10th PwC and Minex Moscow Mining Club meeting Mining investment process and project management Mega-projects - how to increase confidence in delivery and success MOSCOW MINING CLUB What we’ll discuss today • Why do projects fail? • Enterprise/Group Capital Strategy • Project Level Controls • Case Studies • Risk modeling – Quantitative Risk Assessment • Schedule Analytics • Package Level Risk Profiling PwC Slide 2 •Why do projects fail? The vast majority of failures are due to managerial aspects Technical problems Suppliers’ failures Inappropriate/inadequate resources 2.5% Only of companies deliver their projects within the deadline, costs, scope and with the benefits expected for the business. 4% 8% Directly related to technical aspects 10% Inadequate Project Environment 11% Inadequate Planning/ Monitoring 15% Lack of clear objectives 20% 92% Directly related to managerial aspects Lack of management (organizational) PwC 4% 36% Technical and managerial aspects Slide 4 Enterprise Level Strategy How do Companies React? Establishment of Capital Project ‘Center of Excellence’ / Centralized PMO • Central planning and execution across regions with resource optimisation • Establish interdependencies and central coordination between functions • Clearly defined criteria for group level control and strengthened functions for Group support including: • Project portfolio prioritisation and optimisation within set criteria to inform future investments and risk profile of major capital projects; • Enhanced maturity of business cases, via cross-functional teams; • Increased transparency on project and portfolio performance; • Standardized project development /execution (consistency and quality); • Improved support in contract formation and enforcement • Enhanced use of project steering committee’s, and group level investment and procurement committees PwC Slide 6 Mining Industry Best Practice Front end loading – phased project planning Pre-concept • • • • Plan for resources Define roles Define success criteria Define models and scope Concept • • • • Identify opportunities and scenarios Classify risks Align objectives Identify quick wins Concept Pre-feasibility Feasibility • • • • Quantify economics Define options and portfolio Rank by value, risk and effort required Pre-feasibility • • • • • • Basic engineering Operations plan Risk plan Contracting Sanctioning Feasibility Detailed Design Post Imp. Review Implementation • • • • Detailed design Plan and logistics Risk management Execution Supervision Measurement • • • • Track plan vs. real Measurement KPI monitoring Plan correction Implementation Construction Start Up Approval Influence Front End Loading PwC Expenditures Mechanical Completion Slide 7 Constantly Refine Cost and Contingency Estimating Class 5 0%-2% <+100% Class 4 100% Adapted from the AACE Cost Estimate Classification System 1%-15% +50% Estimate Amount +30% Class 2 Class 3 40%-70% 10%-40% -20% +20% -15% Class 1 70%-100% +15% -10% -30% -50% Project Definition 3%-5% Nominal Level of Design Detail Schematic Design 15%-20% Design Development 35%-45% Construction Documents 90%-100% Construction Cost Estimate Accuracy Ranges Confidential - For the sole use and benefit of Minex PwC Estimate Amount 0% Scalable Governance / Delivery Models Avoid a ‘One Size fits all’ approach Capital investment risk scenarios Margin OH/Risk Capex $ Feed/Opex Time Margin OH/Risk Capex $ Feed/Opex Time Margin OH/Risk Capex $ Feed/Opex Time Margin OH/Risk Capex $ Feed/Opex Time PwC Mega Project The mega project is an order of magnitude (or more) larger than the typical project for the organization. One-Time Large or Very Large Project Capital projects are not executed as a normal course of business and this is a single capital investment. Program of Small and Medium Projects The program involves a collection of projects for meeting a specific objective (e.g. growth or regulatory) Capital Intensive Routine Projects The asset base for the company requires steady capital investment to maintain production. Slide 