Friday, October 11, 2013

PROJECT BUSINESS PLAN


INTRODUCTION
The Project Business Plan also called PBP represents a “baseline” for as-sold profitability performance. PBP is the comprehensive commercial basis of the project and is a commercial reflection of the execution plan. The methodology and procedures contained in the PBP are used to evaluate commercial and execution risks involved in the project. PBP is also used to develop strategies that maximize the profits. 

This document addresses the following key elements of a Typical Project Business Plan for major EPC Projects:
1.       Objectives of PBP
2.       PBP Development Phases
3.       Basis of PBP
4.       Roles & Responsibilities
5.       Pricing Model
6.       Risk Management
7.       Working Capital
8.       Return on Investment
9.       Net Present Value
10.    Project Alignment
11.    Business Reports
12.    Revision procedure & Requirements

1.       OBJECTIVES OF PBP

The main objectives of a Project Business Plan are to develop:
1)       A baseline for contract pricing
2)       A yardstick for the evaluation of project performance
3)       A detailed understanding of the contract terms and conditions
4)       Opportunities for increasing the return.
5)       A detailed understanding of financial risks and mitigation strategies
6)       A risk analyses with a mitigation plan


2.       PBP DEVELOPMENT PHASES

On a major project, the PBP is developed in three stages:
1)       Proposal Stage
PBP is initiated during the project proposal phase and documents the overall commercial strategy for the proposal. It takes into account the scope of work, risk analyses, mitigation strategies, pricing, schedule and the execution strategy. Once the contract terms have been established it uses the Net Present Value to establish a commercial basis.



2)       Project initiation Stage
As soon as the Project is awarded, the “As-Sold” model is transformed into a controllable baseline plan and is issued as the Project Business Plan to the project management team.
 
 


3)       Project Execution Stage
As the project progresses, many assumed parameters change necessitating modifications to PBP. The process involves continuous analyses, forecasting in search of new opportunities to increase the return.

3.       BASIS OF PBP

This section contents a list of items and documents that form the basis of project business plan. Listed below are the typical documents:

1)       Contract Document
2)       A complete set of the Proposal
3)       Contractual Project Schedule
4)       Pricing Model
5)       Project Estimate
6)       Project Execution Plan
7)       Project Procurement Plan
8)       Project Contracting Plan
9)       Cash Flow Sheets
10)   Commercial Alignment Methodology
11)   Risk and Mitigation Plan



4.       ROLES & RESPONSIBILITIES

It is very important to develop a Roles and Responsibility Matrix for the development and maintenance of the Business Plan. Outlined below are some typical roles that may vary with the structure of the organization.

1)       Project Manager: The project manager leads the development of Business Plan and assumes it’s overall responsibility. The ultimate goal of the project manager is to maximize the project profitability.

2)       Business Development Manager: Most of the companies executing major projects generally have a Business Development Manager who looks after the project from the proposal stage through the contract award.  This manager or the concerned marketing executive is responsible for the development of overall business strategy based on the “As-Sold” or “As-Bid” philosophy and ensures that it gets incorporated the business plan.

3)       Project Business Manager: In the current market scenario it is becoming common for a project to have a Business Manager on the project. A detailed description and responsibilities of this position will be discussed in a separate blog on project organization.  In the absence of this position on any project, the Project Controls Manager assumes this responsibility. This position is responsible for gathering required information and actual development of the plan document. The business manager plays a key role in developing action plans and strategies for profit maximization.

4)       Project Team Members:  All the senior members of the project team are responsible and accountable for their respective elements of the business plan.

5.       PRICING MODEL & EXPLANATION

The pricing model is a project specific model based on the As-sold pricing with special attention to achieving higher level of margins and profitability. The model transforms the strategic commercial data into a more visible and uniform format. It helps the project manager and provides:

a) Greater visibility of pricing strategies to evaluate various options for an increase in profitability.
b) Details of all available options for the development of commercial strategies.
c) A most appropriate methodology and approach towards the pricing process.

