ASSET LIFE CYCLE, COST

ESTIMATING AND THE CCRG

Alberta Assessors’ Association

2015 Pre-Conference Course

Salvador Hernandez, Verus Capital Assessments

Dan Driscoll, A.M.A.A.
John Elzinga, A.M.A.A.
Carol Zukiwski, Reynolds Mirth Richards & Farmer LLP
1
 INTRODUCTION

• Introduce panel

• Review course outline

• Review course objectives

• Identify industry terminology and practice

• Show how the assessment legislation overlays industry

terminology and practice

2
 CCRG BACKGROUND

• Previous document Special Purpose Property

Assessment Guide (SPAG)

• SPAG in use under MTA

• CCRG Working Group 1999 - ______

• CCRG is a regulation

• When is the CCRG used?

• Legislation chart - handout

3
 CCRG OVERVIEW –
Basic Principles
• Dan to work on hypotetical project with multiple
components hitting different assessment methodologies:
Linear properties, buildings, land, M&E, CCRG

4
 CCRG OVERVIEW –
Basic Principles
• Terminology – included costs – excluded costs

• The term non-assessable can have multiple meanings:

(i) s. 298, (ii) s. 291, and (iii) excluded cost under the
CCRG

• Project cost

• Construction cost

5
 CCRG OVERVIEW –
Basic Principles
• How the CCRG is laid out

• Obligation on property owner to prove claims for

excluded costs

• Limited number of categories of excluded costs

6
 CCRG OVERVIEW –
Main Areas of Dispute
• Section 1.000 – costs to be included

• Do the project costs include feasibility studies?

• Do the project costs include those incurred by the general

contractor(s) plus those incurred by the owner?

• Do the project costs include the cost of bidding and

tendering?

• Do the project costs include the cost incurred by the owner

to supervise the contractor, or to do quality control in the
factory?
7
• When do construction costs start being incurred?

• What is a construction cost?

 CCRG OVERVIEW –
Main Areas of Dispute
• Section 2.000 – costs to be excluded

• Is there a section which allows for the exclusion of the cost

of the DBM and EDS?

• Are all design changes or re-work an excluded cost?

• At what point in time do you measure an abnormal cost?

• What is the benchmark of a normal cost against which an

abnormal claim is made?

• Do you measure abnormal claims against what is typical for

the municipality? Or do you measure against what is typical 8
or normal in the Edmonton area?

• Are all delays or schedule slippage an abnormal cost?

 ASSET LIFE CYCLE –
Expenditures Over Time
Capital Expenditure Operational Expenditure
Business Concept Definition Operations Life of
Execution
Planning Selection Optimization Handover the Asset

Early Advanced Appropriation Assessment Tax Bills

Funding Commitment For Expenditure Tax EBITDA
Notice

9
 ASSET LIFE CYCLE –
Phases Over Time
Project Life Cycle – Major Project Phases

Field
Execution

Early Funding 2%
Optimizations 3%
Engineering 6%
Procurement 32%
10
Field Execution 53%
C&SU 4%
 ASSET LIFE CYCLE –
Phases Over Time

CEO’s Vision What Operations What Major Projects What Procurement CEO promise
Understood asked EPCs Purchased to
shareholders

11

What was documented What Operations What Owner paid for EPC’s support What the company
Received really needed
 DBM / EDS / FEED
• Design Basis Memorandum (DBM) – FEL 1 or Pre-Feed

• Defines basis for further development of a main idea. Possibly includes a narrowed
down list of alternatives previously evaluated as well as descriptions of main
processes with high-level flow diagrams and general and/or special conditions for
continuous operations of facility. Results in a definitive alternative. Class 5 Estimate.

• Engineering Design Specifications (EDS) – FEL 2

• Includes design specificacions to increase definition what project should do/be.

Opportunity to optimize selected alternative. Includes preliminary plot plan,
preliminary size equipment list and major equipment list. Class 4 Estimate.

