Chunnel project project cost management

Project Management in the Chunnel Tunnel Project

1. Cost Management in “The Chunnel Project” Submitted By: Group-04 ( Section-1 ,Batch-17 ) Group Members: PP21016 - Naveen Patange PP21017 - Ravi Kumar Srivastava PP21018 - Sushi Sathish PP21019 - Rana Sagar Kamaleshchandra PP21020 - Nitin Sharma Dean Professor : Dr.Tapash Ganguli PEM P A28 - Fundamentals of Project Management 1

2. Fig 1: A Cross section view of Channel Project. 2

3. What is “COST”? A cost is an expenditure required to produce or sell a product or get an asset ready for normal use. In other words, it’s the amount paid to manufacture a product, purchase inventory, sell merchandise, or get equipment ready to use in a business process. Costs  commonly incurred on a  construction project can be categorized as hard  costs  (those related to physical  construction ) and  soft costs (those that are not instantly visible or tangible). What is “Project Cost Management”? P roject cost management is the process of estimating, budgeting and controlling costs throughout the project life cycle, with the objective of keeping expenditures within the approved budget. For a project to be called successful, it’s necessary that it delivers on the requirements and scope. its execution quality is of a high standard. it’s completed within scheduled time. it’s completed within budget. Hence, project cost management is one of the key pillars of project management and is relevant for a big construction Project. It helps to create a financial baseline against which project managers can benchmark the current status of their project costs and realign the direction if needed. 3

4. Why is “Project Cost Management” Important? The importance of cost management is easy to understand. The budget will determine critical decision points. Without a predefined budget, it becomes impossible to assess whether we are progressing in the right direction once the project is underway. In large Organizations, the scale of this problem is further magnified due to concurrent running of multiple projects, change in initial assumptions and the addition of unexpected costs. That’s where cost management can help. By implementing efficient cost management practices we can: Set clear expectations with major stakeholders Control scope creep due to transparencies established with the customer. Track progress and respond with corrective action at a quick pace. Maintain expected margin, increase ROI, and avoid losing money on the project. Generate data to benchmark for future projects and track long-term cost trends. 4

5. Complexity of the project ( Mega projects). Scale and scope of construction (Major Deviations). Market conditions (Demand). Method of construction (Feasibility). Site constraint (Topography). Client financial position (Financial Organization). Buildability (Assessment of Design / Achievability). Location of the project.(Services available in advantage to undertaken Project). Cost of a Project Mainly Depends on? 5

6. Cost Management in Inception Phase Wh at is Inception phase of a Construction Project? Inception Phase. As the first of the four phases in the project lifecycle, Inception is about understanding the project scope and objectives and getting enough information to confirm that the project should proceed - or not. Project Inception Phase in Chunnel Tunnel project. During the inception phase , The discussion focused on the historical background of the project, its overall objectives ,political climate and pre feasibility studies. The Initial scope of the channel was to create a fixed transportation link between England and France in order to boost the Freight and passenger activities between both countries. The Channel Tunnel Project was based on Build-Operate-Transfer (BOT) type of contract. 6

7. The project was awarded to Channel group/France Manche (Eurotunnel) in 1986 by French and British gov. Their initial cost estimates were approx. £ 4.8 billion. For 32-mile double rail tunnel. The Project was not funded by the governments but rather Financing was done via equity and loan capital market by the Private Players and a consortium of 206 banks worldwide raised the loans for the project. Eurotunnel has secured a concession agreement for a period of 55 years. Any delay or cost increase throughout the project life would impact the planned cash flow for that period. Starting from the Initial phase, there was a scope increase of $200 million for air conditioning systems of the tunnel, which was not considered in the initial Scope. Cost Management in Inception Phase 7

8. Euro tunnel was responsible for roughly 70% of cost overruns on original contract and TML was responsible for remaining 30% capped at a max 6% of total cost. Later a revised agreement was made as per which ,Eurotunnel was responsible for £ 1.8 billion and TML was responsible for 30% of everything above that figure. Delay in IGC (Inter Governmental Commission) approvals, for change in the passenger door size as It was a safety concern, TML’S manufacturing cost increased from $9 million to $70 million for the doors. Cost Management in Inception Phase 8