6.       RISK MANAGEMENT

Risk is defined as the probability of the occurrence of an uncertain event and its consequential significance. A project risk is an uncertain event or set of circumstances that, should those occur, will have an impact on the achievement of the project’s objectives. A risk is only taken when the anticipated benefit exceeds the cost of rectifying the failed act by a significant margin. Though a risk is generally taken in negative terms, but in real terms, it represents any uncertainty affecting the outcome of the event whether negative or positive.

The basic objective of Risk Management is to identify all potential risks and to develop suitable strategies to significantly reduce their impact. The risk management also includes the development of opportunities to maximize the margins by taking advance actions to mitigate the risks. A risk is always taken as an opportunity and a potential for increased returns, profitability or rewards through effective risk management techniques. It is generally believed that risks and rewards go side-by-side, higher the risk, higher is the possibility of a reward.

The Project Management Institute has defined “Risk management” as “the art and science of identifying, assessing, and responding to project risk throughout the life of the project, and in the best interest of the project’s objectives”.  Risk management involves forecasting contingency requirements, identification of the risk areas and proactive actions. The effective risk management leads to having a competitive advantage and depends on the type of response associated with the risk. The response chosen for each risk depends on the risk’s probability and impact as well as the risk tolerance. Given below are five major responses to any risk:

It is important to know the method of responding to a risk. Risk management involves forecasting of contingency requirements, identification of the risk areas and taking proactive actions. The effective risk management leads to having a competitive advantage and depends on the type of response associated with the risk. The response chosen for each risk depends on the risk’s probability and impact as well as the risk tolerance. Given below are six major responses to any risk:


 1)       Avoidance
This risk management strategy requires making efforts to completely avoid the occurrence of risk. This may mean changing or modifying plans so that the risk may not occur. This is strategy is one of the best methods to manage negative risks.  Adoption of this risk management strategy for negative risks is used very commonly while making project plans. From the scheduling point of view, not scheduling any digging work during the heavy rain periods or delaying an outdoor heavy construction work during excessive snow periods are the examples of avoiding risk. 

2)       Mitigation
Mitigation means making efforts to reduce the probability of occurrence of a risk. In case a negative risk can’t be avoided, efforts are made to minimize the impact of such risks, this is mitigation. This risk management strategy is also used very commonly during the project planning and execution. For instance, in case a digging work can’t be delayed or avoided during the rainy months, but must be completed during, plans and arrangements are in place to immediately cover the work site as soon as the rains start. 

3)       Transference
Transferring the liability of the risk to a third party is another golden strategy to reduce the impact of a risk. This generally results in an increase in cost. For example any insurance or execution sub-contracts are ways to transfer negative risks and liabilities to others, but these are associated with extra costs. 

4)       Active Acceptance
This is the acceptance of a fact that a particular risk may take place and nothing could possibly be done to prevent the occurrence the related events. Preparing suitable contingency plans and including the associated costs in the contingency budgets is a risk management strategy to reduce the impact of such risks. An example of this risk could be the loss of work hours due to unforeseen circumstances like non-seasonal storm or an accident. Nothing could be done to avoid such risks but to accept. In case cases suitable risk management strategy is to make provisions in the project plans for such occurrence and inclusion of such risks in the contingency budget. 

5)       Passive acceptance
Accepting that a particular risk may happen, but deciding to act only if and when it occurs is another risk management strategy. 

6)       Initiate Action
Initiating suitable action as soon as the risk is identified. 
The Project Business Plan includes a list of risk areas, a mitigation plan associated with each risk as well as the estimated cost involved with each major risk. 



7.       WORKING CAPITAL

Working Capital is the net invested capital employed in a project and is one of the major concerns of a project manager. It is used as a balance sheet to indicate the value of capital resources employed in a project and is mathematically represented as below:

Working Capital =        Current Assets:
       Work-in-progress
    + Accounts receivable
     Less
     Current Liabilities:
     Unearned revenue
   + Advances
   + Accounts payable 
   + Unrecorded liabilities
   + Project reserves

8.       RETURN ON INVESTMENT

Return On Investment or simply known as ROI is a measure of the project performance showing how efficiently the invested capital is being utilized to produce earnings. A high value of ROI indicates that the capital investment is being utilized efficiently to produce earnings. The ROI is represented as a percentage ratio and is estimated by dividing the Invested Capital (Net Invested Capital) by Earnings Before Tax (EBT).

