CAUSATIVE FACTORS LEADING TO COST OVERRUN

IN EPC POWER PROJECTS

A CASE STUDY OF VUNG ANG POWER PLANT PROJECT IN VIETNAM

By

Ngo Hoang Linh

Abstract

Complete project within its scheduled cost has long been regarded as one of the most important goals of a project and the driving force of project success. Accurate scheduled cost estimates are critical to any client when making decision-to-build for a project. Despite the proven importance of cost target, cost overrun still occurs in almost construction projects, in any scale and kinds of project, in every country.

In an attempt to minimize cost overrun, the owners of power plant projects in Viet Nam widely choose EPC delivery model with fixed price contract. However, cost overrun is still severe in Vietnam Power projects where these overruns sometimes exceed 60% of the anticipated cost of the project (Son La hydro power project – VnEconomy, 2010). There are several factors leading to these cost overruns, some of which are unforeseen, but almost others relate to the incompetency of project management in terms of risk analysis.

Fully understanding and thorough analysis all causations significantly impacting to project cost are very important step for project management system.

This study identifies the major causative factors leading to cost overrun in power projects in Viet Nam. The study addresses causations of these factors and how to manage these factors for future projects and propose a framework for cost control in power plant project.

  

Executive summary

Rationale of research

This research has been conducted to identify factors involving cost overrun in Engineering Procurement Contract (EPC) in Power Plant projects.

Objectives of study

To identify factors involving cost overrun in power plant projects, analyzes causes of factors involving cost overrun and to propose a solution to cost control in EPC power plant projects.

Methodology

The exploratory research method is used for literature review and field research of Vung Ang Coal-fired Power Plant Project. This research is based on document record of happening in the project, statistical data and consultant assessment and analysis.

Findings and conclusion

From results of the case study in Vung Ang project, the following conclusion

• Identification of causative factors affecting project cost overrun

There were many variables that contributed to cost overruns in the power projects implemented in Vietnam. In preparation stage, the major factors are: insufficient soil investigation, in accuracy of FEED design and total cost estimate and non-guaranteed fuel resources. In EPC stage the major factors are design changes, inflation, delay of land reimbursement, interference of public authorities, technical complexity, contractor capability, and delay and weather condition.

This revelation should enable planners to take stock of the past performance and incorporate lessons learned.

·         Frame work to control cost overrun

The ability to mitigate the impact of cost overruns will largely depend on proper FEED design, adequate planning of schedule and resources, commitment of all project teams, application of project management techniques through use of qualified and motivated manpower.

In preparation stage, enough time and resources should be allocated to ensure that the following to be conducted: adequate site investigation, appropriate and up to date information, well definition of project specification and scope, accurate project cost estimates, adequate project analysis, wise selection of capable contractor, proper agreement with fuel resources suppliers, product off-taker, public authorities and other relevant parties.

In EPC stage, among all factors leading to cost overruns, management related factors are those which can be controlled and prevented most easily. Concentration should be placed on improvement of project management and human resources to ensure the followings: adequate contract/sub-contract management well cost control, schedule progress, proper quality management system, risk management, staff training, and good linkage with public authorities and other relevant parties.

Suggestion for future research

This study has indicated factors creating cost overruns in EPC power project but their frequency of occurrence and severity of impaction is still unknown. The scope of study can be extended to find out the impact of these factors in relation to their occurrence pattern and their severity impact. A cost control system and remedial solutions can also be researched to deal with these factors and to bring cost overruns down to some acceptable limits if they cannot be completely eradicated. Future research can also be extended to other type of project in process industries.