W11_SSG_Pareto’s Law for Controlling EPC Cost


PROBLEM DEFINITION

We are now in starting point of EPC execution phase where the contract of EPC work will be delivered. One of the contract requirement is to control the cost in order company are able produce benefit and margin.

DEVELOPMENT OF FEASIBLE ALTERNATIVES

To fulfill this contract requirement we need to control all activities that will incur cost. The greater its activities cost, the tighter we control it. In other words we need more attention to the activities that will incur cost mostly.

Figure 1. Pareto’s Law Distribution Figure

DEVELOPMENT OF OUTCOMES FOR EACH ALTERNATIVE

Referring to Pareto’s Law that 80% cost will be incurred by 20% of activities. This law imply that even we have to control all the activities but our major attention should be to several activities that will incurred cost mostly.

Figure 2. Cost Distribution Level 2 EPC for CPP Project.

Figure 3. Cost Distribution Level 3 EPC for CPP Project.

Figure 4. Cost Distribution Level 4 EPC for CPP Project.

Figure 5. Overal Cost Breakdown Structure

SELECTION OF CRITERIA

To identify which activities that impact the project cost mostly in different level of detail will result different activities. A cost control shall monitor the activities during the project lifecycle especially for activities that will occur in the future (forecast), since the most “expensive” activities can be change during the project period.

ANALYSIS FOR THE ALTERNATIVES

Based on above cost breakdown, it’s identified that in Level 2 (Phase) the most “expensive” activities would be procurement. For level 3 (sub phase) the most “expensive” activities would be “procurement – Equipment Material”. And for level 4 (activities) the most “expensive” activities would be procurement-equipment-mechanical.

SELECTION ON THE PREFERRED ALTERNATIVES

From those 3 level of cost breakdown, it is pictured that the most expensive activities is available in the procurement section.

 PERFORMANCE MONITORING AND POST EVALUATION RESULT

A cost control should monitor the procurement phase tightly since it is the most “expensive” activities currently. Along with project phase, this could be change, and every certain time it needs to be re-forecasted.

REFERENCES

Memory Jogger 2nd Edition (2010).Tools for Continious Improvement and Effective Planning. GOAL/QPC

Alfred Ultsch (2002).Proof of Pareto’s 80/20 Law  and Precise Limits for ABC-Analysis.Retrived on November 9, 2013 from http://www.informatik.uni-marburg.de/~databionics/papers/ultsch02proof.pdf

REFERENCES

Memory Jogger 2nd Edition (2010).Tools for Continious Improvement and Effective Planning. GOAL/QPC

Alfred Ultsch (2002).Proof of Pareto’s 80/20 Law  and Precise Limits for ABC-Analysis.Retrived on November 9, 2013 from  http://www.informatik.unimarburg.de/~databionics/papers/ultsch02proof.pdf

Better Explained. Understanding the Pareto Principle (The 80/20 Rule).retived on November 9, 2013 from  http://betterexplained.com/articles/understanding-the-pareto-principle-the-8020-rule/

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3 Comments

Filed under Sutoyo S, Week 11

3 responses to “W11_SSG_Pareto’s Law for Controlling EPC Cost

  1. Hi Pak Sutiyo, really great case study and overall, you handled it well except for one nagging concern…..

    Why did you use just the COST alone and not factor in the risk, using Expected Monetary Value? (EMV) Normally, the formula we use to analyze and prioritize risk is by multiplying the amount at stake (in this case, the costs) X the probability of it being late = the EMV.

    In other words, you could have a key piece of equipment which is not very expensive but has to come from Midland, Texas, with a high probability of being late and another very large and expensive piece of equipment which is a local purchase with almost zero probability of being late.

    Using your method, the local purchase would take priority over the less expensive but just as important piece of equipment coming from Texas?

    Does this make sense to you?

    Might want to rethink your approach and factor in risk as well….

    BR,
    Dr. PDG, Jakarta

    • Pak Paul,
      Thanks alot for the input. I think you are right, I put it not from the whole point of view. I am just curios, maybe next blog would be on the Risk Management Pak..

      Rgds,
      Sutoyo

  2. Alfred Ultsch

    Dear Authors , I found one of my older papers referenced (Ultsch (2002))
    You might be intersted in a new and more operative one:
    http://www.ncbi.nlm.nih.gov/pubmed/26061064
    Best Regards
    Alfred Ultsch, Univ. Marburg

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