Effective

Project
Management
Through
Applied
Cost and
Schedule
Control
 COST ENGINEERING
A Series of Reference Books and Textbooks

Editor
KENNETH K. HUMPHREYS, Ph.D.
Consulting Engineer
Granite Falls, North Carolina

1. Applied Cost Engineering, Forrest D. Clark and A. B. Lorenzoni

2. Basic Cost Engineering, Kenneth K. Humphreys and Sidney Kate//
3. Applied Cost and Schedule Control, James A. Bent
4. Cost Engineering Management Techniques, James H. Black
5. Manufacturing Cost Engineering Handbook, edited by Eric M. Malstrom
6. Project and Cost Engineers' Handbook: Second Edition, Revised and Expanded,
edited by Kenneth K. Humphreys
7. How to Keep Product Costs in Line, Nathan Gutman
8. Applied Cost Engineering: Second Edition, Revised and Expanded, Forrest D. Clark
and A. B. Lorenzoni
9. Managing the Engineering and Construction of Small Projects: Practical Techniques
for Planning, Estimating, Project Control, and Computer Applications, Richard E
Westney
10. Basic Cost Engineering: Second Edition, Revised and Expanded, Kenneth K. Hum-
phreys and Paul Wellman
11. Cost Engineering in Printed Circuit Board Manufacturing, Robert P. Hedden
12. Construction Cost Engineering Handbook, Anghel Patrascu
13. Computerized Project Control, Fulvio Drigani
14. Cost Analysis for Capital Investment Decisions, Hans J. Lang
15. Computer-Organized Cost Engineering, Gideon Samid
16. Engineering Project Management, Frederick L. Blanchard
17. Computerized Management of Multiple Small Projects: Planning, Task and Resource
Scheduling, Estimating, Design Optimization, and Project Control, Richard E Westney
18. Estimating and Costing for the Metal Manufacturing Industries, Robert C. Creese, M.
Adithan, and B. S. Pabla
19. Project and Cost Engineers' Handbook: Third Edition, Revised and Expanded, edited
by Kenneth K. Humphreys and Lloyd M. English
20. Hazardous Waste Cost Control, edited by Richard A. Selg
21. Construction Materials Management, George Stukhart
22. Planning, Estimating, and Control of Chemical Estimation Projects, Pablo F.
Navarrete
23. Precision Manufacturing Costing, E Ralph Sims, Jr.
24. Techniques for Capital Expenditure Analysis, Henry C. Thome and Julian A.
Piekarski
25. Basic Cost Engineering: Third Edition, Revised and Expanded, Kenneth K. Hum-
phreys and Paul Wellman
26. Effective Project Management Through Applied Cost and Schedule Control, edited
by James A. Bent and Kenneth K. Humphreys

Additional Volumes in Preparation

Cost Management of Capital Projects, Kurt Heinze

Effective
Project
Management
Through
Applied
Cost and
Schedule
Control
edited by

James A. Bent
James Bent Associates, Inc.
Bountiful, Utah

Kenneth K* Humphreys
Consulting Engineer
Granite Falls, North Carolina

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Published in 1996 by
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Preface: A Search for Project Excellence

I recently carried out project management benchmarking evaluations of two large

overseas projects in the $300 to $400 million range. In both cases, the evaluations
identified major problems in both program techniques and personnel skills, re-
sulting in cost impacts of more than $30 million for each project. Ratings were
below average for both projects.
I reviewed the evaluations, in detail, with each company's project groups
and senior management. The results, even though poor, were properly received
by each company's project groups, but the reception by each company's senior
management was very different. One company expressed complete acceptance by
the senior executive and with this acceptance responded with an extensive de-
velopment program to rectify the situation. The second company's senior executive
rejected the major findings, even though the findings were fully supported by the
project groups. With this rejection came no support for the remedial action plan.
It appeared that the rejection was due to the fact that the senior executive
had personally instituted elements of the project program, and these elements
were the major categories contributing to the poor benchmarking rating. The
situation illustrated the frequent case that personal pride can override profes-
sional competence.
And I learned, once again, that where there is serious lack of project
understanding by senior management, it is but a short step to there being little
or no real support from the company for the project function. This, then, means
that project managers potentially face an enormous obstacle to project success.
This book is written for all categories of project personnel—department
managers and executives who plan, schedule, control, organize, staff, and manage
engineering and construction projects. It is also a valuable update for people who
have been in the field for a while and need to reinforce their techniques. It is

iii
iv Preface

especially beneficial to engineering and construction management who operate

in today's demanding multiproject environment, who are responsible for setting
policies and standards in that environment, and who want to keep their profes-
sional skills on the leading edge.
This volume has two major objectives: (1) to provide a reference of an
advanced, state-of-the-art project control program and (2) to develop and enhance
the project skills of all who use this book.
Throughout the book, I have interwoven information on the three major
overlapping parts of the total project program, namely:
• programs—defined as techniques, procedures, and methods
• people skills—defined as experience, application, and analytical ability
• culture of project groups—defined as project commitment and working to-
getherness
The focus is on advanced application skills that directly correlate to all
phases of a project, at both owner and contractor levels. When properly utilized,
these skills can lead directly to cost savings or, at the very least, to risk mitiga-
tion, schedule stability, and cost containment. With poor skills/programs, cost
increase is certain.
This book features, in great detail, a state-of-the-art project control and
trending program, with more than 200 exhibits of reports, techniques, and data.
Such a program requires real business skills, analytical ability, and effective
project control techniques. When properly applied, the program results in the
successful evaluation of project changes and their impact on costs, schedules, and
contract conditions.
Many thanks and appreciation go to my friends and colleagues who have made
contributions to this book: to Ken (my Welsh colleague) and Betsy Humphreys for
their word processing and translation of my Welsh English to American English; to
Ken for his contributions to the material, for his technical editing, and for his many
suggestions and improvements for so effectively managing the scheduling and
coordination of all materials and authors; to Judith Bart for her word
processing/editing of my initial manuscript; to Klane Forsgren for his chapters on
environmental and economic matters; to Jim Neill for his chapter on value
engineering; to Michael and Kevin Curran for their chapter on range estimating;
and to Graham Garratt for persuading and motivating me to undertake this work.
James A Bent
Contents

Preface: A Search for Project Excellence Hi

Introduction and Mission Statement xiii

PART 1 THE RELATIONSHIPS AND IMPACT OF PROJECT SKILLS

1. Benchmarking—The Technical Core of Total Quality
Management 1
I. Introduction 1
II. An Overview of Total Quality Management 2
III. The Benchmarking Process 4
IV. Summary 7

2. The Impact of Personnel Skills on Company Culture and

Bottom Line 9
I. Introduction 9
II. Matrix Theory 9
III. Typical Matrix Interface Conflicts 10
IV. Rotational Project Assignments—Project Control Manager 12
V. The Project Charter—Part of the Solution 13
VI. The Impact of Personnel Skills—A Company Study 13
VI Contents

VII. The Impact of Personnel Skills—The Construction 15

Industry Institute Study
VIII. Summary 19

PART 2 COST AND SCHEDULE BASELINES

3. Estimating Keys—Establishing a Realistic Cost Baseline 21

I. Introduction 21
II. Proration Estimates 22
III. Cost Capacity Curves (Overall) 22
IV. Equipment Ratio (Curves) 23
V. Quantity/Unit Cost or Detailed Estimates 23
VI. Fudging the Detailed Estimate 24
VII. Design Constraint on Estimating Quality 25
VIII. Project Management Estimating Responsibility 25
IX. Scope Review 27
X. Project Conditions Review 27
XI. Reviewing Significant Overall Relationships 27
XII. Major or Engineered Equipment and Material 28
XIII. Bulk Materials—Major Considerations 28
XIV. Direct Construction Labor 31
XV. Construction Indirect Costs 32
XVI. Conceptual Estimating—Engineering 33
XVII. Contingency—Estimating Allowances 39
XVIII. Risk Analysis 42
XIX. Escalation 43
XX. Currency Exchange Conversion 43
XXI. Construction Labor Productivity 43
XXII. Pre-Estimating Survey and Checklist 47
XXIII. Statistical/Historical DATA 51
XXIV. Estimating the Case of Used Versus New Equipment 72
XXV. Location Cost Factors—International (from a U.S. Cost 76
Base)
XXVI. Summary—Basic Scope Appreciation 77

4. Scheduling Keys—Establishing a Realistic Schedule

Baseline (Typical and Standard Schedules) 79
I. Introduction 79
II. Major CPM Scheduling Objectives 79
III. Typical Scheduling Levels 81
IV. Standard—Typical Schedules 84
V. Overall Breakdown—Engineering/Procurement/ 92
Construction for a Large Project
VI. Overall Breakdown for a Small Project—Straight Through 97
VII. Engineering/Procurement Cycle for a Large Project— 99
Standard
VIII. Typical Phase 1 Schedule 99
Contents vii

IX. The Fast-Track Program and Trapezoidal Technique 109

X. Project Duration Chart 120
XI. Construction Complexity and Labor Density 122
XII. Craft Mix By Account 125
5. Value Management 127
James M. Neil
I. Introduction 127
II. Value Management Study Types 128
III. Types of Value 128
IV. Lifecycle Costs 129
V. Formal Value Engineering 130
VI. Formal Value Engineering Phases 131
VII. Value Management After Design Begins and During 133
Construction
VIII. Value Engineering to Cost 135
IX. Summary 135
X. Value Engineering Bibliography 135
XI. Constructability Bibliography 136

6. Economic Evaluation in the Process Industries 137

Klane F Forsgren
I. Purpose of an Economic Evaluation 137
II. Methods of Evaluation 138
III. Discounted Cash Flow Methodology 139
IV. A Case Study: Construct or Contract? 142
V. Reliability of the DCF Methodology for Economic Evaluation 147
VI. Selling Price of the Product 148
VII. Nonfinancial Factors 149
VIII. Summary 149

7. Keys to Controlling and Reducing Environmental Costs 151

Klane F. Forsgren
I. Objective 151
II. Players in the Environmental Arena 152
III. Creating an Environmental Remediation Strategy 154
IV. Estimating the Cost of Remediation 164
V Controlling Cost in Remediation 168
VI. Nomenclature 170

PART 3 PROJECT CONTROL

8. Contracting—Front-End Risks, Key Contract

Administration, and Cost-Schedule Considerations 173
I. General Objectives 173
II. What is a Contract? 173
viii Contents

III. Why Have a Contract? 174

IV. Parties to the Contract 174
V. Contract Responsibility 174
VI. Assessing Risk and Cost Liabilities 175
VII. Project Execution Strategy 177
VIII. Contracting Strategy 179
IX. Contracting Arrangements 180
X. Contractual and Legal Review (for Cost Implications) 186
XI. Cost Aspects of a Lump-Sum Agreement (EPC Contract) 188
XII. Payment of the Fixed/Turnkey Price or the Fixed Fee (of 190
a Reimbursable Contract)
XIII. Biased Bidding 191

9. Cost and Schedule Trend Analysis—Forecasting of Baselines 193

I. Developing Real Cost Consciousness—No Small Task 193
II. Business Decision Making Versus Technical Decision Making 195
III. Timely Cost Accounting/Reporting 196
IV. Effective Trending System 197
V. Accurate Cost and Schedule Forecasts 200
VI. Key Project Control Techniques—Overall Project 200
VII. Key Project Control Techniques for Design Engineering 215
VIII. Key Project Control Techniques for Procurement 242
IX. Key Project Control Techniques for Construction—Direct 250
Hire
X. Key Project Control Techniques for Construction— 293
Subcontract
XI. Summary 304
10. Change Control and Risk Analysis 305
I. Introduction 305
II. Increasing the Cost Baseline 305
III. Increasing the Schedule Baseline 306
IV. Scope Increases 306
V Scope Reduction 306
VI. Management Financial Reserve (Dollars) 306
VII. Risk Analysis (Principles, Procedures, and Programs) 307
VIII. Risk Analysis of an Estimate 311

11. Range Estimating 317

Michael W. Curran and Kevin M. Curran
I. The Truth About Range Estimating 317
II. Risk, Opportunity, and Uncertainty 319
III. Numberclature 319
IV. Pareto's Law 320
V Critical Elements 321
Contents ix

VI. Range Estimating Inputs 324

VII. Simulation 326
VIII. Five Key Questions 327
IX. Range Estimating Advantage 331
X. Bibliography 332

12. Contracting—Claims and Extras 333

I. The Reality of Change 333
II. Claimsmanship 334
III. Records—Documentation 335
IV. Knowledge of Contract Law Fundamentals 335
V Understanding/Avoiding Breach of Contract Conditions 337
VI. Claims Mitigation and Reduction—Essential Elements 341

13. Managing Small, Shutdown, Retrofit, or Outage Projects 345

I. Introduction 345
II. The General Problem (Perception and Organization) 345
III. Small Does Not Mean Easy 346
IV. The Organizational Answer (Partly) 347
V. Project Duration 347
VI. Physical Measurement Systems 347
VII. Jobhour Control 347
VIII. Personnel Skills and Team Building 348
IX. A Standard Project Management/Control Program 348
X. The 80:20 Rule 350
XI. Quality Estimating Program 350
XII. Project Control Plan (Maximum) 350
XIII. Subcontract Control 355
XIV Project Control Plan (Intermediate) 358
XV. Project Control Plan (Minimum) 358
XVI. Major Shutdowns, Retrofits, and Outage Projects 361
XVII. Summary 371

14. Project Closeout—Lessons Learned and Historical Data 373

I. Introduction 373
II. Project Objectives Achieved 373
III. Personnel Skills of Key Players 374
IV. Project Organization—Project Control 374
V. Team Building 374
VI. Techniques and Procedures 374
VII. Project Cost-Consciousness—Trending 375
VIII. Lessons Learned 375
IX. Failures 375
X. Recommendations for Change 375
XI. Historical Data 376
 Contents

PART 4 PROJECT MANAGEMENT KEYS AND INTERFACE

15. Project Management Fundamentals—Key Essentials 377
I. Introduction 377
II. Definition of a Project 378
III. Project Management Function 378

