asset life cycle cost estimating and the ccrg rev4

ASSET LIFE CYCLE, COST ESTIMATING AND THE CCRG

Alberta Assessors’ Association2015 Pre-Conference Course

Salvador Hernandez, Verus Capital AssessmentsDan Driscoll, A.M.A.A.John Elzinga, A.M.A.A.Carol Zukiwski, Reynolds Mirth Richards & Farmer LLP

1

INTRODUCTION

• Introduce panel

• Review course outline

• Review course objectives

• Identify industry terminology and practice

• Show how the assessment legislation overlays industry terminology and practice

2

CCRG BACKGROUND

• Previous document Special Purpose Property Assessment Guide (SPAG)

• SPAG in use under MTA

• CCRG Working Group 1999 - ______

• CCRG is a regulation

• When is the CCRG used?

• Legislation chart - handout

3

CCRG OVERVIEW – Basic Principles

• Dan to work on hypotetical project with multiple components hitting different assessment methodologies: Linear properties, buildings, land, M&E, CCRG

4


• Terminology – included costs – excluded costs

• The term non-assessable can have multiple meanings: (i) s. 298, (ii) s. 291, and (iii) excluded cost under the CCRG

• Project cost

• Construction cost

5


• How the CCRG is laid out

• Obligation on property owner to prove claims for excluded costs

• Limited number of categories of excluded costs

6

CCRG OVERVIEW – Main Areas of Dispute

• Section 1.000 – costs to be included

• Do the project costs include feasibility studies?

• Do the project costs include those incurred by the general contractor(s) plus those incurred by the owner?

• Do the project costs include the cost of bidding and tendering?

• Do the project costs include the cost incurred by the owner to supervise the contractor, or to do quality control in the factory?

• When do construction costs start being incurred?

• What is a construction cost?

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CCRG OVERVIEW – Main Areas of Dispute

• Section 2.000 – costs to be excluded

• Is there a section which allows for the exclusion of the cost of the DBM and EDS?

• Are all design changes or re-work an excluded cost?

• At what point in time do you measure an abnormal cost?

• What is the benchmark of a normal cost against which an abnormal claim is made?

• Do you measure abnormal claims against what is typical for the municipality? Or do you measure against what is typical or normal in the Edmonton area?

• Are all delays or schedule slippage an abnormal cost?

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ASSET LIFE CYCLE – Expenditures Over Time

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BusinessPlanning

DefinitionOptimization Execution Operations

HandoverLife of

the Asset

EarlyFunding

AdvancedCommitment

AppropriationFor Expenditure

Tax BillsEBITDA

Capital Expenditure Operational Expenditure

ConceptSelection

AssessmentTax

Notice

ASSET LIFE CYCLE – Phases Over Time

Project Life Cycle – Major Project Phases

10

Field Execution

Engineering 6%Procurement 32%

Field Execution 53%C&SU 4%

Early Funding 2%Optimizations 3%

ASSET LIFE CYCLE – Phases Over Time

11

CEO’s Vision What Operations What Major Projects What Procurement CEO promise Understood asked EPCs Purchased to shareholders

What was documented What Operations What Owner paid for EPC’s support What the company Received really needed

DBM / EDS / FEED

12

• Design Basis Memorandum (DBM) – FEL 1 or Pre-Feed

• Defines basis for further development of a main idea. Possibly includes a narrowed down list of alternatives previously evaluated as well as descriptions of main processes with high-level flow diagrams and general and/or special conditions for continuous operations of facility. Results in a definitive alternative. Class 5 Estimate.

• Engineering Design Specifications (EDS) – FEL 2

• Includes design specificacions to increase definition what project should do/be. Opportunity to optimize selected alternative. Includes preliminary plot plan, preliminary size equipment list and major equipment list. Class 4 Estimate.

• Front End Engineering Design (FEED) – FEL 3

• The purpose is to further define project facilities to produce the Project Specifications and Standards, and the Job Specification that serve as the basis for Detailed Engineering. Deliverables of FEED are used to prepare bid/tender packages for long leads items. Class 3 Estimate.

PROJECT MANAGEMENT TEAM

(Owner’s Team)

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• Purpose

• To build a team with the range and reach of skillsets in key competencies required to meet project expectations. This group as a whole is responsible for overall project performance.

• Expectation - Designed to ensure alignment in 3 dimensions:

•Vertical among company, project team & 3rd parties: contractors and subcontractors.

•Horizonal among business functions, technical, and operational organizations.

•Time to maintain continuity of key personnel throughout project life cycle.

