by Tom McGreevy, PE, PMP, CFSE, CAP
Congratulations! You’ve been assigned a project to replace your plant’s control system. Perhaps, rather than being in a congratulatory mood, you’re thinking, “What did I do to deserve this?”. Both feelings are understandable – a control system replacement project can be, at the same time, a rewarding, hugely beneficial business and career opportunity and an extremely stressful, sometimes thankless, and even less than fully successful experience. This is the initial installment in a series on control system migrations starting with the most common first step in any such project: Building a financial justification.
The first thing most people consider when contemplating a major investment, whether it be in one’s work life or at home, is “How much is it going to cost?”. Of equal importance should be “How much will it save us in the long run?”. A well-developed financial justification, also commonly referred to as a “business case”, will evaluate both the cost and the benefits over the expected useful lifetime of the system.
How Much Will It Cost?
Developing a cost estimate should be an iterative process, starting with a relatively high-level cost estimate in the earliest stage of project consideration. The initial investment must be estimated, and the annual cost of maintaining the system must be included, to develop a total life-cycle cost. Let’s consider the initial investment, the “capital outlay,” and the annual costs, the “maintenance costs,” for the life of the new system:
Total Life-cycle Cost = Capital Outlay + Annual Maintenance Costs
The initial capital investment can, in the earliest stage of the project, be estimated in a number of ways prior to having a fully detailed project scope:
Parametric: Estimate based on key parameters inherent to the system. For a control system this could be “per I/O point” or “per tag." Configuration costs could perhaps be estimated on a “per line of code” basis or “number of system graphics” basis.
Analogous: Estimating the proposed project based on a similar past project, with adjustments made for known scope, size, and time since the past project was completed.
Actual Costs: Similar to an analogous estimate, but applicable if a very similar, very recent project has been completed.
Other cost estimating techniques, most commonly the Bottoms Up Engineering Estimate, are typically not practical in the early stage of a project, as the full scope and associated design deliverables are typically not yet developed. However, this method is commonly used for final capital expenditure approval and is typically shown as a +/-10% number.
Annual Maintenance Costs
Depending on your organization’s accounting methods, some of the costs normally classified as “maintenance costs” can be initially capitalized and included in the capital outlay estimate. However, from the point where the asset becomes utilized, annual maintenance and upkeep costs are typically expensed by the business. These costs must be estimated over the assumed lifetime of the asset. Your organization may have reasonably good historical records of such costs, and you may be able to get assistance from systems integrators or vendors for costs such as:
Annual license updates
Minor to major system upgrades
Operator and Maintenance Technician training
Another key annual cost to be considered is the annual cost of system downtime: or the number of hours per year that the system is not available to support production. Given that it will be a new system, this should be a very small percentage of hours on an annual basis. However, to consider 100% availability is simply not realistic, so consider the Availability carefully. In a very large facility such as a refinery, even a 99.99% availability can have significant cost implications.
Early-stage cost estimates should not be touted as having high levels of accuracy – typically +/- 50% at first look. A word of caution: Upper management may latch on to the first number as a “Not to Exceed” (NTE) – judicious communication that there is both a “+” and a “-“in front of the number is recommended. Your business may operate in such a way that the number should be advertised as an NTE, in which case, err on the conservative side. If your project is executed in a stage/gate manner, which is highly recommended, you’ll have ample opportunity to sharpen and optimize the cost estimate as the scope is refined.
How Much Will We Save?
Now that you have a cost estimate, you need to evaluate the other part of the $ equation: How much will the new system save us? The difficulty of developing this number can range from relatively easy to very difficult. Perhaps your existing system has suffered a failure that directly resulted in very real costs to your organization, and you know this number only too well. You are fortunate to have this cost available, as it is likely well-known to management, and they are chomping at the bit to avoid a repeat performance. If this is the case, strike while the iron is hot!
Often, however, your system has had less significant failures or “near misses” that, through perhaps heroic efforts, your team was able to ride through to keep production up. In such cases, estimating the cost of a “what-if” scenario is necessary. Working with your operations & business departments can usually result in reasonable estimates of both direct and opportunity costs that can be developed into an overall cost avoidance number. Failures in a “Sold Out” production mode are often the difference between successful and unsuccessful financial justification. Annual maintenance and upkeep costs are hopefully available, and it is very common that, for older systems, these costs are known and have been increasing.
Other annual upkeep costs are not so easy to estimate. You may have older employees who have operated and maintained the system for years and are close to retirement. It can be very challenging to pass this know-how and experience, much of which may be “institutional knowledge”, to new employees. Many factors, including legacy, proprietary protocols, poorly documented control system logic, and even “black box” components that are poorly understood or simply no longer available to purchase, have associated upkeep or loss costs. The team should make attempts to develop estimates of annualized costs for these other factors to capture the overall “How Much Can We Save” part of the equation.
Similar to annualized upkeep costs for the new system, the “How Much Can We Save” number is typically spread over the assumed lifetime of the new asset, using an annualized assumed risk of realizing one or more assumed failures.
Armed now with both “How Much Will It Cost?” and “How Much Can We Save?”, these numbers can be analyzed in a number of ways to arrive at a net financial justification. Common methods include:
Return On Investment (ROI): How many years will it take to break even on the initial capital outlay? The smaller the number, the more attractive the investment.
Operating Expense: What is the net impact on annual expenses to maintain the system?
Net Present Value (NPV): An objective calculation of the net positive (or negative) value, today, of the project, looking at its entire lifespan. The higher the number, the more attractive the investment.
Internal Rate of Return (IRR): An alternate view of the relative attractiveness of the investment, also looking at the entire lifespan. The higher, the better.
Your organization may use one or more of these techniques. Many companies have minimum acceptable investment criteria for project approval.
Some events and their associated costs can be very challenging, sensitive, and proprietary to estimate. Consider the cost to the business of a fatality that can be attributed to a system failure. Some organizations will avoid estimating such a cost altogether, and simply use a risk matrix methodology to justify a project. This is typically done by looking at “Where are we now?” on the risk matrix, compared to “Where does the new system get us?”. Typically, a new control system, or perhaps a new Safety Instrumented System, can result in an estimated risk reduction of two orders of magnitude. A risk matrix system can also be used for environmental or business reputation evaluations as an alternative method for justifying a new control system.
In order to develop your first business case, you need to have at least a preliminary project scope from which to form a cost basis. It is highly recommended that you formally document your Basis of Estimate in parallel with your financial justification and be prepared to defend it as it goes through the approval process.
Building a financial justification for a control system migration or upgrade project is the first step in developing a solid, executable plan. This plan, if appropriately risk-based, will increase the likelihood of success, resulting in a positive project experience. Additionally, it can contribute to the creation of a valuable new asset that helps realize your organization’s business goals in a safe and reliable manner.