9 Scalable project governance and delivery model ($ vary) Routine Projects ($10m-$100m) ($10om-$250m) ($250m-$1b) (> $1b) Medium Projects Large Projects Very Large Projects Megaprojects Small Projects Business Case Basic to simple support Approval Authority Business unit Execution Division or department Tools, Systems, and Processes Oversight and Assurance PwC (< $10m) Basic office Dept. reports ‘Flash’ reports Comprehensive and detailed analysis Divisional and executive Board Capital project cross-functional group Standard project and ERP systems PMO, Steering Committee Custom Board Independent Audits Slide 10 Project Level Controls Effective Project Governance Structures Assurance Oversight Project Sponsor External Program Advisory Board Executive Steering Committee Execution Project Director Project Controls Engineering Procurement Owner’s Engineer Consultants PwC Construction EPC Vendor Quality Management Fabricators Commissioning EHS Material Suppliers Subcontractors Slide 12 Procedural framework Project life-cycle Evaluation Organization design and HR management Project Elements Procurement and contract management Design Project resource plan, organization, roles and responsibilities Contract strategy Contractor qualification and evaluation Development Production Turn-over M&O Mobilize and manage project labor Demobilization Operations staff planning Ongoing requirements / skill review Contractor selection and negotiation Contract compliance review Trouble-shoot and punch-list Vendor qualification and selection Scope and change Project and management scope definition Detailed design and scope freeze Change control Owner acceptance Asset change management Cost management Project estimate Project cost baseline Cost control and Cost to Complete Modeling Final payment / retention release M & O budgeting Schedule management and data analytics Completion checklist Ongoing maintenance Schedule management Project schedule Project schedule requirements baseline Business systems and technology Project systems strategy Risk and issue management Risk and issue management plan QA / QC, Safety Management Health and Safety plan Design review, method statements Communication, reporting and regulatory Stakeholder assessment and reporting requirements Project status and regulatory filings PwC Implement project systems System support and maintenance Risk and issue tracking and resolution Training, Safety Assessments, Independent testing and inspection Permits, Licensing Project performance Asset performance Transition to enterprise asset management Confirm issue resolution Ongoing issue management Safety file handover O&M Manuals Project close-out Operations and financial reporting Slide 13 Establish contracting strategy selection criteria Define objectives and establish parameters (scope, cost, schedule, etc.) •Typically output of Front End Loading (FEL) Segregate scope (self performed, alliance vs. contractor) •Typically bulk of services associated with direct project costs Evaluate delivery options (EPC, EPCM, Multi-prime, etc.) Evaluate pricing options (lump sum, cost +, incentives, etc.) Evaluate award options (bid, , negotiated, Etc.) •Project: Schedule, scope, definition, funding •Owner: Internal capabilities, risk aversion, contract restrictions, strategic, regulatory/political factors •Market: Resource s, competitiveness, commodities •Qualitative Risk Assessment •Desired allocation of risk •Ability to manage risk •Relationship considerations •Commodity vs. Service •Regulatory requirements Contract strategy PwC Slide 14 Standard Project ‘tool box’ to Accelerate Project High Performing Teams: Types of training Media  Leverages multiple accelerators, frameworks, tools and proprietary methods. Northern Trust benefits Tier 1—Learn from co-location (face-to-face) • Traditional classroom, instructor-led training (ILT) • Classroom training materials (CLASS) • Electronic performance support system (EPSS) • Mentoring (experienced with novice) • Train the trainer (TTT) • Quick reference (QRs) and Frequently Asked Questions (FAQs) • Organizational knowledge retention • Interactive simulations and games (SIM) • Quicker remediation • Cascaded learning small group activity (CSGA) • On-the-job training (OJT) • Frontline leadership • Quicker evaluation • ERP sandbox training environment (TRN ENV) • Local coach/mentor support (COACH) Tier 2— Learn from collaboration (group collaboration) • Traditional classroom, instructor-led training (ILT) • Virtual classroom, instructor-led (VCT) • Video teleconferencing/satellite distance learning (DL) • Classroom training materials (CLASS) • Collaborative teamwork • Electronic performance support system (EPSS) • Cross-organizational cooperation • Quick reference (QRs) and Frequently Asked Questions (FAQs) • Quicker communication of solutions • Interactive simulations and games (SIM) • Train the trainer (TTT) • ERP sandbox training environment (TRN ENV) • Cascaded learning small group activity (CSGA) • Collaboration (instant messaging) or (IM) • Broader, effective reach • Increased communication frequency Tier 3—Learn from interaction (multimedia and simulations) • Traditional classroom, instructor-led training (ILT) • Virtual classroom, instructor-led (VCT) • Video teleconferencing/satellite distance learning (DL) • Cascaded learning small group activity (CSGA) • Online self study web-based training (OSS) • Computer/web-based training (WBT) • Self-directed learners • Electronic performance support system (EPSS) • Problem solving • Quick Reference (QRs) and Frequently Asked Questions (FAQs) • 24x7 continuous education • Interactive simulations and games (SIM) • Self-evaluation • ERP sandbox training environment (TRN ENV) • Self-remediation • Higher retention • Collaboration (instant messaging) or (IM) Tier 4—Learn from information (performance support and reference) • On-the-job training (OJT) • Computer/web-based training (WBT) • System understanding • Online self study web-based training (OSS) • Electronic performance support system (EPSS) • Basic skill proficiency/performance • Quick Reference (QRs) and Frequently Asked Questions (FAQs) • Basic navigation • Reference only (REF) • Interactive simulations and games (SIM) • Collaboration (instant messaging) or (IM) • Business process context for transaction Process and Procedures Enabling Systems, and Tools (Reporting) Integrated Performance Analytics Governance and Risk Frameworks  Process and procedures based on best practice, experience and lessons learned.  Reporting tools that help the team accelerate analytics and early warnings As a Result:  Timelines are shortened Cost to Complete Models  Increased efficiencies at all stages  Reduced disruption to mobilization and start-up  Effort required is more predictable,  Project Development has higher level of confidence PwC Slide 15 Real-Time Integrated Scheduling Group - high level schedule Projectoverview 1 Project 2 Project 3 Project 4 PwC Division - Level 1/2 schedules with some level of integration between projects Program/Region – Level 2 integrated schedules Project – Detailed level 3-4 schedules (standard WBS coding) Slide 16 Programme Value Chain Inputs (raw data) Working Tool (‘shadow program’) Contractor Programmes CM Mini-Programmes Start-up & Commissioning PMP, Level 3/4 programmes Design Programs Client Level 2 Programmes Project Management Team Invoice Management Module, Depiction of a Potential Invoice Dispute Process+ Dispute Invoice / Portion of Invoice No Resolution Follow Add’l Dispute Resolution Procedures Receive Notification of Disputed Invoice and Amounts Legal Team Consortium Meet to Resolve Disputed Invoice Invoice Management Module Notify Legal Team Invoice Dispute Resolved Invoice Resolved Submit Notification of Disputed Invoice and Amounts Clarify Issues Related to Interest on Disputed Invoice Receive Notification of Disputed Invoice and Amounts Identify Disputed Invoice and Amounts Receive Notification Invoice is Resolved and Approved Amounts Calculate Interest Due on Approved Amounts Process Resolved