PROJECT MANAGEMENT TEAM

(Owner’s Team)

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• Management PMT Support

• 15% 60% 25%

VicepresidentsProject ChampionsGatekeepersExecutivesProject AdvisorsGeneral ManagersProject DirectorsArea DirectorsPMOProcurement DirectorsExecutive AssistantsAdmin Assistants

Engineering DisciplinesScheduling, PlanningQuality, RiskCost EstimatingForecastingChange ManagementBusiness ServicesProcurementConstructionC&SUHealth, Safety & Envir.Document Control

Human RresourcesInformation TechnologyFinanceMedia RelationsStrategyAccounts PayableReal EstateTravel CoordinationSecurityCareer DevelopmentRegulatory ComplianceShareholders Relations

TRANSITION TO ASSESSMENT

• Assessors are concerned with CapEx (project costs)

• Municipalities are concerned with OpEx

• OPEX may be applicable for Schedule D additional depreciation.

OpEx is the source of tax bills and a source to finance municipalities expenditure operational and growth needs.

15

16

CCRG Overlay on Project Phases

16

Construction Cost

Field Execution

Pre-Construction Cost Post-Construction Cost

Engineering 6%Procurement 32%

Field Execution 53%C&SU 4%

Early Funding 2%Optimizations 3%

ASSET LIFE CYCLE – Expenditures Over Time

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BusinessPlanning

DefinitionOptimization Execution Operations

HandoverLife of

the Asset

EarlyFunding

AdvancedCommitment

AppropriationFor Expenditure

CCRG CostRendition Tax Bills

EBITDA

Capital Expenditure Operational Expenditure

ConceptSelection

AssessmentTax

Notice

PropertyTax

RenditionProgram

MultipleAssessorReviews

ASSET LIFE CYCLE – Expenditures Over Time – Assessment Timeline

Schedule D

CCRG ISSUES WHICH ARISE

• When does construction begin? When do construction costs start?

• What are the differences between a feasibility study and the DBM and EDS?

• Does the CCRG view of a construction cost differ from industry’s view?

• Are the costs of bidding and tendering an included cost?

18

CCRG ISSUES WHICH ARISE

• CARB Decision – Canadian Natural Resources Limited v Regional Municipality of Wood Buffalo, CARB 001-2014

• “[182] The municipality understood the CARB’s decision to interpret “construction costs” to mean costs with a sufficient nexus to the construction of bricks and mortar or that facilitates construction of machinery and equipment. The municipality also believed the CARB’s order supported the view that abnormal costs, including productivity losses were not measured against what was typical or normal in central Alberta or Edmonton, but were measured against what was typical or normal within the municipality.” 19

CCRG ISSUES WHICH ARISE – Owners Costs

• Term used by industry but does not appear in the CCRG

• Can be a “catch all” category for the owner to record costs related to:

• Home office overhead for PMO, IT, Finance, HR, Corporate Support, Media PR

• Perks and trinkets

• Bidding and tendering

• Parties and celebrations, recognitions

• Supervision of the general contractor(s)

• Material and Equipment surplus/damaged

• Quality control in the factory

• PMT – Non dedicated personnel (40% of PMT)

• Fly in Fly Out, Camp, Travel Coordination

• Training not related to build or operate facility (defensive driving, professional associations, healthy living)

• Training for craft labour (safety, drug and alcohol tests)

20

CCRG ISSUES WHICH ARISE – DBM/EDS

• Design Basis Memorandum (DBM)

• Typical contents – COAA document

• Engineering Design Specifications (EDS)

• Typical contents – COAA document

• Front End Loading (FEL) / Front End Engineering Design (FEED)

• Are the costs to prepare the DBM/EDS included or excluded?

21

GROUP EXERCISEOwners Costs / FEED

• Working at your table, please consider whether the list of items shown on slide 16 (owners costs) are: (i) construction costs – refer to CCRG section, and (ii) which costs are excluded costs – and identify the applicable CCRG section which could allow for their exclusion

• Complete your answers in the template provided

22

GROUP EXERCISEOwners Costs / FEED – De-brief

• Exercise De-Brief

23

ASSET LIFE CYCLE

24

ESTIMATE CLASSIFICATION & TYPES OF CONTRACTS

25


26


27

Fixed PriceLump Sum

Cost Plus IncentiveTime & Materials

Cost ReimbursableUnit Rates

Contractor’s Risk

100%

0%

0%

100%

Owner’s Risk

Few Change Orders Max Change Orders


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CCRG ISSUES WHICH ARISE Cost Estimating

• Information found on the Authorization for Expenditure (AFE) is useful to understand the scope of the work. An AFE is

typically a class 3 estimate:

• Known technology industry accuracy -20% + 30% (Power)

• New technology industry accuracy –30% + 50% (Oil sands)

• CCRG requires final project costs, not even class 1 estimates

• Assessors need to ask for final project costs, commonly called by industry: Total Installed Cost or Total Final Project Cost

1. Make sure project has been de-supplemented (AFE removed)

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CCRG ISSUES WHICH ARISE Lump Sum Contracts

• Property owner cannot break out possible excluded costs

• Examples of how this is handled in practice:

• 1. Ask for details of the buildup of the LS contract

• 2. Apply the rest of the project factors to the LS contract

• 3. Calculate from a similar facility

• 4. Producing capacity comparable analisys

• Onus remains on the property Owner to segregate and substantiate costs claims as per CCRG 2005 30

SECTION 2.500 ABNORMAL COSTSBasic Principles

• Types of claims under this heading include: labour productivity losses, schedule slippage, delays, inclement weather, work slow down, accidents, natural disaster, a cost not normally incurred in a balanced market, a cost excluded to maintain consistency among regulated properties:

• This requires clear definition on a case by case basis because there are multiple scenarios possible on each concept mentioned above. Companies need to come forward with full cost details and traceability to let the assessor decide on each case as each project is different by deifnition.

31


• From a review of the section we can see several principles

• Labour force available – travel excluded s. 2.500.100

• Materials and parts are available – transportation past Edmonton excluded s. 2.500.200

• Interest during construction is excluded – s. 2.500.300

• Premium payments for overtime are excluded – s. 2.500.400

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• Typical or normal varies over time

• Typical or normal varies by location

• Typical or normal varies by industry

• Requirement to measure actual costs against typical or normal

• Obligation on the property owner to establish typical or normal, time period, location and the industry constructed.

33


• How do you measure a balanced market?

• Back to basic principles – varies by location, industry and over time

• Measure market during the period of construction

• If everyone in the industry/location is experiencing the same pressure – is normal.

• Deviations from that normal can be abnormals.

34


• Cost excluded to maintain consistency among regulated properties

• CCRG used by the Regulated Property Unit to prepare the rates in the Minister’s Guidelines

35

CHANGE MANAGEMENT

A process whereby changes in the Scope of Work agreed to by the Owner and Contractor are implemented via Change Orders.

Change Orders are additions, deletions of scope which alter the original contract cost and/or completion date.

CO’s are common in large projects under cost reimbursable contracts. Seldom seen in Lump Sum/Fixed Price contracts.

1.Project schedule/scope/cost incorrectly estimated.

2.Owner discovers possible efficiencies that require deviations from original plans.

3.Contractor underestimated efficiencies and additional cost, time or scope must be added to complete project

36

CHANGE MANAGEMENT

37

CHANGE MANAGEMENT

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0%

25%

50%

75%

100%

BusinessPlanning

FeasibilityStudies

ConceptOptimization

Basic Design E&P Construction C&SU

Cost of Change

# of Changes

As projects progress, changes are more costly but fewer

CHANGE MANAGEMENT

Challenges for OwnersCost Reimbursable: Contractors low ball bids seeking to turn it into change management heavens.

Company Staff Turnover: A manager may approve a change that his/her replacement may reject. And viceversa.

Company/EPC Change Management Culture: Change order forms are poorly filled and no relevant info is avaliable to assess a change.

EPC does not adhere to company processes: Competing contractors blame each other for delays, availability of work fronts.

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CHANGE MANAGEMENT

40Queen Isabella Causeway near South Padre Island, Texas, September 15, 2001United States Coast Guard, CWO2 Robert Wyman

CHANGE MANAGEMENT

41

Can you live with it as it is?

SECTION 2.500 ABNORMAL COSTSLabour Productivity

42

Field labour productivity is the single greatest variable in any cost estimate and it is extremely difficult to estimate.

Direct field labour constitutes a high percentage of the total cost of a project from 15% to 25%.

Productivity variations are based on:

Type of project, world and regional location, contractor’s morale, owner’s management, project’s culture, weather, technology, time of the year, craft availability, labour mix (local vs expatriate vs extra-provincial), degree of supervision and degree of skillset to use equipmentm learning curve effect, job size, project change orders.

SECTION 2.500 ABNORMAL COSTSEngineering Productivity

43

Engineering productivity is also subject to variations similar to labour productivity, but easier to estimate and quantify.

Engineering productivity range from 10% to 15%.

Variations are based on:

Type of project, world and regional location, contractor’s morale, owner’s management, project’s culture, weather, technology, engineers avalability and mix (local vs expatriate vs extra-provincial), degree of supervision and job size.


Process to establish the normal vs abnormals:

Projects establish a Base Productivity to define what can be expected as a normal condition in that particular project.

Abnormals are deviations from Base Productivity

There are always abnormal conditions related to any project, whether they were captured as such is another story.

