Week 5.1_John Agbo_ Managing discrepancy in drawings issued to client for construction (IFC) on a tank farm project._ Lanre Giwa

Problem Recognition / Identification

During the periodic QMS surveillance audit in my company, it was observed that Engineering drawings issued for Construction (IFC) Drawings were sent out to the client without reflecting new changes advised by the consultant’s representative. The company intends to work out modalities on how to remedy the situation.

Root Cause Analysis

The consultant representative informed the Lead, Mechanical engineering that the client wanted the number of tanks increased by one (1) and height of the tanks increased by 3metres. The changes were made on Mechanical drawings ONLY by the Lead engineer but he forgot to communicate the change to other disciplines. The consultant representative also forgot to mention the request of the client at the weekly meeting where all disciplines were in attendance.

The company does not intend to lose the client, neither do we intend to spend more on cost ,time and resources doing a re-work and company is thinking of the best way of handling the discrepancy.

The following are excerpts from the Conditions of Contract in the signed contract: “Tanks will be 3No, 20m diameter tanks. Driveway will be concrete grade 25. Engineering design duration will be 6 weeks. Engineering Contractor to submit schedule to Client within 2 days of project kick-off. All correspondences, clarifications and comments shall be conveyed through Principal Consultant (on behalf of client) and Contractor’s Project Manager (on behalf of contractor)”.

In – house records show that jobs of this magnitude were previously executed within 3 months.

Development of Feasible Alternatives/Solutions

The following are the alternatives being considered:

Alternative 1: Retrieve the drawings from the client and re – work at a shared cost with the client .

Alternative 2: Retrieve the drawings from the client and re – work at a shared cost with the client for a period of 6 weeks.

Alternative 3: Advice the client to stop the loan and adopt the initial plan without any increase of quantity of tank and height, while only mechanical drawings are re-worked / revised at the client’s cost.

Alternative 4: Retrieve and re-work drawings at the client’s cost and time.

Alternative 5: Retrieve and re-work drawings at cost and time.

Possible Outcomes and Cash flow of Alternatives / Solution

Alternative 1: The drawings can be retrieved from the client and re-worked within a period of which is the usual duration we execute projects of this nature and magnitude while the cost of re-work is to be shared equally by the client and ourselves. Our company will be at a loss due to the fact that we will share the cost of re-work with the client.

Alternative 2: The drawings may be retrieved and re-worked within 6 weeks and the cost of re-work shared equally between us and the client. But this will put our resources under so much pressure a second time as works of this nature are usually executed within 3 months. It will also entail us committing more cost (by way of extra salary, overtime and overheads), time (burnt man hours) and resources (labor which should have been used on other projects and non-labor) in order to deliver within the tight schedule. Even though the Mechanical scope will not be part of the deliverables, the schedule will still be tight.

Alternative 3: The client can be advised to adopt the initial plan without making increases. This is option will entail that only mechanical deliverables will be re-worked and at so short a time. The client will only have to pay a token compared to what he would have paid for a major re-work of the entire deliverables.

Alternative 4: The drawings can be retrieve and re-work drawings at the client’s cost and time. If he wants it done within the shortest or longest period, he’ll be charged extra for it without compromise.

Alternative 5: The drawings can be retrieve and re-work drawings at our cost and time. We can chose to commit as much or as little resources as we deem fit and deliver the job at the time we please. This will be to the disadvantage of the client since a delay in Engineering design will mean a delay in commencement of construction works and a subsequent delay in return on investment.

Selection Criteria / Attributes of best solution

· Profitability

· Conditions of Contract

· Cheapest in terms of Cost, Time and Resources

· Customer satisfaction

· Reputation

· Most Economical

Analysis and comparison of the Alternatives/Solutions

ALTERNATIVE	OUTCOME	PREFERENCE
1	We will be bearing some cost for an error from the client’s rep(consultants). As a results its not profitable	Not preferred
2	Same as above	Same as above
3	Client will be paying. Profitable to us. Economical to the client due to less work and therefore give him satisfaction. Cheap in terms of time, cost and resources. We’ll preserve our corporate image.	Preferred
4	Profitable to us. Will take longer time to execute. Client will be unsatisfied since it will be cost intensive.	Least preferred
5	Not profitable to us. Our reputation will be at stake. Will take longer time to achieve. Client (customer) will not be satisfied.	Least preferred

Best Alternative to be Selected

Based on the analysis, alternative 3 will be recommended as it will minimize our resources, be profitable (since the client is paying), satisfies the conditions of contract and will leave the client satisfied.

Performance Monitoring / Post evaluation

We will ensure that all information sent to us by the client’s rep will be as per the conditions of contact. All discipline leads and subordinates will be advised not to accept information from any party to the contract but refer them to the Project Manager who must receive only written instructions.

Recommendations

We will advise the client to stop the bank facility and go ahead with the initial plans and construct the tank farm based on that plan as phase 1. When he begins to yield returns on his investment he can increase the number of tanks as phase 2 of the same project using his returns and will not need to take a bank facility.

References:

1. AACE International Education Board. (2006). Project Performance Assessment. In J.K.Hollmann (Ed), Total cost management framework – A process for applying the Skills & knowledge of cost engineering (1^st ed) (chapter 10.1) (pp.199-208). Morgantown, West Virginia: AACE International.

2. Sulliven, W. G., Wicks, E.M., Koelling, C. P., et al. (2009). Engineering Economy (14th ed.), Chp 14 pp551 -570. New Jersey: Pearson Education.
3. AACE International. Skills & Knowledge of Cost Engineering, 5th Edition Revised.Chapter-9, pp.9.1-9.9 Edited by Dr. Scott J. Amos, PE. 2010. AACE International. Morgantown, WV, USA.