16. Managing the Feasibility Study (Preproject Planning) 385

I. Introduction 385
II. Typical Feasibility Project Approach 385
III. Overall Objective 385
IV. Typical Problems 386
V. Project Manager as Communicator/Motivator 387
VI. Operations Interface and Scope Development 387
VII. Owner Authority and Approval 388
VIII. Owner Project Discipline 388
IX. Governmental and Local Authority Permits 388
X. Company Service Divisions—Work Initiation 389
XI. Statement of Requirements 389
XII. Feasibility Study Costs 390
XIII. Key Deliverables 391

17. Front-End Planning and Project Organization 399

I. Introduction 399
II. Project Organization 400
III. Establishing Objectives 404
IV. Scope Definition Control 405
V. Communications—Information Utilization 407
VI. Constructability Planning 410
VII. Summation 411

18. Managing Engineering—Project Control Keys/Interfaces 413

I. Introduction 413
II. Early Engineering Phases 414
III. Proper Technology Development 414
IV. Detailed Engineering/Procurement 415
V. Engineering Design/Project Management Interface 415
VI. Efficient and Cost-Effective Management of Design 416
Program
VII. Correct Balance Between Technical and Procurement 417
Considerations
VIII. Engineering-Procurement Contractor/Project Management 417
Interface
IX. Effective Contractor Engineering-Procurement 417
Performance
X. Typical Design Package for Construction Work Packages 419
Contents xi

XI. Full Sanction and Class II Cost Estimate 419

XII. Technical Approvals and Handling Procedures 421
19 Managing Procurement—Project Control Keys/Interfaces 423
I. Introduction 423
II. Policy—Value and Price Negotiating 423
III. Procurement Responsibility 425
IV. Materials Procurement and Control Essentials 425
V Procurement Process 428
VI. Equipment Spares and Operating Documentation 431
VII. Surplus Materials 432

20 Managing Construction—Project Control Keys/Interfaces 433

I. Cost-Effective Business Management of Construction 433
II. Construction Preplanning 433
III. Owner/Contractor Coordination 436
IV. Construction Manager/Project Manager Interface 436
V. Construction Manager/Operating Staff Interface 437
VI. Construction Manager/Regulating Authorities Interface 437
VII. Effective Overall Site Coordination and Safety 437
VIII. Industrial Relations 438
IX. Efficient Management of Site and Craft Labor 439
X. Quality Control and Documentation 442
XI. Precommissioning—Modules and Pre-Assemblies 442
XII. Handover of Construction Works 442
XIII. Handover Certificates 443
XIV. Safety During Precommissioning/Commissioning 443

Index 445
Introduction and Mission Statement

I. MISSION STATEMENT

The focus of this book is on advanced application skills that directly correlate to
all phases of a project, at both owner and contractor levels. When properly
utilized, these skills can lead directly to cost savings or, at the very least, to risk
mitigation, schedule stability and cost containment. This book features, in great
detail, a state-of-the-art project control and trending program, with more than
200 exhibits of reports, techniques, and data. Such a program requires real
business skills, analytical ability, and effective project control techniques. This,
then, results in the constant evaluation of project changes, cause and effect, their
impact on contract conditions and the cost-schedule impact.

II. TOTAL PROJECT EXECUTION PROGRAM

Throughout the book, the authors have interwoven information on the three major
overlapping parts of the total project program, namely:
• Programs—defined as techniques, procedures, and methods
• People skills—defined as experience, application, and analytical ability
Culture of project groups—defined as project commitment and working to-
getherness
Figure FM.l is a flowchart, showing the above three parts and their constituent
subcategories. As the first two parts cover the same categories, the subcategories
are then combined into two overall categories:
• What to do—skills and techniques

xiii
XIV Introduction and Mission Statement

THREE MAJOR OVERLAPPING PARTS

' "CULTURE" ^
PROGRAMS
of Execution Team
Techniques
& • Project Commitment
Procedures • Togetherness
EXPERIENCE
•APPLICATION I
• ANALYSIS I
1
I
PROGRAMS & SKILLS IN Major Cultures
SAME SUB CATEGORY
• Project Mgt Ethnic
• Engineering Mgt Private Sector
• Contracts Mgt Govt Sector
• Procurement Mgt "Developed"
• Construction Mgt "Undeveloped"
• Project Control Other

J_
(WHAT TO DO ) ( HOW TO POTT)
SKILLS and WORKING
TECHNIQUES TOGETHERNESS
PROJECT
SUCCESS
Current Skill Level - 57% _ § 0 % NECESSARY

Figure FM.1 Total project execution program.

• How to do it—working togetherness

It is our experience and judgement that how to do it is the more important,
by a small margin only.

III. CURRENT INDUSTRY SKILL LEVELS

Construction Industry Institute (CII) project management studies, confirmed by

our direct experience of and data from thousands of individuals and hundreds of
companies, show that today's project skill levels are low and inadequate.
A detailed evaluation of current skill levels and a definition of the best skills
are provided in the following chapters:
Chapter 1, "Benchmarking The Technical Core of Total Quality Management,"
Chapter 2, "The Impact of Personnel Skills on Company Culture and Bottom
Line."
As shown in these chapters, data for the period 1991-1994 shows an overall
worldwide skill level of 58%. It is our judgment that the skill level needs to be
at 80% for successful execution of projects.
Introduction and Mission Statement xv

OldC.Mgt J New Programs New C.Mgt )

JI950 1970^)
(major)
Ci675
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C.P.M. PREPLANNING
• Complete
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• Complete 2. 1970
(CONSTRUCTABIIlUTY)
Purchasing FAST TRACK
VVVVVVVV
3. 1985 [ CONTRACT |
• Install INDEPENDENT CM. (^ ADMINISTRATION J
• Inspect - Fix
• Commission 4. 1990
•Startup PARTNERING BUSINESS ($)
MANAGEMENT
5. 1990
T.Q.M.

6. 1990
DESIGN Q.A. &
VALUE ENG'G

$ $ $ $ $ $ $ $ $
NEW ELEMENTS, impacting on Construction
1955-1975 1 9 7 5 o n . . . . GROWTH OF 1 9 8 4 C.I.I.
GROWTH UNDEVELOPED AREAS ESTABLISHED
+400% • Middle East R&D in Total t
• South America Project Skills t
• Pacific Rim (Asia)
• Japan (Economic)
t
• Weapons - Civil Support t
Change —• Change —•• Change —• Change —• Change
From "Old Texas Redneck" to $ Business Manager

Figure FM.2 Changing role of managing construction.

The rest of the book then covers, in great detail, the skills outlined in these
two chapters.

IV. CHANGING ROLE OF MANAGING CONSTRUCTION

Figure FM.2 is a flowchart that highlights the major changes in construction
management from 1950 to the present day.

A. Old Versus New

The old program of sequential completion of the individual phases of engineering,

procurement, and construction, in which construction management rarely got
involved until four weeks prior to opening the site, has been replaced by the very
challenging—but very efficient—fast-track program. This program and the CPM
scheduling program are the two greatest advances in methodology that have
occurred in the past 30 years; they followed the explosion of work that took place
after World War II. Today's computer programs, while not of the same caliber,
xvi Introduction and Mission Statement

greatly assist in the collection and collation of data that, in turn, is developed
into essential information.

B. A Proactive Role

The best of today's construction management now takes a proactive role through
the newly developed programs of construction preplanning and constructability.
This results in a strong construction involvement at the early stage of the project
to ensure that engineering design and early planning fully recognize the require-
ments of an economic construction program. An example of construction preplan-
ning is backwards scheduling, in which the overall project schedule is structured
around the construction schedule with design drawing issues and material deliv-
eries matched to construction needs. If this is done early in the design stage,
there is no cost impact on design engineering or purchasing, and the construction
cost savings can be considerable, even with the added cost of early construction
involvement.
Business management is now considered of greater value than the old
standard of aggressively pushing the work, with cost and contractual considera-
tions being of lesser consequence.
Note: The timing of new major programs and elements as shown in Figure
FM.2 represents the approximate date when the individual categories were widely
used (proven), not when they were first developed.
Effective
Project
Management
Through
Applied
Cost and
Schedule
Control
1
Benchmarking—The Technical Core of
Total Quality Management

I. INTRODUCTION

Benchmarking is the technical core of the Total Quality Management (TQM)

process. It identifies the quality of current personnel skill levels and company
procedures/methods, and then compares this quality with the latest state-of-the-
art in the industry. The resulting difference, or gap, identifies:
• the need for change,
• dimensions of the needed change, and
• the result that can be achieved by effecting the change.
The need for change is evident only when the latest state-of-the-art tech-
niques are recognized, and when a company realizes and accepts that its current
program is out of date. Further, the company must acknowledge that personnel
skill levels need to be and can be upgraded. It should be noted that many
companies perceive themselves to be better-run than they actually are, which
makes recognition of their actual performance a difficult experience.
In the capital projects side of the business, an effective benchmarking study
of a company's project program is essential if a company is to meet the demands
of today's competitive, low-cost business environment. To be successful, an oper-
ating or contracting company must ensure that its project engineering group
executes its capital projects program with an efficient program, skilled personnel,
and with a positive, contributing company culture. Only benchmarking can first
identify and then implement these dimensions.
 Chapter 1

II. AN OVERVIEW OF TOTAL QUALITY MANAGEMENT

A. The Process

Total Quality Management is a systematic process for continuous improvement

in all facets and at all levels of company operations. The focus is on both the
efficiencies of organizational structure and the skills of company personnel.

B. The Self-Examination Process

The first step in TQM is conducting an in-depth self-examination by assigning

top (i.e., high-quality) personnel to individual teams or task forces. Typical areas
of focus include:
• personnel leadership (at all levels),
• employee involvement in company policy,
• benchmarking methods and procedures,
• employee empowerment,
• management inspection process (measuring progress), and
• the manager as a role model.
As is evident, effectiveness of the TQM process is rooted in the initial assign-
ment of high-quality personnel as team leaders, and in the continuing assignment
of high-quality personnel as the program is implemented. With regard to the
benchmarking aspects of TQM, an outside expert is essential if the examination
is to be unbiased, independent, and of the requisite quality. Conversely, if a com-
pany does not assign high-quality personnel or fails to use an outside expert for
benchmarking, the self-examination and subsequent program will be of little value.

C. Reasons Why Total Quality Management Fails

The TQM process, first begun in the manufacturing industry in the 1980s, is
now sweeping the construction industry. Operators, contractors, subcontractors,
and suppliers are embracing and implementing it with enthusiasm. In fact, many
companies are making it a condition for doing business that their contractors/sup-
pliers have a qualified TQM program in place.
Many of these firms are ecstatic with their TQM results, and report signif-
icant improvement in customer satisfaction, employee morale/commitment, con-
tractor/supplier relationships, return on investments, and company culture. Other
firms find themselves disillusioned, finding employee dissatisfaction/ poor morale,
failing company relationships, unhappy clients, poor company culture, large train-
ing/organizational costs, and little or no return on investment. Such failures are
unfortunately common, and in 1992, the managing director of one of the world's
largest oil companies was fired for just such a failure; his firing came in con-
junction with the first reported financial loss in the company's history. Current
experience has identified several common reasons for TQM failures.
1. Lack of Senior Management Commitment
The TQM process requires tremendous cultural change, particularly in the areas
of self-examination and employee empowerment. This fact is often not understood
Benchmarking—The Technical Core of TQM

or fully accepted by senior management, who may profess acceptance but are
lukewarm in commitment and enthusiasm. These individuals are usually the
autocratic dinosaurs of yesteryear and, fortunately, are a rapidly dying breed.
Beyond this, however, many existing company policies (such as purchasing for
an initial low price rather than the lowest evaluated cost) may need to be changed
to accommodate TQM. See Chapter 2 for a further discussion of outdated policies
and the need for change.
Another commitment problem arises when TQM is viewed as an event rather
than a process. While management typically includes some funding for quality
training in the annual budget and may even appoint a quality manager, such
actions are rarely signs of actual commitment. To be successful, TQM must be
regarded and implemented as an ongoing, consistent program rather a training
exercise or the management fad of the month. Total Quality Management is a
top-down program whose success requires serious understanding, acceptance, and
commitment from senior management.

2. Lack of an Implementation Plan

Successfully implementing TQM generally takes years, not months. For large
companies in particular, the total time period can be six years or more since
every employee, contractor, client, and supplier is affected. Such an undertaking
demands a detailed plan and implementation program. Still, many companies go
straight from the senior management acceptance phase to the implementation
phase, omitting planning altogether. These companies usually find their efforts
fragmented and unsuccessful.
3. A Poor Training Program
Quality training for all levels of management and technical personnel is essential
to a successful TQM program. The curriculum must cover interface management,
interpersonal skills, and technical methods. Holding interactive-type workshops
is also essential. Training alone will not be sufficient, and new training materials,
standards, policies, and methods must be created if the training is to be effective.
This may be a challenge in itself—since TQM was first developed for the man-
ufacturing industry, converting the terminology and examples to the construction
industry requires substantial experience and skill.

4. Lack of Experienced Facilitators/Team Leaders

The initial self-examination and ongoing program require the development of
small employee teams that will identify, evaluate, and recommend improvement
opportunities. Although these teams need strong leadership if they are to be
productive, such leaders are rarely available. Consequently, having an appropri-
ate leadership training program is essential to TQM success.

5. Lack of Measurement
When and if the problems of management commitment, planning, training, and
experience are solved, the challenge of effective measurement must be met. This
involves monitoring the newly implemented policies, standards, and work pro-
cesses for cost-effectiveness and team-building value. Questions such as the
following need to be posed:
 Chapter 1

• Are employee skills improving?

• Is the organization actually more effective?
• Are old matrix interface conflicts disappearing?
• Is an improved company culture developing?
• Is work being performed in less time, at less cost, and at increased levels
of productivity?
The deliverables for these items have to be readily determinable and measurable,
so employees can see that TQM is more than a theoretical exercise.
6. Impatience
As noted earlier, implementing TQM is a matter of years rather than months.
For many people, particularly those who may be results-motivated, this is too
long to wait. Impatience is common in TQM implementation situations, and soon
creates frustration with the drawn-out process. In response, management some-
times gives in to the temptation of a quick fix with a preliminary and shallow
program. Failure always results.
The problem of impatience can be solved, however, by formulating quick
start teams simultaneously with appointment of the self-examination teams. The
quick start teams' output can be put into practice in an area of company opera-
tions where implementation is relatively easy and the probability of success is
high. The resulting success can be used to motivate the rest of the organization,
where it will mitigate impatience and generate enthusiasm.

