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feasibility studies header

Construction project feasibility studies

The old-fashioned traditional approach

Introduction

In the past feasibility studies for projects were produced on an ad hoc basis because a standardised approach has never really been laid down.

As a result various large organisations like the international oil companies and the British Airports Authority developed their own in-house systems to improve the process.

The old unstructured approach was fairly successful on many projects in the past but the complexity of the processes involved in a large modern project inevitably results in a quite high risk of failure when the project either runs very late or is wildly over budget or even worse just does not work.

The biggest projects on the plant are developed, managed and paid for by the major oil companies like Exxon and Chevron. So these companies have been at the cutting edge in the development of improved project processes and discarding this obsolete approach.

The Project Investment life-cycle

The investment life-cycle was normally considered to consist of 6 separate stages of development that could overlap. These were:

Stage 1 - Opportunity identification

Someone had a bright idea, and an initial assessment was made. If the opportunity stood up during an initial analysis than funds were commited for further investigation.

Sometimes pre-feasibility studies were commissioned - to reduce the cost of the initial assessment or to flesh out the project before further funds could be found.

This was always a very ad-hoc process and the lack of clarity of purpose during this stage was often a prime cause of good projects being abandoned before they had even been appraised properly.

Stage 2 - Appraisal

The appraisal stage normally included a comprehensive feasibility study that clearly identified all the development options and the one that was the most attractive.

The appraisal should have included:

At the end of this stage an interim go / no-go decision was normally made.

Investment planning

This stage would have included:

At the end of this stage anotherl go / no-go decision would have been made.

Asset creation

This stage would have included:

Operation

This involved operating and maintaining the asset to provided the benefits that were defined in Item 1 of the Appraisal stage.

Close-down

The end of the investment life-cycle might have been determined by:

Summary

The old approach to the  investment life-cycle stages are summarised in the following table:

Stage Processes Decision parameters

Opportunity identification

Identify business need
Define the opportunity
Undertake initial assessment
Decision to proceed

Capital cost estimate (+/- 30%)
Operating cost estimate
Cash flows
Preliminary risk review

Appraisal

Define objectives, scope and business requirement
Define project structure and strategy
Develop business case
Identify source of funds and cost
Carry out studies
Decision to proceed

Capital cost estimates (+ / - 15%)
Operating cost estimate
Cash flows
Identify the cost of the planning phase
Full risk review

Investment planning

Put funds in place
Obtain all consents and licences
Undertake the concept design
Preparation of the project plan
Final decision to proceed
Place any enabling contracts that are required

Cost of finance
Capital cost estimates (+ / - 10%)
Operating cost estimate
Cash flows
Identify the total cost of the asset creation phase
Risk review

Asset creation

Put project team in place
Detailed design
Place contracts
Construct
Commission and handover
Train operators and prepare for operation

Scope
Quality
Schedule
Capital Cost
Risk management

Operation

Operate
Take benefits
Maintain

Operating Cost
Maintenance cost
Revenue
Other benfits

Close-down

Shutdown
Sale or disposal

Shutdown costs
Staff redundancy cost
disposal cost / income

 

The Complexity was a nightmare!!

It is quite obvious that the above process can become so complex on many projects that an ad-hoc approach to project development will result in a high risk that either the project just does not work or overruns on time and / or cost.

It is also the case that most projects will require the input of specialist skills that are not available from the company or organisation that identified the opportunity.

Consultants and other contractors are then required and it then becomes very difficult to decide who does what and to ensure that all the best development options are thoroughly explored and compared with each other.

It is also the case that consultants are often asked to undertake the feasibility studies because they have the necessary skills. Objectivity can then easily be lost because the consultants will often have a vested interest in the adoption of one or more of the alternatives i.e. more work and more fees!

However the biggest danger in this approach was that the stages always overlapped and this resulted in the next stage starting before managers had all the facts at their disposal so that a clear-cut go or no-go decision could be made.

So the lesson is absolutely clear - identify the project stages and then finish each stage before deciding to invest more money in the next one.

In every project where this principle is not followed there will be late changes and consequent delays and cost overruns if not complete cancellation because the budget gets out of control!!

And what should have driven the whole process?

So the most important driver in the conventional project development process should have been that the cost and duration of the next stage of project development was known before funds are committed to the project.

This can be extraordinairly difficult for the inexperienced project manager and so it is common for cost and duration overruns to occur during the Appraisal, Investment Planning and Asset Creation stages.

Feasibility Study Jargon

You may need some help in understanding some of the Jargon that has been in common use in Project Development until now

I have included the following information to help in your study of other Feasibility Studies that you will come across. Just be warned that most of them will be very poor documents but the following notes should help you understand the various terms that are in common use..

Feasibility Study Terminology in Different Industries

Many industries use different terminology for the various aspects involved in a Feasibility Report or Feasibility Study.

The one common factor in all these approaches is that it is invariably a staged approach. This is always necessary because the cost of a Feasibility Study or Feasibility Report can be quite large even for a comparatively small study. So the staged approach is essential to allow the project to be cancelled or abandoned, as soon as it is apparent that it does not work, to minimize unnecessary costs.

If you examine the following table it will become obvious why so much confusion exists as professionals are always moving between Construction, Investment Planning and the Oil and Gas.

Feasibility Study Terminology in Different Industries

Step or Stage

Construction Industry Terminology

Investment Appraisal Terminology

Oil and Gas Terminology

1

Inception

Appraisal

Feasibility

2

Pre-feasibility

Appraisal

Concept

3

Feasibility

Investment Planning

Front End Engineering Development (FEED)

4

Project Plan

Asset Creation Design and Planning

Detailed Design

5

Detailed design and construction

Asset Creation and Operation

Construction and Operation

Other Terminology in common Use

Technical Feasibility or Technical Study

As its name suggests this was a study that concentrated on technical feasibility of a project and was often considered to be necessary to make sure that a technical innovation worked before undertaking a full-blown Feasibility Study.

Market Feasibility or Market Study

A Market Feasibility Study was one that concentrated on the size of the market for the product or service involved and was deemed to be necessary to make sure that the prices that could be charged for the product or service was realistic before undertaking a full-blown Feasibility Study.

Pre-Feasibility Study

This term was normally restricted to the construction industry but was also used occasionally in the Oil and Gas Industry. It invariably involved the consideration of the different Alternatives or Options that could have been used to achieve the Project Objectives.

Business Feasibility Study

In this type of study the resources of the sponsoring business may habe been limited and the Feasibility Study was then concentrated on the management capacity of the Sponsor.

Alternatively the Technical and Market Feasibility may have already been confirmed and the Feasibility Study was then restricted to Business Aspects such as the Forecast ROI (Return on Investment) or NPV (Net Present Value)

Feasibility Study Proposal or Proposal Study

Sometimes managers decide whether to proceed with a Feasibility Study by commissioning Proposals from Consultants to see whether the Consultants know more about their Business than they do. Needless to say this is very bad practice!

The Modern Approach is Best!!

I am sure that you will appreciated this by now!

 

If you want advice or help on any aspect of a Construction or Engineering Feasibility Study Project get in touch with me by filling in the Bronze Membership form here

Join the CeeVex Community

 

Best Regards

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PS - You also get my Skype address if you want to Skype me


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