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:
