An important piece of a Utilities’ business is customer driven construction work. Customer driven work can originate from the commercial or residential space, or even government funded. This type of work brings in revenue for the utility in the form of the cost of materials and labor to accomplish the work being requested.
A common work scenario to a utility would be commercial new business. A gas station is being built and breaking new ground. The building will require gas, water and electric service. A utility may offer one or more of those services, and each commodity would be separate scoped work efforts.
Based on the KVA requirements the utility will need to determine where the electricity will be coming from. The decision will be based on the grid network around the location and if the grid can handle the additional load.
Assuming the electric load can be handled by the existing network, the utility can start to design how power will be provided to the new property.
A sophisticated design tool will be able to handle the graphical part of drawing (usually on a map) where and what electrical assets will be used. The tool will also have those electrical assets (ex. Pole, Riser, Transformer, Bracket, Switch, etc…) tied to the parts and labor required to construct each of those electrical assets. The material and labor will also have costs tied to them, and a total cost for each asset installed can be derived. This is what is commonly referred to as a Compatible Unit (CU).
A utility that is sophisticated in their design cost estimation efforts will have a library of CUs that covers all the different types of assets that could be installed during construction. The CUs will also account for removal of existing assets, which will only account for the labor cost of removing the asset. This is typically and replace scenario where the utility wants to install new equipment to replace an older asset, or asset that isn’t functioning properly. Often as rule of thumb the labor required to remove an asset is estimated at half of the amount of labor it would take to install it.
Compatible Units can often be traced back to a Construction Standard. A Construction Standard is a guide for utility construction workers, and back-office designers, on how to install/construct certain components onto an electrical grid.
Let’s examine the makeup of compatible units that may be required to supply electricity to a new gas station being constructed.
CU Labor
Let’s start with the CU itself and the labor component. The standard installation or removal of a CU may be done by internal labor, meaning done by staff that work for the utility directly. Often utilities use contracted crews that aren’t employed directly by the utility. In that case, that will increase the cost since contract labor is more expensive than internal labor. The cost estimation tool should be flexible enough to say whether internal or contract labor will be used.
Site Condition
The condition of the site is a variable that should be considered.
Here are a few examples:
- The soil is very rocky and not easy to dig into to.
- The replacement components could already be energized and will take more time to work with.
- The site in not easily accessible by the trucks and other equipment required to do the work.
All the above examples will add additional labor time to the install and removal work of the job. In these cases, a labor multiplier would be applied to total labor hours of the CU. Each site condition could potentially have its own multiplier, which in that case, need to be averaged together if multiple conditions are applied to the same CU.
Travel Time
The work sites will have variable travel times associated with them. It’s possible that the cost estimation can take travel time into account which will affect the labor costs. This is typically a separate line time within the cost estimation that isn’t tied to any CU labor. The estimation would need to take the crew size into account and the amount of time they will be traveling to and from the job site.
Equipment
There may be additional equipment needed for more complex construction and installations, or removals, that the utility will to need to rent and pay for separately. This cost can be tracked as part of the estimate.
Engineering
For jobs that require a third-party engineering firm, or perhaps longer than normal internal engineering time that needs to be accounted for, there can be an additional line item in the estimate to account for engineering costs.
Management & Other
Other types of labor not directly associated with a CU can also be tracked as a separate line item. For instance, a design or engineering supervisor may need longer than normal involvement due to the scope of the work, and that additional management overhead can be accounted for. Other labor types could involve safety workers and if Locates are required.
Miscellaneous Costs
Miscellaneous costs are a way to account for the cost of ad-hoc items needed to complete the work. These costs can be hand entered in with a description and cost up to the discretion of the user. Examples of a miscellaneous cost would be the following:
- Miscellaneous Equipment usage such as a Hydro Vac
- Contingency
- Bore Costs
- Misc Labor that doesn’t fit into standard labor roles
- Temporary Heating
Overhead Cost Multipliers
Project overhead multipliers are common to account for items such as labor contingency, warehouse stock picking and administrative costs.
Overhead costs typically average around 10% – 15% of the total project costs. At the simplest form, a utility may just add 10% across the top of all labor and material costs. More complex calculations will apply set multipliers to internal labor costs, which can vary by the type of labor as well (engineering vs. construction).
CIAC
CIAC stands for “Contributions in Aid of Construction”. CIAC is often pronounced “kayak” for short. Utilities will credit CIAC contributions to help offset project costs.
CIAC is payment by the customer requesting the work done by the utility. The utility owns the assets and infrastructure but is charging the customer the uneconomic portion of the project work based on projected consumption and regulator-established utility rates.
For instance, if the total cost of the project is $10,000 and the utility deems that the break-even cost based on future revenue is $7,500, the CIAC amount paid by the customer up front would be $2,500.
AFUDC
AFUDC stands for “Allowance for Funds Used During Construction”. It’s a vehicle to allow utilities to recoup the financing costs of assets used in construction.
AFUDC is a dynamic cost since a multiplier used in the total AFUDC cost is the length of the project. Typically, the length of the project is calculated from the date the construction work is scheduled to begin to when the utility assets are deemed “In Service”.
The calculation is total capital cost of the project (minus the CIAC) multiplied by the AFUDC rate that is calculated using the weighted average cost of long-term debt. The AFUDC rate guideline is published in Section 3 of the FERC USOA plant instructions.
Simplified Formula:
AFUDC Total = (((Capital Project Cost)–(CIAC))*(AFUDC Rate))*(Project Length in months)
While this explanation of costs is not intended to be a guide for accountants, it should serve as a guide in how utilities determine the total cost of a project. The hard part about project costs is that they are based on estimates. The more flexible the cost estimation tool is, it allows the utility to react intelligently to estimate vs. actual costs and always be adapting to the current landscape of project costs.
A streamlined and efficient cost estimation tool such as SSP Lifecycle helps enable utilities to better serve their constituents on a consistent basis.
Gary miller says:
Hey josh,
That was a well presented explanation of utility construction cost estimation via cu’s, adders, and multipliers.
Gary