9.       NET PRESENT VALUE

Net Present Value (NPV) is the difference between the present value of all cash inflows and the present value of all cash outflows required to finance the project at a given discount rate. The present value represents the current value of funds to be received at a future date at a discount rate. It is being increasingly acknowledged that the use of Net Present Value (NPV) evaluation technique is proving beneficial over the use of Net Earnings technique in many ways.  Given below are some arguments to support this theory:

NPV uses the ‘Cost of Cash’ principle thereby recognizing time value of the capital.

NPV uses cash flow rather than net earnings. Cash flow takes into account many variables like inflation, interest, cost of money, etc.

NPV has a better understanding and a positive NPV reflects better value.

10.   PROJECT ALLIGNMENT

The success of a project depends on the alignment of the project team. A business plan therefore needs to puts emphasis on proper alignment of the team.  It’s the responsibility of the project manager to initiate the commercial alignment process during the initial stages of the project. The alignment procedures are prepared with the active participation of Project Manager, Business Manager, Finance Manager, Construction Manager, Procurement and Contracts Manager and involve:

Project alignment meetings where the team is informed about the project details through presentations and distribution of documents.
A commercial alignment checklist is prepared and shared with the team.
 

11.   BUISINESS & FINANCIAL REPORT

Development of "Business Reports" also known as "Financial Reports" is an important part of business plan. The business plan must include the formats for reporting various reports to be issued during the project execution. Given below are some of the important reports: 

a) Financial Status Report
The Financial Status Report gives a view of the financial health of the project. The report compares the current budget, current forecast and monthly change of costs under various heads to the As-sold model. Calculations of gross margin, cost of cash and project margin indicate the financial status and health of the project. The chart below shows the financial calculation methodology. 





        b) Risk Management Report
Given below is a typical Risk Management Report:



 c)  Incentive Report
Given below is a typical Incentive Report:


d)  Balance Sheet & Working Capital Report
Given below is a typical Working Capital Report: 



e)  Cash Flow Report
Given below is a typical Cash Flow Report:




Thursday, October 10, 2013

VALUE ENGINEEING

Introduction

In an age of increasing competition and sophistication, innovation and improved value is needed to manage major EPC Projects. Value, is defined as the ratio of function to cost. Value can therefore be increased by either improving the function or reducing the cost.Value Engineering is recognized worldwide as a highly profitable means to achieve reduction in cost and improved quality thereby resulting in higher client satisfaction. Value methodology is extensively used in Engineering, Procurement and Construction projects to optimize processes and engineering development. Benefits include decreasing costs, increasing profits, improved quality and performance, thereby enhancing owner satisfaction.
 

1.           What is Value Engineering?

 
Value Engineering (VE) is a creative, structured and organized approach to improve the performance at the least life cycle cost. It is an investigative and systematic methodology by an experienced, multi-disciplinary project management team to improve the "value" of projects, products and processes by use of the ˜examination of function and quality”. It analyzes and identifies the processes, design and construction plans of projects, and business and administrative processes and removes unnecessary expenditures and redundant processes resulting in an increase in the value. It helps achieve balance between required functions, performance, quality, safety, and scope with the cost and other resources necessary to accomplish those requirements. The proper balance results in the optimization in value for the project.

Value engineering is also referred to as “Value Improvement Practices” (VIP) or "value management" or "value methodology" (VM), or "value analysis" (VA) and is a body of knowledge as a technique in which the value of a system’s outputs is optimized by crafting a mix of function, quality and costs.

Mathematically, Value is the ratio of function plus quality to cost and can be increased by either improving the function and quality or reducing the cost.

V = (F+Q)/C where

V (Value) is the reliable performance of functions to meet project needs.
F (Function) is the specific work that a design or item must perform.
Q (Quality) is the owner’s needs, desires and expectations.
C (Cost) is the life cycle cost of the product or facility.