D. TQM Failure Impacts on the Bottom Line

Without question, TQM failure will result in increased cost and lower return on
revenue or even in a loss. It will also result in low skill levels, poor company culture,
matrix interface conflicts, low morale, loss of resources, and poor public image.

III. THE BENCHMARKING PROCESS

A. Hiring the Benchmarking Expert

Many companies assume that if a management consulting company is working

in the construction industry, it is a benchmarking expert. The author, having
seen such situations, knows this assumption to be false. In addition to knowledge
of the construction industry, the benchmarking expert needs:
• a great many years of hands-on project experience,
proven technical skills backed by reputation and credibility,
• significant interviewing and people skills,
• established measurement criteria, and
an industry-wide level of comparison (state-of-the-art).

B. The Measurement Process

The company's level of technical expertise is determined by interviewing its

technical personnel and by evaluating the quality of the company's formal, written
Benchmarking—The Technical Core of TQM

procedures and techniques. The interviews should be conducted with all levels
of personnel and with key interfacing personnel from supporting service groups.

C. Project Control Benchmarking (Deliverables)

Project control organizations usually consist of the following groups:

• cost estimating,
cost control,
• planning and scheduling, and
• cost accounting.
In some instances, cost accounting is part of the company's general accounting
department rather than part of the project control organization. When conducting
interviews, two three-hour sessions are held with a mix of junior-to-senior person-
nel. Since all of the project controls disciplines are dependent on input informa-
tion, it is proper and even requisite to conduct interviews with the organizations
that provide the input as well as with those in the project control organization
who use the input. Key interfacing organizations are:
• project management,
• discipline engineering,
• operations/maintenance,
procurement,
• contracts,
• construction,
• sales/proposal, and
quality assurance/quality control/safety.
The deliverables are an assessment of:
• personnel technical experience,
• personnel technical skills,
• personnel supervisory skills, and
• company culture (both in- and out-group).
The assessments are then compared with the current industry state-of-the-art,
and, if possible, to those of similar companies. They could also be compared with
a chart of skill levels as described below. A deliverables report illustrates all these
issues and also provides a remedial action plan for reinforcing the strengths and
weaknesses.
D. 1991-1994 Chart of Group Performance and Skill Levels

The chart contained in Figure 1.1 shows skill levels of participants in senior,
professional project courses for the period 1991-1994. The participating compa-
nies are all leading companies from USA, Europe, UK, Australia, South Africa,
Middle East, and Indonesia and therefore represent a good international mix.
Even though these are many of the world's leading companies, the skills level
shows an individual group range of 40-71% with an overall average of 58% over
the four years. The author has a second, independent benchmarking database
that has an overall average level of 55%. The correlation of these two independent
 Legend: • Total Course Performance, P - Project Management, C - Contracting
TITLE
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Figure 1.1 Course performance—project cases/skills.

Benchmarking—The Technical Core of TQM

databases is remarkably close. The skill levels of this chart are determined by
how well course work-groups resolved a wide-ranging set of case histories in the
areas of project estimating, cost control, scheduling, contractual risk, contract
strategy, project organization, project planning and business analysis. These re-
sults confirm many current studies that point to low project management skills
in present-day industry. It is the author's position that skill levels must exceed
80% if the cost savings illustrated in Chapter 2 are to be realized.

IV. SUMMARY

The title of this book features Applied and Effective and is meant to emphasize
and illustrate the skills and techniques essential to a high-quality project control
program. The benchmarking deliverables described in this chapter are, then, a
summary of the skills needed to achieve effective cost and schedule control on
engineering/construction projects. Moreover, there is a distinct relationship be-
tween skill level and project cost, a subject that is discussed more fully in Chapter
2, "The Impact of Personnel Skills on Company Culture and Bottom Line."
The overall assessment by the Construction Industry Institute (CII) that
proper use of these techniques can lead to the U.S. construction industry saving
$15 billion per year is challenging, to say the very least.
It must be emphasized that failure of TQM can impose a significant burden
on any project program. Project personnel must ensure that the impacts of this
burden are properly reflected in their project planning.
The Impact of Personnel Skills on
Company Culture and Bottom Line

I. INTRODUCTION

One of the key considerations in managing projects effectively is the question of

company commitment and support of the project function. Is the support real or
not? Many studies and the author's extensive experience show that a direct
correlation exists between people effectiveness, technical skills, and the working
environment or company culture.
Individuals may be extremely skilled, but their effectiveness can be severely
limited in a company with a poor project culture. When initiative is stifled,
decision making is constantly influenced by political considerations, advancement
is by patronage, and departmental loyalty is more important than the needs of
the project. Even in contracting companies, where execution of projects is the
major product, poor and inefficient cultures may be found.
Such negative cultures are unfortunately all too common. They were brought
into existence when the matrix organization was destroyed by poor people skills,
individual jealousies, company politics, little or no desire to excel, and ultimately,
by management neglect.

II. MATRIX THEORY

Most projects, being small ones, are handled in a matrix organization environ-
ment: they are executed by many departments carrying out the work. This is
usually done with a project manager who does not have adequate decision-making
authority. This authority is shared between the departmental managers who
actually do the work and the project manager who coordinates the work.

9
10 Chapter 2

The fundamental of matrix theory in a project engineering environment

requires that the project objectives and schedule/critical path(s) be clearly defined
so that all working groups will then accept, commit to, and work to those
objectives and schedules. Theoretically, there will be unanimous support from
everyone, so that all will be working to the same set of priorities and objectives.
With a strong project management culture and effective management leader-
ship, the matrix theory would work. In fact, it did work for a time, as individuals
and departments put the project interests first. Still, by the early 1980s, the
matrix interface conflict was widely recognized. Today we realize that the matrix
theory has failed, and we are applying the current antidote of total quality
management. This new approach that is sweeping the industry, when correctly
implemented, does solve the matrix interface conflicts problem.
All major studies conducted during the past ten years have come to the
same conclusion: our failure to make the matrix work is the single biggest
problem faced by the industry today. A 1982 study by Folger & Company, The
Project Management Speaks Back, surveyed project managers working in matrix
organizations of major contractors. This was one of the study's major conclusions:

The consensus opinion is that most problem areas are internal, rather
than external in nature. Over 90% of the Project Managers stated that
conflicting interests and struggles with department managers was their
chief problem.

Many companies tried team-building programs in an effort to develop and

build esprit de corps and a project team environment; they met with only limited
success. At the same time, many companies implemented policies that were
directly opposed to individual initiative and working-togetherness.
Total quality management can solve many of these problems and can result
in a positive working environment and company culture. Still, many of the old
policies will need to be eliminated. The following section refers to these old
policies as matrix interface conflicts.

III. TYPICAL MATRIX INTERFACE CONFLICTS

The matrix interface conflicts discussed in this section are common in the engi-
neering/construction industry and are to be found in even the best of today's
leading companies.

A. Production Versus Engineering—The Hidden Company Charter

In large operating companies, the production company has the budget for all
capital work, and the engineering department provides the technical service and
support for designing and building the capital projects. The production company
can delegate some of its financial responsibility for project development to the
engineering department while still holding final financial approval. On the other
hand, the engineering department is separately charged with technical/economic
viability and must act as technical auditor of the production company. This gives
The Impact of Personnel Skills 11

the production company protection through a check-and-balance system, but it

can and does create people problems because of the divided responsibility.
Numerous studies have shown that the biggest single project-related problem
in our Western business environment is likely to be the lack of scope definition
control at the front end. This results in a constant stream of technical changes
and their accompanying budget overrun and schedule slippages. The conflicting
responsibilities of operations and engineering directly contributes to this problem.
Although common understanding, project discipline, and a commitment to excel-
lence can allow individuals to rise above such situations, failure is the more com-
mon result. This is not to suggest, however, that the check and balance/divided
responsibility structure should be changed. It only means that senior manage-
ment must reinforce the project management function, raising its status so that
the image and responsibility of the two groups become more balanced. The gap
between the two groups can also be reduced by continuing training of project
management personnel and by continuously upgrading the training program.

B. A 10% Estimate and a Fast Track—Impossible

Company policy requires a 10% quality estimate for the funding of capital pro-
jects. Yet at the same time, company management usually wants projects devel-
oped yesterday! These two objectives are totally incompatible in plant-type
projects, and to accomplish the impossible, engineering lies about the quality of
the estimate. In a total quality management culture, this policy must change.

C. Management Controls the Contingency—Unbelievable

Company policy does not give the project manager direct control or management
of the project contingency, while at the same time it holds the project manager
directly responsible for every dollar of the approved funds. This situation is
sometimes a result of management ignorance in confusing contingency with
management reserve. Even in our enlightened technical age, many individuals
still do not understand or accept the need for project contingency. In a total
quality management culture, this policy must change.

D. The Purchasing Interface—Mostly Negative

Companies do not allow project and discipline engineers full access to commercial
information on equipment/material bids. This practice has led many procurement
departments to assume a pre-eminent position in which the tail wags the dog.
Ideally, the engineering and project management functions should include both
business analysis and decision-making roles, particularly for all equipment and
material purchasing. This is becoming a common practice in TQM. In a total
quality management culture, the purchasing department should be in a support
position and provide a full-service function.
Management commonly explains this situation by saying that project per-
sonnel who are aware of prices cannot be trusted to maintain confidentiality or
to give an unbiased, technical assessment. Many owner project managers resolve
this purported problem by delegating this function to outside contractors (usually
12 Chapter 2

on a reimbursable basis) over whom they have more direct control. In a total
quality management culture, this policy must change.
If management feels that discipline or project engineers cannot properly
evaluate technical and commercial considerations or that they cannot be trusted
with sensitive commercial information, then management should train them to
properly handle these responsibilities and provide a culture where these qualities
are commonplace.

E. Project Cost Accounting—What For?

In many instances, accurate and timely cost accounting to an appropriate project

code of accounts is not available. It is often late (by three to four weeks after
the cutoff date), inaccurate, and without an adequate breakdown. To compensate
for this situation, many project engineering groups set up their own independent
program of cost accounting, even though having a duplicate system is expensive
and takes precious time and resources to maintain.
Most accounting groups belong to the company's financial divisions where
the financial vice-president or controller is in charge. These individuals are rarely
conscious of or sympathetic to project management needs (since matrix interface
conflicts occur at senior management levels as well as at intermediate and junior
levels). In a total quality management culture, this policy must change.
Resolving this problem is relatively simple (although "relatively simple" is
a complete understatement, since management of most companies does not have
the understanding or the will to implement this solution). A project cost account-
ing group of two or three individuals is established within the accounting depart-
ment and receives daily direction from project engineering.

F. Mandated Lump-Sum Contracting Regardless of

Environment—Lunacy

Again, this situation is created by company policy. It exists regardless of the

business environment, regardless of the project objectives, and regardless of
resources, experience, and capability. Contracting flexibility is absolutely essen-
tial for effective project management and a cost-effective program. For example,
a lump-sum approach in a seller's market can be expensive, yet in certain
countries the lump-sum requirement is mandated by government regulation.
Obviously, any company working in such a country must obey the law, often to
its own detriment. In a total quality management culture, this policy must change.

IV. ROTATIONAL PROJECT ASSIGNMENTS—PROJECT CONTROL

MANAGER

One of the essentials of TQM is that the manager must be a role model. This
means being a technical expert over the discipline being managed. Yet in many
companies, the manager of project control is not an expert in estimating, or cost
control, or planning and scheduling. In key positions such as director of projects,
manager of purchasing or director of construction, this lack of technical expertise
is rarely a problem as only senior people with extensive project experience are
The Impact of Personnel Skills 13

assigned. Of course, the manager of design cannot possibly be an expert in all

engineering disciplines, but the assignment of nonexpert managers to the project
control function is a common practice and, in a TQM culture, must be curtailed.

V. THE PROJECT CHARTER—PART OF THE SOLUTION

Apart from, or in addition to, TQM, an ever-expanding technique for overcoming

matrix interface conflicts is to develop a charter for each project. This formal,
internal document establishes the project objectives and execution plan, and
outlines major responsibilities of the key parties involved. The key parties are
then required to sign the charter, which signifies their acceptance of and com-
mitment to the project program.

VI. THE IMPACT OF PERSONNEL SKILLS—A COMPANY STUDY

Much has been written about the factors affecting efficient execution of engineer-
ing/construction projects, yet all major studies have come to the same conclusion
that two fundamental factors are involved:
adequate or high-level personal skills, and
• quality project management methods and techniques.
A. Impact of Personal Performance

Some companies have analyzed the impact that personal skills and performance
play in executing engineering/procurement/construction projects. During James
A. Bent's career in the engineering department of Mobil Oil Corporation, senior
management initiated a study to determine why then-current project performance
was poor, resulting in major cost overruns and schedule slippages in the capital
projects program. The study was carried out by four of the company's most senior
project managers, who arrived at the following conclusions:
The design basis contributed 80% of cost.
• The complete project management program contributed 20% of cost.
Figures 2.1 and 2.2 show a breakdown of the study team's findings.

B. Major Effects on Engineering/Procurement/ Construction

Project Costs

As the Mobil Oil study determined, once the process design technology has been
selected and major project elements/objectives are established, the maximum
amount represented by the total project program would be 20%. An effective
project management program includes a combination of project execution meth-
ods/procedures and personnel skills. Effective methods, good personnel skills, and
adequate resources are essential if quality project management is to exist. The
Mobil Oil study team determined that high-quality methods and advanced per-
sonnel skills can result in savings totalling up to 20% of a project's cost. Con-
versely, a poor program and low skills can increase costs by 20% or more, and
14 Chapter 2

E.P.C. Projects

DESIGN PROJECT MANAGEMENT

BASIS PROGRAM

Probable Effect Savings

1. Quality Project Management 5 %
2. Effective Contr. Management 5%
3. "Buyer's Market" 10%
Mobil Study

Figure 2.1 Major effects on project cost.