• Front End Engineering Design (FEED) – FEL 3

• The purpose is to further define project facilities to produce the Project 12

Specifications and Standards, and the Job Specification that serve as the basis for
Detailed Engineering. Deliverables of FEED are used to prepare bid/tender
packages for long leads items. Class 3 Estimate.
 PROJECT MANAGEMENT
TEAM
(Owner’s Team)
• Purpose

• To build a team with the range and reach of skillsets in key competencies required to
meet project expectations. This group as a whole is responsible for overall project
performance.

• Expectation - Designed to ensure alignment in 3 dimensions:

•Vertical among company, project team & 3rd parties: contractors and subcontractors.

•Horizonal among business functions, technical, and operational organizations.

•Time to maintain continuity of key personnel throughout project life cycle. 13

 PROJECT MANAGEMENT
TEAM
(Owner’s Team)
• Management PMT Support
Vicepresidents Engineering Disciplines Human Rresources
Project Champions Scheduling, Planning Information Technology
Gatekeepers Quality, Risk Finance
Executives Cost Estimating Media Relations
Project Advisors Forecasting Strategy
General Managers Change Management Accounts Payable
Project Directors Business Services Real Estate
Area Directors Procurement Travel Coordination
PMO Construction Security
Procurement Directors C&SU Career Development
Executive Assistants Health, Safety & Envir. Regulatory Compliance
Admin Assistants Document Control Shareholders Relations 14

• 15% 60% 25%

 TRANSITION TO
ASSESSMENT
• Assessors are concerned with CapEx (project costs)

• Municipalities are concerned with OpEx

• OPEX may be applicable for Schedule D additional

depreciation.

OpEx is the source of tax bills and a source to finance

municipalities expenditure operational and growth needs.

15
 ASSET LIFE CYCLE –
Expenditures Over Time
CCRG Overlay on Project Phases

Pre-Construction Cost Construction Cost Post-Construction Cost

Field
Execution

Early Funding 2%
Optimizations 3%
Engineering 6%
Procurement 32%
16
Field Execution 53%
C&SU 4%
 ASSET LIFE CYCLE –
Expenditures Over Time – Assessment Timeline
Capital Expenditure Operational Expenditure
Business Concept Definition Operations Life of
Execution
Planning Selection Optimization Handover the Asset

Early Advanced Property Appropriation Multiple CCRG Cost Schedule D Tax Bills
Assessment
Funding Commitment Tax For Expenditure Assessor Rendition EBITDA
Tax
Rendition Reviews
Notice
Program

17
 CCRG ISSUES WHICH ARISE

• When does construction begin? When do construction

costs start?

• What are the differences between a feasibility study and

the DBM and EDS?

• Does the CCRG view of a construction cost differ from

industry’s view?

• Are the costs of bidding and tendering an included cost?

18
 CCRG ISSUES WHICH ARISE

• CARB Decision – Canadian Natural Resources Limited v

Regional Municipality of Wood Buffalo, CARB 001-2014

• “[182] The municipality understood the CARB’s decision

to interpret “construction costs” to mean costs with a
sufficient nexus to the construction of bricks and mortar
or that facilitates construction of machinery and
equipment. The municipality also believed the CARB’s
order supported the view that abnormal costs, including
productivity losses were not measured against what was
typical or normal in central Alberta or Edmonton, but
were measured against what was typical or normal within
the municipality.” 19
 CCRG ISSUES WHICH ARISE –
Owners Costs
• Term used by industry but does not appear in the CCRG

• Can be a “catch all” category for the owner to record costs related to:

• Home office overhead for PMO, IT, Finance, HR, Corporate

Support, Media PR

• Perks and trinkets

• Bidding and tendering

• Parties and celebrations, recognitions

• Supervision of the general contractor(s)

• Material and Equipment surplus/damaged

20
• Quality control in the factory

• PMT – Non dedicated personnel (40% of PMT)

 CCRG ISSUES WHICH ARISE –
DBM/EDS
• Design Basis Memorandum (DBM)

• Typical contents – COAA document

• Engineering Design Specifications (EDS)

• Typical contents – COAA document

• Front End Loading (FEL) / Front End Engineering Design (FEED)

• Are the costs to prepare the DBM/EDS included or

excluded?

