Lecture 1

Overview to Managing Financial

Performance and Projects

Topics to be covered
What is a Project? Why do it? Understanding the Stages of a
Project, Steps for carrying out a feasibility study.
Tools Required for Feasibility Studys Project development &
Profitability Analysis
- Revenue Forecasting
- Capital Cost Estimating
- Operating Cost Estimating, Cash Flow Analysis
- Time value of money
- Net Present Value, Discounted Cash Flow Methods

Content
1.
2.
3.
4.

What is a project and why do it?

The five stages of a project
Creating value from a project
Project Success

What is a Project & Why do it?

A unique set of activities with defined start and
finish times, undertaken to meet established
goals/objectives/deliverables within defined
constraints of scope, cost, time, quality and
stakeholder/customer satisfaction.
WorleyParsons

Example: Project for flood protection scheme

www.selkirkfloodscheme.com

Projects

Projects vary in scale and complexity,

from small improvements to existing
products to large capital investments.
However they are all:

An investment of resources for an objective

A cause of irreversible change
Novel to some degree
Concerned with the future
Related to an expected result

Definitions related to process engineering applications

Greenfield new plant on a new site
Brownfield existing plant modified

Content
1.
2.
3.
4.

What is a project and why do it?

The five stages of a project
Creating value from a project
Project Success

The Five Stages of a Project

Full Funding
Approval
Execution

Development
IDENTIFY

SELECT

Project
Identification

Scoping / Feasibility

DEFINE
Pre-FEED/
Front End
Eng

EXECUTE
Detailed Engineering
Procurement /
Fabrication/Constrn.

OPERATE
Commissioning
Close-out

Front End Loading

Determine
project
feasibility and
alignment with
business
strategy.

Select the
preferred
development
option(s) &
execution
strategy.

Finalize project
scope, cost
and schedule
and Sanction
Project.
Prepare for
Execute Phase.

Produce an
operating
asset
consistent with
scope, cost &
schedule.

Evaluate &
Operate asset
to ensure
performance to
specifications
and maximum
return to the
Client.

Understanding Stages of a Project

Importance of the Gate System
The Gate System is a formal system which
enables the amount of capital outlaid to
progressively increase in line with the
development of the project
A Gate System review is conducted at the end
of each stage to confirm the
readiness/appropriateness for the project to
proceed to the next stage, and the capital,
people and resources required for the next
stage

Understanding Stages of a Project

Importance of the Gate System

http://www.renewableenergyworld.com/rea/blog/post/2013/11/geothermal-visual-project-cost-and-risk-profileat-various-stages-of-development

Understanding Stages of a Project

Importance of the Gate System
Large amounts of capital are required by projects,
monies which could be used elsewhere in a business.
Therefore proper justification of expenditure is
essential.
Phased approach enables the amount of capital
outlaid to progressively increase in-line with
development of the project (and at points where
there is a reduction in risks)
Gate System enables this to be done

Understanding Stages of a Project

Key Steps/Outcomes for Each Stage
Full Funding
Approval
Execution

Development
IDENTIFY

SELECT

Project
Identification

Scoping / Feasibility

Front End Loading

DEFINE
Pre-FEED/
Front End
Eng

EXECUTE
Detailed Engineering
Procurement /
Fabrication/Constrn.

OPERATE
Commissioning
Close-out

Stage 1 Identify
1.

Identify need and be clear on it

Market Need

Increased capacity
Product quality
New product / replacement
Opportunity

Plant Need

Efficiency / reliability
Raw material issues
Energy conservation
Logistics
New technology

Safety, legal and / or

environmental need

Stage 1 Identify
1.
2.

Identify need and be clear on it

Brainstorm ideas

Market Need

Increased capacity
Product quality
New product / replacement

New plant?
-Different location?
-Different technology?
-Import?

Opportunity
Plant Need

Efficiency / reliability
Raw material issues
Energy conservation
Logistics
New technology

Safety, legal and / or

environmental need

-Produce

different product
-Research possible options

Stage 1 Identify
Identify need and be clear on it
Brainstorm ideas
Develop Database

1.
2.
3.

Develop feasibility quality data on:

Potential sales volume and price

Plant investment for various sizes /technologies
Operating costs

Sources

Any in-house data

What are competitors doing?
What is there in literature
What is the market situation

Stage 1 Identify
Identify need and be clear on it
Brainstorm ideas
Develop Database
Identify Issues for Consideration

1.
2.
3.
4.
-

How big? potential sales, market size, market share,

new plant or de-bottleneck, capital constraints, feed
stock constraints.
What technology? product quality desired, feedstock
type, source, availability, yield, operating cost,
equipment life
Location? proximity to market, raw material
availability, construction and operating labour
availability, taxation treatment/incentives
When? time for screening, planning, design and
approval, time for construction

Design Constraints

Stage 1 Identify
1.
2.
3.
4.
5.

Identify need and be clear on it

Brainstorm ideas
Develop Database
Identify Issues for Consideration
Select alternatives for evaluation
- considering different size, process,
location, timing and base case of do
nothing

Stage 1 Identify. Increased capacity?

