1. Produced by: Towards a Rational Cost Model Presenter: Tom Lenahan Tom Lenahan Limited

2. Total business impact The rational cost model Cost breakdown structure Cost Mapping Estimating for the future What I’ll Cover

3. Slide 3 Defining the Term What do we mean by “Turnaround Costs”? Only the direct cost of doing the Turnaround? The direct cost plus the penalty of lost production? Do we include incidental costs? How about this definition? “Every dollar we spend or lose in planning and executing the event compared with what we would have saved or kept if we had not performed the Turnaround”

4. Slide 4 Includes all cost generators -Preparation -Manpower -Material -Equipment -Services -Loss of Production -Downtime salaries -On costs -Disposal costs -Interaction costs -Emergent work -Overrun -Overspend -Throughput -Product Quality -Loss of Profit -Loss of Market share -Loss of customers -Loss of reputation -Legal action EVENT COSTS POTENTIAL COSTS PRODUCTION COSTS BUSINESS COSTS Event cost $3.44 ($2.6) Potential costs $0.75 Production Costs $0.37 Business Costs: $5.80 Total Business Impact $10.36 Actual Example: Figure in brackets represents what the company would have calculated as the “cost” of the Turnaround in the past, before they began to use this model. The Bottom Line – Total business impact +

5. Slide 5 Shutdowns are task driven events and each task incurs a cost: TASK Loss of production Emergent work Generates - Preventive - Corrective - Process driven - Inspection - Improvement 3 Types of cost -Indirect -Direct -Contingency Incurs You do not control cost because cost is an output What you need to control is the input - people’s spending behaviour How costs are generated Elements Manpower Materials Equipment Services Facilities Utilities

6. Slide 6 The limits of control Requests for planned work are generated by others Requests for emergent work is generated by the situation Once the workscope is agreed, material costs are fixed The Turnaround manager controls only labor costs These can represent as little as 30% of the total cost

7. Slide 7  Costs accrued for the Whole event Planning phase. Relatively small team and low expenditure Build up of pre- shutdown work and remainder of planning Execution phase Plant shut down, scheduled work and start up Termination phase - bringing plant back up to full production 10% 8% 80% 2% Volume – where you spend the money

8. Slide 8 Don’t confuse volume with value Highest value derived from lowest revenue spend Highest value First 1% - (Strategy) Determines planning Next 9% - (Planning) Determines Execution Next 8% - (Pre-shut) Influences Execution Lowest value Execution %Value Value – the leverage you get from the money you spend

9. Slide 9 Generate a single event cost code for the Turnaround Don’t book Turnaround costs to any other cost code Don’t book non Turnaround costs to the event cost code Book all Turnaround costs to the event cost code Employ a cost breakdown structure to differentiate costs Employ cost mapping detail the differentiated costs Use a qualified cost coordinator to operate the cost model Build the cost model in your finance system (SAP etc.) Basic Rules – If you honestly want to know the real cost of a Turnaround

10. The rational cost model Stage 1 - Differentiate Costs This takes discipline and determination Worklist Closure Event Start Date End Date Planned Work Late Work Emergent Work - Measure performance against this figure - I nvestigate and eliminated them - Extra & Additional work (+ late work) Event Initiated Control estimate - Agreed workscope for the event Late work Costs - Measures control of work (+ defects) Contingency Cost - Analyse to improve prediction

11. Slide 11 Turnaround Costs Compression Unit Processing Unit Fractionation Scheduled Work Emergent Work Late Work Capital Project Modification Project Preparation Emergent Work General Contingency Fund Stage 2 - Create a cost breakdown (Example)

12. Slide 12 Turnaround Costs Compression Unit Processing Unit Fractionation Scheduled Work Emergent Work Late Work Capital Project Modification Project Preparation Emergent Work General Contingency Fund Stage 3 - General Cost Mapping Cost Mapping  Costs are allocated to individual jobs  For each job, cost are further broken down into:  Manpower (hours, %overtime)  Equipment (purchase, hire costs & servicing  Materials (proprietary items, raw materials & consumables  Services (scaffold, insulation, cleaning etc.)  Costs not usually broken down per job  Utilities (electricity, gas, water)  Facilities (stores, cabins, canteens, washrooms etc)  Temporary Infrastructure (cables, plumbing, barriers, signs etc)

13. Slide 13 Turnaround Costs Compression Unit Processing Unit Fractionation Scheduled Work Emergent Work Late Work Capital Project Modification Project Preparation Emergent Work General Contingency Fund Stage 4 - Detailed Cost Mapping Cost Mapping  Costs are allocated to individual jobs  For each job, cost are further broken down into:  Manpower (hours, %overtime)  Equipment (purchase, hire costs & servicing  Materials (proprietary items, raw materials & consumables  Services (scaffold, insulation, cleaning etc.)  Costs not usually broken down per job  Utilities (electricity, gas, water)  Facilities (stores, cabins, canteens, washrooms etc)  Temporary Infrastructure (cables, plumbing, barriers, signs etc) Rolled up into preparation and execution costs for client, contractor and sub-contractor resources Management Engineering Supervision Inspection Technicians (tradesmen) Semi skilled Unskilled Mechanical Electrical Instrument Fabrication Civil

14. Slide 14 Fragment of a Cost Estimate/ Report - Detailed Materials Client –Area 1 Proprietary Fabrications Consumables Common stock Raw materials Gaskets Capital Equipment Client –Area 1 Cranes Lifting Weld sets Generators Transport Compressors Tenders Safety Services Client –Area 1 NDT Scaffolding Water wash Cleaning Painting Insulation Hi-torque Manpower Client –Area 1 Engineering Inspection Electrical Instrument Fabrication Supervision Mechanical Civil Riggers Unskilled Management 11500 10300 29300 44000 54600 17000 8200 11600 3100 10900 8900 11500 10300 27200 40200 49400 14000 7100 13600 3200 9200 19200

15. Slide 15 Execution Cost Estimate/ Report (roll-up) l Client Area 1 Client Area 2Contractor 1 Contractor 2 Planned Actual Manpower Materials Equipment Services Contingency 8% Contractor 3 Totals Fixed Price Contractor 4 Fixed Price Grand Total Planned Actual Variance + / - 216500 242200 49600 199100 56600 764000 927400 484200 892100 129000 379400 3067700 204900 212800 71600 200200 89300 778800 943400 500 400 884100 129000 402400 3106700 +39000

16. Slide 16 Estimating for the future Detailed comparison highlights critical cost issues Main Contractor Sub-Contractor Client Resource Spares/ Materials Workshops Hire charges Safety costs Miscellaneous

17. Use money as the ultimate control mechanism o Calculate the total business impact o Use a rational cost model o Don’t confuse volume with value o Control people’s spending behavior o Map out your costs in great detail Key Points to Take Home

18. Slide 18 Thank you – any questions

19. Produced by: Tom Lenahan Tom Lenahan Limited tomlenahan@hotmail.com