21
 GROUP EXERCISE
Owners Costs / FEED
• Working at your table, please consider whether the list of
items shown on slide 16 (owners costs) are: (i)
construction costs – refer to CCRG section, and (ii)
which costs are excluded costs – and identify the
applicable CCRG section which could allow for their
exclusion

• Complete your answers in the template provided

22
 GROUP EXERCISE
Owners Costs / FEED – De-brief

• Exercise De-Brief

23
ASSET LIFE CYCLE

24
ESTIMATE CLASSIFICATION &
TYPES OF CONTRACTS

25
ESTIMATE CLASSIFICATION &
TYPES OF CONTRACTS

26
 ESTIMATE CLASSIFICATION &
TYPES OF CONTRACTS

Fixed Price Cost Plus Incentive Cost Reimbursable

Lump Sum Time & Materials Unit Rates

100%

Contractor’s Risk 0%

100%

Owner’s Risk
0%
27
Few Change Orders Max Change Orders
ESTIMATE CLASSIFICATION &
TYPES OF CONTRACTS

28
 CCRG ISSUES WHICH ARISE
Cost Estimating
• Information found on the Authorization for Expenditure (AFE)
is useful to understand the scope of the work. An AFE is
typically a class 3 estimate:
• Known technology industry accuracy -20% + 30% (Power)

• New technology industry accuracy –30% + 50% (Oil sands)

• CCRG requires final project costs, not even class 1 estimates

• Assessors need to ask for final project costs, commonly

called by industry: Total Installed Cost or Total Final Project
Cost
29
1. Make sure project has been de-supplemented (AFE removed)
 CCRG ISSUES WHICH ARISE
Lump Sum Contracts
• Property owner cannot break out possible excluded costs

• Examples of how this is handled in practice:

• 1. Ask for details of the buildup of the LS contract

• 2. Apply the rest of the project factors to the LS contract

• 3. Calculate from a similar facility

• 4. Producing capacity comparable analisys

• Onus remains on the property Owner to segregate and

substantiate costs claims as per CCRG 2005 30
 SECTION 2.500 ABNORMAL COSTS
Basic Principles
• Types of claims under this heading include: labour productivity
losses, schedule slippage, delays, inclement weather, work
slow down, accidents, natural disaster, a cost not normally
incurred in a balanced market, a cost excluded to maintain
consistency among regulated properties:

• This requires clear definition on a case by case basis because

there are multiple scenarios possible on each concept
mentioned above. Companies need to come forward with full
cost details and traceability to let the assessor decide on each
case as each project is different by deifnition.

31
 SECTION 2.500 ABNORMAL COSTS
Basic Principles
• From a review of the section we can see several principles

• Labour force available – travel excluded s. 2.500.100

• Materials and parts are available – transportation past

Edmonton excluded s. 2.500.200

• Interest during construction is excluded – s. 2.500.300

• Premium payments for overtime are excluded – s. 2.500.400

32
 SECTION 2.500 ABNORMAL COSTS
Basic Principles
• Typical or normal varies over time

• Typical or normal varies by location

• Typical or normal varies by industry

• Requirement to measure actual costs against typical or normal

• Obligation on the property owner to establish typical or normal,

time period, location and the industry constructed.

33
 SECTION 2.500 ABNORMAL COSTS
Basic Principles
• How do you measure a balanced market?

• Back to basic principles – varies by location, industry and over

time

• Measure market during the period of construction

• If everyone in the industry/location is experiencing the same

pressure – is normal.

• Deviations from that normal can be abnormals.

34
 SECTION 2.500 ABNORMAL COSTS
Basic Principles
• Cost excluded to maintain consistency among regulated
properties

• CCRG used by the Regulated Property Unit to prepare the

rates in the Minister’s Guidelines

35
 CHANGE MANAGEMENT
A process whereby changes in the Scope of Work agreed to by the
Owner and Contractor are implemented via Change Orders.

