Systematic Procedures to Determine Incentive / Disincentive Dollar Amounts for Highway Transportation Construction Projects, Research Report 11-22

The Federal Highway Administration has encouraged state transportation agencies to implement Incentive/Disincentive (I/D) contracting provisions for early project completion. Although general guidelines to determine the I/D dollar amount for a project are available, there is no systematic and practical tool in use to determine optimum I/D dollar amounts for I/D projects considering road user cost, agency cost, contractor’s acceleration cost, and contractor’s cost savings. Therefore, systematic procedures and models to assist project planners and engineers in determining an appropriate I/D dollar amount are essential to optimizing the use of I/D contracting techniques. This research performed a literature review related to the determination of daily I/D dollar amounts. Caltrans I/D project data were then collected and evaluated. Project performance data were analyzed with regard to project outcomes in two key areas: project time and project cost. Statistical analyses were performed to identify the impact of I/D dollar amount on project time and cost performance. Using Construction Analysis for Pavement Rehabilitation Strategies (CA4PRS) software, Caltrans I/D projects were analyzed to introduce three different levels of CA4PRS implementations for the I/D dollar amounts calculation. Based on the results of the I/D project case studies, the systematic procedures to determine appropriate I/D dollar amounts were developed using the CA4PRS schedule-traffic-cost integration process for the new I-5 rehabilitation project in LA. The proposed procedures were applied to a typical highway pavement rehabilitation project using HMA (hot mix asphalt) materials. Further research is needed to apply the proposed model to other types of highway projects, with adjustment for the type of project

Reducing Voltage Volatility with Step Voltage Regulators: A Life-Cycle Cost Analysis of Korean Solar Photovoltaic Distributed Generation

To meet the United Nation’s sustainable development energy goal, the Korean Ministry of Commerce announced they would increase renewable energy generation to 5.3% by 2029. These energy sources are often produced in small-scale power plants located close to the end users, known as distributed generation (DG). The use of DG is an excellent way to reduce greenhouse gases but has also been found to reduce power quality and safety reliability through an increase in voltage volatility. This paper performs a life-cycle cost analysis on the use of step voltage regulators (SVR) to reduce said volatility, simulating the impact they have on existing Korean solar photovoltaic (PV) DG. From the data collected on a Korean Electrical Power Corporation 30 km/8.2 megawatts (MW) feeder system, SVRs were found to increase earnings by one million USD. SVR volatile voltage mitigation increased expected earnings by increasing the estimated allowable PV power generation by 2.7 MW. While this study is based on Korean PV power generation, its findings are applicable to any DG sources worldwide.11Nsciescopu

A Forecast Model for the Level of Engineering Maturity Impact on Contractor's Procurement and Construction Costs for Offshore EPC Megaprojects

This paper focuses on the influence of detailed engineering maturities on offshore engineering, procurement, and construction (EPC) project procurement and construction cost performance. The authors propose a detailed engineering completion rating index system (DECRIS) to estimate the engineering maturities, from contract award to beginning of construction or steel cutting. The DECRIS is supplemented in this study with an artificial neural network methodology (ANN) to forecast procurement and construction cost performances. The study shows that R-2 and mean error values using ANN functions are 20.2% higher and 19.7% lower, respectively, than cost performance estimations using linear regressions. The DECRIS cutoff score at each gate and DECRIS forecasting performance of total cost impact were validated through the results of fifteen historical offshore EPC South Korean mega-projects, which contain over 300 procurement cost performance data points in total. Finally, based on the DECRIS and ANN findings and a trade-off optimization using a Monte-Carlo simulation with a genetic algorithm, the authors propose a cost mitigation plan for potential project risks based on optimizing the engineering resources. This research aids both owners and EPC contractors to mitigate cost overrun risks, which could be continuously monitored at the key engineering gates, and engineering resources could be adjusted per optimization results.11Ysciescopu

A Probabilistic Alternative Approach to Optimal Project Profitability Based on the Value-at-Risk

This paper focuses on an investment decision-making process for sustainable development based on the profitability impact factors for overseas projects. Investors prefer to use the discounted cash-flow method. Although this method is simple and straightforward, its critical weakness is its inability to reflect the factor volatility associated with the project evaluation. To overcome this weakness, the Value-at-Risk method is used to apply the volatility of the profitability impact factors, thereby reflecting the risks and establishing decision-making criteria for risk-averse investors. Risk-averse investors can lose relatively acceptable investment opportunities to risk-neutral or risk-amenable investors due to strict investment decision-making criteria. To overcome this problem, critical factors are selected through a Monte Carlo simulation and a sensitivity analysis, and solutions to the critical-factor problems are then found by using the Theory of Inventive Problem Solving and a business version of the Project Definition Rating Index. This study examines the process of recovering investment opportunities with projects that are investment feasible and that have been rejected when applying the criterion of the Value-at-Risk method. To do this, a probabilistic alternative approach is taken. To validate this methodology, the proposed framework for an improved decision-making process is demonstrated using two actual overseas projects of a Korean steel-making company.111Nsciessciscopu