Portion of Invoice Site Outputs Variance / Dash-boards Three Week Look-aheads Analytics PwC Management Outputs Level 1 programme Oversight Authorities - Public Audits Client Executive Leadership / Dashboards Strategy (what-if’s) Contracts / Commercial Quantitative Risk Assessment Slide 17 Cost to Complete Changes pending and agreed Resource Flow for Cost Cumulative Earned value trends Time Contract Control Sheet Formulae Total Approved Budget Proposed Budget Original Contract Value Contingency Strategical Spares Approved CSI Cost Savings (B)+(C) (A)=(B)+(C)+(D) (B) (C) (D) (E) R R R R R R 21,307,113,033 21,260,530,901 19,913,189,751 1,393,923,282 176,276,269 -46,582,132 (F ) R R R R R 320,762,271 558,953 296,301,470 23,412,055 489,793 Total Approved Value to Date (G)=(B)+(E)+(F) R 20,187,369,890 Pending Variations Pending Instructions Pending Proposals Pending Deviations Pending Claims (H) Pending CSI Cost Savings (I) R - Forecast Cost at Completion (Approved & Pending Variations Only) (J)=(G)+(H) R 20,763,190,449 (K) R R R R R 244,330,381 244,330,381 Forecast Cost at Completion (Approved, Pending & Potential Variations Only) (L)=(J)+(K) R 21,007,520,830 Contingency & Additional Approved Commitment less Total Growth Balance of Contingency Allowance (M)='(C) (N)=(E)+(H)+(K) (O)=(M)-(N) R R R 1,393,923,282 1,140,913,211 253,010,071 Forecast Cost at Completion (incl. Balance of Contingency Allowance) (P)=(L)+(O) R 21,260,530,901 Contract Price Adjustment (CPA) (Q) R 5,044,663,375 Forecast Cost at Completion (incl. CPA) (R)=(P)+(Q) R 26,305,194,276 Financial Costs Foreign Exchange Cover (FEC) Interest During Construction (IDC) (S) R R R 4,774,946,335 695,729,527 4,079,216,808 Forecast Cost at Completion (incl. Fin. Costs) (T)=(R)+(S) R 31,080,140,611 Approved Variations Approved Instructions Approved Proposals Approved Deviations Approved Claims Potential Variations Risks within the Contract Execution Trends Disputed Claim Values Potential Claims Eskom Cost Items Forex CONTRACT COST FORECAST Contracted work & variable price elements PB Power Cost Items CONTRACT COST INFORMATION Description P02 - Boiler R R R R 575,820,559 2,118,000 577,747,222 -4,044,663 Risk Weighted CPM and scenario analysis Interest during construction Risk weighted cost estimate PwC Inflation Quantified risks & mitigation costs Slide 18 Modeling Risks Using Monte Carlo • Based on the risk probabilities and ranges, thousands of unique possibilities are simulated. • Probabilities trigger risks & impact are randomly selected from distribution range • Workshops help identify risks, likelihoods, and potential impact • Typically a three-point estimate, as follows: Optimistic – The best possible outcome if the risk occurs Most Likely – The most likely outcome if the risk occurs Pessimistic – The worst possible outcome if the risk occurs • A three-point estimates is typically modeled by a triangular distribution Triangular Distribution : When each risk occurs, its impact will be along the defined distribution (three point estimate), randomly Each risk has a unique distribution PwC Optimistic Most Likely Pessimistic Slide 19 Risk and Issue Management Description This chart illustrates the documents, e-mails, testing, meetings and events that are relevant to the negotiations of root-cause analysis Notes: PwC Observations Based on the assessed risks, there were large periods of time when SEC did not respond to specific requests, causing delays. Actions Issue notice of delay, notify insurers, and underwriters of SEC failure, and quantify damages resulting from delay. Change Order 105 Chronology : Base on the document and records management system log dated August, 2011 Slide 20 Medupi Organisation Assessment and Re-Alignment Executive Project Management Executive PM Project Execution Director Project Execution External S/H Mgt & Reporting Assurance Project Controls Contract and Change Mgt Project Support Deputiy Project Dir. Site Director MG LDM PS LDM LDM LDM TC RG NP BS SHE & Q Mgr FIDIC Engineer Qual Controls Mgr Eng & Config Mgr Gap Attack Lead Commissioning & Integration Site Serv Mgr Coal, Water, Tx, Gx Balance of Plant Coal & Ash Civil & Buildings LDM Project Support Mgr LDM DM Commercial Mgt Mgr LDM QS Estimating TBD Proj Controls Mgr LDM Controls & Instrumentation Electrical Turbines Boiler & Mechanical Site CM Cost Contract Admin HR C Fourie / V Scheduling Claims Doc Mgt Risk Variations Admin Document/ Issue Mgt TBD Procurement Finance IM Case Studies Mining & Energy Case Study Mining PwC Slide 23 Case Study 1 Capital Project Review for an $1Bn Mine development Development Factors Operational Factors Funding / Partners Owner vs Contractor operated Plant and equipment ownership Depreciation Water & Power Taxation Rail, Port and pipeline Foreign exchange rates Permitting Royalties and levies Environmental and Closure Costs Emissions monitoring Community relations Consumer price indices Man-Camps / force optimization Product split/price relativity Safety Commodity proce Closure costs PwC Slide 24 Case Study 1 Procurement and contracting strategy Misalignment of contracting strategy and risk appetite Actual split among different types of client’s contracts 0% 39% 1 - Contracts based on time and materials 2 - Contracts based on unit price Combination of 1 and 2 Contracts based on fixed price 60% 1% PwC In this case client believed that all his contracts were with fixed price, however analysis revealed another situation Slide 25 Case Study 1 Schedule Analytics Common ‘Tricks’, Tactics or Strategies • Reducing owner/employer design/drawing review time; • Unrealistic early completion schedules; • Artificial activity durations to hide float; • Artificial logic to hide float (sequestering); • Artificial logic to exaggerate known delays; • Selective issue of progress information; • Progress updates with no historic as-built data; • Incorrect actual dates in progress updates; • Changing historical data in final as-built; • Unidentified logic/duration changes in updates. PwC Slide 26 Case Study 1 Schedule Analytics – Float Deterioration Description Observations Actions This chart illustrates the trending of the total float for the various key components of the project. The platform rehabilitation work continues to lose float due to low contractor productivity. Engage with contractor to remedy the lackluster productivity. Ensure that sufficient manpower is being provided. 60 Total Float (Days) 40 Sub-Critical 20 0 -20 -40 Most Critical -60 -80 Track Extension Notes: As-Planned Platform Rehabilitation Port Rehabilitation Systems Upgrades Site Development Case Study 1 Equipment and consumable lead times Consumables are in short supply and lead times are rapidly returning to 2007 boom levels Heavy equipment lead time Consumables demand / supply Global Tyre Sypply/Demand (Thousands of 40’’ to 63’’ Units) Grinding mills Locomotives Barges 185 175 Draglines 165 155 Ship Loaders 135 Crushers 2007 delivery time 117 120 143 127 105 Large Haul trucks Current delivery time Tyres Normal delivery time 98 Reclaimers Rope Shovels Wagons Gas generators 0 1 2 2011 lead time outlook (years) PwC 3 4 5 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Demand Supply Slide 28 Case Study 1 Schedule Analytics – Logic Check Description Observations Actions This graphic shows the percentage of open ends (i.e. activities without predecessors or successors) in the updates analyzed in this report. Then number of open ends has been substantially reduced in the last two updates. This is a good trend and indicates that the team is taking steps forward to enhance the quality of the schedule.duration overruns . Ensure that open ends in the schedule are kept to a minimum. 