Search

This chapter presents a recommended systematic risk management program and further describes a methodology for analyzing field architectures to improve the reliability of system design and to reduce operating expenses by using reliable engineering tools. A subsea project is complex and involves uncertainties from a wide range of sources. Managing these uncertainties in a systematic and efficient manner with a focus on the most critical uncertainties is the objective of a successful risk management plan. Some of the areas of uncertainty that need to be considered are as follows: technical; financial; organizational; contract/procurement; subcontractors; and political/cultural, etc. Project risk management is a systematic approach for analyzing and managing threats and opportunities associated with a specific project and can, thereby, increase the likelihood of attaining the project's objectives in terms of cost, schedule, and operational availability. The use of a project risk management process will also enhance the understanding of major risk drivers and howthese affect project objectives. Through this insight, decision makers can develop suitable risk strategies and action plans to manage and mitigate potential project threats and exploit potential project opportunities.

The recent nuclear power plant (NPP) shutdowns in the United States and the retirement of aging NPPs and other fuel cycle facilities worldwide have drawn attention to the need for accurate decommissioning cost estimates (DCEs). Earlier DCEs were prepared for the purpose of building a decommissioning trust fund over the operating life of the facility so sufficient funds would be available for safe decommissioning at the end of its life. These early DCEs reflected the known or estimated conditions at the time the NPP would be shut down, but in general they were never updated after shutdown to reflect changes to the scope of work, regulatory rulemaking changes, or stakeholder input. Efforts were initiated to standardize DCEs to ensure all work scope items were included with an aim to permit comparison of DCEs from one estimator to another or one country to another. In this manner, new DCEs could be “benchmarked,” or compared to the completed project’s actual costs to validate the DCEs. This proved more challenging than planned because much of the actual completed project cost data was considered proprietary to the contractors who performed the work or the utility/licensees who managed the project. A further complication was the confusion of terms used in the DCE to describe uncertainty, specifically “allowances, contingency, and risks.” To the layman, these terms were sometimes used interchangeably without an attempt to define them. The international decommissioning community then joined forces to address these terms and to explain how they are to be applied in DCEs. This chapter describes the evolutionary process DCE has gone through to identify the real costs of decommissioning and how to apply that knowledge to funding and actual implementation.

This chapter summarizes the key provisions usually found in the major Sub-Contracts, i.e. the Project Contracts that may be signed by the Project Company, apart from the Project Agreement discussed in the last chapter, as well as other related Agreements, namely: Construction Contract (§8.2); OM Building-Services Contract (§8.4); Fuel or other Input-Supply Contract (§8.5); Insurance (§8.6); Site lease (§8.7); Permits and other rights—not a contract as such but an important underpinning for all the Project Contracts (§8.8); Parent-company guarantees for Sub-Contractors (§8.10); Direct Agreements, which link the lenders (and the Offtaker/Contracting Authority) to the Project Contracts (§8.11).

Project Technology deals with project identification, choice of technology, transfer of technology, locate the project site, developing project cost, proving project's technical and commercial feasibility. Develop financial projections, coordinate various tasks for completing the project using managerial techniques like critical part method, programme evaluation review (PERT), etc., for scheduling, controlling, resources leveling, crashing and cost optimising. Also deals with specific environmental problems that arise during project implementation.

The Project Contracts provide a basis for the Project Company’s construction and operation of the project. The most important of these is the Project Agreement (i.e. the contract that provides the framework under which the Project Company obtains its revenues). The Sub-Contracts which make up the rest of the Project Contracts are discussed in Chapter 8. A preliminary clarification: expressions such as BOT, DBFO, and so on are rather confusing, and overlap with each other. There is no need to use these terms (§6.2). There are three main models for a Project Agreement: (1) an Offtake Contract (i.e. a process-plant project), under which the Project Company produces a product and sells it to an Offtaker (§6.3); (2) an Availability-based Contract (i.e. one based on the PFI Model), where a Contracting Authority pays a Project Company for making the project available for use (§6.4); (3) a Concession Agreement, under which the Project Company provides a public service, and collects User Charges for doing so (§6.5). The confusing list of ‘PPP-like’ contracts, which are often counted as PPPs, but most of which do not require project finance, is reviewed in §6.6.