Technical Memorandum on Innovative Contracting Methods Implementation Studies

The main objective of this study is to determine the effectiveness of alternative contracting strategies on aspects of project performance such as schedule and cost, in order to promote ways to apply the strategies effectively. A quantitative analysis that draws on 1,372 infrastructure improvement projects recently completed in California from 2000 to 2008 was conducted to achieve the objective. According to the analysis, alternative projects contracted with I/D and A+B represented 7% of all project establishments and 23% of all project allotment costs. The results of one way ANOVA analyses show that I/D projects held a decisive schedule-saving advantage over A+B and conventional projects, but that I/D also increased project costs significantly more than the others because of a higher frequency of contract change orders. The results of statistical analyses reveal a severe effectiveness problem with use of the A+B contracting strategy. When compared with conventional projects, A+B not only included extreme severe schedule overruns, but it also increased project costs far above the levels seen in conventional projects; both of these resulted from inaccuracies created by allowing contractors to bid on contract time. According to the analysis, the additional cost growth for utilizing I/D was recouped by reduced construction time, but this tradeoff was not seen in A+B projects

Power Plant Economic Analysis: Maximizing Lifecycle Profitability by Simulating Preliminary Design Solutions of Steam-Cycle Conditions

Many existing financial models for power plants chose a design based on the maximum thermal efficiency excluding the operational (OPEX) and capital (CAPEX) cost variations of technical factors. These factors are often fixed because including them in financial assessments can be burdensome and it is assumed that maximum efficiency equals maximum profit. However, this assumption may not always be right. Through 19,440 power plant steam-cycle design solutions and their associated OPEX and CAPEX, this study found the eighth most thermally-efficient solution to be $1.284 M more profitable than the traditional thermally-optimized design solution. As such, this paper presents a model incorporating technical factors through parametric estimation by minimizing the burden on decision makers. While this may reduce precision, it allows for quick cost assessments across differing design solutions. The data for model development was collected from a Korean-constructed, operational 600 MW coal-fired power plant in the Philippines. Using the Thermoflex software, nearly all design configurations' heat rate outputs are simulated. Profitability is then optimized based on the resultant design configuration's impact on revenue and CAPEX and OPEX costs. The simulation inputs included variables found to be most impactful on the steam generated power efficiency per existing literature. Lastly, the model includes an assessment of cost impacts among recent environmental regulations by incorporating carbon tax costs and a sensitivity analysis. The economic analysis model discussed in this paper is non-existent in current literature and will aid the power-plant project investment industry through their project feasibility analyses.112sciescopu

Schedule Modeling to Estimate Typical Construction Durations and Areas of Risk for 1000 MW Ultra-Critical Coal-Fired Power Plants

To date, Korea has built four 1000 MW gross-power ultra-critical coal-fired power plants. With the introduction of this new power plant type, there is a need for the development of best practices and lessons learned associated with its construction. One such need identified as a gap in literature is the early project planning estimation of project duration. To fill this research gap, this study utilized the Program Evaluation and Review Technique/Critical Path Method (PERT/CPM) and Monte Carlo simulations for estimating the appropriate construction duration at the planning stage of a new 1000 MW class coal-fired power plant project. Through the case study of the four Korean ultra-critical coal-fired power plants in operation, there was found an 85% likelihood of construction duration to be between 64 and 68 months. From interviews with subject matter experts, the most significant risk factors were found to be labor strikes and construction safety incidents. The findings within aid early planning decision makers by providing a replicable and accurate schedule estimation process. While the findings are based on Korean power plants, the results of this research can be used as a tool for coal-fired power plant construction schedule estimation worldwide.111sciescopu

Cost Estimate Modeling of Transportation Management Plans for Highway Projects, Research Report 11-24

