Letter of Engagement: midterm exam

You have received a tentative “letter of engagement” from Lauren Hill, Director of R&D at
Corpus Christi Vinyl-Chloride Monomer (CCVCM) asking you to work for them as a consultant to
upgrade the design of their existing process. As a result of the upgrade, they would like you to
lower raw material costs, lessen the costs of EDC purification, prevent fouling in the pyrolysis
reactor, and minimize by-product handling and disposal. They also want you to assess the
viability of an integrated waste treatment system that they have identified. It utilizes
incineration, absorption, caustic scrubbing and activated carbon adsorption to avoid releasing
any hazardous waste into the environment.

The waste treatment system has a budget for capital investment of $800 000 (capex).
Upgrading the design of their existing process for manufacturing vinyl chloride monomer has a
capital budget of $ 1 million (capex). The conditions attached to this project are as follow:

 Production of VCM is to be maintained at 15 million pound-moles (lbmol) per year.

 The company is prepared to accept a decrease in net profit from $30 million to $25
million for 3 years as existing processes are modified and new processes implemented.
However, it is expected that when process modification is complete, net profit will
increase to $35 million.

Lauren Hill has asked you to provide an estimate for your services on this project. Although
you had a conversation with her discussing the process used at CCVCM on October 5, and
received a tentative letter of engagement dated October 12, subject to your estimate for the
cost of the work and their approval, you are not sure how to proceed. If your estimate is
too high, you won’t get the job, and if your estimate is too low, you may end up working for
free. Unfortunately, it is difficult to estimate this job according to the standard EPCM model.

The standard EPCM model applies basic guidelines for project work based on the costs for
its components: engineering design, procurement of equipment and material, and
construction management. In this model, staffing requirements for each of these project
components is estimated as well as the time required for milestones, with steps specified for
each milestone, and tasks specified for each step, and charge-out rates. A total cost for
each of the engineering functions (engineering design, procurement, and construction
management\implementation) is estimated, and a profit margin is applied to the total cost
of each function. Generally, this is 15-10% on a sliding scale for projects estimated at $1
million to $10 million; 10-5% for projects estimated at $10 million to $100 million, and 5-
1% for projects estimated at $100 million to $ 1 billion.

The problem with applying the standard EPCM model is that you aren’t preparing a
complete engineering design but evaluating and improving an existing design and don’t
know how long that will take. CCVM has provided the existing design process to review but
you haven’t yet seen the waste treatment the client wants you to evaluate. Once you have
it, you can provide an estimate of procurement for equipment and materials and calculate
its effectiveness. Capex for process modifications is a maximum of $1 million, and capex for
the waste treatment system is a maximum of $800 000. You are tempted to specify the
maximum allowable capex for both projects and back-calculate your costs.
Letter of Engagement: midterm exam
Another option you could chose is to adopt the design\build model selected by the BC
government for infrastructure projects whereby you work with a senior engineer from
CCVCM to develop the specifications for project work and time estimates for milestones,
steps, and tasks. In this situation, you are paid a standard per diem ($1 500\day) to
develop a detailed bid proposal which you will then submit to the CCVCM for evaluation and
approval.

A 3rd option is to propose a hybrid of the 2 models: after costing out the equipment for the
integrated waste treatment plant it should be fairly easy for you to apply a percentage
charge to that component of project work that will take into account your costs for
assessing its viability. Remember though, that you need to assess its viability in terms of the
criteria that the client has set for the integrated, waste treatment system.

The more difficult costs to estimate are modification of process. One of the questions you
have is since adjustments are expected over a 3-year break-in period, are you going to be
responsible for those adjustments or will they be done in-house with your advice? Also, will
there be performance bonuses or penalties for exceeding, meeting, or not meeting targets?

Your task is to respond to CCVCM’s tentative letter of engagement, with one of your own. It
should itemize project steps and you can estimate some of the costs. It is unlikely that your
letter of engagement will result in a finalized agreement, but you hope that it will take you
to a point so that with further discussion either face to face or by conference call you will be
able to come to a finalized agreement for this project. The length of your letter should be
350-500 words.