12% 10% 8% 6% 10% 4% 2% 8% 7% 3% 3% 31-Jan-12 29-Feb-12 5% 4% 5% 2% 1% 0% 31-Mar-12 Data Date No Predecessors Notes: 30-Apr-12 No Successors 31-May-12 Case Study 1 Schedule Analytics - Relationship Tie Check Description Observations Actions This graphic shows the number of each relationship type in the schedule updates analyzed. In order for a logic tie to be valid, it has to be linked to an incomplete task (e.g. not a completed task, LOE, etc.) There are a number of start to finish task in the schedule the usage of which is highly discouraged due to the ambiguous nature of the tie. Eliminate SF relationships where possible and replace these with more suitable schedule ties (e.g. FS, SS).path. Notes: Case Study 1 Schedule Analytics - Hard Constraint Check Description Observations Actions This graphic summarizes the various constraint types in the schedule. Hard constraints which override the logic may dampen the ability to accurately report the project's critical path. As of the May 2012 update, all hard constraints have been eliminated with the overall number of constraints dropping as well. This is a positive trend in the quality of the schedule. Excessive use of constraints impedes ability to determine the project’s critical path Increasing constraints could indicate ‘lazy’/ bad scheduling practices. Confirm need for hard constraints Notes: Case Study 1 Schedule Analytics - High Float Check Description Observations Actions This chart shows the distribution of the float values reported in the schedule for all of the remaining tasks. Over 50% of tasks have over 70 days of float. For a project with only 13 months of remaining duration, this percentage is excessive and may be an indication of missing logic ties. Ensure that all tasks are properly linked to the project's completion milestone and that the float is accurately reported Notes: Case Study 1 Schedule Analytics - High Duration check Description Observations Actions This chart shows the distribution of the durations reported in the schedule for all of the remaining tasks. Since the schedule is updated on a monthly basis, the target should be to have as many activities as possible with a duration of one month or less. In the latest update, about 60% of tasks fall into that category. Where possible, tasks should be broken down into a higher level of detail to improve the ability to track progress on a monthly basis. Notes: Case Study 1 Schedule Analytics - Early Finish count Description Observations Actions This chart illustrates the planned early completion date of all activities , window by window. The wave of activities appears to shift indicating that slow progression and failure to meet planned progress Identify root cause of progress slippage, issue warnings for non-performance, or revised projections to reflect realistic progress Activity Count 2000 1500 1000 500 0 Notes: Analysis is based on contractor submissions from 5700 to 5702 Case Study 1 Early finish activity count - sample schedule slippage Description Observations Actions This chart illustrates the planned early completion date of all activities , window by window. The wave of activities appears to shift indicating that slow progression and failure to meet planned progress Identify root cause of progress slippage, issue warnings for non-performance, or revised projections to reflect realistic progress 1500 December 2010 update forecasted 1395 activity completions for January 2011 1000 Variance = 928 500 July 2010 update forecasted 467 activity completions for January 2011 J-14 D-13 N-13 S-13 O-13 A-13 J-13 J-13 A-13 M-13 M-13 J-13 F-13 D-12 N-12 S-12 O-12 J-12 A-12 J-12 A-12 M-12 F-12 M-12 J-12 D-11 N-11 O-11 S-11 J-11 A-11 J-11 A-11 M-11 M-11 J-11 F-11 D-10 N-10 S-10 O-10 J-10 J-10 A-10 0 M-10 Activity Count 2000 M- J- J- A- S- O- N- D- J- F- M- A- M- J- J- A- S- O- N- D- J- F- M- A- M- J- J- A- S- O- N- D- J- F- M- A- M- J- J- A- S- O- N- D- J10 10 10 10 10 10 10 10 11 11 11 11 11 11 11 11 11 11 11 11 12 12 12 12 12 12 12 12 12 12 12 12 13 13 13 13 13 13 13 13 13 13 13 13 14 7/23/2010 0 0 597 208 141 102 849 569 467 456 476 337 340 183 139 94 102 97 119 44 8/27/2010 0 0 0 390 198 153 974 722 474 476 544 359 377 216 213 105 105 123 125 40 15 35 9/24/2010 0 0 0 0 470 186 122 681 640 556 711 559 241 248 159 67 128 74 96 44 13 39 20 10/22/2010 0 0 0 0 0 413 157 110 802 641 772 468 226 276 323 91 135 48 91 56 15 20 24 