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Glossary of Technical Terms Used in Cost Estimation & Control: Contract Target Cost ("CTC")

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Contract Target Cost ("CTC")

Contract Target Cost (CTC): A Key Metric for Oil & Gas Projects

In the complex world of Oil & Gas project management, ensuring successful delivery within budget is paramount. To achieve this, industry professionals rely on a variety of cost-control tools and metrics, one of which is the Contract Target Cost (CTC).

The CTC represents the negotiated costs for the original contract, including all definitized changes, but excluding the estimated cost of any authorized but unpriced changes. In essence, the CTC is the total estimated cost of the project at a given point in time, taking into account all known and priced variables.

Here's a breakdown of the key elements:

  • Negotiated Costs: This refers to the initial contract value and any subsequent changes that have been formally agreed upon and incorporated into the contract.
  • Definitized Changes: These are changes to the contract scope that have been definitively priced and included in the project budget.
  • Authorized, Unpriced Changes: These are changes that have been approved but are not yet formally priced. They are excluded from the CTC calculation as their cost is still uncertain.

The Relationship to the Budget at Completion (BAC):

The CTC is closely linked to the Budget at Completion (BAC), which represents the total estimated cost of the project at its completion. The CTC is generally considered to be equal to the BAC plus any management or contingency reserve that has been allocated to the project.

Why is CTC Important?

The CTC serves as a crucial benchmark for project management in the Oil & Gas industry for several reasons:

  • Cost Control: It provides a clear and measurable target for project costs, enabling teams to monitor progress and identify potential cost overruns early on.
  • Decision Making: CTC serves as a foundation for informed decision-making, allowing stakeholders to evaluate the impact of changes and prioritize resources accordingly.
  • Risk Management: By factoring in contingency reserves, the CTC helps to mitigate potential risks and ensures that project budgets are resilient to unexpected challenges.

Using CTC Effectively:

To maximize the effectiveness of CTC, it's essential to:

  • Maintain accurate records: Ensure that all contract changes and adjustments are documented and reflected in the CTC calculation.
  • Regularly review and update: The CTC should be reviewed and updated periodically to account for changes in project scope and costs.
  • Communicate transparently: Keep all stakeholders informed about the CTC and any changes that may affect it.

In Conclusion:

The Contract Target Cost (CTC) is a vital tool for managing the financial aspects of Oil & Gas projects. By providing a clear and measurable target for project costs, the CTC empowers stakeholders to make informed decisions and ensure successful project delivery within budget.

Test Your Knowledge

Contract Target Cost (CTC) Quiz

Instructions: Choose the best answer for each question.

1. What does CTC stand for?

a) Contract Total Cost b) Contract Target Cost c) Cost Tracking Calculation d) Cost to Completion

Answer

b) Contract Target Cost

2. Which of the following is NOT included in the CTC calculation?

a) Negotiated Costs b) Definitized Changes c) Authorized, Unpriced Changes d) Management Reserves

Answer

c) Authorized, Unpriced Changes

3. What is the main purpose of the CTC in Oil & Gas project management?

a) To track actual project spending b) To predict project profitability c) To establish a cost benchmark for the project d) To evaluate the performance of project managers

Answer

c) To establish a cost benchmark for the project

4. How does the CTC relate to the Budget at Completion (BAC)?

a) The CTC is always lower than the BAC. b) The CTC is always higher than the BAC. c) The CTC is generally equal to the BAC plus management reserves. d) The CTC is determined by subtracting the actual costs from the BAC.

Answer

c) The CTC is generally equal to the BAC plus management reserves.

5. Which of the following is NOT a benefit of using CTC in Oil & Gas projects?

a) Improved cost control b) Enhanced risk management c) Increased project profitability d) Informed decision-making

Answer

c) Increased project profitability

CTC Exercise

Scenario:

You are the project manager for a new offshore drilling platform construction project. The initial contract value is $100 million. After initial negotiations, there are two definitized changes, increasing the contract value by $5 million. There is also an authorized but unpriced change for a new safety feature, estimated to cost between $2 and $3 million.

Task:

Calculate the Contract Target Cost (CTC) for this project.

Exercice Correction

Here's how to calculate the CTC:

1. **Initial Contract Value:** $100 million

2. **Definitized Changes:** + $5 million

3. **CTC (excluding unpriced changes):** $100 million + $5 million = $105 million

**Note:** The authorized but unpriced change is NOT included in the CTC because its cost is uncertain. The CTC is a fixed target for known and priced costs.

**Therefore, the CTC for this project is $105 million.**

Books

  • Project Management Institute (PMI). (2017). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) (7th ed.). PMI. (Chapter 11: Cost Management) - This standard reference provides a comprehensive overview of cost management principles, including CTC concepts and applications in various industries.
  • Meredith, J. R., & Mantel, S. J. (2019). Project Management: A Managerial Approach (10th ed.). John Wiley & Sons. - Covers the fundamentals of project management, including cost management, and offers valuable insights into the importance of CTC for effective project control.
  • Cleland, D. I., & Ireland, L. R. (2016). Project Management: Strategic Design and Implementation (7th ed.). McGraw-Hill Education. - Provides a detailed understanding of project management principles, including risk management and cost control, where CTC plays a significant role.

Articles

  • "Cost Management in Oil & Gas Projects: A Comprehensive Guide." (2023). Energy Business Review. ** - This article delves into the challenges of cost management in oil & gas projects and discusses the crucial role of CTC in achieving cost-effective project delivery.
  • "Best Practices for Contract Target Cost Management in Oil & Gas Projects." (2022). Oil & Gas Journal. ** - This article explores best practices for implementing and using CTC effectively in oil & gas projects to improve cost control and project success.
  • "The Importance of Contract Target Cost in Risk Management." (2021). Project Management Institute Journal. ** - This article highlights the critical link between CTC and risk management, demonstrating how effectively managing CTC can mitigate risks and improve project outcomes.

Online Resources

  • Project Management Institute (PMI): https://www.pmi.org/ - Visit the PMI website for extensive resources on project management, including cost management techniques and best practices.
  • Society of Petroleum Engineers (SPE): https://www.spe.org/ - This organization offers valuable information on oil & gas project management, including cost management and contract target cost applications in the industry.
  • Oil & Gas Journal: https://www.ogj.com/ - This publication provides industry news, insights, and technical articles related to oil & gas projects, often featuring articles on cost management and CTC.

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