ADMAS UNIVERSITY

School of Post Graduate Studies

Project Cost Management

MCE HFO to Coal Conversion Report

Prepared By: Group 3: P2

NAME ID NO
1. EPHREM AYALEW PGMKP/5118/22
2. FREHIWOT ADANE PGMKP/5125/22
3. TRUALEM AYELE PGMKP/5122/22
4. HAWI TESHALE PGMKP/5085/22

Submited To: Aron H. (PhD)

June, 2023

Table of Contents
1. Project Overview............................................................................................................................1

1.1 Purpose of the project Cost Management Plan.......................................................................1

1.2 Assumptions (Basis of Accounting)...........................................................................................1

1.3.1 Project Cost Management................................................................................................3

1.4 Roles and responsibilities........................................................................................................3

2. Cost Planning.................................................................................................................................5

2.1 Cost Base line..........................................................................................................................5

2.2 Adjusting Cost Baseline..........................................................................................................5

2.3 Confirmation/Adjustment of Current Year Spending Plan.....................................................5

3. Cost Management...........................................................................................................................5

3.2.1. Reconciliation (Agreement or Settlement)...........................................................................6

Fig 3 Project Minute on Liquidated Damage & its Settlement......................................................7

Notice, PAC (Provision of Acceptance Certificate).......................................................................7

3.2.2. Cost Variance.......................................................................................................................7

3. Reference......................................................................................................................................12

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 1. Project Overview
 The project owner Muger Cement Factory is located about 90kms North West of the capital city.

 The factory has three production lines with production capacity of 5000 tons of clinker per day.
The first, second and third lines started operation in 1984, 1990 and 2011 respectively.

 The (HFO to Coal Conversion Project) contract agreement made between Chemical Industries
Corporation Mugher Cement Factory and the contractor, CNBM International Engineering Co.,
Ltd, subsidiaries of China National Building Materials & Equipment Import & Export Co., Ltd,
with the total cost of USD 38,357,963 by 12th Jan, 2014.

 The project was expected to be completed within 13 months but after 16 months delay it was
commissioned in November 2016 .

 The main expenditure of the Factory is energy expense for HFO (Heavy Furnace Oil). It is about
60% of the production cost. Except Mugher cement enterprise all other similar factories were using
coal as their energy source for calcination.

 The project objective is to convert energy consumption of HFO to Coal and to reduce the
production cost by more than 40%. The project is realized as per objective was set.

1.1 Purpose of the project Cost Management Plan

The Project was had its Master Schedule that can be used to manage Time, Cost and Scope of the project.
The purpose of project cost management plan is to measure Cost and time by looking the variance seen
between what is set and what actually is. The effectiveness of the project will be looked based on the
actual time consumed, the total cost at the end of the project and whether the project meets its
target or not. MCF was planned to complete the project in cost of USD 38,357,963 within 13 months.
But completed, after 29 months.

1.2 Assumptions (Basis of Accounting)

The project applies accrual basis of accounting.

Accrual accounting involves tracking income and expenses as they are incurred (when an invoice is
present or a bill (Payment Request) received) instead of when money actually changes hands.
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 1.3 Project Scope
Scope refers to the quality and quantity of project deliverables specific to a particular project. In this
project the Contractor CNBM sells, erects and commissions and the Owner takes over after final
acceptance a Coal Handling, Storage (30+20=50t),Grinding System(30t/hr) and Conveying System to
convey coal as fuel for the three existing operating lines at MCF , on turnkey basis (Design, Supply,
Construction, Erection, Commissioning and Training ) to be installed at Mugher Cement Plant.

Fig1. HFO to Coal Conversion Project with first, second and third production line

Table 1. Overall Project progress @ (30-12-2016) Completion Report

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Remark:

FOB means Free On Board and is when the seller (Contractor) takes care of all shipping documentation
and delivers the goods to the ship. Once aboard, the transportation risk passes from the seller to the buyer.
The buyer then pay for the freight to get to its destination, but the seller pays for the export customs
clearance.

1.3.1 Project Cost Management

In PMBOK‘s (1996) defines project cost management as a requirement for financial control of the
project, which is accomplished through accumulating, organizing and analyzing data and reporting the
cost information.

 Cost planning and Cost management:-

Cost planning and cost management (Control) is the estimation of costs, the setting of an
agreed budget, and management of actual and forecast costs against that budget.

1.4 Roles and Responsibilities

CIC

Corporate Audit

Project and Operation Division.