This chapter reviews the main building blocks of information and assumptions used for projections that are assembled to create inputs for a project’s financial model (§13.2), namely: macro-economic assumptions (§13.3); project costs and funding (§13.4); operating revenues and costs (§13.5); accounting and taxation assumptions (§13.6). The final model outputs (§13.8) will confirm the viability (or otherwise) of the project from the point of view of investors (and in the case of a process-plant or infrastructure project the costs to the Offtaker/Contracting Authority, or users). Lenders use the model to carry out sensitivity calculations to ensure that their loan is not unduly at risk in downside scenarios (§13.9). The final version of the model as at Financial Close is known as the ‘Base Case’ (§13.10). The Base Case continues to be used by the lenders and the Project Company after Financial Close (§13.11).

Project control has been a research topic since decades that attracts both academics and practitioners. Project control systems indicate the direction of change in preliminary planning variables compared with actual performance. In case their current project performance deviates from the planned performance, a warning is indicated by the system in order to take corrective actions. Earned value management/earned schedule (EVM/ES) systems have played a central role in project control, and provide straightforward key performance metrics that measure the deviations between planned and actual performance in terms of time and cost. In this paper, a new statistical project control procedure sets tolerance limits to improve the discriminative power between progress situations that are either statistically likely or less likely to occur under the project baseline schedule. In this research, the tolerance limits are derived from subjective estimates for the activity durations of the project. Using the existing and commonly known EVM/ES metrics, the resulting project control charts will have an improved ability to trigger actions when variation in a project׳s progress exceeds certain predefined thresholds A computational experiment has been set up to test the ability of these statistical project control charts to discriminate between variations that are either acceptable or unacceptable in the duration of the individual activities. The computational experiments compare the use of statistical tolerance limits with traditional earned value management thresholds and validate their power to report warning signals when projects tend to deviate significantly from the baseline schedule.

26th IPMA World Congress. 2012, Crete, Greece, In this paper, we propose an innovative and simple graphical framework for project control and monitoring, to integrate the dimensions of project cost and schedule with risk management, therefore extending the Earned Value methodology (EVM). EVM allows Project managers to know whether the project has overruns (over-costs and/or delays), but project managers do not know when deviations from planned values are so important that corrective actions should be taken or, in case of good performance, sources of improvement can be detected. From the concept of project planned variability, we build a graphical methodology to know when a project remains “out of control” or “within expected variability” during the project lifecycle. To this aim, we define and represent new control indexes and new cumulative buffers. Five areas in the chart represent five different possible project states. To implement this framework, project managers only need the data provided by EVM traditional analysis and Monte-Carlo simulation. We also explore the sensitivity of the methodology to control variables., Project “Computational Models for Strategic Project Portfolio Management”, supported by the Regional Government of Castile and Leon (Spain) with grant VA056A12-2.

This chapter starts with a summary overview of a wide range of computer aided cost estimation software systems available, ranging in sophistication from simple spreadsheet calculation software to integrated systems involving design and price negotiation over the Internet. It then discusses Davis Langdon's study “Costing Green: A Comprehensive Cost Database and Budgeting Methodology” which concluded that for many of the sustainable projects seeking LEED® certification there was little or no impact on the general budget. It is shown that to arrive at an accurate estimate of the total project cost (TPC), all hard and soft costs must be included to reflect the building being complete and useable as intended. For clarification, a sample project cost breakdown is given that shows the main elements to be considered when preparing a budget estimate for a project. Moreover, the necessary steps required to be taken to develop a budget for a project are outlined, in addition to sample budgets to clarify these steps. The concepts of project buyout and bid shopping are presented and explained as well as general and supplemental conditions. Contingency types and allowances are also clearly defined, as are cost management procedures and objectives and cost planning.