Change Orders are additions, deletions of scope which alter the

original contract cost and/or completion date.

CO’s are common in large projects under cost reimbursable

contracts. Seldom seen in Lump Sum/Fixed Price contracts.
1.Project schedule/scope/cost incorrectly estimated.

2.Owner discovers possible efficiencies that require deviations from

original plans.

3.Contractor underestimated efficiencies and additional cost, time 36

or scope must be added to complete project
CHANGE MANAGEMENT

37
 CHANGE MANAGEMENT
As projects progress, changes are more costly but fewer
100%

Cost of Change
75%

# of Changes

50%

25%

0%
Business Feasibility Concept Basic Design E&P Construction C&SU
Planning Studies Optimization

38
 CHANGE MANAGEMENT
Challenges for Owners
Cost Reimbursable: Contractors low ball bids seeking to turn it into
change management heavens.

Company Staff Turnover: A manager may approve a change that

his/her replacement may reject. And viceversa.

Company/EPC Change Management Culture: Change order forms

are poorly filled and no relevant info is avaliable to assess a change.

EPC does not adhere to company processes: Competing

contractors blame each other for delays, availability of work fronts.
39
 CHANGE MANAGEMENT

40
Queen Isabella Causeway near South Padre Island, Texas, September 15, 2001
United States Coast Guard, CWO2 Robert Wyman
CHANGE MANAGEMENT
Can you live with it as it is?

41
 SECTION 2.500 ABNORMAL COSTS
Labour Productivity
Field labour productivity is the single greatest variable in any cost
estimate and it is extremely difficult to estimate.

Direct field labour constitutes a high percentage of the total cost

of a project from 15% to 25%.

Productivity variations are based on:

Type of project, world and regional location, contractor’s morale,

owner’s management, project’s culture, weather, technology, time
of the year, craft availability, labour mix (local vs expatriate vs
extra-provincial), degree of supervision and degree of skillset to
use equipmentm learning curve effect, job size, project change
orders. 42
 SECTION 2.500 ABNORMAL COSTS
Engineering Productivity
Engineering productivity is also subject to variations similar to
labour productivity, but easier to estimate and quantify.

Engineering productivity range from 10% to 15%.

Variations are based on:

Type of project, world and regional location, contractor’s morale,

owner’s management, project’s culture, weather, technology,
engineers avalability and mix (local vs expatriate vs extra-
provincial), degree of supervision and job size.

43
 SECTION 2.500 ABNORMAL COSTS
Labour Productivity
Process to establish the normal vs abnormals:

Projects establish a Base Productivity to define what can be

expected as a normal condition in that particular project.

Abnormals are deviations from Base Productivity

There are always abnormal conditions related to any project,

whether they were captured as such is another story.

44
SECTION 2.500 ABNORMAL COSTS
Labour Productivity

DFL Non-Productive Time

10 hr shift

6%
12%

10%

50%
6%

16%

Actual Work Time Idle/ Moving Instructions 45

Socializing Tools & Matls. Other

University of Calgary – Productivity in Construction Research Studies

 SECTION 2.500 ABNORMAL COSTS
Labour Productivity
Overtime Premium – Day Shifts

Job Rotations in Remote Locations

Days Days One Hours Standard Over Cost Base
On Off Cycle Worked Time Time Increase Productivity

4 3 7 40 40 0 0% 100%

5 2 7 50 40 10 3.9% 90%

6 1 7 60 40 20 7.9% 80%

10 4 14 100 70 30 11.8% 75%

21 7 28 210 120 90 35.4% 64%

35 21 56 350 200 150 58.9% 60%

Calculating Overtime Premium:

ST $70/hr & OT $97.5/hr
46
Delta ST vs OT = $27.5/hr
OT Premium = (27.5/70) = 39.2%
 SECTION 2.500 ABNORMAL COSTS
Labour Productivity
More than one way to calculate actual productivity depending info available

