Delay and project profitability .

1. Delay and project profitability. Sigurður Guðni Sigurðsson September 2007

2. Delay and project profitability. Presumptions Total time = Production time + Time of utilization Total time is constant • Period of production 1 year, duration of operations 5 years • Affect on producer/developer • Affect on buyer • Period of production 3 years, duration of operations 10 years • Affect on producer/developer • Affect on buyer • Lump sum payment vs. distributed payment

3. Reason of delay. Contract variation. • The owners (buyer) determination that makes delay and extra cost on his accountability. • Force Majeure. Neither seller or buyer have any control of the cause. The seller can delay the project of such reasons. • Delay based on sellers action. The seller is responsible and pays for it with penalty.

4. Short project . Sellers presumptions Fixed contract price– Payment on delivery. • Cost estimate Kr. 1.000.000 • Contribution margin 30% • Contract price Kr. 1.428.571 • Duration of production 12 months • Penalty 5 % per month • Maximum penalty 15% • Fixed cost per year 7,5% • Cost of capital 8% • Inflation 4%

5. Sellers cost distribution Short production time

6. Affection of delay on profit Short production time

7. Relative effect of delay on profit Short production time

8. Sensitivity analyzes

9. Short project Buyers presumptions • Investment – no delay Kr. 1.428.571 • Operation cost per year Kr. 1.000.000 • Markup 70% • Lifetime 5 years • Financial cost 6 % • Fixed cost per year Kr. 75.000 • Inflation 4% • Return on capital 20%

10. Distribution of income Fixed total income

11. NPV calculated from income distribution and delay.

12. Internal Rate of Return based on income distribution and delay.

13. Long project period. Sellers presumptions Fixed contract price – Payment on delivery. • Cost estimate Kr. 1.000.000 • Contribution margin 34,1% • Contract price Kr. 1.517.451 • Duration of production 3 years • Penalty 2,5 % per month • Maximum penalty 15% • Fixed cost (36 months) Kr. 75.000 • Financial cost 8% • Inflation 4%

14. Affection of delay on profit Long production time

15. Sensitivity analyzes

16. Affect on sellers presumptions

17. Long project. Buyers presumptions • Investment – no delay Kr. 1.517.451 • Operation cost per year Kr. 1.000.000 • Markup 50% • Lifetime 10 years • Financial cost 8 % • Fixed cost per year Kr. 75.000 • Inflation 4% • Return on capital 20%

18. Distribution of income Fixed total income

19. NPV and IRR

20. Distributed payment . Long project Two payment series • Four payments: Payment order Month. Percentage Dawn payment 0 10,0% Payment # 2 12 25,0% Payment # 3 24 25,0% Final payment 36 40,0% • Four payments - 85% of earned value at each time

21. Sellers profit, Lump sum and distributed payments

22. NPV and distributed payments.The buyers side

23. Conclusions I • Time and cost in projects have strong connection. • Delay harm both seller and buyer. • The buyers protection by using penalties protect him only if income is low in the delay period or the delay is short. • It is of common interest that the production period is successful. • The length of the production period and lifetime of the product does not influence the results strongly. • Sensitivity for changes in presumptions increase with longer delay.

24. Conclusions II • The distribution of the income affects the delay impact. More impact as the delivery is later in the product life-cycle. • It is of great interest to study further interaction between distributed payment and profitability of projects. • The impact of distributed payments are often higher than penalty. • Distributed payment is of high value for the seller. • Distributed payment cost the buyer more as the delay increase.

25. Thank you