Major Projects Advisory Project Leadership Series

Transcription

1 KPMG GLOBAL ENERGY INSTITUTE Major Projects Advisory Project Leadership Series February 7, 2013 Disclaimer The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. 1 1

2 Welcome John Herzog Managing Director, Major Projects Advisory KPMG LLP (U.S.) Administrative CPE regulations require online participants take part in online questions. You must respond to four questions per hour. Questions will appear on your media player. Results are reviewed in the aggregate; no responses will be tracked back to any individual or organization. Do not view the presentation on slide show mode; polling questions will not appear. To ask a question, use the Ask a Question icon on your media player. Help Desk: or outside the United States at

3 Today s agenda 1 Project leadership series recap 2 Project development and delivery strategy t 3 Budgeting, estimating, and contingency management 4 Questions and answers 4 Presenters Clay Gilge Principal, Advisory KPMG LLP (U.S.) John Herzog Managing Director, Advisory KPMG LLP (U.S.) Kip Jackson Major Projects Director NV Energy 5 3

4 Project leadership series recap Clay Gilge Principal, Major Projects Advisory KPMG LLP (U.S.) Project leadership background Background Owners, contractors, designers, and stakeholders have focused on improving project management processes and project controls, but there are still many areas for improvement Target Audience Owners with major construction programs but applicable to all stakeholders involved with construction projects Key benefits Example pitfalls of inadequate project management processes and controls Outlines leading industry practices Example approach for assessing project management processes and procedures and project delivery processes Identifies the link between project control gaps and project management processes/procedures and the successful delivery of projects 7 4

5 Project leadership white papers Project Organization and Establishing a Program Management Office (PMO) Stakeholder Management and Communication Project Controls and Governance From concept to project: Critical Considerations for Project Development Budgeting, Estimating, and Contingency Management Project Risk Management Monitoring Capital Projects and What to Do if One is in Trouble Investing In Tools and Infrastructure 8 From concept to project: Critical considerations for project development Clay Gilge Principal, Major Projects Advisory KPMG LLP (U.S.) 5

6 From concept to project: Critical considerations for project development Project development cycle Appraisal Development Execution Operation Organizations with an extensive track record often experience the repercussions of unmet expectations, delayed ribbon cuttings, and bloated expenditures. Keys for success: Carefully conceived concept Well-designed project plan 10 From concept to project: Critical considerations for project development (continued) Example appraisal stages Project Identification Project Screening Project Prioritization Project Selection/Budgeting Asset Inventory & Condition Assessment Customer Demand Growth/Planning & Forecasting Customer Satisfaction & Service Level Issues Safety & Regulatory Requirements Sustainability Targets Federal Grants/Opportunities Risk Analysis (Operational, Safety, Environmental, Legal, Regulatory, Financial) Financial Analysis (NPV, IRR, payback) Qualitative Analysis based on key factors such as risk mitigation, public relations, etc. Project scoring/ranking (Operational, Safety, Environmental, Legal, Regulatory, Financial, ROI, Customer Satisfaction, etc.) Projects grouped into tiers based on the initial ranking with the top 1 or 2 tiers identified for further estimating & risk analysis p, identified for further Top-tier projects are reviewed by a project panel Key issues or questions are raised Projects receive full approval or are flagged for further analysis and follow-up 11 6

7 From concept to project: Critical considerations for project development (continued) Appraisal Development Execution Operation Key questions to address during this stage Will the business inspiration for this need be sustained? How is the need best fulfilled? What happens if we don t meet the need? What will it take to fulfill the need? What are the funding or financing options? What are the alternatives? What are the key risks? The ability to influence project success or enhance value is the greatest in the development stages and declines as the project advances towards implementation. 12 Knowledge check #1 Ranking projects based on key factors is typically part of the project identification process? A B True False 13 7

8 From concept to project: Critical considerations for project development Appraisal Development Execution Operation Key Outcomes of this stage Preparation of detailed designs and specifications Realistic estimation of costs, schedule, and operational requirements Identification of risk and uncertainty, and exploration of mitigation measures Identification of human and other resources for the project Preparation and refinement of project execution plans, work breakdown structures, organizational charts, roles and responsibilities, tailored project procedures, budgets, and funding documents 14 From concept to project: Critical considerations for project development (continued) Feasibility Reviews Insufficient feasibility studies are often identified as a contributing factor in project failures. Feasibility reviews can be used to evaluate various technical, operational, environmental, and other performance aspects of the project. Project Team Development Projects must be executed by a project team capable of meeting the unique needs of the project including technical complexities, resource challenges, and stakeholder assumptions and constraints. Funding Capital projects are typically funded from the corporate balance sheet or through equity investment in a special purpose entity, or single project financing. Financing arrangements differ sharply by the type of owner and the type of project construction. ti Risk Management & Insurance Lenders may require insurance policies to cover specific project risks (injury to persons or property, professional errors and omissions, automobile liability, etc.). Organizations may also secure business interruption insurance to cover other risks. 15 8

9 Knowledge check #2 Which activities are common elements of the development phase of the project life cycle? A B C D Preparation of specifications Development of cost and schedule estimates Identification of risks and risk mitigation measures Ranking and prioritization of projects 16 From concept to project: Critical considerations for project development Incentive Programs Construction material sales tax relief Special utility rates Government or private grants Research and development tax incentives Federal tax incentives including energy efficiency programs Direct subsidized loans from state and local governments to private businesses for the purpose of job creation Site advantages government entities may provide private sector organizations with free land, buildings, exemptions from local and state regulations, and other customized services to develop in a specific area, zone, or site 17 9