Resource requirements and organisation arrangements to define, develop, deliver and commission a safe and beneficial capital project are described. This chapter outlines typical phases from the justification of business case, through programme definition and the delivery of a capital project. The appointment criteria and various organisational arrangements for project teams to design, engineer, construct and commission a capital project are explained. Key requirements, checklists and deliverables at the various project stages are described to achieve safe delivery at minimum risk.

peer-reviewed Context: Software project cancellations are often caused by mistakes made during the project, and such cancellations make a strong economic impact. We analyzed five cancelled software engineering projects. One case was an internal product development project of a company that sells products to its customers. The other four cases were different software engineering projects, and outcomes of these projects were planned to be delivered to external customers. Objective: This study reports a post-mortem analysis of five software engineering projects with the aim of providing more knowledge about the reasons for cancellation decisions and the causes behind those reasons. Method: The research method is case study. A method for a document-based post-mortem analysis was developed and post-mortem analysis was performed. All project documentation was available for analysis. Results: The reasons for the cancellation decisions were well-known ones. In four cases of five, the outcome of the project was to be delivered to an external customer, but in these cases the causes of the cancellation reasons were not found from the normal project documentation. In these cases the cause of the cancellation originated in a phase before the start of the project and therefore the project was doomed before it was started. Conclusion: It is reasonable to suggest that a remarkable portion of project cancellations are due to mistakes made before the project is started in the case of contract-based software engineering projects.

Publisher Summary Successful development projects are grounded in painstaking analysis and rigorous planning, which means that a comprehensive compilation of construction-related cost information is a pivotal tool for assessing the merits of a proposed construction undertaking. The consequence and significance of each of the cost elements rely on the project's type, size, and location, as well as the management organization, among many other considerations. Most construction budgets contain a contingency clause for unexpected cost overruns that may occur during construction. A project budget estimate is a financial plan to design and build a particular project and setting out the estimated costs to complete the project. Cost overruns are mitigated by the inclusion of appropriate contingencies in the budget estimate to cover change orders, etc., and these contingency allowances are disbursed as the project proceeds to cover the additional costs. Budget development is particularly important for obtaining a construction loan. Optimum results are most often achieved when the project's activities are integrated and costs are managed collaboratively. Once the construction process begins, any instructions issued to the integrated project team requesting a change through a formal change order procedure can have a pronounced impact on the project's cost and possibly other impacts such as time delay once the construction process begins, any instructions issued to the integrated project team requesting a change through a formal change order procedure can have a pronounced impact on the project's cost and possibly other impacts such as time delay.

Publisher Summary A project can be defined as a task that has to be completed to a defined specification within an agreed time and for a specific price. Large, capital-intensive projects are characteristics of the oil and gas industry. Planning and controlling a project essentially involves hundreds of personnel, millions of individual items, and significant investment. This chapter explores how and why a typical project is organized in a number of well-defined stages. It discusses the methods used to ensure that the cost and time expectations are fulfilled, and the products are delivered to an agreed specification. It is observed that many oil and gas companies use contract staff to perform a part of the project between preliminary design and commissioning. Contracting out tasks is generally not limited to project work and affects most departments in a company, from the drilling department through to the catering services. The chapter also outlines some of the reasons for contracting out work, and the main types of contract used in the oil and gas industry.

The third value-added stage in a project is all about the delivery. A project with a robust business case and a robust delivery plan can still fail if the delivery stage is not controlled. During the delivery phase, the project manager is continually trying to forecast the outcome with increased certainty. These forecasts focus on several project variables—namely, cost, scope, time, and business benefit. When setting up a control strategy, project managers use control hierarchies to ensure alignment throughout their projects. In this way, they can develop their control strategy and ensure consistent and aligned progress monitoring, outcome forecasting, and change control. This chapter provides several tools that can be used during the delivery stages of a project to provide support.

