cost estimation problem in FS and FEED phase of thermal power PROJECTS

A CASE STUDY OF

thai binh 2 thermal power PROJECT

By

Tran Viet Sinh

Abstract

The accurate determination of investment capital and project costs in all projects as well as its stages has strong affect to the project success and efficiency. The required levels of accuracy of project cost estimates vary at different stages of project development, ranging from ball park figures in the early stage to fairly reliable figures for budget control prior to construction. Since design decisions made at the beginning stage of a project life cycle are more tentative than those made at a later stage, the cost estimates made at the earlier stage are expected to be less accurate. Generally, the accuracy of a cost estimate will reflect the information available at the time of estimation.

The project cost estimates may be viewed from different perspectives because of different institutional requirements. In spite of the many types of cost estimates used at different stages of a project, cost estimates can best be classified into three major categories according to their functions. A project cost estimate serves one of the three basic functions: design, bid and control. For establishing the financing of a project, either a design estimate or a bid estimate is used.

1.Design Estimates

For the owner or its designated design professionals, the types of cost estimates encountered run parallel with the planning and design as follows:

-           Screening estimates (or order of magnitude estimates)
-           Preliminary estimates (or conceptual estimates)
 -          Detailed estimates (or definitive estimates)
 -          Engineer’s estimates based on plans and specifications
for each of these different estimates, the amount of design information available typically increases.
2. Bid Estimates

For the contractor, a bid estimate submitted to the owner either for competitive bidding or negotiation consists of direct construction cost including field supervision, plus a markup to cover general overhead and profits. The direct cost of construction for bid estimates is usually derived from a combination of the following approaches.

-           Subcontractor quotations
-           Quantity takeoffs
-           Construction procedures.

3. Control Estimates
For monitoring the project during construction, a control estimate is derived from available information to establish:
-           Budget estimate for financing
-           Budgeted cost after contracting but prior to construction
-           Estimated cost to completion during the progress of construction.

In this study, the author shall focus on the cost estimation methods in the view of the Owner (Design estimate), with reality project case study of Thai Binh 2 Thermal Power Plant Project.

Executive summary

Rationale of research

This research has been conducted to identify problems in cost estimating for EPC contract

Objectives of study

To study different estimating methods from FS to FEED phase, Government regulation which affects estimation.

Discuss strengths and weakness, to propose frame work for accurate estimation for power plant projects.

Methodology                                            

The exploratory research method is used to study problems in cost estimation of thermal power projects in Vietnam and using case to study about frame work for estimating in thermal power plant projects.

Findings and conclusion

As the power plant projects in Vietnam are invested by Government, so total cost from FS to FEED should comply government rules and regulations. The application of the Vietnam government regulation in determining the total investment and total project cost of the thermal power project, also raises some of problem

·         Equipment Cost is usually estimated too low (compared to similar international projects)

·         Policies and cost rates of layout clearance, compensation and resettlement is not close to reality price which leads to almost of the thermal power projects have encountered obstacles to hand over plan and causing project delays.

·         Cost consultants and project managers is low due to excluding the cost of foreign consultants

·         Contingency cost is determined too low.

The method of estimating the total investment and total project cost of thermal power project is combined methods, including some of the following main steps.

·         Breakdown total cost to subdivision of cost areas.

·         Quantity takeoff is determined basing on the basic design for FS phase and the FEED design for FEED Phase. If design drawings are not available, the quantities are calculated with references to similar projects already executed.

·         Detail cost determination.

·         Applying the government rules and regulations into the project to identify sub-divide the areas cost of project.

·         Summarize total project cost estimation.

Recommendations

·         In the thermal power project, the imported equipment and materials cost is a large proportion of the total cost of the project, so the currency in calculation and approval of total project cost is recommended to use two type of money in the spreadsheet which is VND and USD. Amount in USD which is used for the purchase of overseas equipment/material. This reduces the risk causing by variation of exchange rate (always increasing) between VND and USD for investors.

·         Management and consulting Cost of projects need to be supplemented the unit price for the foreign consultant

·         Policies and unit prices application for compensation must be consistent with the actual market price; residential land can be compensated under once with the real market prices. With agricultural land compensation policy of the State should pay for farmer in yearly based on the profits of farm products on the land.

·         Contingency cost applied in FS stage is minimum rate of 20%; For the FEED is 10%, as same with international project cost estimate.

·         Electricity distribution prices to consumers in Vietnam are now too low. PPA (Power Purchase Agreement) between investor (PVN) with EVN should be low. Therefore, the investor has pressure to reduce of total investment and total project cost estimates to meet the economic criteria of the project (IRR, NPV).

·         In the technical engineering design (FEED) and bidding documents, OWNER should define the origin of Equipment. Estimator can determine the equipment cost in a more accurately.