9. In inception phase, Eurotunnel entered in a construction contract with TML in 1987 having 3 cost categories, They were: Cost-Plus (Fixed basis) : A cost-plus-fixed-fee contract is a contract that provides for payment to the contractor of a negotiated fee that is fixed at the inception of the contract. The fixed fee does not vary with actual cost, but may be adjusted as a result of changes in the work to be performed under the contract. For Chunnel tunnel, Target cost was done on a cost-plus (fixed basis), with a target cost above or below which there would be a sharing of difference. Lump Sum : A lump sum contract is a construction agreement in which the contractor agrees to complete the project for a predetermined, set price. Under a lump sum agreement, also known as a “stipulated sum,” the contractor submits a total project price instead of bidding on each individual item. Lump sum contract was awarded for terminal ,and for mechanical and electrical works for the Chunnel tunnel Cost Management in Inception Phase 9

10. Cost plus percentage fee: Cost plus percentage contracts are invoices that charges the cost of the materials plus a percentage of the total materials used .i.e. charges for the cost of the materials plus a percentage to cover the operating overhead of the contractor as well as their time. The procurement contract for rolling stock and associated major equipment was to be procured on a cost-plus percentage fee basis for the Chunnel tunnel project. Cost Management in Inception Phase 10

11. Inception Phase Rating The Inception Phase receives a score of 2/5 meaning poor. Poorly defined scope and the contracts used were lacking in incentive for the seller. Short time frame, leading to poor estimates of budget and schedule as well as poor choice of contracts. The three construction segments, a Cost Plus Fix Fee (CPFF), lump sum, and Cost Plus Percentage of Cost (CPPC) contract were used even though the scope was not well defined. 11

12. Development Phase During the development phase, everything that will be needed to implement the project is arranged. Potential suppliers or subcontractors are brought in, a schedule is made, materials and tools are ordered, instructions are given to the personnel and so forth. It was one of the most important phase, cause of it’s sheer size and it’s complexity. Being it a enormous project, The project has no hope of being profitable. 12 Pic 3: The Tunnel Boring Machine(TBM) for the UK’s Side

13. The Scope Creep played a large part in the substantial increase in the initial cost estimation and failing to meet the project schedule. Scope wasn’t fully assessed and proper precautions to prevent scope creep were not put in place. The treaty signed & setting up of IGC(Intergovernmental Commission) to coordinate the approach, construction, operation and safety of the tunnel resulted in total loss of control, eventually increasing cost Cost is one of the most difficult aspects to plan for when a project is in huge magnitude. Cost Management in Development Phase 13 Pic 4: The movement of breakthrough in December 1990

14. Chief Project executive of Eurotunnel from 1990-93 stated “ central problems were the banks” Because, they were involved early in the renegotiations of the contract. The banks decided to come up with different method of compensation for different part of the work Difficulties in cost planning during the development phase was blamed partially for the 2.25 billions USD of claims was brought against the Eurotunnel by the contracting company. The claims said that the fixed equipment would cost £1.27 billion, as opposed to the £620 million original total, and that Eurotunnel should pay this sum plus a management fee of £160 million. 14 Pic 5: The Cross section of The Tunnel Cost Management in Development Phase

15. The banks were given too much leeway and control in this project. The deadline to have the extra £2 billion raised, forcing the imminent rights issue to be put back, and still Eurotunnel struggled to back the project. Generally when the banks are involved they try to minimize risk, which is good thing but if taken into extreme(like Channel Project), all the efforts to save money and minimize risk to the banks are thrown out the window because of things like the claim and settlement went against Eurotunnel It was thought that the risk was thought to be on the banks’ side of development phase of the project, but in hindsight, the banks plans backfired badly The court ruled in favor of the contractors’ claim and eventually casting a lot of money to the project. Cost Management in Development Phase 15 Pic 6:The Cutterhead of TBM from UK’s side

16. Development Phase Rating The Development Phase receives a score of 2/5 meaning poor . Scope Creep Played a large part in the substantial increase from its initial cost estimates IGC was allowed to have a scope control without the ability to approve additional funding At times an over management of risks led to unnecessary expenses which could have been avoided Based on the above mentioned factor, cost management is placed at the lowly rating of very poor. 16

