# W8.2_HWB_Forecast of Construction Cost with Gold Price

1. Problem Definition

In this 8th blog I will try to calculate the construction price forecast for Drilling Site Preparation (DSP) for year 2022 with predictions based on the gold price increases. As we know the value of gold has relative purchasing power remains. The cost price that would be predicted is for budgeting POFD (Plan of Future Development) in onshore oil and gas field as part of the 30 years contract.

2. Development of Feasible Alternatives

The owner estimate of DSP jobs in 2005 was 286,175 USD where the site area of 90m x 90m with pareto job is earth works. The price of gold in 2022 is determined based on extrapolation of historical data from 1990. Before estimating the forecast cost, it will show of how to use control chart for gold price.

3. Development Outcomes for Alternative

Below are the historical data of the average price of gold per year from 1990 to 2012:[1][2]

4. Selection of Criteria

The value of the average price of gold per year are plot into the charts and it extrapolate to year 2022 with trendline polynomial order 3 (aggresive), polynomial order 2 (moderate) and linier (conservative) as below:

5. Analysis of the Alternatives

Regression analysis applied to moderate model comparing to actual data [3]. The data tested using residual analysis to describe the reability of the base predictive model. Below is residual analysis data from regression:

From the residual data and it analysis above, plot it using control chart as below:

The chart above indicates that the model is quite reliable since 95.45% of distribution residual data are within 3 sigma limit and 73.73% are within 2 sigma limit. [3]

6. Selection of Preferred Alternative

As we see that actual average gold price in 2005 is 444.74 USD/oz, so the value of DSP at that time is 286.175 USD / (444.74
USD/oz) = 643.47 oz gold.

Now we can predict the cost of DSP in 2022 using aggressive (7097.84 USD/oz), moderate (4008.61 USD/oz) and conservative (1537.07 USD/oz) models:

• Aggressive prediction : 4,567,219.73 USD
• Moderate prediction : 2,579,402.57 USD
• Conservative prediction : 989,052.82 USD

7. Performance Monitoring & Post Evaluation of Results

The estimation results of this forecast budget can be used as reference other than calculation by currency inflation predictions. The price of course can be updated with respect to current gold prices and displays various other types of trendline that comes closest historical chart pattern data.

References:

[1] London Fix Historical gold – result. (n.d.). Retrieved from http://www.kitco.com/scripts/hist_charts/yearly_graphs.plx

[2] Using History to Determine Gold’s Intrinsic Value [SPDR Gold Trust (ETF), iShares Gold Trust(ETF), ProShares Ultra Gold (ETF)] – Seeking Alpha. (n.d.). Retrieved from http://seekingalpha.com/article/262560-using-history-to-determine-golds-intrinsic-value

[3] Asmoro, T. H., (2013). Exploring Gold Equivalency for Forecasting Steel Prices on Pipeline Projects. Retrieved from http://pmworldjournal.net/wp-content/uploads/2013/05/pmwj10-may2013-asmoro-gold-equivalency-for-forecasting-steel-prices-FeaturedPaper.pdf

3 Comments

Filed under Hari W, Week 08

### 3 responses to “W8.2_HWB_Forecast of Construction Cost with Gold Price”

1. AWESOME Pak Hari!!!! NOW you’ve got it!!!! Really nice work on this case study and well worth the time invested to master this very useful and practical method of predicting costs into the future.

Now if you REALLY wanted to get fancy (and you may want to consider this for another blog) you could take the data from your regression analysis and applying the PERT formula, calculate the P25, P50. P75 and P90 values. Then based on those calculations tell us HOW you would present this to your management.

Sorry to be so tough and demanding of you, but when you graduate from my class I want to know you are COMPETENT at more than just being able to pass multiple choice exams and I want you to have confidence in your ABILITY to actually use what you’ve learned under life fire conditions.

BR,
Dr. PDG, Jakarta

• Thanks a lot DR Paul