Stressing Out Over Your Project Costs? You're Not Alone04/15/2015
Cost visibility and control can be a competitive advantage for upstream oil and gas companies
When we think about AFE management, we break it into two parts: effectively managing the workflow and approval process and cost control throughout the project. Today, let's address project cost control.
How do you properly manage what you can't see? The answer, of course, is you can't! The same is true for upstream oil and gas teams ... if you can't see project costs in real time, then you can't manage them. If you do have access to accurate and timely cost data, the business advantages that follow are huge.
If you're struggling with controlling your project costs, you're not alone. A recent AlixPartners survey found that only 19 percent of North American firms finish projects within their budget. This data point can be partially explained with another finding from the same study: only 30% of oil and gas drillers had a strong series of checks and balances to ensure that projects were on time and on budget.
Starting with the planning stage and throughout the execution of a project, teams must have convenient access to quality and timely cost data if they are to ensure project success.
In project planning, we've seen companies falter when using "last month's project costs," or even worse, "last year's project costs," to estimate their upcoming projects. This practice doesn't work because it assumes that one variable remains constant over relatively long periods of time -- the economics of projects. This way of estimating is broken because it's based on out-of-date information. The prices of all inputs, from contractor day rates to the price of a sacks of mud, change rapidly.
The best practice here is to keep your project-estimation process constantly informed of changing prices. To do so, members of the project planning team, especially engineers, need access to real-time data on their recently finished and in-progress projects to understand the closest-to-true cost estimate of their next project. Not having this accuracy in project estimates can lead to cost overruns and supplemental AFEs, which cause partners to think twice before joining projects with your company in the future.
During the execution of a project, effective cost control is difficult with the rate at which projects can change; a project can go from under budget to over budget in a matter of a day or two. When AFE processes are managed manually, cost control becomes very hard to do as there are often long lag times between when data is collected in the field and when it is transmitted to offices. In addition, visibility into cost data tends to be limited as most of the files are in hardcopy form and accessible by only a few people.
The best practice here is to have an accessible, centralized, integrated, real-time AFE solution that multiple teams can use to make strategic decisions for project cost optimization. With such a solution, teams can keep tabs on any variances between field tickets and AFE budgets, and proactively mitigate any potential project overspend situations.
Broad access to accurate and timely cost data can save time and further empower the roles of everyone, from the engineer estimating a project, to the field personnel receiving supplies, to the accountant processing invoices. Strong cost control is key to achieving organizational objectives and can ultimately lead to a competitive advantage.
Want to Learn More?
Watch this webinar, "Strategies For Controlling Project Overspend in 2015," to learn more about best practices for controlling your project costs.
Jordan joined P2 in January 2014 and has five years’ experience delivering software solutions to various organizations. Before coming on board at P2, he created innovative governance, risk, and compliance solutions for a wide range of publicly-traded companies. Jordan graduated from Purdue University and is heavily involved in nonprofit work, including at Habitat for Humanity of Metro Denver. He’s passionate about spending time in the field with oil and gas teams, learning more about what they do, and finding ways to make their day-to-day jobs easier. When he’s not working, chances are you’ll find Jordan on his mountain bike or on his skis.