Detailed Effect

E P C Project
Complete Execution

j | 20% COSTJ §
PROJECT MANAGEMENT
PROGRAM Large Small
Project Project

ENGINEERING 4% 3%
PROCUREMENT 4% 3%
CONSTRUCTION 6% 4%
PLANNING & SCHEDULING 3% 3%
ESTIMATING/COST CONTROL 2% 2%
PROJECT MANAGEMENT 1% 5%
TOTAL 20% 20%
NOTES:
1. On large projects, the value of Project Management is low (1%) as the
effect of a single individual is less than that of a cohesive Project Team.
2. On small projects the reverse is true, and the effect of the Project
Manager can be the biggest single factor.
MobU Study

Figure 2.2 Project management program.

The Impact of Personnel Skills 15

it is probable that the downside risk of cost increases is much greater, sometimes
in excess of 100%.
Figure 2.1, showing the overall impact, tempers the potential 20% savings
with the probability that half the savings (10%) might be influenced by a buyer's
market. It should be noted that a proper assessment of market conditions must
be reflected in the project estimate and contracting strategy so as to prevent
contracting pricing surprises at the later stages of the project.
Figure 2.2, showing a detailed breakdown of the 20% savings, allocates
individual percentages to the six major phases of an engineering/procurement/
construction project and shows the probable variations for large and small pro-
jects. The most significant variation is shown for project management, where the
impact of an individual on a small project can be the largest single factor. This
is especially true when the project manager is the designer, estimator, and
scheduler, as is often the case in the multiple small projects environment.

VII. THE IMPACT OF PERSONNEL SKILLS—THE CONSTRUCTION

INDUSTRY INSTITUTE STUDY

In mid-1987, the Construction Industry Institute (CII) undertook a Project Man-

agement Practice Assessment Survey to evaluate industry skill levels and prac-
tices. That study, and its results, are discussed below. The general purposes of
the study were to:
• select, categorize, and measure key project management practices;
• relate these practices to other key project characteristics;
• determine current levels of project performance in project cost, schedule,
technical quality, safety, and profit; and
• relate the levels of skills utilization to project performance.

A. Key Project Management Categories

To meet the general purposes of the study, eight project management categories
were determined to be essential and were examined in detail; they were:
1. strategic project organizing (front-end planning),
2. contracting practices,
3. design effectiveness,
4. project controls,
5. management of quality,
6. materials management,
7. human resource management, and
8. safety.
The detailed composition of each category is shown in Table 2.1.
The Construction Industry Institute then surveyed owners, architect/engi-
neers, and contractors to determine their assessment of utilization and import-
ance of the identified categories. Table 2.2 contains information about survey
participation.
16 Chapter 2

Table 2.1 Project Management Categories of CII/CICE Principles and Recommended

Practices

Management
category Scope statement
Strategic This category focuses on principles/recommendations related to
project project organization, establishing objectives, scope definition,
organizing control, establishing communications/information processes, and
constructability planning.
Contracting This category focuses on those principles/recommendations related
practices to contracting strategy (planning, packaging, etc.) and the
utilization of specific contract provisions and/or clauses for
contracts controlled by the initiating party.
Design This category covers principles/recommendations relevant to the
effectiveness evaluation of the design effort, incorporating constructability
concepts into design, and control of design activities.
Project controls This category focuses on principles/recommendations related to
control integration, decision making, scope control, control
techniques, and estimating practices.
Management of This category is concerned with principles/recommendations related
quality to the implementation of quality assurance/quality control and
the documentation of quality effectiveness.
Materials This category focuses on principles/recommendations related to
management planning and utilization of materials management on projects.
Human This category is concerned with principles/recommendations related
resource to the quality of site supervision, field work force motivation,
management training, and site labor practices (substance abuse, overtime, etc.)
Safety This category covers principles/recommendations related to safety
communications, specific practices, and management attitude
toward safety.

Table 2.2 Survey Distribution and Receipt

Sent out Returned % %

Companies Surveys
Participants Companies Surveys Companies Surveys responding returned
Owners 220 2204 105 773 47.7 35.1
Architects/engineers 630* 3230 113 465 17.9 14.4
Contractors 1450 7306 210 664 13.7 9.1
Total 2300 12740 428 1902 18.6 14.9

Some duplication exists because several of these companies provide engineering and
construction services. They completed both the A/E and contractor questionnaires.
The Impact of Personnel Skills 17

B. Cost Benefits of Enhanced Skill Levels

Three areas were determined to be crucial if a project is to be cost effective; they

were:
1. making technology enhancements,
2. properly managing the design-construct interface, and
3. using good project management practices.
This section will concentrate on the third area.
It is difficult to quantify potential savings achieved by using good project
management techniques and practices. This is because real-life cost-benefit anal-
yses of different alternatives are not always based on hard facts but on subjective
assessments made of historical data. Further, many assumptions that are critical
to the assessment are subjective in and of themselves. Nevertheless, assessment
of dollar savings is considered to be a worthwhile undertaking.
The Construction Industry Institute asked 35 industry experts to assess
potential gross savings and the associated benefit-to-cost ratios. Table 2.3 shows
the result of these assessments. The numbers are rounded and do not imply
precision. The number one category of choice was "Strategic Project Organizing,"
closely followed by "Design Effectiveness," "Human Resource Management," and
"Project Controls." It should be noted that project control skills are also at the
core of the first three categories, thus emphasizing the need for these skills. This
subjective evaluation led to the conclusion that the potential return (integrated
effect) of 25%, with a cost-to-benefit ratio of 15:1, is most attractive.
C. Techniques Utilization—Owner, Architect/Engineer, Contractor

Another part of the CII study analyzed the respondents' utilization of the key
techniques listed in Table 2.3. The respondents were asked to assess those
practices that were performed directly by the company by which the respondent
was employed. Owner/respondents were also asked to assess those practices
required of their engineering design and construction contractors. Table 2.4 shows
that overall utilization ranged from 66-70%, with safety highest at 76-82%, and
project control being second highest, at 72-77%.
Based on this data and taking a conservative approach, a savings of only
10% would result in $24 billion in savings per year. (The construction industry
is estimated to be $240 billion per year). At the indicated 70% utilization level
of high-quality project management skills by the owner (Table 2.4), the resulting
savings would be an annual $15 billion.

D. Current Project Performance

In addition to conducting the skills impact study, CII also asked owner/respon-
dents to indicate performance of their current projects. These results are shown
in Table 2.5. Current cost and schedule performance (at 61% and 66%, respec-
tively) is the result of an industry out of control. This is the other end of the
scale from the subjective cost savings discussed previously.
18 Chapter 2

Table 2.3 Cost Benefit of Maximum Utilization of CII/CICE Principles and Recommended
Practices

Potential gross Range of gross

savings for savings for
maximum maximum Benefit to
Management category utilization3 (%) utilization (%) cost ratio
Strategic project organizing 15 10-20 20:1
Design effectiveness 10 5-20 15:1
Human resource 10 5-20 15:1
management
Project controls 10 5-15 10:1
Management of quality 8 5-10 10:1
Materials management 5 3-8 10:1
Contracting practices 5 3-10 10:1
Safety 5 2-8 10:1
Integrated effect 25 15-30 15:1
a
Gross savings of total project cost.
b
The integrated effect does not reflect a summation of savings for all eight management
categories. It represents a composite of the subjective assessments of all the respondents
(adjusted for other data sources). Each respondent had its own weighting process to derive the
percent savings for the combined maximum utilization of all categories.

Table 2.4 Comparison of Owner, Architect/Engineer, and Contractor Utilization

Average percent utilization of

principles and recommendations
Management categories Owner A/E Contractor

Strategic project organizing 70 69 73

Contracting practices 69 — 58
Design effectiveness 69 69 —
Project control 74 72 77
Management of quality 72 60 62
Materials management 63 58 62
Human resource management: all 58 — 64
Human resource management: union 73 — 76
Safety 82 — 76
Total 70 66 68
The Impact of Personnel Skills 19

Table 2.5 Summary of Current Owner Performance

Average percent frequency of

Performance measure meeting or performing better
Cost 61
Schedule 66
Technical 80
Quality Not tested
Safety Not tested
Profit Not tested

VIII. SUMMARY

Even though a full TQM program is time-consuming, expensive, difficult to

implement, and requires tremendous company-wide changes, correct application
of such a program can lead to major improvements and cost benefits. The impact
of a good TQM program on the project control function is direct, immediate, and
significant.
Project control personnel are generally not the project leaders or decision
makers but are the generators and compilers of the project status and, especially,
of change and variation. To accomplish this generation and compilation, project
control personnel need to be very effective communicators. Establishing facts,
forecasts, and trends, as well as developing people skills and listening capabilities
are essential.
One of the key objectives of TQM is to create a culture where team-building,
togetherness, and good communication channels are commonplace. Thus, there is
a direct correlation between project team-building and effective cost-schedule control.
Estimating Keys—Establishing a Realistic
Cost Baseline

I. INTRODUCTION
A. Quality of Estimates

Estimating is roughly divided into conceptual and detailed. The general range in
the quality of these two phases of estimating is about 40% to 10%, respectively.
The measure of the quality of an estimate is usually categorized by the amount
of contingency that is contained in the estimate. For example, a 10% estimate
would have a 10% contingency. Due to the high development cost and the time
necessary to produce a 10% quality estimate, many companies approve the funding
and full execution of design-based projects at the ±20% estimate quality. It is pos-
sible, in the special equipment areas and building industry, to produce 10% quality
estimates from preliminary design information. With plant projects, the construction
phase can have a 10% estimate, but only when design is 80% complete or greater.
The accuracy of estimates is largely dependent on the quality of the esti-
mating program and the experience of the estimator. Quality is also dependent
on estimating labor and time. The relationship is not linear. Reasonable invest-
ments of time and resources will, usually, provide better cost estimates. Further
improvements become increasingly expensive, with only modest improvements in
accuracy resulting from substantial expenditures of time and resources. A point
is soon reached where estimate quality is almost completely controlled by prob-
lems of forecasting future economic conditions, local project conditions, and qual-
ity of project performance. No significant improvement in estimate quality can
be made thereafter, except by incorporation of actual design and cost information
as the work develops. Often, senior management does not understand or prefers
not to accept this reality and insists that a 10% quality be produced when the

21
22 Chapter 3

requisite information is not available. Thus, many projects are funded/approved

with an inadequate cost baseline.

B. Purpose of Estimates

The primary purposes of performing an estimate are:

• to establish cost levels for economic evaluation and financial investment, and
• to provide a baseline for cost control as the project develops.
Most projects are estimated by system, designed by system, constructed by
area, and started up by system. As most conceptual estimating bases are struc-
tured on a system basis, rather than on an area basis, it requires considerable
effort at an early estimating stage to develop an estimate on an area basis that,
in turn, maximizes the controllability aspect. This is especially important for
construction, where work is executed on an area basis.
When there is a lack of time, it is probable that the early conceptual estimate
would be a capacity-cost or curve-type estimate for direct costs, with indirect
costs on a percentage basis. Even though lacking time, the estimator should be
encouraged to put as much quality (definition) into the estimate as possible, as
this estimate may become the control base for the project.

C. Typical Estimating Categories

Estimating can be broken down into the following categories:

• conceptual
proration, budget, rough order-of-magnitude, etc.
- cost capacity curves
- equipment ratio (curves)
• detailed (quantity/unit jobhours/unit costs).
In practice, most estimates are composed of all or many of the above categories;
even a detailed estimate may have factored elements. See Chapter 16 for detailed
discussions of estimating during the feasibility-conceptual phase.

II. PRORATION ESTIMATES

This method takes the cost of a similar, previously built facility, and prorates the
cost for the new facility, based on changes for project conditions, capacity, esca-
lation, productivity, design differences, and time. This method is based on some
historical data and a lot of statistical relationships and assumptions. It is, there-
fore, usually accurate to about ±40%.

III. COST CAPACITY CURVES (OVERALL)

A historical database is developed for similar plants where the total cost is related
to capacity. This method is usually more accurate, generally around ±30%, but
does depend on the quality of the database. Economies of scale are also built in
Estimating Keys—Establishing a Realistic Cost Baseline 23

with capacity databases. This method is also used, at a lower level of detail, for
individual pieces of equipment and/or process/utility systems.
These conceptual estimating systems are generally used to give a quick and
early indication of required investment level. The resulting evaluations should
only be used for budget purposes and investment possibilities. The information
is not sufficiently accurate to make firm investment decisions. Sometimes invest-
ment decisions are made on this preliminary information, where economic viability
is not the first priority. Projects to meet environmental standards, stay-in-business
criteria, or research and development programs fall into this category. Another
purpose of these early estimating programs is to provide technical and economic
information on investment and resource requirements to advance the technical
basis and estimating quality to a higher level. Thus, many projects are funded
on a partial or phased approach.

IV. EQUIPMENT RATIO (CURVES)

This method calculates all other costs as a percentage of the major equipment
cost. Ratio methods are effective with a good database. The accuracy of this
method is generally ±20%. This quality of estimate is usually the minimum
requirement for a full investment decision of a design-build project.
This type of estimate should be produced after completion of conceptual
design and process selection and is an update of the conceptual estimate prepared
during feasibility studies.
The following shows the general design/scope basis:
• overall process flow diagrams,
• heat and material balances,
• onsite and off site facilities and layouts (power, steam, air, electricity, water),
• preliminary plot plant/building layouts,
• equipment list (by size and category),
• preliminary execution plant/organization/resources/schedule, and
• completed survey of appropriate estimating data.
This is an equipment and bulk ratio estimate for direct labor and material costs.
Indirect costs are factored from direct costs. A further statistical breakdown is
made to development engineering and construction jobhours for scheduling and
resource evaluation.

