Glossary of Technical Terms Used in Cost Estimation & Control: Construction Cost

Construction Cost

Construction Cost: A Deep Dive into Oil & Gas Project Finances

In the oil & gas industry, "Construction Cost" refers to the total financial outlay associated with building and equipping a new facility or upgrading an existing one. This cost is a crucial aspect of project planning and budgeting, influencing everything from feasibility studies to project timelines and profitability.

Here's a breakdown of the key cost types related to construction in the oil & gas sector:

1. Appropriations:

  • Definition: The initial budget allocated to a specific construction project. This amount is typically approved by senior management and serves as the maximum allowable expenditure for the project.
  • Example: A $500 million appropriation for the construction of a new offshore drilling platform.

2. Commitment:

  • Definition: A legally binding agreement to incur a specific cost, often for materials, equipment, or services. Commitments are made throughout the construction phase and represent a future financial obligation.
  • Example: A $100 million commitment to purchase specialized drilling equipment for the platform.

3. Expenditure:

  • Definition: Actual payments made for goods, services, and labor during the construction process. Expenditures are incurred as work progresses and can include costs for materials, labor, equipment rentals, and permits.
  • Example: $20 million spent on the construction of the platform's foundation.

4. Estimate to Complete (ETC):

  • Definition: A projected cost estimate for finishing the remaining construction work. This figure is updated regularly as the project progresses and can be influenced by unforeseen events or changes in scope.
  • Example: An updated ETC of $150 million to complete the remaining construction and commissioning activities for the platform.

Project Cost:

It's important to note that construction cost is just one component of the broader "Project Cost." Other key cost categories include:

  • Engineering and Design: Costs for planning, designing, and engineering the project.
  • Procurement: Costs associated with sourcing materials, equipment, and services.
  • Construction Management: Costs associated with overseeing the construction process.
  • Commissioning and Start-up: Costs for testing, commissioning, and bringing the facility online.
  • Contingency: A reserve allocated to cover unforeseen costs and risks.

Factors Influencing Construction Costs:

  • Location: Remote or challenging environments typically lead to higher costs.
  • Technology: Advanced technologies and specialized equipment can increase costs.
  • Regulations and Permits: Environmental and safety regulations add to project costs.
  • Market Fluctuations: Price fluctuations for materials, labor, and equipment can impact project budgets.
  • Project Scope: Larger and more complex projects generally have higher construction costs.

Conclusion:

Construction cost is a critical element in the success of oil & gas projects. Understanding the different cost types, their interplay, and the factors influencing them is essential for effective project planning, budgeting, and financial management. By closely monitoring and managing these costs, companies can ensure project profitability and maintain a strong financial footing in a challenging and competitive industry.


Test Your Knowledge

Construction Cost Quiz: Oil & Gas Project Finances

Instructions: Choose the best answer for each question.

1. What is the initial budget allocated to a specific construction project called?

a) Commitment

Answer

Incorrect. A commitment is a legally binding agreement to incur a specific cost.

b) Expenditure
Answer

Incorrect. An expenditure is an actual payment made for goods, services, and labor.

c) Appropriation
Answer

Correct! An appropriation is the initial budget allocated to a project, typically approved by senior management.

d) Estimate to Complete (ETC)
Answer

Incorrect. An ETC is a projected cost estimate for finishing the remaining work.

2. Which of the following is NOT a key category within "Project Cost" besides construction cost?

a) Engineering and Design

Answer

Incorrect. Engineering and Design are essential components of project cost.

b) Procurement
Answer

Incorrect. Procurement is a significant cost category in projects.

c) Market Fluctuations
Answer

Correct! Market fluctuations influence overall costs but are not a separate cost category within "Project Cost".

d) Commissioning and Start-up
Answer

Incorrect. Commissioning and Start-up are essential phases with associated costs.

3. What does "ETC" stand for in the context of construction cost?

a) Estimated Time of Completion

Answer

Incorrect. ETC refers to cost, not time.

b) Estimated Total Cost
Answer

Incorrect. ETC specifically refers to the remaining cost to complete a project.

c) Estimate to Complete
Answer

Correct! ETC stands for Estimate to Complete and represents the projected cost for finishing the remaining work.

d) Estimated Total Construction
Answer

Incorrect. ETC focuses on the remaining cost, not the entire construction cost.