17. Cost Management in Implementation Phase Started in the 4 th Quarter of 1987 & Ended on December 15, 1994, with the project being handed over fully operational(1997) The actual contractor was a consortium of construction companies, some of which were investors (through joint ventures) with the original CTG/FM winner. These conflicts of interest would cause problems as the project was implemented. When the construction contract was awarded, the cost estimate was US$4.3 billion and the original completion date was May 15,1993. When the implementation phase was completed, the project was 19 months late and had cost overruns of some US$3 billion. CTG/FM, under pressure from the French and British governments to control costs, insisted that TML, issue fixed price contracts to their subcontractors and vendors. Since underground construction is rife with changed conditions, the use of fixed price contracts (rather than some sort of cost plus incentive fee)set the stage for a contentious relationship between the subcontractors and TML , and CTG/FM. 17

18. These change orders, although many were resolved in favor of CTG/FM, nonetheless caused cost escalation. More importantly, as will be shown in the closeout phase, the impact of cost overruns was nowhere near as serious as the impact of delays to the functional completion of the project. TML was attempting to use fixed price contracting methods when scope was not sufficiently defined. Another example was the fact that the original consortium (CTG/FM) consisted of construction companies and bankers whose primary objective was to make money on the construction and not on the operation. Remembering that this was a 55 year BOT, it may have been better to structure the consortium so that the construction was done at cost, and the only profit would come from completing the project at the lowest possible cost, within the framework of the quality and safety constraints established by the govt. of France and Britain. Cost Management in Implementation Phase 18

19. The Implementation Phase receives a score of 2/5 meaning average. Cost overruns. More importantly the lost revenue and carrying cost of the project during the 19 month period. The impact of cost overruns was nowhere near as serious as the impact of delays to the functional completion of the project. Implementation Phase Rating 19

20. Project Closure involves handing over the deliverables to your customer , Passing the documentation to the business, cancelling supplier contracts, releasing staff and equipment, & informing stakeholders of the closure of the project. Cost Management in Closure Phase 20 T H E C L O S U R E P H A S E

21. What happens in Closeout Phase ? Review Change Orders and Modifications Ensure Order Specifications Are Met Present to Client Address All Client Feedback Close Any Open Contracts Gather Project Takeaways for Future Learning (Archive) What happened in the project ? Scope modified at the end schedule of the project (air conditioning requirement as per IGC board) , project implementation delayed leading to disruption of the closing schedule. Delay due to settling key contract disputes Late delivery of the project Numerous litigations and no source of income from tunnels operation due to delays. Cost Management in Closure Phase 21

22. IMPACT Huge scope modification in the end of the project led to cost as well as time overruns. Additional Expense incurred in involvement of arbitration bodies (International Chamber of Commerce) Impacted the projects overall ROI(Return On Investment) - stakeholders were not happy. The original cost estimates eventually got increased to £ 9.5 billion from £ 4.8 billion. McKinsey & Company (Management Consulting Company) has estimated that bridges and tunnels incur an average 35 percent cost overrun. Regardless of management competence and the financial strength of the contractor, accurate cost estimation at an early stage is the key to avoid cost overrun in projects. Cost Management in Closure Phase 22

23. Closure Phase Rating The Closeout Phase receives a score of 2/5, meaning poor. Lack of Cost Analysis. Poor procurement management. Low ROI (Return on investment) from its operation. Loss of Focus from the actual goal. 23

24. Lesson Learned? Enough time should have been provided for finalization of details in Initial Scope Approved design draft should compliment the original design IGC should have given the approval for both scope control and additional funding Banks shouldn’t be allowed to control the project as much as it is in the case of Chunnel Project Use of old equipment effectively instead of using sophisticated and advance equipment Fixed price contract shouldn’t be used in this case which would have resulted in less Number of Claims A contingency should have been set up to cover the “unknown unknowns” Original consortium(CTG/FM) which consisted of bankers and companies should have focused more on making money on the operation instead of construction 24

25. References... https://www.bigrentz.com/blog/project-closeout https://www.gihub.org/resources/showcase-projects/the-channel-tunnel/ https://www.myaccountingcourse.com/accounting-dictionary/cost https://booksc.org/book/72989041/21dca9 https://www.mckinsey.com/business-functions/operations/our-insights/megaprojects-the-good-the-bad-and-the-better https://youtu.be/uRdqoQnQ6Pk 25