Friday, November 30, 2012

Project Cost Estimation and Turnkey Contracts : Some Important Considerations !

Many times it would be necessary for organizations to invest money for some projects involving multidisciplinary engineering and technology.

The organizations could be government departments, government funded autonomous institutions, Public Sector Undertakings, large private sector companies, Non-Governmental Organizations (NGO), etc.

The projects could be some thing of the following kind:

1. Implementation of a water treatment plant with or without the distribution pipe networks.

2. Implementation of a water supply project

3 Implementation of a waste water treatment facility

4 Implementation of a municipal or industrial waste handling and treatment facility

5 Implementation of a captive power plant project or power utility project

6 Development and construction of a township

7 Implementation of a Pollution Control Project for an existing industrial unit.

8 Implementation of a new processing plant with new technology.

9 Building a new multi-storey office complex

10. Implementation of a fire protection system or an Air Conditioning and Ventilation System.

There could be many more such projects. I have mentioned some common investments that keep arising for most of the organizations.

There is a notable thing in this kind of projects that may surprise a common man. That is the project cost.

Even when two projects resemble in their titles and the essential descriptions, their costs could be widely different.

This is because of the wide variety of engineering and technological design options that such projects can have.

For example, a waste water treatment project which I had formulated for my company about two decades ago was estimated by me as costing Rs. 14 Crores.

While this was tendered out for implementation on a turn-key contract basis, the costs as quoted by the various bidders ranged from Rs 12 to Rs 30 Crores.

The more the engineering and execution competency of the bidder, the more was their price.

In this case the purchaser naturally face a dilemma.

Suppose the purchaser make stringency in the eligibility criteria, he has to spend much more money than his estimate.

Again, in this case none of the bidders had any previous experience of implementing a project of similar nature, while all of them had experience in executing turnkey projects involving similar engineering of various scopes and costs.

Some of the bidders have a name and a reputation. While the others are lesser known.

While evaluating this case, I had the opportunity to study the methods used by the bidders in estimating their prices.

Cost estimation is important for both the purchaser and the bidders.

The techniques and assumptions used are all important.

For the bidders pricing is a policy based on the initial engineering estimates worked out.

Some bidders, especially the ones which are large companies, the costing is done by various engineers belonging to various engineering disciplines.

Some others add it arithmetically and add other costs like taxes, contingencies and profit margins to make the final price.

In countries like India, where bidding is the process by which pricing is finalised, it is extremely difficult to establish the cost of an equipment or system.

The various requirements of Earnest Money Deposits, Bank Guarantees, conditions for performance guarantees, payment schedules, etc make the cost of the project to go much higher than the reasonable cost at which a project could be implemented.

In India, both the purchasers and the bidders are pretty unaware of the principles of cost engineering.

Costing, estimation or other aspects related to investment appraisal etc are either handled by engineers who do not have much formal exposure in this field or by finance personnel who have some formal back ground in accountancy only.

Cost Engineering is not a common field of study in India. Indian purchasers or bidders normally  do not use cost engineering tools or softwares.

I remember some attempts made by some engineering  colleges in India, including the one where I studied, making some attempts to introduce this topic in the engineering curricula. As far I know these attempts did not succeed.

In  the developed nations, such as the US and some European countries, where engineering professionalism is statutorily protected and respected, cost engineering training and proficiency is considered as an essential pre-requisite for successful implementation of projects.
However, engineering professionalism could be a problem for those desiring to adopt whimsical project management.

The absence of such competencies, in my opinion, cause cost and time over runs for projects which is a very common thing in India.

How much the country collectively lose on account of this is a matter of debate !

I wonder why India is reluctant to learn certain things from the developed nations ! Cost engineering and contract management are two of such things !

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