4. Which factor is LEAST likely to influence construction costs?

a) Location

Answer

Incorrect. Location significantly impacts costs due to accessibility, infrastructure, and labor availability.

b) Technology
Answer

Incorrect. Advanced technology often requires specialized equipment and expertise, driving up costs.

c) Weather Patterns
Answer

Correct! While weather can disrupt schedules, it is not a direct cost factor like location, technology, or regulations.

d) Regulations and Permits
Answer

Incorrect. Environmental and safety regulations add complexity and cost to projects.

5. What is the main takeaway from the text regarding construction cost management in the oil & gas industry?

a) Construction cost is the only relevant factor for project success.

Answer

Incorrect. Construction cost is a significant but not the sole determinant of success.

b) Construction cost is a minor component of overall project cost.
Answer

Incorrect. Construction cost is a major and crucial part of project cost.

c) Understanding and managing construction cost is essential for project profitability.
Answer

Correct! The text emphasizes the importance of understanding and managing construction costs for financial success.

d) Construction cost management is irrelevant in a competitive industry.
Answer

Incorrect. Effective cost management is crucial for success in any industry, especially competitive ones.

Construction Cost Exercise:

Scenario:

You are a project manager for an oil & gas company, overseeing the construction of a new pipeline. Your initial appropriation for the project is $250 million. You've already made commitments for $100 million in materials and equipment. To date, you've incurred expenditures of $75 million.

Task:

  1. Calculate your current Estimate to Complete (ETC).
  2. Explain how you would use this information to manage the project budget effectively.

Exercice Correction

1. **ETC Calculation:** - Initial Appropriation: $250 million - Commitments: $100 million - Expenditures: $75 million - ETC = Appropriation - Commitments - Expenditures - ETC = $250 million - $100 million - $75 million - **ETC = $75 million** 2. **Budget Management:** - **Monitoring:** Regularly track commitments and expenditures against the appropriation and ETC. - **Contingency:** Allocate a portion of the ETC for unforeseen costs or risks. - **Cost Control:** Implement measures to minimize potential cost overruns, like: - Negotiating favorable contracts with vendors. - Optimizing construction methods and materials. - Identifying and addressing potential risks early. - **Reporting:** Provide clear and regular updates on the project's financial status to stakeholders. By carefully managing the ETC, you can ensure the project stays within budget and prevent costly overruns.


Books

  • Construction Cost Estimating for Building and Civil Engineering Projects: This book provides a comprehensive guide to cost estimation techniques, including those relevant to oil & gas projects. It covers cost elements, pricing models, and risk assessment.
  • The Oil & Gas Industry: A Handbook: This handbook offers a detailed overview of the oil & gas sector, including a chapter on project finance and cost management. It provides valuable insights into the specific challenges and factors influencing construction costs in this industry.
  • Cost Engineering: A Practical Guide for Engineers and Managers: This book provides a broad understanding of cost engineering principles, applicable to various industries including oil & gas. It covers cost estimation, control, and risk analysis.

Articles

  • "Construction Cost Trends in the Oil & Gas Industry" (Source: Industry Publications like World Oil, Oil & Gas Journal, or SPE): These articles often analyze recent trends in construction costs and highlight the factors driving these changes.
  • "Managing Construction Costs in Challenging Oil & Gas Projects" (Source: Project Management Institute (PMI) Journal or similar publications): These articles delve into best practices for managing construction costs effectively in complex projects.

Online Resources

  • Cost Engineering Council (CEC): The CEC offers resources, publications, and training materials related to cost engineering, including a focus on the oil & gas sector.
  • Society of Petroleum Engineers (SPE): The SPE website features articles, reports, and case studies on cost management in oil & gas projects.
  • Oil & Gas Industry Associations: Associations like the American Petroleum Institute (API) and the International Energy Agency (IEA) often publish reports and analyses on cost trends and challenges in the oil & gas industry.

Search Tips

  • Use specific keywords: "Oil & Gas Construction Cost", "Construction Cost Estimation Oil & Gas", "Project Cost Management Oil & Gas".
  • Combine with location: "Construction Cost Oil & Gas [Specific Region]" (e.g., North Sea, Gulf of Mexico).
  • Specify project type: "Construction Cost Offshore Platforms", "Construction Cost Gas Pipelines".
  • Include cost trends: "Construction Cost Oil & Gas Trends", "Construction Cost Inflation Oil & Gas".
  • Focus on specific companies: "Construction Cost [Company Name] Oil & Gas Projects".
Similar Terms
Oil & Gas Processing
Cost Estimation & Control
Project Planning & Scheduling
Budgeting & Financial Control
Oil & Gas Specific Terms
General Technical Terms
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