V. QUANTITY/UNIT COST OR DETAILED ESTIMATES

This method is the most accurate, generally ±10%, and is costly and time consum-
ing, as detailed takeoffs must be made of all material units and associated labor
in the project. This method requires that engineering be sufficiently advanced so
that accurate material quantity takeoffs can be produced. It also requires detailed
historical data for applying unit jobhour rates and costs to the estimated quantities.
This type of estimate can be developed only when the process design has
essentially been completed. It will also require a significant amount of detailed
engineering to be completed so that material takeoffs can be developed for civil
work, mechanical, piping, electrical, etc.
24 Chapter 3

The following are typical for a design-build project:

• approved process descriptions—feedstock and product slate;
licensor engineering (Schedule A package);
• approved flowsheets;
heat and material balances;
approved process piping and instrumentation diagrams (P&IDs) (process and
utilities);
• approved plot plans;
• general specifications;
• equipment specifications and data sheets;
• completed site-soil survey and report;
site development, grading drawings, building layouts/specifications;
• underground piping and electrical layouts;
concrete foundation layouts;
above-ground piping layouts;
• one-line electrical drawings;
milestone schedule;
• detailed project-owner conditions and requirements;
project-owner conditions and requirements;
environmental and governmental requirements;
• equipment quotations (transportation costs);
• bulk material takeoffs;
labor cost-productivity data;
layouts for construction temporary facilities;
organization charts (project, engineering, and construction);
personnel schedules and labor histograms; and
• construction equipment schedules.
A detailed estimate is quantity based, and reflects separate unit costs for
material, labor, and jobhours. Construction is based on an area breakdown rather
than on the system basis of a conceptual estimate. This estimate can be an
updated, trended version of the first conceptual estimate and subsequent updates.
In most cases, however, it is a completely separate exercise, since the format and
work breakdown structure are different from and more detailed than that of a
conceptual estimate. In particular, the construction estimate is done on an area
basis with takeoffs by work units and jobhour rates.
On a design-build, reimbursable-type project, this estimate can be developed
between six and eight months after the contract is awarded, as that amount of
time will be required to provide an adequate level of completion of detailed
engineering (about 50%).
The most significant element of a high-quality estimate is the maximizing
of quantities and minimizing of factors and statistical relationships.

VI. FUDGING THE DETAILED ESTIMATE

Many companies have a policy that requires a detailed 10% estimate before the
project appropriation will be approved. These same organizations (typically manu-
facturing companies), also require that the project be started yesterday. Manufac-
Estimating Keys—Establishing a Realistic Cost Baseline 25

turing and plant management often insist on these two objectives, even though
they are incompatible. In most cases, the practical resolution of this management
inconsistency is for the estimate to be fudged. In other words, the estimate shows
a 10% contingency below the line, with a similar amount of money buried above
the line in individual categories where the risk is deemed to be the greatest.
While this process meets the company financial approval policy, it nevertheless
is poor management practice and provides an inadequate basis from which to
execute and manage the project.
It is also quite common for some companies to execute projects on a crisis
management basis, an approach that will in most cases increase a project's capital
costs. Still, since the project may be able to reach the marketplace at an earlier
time, this approach may increase the economic return as well.

VII. DESIGN CONSTRAINT ON ESTIMATING QUALITY

Figure 3.1 shows the quality of estimating in relation to its completion of the
engineering, procurement, and design (EPC) progress curves. This information
is based on historical experience and shows that for a 10% quality estimate, the
percentage completions for a design-build project should be:
Engineering 85%
Procurement 90%
Construction 20%
With an outstanding historical database and high-quality personnel, it is possible
to provide a 10% estimate with lower percent completions of EPC.

VIII. PROJECT MANAGEMENT ESTIMATING RESPONSIBILITY

Since many companies have a formal estimating section, the relationship between
the estimator and project manager should be clearly defined and properly under-
stood by all parties. The project manager should direct development of the
estimate before it is issued and should ensure the estimate properly reflects:
project objectives and their priorities,
• design scope and design specifications,
• maximizing of quantities and minimizing of factors (numbers of drawings
and construction work units),
correct evaluation of design and labor productivities,
• current project and site conditions (access, congestion, etc.),
• proposed execution plan/contract strategy,
• schedule requirements (economic versus acceleration), and
adequate contingency evaluation.
As can be seen from the above list, the project manager is actively involved in
developing the estimate and is ultimately responsible for the final product.
NOTES : TYPICAL ESTIMATING CATEGORIES
1. ACTUAL PROGRESS PLOTTED AGAINST COMPANY HISTORICAL EXPERIENCE . 1. Proration (40/25**)
2. Cost Capacity Curves (30/20%) IS)
2. EARLY CONSTRUCTION START REFLECTS A PROJECT WITH EXTENSIVE SITE PREPARATION . 3. Equipment Ratio (20/15%)
3. CONCEPTUAL DESIGN HAS BEEN COMPLETED DURING A PHASE I OPERATION . 4. Quantttv/Untt Cost (10/5%)
r— 1 0 0 - • —-
ESTIMATE
"QUALITY
90 -

40/25%H
80 -
ENGINEERING IS A KEY fr-
m
MATERIAL &
SUBCONTRACT
S>
MILESTONE . PROVIDES
ADEQUATE SUPPORT FOR
iz
•
70 - COMITMENTS .) j . T U L L CONSTRUCTION —
c /
PROGRAM I MECHANICAL
o | (PIPING t ERECTKDN)
?TK)N) 11 I |
M 60 COMPLETION
P

m
ill
L
E
T
50 - =r 4--/ H i l
STAlRT OF
CONSTRUCTION } - :g:;:^
-f-
E
40 -

m fcoNSTRUCTIONl
30 -

m 20

10
ADVANCE COMITMENTS
OF CRITICAL MATERIAL
CAN BE MADE IN PHASE 1 .I

o
PROJECT DURATION-
CONCEPTUAL PHASE EXECUTION PHASE
PHASE I PHASE 1 I CO

Figure 3.1 Estimating quality versus status of EPC.

Estimating Keys—Establishing a Realistic Cost Baseline 27

IX. SCOPE REVIEW

To ensure that the scope definition is of the required quality, the estimator/project
manager should make a detailed review of all basic design documents, their
revision numbers, and dates of issue, as follows:
check that all major equipment is included and is listed by equipment number;
• review all items shown on plot plans, flow sheets, P&IDs, and equipment
lists to ensure their inclusion in the estimate;
check equipment and system capacities, flow rates, temperatures, and pres-
sures for deviation;
check whether owner costs are to be included or shown separately;
• evaluate deviations in the scope, design, or estimating basis from those
assumed in the earlier estimate, and include them on a puts-and-takes list;
and
• have specialist engineers assigned to the project review and verify the design
scope.

X. PROJECT CONDITIONS REVIEW

Before developing the line-by-line details of the estimate, an overall evaluation

should consider the following:
• project location (i.e., site characteristics such as high winds, weather, soil
conditions), and local affiliate/governmental practices or regulations;
• schedule (i.e., start of engineering, start of construction, mechanical com-
pletion, and milestone dates);
• labor basis (e.g., subcontract or direct hire);
economic outlook;
contracting mode and execution plan; and
compatibility of the estimate with contract conditions.

XL REVIEWING SIGNIFICANT OVERALL RELATIONSHIPS

A comparison should be made of significant relationships. This can be for both

owner scope and contractor scope, such as:
• engineering jobhours per piece of equipment,
contractor's home office and engineering costs as a percentage of total cost,
• contractor's fee as a percentage of total cost,
indirect construction costs as a percentage of direct labor cost,
• percentage breakdown of engineering jobhours by prime account,
percentage breakdown of construction jobhours by prime account,
• all-in engineering jobhour rate,
• all-in field jobhour rate,
• escalation allowances for material and labor,
productivity factors for engineering and construction, and
• currency exchange rates (for overseas procurements).
28 Chapter 3

XII. MAJOR OR ENGINEERED EQUIPMENT AND MATERIAL

The cost of major or engineered equipment can be established by actual quota-

tions or from historical data. The method used depends on the type of equipment
involved and its relative cost. For example, quotations should be obtained for
large compressors, but small mixers may be estimated from catalogs or estimating
manuals. A cheapest source program should be used for source guidance on
worldwide purchasing.

A. Developmental (or Growth) Allowances for Fast-Track Projects

Estimates based on vendor quotes, catalog prices, or initial inquiries should

include an allowance for future increases in scope. When the design is at an early
stage, costs can rise as much as 15% from an original purchase price as a result
of design changes. Verify that the estimate has included an appropriate design
allowance (typically 5-10%) for future changes.

B. Some Major Equipment Considerations

The following are considerations for engineered or major project equipment:

vessels (towers, reactors, drums)—adjust for shop fabrication versus field
fabrication, and the need for lifting lugs (field erection);
• heaters and furnaces—evaluate the degree of prefabrication before field
erection;
• boilers and superheaters—check the proposed field erection program; and
storage tanks—ensure that tank foundations are adequate for duty and soil
conditions.
C. Project-Schedule Conditions That Could Influence Prices

Care should be exercised to ensure that schedule conditions do not adversely

influence price. For instance, evaluate:
• market conditions;
• purchasing preference/plant compatibility/maintenance costs;
• schedule acceleration (premium costs);
escalation/currency exchange rates;
• freight, duties, taxes; and
• size of order/quantity discount.

XIII. BULK MATERIALS—MAJOR CONSIDERATIONS

A. Concrete Foundations (Equipment)

Spot-check design quantities for large equipment.

• Determine average jobhours per cubic yard installed (with rebar, formwork,
and embedments).
Estimating Keys—Establishing a Realistic Cost Baseline 29

B. Roads and Paving

• Determine cost per square foot installed.

C. Fireproofing

Ensure adequate allowance for cutouts, penetration seals, and rework.

D. Buildings and Structures

• Examine all-in square foot costs of building.

E. Site Preparation

Check soil conditions (i.e., type, frost depth, de-watering, sheet piling, and
drainage requirements).
• Consider possible underground obstructions.
• Be aware that on large, grassroots projects, earth-moving quantities are
often underestimated.

F. Piling

Check the type of piles (e.g., precast, in situ, timber) and the cutting of pile
caps.
• Determine who will do the layout work (i.e., the prime contractor or a
subcontractor).

G. Piping Estimating Methods

Following are four methods of preparing a piping estimate. The method chosen
depends on detail and accuracy of the estimate.
Estimating by length. This method is based on historical data and assumes an
average number of fittings and flanges for a standard piping configuration.
Costs are on a unit length basis by pipe size and schedule. Fabrication is
separated from field installation. It is necessary to add only the cost of such
items as valves, pipe supports, and testing to arrive at a total direct cost
for the piping system. Care should be taken to check allowances for unusual
complexity of piping arrangements (especially onsite units or revamps).
Estimating by weight. In this method, piping materials are assumed to have a
value approximately proportional to their weight. Pipe is assigned a cost
per pound for material and a number of jobhours per ton for fabrication and
erection. Adjustments should be made for unusual materials and labor
productivity for the plant location.
Estimating by ratio. This method calculates piping as a percentage of the major
equipment cost. Ratio methods can be used only with an appropriate data-
base. This is not a very accurate method and is usually applied only to
conceptual estimates.
30 Chapter 3

Estimating by unit cost. This method is more accurate than estimating by ratio,
but it is costly and time consuming, since detailed takeoffs must be made
of all labor and material units in the system. This method requires that
engineering be well advanced before accurate takeoffs can be produced. It
also requires detailed historical data for pricing installation labor.
After an estimating method is selected and applied, a piping estimate review
should be performed to examine the method and extent of the takeoff by sampling
line takeoffs and comparing actual quantities and costs with estimates. Such
items as the basis of fabrication and the impact of special materials should also
be reviewed.

H. Electrical

In estimating electrical work, a schedule of the number and size of motor drives
is a basic requirement. Motor control center and power distribution items usually
constitute a major part of the electrical work. Since their prices can vary consid-
erably, budget prices should be obtained from potential suppliers. The cost of
power cable should be estimated in reasonable detail. A plot plan layout is useful
in assessing quantities, while material unit prices may be estimated from his-
torical data. Minor/miscellaneous services, such as emergency lighting, fire
alarms, intercoms, power outlets, and telephone systems, can be assessed approx-
imately or represented as an allowance. Plant lighting may be estimated on an
area or unit length basis. A gross estimate of electrical work based on horsepower
can be inaccurate. The estimate should take into consideration local electrical
codes and area classification. Climatic conditions may require a different type of
cable and hardware, and therefore could affect cost,

I. Instrumentation

The following methods are generally used to estimate instrumentation:

Factors. With an adequate database, instrumentation can be factored relative to
the installed major equipment cost. Additional points for consideration are
local electrical and environmental codes, and the degree of computer con-
trol/technical upgrading.
Cost per instrument loop. This can be done by using previous return data to
establish costs for typical loops based on instrument type and materials of
construction, and multiplying these by the estimated number of loops in the
system. Loop configurations should be developed by the instrument engineer.
Total installed cost per unit. Instruments are priced from a preliminary list by
means of quotes, catalog prices, or price data. Auxiliary material and instal-
lation costs (such as tubing, wiring racks, supports or testing) are assessed
for each instrument based on experience and judgment.
Detailed estimating. This is the most accurate approach and requires a detailed
instrument list priced from past data or quotes. Labor jobhours for each
instrument are added. Instrument tubing and wiring should be established
by detailed takeoff. Auxiliary material and labor cost can be taken as a
percentage of the total instrument cost.
Estimating Keys—Establishing a Realistic Cost Baseline 31

When the instrument estimate is complete, it should be reviewed and the

process and instrumentation diagrams examined for numbers and complexity of
instrumentation such as distributed control systems (DCS) and/or extensive
alarms for safety and security. Conflicts between owner and contractor specifica-
tions should also be checked.

J. Insulation

Review requirements for heat conservation, winterizing, cold insulation, and

personnel protection for equipment and piping.

K. Painting

Painting is not usually large enough to justify a detailed estimate, but any
prorated method and values used should be reviewed.

XIV. DIRECT CONSTRUCTION LABOR

A. Equipment Installation (Jobhours)

A check of jobhours required for equipment installation may be made either by

jobhours per weight and type of equipment, or jobhours per piece and type of
equipment.

