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W9__Hamda__ Determining the amount of Incentives and Disincentives for Power and Water Projects__Part3

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
The next alternative to be developed in this blog (part 3) is Total Cumulative Project Cost (Owner and Contractor). Total Cumulative Project Cost Curve is a combination of the two above curves (the Contractor’s Costs Curve and the Owner’s Overhead and Opportunity Costs Curve). And the process of developing this curve, is to sum the values of the both curves. Figure 1 describes the Total Cumulative Project Cost Curve. 
           5- Analysis and comparison of the Alternative
Figure 2: Schedule vs Time Optimization Curve
The curve above shows the cumulative sum of the previous two curves such as: The Total Contractor’s Cost Curve and the Total Cumulative Owner Overhead and Lost Opportunity Cost.
The Contractor’s optimum cost and duration is determined based on the agreed duration and agreed cost in the Contract between the contractor and the owner which is in this case is 30-month and $ 1.9B respectively. Moreover, the owner’s optimum cost is the cost where the cost curve is the lowest and at what it occurs which is in this case is 24-months and $ 3.2B. The determination of the maximum duration overrun will be by allowing one month for every year of the project. So, in this case will be month-33.
6-     Selection of the preferred Alternative
No alternative for this curve since it depends on the Total Contractor’s Cost curve and Total Cumulative Owner Overhead and Lost Opportunity Cost, and as it the last part (part 3) of developing the model by which the amount of Incentive and disincentive will be determined in next blog (part 4).
7-     Performance Monitoring and the Post Evaluation of result
After developing the 3 curves in three blogs (part 1, 2, &3), the last curve will be developed is the total curve which shows the model results and by establishing that model, the analysing and determining the amount of incentives/ disincentives will be done (blog part 4).
   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

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