W4_YAW_Contract Risk Mitigation


1.      Problem Definition.

We have been conducting bidding for site assessment work in offshore area. We plan to start this work in April 2014 until July 2014 (4 months duration). Due to the location of the work is at offshore area, this work is very susceptible to weather condition. So that, during negotiation meeting, the prospective winner bidder proposed 2 options for its offer. First option is IDR 1,600,000,000 without condition; or second option is IDR 1,400,000,000 + IDR 10,000,000/day stand by rate if offshore survey could not be conducted due to a bad weather.

2.      Identify the Feasible Alternative.

Facing to this case, we have to decide which proposal option is accepted, IDR 1,600,000,000 without condition (option1);  or   IDR 1,400,000,000 + IDR 10,000,000/day stand by rate (option 2).

3.      Development of the Outcome for Alternative.

It is clearly that if we accept first option, then contract price will be IDR 1,600,000,000.

But, what about second option?  What is the standby cost due to bad weather?  For calculating the standby cost, we need to know the number of bad weather days during period of work. This number may be estimated by using historical weather data. The following table contains weather data for past five years from our marine division:

W4_YAW_1

By using Monte Carlo simulation, it is forecasted the total bad weather days for each month in 2014, at P70 as follows:

W4_YAW_2

Therefore, stand by cost is estimated as 9 days * IDR 10,000,000 = IDR 90,000,000, so that the price for second option is IDR 1,400,000,000 + IDR 90,000,000 = IDR 1,490,000,000.

4.      Selection of Criteria.

Of course, the main criterion is the lower cost. Another criteria is comes from our bidding procedure, namely the price should be lower than our owner’s estimation (OE) of IDR 1,750,000,000.

5.      Analysis and Comparison of the Alternative.

Below table contains total cost for both options:

W4_YAW_3

6.      Selection of the Preferred Alternative.

Based on comparison table above, we decided to proceed with option 2, IDR 1,400,000,000 + IDR 10,000,000/day stand by rate.

7.      Performance Monitoring and the Post Evaluation of Result.

Monitoring and supervision should be conducted strictly during the execution of the work, especially in relation to the determination of whether a day is bad weather or not.

References:

  1. Microsoft.com. (2014). Introduction to Monte Carlo simulation. Retrieved from  http://office.microsoft.com/en-us/excel-help/introduction-to-monte-carlo-simulation-HA001111893.aspx
  2. Bidding Document. (2014). Site assessment project. PT. ABCD. (Disguised).
  3. Sullivan, W.G., Wicks, E. M., Koelling, C. P. (2012). Engineering Economy page 502 to 506. Prentice Hall. Fifteenth Edition.
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4 thoughts on “W4_YAW_Contract Risk Mitigation

  1. WOW!!! Awesome Pak Yosep…… Another winner!!!!

    How about a THIRD option? Why not have them base their bid on the P50 value and then SHARE the risk?

    IF there are MORE weather days than P50 YOU owe THEM 10,000.000 standby time. On the other hand if there are LESS than P50 rain days, then THEY owe YOU a credit of 10.000.000 per day?

    That is exactly how we use this tool/technique in Alaska to deal with a risk over which NEITHER party has any control over. SHARING risks like this which neither part has control over, is the only fair and equitable way to manage something like this.

    Why not at least propose it to them? If nothing else, you will soon find out if they 10.000.000 per day was a “real” number or a padded value. How? If they object to using that value as a deduct then you will know they were gaming the system.

    BR,
    Dr. PDG, Jakarta, Indonesia

  2. Pingback: W4_MFO_Contract Risk Mitigation For Topographic Survey – EMERALD AACE 2017 – WEEKLY BLOG

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