44


45

DFL Non-Productive Time10 hr shift

6%12%

10%

6%

16%

50%

Actual Work Time Idle/Moving InstructionsSocializing Tools & Matls. Other

University of Calgary – Productivity in Construction Research Studies

SECTION 2.500 ABNORMAL COSTS Labour ProductivityOvertime Premium – Day Shifts

46Calculating Overtime Premium:

ST $70/hr & OT $97.5/hr

Delta ST vs OT = $27.5/hr

OT Premium = (27.5/70) = 39.2%

DaysOn

DaysOff

OneCycle

HoursWorked

StandardTime

OverTime

CostIncrease

BaseProductivity

4 3 7 40 40 0 0% 100%

5 2 7 50 40 10 3.9% 90%

6 1 7 60 40 20 7.9% 80%

10 4 14 100 70 30 11.8% 75%

21 7 28 210 120 90 35.4% 64%

35 21 56 350 200 150 58.9% 60%

Job Rotations in Remote Locations

SECTION 2.500 ABNORMAL COSTS Labour Productivity

More than one way to calculate actual productivity depending info available

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1. Productivity = QAB workhours

Actual workhours

2. Productivity = % physical completion

% of QAB workhours

3. Productivity = Budget Unit Rate

Actual Unit RatesQAB – Quantity Adjusted Budget: Includes adjustment for actual conditions on site to reflect real productivity

SECTION 2.500 ABNORMAL COSTSDelays / Schedule Slippage

The Schedule Control Basis, typically includes the following:

1.The Plan

2.Schedule Control Baseline

3.Planned Schedule

4.Schedule Basis

5.Schedule Control Plan

Schedule Basis covers assumptions, inclusions, exclusions, risk and uncertainty as well as schedule contingencies, such as inclement weather. Schedule slippage and delays are incorporated into the schedule as they happen as they are usually EPC change orders.

48

SECTION 2.500 ABNORMAL COSTSEdmonton Area

• Historically under SPAG, all abnormal costs were compared to normal costs in the Edmonton area

• This was because prior to 1995 all assessments were regulated based on cost manuals which reflected Edmonton area costs

• There is a debate as to whether abnormal cost claims are still measured against what is typical or normal in Edmonton

• Only mention of Edmonton area is in s. 2.500.200 with regard to transportation costs

• If this is the case – conflicts with the basic principles under s. 2.500

49

DESIGN CHANGES s. 2.300.400INTERFERENCE COSTS s. 2.300.500

• Most projects have some costs for re-work

• The allowance for re-work is often found in the following documents:

• ___________________

• ___________________

• Generally interference costs are for brownfield sites

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TRAVEL s. 2.500.100TRANSPORTATION s. 2.500.200

• Travel to the site is excluded.

• Travel within the site would be an included cost.

• Transportation costs of materials within the site are an included cost.

• The cost of loading and unloading the raw materials and components is included.

51

TRANSPORTATION s. 2.500.200 IMPORT DUTIES & BROKER FEES S. 2.300.700

• Consider that nine countries shipped equipment worth $392M CAD to a job site in RMWB in circa. 2006. Generating costs for transportation and import duties and brokerage fees.

• Austria Canada Germany

• Holland Italy Mexico

• Spain Sweden USA

• Transportation cost to EDM included, from EDM to jobsite excluded

• Duties & Fees all excluded52

SITE PREPARATIONPage 8 of the Interpretive Guide

• The cost to clear, level and finish the site is an included cost

• Except if the land assessment is based on the value of finished industrial land (stripped or graded) – then the actual site preparation costs for stripping and grading are excluded but any other site preparation costs are included

53

CCRG BEST PRACTICESEstablish Expectations

• Recommend a meeting with the property owner early in the construction process to set out expectations with regard to: (i) types of documents required, (ii) interpretation and application of the CCRG

• Have regular follow up meetings, steer conversations to have cost-data discussions segregating included vs excluded.

• Cost reporting should comply with the requirements of the CCRG

• Claims for excluded costs should be made under a section of the CCRG

• Re-work your RFI to set out your expectations regarding the CCRG, and the cost reporting

54

CCRG BEST PRACTICESDocuments

• Depending on the scope of the project, it is good practice to request:

• Feasibility study

• DBM and EDS

• The sanction budget, and all updates to the budget

• AFE’s and final cost reconciliation documents

• Change orders – which relate to claims for abnormal costs

• Man power plan for the PMT

• ________________________________________________55

COURSE WRAP UP

56

THANK YOU FOR YOUR ATTENTIONQUESTIONS ARE WELCOME

Salvador Hernandez, Verus Capital Assessments email: [email protected]

phone: 1-403-690-3053

Dan Driscoll, A.M.A.A.email: [email protected]

John Elzinga, A.M.A.A.email: [email protected]

Carol Zukiwski, RMRF LLPemail: [email protected]: 1-780-497-3350

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mailto:[email protected]

mailto:[email protected]