MCF

Project Manager

TURNKEY
TURNKEY Site Supervision and Consultant
Contractor
Contractor (CNBM)
(CNBM) Monitoring Team Lead (HOLTEC
by Site Manager
Site Engineers
Coordinator

Fig2. Project Organizational Structure

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 General Role and Responsibility of the Project Structure
Role and Responsibility of the Chemical Industry Corporation
• Approves the budget that availed by the Agreement of CBE long term loan;
• Examines and approves the plan for project implementation;
• Provides support and monitoring according to the implementation plan prepared for the implementation
of the project.
Role and Responsibility of Corporate Project and Operation Division
• Develops the overall organization of the project;
• Monitors, and supports the overall project process;
• Completes and provides the budget, manpower and other resources required for the project;
Role and Responsibility of MCF
 Owner of the project,
 Assist the project manager in ensuring successful implementation,
 Control and evaluate the overall progress of project as per CIC decision.
Role and responsibility of project manager
• Accountability will be for the MCF;
 Creating the project plan and schedule

 Recruiting project staff (Team)

 Managing the budget, project schedule and all project deliverables

 Delegating project tasks to team members

 Communicating with upper management and other stakeholders

Role and Responsibilities Consultant:

 Accountability will be for PM;
 Takes responsibility for supervising the overall work activities carried out on the site;
 Investigates and verifies payment requests when submitted;
The role and responsibility of (Turnkey) contractor
• Accountability will be to the Project Manager;
• Design, Supply, Construct, Erect, Commissioned and trained (Owner experts)
• Performs overall project work in accordance with the Project Contract Agreement.

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Notice; A turnkey project is a delivery method in which a contractor works with a project owner under a
single contract to complete all project stages from detail engineering through construction.
Project Supervision and Monitoring Team:

 Identified, constructed from different discipline (Civil, Mechanical, Electrical and Process
Engineering) and lead by the Site Manager and Project Manager,

 They are responsible for contributing to the overall objectives of the project and the specific team
deliverables

 Perform the project tasks and activities that have been assigned to them,

2. Cost Planning

2.1 Cost Base line.

A cost baseline is the budget that has been approved for the project, broken down into a list of salaries,
materials, equipment and more. It’s the sum of the cost estimates for all the tasks on the project schedule.
Cost baseline may not include a management reserve, which is a portion of the project budget that’s used
as a contingency reserve for management control and unexpected costs.

Cost Base Line:- Approved HFO Coal conversion project budget was 38,357,963 USD. or (38,357,963
*19.27=739,157,947.01Birr

2.2 Adjusting Cost Baseline

Cost overrun = Final Contract Amount – Original Contract Amount

Dollar exchange by 2014 1USD=19.27 birr (@ Project start)

Dollar exchange by 2017 1USD=23.96 birr (@ Project Completion)

About 70% of 38,357,963 (USD 26, 551,831) is paid in foreign currency and the rest USD 11,806,132in
local currency. 11,806,132*19.27 = 227,504,163.64birr (@ starting of the project) but due to delay as
exchange rate rise to 739,157,947.01 to 951,491,196.00

Due to delay on the project MCF withhold a 5% Contract Price as a liquidated damage which is 1.5
million American Dollar. Liquidated damage is a contractually agreed upon sum of money that one party
to a contract must pay the other party if they breach the contract. This sum is intended to provide the non-
breaching party with compensation for any losses or damages they incur as a result of the breach.

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 2.3 Confirmation/Adjustment of Current Year Spending Plan

3. Cost Management
3.1 Expenditure Tracking

Expenditure tracking is a recording of all expenditures to have a clear and detailed understanding of
the budget.

1. ..\Billing Schedule Final 280115R.xlsx

2. ..\Civil Construction payment 04 (Mar & Apr 2015).xlsx

3.2 Cost Control and Changes

3.2.1. Reconciliation (Agreement or Settlement)

 MCF agreed to borrow construction material like rebar (210t) for the contractor CNBM because of
the delay on the port. CNBM replace it when the material arrived. (Notice Ethiopia is port less).

 Time extension agreement for design modification (E.g increasing Concrete car parking area and
other additional works.

 Cost adjustment agreement made in both side for those additional works.

 All disputes resolved with mutual agreement harmoniously, that is the good side of the
project..

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 Fig 3 Project Minute on Liquidated Damage & its Settlement

Notice, PAC (Provision of Acceptance Certificate)

3.2.2. Cost Variance

Cost variance is the project is the process of evaluating the financial performance of the project. It
compares the budget that was set before the project started and what was spent. This is calculated by
finding the difference B/n BCWP (Budgeted Cost of Work Performed)

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 3.3. Expenditure Reports and Metrics

CHEMICAL INDUSTRY CORPORATION

COAL CONVERSION PROJECT
BALANCE SHEET
AS AT 30 JUNE 2016
2016 2015
Notes Ethiopian Birr Ethiopian Birr
ASSETS

Construction in progress 593,444,540.00 301,015,003.00

Deferred expenditure 3 256,597,446.00 61,003,004.00

Goods in Transit 43,108,622.00 69,220,506.00

Advance Payment to Supplier 56,047,410.00 146,194,225.00

Cash 2,293,178.00 40,478,936.00

951,491,196.00 617,911,674.00

FINANCED BY (Source of Finance)

