF/8% LCR, and 93% EF/ 7% LCR as shown in figure 1. And in able to determine which of them to be used, the following figure will explain that.

6-     Selection of the preferred Alternative

According to concept of that the suitable learning curve to be selected is that the higher the learning curve the lower the inefficiency/the acceleration cost and via versa, and as shown in above figure, the best curve to fit the model is the 91% EF / 9% LCR which is the closest Curve to month-24 which is the owner’s Target.

7-     Performance Monitoring and the Post Evaluation of result

As this blog is part of a series number of blogs, until last blog (3^rd or 4^th) is complete, the post-evaluation performance cannot be performed until the full model is completed.

   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