Highway rehabilitation and reconstruction projects frequently cause road congestion and increase safety concerns while limiting access for road users. State Transportation Agencies (STAs) are challenged to find safer and more efficient ways to renew deteriorating roadways in urban areas. To better address the work zone issues, the Federal Highway Administration published updates to the Work Zone Safety and Mobility Rule. All state and local governments receiving federal aid funding were required to comply with the provisions of the rule no later than October 12, 2007. One of the rule’s major elements is to develop and implement Transportation Management Plans (TMPs). Using well-developed TMP strategies, work zone safety and mobility can be enhanced while road user costs can be minimized. The cost of a TMP for a road project is generally considered a high-cost item and, therefore, must be quantified. However, no tools or systematic modeling methods are available to assist agency engineers with TMP cost estimating. This research included reviewing TMP reports for recent Caltrans projects regarding state-of-the-art TMP practices and input from the district TMP traffic engineers. The researchers collected Caltrans highway project data regarding TMP cost estimating. Then, using Construction Analysis for Pavement Rehabilitation Strategies (CA4PRS) software, the researchers performed case studies. Based on the CA4PRS outcomes of the case studies, a TMP strategy selection and cost estimate (STELCE) model for Caltrans highway projects was proposed. To validate the proposed model, the research demonstrated an application for selecting TMP strategies and estimating TMP costs. Regarding the model’s limitation, the proposed TMP STELCE model was developed based on Caltrans TMP practices and strategies. Therefore, other STAs might require adjustments and modifications, reflecting their TMP processes, before adopting this model. Finally, the authors recommended that a more detailed step-by-step TMP strategy selection and cost estimate process be included in the TMP guidelines to improve the accuracy of TMP cost estimates

Balancing Project Financing and Mezzanine Project Financing with Option Value to Mitigate Sponsor’s Risks for Overseas Investment Projects

Major steel-making companies in Korea have recently been trying to advance into international markets for better profitability and new market shares. Even with strategic partnerships with local organizations, the Korean steel companies are facing and incurring significant risks which impact their ability to achieve a sustainable profit. The objective of this research is to determine an optimum combination of financial models, specifically Project (PF) and Mezzanine Financing (MF) with an option (convertible bond and bond with warrant). The results of the proposed model can lower interest rates of financing, thereby increasing the profitability of the project investors. To analyze the MF method’s effectiveness and proper use, the following three steps are applied: (1) Monte-Carlo Simulations (MCS) using Excel and @Risk software are performed for the Net Present Value (NPV) of the project and its volatility; (2) the Black-Scholes model (BSM) is applied to evaluate MF based on project value; and (3) interest rate of MF is calculated from its option value and is reapplied back to the NPV calculation of the project to determine the effects of MF. Assuming a 50% debt/equity ratio, these simulations were performed on five cases (50% senior debt, 0% MF for a base case then increasing MF and decreasing senior debt by 10% four times). Through this process, using the 10%, MF lowered the borrowing size by 20% and using MF continued to lower the borrowing size up to 40% borrowing when using 40% MF. Based on this result, the researchers support the use of MF to optimize Korean steel international financial models. The resultant data will serve as an effective method to increase net cash flow in overseas steel-plant project investments. This research was performed for a steel plant located in Iran as a case-study, but this optimized financing method using MF with an option product can be applied sustainably not only for overseas investment of steel plants but also any other business, such as oil & gas, power generation, and transportation industries.11Ysciessciscopu

Detail Engineering Completion Rating Index System (DECRIS) for Optimal Initiation of Construction Works to Improve Contractors' Schedule-Cost Performance for Offshore Oil and Gas EPC Projects

Engineering, Procurement, and Construction (EPC) contractors with lump-sum turnkey contracts have recently been suffering massive profit losses due to re-works and schedule delays in offshore oil and gas EPC megaprojects. The main objective of this research is to develop and implement a detail engineering completion rating index system (DECRIS) to assist EPC contractors to optimize fabrication and construction works schedules while minimizing potential re-work/re-order. This is achieved through adequate detail design development and results in minimizing schedule delays and potential liquidated damages (i.e., delay penalties). The developed DECRIS was based on findings from an extensive review of existing literature, industry-led studies, expert surveys, and expert workshops. The DECRIS model is an evolution, and improvement of existing tools such as the project definition raking index (PDRI) and front-end loading (FEL) developed specifically for the early stage of engineering maturity assessment (i.e., planning, basic design, and front-end engineering design (FEED)), prior to EPC projects. The DECRIS was evaluated and validated with thirteen sample as-built offshore megaprojects completed recently. When the DECRIS was applied to the completed projects post-hoc, a correlation (R-squared 0.71) was found between DECRIS scores and schedule/cost performances. This is much superior to the PDRI-Industrial model's correlation (R-squared 0.04), which was primarily devised for owners' basic engineering or FEED completion assessment. Finally, as a means of further validation, project schedule and cost performance of an ongoing project was predicted based on the correlations found on the thirteen completed projects. The resultant predicted schedule and cost performance was well matched with the current project performance status. Based on the accuracy of the DECRIS model found in the validation, said model is an effective prospective tool for EPC contractors to manage their engineering and procurement/construction risks during the initial detail design stages.11sciessciscopu