Exploring Escalation Method for Accurate,
Precise, Reliable, and Valid Project Budgeting
FEATURED PAPER
By Glenn Cahya Dwi Ramadhan
Jakarta, Indonesia
ABSTRACT
The oil and gas industry’s inherent volatility, influenced by geopolitical events, supply and demand fluctuations, and economic conditions, poses significant challenges to project schedules and budgets. Accurate project cost prediction is vital for effective project management, particularly in long-term projects in PERTAMINA’s downstream sector. Currently, PERTAMINA faces project delays, primarily due to market volatility and lengthy preparatory activities. This time gap results in budget disparities, necessitating an accurate cost escalation method. In current PERTAMINA Downstream project budgeting, cost escalation methods adjust the Owner’s Estimate during tender processes but typically only focus on the bidding year, omitting the construction period gap which should also be factored in.
This paper analyzes various benchmarks, including gold price, Big Mac index, US Dollar index, and Indonesia’s inflation rate, considered as alternative currencies for precise project budgeting, and selects the most suitable one. Results indicate that the Gold Price emerges as the best benchmark for precise cost escalation due to its consistent growth trend, in line with the RAND Study’s insights on the impact of omitting scope and risks.
Keywords: Oil and Gas, Downstream, Cost Estimate, Cost Escalation, Gold Price, Big Mac Index, PERTAMINA
INTRODUCTION
- Oil and Gas Volatile Market in Indonesia
The energy and gas industry is volatile by nature, with prices fluctuating due to geopolitical events, variations in supply and demand, and economic conditions, among other factors. “This instability can have substantial effects on project schedules and budgets. For example, volatile costs and labor and material supply uncertainties can jeopardize everything from field operations to project schedules.”[1] In addition, a 2022 study by Goldman Sachs suggests that “delays in oil and gas project investment since 2014 could result in significant production losses.”[2]
Even though the downstream market experienced a decline in output due to the COVID-19 outbreak in the first quarter of 2020, “from 2022 to 2027, Indonesia’s downstream oil and gas market is expected to grow at a CAGR of over 4%.”[3] “Several laws and regulations govern Indonesia’s downstream oil and gas industry, and the government seeks to encourage downstream development through industrial estates that facilitate the integration of associated processes. However, there are risks and concerns, including long and uncertain negotiation processes for large-scale projects, uncertainty about future policies, and a monopolistic market structure. Given the growth opportunities in this industry, there is an urgent need to expand infrastructure to accommodate this growth.”[4]
These market volatilities can lead to project delays and significant discrepancies between the proposed budget and the actual project costs. “Therefore, accurate project cost prediction is a cornerstone of successful project management in this sector. It allows for effective budgeting, resource allocation, and risk management, ultimately improving project outcomes.”[5]
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How to cite this paper: Ramadhan, G. C. D. (2023). Bridging the Time Gap: Exploring Escalation Method for Accurate, Precise, Reliable, and Valid Project Budgeting; PM World Journal, Vol. XII, Issue X, October. Available online at https://pmworldlibrary.net/wp-content/uploads/2023/10/pmwj134-Oct2023-Ramadhan-bridging-the-time-gap-exploring-escalation-method.pdf
Editor’s note: This paper was originally prepared during a 6-month long Graduate-Level Competency Development/Capacity Building Program developed by PT Mitrata Citragraha and led by Dr. Paul D. Giammalvo to prepare candidates for AACE CCP or other Certifications. https://build-project-management-competency.com/our-faqs/
About the Author
Glenn Cahya Dwi Ramadhan
Jakarta, Indonesia
Glenn Cahya Dwi Ramadhan is an engineer with a proven track record of eight years of professional experience in construction and holding various roles in the oil and gas downstream sectors, including marine operations, strategic budgeting, and project management. Currently, he is employed as an engineer at Indonesia’s national oil company, specializing in berthing facilities and other downstream infrastructure design. He earned his bachelor’s degree in Mechanical Engineering from Universitas Indonesia (UI) and is currently pursuing a master’s degree in Management at the same institution. Glenn is currently enrolled in a distance learning mentoring program led by Dr. Paul D. Giammalvo, CDT, CCE, MScPM, MRICS, and GPM-m Senior Technical Advisor, PT Mitratata Citragraha, with the goal of achieving Certified Cost Professional certification from AACE International.
Glenn resides in Jakarta, Indonesia, and can be reached at glenn.cahya@gmail.com.
[1] How oil and gas companies can secure supply-chain resilience. (2023, March 6). McKinsey & Company. https://www.mckinsey.com/industries/oil-and-gas/our-insights/how-oil-and-gas-companies-can-secure-supply-chain-resilience
[2] Ziomecki, M. (2023, January 30). Oil and gas: The investment gap dilemma. GIS Reports. https://www.gisreportsonline.com/r/oil-gas-investment/
[3] Mordor Intelligence Research & Advisory. (2023, July). Indonesia Oil and Gas Downstream Market Size & Share Analysis – Growth Trends & Forecasts (2023 – 2028). Mordor Intelligence. Retrieved July 10, 2023, from https://www.mordorintelligence.com/industry-reports/indonesia-oil-and-gas-downstream-market
[4] Overview of Indonesia’s downstream oil and gas sector | GBG. (n.d.). GBG Indonesia | Global Business Guide Indonesia. https://www.gbgindonesia.com/en/energy/article/2014/overview_indonesia_s_downstream_oil_and_gas_sector.php
[5] Kerzner, H. (2017). Project management: a systems approach to planning, scheduling, and controlling. John Wiley & Sons.