B. Bulk Materials Installation (Jobhours)

The following major items should be checked:

• jobhours per cubic yard for excavation (machine, hand, or weighted average);
jobhours per cubic yard for foundation concrete (including forming, pouring,
reinforcing steel, and embedments). Review dewatering, sheet piling, and
shoring requirements for a civil program;
jobhours per ton of structural steel (for field fabrication and erection); and
• jobhours per foot of piping by size and pipe schedule.

C. Productivity (Jobhours)

Depending on the quality of the estimating base, the preceding jobhours are
normally factored for time and project location. A geographic productivity system
is essential for a quality estimating program. General items (such as handling,
scaffolding, testing, and rework) are on a jobhour percentage basis for a detailed
estimate, and are included in jobhour rates for a conceptual estimate.

D. Labor Costs

Current labor agreements and conditions, productivity factors, labor availability,

site conditions, and project conditions should be reviewed. Total jobhours as well
as the craft jobhour distribution should also be reviewed:
32 Chapter 3

subcontract versus direct hire, and what is covered in the all-in subcontract
wage rate, especially field indirects;
average wage rate;
inclusion of appropriate fringe benefits, taxes, and insurance; and
allowances for premium pay on overtime and shift work.

XV. CONSTRUCTION INDIRECT COSTS

Where possible, ensure that estimates have dimensional sketches showing layouts
of temporary facilities that can then be quantified for estimating.

A. Temporary Facilities

Review estimates for:

• temporary utility lines and utilities consumed during construction;
• temporary roads, parking, warehousing, and laydown areas;
fencing and security;
• temporary buildings, furnishings, and equipment;
• personnel transportation and equipment-receiving facilities; and
• erection-operation of a construction camp, if required.
Most of these items are estimated on a cost-per-foot and square foot basis.

B. Construction Tools and Equipment

Discuss and check the methods used by the construction group in establishing
equipment requirements. Check for:
• list and scheduled duration of all major equipment;
• small tools (normally estimated as cost per labor jobhour or percent of
direct-labor costs);
• availability of equipment, and start and finish of rental period;
• major and minor equipment maintenance;
• purchased equipment, and rented equipment and its source;
• special and/or heavy lift requirements; and
construction equipment cost per direct-hire jobhour.

C. Construction Staff

Examine the site organization chart and assignment durations of personnel. Also
review:
• relocation costs, travel and living allowances, fringe benefits and burdens,
and overseas allowances;
• total staff jobhours related to total labor jobhours; and
• supervision cost related to the construction labor cost.
Estimating Keys—Establishing a Realistic Cost Baseline 33

D. Field Office Expenses

Review the estimates of field office supplies, copying, telephone and facsimile,
office equipment, and consumables. These items are usually estimated as cost
per labor jobhour or as a percent of direct field costs.

XVI. CONCEPTUAL ESTIMATING—ENGINEERING

A. Key Elements

Conceptual estimates vary widely in quality, but generally in the range of 40%
to 15% quality, where quality is defined as the amount of estimating contingency.
For developing a 20% quality estimate, the following are key elements of engi-
neering costs:
• engineering scope review,
• project conditions review,
• key database—hours per piece of equipment,
engineering costs (Fig. 3.2),
large project experience—size effect (Fig. 3.3),
breakdown of home office hours (Fig. 3.4),
home office expenses (Fig. 3.5),
typical data points (Fig. 3.6), and
• project support for approved projects—owners (Fig. 3.7).
B. Engineering Scope Review

To ensure that the scope definition is of the required quality, the estimator/project
manager should make a detailed review that all preliminary-basic design docu-
ments are available and up-to-date (revision numbers and dates of issue); the
estimator/project manager should:
• check that all major equipment is included and is listed by equipment number;
review all items shown on plot plans, flow sheets, P&IDs, and equipment
lists to ensure their inclusion in the estimate;
• check equipment and system capacities, flow rates, temperatures, and pres-
sures for deviation;
• identify unique, special, or high cost equipment; and
• check whether owner costs are to be included.

C. Project Conditions Review

Before developing the details of the estimate, an overall evaluation should con-
sider the following:
• project location (site characteristics, labor productivity, and local conditions);
• schedule (anticipated project start, fast track, economic, acceleration);
grassroots installation, revamp, and shutdown elements; and
• economic outlook, engineering and construction resources, vendor-material
capacity.
34 Chapter 3

The overall evaluation also should recognize innate characteristics of the project.
Both equipment items and construction elements can add to design engineering
hours. Special handling or foundation requirements of equipment can lead to
more than normal engineering hours. Similarly, construction preplanning con-
structability considerations and unusual installation requirements can, again,
add to engineering hours. Schedule acceleration and lack of skilled resources can
impact on engineering productivity.

D, Key Database—Hours Per Piece of Equipment

The most widely used database for conceptual estimating of engineering is:
Engineering Hours per Piece of Equipment
The engineering hours represent total design hours, including supervision, start-
ing from a completed basic design package to mechanical completion. Feasibil-
ity-conceptual design hours are not included; this category of work is covered
with a follow-up paragraph. Also not included are project management and other
home office services. The total pieces of equipment are represented by the equip-
ment list, which is a standard industry document. The following is a typical
database (U.S.):
Category Engineering hours
Petrochemical, utilities 800-1200
Chemical 600-800
Pulp and paper 500-700
Pharmaceutical 400-500
Metals-mining 300-400
Food 200-300
Mechanical handling 100-200
Selecting a specific number from the above ranges will depend on engineering
complexity and special considerations, as previously outlined, of the individual
project. For example, considering the petrochemical range of 800-1200 engineer-
ing hours per piece of equipment, the following would be typical:
Cracking (complex) 1200
Merox (simple) 800
However, good judgment is required to properly assess the engineering com-
plexity and associated project conditions to determine the correct rate. In excep-
tional cases, it is possible for a project to be outside the normal range. In addition,
it is possible that overseas engineering would require an added factor of 10-20%.
The following descriptions of the figures noted above provide further guidance.

E. Engineering Costs

Figure 3.2 is a chart showing a family of curves for differing work categories/
industries, where engineering is shown as a percent of the total project cost. The
most widely used curve is Curve C, chemical process plants, where the midpoint
of the curve shows engineering at 10% of the total cost. Curve E is used for small
 m
S
1
(O

I
Engineering costs are approximately 10% of TIC for intermediate and large
projects. However, experience indicates that this number can increase as
shown in curve F due to size effect, lack of skilled resources, and poor
planning. Ift
90 ^ ^ ' i
E '
i i i i i s
i
I
•
to - "
8" . D

B
c
*——
-^ -^
• L J J •JL am
F
i — M l " • •••
m»^" I (Q
fi)
£ 10 —*— - - ^ -+ -
a
- — -
co 8 -
•——

2 6
o
1
—
*O 5
O
1- o
u
Q-
3 a
2
0.1 0.2
i i i i
0.3 0.4 0.5 0.7 1 2 3 4 15
! 1 1 1
7 10 20 30 40 50 10C 30C 600 1000 140C w
160C 0)
Total installed cost, millions of dollars 1130C
20 0 0 8
Engineering costs as average percent of total installed costs: A, office buildings and laboratories; B,
power plants, cement plants, kilns, and water systems; C, battery-limits chemical process plants; D,
complex chemical and grass-roots chemical plants and pilot plants; E, small revamp/retrofit projects; F,
large process projects.

Figure 3.2 Engineering costs.

 11. Stat B 1983
Contractor Performance,!978-1985 12. Stat A 1977
ENGINEERING & MflNflGEMENT 13. Stat C 1985
14. Gulfaks A 1986
30% Full EPC Responsibility of Large 15. Valhall 1983
Process Projects. 16. Frigg 1979
( Includes: Detailed Design, Project Management & Control,
Purchasing, Contracting, Computer Services, Accounting,
Auditing, General Administration, Construction Management).

© 20 - 22 % Norn
20% lllliii Ilil 1 3
1 6 - 1 8 % Norm

1. Woerth Ref'y 1970

2. Paulsboro FCC .... 1980
3. Jeddah Lube 1978
4. Coryton FCC 1980
5. Arun Gas 1978
10% 6. Joliet Ref'y 1973
7. Arun LNG 1978 Major Factors of this Poor Performance are
8. Wilhms'vn Ref'y .1975 1. Lack of skilled Resources
9. Red Sea Ref'y 1985 2. Poor Planning
10. Yanbu P'chm 1984 3. Poor Control of Reimbursable FOC

1( 300 500 700 900 1100 1300 1500 1700 1900

o

TOTAL PROJE )T COST - $ MILLION (D

Figure 3.3 Large project experience—size effect.

Estimating Keys—Establishing a Realistic Cost Baseline 37

revamp/retrofit projects, and it should be noted that the percentage more than
doubles, to 20% plus. Curve F applies to large process projects. Key features of
this curve are illustrated by Figure 3.3.

F. Large Project Experience—Size Effect

Figure 3.3 shows data of 16 large projects, over the period 1970-1985, where the
size or scale effect of the previous curve (unit cost reduces as size increases, as
per 6/10th rule) is reversed. This means that the curves, instead of steadily
reducing as size increases, can and do increase when projects reach a very large
size and/or are outside the experience of the assigned project personnel. This is
known as the size effect and is, in fact, a further variation of the learning curve.

G. Breakdown of Home Office Hours

Figure 3.4 is a typical breakdown of total home office hours for a contractor who
has total responsibility (i.e., full scope) for executing the project. Other conditions
are:
work completion is mechanical completion,
data does not include feasibility-conceptual design,
• data applies to projects over $5 million,
• owner's support hours are not included,
project's experience over the period 1970-1990, and
• adjustment for increased sophistication of instrumentation is included.
Application
This information can be used to check an estimate or a contractor proposal of
home office hours. It can also be used for early evaluation of home office labor
and schedules when only total costs or hours are available.
Example:
1. For a typical project, we can assess the percent of piping hours. This is
derived by totalling the hours required for piping engineering activities
(plant design, 16.4%; piping engineering, 2.1%; bill of materials, 2.1%; and
model, 0.4%, for a total of 21%).
2. As a percentage of engineering only, piping becomes 21% divided by 0.67,
or 32%. As overall engineering and piping design are often on the critical
path, individual evaluations are frequently required. Where information is
lacking, the following percentages should be used:
engineering hours as a percentage of total home office (65%), and
• piping hours as a percentage of engineering (35%).

H. Home Office Expenses

Figure 3.5 illustrates many home office services considered part of the expense
category that are often forgotten or underestimated.
• Full scope EPC responsibility for contractor • Work completion at mechanical completion
• Data does not cover conceptual design (Phase 1) • Data applies to intermediate / large projects ($5 MM plus)

• Data is based on historical experience • Owner's support jobhours not included

Full-scope % % Jobhours
Design & Drafting
25.00 10.0
Civil and structural
7.50 3.0
Vessels
15.00 6.0
Electrical
41.00 16.4
Plant design (piping)
5.25 2.1
Piping engineering
5.25 2.1
Bill of material
1.00 0.4
Model
Sub-Totals 100.00 40.0

Administration - indirect drafting 4.0

Engineering

Instrument (engineering and drafting) 3.0

Mechanical (rotating machinery, plant utilities,metallurgy, etc.) 3.0

Mechanical (consultants) 0.2

Project management 7.5

Project engineering 6.0

Project (operating expenses, services administration) 3.0

Process design 3.0

Process technology services 0.1

67% Engineering

Project services

Estimating and cost control 4.0

Proposals

Computer control

Computer systems 1.0

Initial operations -- office 0.2

Technical information 0.2

Scheduling 2.0

Procurement

Purchasing 5.0

Inspection and expediting 5.0

General office

Stenographic 4.5

Accounting 7.0

Office services 2.0

Labor relations 0.1

Construction (office) 2.0

Total 100.0

Figure 3.4 Typical contractor home office breakdown.

Estimating Keys—Establishing a Realistic Cost Baseline 39

REPRODUCTION CHARGES

COMPUTER SERVICES

MISCELLANEOUS

Figure 3.5 Home office expense breakdown.

I. Typical Data Points

Figure 3.6 shows engineering hours, at both conceptual and detailed levels, for
various categories of drawings and documents.

J. Project Support For Approved Projects—Owners

Figure 3.7 is a set of curves used to estimate the owner cost of its project team
throughout the project execution phase. The two curves-databases are for stan-
dard approach cost-reimbursable projects and for a lump-sum approach. Obvi-
ously, the size of an owner project team should be less on a lump-sum job. As
illustrated, the curves are based on actual project experience.

K. Other Home Office Services Costs

As covered by Figure 3.4 and Figure 3.8, this category is generally 3% of total
project cost.

XVII. CONTINGENCY—ESTIMATING ALLOWANCES

The contingency or estimating allowance is usually a function of:

• design definition (such as process, utilities, facilities, and revamp);
estimating methods (database and level of detail);
time frame and schedule probability;
 40 Chapter 3

The following are typical data points for evaluating

estimating levels or monitoring project performance.
This data applies to large U.S. process plants.
Adjustments should be made for overseas locations
and for small projects.

Engineering
• Jobhours per drawing (total drawings) 150 to 160
• Jobhours per piece of equipment 1000 to 1200
• Jobhours per piping isometric
without CAD 8 to 10
with CAD 4 to 5
• Jobhours per P & I diagram 400 to 500
• Jobhours per plot plan 200 to 300
• Jobhours per material requisition 8 to 10

Figure 3.6 Typical data points—engineering.

This chart reflects a "Full, independent

PROJECT SUPPORT - Approved Projects. Project Task Force Approach", as used
by leading international oil companies.
• Hours per $ million (Base Project Cost). It does not reflect a "Partnering" Approach

Covering design, project management, project control, procurement services, construction &
contract administration. With a Managing Contractor, project team is in a monitoring role. For
"Small Projects Program", includes detailed engineering and "full" management of the work.
60001
5000
4000
3000

2000
HOURS
PER 1000 80%
$M. 800
600
40O

200
1 2 3 4 5 7 10 20 30 40 50 10 300 600 1000 1400
1600
Total installed cost, millions of dollars 1800
2000
Schedule - Detailed engineering to mechanical completion
Confidence level at plus/minus 20% with 80% probability.
Figure 3.7 Owner engineering project department standards.
Estimating Keys—Establishing a Realistic Cost Baseline 41

detailed equipment and bulk breakdown

is for a typical refinery

HOME OFFICE

Figure 3.8 Typical prime contractor cost breakdown.