Every project requires a robust plan if it is to be successfully delivered and the benefits realized sustainably. Good project management is about effective management of uncertainty, and project-delivery planning is the mechanism for increasing the certainty of a successful outcome. A project-delivery plan is specifically prepared for a project based on standard project-delivery-planning practices. A project-delivery plan ensures that strategies specific to the needs of that project are developed, implemented, communicated, and constructed around “best practice” project management. A project delivery plan is a “live” document, which should be updated at regular intervals. This is necessary to ensure that as strategies are developed and refined, they are aligned to support achievement to the project objectives and business benefits. The initial project-delivery plan should be developed and approved prior to the start of the project-delivery phase. In a large or complex project, a number of project-delivery plans may be developed and linked through a hierarchy of project-delivery plans. This chapter provides a tool that can be used proactively throughout Stage Two as a reminder of what should be done next.

This chapter discusses the way projects work. From an experienced project manager's perspective, a large project is a set of related plans and activities to accomplish certain specific objectives. From an inexperienced project engineer's point of view, a project is a torrent of activity rushing along, sweeping away everything in its path. The chapter provides a figure to illustrate the overall project framework, which has two major activities: project planning and project implementation. The major phases within planning are evaluation of the project (measured against some prescribed criteria) and definition of the project's basis (design criteria, technical concept, execution plans, schedule, and cost estimate). Project implementation is executing the plan or actually doing the project. It has four distinct phases: (1) engineering and procurement, (2) manufacturing, (3) construction, and (4) commissioning and start-up. A crucial factor for project success is having someone in charge—a single project manager—who is responsible for the entire project and accountable to the management of the venture for safety, quality, cost, progress, and all the other project objectives.

Publisher Summary Project management can be defined as the planning, monitoring and control of all aspects of a project and the motivation of all those involved in it, in order to achieve the project objectives within agreed criteria of time, cost and performance. To achieve this, a number of methods, procedures and techniques have been developed, which together with the general management and people skills, enable the project manager to meet the set criteria of time cost and performance/quality in the most effective way. The project manager is the individual who has the responsibility, authority and accountability assigned to him or her to achieve safely the project objectives within agreed time, cost and performance/quality criteria. Apart from the conventional responsibilities for time, cost and performance/quality, the project manager must ensure that all the safety requirements and safety procedures are complied with.

Publisher Summary One of the topics in the project management plan is the project success criteria. These are the most important attributes and objectives that must be met to enable the project to be termed a success. Success criteria can of course be subjective and depend often on the point of view of the observer. The important success factors are: clear objectives and project brief agreed with client, good project definition, good planning and scheduling methods, accurate time control and feedback system, rigorous performance monitoring and control systems, rigorous change control (variations) procedures, adequate resource availability (finance, labor, plant, materials), full top management and sponsor support, competent project management, tight financial control, Comprehensive quality control procedures, motivated and well integrated team, competent design, good contractual documentation, good internal and external communications, good client relationship. A key performance indicator (KPI) is a major criterion against which a particular part of the project can be measured. Even when the project has been commissioned and handed over, KPIs relating to performance over defined time spans are often still part of the contractual requirements.

Publisher Summary Almost any person or organization with an interest in a project can be termed a stakeholder. The process of listing, classifying and assessing the influence of these stakeholders is termed stakeholder analysis. Stakeholders can be divided into two main groups: direct (or primary) stakeholders, and indirect (or secondary) stakeholders. People or organizations directly involved in all or some of the various phases of the project. This group covers all those indirectly associated with the project such as internal managers of the organization and support staff not directly involved in the project including the HR department, accounts department, secretariat, senior management levels not directly responsible for the project, and last but not least the families of the project manager and team members. Direct stakeholders mainly consist of positive stakeholders, as they are the ones concerned with the design and implementation of the project with the object of completing it within the specified parameters of time, cost and quality/performance. Although most negative stakeholders are clearly disruptive and tend to hamper progress, often in ingenious ways, they must nevertheless be given due consideration and afforded the opportunity to state their case.