10 From concept to project: Critical considerations for project development (continued) Delivery and procurement strategy Selecting the most appropriate project delivery strategy and contracting strategy requires deliberate planning and careful consideration of the market environment. The spectrum of project delivery strategies ranges from those where the owners are fully involved to where their involvement is minimal. The project owner s objectives and organizational characteristics dictate the available project delivery strategies, and the most appropriate delivery strategy will also depend on the specific project and circumstances. Contracting strategy includes decisions about how to: Execute the work Segregate the project s scope into various work packages Obtain financial guarantees from vendors Allocate risks and rewards in contracts among the various project participants. 18 Budgeting, estimating, and contingency management Clay Gilge Principal, Major Projects Advisory KPMG LLP (U.S.) 10

11 Budgeting, estimating, and contingency management A comprehensive project budget with a reasonable contingency is critical for a project to be considered a success. Depending upon the accuracy of project estimating techniques employed, the development of the overall project budget may or may not include a reasonable contingency amount. If an estimate is too low, the project contingency will most likely be insufficient, leading to budget overruns. An overly conservative estimate can tie up valuable capital that could be used for other capital projects, and the project may be deferred or rejected by senior management. 20 Budgeting, estimating, and contingency management (continued) How do I prepare an accurate project estimate during planning and development? Establish the degree of accuracy based on the phase of the project. Utilize the appropriate estimating technique for the phase or project stage (At the initial feasibility or conceptual stage, parametric, order-of-magnitude, of unit price, or other estimating methods). Prior to bidding, a detailed estimate based on actual quantity take-offs and current market pricing for labor, equipment, materials, and subcontractor services should be prepared. Any significant variation between the values for individual line items should be investigated. Consider obtaining a third-party cost estimate to validate the construction bids

12 Budgeting, estimating, and contingency management (continued) How should historical construction costs be used to develop an estimate for a project? Construction cost estimates typically utilize use historical cost data. Supplemental information specific to the project maintained by the owner may be combined with this cost data, such as: Actual construction project cost information from other completed or ongoing projects Published cost estimating manuals Construction cost indexes Manufacturers catalog information including price information The owner should confirm that project-specific variables have been accounted for in the cost estimate, including cost indices adjusting for location and inflation, as well as regulatory and other location factors such as more restrictive building codes. 22 Budgeting, estimating, and contingency management (continued) What is the benefit of getting third-party validation of project costs during budgeting? Minimize the risk of exceeding the budget by validating the projected costs. This validation can utilize additional information that may not be available in cost indexes such as data collected from other construction projects. This information can be used for an individual construction project, or, if an owner is embarking on a larger capital program, it may be useful to incorporate this information into an updatable database

13 Knowledge check #3 Example cost data utilized by estimators includes all of the follow except? A B C D Construction cost indexes Manufacturers catalog information Public cost estimating manuals Cost of another similar project as reported by a local newspaper 24 Budgeting, estimating, and contingency management What is the process for developing a comprehensive budget? The project budget should not only include the construction contract costs, but also the costs associated with: Land acquisition Planning and feasibility studies Architectural and engineering design Field supervision and inspection Construction equipment Financing, incentives, insurance, and taxes. Project-specific variable costs such as municipal requirements and weather conditions should be accounted for in the budget as well. The owner is responsible for developing the budget for costs that are not included in the construction contract prepared by the construction manager or contractor. Any proposed value engineering substitutions should be reviewed by the owner and the design team to determine the impact to both construction costs as well as operational costs

14 Budgeting, estimating, and contingency management (continued) How should contingency be established? Most projects include a contingency fund to cover both anticipated costs due to the project s phase and unexpected costs. Project contingency is an amount included in the construction budget to cover unknown conditions, allowance for design growth, errors in the contract drawings, inaccurate pricing, price escalation, and minor changes within the project scope. The optimal amount of project contingency permits the owner to adequately address project risks while not restricting the use of capital funds that can be assigned to other projects. Developing the contingency fund is not a one-size-fits-all approach. A risk assessment can confirm that the contingency budget is appropriate to cover the costs of all probable risks, as well as including contingency for unknown risks. 26 Knowledge check #4 When developing a detailed project budget it is not important to worry about financing costs, insurance or taxes as they are always accounted for as operational expenses. A B True False 27 14

15 Budgeting, estimating, and contingency management How do I manage and track contingency once established? Contingency is critical to the success of a project and should be monitored on a continuous basis. Contingency should not be used to fund significant changes to the scope of the project. The project management team should review the contingency fund balance along with project risks throughout the duration of the project to determine if adjustments to the fund are needed. 28 Budgeting, estimating, and contingency management (continued) What controls should be in place to avoid budget overruns? The project management team should review the contingency fund balance along with current project risk register/risk dashboard on a continuous basis throughout the duration of the project to determine project budget variances. Tools that facilitate budget monitoring include project earned value and a cost to complete analysis. The risk register should be updated to reflect the progress of the project as well as any additional risks or opportunities identified. All changes to the contingency forecast should be communicated to all relevant parties by means of a formalized communication process

16 Knowledge check #5 Project contingency is utilized to cover all of the cost items except: A Unknown conditions B Inaccurate pricing C Price escalation D Major/significant changes in project scope 30 Questions and answers 16

17 Contact us Name Phone Clay Gilge John Herzog Closing remarks Thank you for joining us. Please send any questions to For more information, visit the KPMG Global Energy Institute at Save the date! 2013 KPMG Global Energy Conference, May 22 23, 2013 in Houston, TX