2.        Characteristics of Value Engineering:

 The Value Engineering can be characterized as a process that:
1)     IS a creative, structured and organized approach to optimize performance at the least Life     Cycle Cost (LCC)
2)      IS an investigative approach by a team of experienced, multi-disciplinary experts to               improve value?
3)       IS elimination or modification of functions that do not add value?
4)       IS a methodical approach producing better results?
5)       IS NOT a mere cost cutting exercise.
6)       IS NOT limited to only early design stages.
7)       DOES NOT result in a delay in project completion
8)       DOES NOT cost more than it is worth

Value Engineering is based on the following principles:

1)          Everyone is creative and all ideas should be evaluated
2)          Brain storming sessions generate more creative ideas than individuals
3)          There is always a room for improvement
4)            4)       Perfect Life Cycle Costs (LLC) should be as low as possible

3.       Value Engineering Methodology


Value engineering uses rational logic technique where an expert team raises “How” and “Why” questions and analyses the function to identify relationships that increase value. It uses brain storming sessions and focuses on hypothesis-conclusion approaches to test relationships.  The VE process produces better results when applied by a multi-disciplined team with experience and expertise relative to the type of project being evaluated. Following methodology is found to be quite effective for EPC projects:

1)       Team Preparation
Assemble a multi-disciplined team with experience and expertise relative to the type of project being evaluated. Following questions help in understanding the Team Preparation:

a)       Do we have representatives from all related disciplines in the team?
b)       Are group leads included in the team?
c)       Do we have representatives from outside of the project who can look outside the box?

2)       Gathering Information
Gather significant information to have a good understanding of the project. Following questions help in understanding the project:

a)       What is being done?
b)       Who is doing it?
c)       What could it do?
d)       What must it not do?


3)       Measurement
Analyze the project to determine the requirements. Questions similar to given below help:

a)       How will the alternatives be measured?
b)       What are the alternate ways of meeting requirements?
c)       What else can perform the desired function?

      4)       Analysis
Analyze the project to understand and clarify the required functions. Following questions help understand:

a)       What must be done?
b)       What does it cost?

      5)       Generation of ideas
Generate ideas on all possible alternatives to accomplish the required functions. Following questions help understand:

a)       What else could be done?
b)       Will another alternative work?

      6)       Evaluation
Evaluate and synthesize generated ideas and concepts to select feasible acts for development into specific value improvement. Following questions help:

a)       How much do we save in cost?
b)       Which alternatives will work better?
c)       Which Ideas are the best?

      7)       Development
Identify the best alternatives and ideas and prepare for improving value. Following questions help:

a)       What are the impacts?
b)       What is the cost?
c)       What is the performance?

      8)       Expansion of Ideas
Explore the developed Ideas to examine if some ideas could be further expanded.

      9)       Presentation
Compile the development results and present the value recommendation

     10)   Implementation
Implement the ideas.

4.   Potential Savings


VE exercises far exceed the investment in VGFE process. Savings in time, cost, and quality contribute to improving an organization’s competitive position. Though there are opportunities for improvement at all stages, but, in case of EPC projects, a stage comes beyond which the Value Engineering exercises even result in a loss.  

Expectations:
Potential savings from VE during the initial stages are found to be in the range of +2% to +7% of TIC. The chart illustrates the expected savings during different stages of the project execution. As represented in the chart, the VE efforts may even result in losses if undertaken at later stages of project execution. The stages vary from project to project, but generally speaking, the value engineering implemented on a project after the start of construction may result in a net loss.

The RED Line in the chart represents the savings in cost on account of the implementation of Value Engineering.
 
The BLUE Line in the chart represents the total cost incurred as a result of the implementation of Value Engineering.

 5.     Impact of Project Time on Cost


The Performance of a Project is judged from three important angles
1)       Project Schedule
2)       Project Cost
3)       Project Quality
There is usually a direct and very important relationship between these parameters where a change in one parameter impacts the other. The discussion here is limited to a relationship between the performance of schedule and cost of a project.


