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29thJune
Cost Management: The Importance of Close-Out Reports

Most of you know that turnarounds are major events for refineries and other petrochemical facilities. They typically cost significant sums of money to execute (capital expense), but also a major loss of revenue when the facility is shut down (operational expense).

As a result, these turnaround projects are usually schedule driven, where the only priority is to get the facility up and running again, rather than keeping control of spent cost. But is this really the best way to go forward or can cost management result in higher cost efficiency when you take all aspects into account?

Why turnarounds?

A turnaround (in the context of the process industry) is defined by the American Petroleum Institute as “a planned, periodic shutdown (total or partial) of a process unit or plant to perform maintenance, overhaul and repair operations and to inspect, test and replace process materials and equipment”. Refineries and other petrochemical facilities that run on a continuous rather than a batch production cycle must, every few years, shut down operations to provide access to the production units in order that essential maintenance, modification, and inspection work can be carried out that could not be done while the units are in operation.

Triple Constraint

Historically, there was a tendency among operating companies to view turnarounds as an inevitable and necessary evil that should be done as quickly as possible to minimize the loss of revenue. But is this not a short-term solution? As shown in Figure 1, the Devil’s Triangle, it can be seen that there is a direct relationship between the cost, time and quality of each (turnaround) project.

 

Figure 1. Devil’s Triangle (also known as the Triple Constraint)

According to this triangle, when you just focus on time, as in most schedule driven turnaround projects, the quality of the project outcome will likely be affected and the cost will increase. But if you just focus on quality, both cost and time will escalate. Therefore, in order to improve turnaround efficiency, you need to consider the cost estimation for the project, the estimated schedule, and the efficiency of planning and execution of the turnaround. Cost management can help to find this optimum balance between these aspects.

Cost Management

Cost management is involved in the following three topics:

  • Cost control: it is important that adequate change management is in place so that changes in project scope can be assessed, and the project estimate is updated accordingly.
  • Planning: information from the project plan including the schedule and key milestone dates affecting the estimate.
  • Risk analysis: every estimate is a prediction of probable costs and therefore involves uncertainty and risk. Contingency is typically included in an estimate to cover the costs associated with this uncertainty.

Therefore when applying proper cost management for turnaround project, higher cost effectiveness can be achieved resulting in a cheaper long term solution instead of the short term schedule-driven approach.

 

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