Production

Case 1 Do nothing

Production Capacity

Years

Stage 1 Identify. Increased capacity?

Production

Case 2 debottleneck or import

Production Capacity

Years

Stage 1 Identify. Increased capacity?

Production

Case 3 New Plant

Existing Capacity

Years

Stage 1 Identify. Increased capacity?

So there is a choice. The same outcome,

an increase in capacity is achieved for
both options (debottleneck versus new
plant) but the options vary in terms of
the capital costs, operating costs,
construction timeframes, location, options
for improved product quality. It is the
impacts of these other variables that we
are evaluating.

Key Steps/Outcomes for Each Stage

Stage 2 - Select
Full Funding
Approval
Execution

Development
IDENTIFY
Project
Identification

SELECT
Scoping / Feasibility

DEFINE
Pre-FEED/
Front End
Eng

EXECUTE
Detailed Engineering
Procurement /
Fabrication/Constrn.

OPERATE
Commissioning
Close-out

Front End Loading

Selected variables for consideration (i.e. debottlenecking versus

new plant), gathered data on them and now is the time to give
them some analysis, scoping and feasibility to see how they
compare to each other
- Market analysis
- Technical analysis
- Financial analysis
- Ecological Analysis

Stage 2 Select
1.

Define Bases and Assumptions for each

alternative (based on your database)
-

Sales/production volume (market share)

Product and by product prices
Raw material cost
Operating costs
Distribution cost
Capital cost
corporate outlook
Taxation rate

Stage 2 Select
1.
2.

Define Bases and Assumptions for each

alternative
Evaluate and Compare
- Rough screening to short list alternatives

Stage 2 Select New Chloralkali facility (electrolysis

of salt to produce chlorine and caustic soda).
Parameter
Prox. To raw mat
Prox. To market
Shipping Facilities
Environmental
sensitivity
Infrastructure
availability
Constr/Op labour
availability
Govt incentives
Land cost
availability
Climate/impact
TOTAL

Weighting
0.15
0.20
0.10
0.10

Karratha
9
6
9
8

0.15

0.15

0.05
0.05

9
9

7
3

9
7

0.05

4
70.0

Perth
4
9
9
4

9
73.5

Gladstone
9
6
9
6

6
72.5

Stage 2 Select
1.
2.

Define Bases and Assumptions for each

alternative
Evaluate and Compare
- Rough screening to short list alternatives
- Carryout economic evaluation of
combinations of perhaps the three best
locations and three best plant size (tools
presented in later lectures).
- Determine preferred alternatives (usually
one with highest Net Present Value
calculation procedure discussed in later
lectures)

Stage 2 Select
1.
2.
3.

Define Bases and Assumptions for each

alternative
Evaluate and Compare
-Test preferred alternatives for what if

Government laws change, supply agreements

not renewed, new process discovered,
Sensitivities impact on economics if
parameters vary by probable inaccuracy (eg:
+/- x%)
price, volume, capital cost, operating cost

Stage 2 Select
1.
2.
3.

Define Bases and Assumptions for each

alternative
Evaluate and Compare
-Test preferred alternatives for what if
-Test preferred alternative for
Environmental and safety Issues

potential greenhouse gas production, waste

management, flammability, explosivity.

Stage 2 Select
1.
2.
3.

Define Bases and Assumptions for each

alternative
Evaluate and Compare
-Test preferred alternatives for what if
-Test preferred alternative for
Environmental and safety Issues
- Test preferred alternatives versus Best of
Competition
If industry/price can absorb new
investment
And no disadvantage vs best of
competition
Then Project should be attractive

Stage 2 Select
1.
2.
3.

4.

Define Bases and Assumptions for each

alternative
Evaluate and Compare
- Test preferred alternatives for what if
- Test preferred alternative for
Environmental and safety Issues
- Test preferred alternatives versus Best of
Competition
Decide and Recommend
- Should project proceed to next stage
- If so, which alternative(s) should be developed
further

Stage 3 - Define
Full Funding
Approval
Execution

Development
IDENTIFY
Project
Identification

SELECT
Scoping / Feasibility

Front End Loading

DEFINE
Pre-FEED/
Front End
Eng

EXECUTE
Detailed Engineering
Procurement /
Fabrication/Constrn.

OPERATE
Commissioning
Close-out

Stage 3 Define

Also termed Front End Engineering & Design

1.

2.
3.
4.

Design bases agreed:

- Project philosophy, scope and objectives
- Preliminary P&ID layout
- Major equipment specifications
- Control logic
- Preliminary Hazop review
Basic engineering & design carried out for one selected
alternative
Project Execution Plan fine-tuned (critical path & long lead
items identified)
Basis established for Contractors Detailed Engineering
Design
Investment now OK for formal approval Project scope
developed such that cost estimate and schedule accurate to 10/+15%

At End of Stage 3
Formal Approval Takes Place
Full Funding
Approval
Execution

Development
IDENTIFY
Project
Identification

SELECT
Scoping / Feasibility

DEFINE
Pre-FEED/
Front End
Eng

EXECUTE
Detailed Engineering
Procurement /
Fabrication/Constrn.