A project manager has three important responsibilities. They are: building the job to specification and to satisfy the operational requirements; timely project completion, and building the job within previously established budgetary constraints. if the job is on schedule, either the cost has not exceeded the budget or good grounds exists for claiming any extract costs from the client. It is far more difficult to obtain extra cash if the program has been exceeded and the client has also suffered loss due to the delay. A correctly drawn network, regularly updated, can be used to give vital information and has the following beneficial effects on the project. A manual network enables the project manager to control both the program time and the cost of the job with minimum paperwork It is vitally important that no one, but no one, associated with a project must lose faith in the program or the overall plan. It is one of the prime duties of a project manager to ensure that this faith exists. By using the various regular inputs generated by the different operating departments, integrated systems can, on demand, give the project manager an up-to-date status report of the job in terms of time, cost and resources. The basis of all these systems is, however, still a good planning method based on well-defined and realistic networks and budgets.

This chapter discusses the case study of a capital-engineering project. This case study is chosen because of the complexity of the initial set-up: it is a project consisting of different customer and supplier organizations in different continents with different views on the way a project is delivered. From the case study, the following points are inferred: (1) developing a real planning culture within a project team is often difficult when management is pushing for delivery; however, it is crucial in maintaining alignment as delivery occurs, (2) planning helps to bring a diverse team together and to quickly establish ground rules for project delivery, and (3) virtual team working works if you spend the time on building a shared goal and on agreeing roles and responsibilities.

This chapter presents a case study to demonstrate the use of tools within a capital project—specifically, the design and construction of a refurbished multi-purpose pharmaceutical manufacturing facility. Capital-engineering projects usually have very well-defined funding authorization and management procedures that are specific to an organization. To gain capital-funding approval, the project went through a series of early design phases. This allowed the development of an accurate scope, based on the initial site location decision estimates, an associated accurate capital cost estimate, and overall project schedule. Following project approval, a small team was formed to plan how the facility would be designed and then constructed so that the benefits could be realized as soon as possible. A review of the project-delivery phase is provided in the chapter along with examples of each of the “In Control” tools that were used during the phase. Each tool was actually used several times during the delivery phase to assess progress and to provide forecast project costs and end dates. Reporting tools were also used to update the project stakeholders. Following the mechanical completion of the project, the customer and sponsors took responsibility for the start-up, operation, and maintenance of the facility, including the provision of all necessary technical services and quality support.

This chapter discusses the rotating equipment reliability assurance. The company life cycle revenue and profit, potential for added profit, will be a result of incorporating all of project best practice requirements in the project action plan at the first opportunity before the first project budget estimate is prepared. The action taken during the pre-Front End Engineering Design (FEED) phase relative to rotating equipment will set the stage for its availability and profit improvement for the entire life of the process unit. However, the company must take the initiative to assemble and brief the project team members immediately upon project inception. After the potential vendors are determined, the degree of risk for this application must be defined to determine when and where audits are required. The selected format of the specifications will significantly affect the project schedule in terms of preparation time, vendor response time and contractor/end user/vendor time to review specification exceptions for approval. Planning and conducting effective supplier design, and manufacturing audits require pre-planning and a significant amount of work, however, it is certainly worth the effort in terms of increased profits and reduced project schedule.

This chapter provides an overview of the project analysis and planning process that includes each of the many deliverables required to take a project from the planning to the design stage. It covers a High-Level Solutions Document and various evaluation techniques for risk mitigation. It also includes project tailor ability issues, defining the work necessary for successful completion of the project; performing data analysis and technical analysis; requests for proposals, budgets, schedules, estimations, change management processes, and approval requirements; and so on. This phase of project development focuses on providing the framework for the entire project life cycle. Each step of this phase addresses important planning and documentation considerations that will affect all future projects work and ultimately play a leading role in dictating the project's critical path. The best-run projects use some common approaches to managing the effort. These common approaches include the following: planning and executing project tasks in staged deliveries; tracking the progress of the project by both senior management and the user community; and conducting open reviews of the project status (good and bad news) on a recurring basis.