14 11/26/2010 0 0 0 0 12/17/2010 0 0 0 0 5 33 6 7 37 8 4 2 2 12 12 0 1 4 1 0 1 0 0 0 4 0 0 0 3 6 13 33 8 4 2 2 12 12 0 1 4 1 0 1 0 0 0 4 0 0 0 3 8 4 2 7 8 10 0 1 5 3 0 0 0 1 0 6 0 0 0 0 6 4 2 6 8 7 0 4 5 3 0 0 0 0 0 6 0 0 0 0 0 0 658 150 914 761 849 513 324 268 265 132 87 107 106 62 14 16 25 18 10 13 4 1 7 12 9 2 2 9 3 0 0 0 0 0 6 0 0 0 0 0 0 4 3 5 12 10 2 3 9 3 1 0 0 0 0 6 0 0 0 0 9 29 0 794 139 967 871 615 379 296 269 142 92 111 57 112 27 14 25 18 1 9 13 Case Study 1 Schedule Analytics - Task Duration Variance Description Observations Actions This chart illustrates the distribution of activities performed within their as-planned duration by Wick’s law contractor H & P were relatively accurate in predicting the majority of their task durations. G & E activities however , show significant duration overruns . 80.0% 70.0% Mechanical ENER Civil/Structure VOSE 60.0% Railway DOMD Port Percentage of Activities TOSH 50.0% 70% - Greater than Original Duration in Port tasks 40.0% 30% - Less than or Equal to Original Duration 30.0% 20.0% 10.0% -50 Notes: -40 -30 -20 0.0% -10 0 10 Days Between Original Duration and Actual Duration Analysis is based on contractor submissions to update 5751 20 30 40 50 Case Study 1 Schedule Analytics – Integrity checks • 14 Point Assessment gauges the quality of the contractor’s schedule Assessment Area Criteria 1. Logic Check <5% missing ties 2. Leads Check (Negative Lag) 0% 3. Lags Check <5% 4. Relationship Types Check No SF relationships 5. Hard Constraints Check <5% 6. High Float Check <5% Acts with excessive float 7. Negative Float Check No negative float 8. High Duration Check <5% with excessive duration 9. Invalid Dates Check planned dates < DD or actual > 10. Missed Tasks Check 95% of monthly targets achieved 11. Critical Path Test Check Delays in CP accurately reflected PwC Schedule Update Jan-12 Feb-12 Mar-12 Apr-12 May-12                                                        Slide 37 Case Studies Energy PwC Slide 38 Case Study 2 Refinery Modernization / Expansion Modernization/ expansion to diversify products and improve product yields. Due to repeated funding requests client required validation of cost and schedule Forecasts • Review growth of the cost and schedule projections • Establish accurate design status and undefined scope • Challenge assumptions and reasonableness of estimates • Challenge manpower productivity drivers to completion • Prepare independent cost-to-complete/quantitative risk assessment (QRA) to establish required contingency to ensure P80 confidence level PwC Slide 39 Case Study 2 Cost and schedule validation Design Completion Establish Completion Level • Design hours • Design drawings • Provisional Sums • % Complete PwC Quantity Estimation Establish Confidence Level • Bulk Material • Parametric Estimates • Allowances • Quantity Take-Offs Performance Factor / Output Assumptions Cost to Completion Schedule Durations/ Logic Verify P/F Assumptions Identify ‘soft spots’ • Allowances • Unit Rates • Historic Outputs • Performance Degradation • Anticipated disruption and Inefficiency • Cost at Completion • Remaining Durations • Allowances • Assumptions • Potential over-runs and undefined scope Contingency Management Remaining Contingency • Test confidence in remaining UAP • Review content of worst-case scenario assumptions Slide 40 Case Study 2 Cost validation (qualitative) Estimate Project 12PS GOHT OSBL Coker SRC PMT PwC Design l l l l l l Schedule Risk Quantity Perf. Factor Indirects CPM PRA Cost Schedule l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l Slide 41 Case Study 2 Quantitative Risk Analysis Stakeholder Input Risk Mitigation •Mitigate/Manage Risk •Accept /Share Risk •Transfer Risk •Revise Scope/Budget/Schedule •Update Estimate to Complete Summarize Output •Create functional reports to present to steering groups • Update Risk Dashboards • Identify Exposure (P80/P90) • Update Sensitivity Analysis • Prepare Mitigation Road-map Risk Response Develop Risk Model Generate Reports Run Simulation Review Results •Validate