Week 5_ Agbato Oluwabusayo_ Choosing the most economic business plan _Week 16 _SeeGod Meregini

Problem Recognition/Evaluation

In my company, I support business development department. Sometimes proposals are sent to my team for verification and evaluation.

Recently, I was made to lead a small team in analysing a small scale business opportunity.

Interestingly, the business is expected to be utilised for only one year as it would be a test piloted one.

I was faced with the problem of correctly evaluating which business proposal should be chosen.

Development of Feasible Alternatives/Solutions

After the evaluation of the risks involved in the proposal, three (3) feasible business ventures is used based on total life-cycle costs.

Alternative 1- Rental of Personnel services as support to other company needs

This involves receiving positive cash flows or cash inflows for the service of personnel measured in standard service hour.

Alternative 2 – Rental of Housing equipment hours for support of household needs

This involves the obtaining monetary receipts for hours of service loaned out because of equipment usage.

Alternative 3-Rental of Telecomm services

This involves a flow of money such that monetary receipts are gotten for hourly usage of telecomm.

Probable Outcomes of Alternatives / Solutions.

In carrying out this analysis, an assumption is that comparison is done over one year.

I used a type of analysis called present economy studies hence the time value of money is not a factor.

A number of meetings were held with various key financial players already in the respective business divisions. Other external stakeholders were also consulted including some regulatory bodies.

Factored costs are used in this analysis but have same equivalence with original for the purpose of showing the final result.

Alternative 1 Rental of Personnel services as support to other company needs

This alternative has fixed cost calculated to be $170,000 per month and a variable cost of $72 per standard service hour. The charge out rate (selling price) is $105.25 per hour.

Alternative 2 Rental of Housing equipment hours for support of household needs

Here the fixed cost is about $153,000 per month with a variable cost of $80 per hour. The charge out rate (selling price) is $105.25 per hour.

Alternative 3 – Rental of Telecomm services

This alternative has fixed cost calculated to be $170,000 per month and a variable cost of $80 per hour. The charge out rate (selling price) is $115.78 per hour.

Selection Criteria in determining the solution

1. The business venture should have a lower breakeven point so that profit can be earned earlier.

2. The venture should have a capability of earning the maximum profit.

Analysis and Comparison of the alternatives

Another assumption is that no service hour is rejected.

Also, in this analysis, an assumption is that Price is independent of Demand and is greater than the Variable cost per unit (c_v). This would result in a single breakeven point.

Also, under the assumption that demand is immediately met, the following conditions are necessary for a profit to occur:

· Total Revenue (TR) must exceed Total Cost (C_T) for the period involved

· Price per hour must exceed variable costs (C_v).

The formulas below were used in determining the breakeven point (D’), Total Revenue (TR) and Total Cost (C_T).

TR = D * P....................................................................................................Equation 1

C_T = (C_v * D) + C_F........................................................................................Equation 2

TR = C_T

[P*D’ = C_F + C_v*D’} breakeven point...........................................................Equation 3

Where:

C_v = variable cost per hour

C_F = Fixed cost

P = selling price per hour

D’ = Breakeven point (TR= C_T)

D = demand

TR = Total Revenue

C_T = Total Cost

Quantitative analysis of the alternatives

Using Equations 1, 2 and 3;

Total Revenue = Total cost (breakeven point)

P*D’ = C_F + C_v*D’

D’ = _______ C_F _______

(P - C_v)

Alternative 1

D’ (breakeven point) = $170,000

$105.25 - $72

= 5,113 hours per month

Alternative 2

D’ (breakeven point) = $153,000

$105.25 - $80

= 6,059 hours per month

Alternative 3

D’ (breakeven point) = $170,000

$115.78 - $80

= 4,751 hours per month

Selection of Preferred Alternative

Based on the above quantitative analysis and criteria, I recommend ALTERNATIVE 3 because of the following reasons:

· Alternative 3 has the lowest amount of hours needed to reach the breakeven point. This means that any further increase in hours (demand) will result in a profit for the company.

· Of the three alternatives, selecting Alternative 3 would reduce the likelihood that a loss will occur during market fluctuations.

· Also if the selling price remains constant or increases, a larger profit will be achieved at any level of operation above the breakeven point.

Performance Monitoring/Post Evaluation

This would be monitored by constantly evaluating

· How the single breakeven point would be affected by changes in fixed costs and variable costs due to market fluctuations.

· How the single breakeven point would be affected by changes in selling price due to market fluctuations

· How the effect of other risks and uncertainties affects the profit.

References

Sullivan, W. G., Wicks, E.M., & Koelling, C.P. (2009). Cost Concepts and Design Economics. In M.J. Horton (Ed.), Engineering economy (15^th ed.) (chapter 2) (pp. 20 - 25). New Jersey, NJ: Pearson Education, Inc.

Sullivan, W. G., Wicks, E.M., & Koelling, C.P. (2009). Engineering Economy and the Design Process. In M.J. Horton (Ed.), Engineering economy (15^th ed.) (chapter 1.3) (pp 7). New Jersey, NJ: Pearson Education, Inc.

United States Government Accountability Office (2009, March). Cost Risk and Uncertainty. GAO Cost Estimating and Assessment Guide. Best Practices for Developing and Managing Capital Program Costs. (chapter 14) (pp.160).Washington, DC: GAO.

AACE International Education Board. (2006). Risk Management. In J.K.Hollmann (Ed), Total cost management framework – A process for applying the Skills & knowledge of cost engineering (1st ed) (chapter 7.6.1) (pp.159-160). Morgantown, West Virginia: AACE International.