Publisher Summary This chapter focuses on the application of functional verification to a project. Functional verification is a complex process, and there is no single, agreed-upon approach to verifying a project. It requires careful planning and management, and a good understanding of the goals, methods, and tools to be used, so as to run smoothly and meet the cost and risk requirements of the project. The first part to deciding on a methodology is to understand the project requirements. This will include factors such as the complexity of the project, the number of components that are being re-used from previous projects (and are, therefore, at least partially tested) or that are being designed from scratch, as well as the time and risk requirements. Organizing the requirements of the project, and determining the appropriate verification tools and methods based on those requirements are often reasonable ways to start the verification project. Because cost is often an overriding factor, it may be important to determine where project costs can come from. While this may vary greatly for any particular company or project, listing the cost sensitivities may help in making decisions.

This chapter focuses on financial project appraisal and the most appropriate contract strategies for decommissioning projects. The aim of a decommissioning or waste management project is to spend money on capital goods in the expectation of the project working efficiently—contributing to the safe and secure remediation of the nuclear facility or the nuclear materials involved—at a later date. The average annual rate of return on investment is a simple, easy to understand, and a generally good project appraisal methodology. Payback allows for the timing of returns. It indicates how many years it will take before the original amount invested in a capital project is “paid back”. Discounted Cash Flow (DCF) techniques may be adopted for project appraisal using the methods of Net Present Value (NPV) and Internal Rate of Return (IRR). With the advent of the spreadsheet and the personal computer, these calculations are relatively easy to perform. On the other hand, the selection of a contract strategy for a project is a key decision that will have a major impact on the project's outcome. Any project incorporates a degree of risk that, once initiated, may be countered by effective change control, producing a revised clear scope and work definition, rescheduling both the program and the cash flows, together with the application of insurances, payment bonds, advance payments, and retentions as appropriate. The type of contract employed to complete the project works should take into account risk identification and then the appropriate apportionment of the risks with those—clients or contractors—who are best able to manage them.

This chapter summarizes the key provisions usually found in the Project Contracts that may be signed by the Project Company apart from the Project Agreement. In a conventional contracting procedure for a major project, the project developer has a consulting engineer draw up the design for the project, based on which a bid for the construction is invited with detailed drawings and bill of quantities. Any specific equipment required is procured separately. Another approach to contracting for major projects is to appoint a contracting or engineering company as construction manager, with the responsibility of handling all aspects of the construction of the project, against payment of a management fee. The fee may vary according to the final outcome of the construction costs. Although this may be an economically efficient way of handling major projects, a variable construction cost is not acceptable to lenders because of the risk of a cost overrun for which there may not be sufficient funding, or which adds so much to the costs that the project cannot operate economically.

The client and the project manager have to work together to bring the project into existence. In carrying out their duties, each needs to know where the other stands and have' reasonable expectations of how the other will perform. Although quite different, their roles complement each other. The client manages the project through the project manager; the project manager manages the project while keeping the client on-side and satisfied.

Publisher Summary This chapter discusses plant design and cost. Capital cost projects begin when a need is defined that cannot be satisfied in existing facilities. In the conceptual phase of the project, multiple approaches are evaluated and one or more plans are evaluated for meeting these needs. The conceptual plan, if a process plant, is defined in plant configuration drawings and process flow diagrams; if an architectural project, by plant configuration and programming documentation. If it is a process plant, then a process flow scheme must be generated and a configuration for the facility conceived including any support requirements that must be included for the operation to function. If an architectural project, then all the spaces must be defined and the programming completed to a stage that assures that all required building functions are provided. This phase is concluded with an order of magnitude estimate that is used to assess the economic viability of the project. The second phase is normally called preliminary engineering and its objective is normally twofold: sufficient engineering to achieve overall definition of scope for the project and establish a firm budget for completion of the project. Next is the main design phase of the project, normally called detailed engineering during which the design of the facility is completed and the procurement for the project begins.

Once the internal proposal is submitted for approval, project selection begins. Other projects in the corporation may also be competing for the same resources, dollars, or people, and a corporation has to prioritize its projects. A project selection will be based on the corporate business goals, priorities, and other criteria. Once the project has been approved, additional work such as a requirements study, preparation of controller specification, or even development of a prototype system may take place. A contract is then required between the customer and the contractor who will perform the work. A detailed work statement is prepared, either at the same time or prior to the placement of the purchase order. The work statement is based on the functional specifications and defines all the tasks, resources, deliverables, responsibilities, acceptance criteria, project schedule, and payment milestones. While the contract defines the agreement between the two corporations—user and system builder—the work statement is an agreement between the team members. It defines what work will be performed during a given phase of the project and who is responsible for each task. There can be several work statements within a given contract. This work statement should be signed by all parties and individuals assigned to the project. It is at this time that the official kick-off of the project takes place.