1. Productivity = QAB workhours

Actual workhours

2. Productivity = % physical completion

% of QAB workhours

3. Productivity = Budget Unit Rate

47
Actual Unit Rates
QAB – Quantity Adjusted Budget: Includes adjustment for actual conditions on site to reflect real productivity
 SECTION 2.500 ABNORMAL COSTS
Delays / Schedule Slippage
The Schedule Control Basis, typically includes the following:

1.The Plan

2.Schedule Control Baseline

3.Planned Schedule

4.Schedule Basis

5.Schedule Control Plan

Schedule Basis covers assumptions, inclusions, exclusions, risk and

uncertainty as well as schedule contingencies, such as inclement
48
weather. Schedule slippage and delays are incorporated into the
schedule as they happen as they are usually EPC change orders.
 SECTION 2.500 ABNORMAL COSTS
Edmonton Area
• Historically under SPAG, all abnormal costs were compared to
normal costs in the Edmonton area

• This was because prior to 1995 all assessments were

regulated based on cost manuals which reflected Edmonton
area costs

• There is a debate as to whether abnormal cost claims are still

measured against what is typical or normal in Edmonton

• Only mention of Edmonton area is in s. 2.500.200 with regard

to transportation costs

• If this is the case – conflicts with the basic principles under s. 49

2.500
 DESIGN CHANGES s. 2.300.400
INTERFERENCE COSTS s. 2.300.500
• Most projects have some costs for re-work

• The allowance for re-work is often found in the following

documents:

• ___________________

• ___________________

• Generally interference costs are for brownfield sites

50
 TRAVEL s. 2.500.100
TRANSPORTATION s. 2.500.200
• Travel to the site is excluded.

• Travel within the site would be an included cost.

• Transportation costs of materials within the site are an

included cost.

• The cost of loading and unloading the raw materials and

components is included.

51
 TRANSPORTATION s. 2.500.200
IMPORT DUTIES & BROKER FEES S. 2.300.700

• Consider that nine countries shipped equipment worth $392M CAD

to a job site in RMWB in circa. 2006. Generating costs for
transportation and import duties and brokerage fees.

• Austria Canada Germany

• Holland Italy Mexico

• Spain Sweden USA

• Transportation cost to EDM included, from EDM to jobsite excluded

52
• Duties & Fees all excluded
 SITE PREPARATION
Page 8 of the Interpretive Guide
• The cost to clear, level and finish the site is an included cost

• Except if the land assessment is based on the value of finished

industrial land (stripped or graded) – then the actual site
preparation costs for stripping and grading are excluded but
any other site preparation costs are included

53
 CCRG BEST PRACTICES
Establish Expectations
• Recommend a meeting with the property owner early in the
construction process to set out expectations with regard to: (i)
types of documents required, (ii) interpretation and application
of the CCRG

• Have regular follow up meetings, steer conversations to have

cost-data discussions segregating included vs excluded.

• Cost reporting should comply with the requirements of the

CCRG

• Claims for excluded costs should be made under a section of

the CCRG
54
• Re-work your RFI to set out your expectations regarding the
CCRG, and the cost reporting
 CCRG BEST PRACTICES
Documents
• Depending on the scope of the project, it is good practice to
request:

• Feasibility study

• DBM and EDS

• The sanction budget, and all updates to the budget

• AFE’s and final cost reconciliation documents

• Change orders – which relate to claims for abnormal costs

• Man power plan for the PMT

55
• ________________________________________________
COURSE WRAP UP

56
THANK YOU FOR YOUR ATTENTION
QUESTIONS ARE WELCOME

Salvador Hernandez, Verus Capital Assessments

email: salvador@vecaas.ca
phone: 1-403-690-3053

Dan Driscoll, A.M.A.A.

email: dandriscoll@shaw.ca

John Elzinga, A.M.A.A.

email: john.a.elzinga@gmail.ca

Carol Zukiwski, RMRF LLP

email: czukiwski@rmrf.com
phone: 1-780-497-3350
57