• new technology and prototype engineering;

• remoteness of job site, and infrastructure requirements;
• engineering physical progress (percentage complete); and
• material commitment.
Determining overall estimate reliability is made more difficult by the fact
that some segments of a project may be completely defined at the time of
estimate, and others only sketchily defined; some may be estimated by reliable
methods and others by methods that produce less accurate results.
It is necessary, therefore, to separately quantify the degree of reliability of
each major, independently estimated segment or unit of an estimate. This can
be done by using guidelines for classifying the degree of definition and the quality
of methods/data used. These in turn establish appropriate estimating allowances
and accuracy ranges for each of the segments.
After a project is approved and work begins, changes begin to take place in
facility definition, estimating methods, knowledge of project conditions, and fore-
42 Chapter 3

cast time-span. This then allows successive re-appraisals of contingency and

should produce a continuing reduction of estimating allowances.
Estimating allowances or contingency is defined as the amount that statis-
tical experience indicates must be added to the initial, quantifiable estimate so
the total estimate has an equal chance of falling above or below the actual cost.
This allowance is required to cover oversights and unknowns, which on average
always result in final project costs that are higher than initial quantifiable
estimates. If required, estimating allowances may be modified to produce greater
or lesser overrun probabilities.
For any individual project or series of projects, the estimated cost, including
estimating allowance, will fall under or over the actual cost of the project. A well-
developed estimating system, when applied to a series of projects, produces a pat-
tern of underruns and overruns that approach a normal or bell-curve distribution.
Overestimate and underestimate amounts are caused by so many unrelated happen-
ings that the results resemble those obtained by chance. Major systematic errors
are eliminated in developing an estimating system, and analysis of departures
from normal distribution is one of the tools available for improving estimating
systems. It is important, therefore, to constantly analyze actual costs versus the
estimate so such biases can be detected and corrected. These elements of contin-
gency and accuracy are often determined by a computer risk analysis program.

XVIII. RISK ANALYSIS

When the estimator's experience leads to conventional contingency application

based on a history of project cost growth, risk analysis principles attempt to
quantify this potential for direct cost elements. The members of the project team
then review these elements and identify the likelihood of increases and decreases
in the cost of the element, along with probabilities of deviations from the estimate.
For example, they may place a 70% likelihood of the earthwork cost increasing

Table 3.1 Example of Results from a

Computerized Risk Evaluation Program

Target estimate = $1,225,000

Probability or accuracy
Certainty Contingency
90 162,600
80 108,400
70 81,100
60 49,400
50 21,500
40 900
30 -28,900
20 -54,200
10 -200,950
0.5 -268.947
Estimating Keys—Establishing a Realistic Cost Baseline 43

because soil borings are not available. For instance, the earthwork cost might
increase by as much as $100,000. The cost might also be $30,000 less than the
estimate due to competitive market conditions.
After the project team establishes the highest and lowest possible values
for each element in the estimate, these numbers are entered into a computerized
risk evaluation program that performs a Monte Carlo simulation. In this process,
a random sample value for each element is taken, and the resulting total esti-
mates are arranged in order from highest to lowest. The deviations of each total
value from the original estimate are presented in Table 3.1. The certainty column
represents the likelihood that the actual cost will not exceed the original estimate
after the indicated amount of contingency has been added.
This information is provided to management to determine the risk it is
willing to take on the project. For instance, in this example, if management
selects a 70% risk level, the estimate would be $1,306,100 ($1,225,000 + $81,100).
Risk analysis is discussed in greater detail in Chapter 11, "Range Estimating."

XIX. ESCALATION

Escalation is usually included as a separate line item. Escalation rates for ma-
terial and labor costs should be separately identified.

XX. CURRENCY EXCHANGE CONVERSION

Currency conversion rates can fluctuate widely over the life of a project. It is
recommended, therefore, that the estimator use the rate established at the time
of appropriation and track subsequent deviations as a one-line item. Corporate
and affiliate financial groups should be consulted when establishing currency
conversion rates for the estimate.

XXI. CONSTRUCTION LABOR PRODUCTIVITY

Good assessments of labor productivity are essential for a quality cost estimate.
Cost control, planning, and scheduling can be ineffective without an adequate
evaluation of labor jobhours.
Figure 3.9 shows major elements of a labor productivity system. The rec-
ommended additional factors and associated curves have been developed from
historical data. However, on a specific project, any one or even several conditions
can have an abnormal effect on productivity.

A. Project Condition Analysis

The productivity analysis starts from a general area factor. Additional allowances,
based on the recommended ranges are then made for the listed conditions.
Judgment and experience are necessary for determining these additional allow-
ances. Even if no previous experience of the area exists, this procedure can still
be very effective since the condition productivity adjustments are often of a
greater magnitude than area productivity differences.
44 Chapter 3

INFORMATION SOURCE

AREA WORK LOAD - 10 TO ••

JOB S I Z E - ZOOM TO 10.O0OM -«TO<

SITE CONDITIONS OTO «- 2 0

LABOR CONDITIONS OTO «-10

OELO MANAGEMENT - 6 TO* 6

WRECT H*tE TO SUBCONTRACT - 1 0 TO

PROJECT CONDITIONS
SCHEDULE / CONTROL - 5 TO •• 6
(ADOS SHEET)

GENERAL RANGE •••10 TO 1f 30

JOB SIZE 1 COMPLEXI:nrv I

CONSTRUCTION PROGRAM IOJECT LABOR P

FACTOR I
PRE-PLANNING \
ENGMEERMG COMPLETION
MATERIAL DELIVERIES
MEASUREMENT SYSTEM
SCHEDULE OBJECTIVE
INDUSTRIAL RELATIONS
, ECONOMIC
PLANNING & SCHEDULING
WEEKLY WORK PROGRAM] TYPICAL PROFILE • ACCELERATION

SCHEDULED OVERTIME
LABOR OENSITV 1

Figure 3.9 Flowchart of labor productivity system.

Figure 3.10 depicts productivity adjustments for:

• area workload and peak construction labor,
• job size, and
• extended workweek.
The data and analysis are generally based on construction of new facilities at an
existing plant, with minor hot work restrictions and an average labor perfor-
mance. Guidance for major revamps is given in the historical data section.
B. Area Workload/Peak Construction Labor

As seen in Figure 3.10, in a normal economic environment, as area workload and

peak labor increase, productivity will generally decrease. It is assumed that the
estimating database, at a productivity of 1.0 (on the curves), is based on the
normal area workload, with a peak labor level of 750.
If area workload is low, then the labor peak can rise to 2000 before a
productivity loss adjustment needs to be made. Conversely, if area workload is
low and project size and schedule requires a labor peak of 1000, then a produc-
tivity improvement (0.96) is determined from the curves.
 Estimating Keys—Establishing a Realistic Cost Baseline 45

; 5000 i 6000 I 7000 | 8000 : 9000

AREA WORK LOAD / PEAK CONSTRUCTION LABOR

M51

in
H
- t
1-05
ill]

7
0-95-

0-90
1 i I I ? I . I M Lit 3 J 4 I T i 8
PROJECT CONSTRUCTION JOBHOURS ( MILLION )
JOB SIZE
Note;* Curves do not include loss
for second s h i f t .
PRODUCTIVITY LOSSES DO NOT
NORMALLY OCCUR FOR SELECTIVE
OR SPOT OVERTIME

;i|.!.;;20!:il:;:;|:; : i ^ | : . : :
EXTENDED WORK WEEK

Figure 3.10 Project condition analysis—construction productivity.

46 Chapter 3

The Base : S.E. USA @ 1.0 (Florida, N & S Carolina etc.) - Non Union;
and has best "Basic Elements", as listed

1 . BASIC ELEMENTS
a) Weather/Geographic-Cold, Ice, Heat, Rain(excess) etc.
b) Inherent Trade Skills & Capabilities - Resources Available.
c) Work Ethic, Culture, Militant Trade Unionism(very negative).

2. USA - NU = Non Union. U = Union

1.S.E.-1.0tNU1 2. N . E . - 1 . 6 ( U ) 3. TX. - 1.2(U) & 1.1(NU)
4. ILL. - 1.6(U) 5. GA/AL - 1.3(U) 6. U T / C O / W Y - 1.5tU)
7. AZ/CA - 1 . 2 ( U ) -1.1(NUJ 8. HAWAII - 1.5(U)
9. N.W. - 1.6(U) 1 0 . ALASKA - 1.9(U)

3. INTERNATIONAL
CANADA-1.7 JAPAN-1.1 INDIA-3.0/2.0
MEXICO - 1.5/1.8("sticks") S. KOREA-1.3 PHILIPPINES - 2.5
MALAYSIA-1.9 BRAZIL-1.8 HONG K O N G - 1 . 5
SRI LANKA-2.5 CHINA - 2.2 AUSTRALIA-1.6
SINGAPORE-1.6 INDONESIA-1.9 I N D I A - 2 . 5
NEW ZEALAND-1.5 TAIWAN-1.3 PAKISTAN - 2.2
VENEZUELA - 1.65/1.8("sticks") "sticks"= Remote, undeveloped area,
SOUTH AFRICA - 1.4/1.9("sticks"J with little or no Infrastructure.

4. EUROPE/SCANDINAVIA/MIDDLE EAST
GERMANY-1.1 KUWAIT-2.1 SAUDI ARABIA-1.6
U.A.E.-1.7 ISRAEL-1.8 E. EUROPE - 2 . 0
FINLAND - 1 . 7 RUSSIA - 2.0 NETHERLANDS-1.35
NORWAY-1.75 DENMARK-1.35 SWEDEN-1.35
FRANCE-1.3 BELGIUM-1.3 SWITZERLAND-1.5
EIRE-1.65 ITALY-1.4 GREAT BRITAIN-1.5
SPAIN-1.7 POLAND - 1 . 9

5. Plus adjustment for PROJECT SPECIFIC Site Conditions

Figure 3.11 Worldwide area productivity (labor) factors.

Estimating Keys—Establishing a Realistic Cost Baseline 47

C. Job Size

In addition to staffing levels, as shown in Figure 3.10, job size (in jobhours) has
a significant effect on productivity. This curve shows that the estimating database
reflects a project size of one million jobhours (direct work only). Thereafter, as
job size increases, productivity decreases.

D. Extended Workweek—Productivity Loss

Figure 3.10 shows extended workweek curves for small and large jobs. The
productivity loss adjustment applies to total jobhours and not merely to the
additional overtime hours. Note, however, that during periods of major low em-
ployment, such as recessions and depressions, it is possible that labor productivity
will not follow these curves, since the fear of unemployment can be an overriding
consideration.

E. Area Factors

Figure 3.11 contains a series of worldwide area productivity factors. As shown,

the basic elements are weather, trade skills, and work ethic. These are, however,
conceptual numbers, and considerable judgment is required for their proper
application. The data has been developed over many years from the author's
company and individual contracts at the locations illustrated.

XXII. PRE-ESTIMATING SURVEY AND CHECKLIST

Figure 3.12 shows the major items to be developed and/or considered before
developing the estimate. In conjunction with the pre-estimating survey, a com-
prehensive checklist can be a significant aid in ensuring that all appropriate
details have been covered. The following is not a complete list, but it will
significantly assist with major considerations:
• plan the estimate,
• cover all items,
serve as a base for your database, and
• cover the three p's—political, procurement, process design.

A. Political Considerations

Political considerations can be broken down as follows:

local political and social environment,
• regulatory and permitting requirements,
• business environment,
• tax structure and expense versus capital costs allocation, and
• overseas (nationalistic/logistics/infrastructure).
48 Chapter 3

Section
Project Management Estimating
and
Control Manual Subject

Estimating Checklist • Jobslte Utilities

• Project Execution Plan • Construction Supplies
• Process Flow Diagram D Equipment Rental and Leases
• Plot Plan • Security
D P & ID'S D Fabsite Leases and Fees
• Construction Drawings • Taxes
• Schedule Constraints • Fees
• Equipment Ust D Documentation and As-Builts
D Transportation and Freight D Home Office Reid Assistance
• Spare Parts n Design Status and Pending Changes.
• Vendor Representatives • Vendor Shop Visits
D Purchasing Plan • Expediting
D Contracting Plan • Quality Assurance
• Permitting Requirements • Inflation and Escalation
• Code Requirements
D Safety Requirements
• Gravel Requirements
D Demolition Allocated Costs
• Revamp •
• Foundation Requirements D
• Painting and Coating D
•
D
Insulation
Fireproofing
a
D
•
•
Fire Protection
Instrumentation
•
• Communications Equipment
a
• Furniture and Fixtures
a
a
•
D
Geotechnical Requirements
Non Destructive Testing
•
D Welder Certification and Testing
a
D Functional Check Out D
a
•
D
Start Up
Operating Fluids •
D Utility Tie-Ins D
D Hot-Taps Other
D Construction Mobilization D
and Demobilization a
• Labor Productivity a
• Payroll Benefits and Burdens a
• Cleanup a
• Scaffolding
• Material Handling • Risk Analysis
• Temporary Facilities • Contingency

Page

Figure 3.12 Estimating checklist.

Estimating Keys—Establishing a Realistic Cost Baseline 49

B. Procurement Program Considerations

A careful review of the procurement program is essential, since the equipment/

material costs can comprise more than 50% of a project's total cost. The following
are typical considerations:
• quality vendors list (information/experience of suppliers);
domestic versus worldwide purchasing plan;
• import duties, taxes, delivery charges;
• currency considerations and exchange rates;
• vendor service people requirements;
• plant compatibility of existing versus new;
ease of maintenance, operating costs;
• spare parts requirements;
• inspection and expediting requirements; and
• critical purchasing plan (schedule priority).

