How To Successfully Plan Financing In Plant Construction

2023 Author : Hannah Pearcy | [email protected] . Last modified: 2023-05-24 11:12

Investment projects in plant construction are carried out according to the classic project life cycle. The project life cycle begins with the so-called appraise phase (FEL-1) and ends in the execute phase with the handover of the project or system to the company (operation) (see picture). Within these two stages, the project is in different development cycles (Select and Define as well as Execute) with different development progress

In the picture gallery you will find a compact description of the most important terms used to estimate costs for plant construction projects

Picture gallery

Picture gallery with 16 pictures

In the appraise phase (FEL-1) it is the main task of the project team to summarize the scope of the project in the form of a concept. The following documents must be created for this:

• Project performance description (scope of work)
• Preliminary heat and material balance
• Preliminary layout plan
• Level 1 schedule
• ± 50% cost estimate

When creating the ± 50% cost estimate, it is possible to use different methods:

• Factorised
• Use comparable projects or
• Material take-off (parts lists) based.

The appraise phase ends with the so-called Decision Gate 1. In principle, the decision gates constructively question the engineering, the cost estimate and the schedule. After the successful review, which also includes adherence to the business objectives, the project “goes” into the select phase.

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In the select phase (FEL-2) it is the main task of the project team to summarize the scope of the project in a more differentiated manner, the focus here being the investigation of variants. The following documents must be created for this:

• Project performance description (scope of work)
• Heat and material balance
• Preliminary layout plan
• Level 3 schedule
• Preliminary pipeline list
• Requests for budget offers
• Equipment data sheets
• +/- 30% cost estimate

Analogous to decision gate 1, decision phase 2 is pending at the end of the select phase. After the successful review, the project goes into the define phase.

In the define (FEL-2) phase, the main task of the project team is to determine the scope of delivery and services (“scope freeze”). The following documents must be created for this:

• Project performance description (scope of work)
• Heat and material balance
• Layout plan
• Level 3 schedule
• Final equipment specification
• Final pipeline list
• Requests for +/- 10% offers
• Equipment data sheets
• +/- 10% cost estimate

The define phase ends with decision gate 3. After successful completion of Decision Gate 3, the complete project budget is released with Final Invest Decision (FID).

In the execute phase, the detailed engineering, material procurement and construction of the plant take place. The end of the project is reached with the handover of the system including the performance check to the company (Operate).

In addition to the cost estimate, the following essential cost estimation accompanying documents must be created for each project development phase so that the basis and the facts are plausible and transparent for all stakeholders:

• Estimating plan
• Basis of estimate
• Cost Estimate consisting of the Summary Block and the Detail Block
• Key quantities
• Escalation as well as the
• Project checklist.

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Supplement to glossary: The most important terms for cost estimation in plant engineering

• Appraise phase: First phase of a project (project start). During this phase, the planning concept, a ± 50% cost estimate and a schedule are drawn up for the project. At the end there is a gate review in which the project is questioned both technically and financially. The approval for the start of the select phase follows the appraise phase.
• Basis of Estimate: The BoE summarizes the project details and documents the assumptions and exclusions for the cost estimate that were made in the Cost Estimate.
• Cost estimate: cost estimate. A cost estimate contains an estimating plan, a basis of estimate, cost estimate summary, cost estimate details and key quantities.
• De fi ne phase: Third phase of a project. During this phase, basic planning is drawn up for the project for the variant selected from the select phase. This includes a ± 10% cost estimate and a schedule. At the end there is a gate review in which the project is questioned both technically and financially. The define phase is followed by approval for the start of the execute phase with a final investment decision. As a rule, no cost estimate will be created in the further course of the project.
• Escalation: Price-related price increases due to rising wages, raw material costs, etc.
• Estimating plan: The estimating plan summarizes the procedure, the planned price sources and the dates for the preparation of the cost estimate.
• Execute phase: fourth phase of a project. In this phase, detailed planning (detail engineering), procurement (procurement) as well as construction (construction and installation) and commissioning (commissioning) activities usually take place.
• Final Investment Decision (FID): Approval of the investment budget after the de fi ne phase.
• Material Take Off (MTO): parts list. Each specialist trade involved in the project creates an MTO with at least the following information: category (such as construction or pipeline construction), performance description (for example, excavation by machine or pipe with a nominal diameter of DN100), material and number.
• Operate phase: handover of the system to the operator.
• Select phase: second phase of a project. During this phase, various variants are further developed for the project based on the planning concept from the appraise phase and a ± 30% cost estimate and a schedule are drawn up. At the end there is a gate review in which the project is questioned both technically and financially. The select phase is followed by the release for the start of the de fi ne phase.
• ± 50% Cost Estimate: ± 50% Cost Estimates (Class 5) are usually to be drawn up in the appraise phase of a project. At this point, only the main equipment of a project is known. For ± 50% cost estimates, the two methods “factored cost estimates” and “cost estimates based on comparable projects” are particularly suitable.
• Facorized Cost Estimate: Factorized Cost Estimates are always about using a few known costs to draw conclusions about the total costs of a project. This way of estimation is suitable for ± 50% cost estimates and only for the equipment-bound part, i.e. the costs for the equipment including the other trades (such as solid construction, steel construction, pipeline construction, etc.) and the planning services - all related to the ISBL section.
• ± 30% Cost Estimate: ± 30% Cost Estimates (Class 4) are usually created in the select phase of a project. At this point, in addition to the main equipment, the installation locations and the basic pipeline routing are known without the utilities of a project. ± 30% cost estimates are usually based on Material Take Off (MTO) ».
• ± 10% Cost Estimate: ± 10% Cost Estimates (Class 2) are usually to be drawn up in the define phase of a project. At this point in time, in addition to all the equipment, the locations and the pipeline routing of a project are known. At ± 10% cost estimates, MTO-based cost estimates are normally used.
• Key Quantities: Key quantities / quantities of the individual trades. The key quantities list summarizes the quantities of the overall project. The key quantities list means that quantity tracking is transparent throughout all project phases. Therefore, such a list must be completed at the end of each project phase (also after detailed engineering).

This article first appeared on our partner portal Process.de.

* After his training as a technical draftsman and his studies as a development engineer, Ibrahim Kar worked as a research assistant, project manager and project service engineer. His current focus at Royal Dutch Shell includes cost, controlling and physical progress.

* As a Discipline Head Cost Estimator at Worley Projects, Worley Projects is responsible for the creation and presentation of TIC estimates in various project phases for customers in the chemical and petrochemical industries.