OPERATE
Commissioning
Close-out

Front End Loading

Capital cost estimate accurate to -10/+15%

Detailed operating costs determined
Detailed economics carried out
Business plan consistency confirmed
Base business profitability confirmed
Consistency with Budget
RISK OF THE PROCESS REDUCED READY TO MAKE A
BIGGER INVESTMENT

Key Steps/Outcomes for Each Stage

Stage 4 - Execute
Full Funding
Approval
Execution

Development
IDENTIFY
Project
Identification

SELECT
Scoping / Feasibility

DEFINE
Pre-FEED/
Front End
Eng

EXECUTE
Detailed Engineering
Procurement /
Fabrication/Constrn.

OPERATE
Commissioning
Close-out

Front End Loading

Detailed Engineering and Drafting Construction Packages

produced

Procurement of Equipment

Construction of plant

Pre-commissioning of equipment

Cost Estimate accuracy -5/+10%

Key Steps/Outcomes for Each Stage

Stage 5 - Operate
Full Funding
Approval
Execution

Development
IDENTIFY

SELECT

Project
Identification

Scoping / Feasibility

DEFINE
Pre-FEED/
Front End
Eng

EXECUTE
Detailed Engineering
Procurement /
Fabrication/Constrn.

OPERATE
Commissioning
Close-out

Front End Loading

Commissioning/start-up of plant
Monitor/adjust plant during warranty period

Warranty period/Project performance assessment

Post Audit/Project re-appraisal

Complete Close-out

In a Design House
Determine
customer
needs

Set design
specifications
Build
performance
models
Generate design
concepts

Customer
approval

Evaluate
economics,
optimize &
select design

Detailed
design &
equipment
selection

R & D if needed
Predict fitness
for service

Procurement &
construction

Begin operation

Structure of a
chemical
engineering project

Chemical Engineering Projects

~50% - Modifications and additions to
existing plant, usually carried out by the
plant design group
~45% - New production capacity to meet
growing sales demand. Repetition of
existing designs, with only minor design
changes.
Remaining new processes, developed
from laboratory research, through to pilot
plan, to a commercial process.

Techno-Economic Analysis
1.
2.
3.

4.

5.
6.

Executive summary
Technology description

Process chemistry, Process specification

Commercial analysis

Product applications, competitor assessments,

Existing and planned capacity.
Economic analysis

Pricing, investment analysis (explain capital cost

estimates etc.), Financial analysis
Risk analysis
Process hazard analysis, EIA, Commercial risk
Appendices

CONTENT
1.
2.
3.
4.

What is a project and why do it?

The five stages of a project
Creating value from a project
Project Success

What is Value?
Value :

What client is looking for

Examples: Lowest cost

Quickest schedule
Highest safety/reliability
Highest return
Ensure:

Right cost outlaid to achieve best

value

Creating Value
IDENTIFY

Gate

SELECT

Gate

Select the Right Project

(Worley)
DEFINE

Gate

EXECUTE

tim
Se um P
lec ro
tio jec
n
t

Poor Pro
ject
Definitio
n/Execu
tion

Op

Value

OPERATE

Develop and Deliver the Project Right

Front End Loading

Project
Optimum
on
n/Executi
Definitio

ject
Pro n
r
o
Po lectio
Se

Gate

CONTENT
1.
2.
3.
4.

What is a project and why do it?

The five stages of a project
Creating value from a project
Project Success

Success

Delivery of whats expects

On time
Within budget
With quality
Develop productive relationships

Tools to assist teams to meet goals

on schedule and within budget.

Microsoft Project expected to produce similar outputs in DP

Further reading

Lecture notes
Wearne, S.H. (1989) Control of Engineering Projects,
Thomas Telford.
Morris, P.W.G. (1997) The Management of Projects,
Thomas Telford
Smith, N.J. (2008) Engineering Project Management.

Recap: The Five Stages of a Project

Full Funding
Approval
Execution

Development
IDENTIFY

SELECT

Project
Identification

Scoping / Feasibility

DEFINE
Pre-FEED/
Front End
Eng

EXECUTE
Detailed Engineering
Procurement /
Fabrication/Constrn.

OPERATE
Commissioning
Close-out

Front End Loading

Determine
project
feasibility and
alignment with
business
strategy.

Select the
preferred
development
option(s) &
execution
strategy.

Finalize project
scope, cost
and schedule
and Sanction
Project.
Prepare for
Execute Phase.

Produce an
operating
asset
consistent with
scope, cost &
schedule.

Evaluate &
Operate asset
to ensure
performance to
specifications
and maximum
return to the
Client.

Topics to be covered
What is a Project? Why do it? Understanding the Stages of a
Project, Steps for carrying out a feasibility study.
Tools Required for Feasibility Studys Project development &
Profitability Analysis
- Revenue Forecasting
- Capital Cost Estimating
- Operating Cost Estimating
- Cash Flow, NPV/DCFR, etc