the data •Test results against estimtate •Test results to industry standards (AACEi, DOE, ANSI, ASPE) •Compare outliers to assumptions PwC Gather data: • Risk & Issues (Workshops/ Risk Registers) • Review status reports (minutes, monthly reports) • Cost Estimates / Estimate to Complete models • Contract / Design Documents Vet Data Quantitative Model •Create model based on • budget •ETC/EAC • level 2 schedule) • estimating confidence range (Class 1, 2, 3, 4, or 5) •Quantify risk likelihood •Quantify risk impacts •Create risk register Monte-Carlo (@Risk) •Run simulation and gather output •Test results and model integrity •Adjust model if appropriate Slide 42 Case Study 2 Monte-Carlo Simulation (Results Distribution) Distribution of rolling a pair of dice a 1000 times PwC Slide 43 Quantitative Risk Assessment P90 = $1.57Bn P50 = $1.55Bn Distribution of building a project 1000 times. PwC Slide 44 Case Study 2 Risk Weighted Contingency Confidence model Confidence 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% 70% 75% 80% 85% 90% 95% 100% PwC Forecast + UAP ($M) $ 8,692.31 $ 8,880.34 $ 8,934.22 $ 8,961.11 $ 8,986.39 $ 9,007.90 $ 9,028.86 $ 9,045.76 $ 9,063.55 $ 9,075.98 $ 9,094.21 $ 9,109.87 $ 9,126.12 $ 9,148.78 $ 9,167.78 $ 9,193.81 $ 9,219.84 $ 9,249.40 $ 9,293.65 $ 9,349.05 $ 9,609.42 Forecast + UAP +Discrete Risks ($M) $ 8,818.85 $ 8,961.37 $ 9,004.27 $ 9,038.06 $ 9,067.49 $ 9,090.49 $ 9,111.90 $ 9,127.08 $ 9,142.84 $ 9,159.37 $ 9,173.02 $ 9,195.27 $ 9,214.58 $ 9,233.08 $ 9,254.97 $ 9,280.19 $ 9,310.05 $ 9,342.35 $ 9,387.51 $ 9,440.45 $ 9,725.96 What we did • Challenged proposed project funding cap of $9bn • Developed risk model incorporating • Estimated to complete • Risks (monetized) • Performance trends • Schedule trends • Quantity increases • Established quantitative confidence level with, and without discretely monetized risks Benefit to Client • Request adequate project funding based decision support. • Establish realistic project targets • Enable more effective project controls and realistic baseline. Slide 45 CP&I – Selected thought leadership Risk management and schedule management on mega-projects. Since your day-to-day business is construction, you know construction projects are inherently risky. Managing this risk is essential and, like any other important management or oversight function, is either done well or it is a wasted effort that can risk everything. Capital project owners have focused on improving governance structures; yet too many projects still fail to deliver on cost, schedule or quality commitments. The consequence of failure can be public embarrassment and disappointed stakeholders Quantitative risk analysis. As major capital projects are subjected to greater regulatory and political scrutiny, the pressure on contractors to meet tight schedule and budgetary constraints increases. Often cost and schedule targets are reported without accounting for potential risks and impacts, which leads to an erosion of confidence in reaching those targets. Having a systematic quantitative risk analysis process in place to gauge the confidence level of the project’s cost and schedule is important for establishing realistic expectations. Schedule analytics tools As capital project spend increases and aggressive deadlines are built into project schedules, the reliance on accurate, transparent and meaningful schedule practices is growing. Too often, major projects suffer from missed milestones, schedule slippage and delays with no way of determining recovery plans or realistic forecast completion dates. Optimizing capital project delivery. A major US utility was finalizing its plans to construct new plants costing several billion dollars. Working in a highly regulated environment, the client recognized the importance of a strong control environment to manage the project. The client requested a governance readiness review to determine whether its systems and controls could support a project of this magnitude and complexity. PwC Slide 46 Thank you PwC Slide 47