If the project schedule gets delayed, the original cost estimate or the project budget is almost certain to increase resulting in over-runs. The continuation of project always costs money every day whether working or non-working, weekday or weekend, from day one, right through the commissioning and start-up of the project. The cost goes up with time due to a number of reasons including:

1)     Payment to the work-force is time related any delay in time results in additional payments resulting in an increase in cost.

2)   The project overhead costs including management, administration, accommodation, services, and general facilities, need to be paid till the end of the project.

3)      Inflation and escalation costs are always time related.
  Therefore, when a project finishes later than the plan, it is likely to cost more on account of a rise in the cost of materials as well as salaries and wages.

4)      A delay in project completion also implies lower performance or inefficient working. This in turn results in higher project costs.

5)      Poor planning results in project delays and costs more on account of missing information, change orders, material shortages, etc.

6)      Increase ion man-hour expenditure due to poor performance directly increases the cost.

7)      Financing cost is another factor that goes with the time. Most of the finance raised for major projects, is likely to be invested for a longer time till the returns start.
All these time-cost considerations mean that any delay on a large project can easily cause additional costs and over-runs.

The chart below illustrates a typical time-cost relationship:


Wednesday, October 9, 2013

RASCI MATRIX


Every project must have well defined roles and responsibilities for the team. With that in view the projects develop RASCI matrix in the initial stages of the project. It is therefore necessary to develop a detailed responsibility matrix to define the responsibility and approval process of each team member. This is where a RASCI chart comes into the picture.

What is RASCI?
RASCI is used to define the responsibilities and account-abilities of the project team. As discussed under the EPC section, the project team on a complex project consists of the Owner, the EPC Contractor and some third parties engaged on specific jobs. On account of the complex responsibility, decision making and approval process, the formation of the project team under such agreements needs a great deal of effort.


The RASCI model is built around a simple 2-dimensional matrix which shows the 'involvement' of Functional Roles of the project team members formed under different groups.  RASCI acronym is derived from five key words R A S C I. It has a number of explanations depending on the use. In case of the EPC projects, following explanation is widely used and accepted.

R stands for Responsibility. In the RASCI chart, it represents the team member responsible for completing a specified work or task or deliverable. It is more meaningful to say that is the Responsible for “Doing”, or “Getting it done”; or “has technical responsibility to design engineer and produce the deliverable”. This role may be assigned to a design engineer or a disciple lead. There can possibly be more than one R’s for a single activity depending on the activity.
 
A stands for Approval. In the RASCI chart, it represents the team member who is authorized to approve, or is accountable, or takes the final decision and signs the work or document or deliverable.

This person is ultimately accountable for the correctness and thorough completion of the specified work. This is also the person to whom “R” (Responsible) is accountable. There must be only one person for a particular work and it represents the last leg in the execution. “A” also takes the ownership of the quality and the end result of the process and, so to say, the buck stops here. A can't be assigned to multiple persons and only one person is accountable for an activity.

S stands for Supervision. In the RASCI chart, it represents the team member who supervises the work. The supervision may include co-ordination with other disciplines & organizations, and recommendations. “S” also provides or arranges to provide the additional resources to conduct the work, or plays a supportive role in the implementation of the work.

C stands for Consultation. In the RASCI chart, it represents the team member who must be consulted before the work is done and who must endorse the work or document or deliverable. The involvement of “C” is based on the input of knowledge and information. This responsibility is for senior members of the team including advisers and experts. This level may also have a veto power.

I stands for Information. In the RASCI chart, it represents the team member who needs to be informed of the work and receives copies of correspondence, documents or decisions in connection with the work. "I" is expected to be kept in the loop and has to be made aware of the status of the work, and outcome of any actions.


RASCI Process


The process of establishing a meaningful RASCI Matrix consists of a systematic development of roles and responsibilities of key members of the project team for each of the identified project tasks or deliverables. It is a good practice to organize a session of the key personnel of the project team and review the roles and responsibilities.