Publisher Summary The chapter discusses the energy project evaluation and planning. To place energy project decisions and economic cost-benefit analysis in its proper perspective, the systematic approach used by the World Bank is summarized in a typical project cycle that includes: identification, preparation, appraisal, negotiations and financing, implementation and supervision, and evaluation. Project identification involves preliminary selection of potential projects that appear to be feasible and conform to national and sectoral development goals. In the preparation phase, the borrower studies the engineering, technical, environmental, institutional, economic, and financial aspects of a proposed project. At this stage, the bank may provide staff guidance and financial assistance or help borrowers obtain other assistance to carry out the studies. Supervision of the implementation process is carried out by the bank through periodic field visits and progress reports from the borrower. Evaluation is the final stage of the project cycle, following disbursement of the loan. Project performance audits are carried out by an independent bank department involving review of previous project documents and field visits, where appropriate.

This chapter analyzes various aspects of costing and project evaluation. Cost estimation is a specialized subject and a profession in its own right. The design engineer, however, needs to be able to make quick, rough, cost estimates to decide between alternative designs and for project evaluation. Chemical plants are built to make a profit, and an estimate of the investment required and the cost of production are needed before the profitability of a project can be assessed. The accuracy of an estimate depends on the amount of design detail available; the accuracy of the cost data available; and the time spent on preparing the estimate. In the early stages of a project only an approximate estimate will be required, and justified, by the amount of information by then developed. In this chapter the various components that make up the capital cost of a plant and the components of the operating costs are discussed. The techniques used for estimating are reviewed. Simple costing methods and some cost data are given, which can be used to make preliminary estimates of capital and operating costs at the flow-sheet stage. They can also be used to cost out alternative processing schemes and equipment.

In today's operating and investment climate, project evaluation is both more important and more difficult. It is more important because economic and financial analyses of a proposed project provide a basis for judgment of a project's commercial viability by equity participants, lenders and, in some cases, other participants such as offtakers and governments. It is more difficult because these analyses must, of necessity, be based on estimates, projections and evaluations which must be made in a period remarkable for its economic and political uncertainty. Project evaluation starts with the analysis of the engineering, commercial and financial information available. Beginning with the preliminary design and capital cost estimates, alternative financing plans can be developed outlining possible sources of funds, terms and security arrangements. Pro-forma financial statements can also be developed, including sources and uses of funds, cash flow schedules, income statements and balance sheets. With these results, various profitability measures can be determined. Subsequently, in an effort to deal with uncertainty, these results can be tested by measuring the impact on project viability and profitability of changes in project and external variables such as product process, mining and processing rates, operating and financing costs, currency exchange rates and other factors. The results are a number of financial projections reflecting different assumptions for key project parameters. The projections can be used to structure the project to achieve the maximum financial performance. Projects, the financial viability and profitability of which can be demonstrated under varying market conditions, will be the most competitive in capital markets.

Some ingenuity can be exercised in finding bases for allocating the indirect expenses and calculating the absorption rates. The calculations are made in advance on the basis of estimate or budgets, and the total expenditure is compared with the total amount absorbed by applying the predetermined rate to the actual production to show an overall variance. The labour and material content of an order can readily be estimated from drawings and specifications, but the overheads applicable to a job can only be arrived at indirectly by the use of an absorption rate. It is generally thought best to relate overhead absorption to time in this way, and a fair measure of the time spent in the factory is the number of labour or machine hours that have been charged up to the unit as a direct cost. It is only production departments that will have absorption rates to apply to their output. The estimated expenditure of the service departments is apportioned among the production departments in much the same ways as are used to allocate the indirect expenses.