Head Office (Long term Loan from CBE) 4 945,919,613.00 612,340,091.00

Industrial Development Fund (IDF) 5,571,583.00 571,583.00

951,491,196.00 612,911,674.00

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 Cumulative
Through
2016 30-Jun-16 2015
Ethiopian Birr Ethiopian Birr Ethiopian Birr
3. DEFFERED EXPINDITURE
Testing production before 137,186,984.0 137,186,984.
Commissioning 0 00
9,115,839.0
Bank charge 0 50,792,596.00 41,676,757.00
40,098,736.0
Loan Interest 0 48,177,143.00 8,078,407.00
6,378,582.0
Consultancy fees 0 11,917,039.00 5,538,457.00
1,357,792.0
Salaries and benefits 0 4,338,744.00 2,980,952.00
229,400.0
Supplies 0 943,770.00 714,370.00
316,824.0
Entertainment 0 906,279.00 589,455.00
281,537.0
Cost of tickets 0 804,454.00 522,917.00
271,656.0
Communication 0 635,281.00 362,625.00
259,494.0
Audit fee 0 319,494.00 60,000.00
71,599.0
Insurance 0 169,315.00 97,716.00
25,000.0
Miscellaneous 0 406,347.00 381,348.00
195,593,443.0
0 256,597,446.00 61,003,004.00

4. HEAD OFFICE 612,340,091.00

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Balance at 30 June 2015
Net Transaction carried out by MCFon
behalf of the project 127,071,816.00
Additional withdrawals from the Loan
account 206,507,706.00

945,919,613.00

Actual cost of the project or actual cost work performed (ACWP) will be birr 951,491,196.00

Earned Value @ the end of Dec 30, 2016 =739,157,947.01(BAC)

Cost Variance (CV) = [Budgeted cost of work performed (BCWP)] – [Actual cost of work performed
(ACWP)]

CV=EV-AC

739,157,947.01 - 951,491,196.00= (-212,333,248.99)

CV is negative <0 that means the project is over budget.

CPI =EV/AC =0.78 CPI less than 1 that shows our actual cost is greater than planned.

Reasons for Cost overrun

Delay of the project is directly related to Cost overrun some of are:-

1. Delay of the project as a result rise exchange rate (19.27 to 24) due to agreement made.

2. Additional payment for the consultancy fee due to first amended agreement (USD 101,745) on
client side.

3. Additional works and design modification on the project.

Schedule Variance

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Project Schedule

Fig.3 Project Schedule

The contract is signed here in Ethiopia on 12th Jan, 2014 and planned to complete by February 2015 but

Completed November 2016 So (January 2014-Novemeber 2016) =13-29=-16 Months

The project delay over 16 months totally takes over 29 (13+16) months to complete.

Basic Factors for the Delay

1. Incompetent subcontractors that failed to deliver its obligations in due time because of inadequate
man power, resource shortage (equipment and machinery)

2. Delay initial (advance) payment for the contractor,

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 3. Late delivery of materials and equipment as result of Ethiopia shipping line and Port clearance
delay

4. Contractors occasional strikes by its employees due to delay in paying out their wages.

5. The 2016 civil unrest in the country has major contribution to the delay of the project.

3.4. Recommended Cost Management Practices

Delay is one of the biggest problems often experienced on construction project sites. Delays can brings
negative effects such as increased costs, loss of productivity and revenue, even can lead to contract
termination.

Due to the delay occurred in this project (16 months), Mugher cement Factory , based on its annual HFO
consumption rate, lose 392 million birr.

From the Contractor side the consequence is very high, Additional payment to its staff, covering
additional fee to the consultant for extended period and 5% USD 1.5million about (34,500,000 million
birr ) liquidated damage payment to the client(MCF).

This would be handled by:-

Certain types of delays are highly predictable (i.e. late delivery from outside sources), and should have
been factored into the schedule before project work begins.

The client should have been tolerant and consider the contractor‘s additional project duration instead of
sticking its own proposal.

The employer should allow the contractor to use any carrier to import equipment. Allowing searching and
use sea carrier fasten the importation and avoid delay due to transportation caused by ESL.

The contractor should assign proper staff and qualified Sub-contractor.

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 4. Reference

Chemical Industry Corporation(CIC). (2017). Chemical Industry Corporation Mugher Cement Factory
HFO to Coal Conversion Project Progress and Exit report.

Chemical Industry Corporation HFO to Coal Conversion Project. (2016). Independent Auditor Report and
Financial Statement.

Henok Eshetu W/Senbet. (2017). Assessment on The Effectiveness of Mugher Cement Enterprise Coal Conversion
Project

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