C. Detailed Checklist for Estimating

climate:
- humidity,
- temperature,
- prevailing winds,
- seasons,
- storms,
- snow accumulation and ice conditions,
rain (average and seasonal),
- days lost due to weather,
- shelters required,
- special methods of construction necessary, and
- indoor/outdoor equipment.
earthquake factors
• access:
- distance from metropolitan area;
- roads, water, air, railroads;
- road conditions;
- road clearances (tunnels);
- road and bridge capacity; and
ice conditions.
• offshore facilities:
water depth,
- wind forces,
- wave forces,
- sea floor conditioning, and
soil conditions.
50 Chapter 3

environment:
- attitude of the community,
present and future zoning,
- other industry in the area,
- environmental restrictions,
environmental impact study,
required permits—local/state/federal/other,
legal counseling,
- delays in obtaining permits and associated costs in terms of escalation,
requirements for and costs of pollution control (noise/air/water/waste
disposal), and
- considerations of alternate site.
political aspects:
political climate of the proposed site and its prospects for future stability;
- governing authority's encouragement/discouragement of investment,
attitude toward business, tax structure; and
- on overseas projects, the degree of government involvement and the
terms of payment and the probability of delayed payment.
procurement:
source of information about vendors;
- location of vendors;
- methods of transporting equipment and material;
availability of a minimum of three bidders;
- vendor reliability and experience;
- origin of material and equipment;
- import restrictions;
- import duty;
- availability of equipment on reasonable delivery schedules;
- terms and conditions;
- discounts for large purchases;
- consideration of whether purchase orders will be firm, cost plus, or
with specified escalation;
warranties;
- service that suppliers can provide during construction and operation,
and the cost of those services;
provisions for inspection and expediting;
- export packing requirements;
spare parts and their cost;
- currency in which purchases will be made;
- exchange rates;
payment schedules;
- marshalling yard requirements;
- loading and unloading requirements;
lightering;
- demurrage costs;
higher costs due to congested harbors; and
Estimating Keys—Establishing a Realistic Cost Baseline 51

use of trading companies.

• process design:
- plant capacity;
- plant product;
- by-products;
- flowsheets available;
utility flowsheets;
- plant layout;
- material specifications (standard or exotic); and
mechanical specifications (pressures, temperatures, flows, corrosion).
• process specifications:
- local code requirements,
- state code requirements,
- federal code requirements,
- client/engineer's specifications,
- architectural requirements,
metric/English measurements, and
- pollution control.

XXIII. STATISTICAL/HISTORICAL DATA

This section includes references, which will be helpful in developing a cost esti-
mate.

A. Typical Prime Contractor Cost Breakdown

Figure 3.8 illustrates the overall breakdown of project cost based on historical
data for projects built in the United States on a prime contract basis during the
past 20 years. Since most costs have retained the same parity over time, the
only significant change to this experience is the increase in instrumentation costs.
Application
When only an overall cost is known, this breakdown can be useful in providing
overall data for a quick evaluation of engineering and construction costs and
jobhours. This can enable cost claim and schedule evaluations to be made.
Example-
Assume that a project has an estimated overall cost of $100 million.
1. Figure 3.8 shows that home office costs are roughly 13%, or $13 million. By
a further assumption that the contractor's home office all-in cost is $50 per
hour, we can derive a total number of home office jobhours:
Number of jobhours = 13>0(^>000 = 260,000
ou
Thus, a gross schedule and jobpower evaluation can now be made.
52 Chapter 3

TYPICAL PROJECT COST BREAKDOWN

(CONTRACTOR - TOTAL SCOPE PROJECT)
GRASS ROOTS-LARGE ITEM SMALL REVAMP

10 ENGINEERING (D&D) 20
3 HOME OFFICE (SUPPORT)- 5
47 MATERIAL (DIRECT) 40
21 CONSTRUCTION DIRECT - - 17
19 CONSTRUCTION INDIRECT- 18

100% 100%

DIRECT CONSTRUCTION LABOR HOURS

10 SITE PREPARATION - 1
12 FOUNDATIONSflJNDRGRDs - 8
7 STRTL STL BLDGS. 5
10 EQUIPMENT 12
•PIPING *8 (l F N A c B L j
11 ELECTRICAL 10
6 INSTRUMENTS --- 8
4 PAINTING 3
4 INSULATION 3
1 HVAC/FIREPR00F1NG-- 2

100% 100%

Figure 3.13 Typical project cost breakdown.

COST BASIS
(Excluding Material Costs)
PROJECT (EPC)

ENGINEERING HOURSN CONSTRUCTION HOURS (DIRECT)

•
HOME OFFICE
• J INDIRECT HOURS - 30 %

SERVICES - 40 % CONSTRUCTION EQUIPMENT - 20%

FIELD STAFF - 15 %

FIELD OFFICE EXPENSES

& -35%
TEMPORARY FACILITIES
(material only)
100%
ENGINEERING - CONSTRUCTION LABOR COST
RELATIONSHIP

Figure 3-14 Cost basis—engineering/construction relationship.

Estimating Keys—Establishing a Realistic Cost Baseline 53

2. Figure 3.8 shows that direct field labor costs are roughly 21% or $21 million.
By a further assumption that the direct field labor payroll cost is $25 per
hour, we can derive a total number of direct field jobhours:
TVT u ruu 21,000,000 O/IAAAA
Number of jobhours = — — ^ = 840,000
Applying known and historical relationships allows gross evaluations for
engineering and construction durations to be made. These, in turn, can be
used to prepare labor histograms and progress curves. Note that for larger
projects, the percentage of home office and field overheads may increase.

B. Typical Project Cost Breakdown

Figure 3.13 shows the same overall cost breakdown as Figure 3.8 and compares
it with small revamps. The probability for "Grassroots—Large" is 80%, whereas
the probability for "Small Revamp" is 70%, as the variation in small projects
costs is much wider. The data also includes a breakdown of construction direct
labor hours, by discipline. As with the previous figure, these breakdowns/relation-
ships can be helpful in evaluating labor hours, schedules, and labor requirements.

C. Cost Basis—Engineering/Construction Relationship

Figure 3.14 shows construction indirect and direct costs. A typical breakdown of
the major indirect costs is also shown. Individual companies might allocate their
indirect costs somewhat differently, but a high degree of conformity still exists
in the contracting side of the industry. Again, it is emphasized that the stated
information only applies to a full EPC project.
A further emphasis of this figure is on the engineering/construction labor
hour relationship. This is shown as the ratio of 1:6 and is for large projects.
Small projects have a 1:3 ratio. In other words, one engineering labor hour
automatically generates 6 direct construction labor hours. This is a very useful
rule of thumb, although the ratio does vary as the design/construction complexity
and size vary.
This relationship highlights the need for design engineers to realize that as
they are designing, they are also generating the construction labor hours. Full
realization of this fact should lead designers to more carefully consider the
question of constructability of their designs. This is the design process of working
to construction installation considerations, as well as working to standard design
specifications. Constructability considerations can result in significant savings in
construction labor. Such considerations are essential in the following types of
construction/conditions:
• heavy lifts,
prefabrication and pre-assembly,
• modularization,
• offshore hookup work,
site problems of limited access, and
• lack of resources at the jobsite.
 Cost Capacity Curves - Oil Refinery - Direct Material, $ per Barrel
Bare Material Costs; Data below
not incded: Freight, -|OOO- 10,000 BPD Time Base Mid 1 9 9 4
Taxes, Duties, Spares is of Lesser | Exponent 0.60
or Vendor Services. Quality.
By JAB
900 Date Dec.1994

800 This Data represents

Cheapest Source
700- Pricing & Current
$ Cost of Market Conditions.
Assessed at 20% DISCOUNT.
Direct 600

Material 500-

Per Barrel

300-

200

100

These are "Bare Process" numbers

10 20 30 40 50 60
Barrels per Day [1 OOP's)
Exercise Care and Judgement as Oil Refinery Process can have
enhancements that would add to these Basic Numbers . James Bent Associates, Inc.

O
Figure 3.15 Cost capacity curves—material costs per barrel.

1
Estimating Keys—Establishing a Realistic Cost Baseline 55

The relationship between engineering and home office support services (such
as project management, project control, procurement, computer, and clerical) is
shown also at 40%. This relationship is in labor hours.

D. Cost Capacity Curves

Figure 3.15 is based on 30 years of experience and shows costs for various oil
refinery process units. These are bare bones rates, and the following adjustments
need to be carefully considered:
• bare process numbers (there are usually enhancements/additions);
• assumes cheapest source;
• assumes 20% discount from current pricing levels; and
• does not include inspection, expediting, spares, vendor services, etc.
This is a project approach to estimating, where current market experience
is built into the budget/estimate as targets for the project manager. Overall
project experience has been that, in most cases, the lower costs of cheapest source
and 20% discount are not achieved due to low project-purchasing skills. With
project-specific information and assuming fair-to-average project skills, the above
adjustments can be more than +50% to +60%.
Figure 3.16 shows labor hours for various oil refinery process units. These
are bare bones rates, and the following adjustments need to be carefully con-
sidered:
• area factor, (see Figure 3.10; base is Southeast USA)
area workload, (see Figure 3.9; -10% to +10%)
• job size (large), (see Figure 3.9; -5% to +20%)
• site conditions (extreme), (0 to +20%)
labor conditions (militant unions), (0 to +10%)
field management (quality), (-5% to +5%)
direct hire to subcontract (US only), (-10% to 0)
• schedule/control skills, (-5% to +5%)
If the above specifics cannot be developed, use a general number from the range
of +10% to +30%.

E. Subcontract Estimating

As unit price estimating databases are difficult to obtain, an effective technique

is to develop an all-in dollar rate to apply to hourly estimating databases, which
are readily available. Figure 3.17 shows the major components for developing an
all-in dollar rate.

F. Productivity Loss for Extended Workweek

Projects are occasionally placed on extended overtime so the schedule may be

shortened. In many of these cases, under normal economic conditions, productivity
will be reduced and costs will increase. If this condition was not part of the original
estimate, an assessment of the increased cost, as well as the schedule advantage,
should be made. The schedule evaluation should recognize increased jobhours in
 en
o
Cost Capacity Curves - Oil Refinery - Direct Labor Hours per Barrel

These are Standard Data below

Hours (S.E.USA]. 1 0 , 0 0 0 BPD Time Base Mid 1994
20- is of Lesser [
See Productivity Exponent 0.60
Factors for Quality. By JAB
adjusting to 18-
Date Dec.1994
other Locations.
16-

14
Direct
12"
Labor Hours
10-
Per Barrel
8

6-|

These are Bare Process numbers

10 20 30 40 50
Barrels per Day (1 OOP's)
Exercise Care and Judgement as Oil Refinery Process often
have enhancements that would add to these Basic Numbers . James Bent Associates, Inc.

O
Figure 3-16 Cost capacity curves—jobhours per barrel. 0)

i
CO
Estimating Keys—Establishing a Realistic Cost Baseline 57

• Convert $ units to hours by building an all-in labor rate as follows:

1. Bare Labor Rate
CAREFULLY consider type & size of Base $
job and add the following items to
labor rate. Then convert into $ rate.
2. Construction Staff 10 to 20%
3. Construction Equipment 10 to 40%

4. Field Expenses 30 to 40%

5. Home Office Overhead & Profit 10 to 20%
ALL-IN LABOR COST 60 TO 120%

Figure 3.17 Subcontract administration.

the duration calculation. It is also possible that absenteeism will increase, sometimes
to such an extent that there is no schedule advantage for the increased workweek.
Figure 3.18 presents data compiled from the sources indicated and plots
labor efficiency against overtime hours worked, based on 5-, 6-, and 7-day
workweeks. This data applies only to long-term, extended workweeks. Occasional
overtime can be very productive with no loss of efficiency. The figure shows a
recommended range of productivity loss by project size (small to large). It should
be noted that studies of the Construction Users Anti-inflation Roundtable (now
the Business Roundtable) have concluded that prolonged periods of scheduled
overtime can actually result in a net loss of productivity (i.e., no gain from the
expenditure of overtime hours). Depending upon the schedule, this can begin to
occur after 6-8 weeks and, if the extended overtime continues, the schedule can
actually be lengthened rather than being improved. Scheduled overtime should
therefore be used with great caution.
Application
Figure 3.18 can be useful in an overall evaluation of the impact overtime hours
will have on schedule and cost. It can establish an increase in total labor hours
required for a loss in efficiency due to an extended workweek. However, judgment
should be used on an individual location basis. Some areas, particularly less devel-
oped countries, work 60-hour weeks that are only as productive as 40-hour weeks.
Example:
Assume that a project has a total construction scope of 1 million jobhours and
is based on a 5-day, 40-hour workweek. If the same workweek is increased by
eight hours, look to the chart for eight hours of overtime, and using the NECA
5-day, large project curve, read across to an efficiency of 90%. This indicates
that, due to a loss in efficiency, 10% more hours will be required to accomplish
the same amount of work. Thus the jobhours will be estimated at 1 million x
1.10 = 1,100,000 jobhours. Schedule and cost evaluations can now be made for
an additional 100,000 jobhours, but at an increased level of work. Obviously, a
schedule advantage accrues.
Note, however, that the curves contained in Figure 3.18 do not include
efficiency losses for a second shift, which can be about 20%. However, shift work
 01
ECONOMIC BUDGET BASIS
100? 00

90%

80%

70%

NECA Published Data (NECA)

Source: National Constructors Assoc
60% Bulletin # 69-40
Foster Wheeler Data (FW)
" " Source: N.C.A. Bulletin t 69-40
Acceleration Claim (AC)
Titian Missile Base, Tucson,
Ariz. 1963
50% Note:*Curves do not include loss
for second shift.
PRODUCTIVITY LOSSES DO NOT
NORMALLY OCCUR FOR SELECTIVE
OR SPOT OVERTIME

OVERTIME H O U R S O
0)

Figure 3.18 Productivity loss for extended workweek. 1

CO
Estimating Keys—Establishing a Realistic Cost Baseline 59

Escalation of "rate costs" for a new time period

Originally, the costs for direct

labor and field indirects were
developed by estimating the
monetary rate that would be
appropriate at the point in time
when 50% of the costs were
expended. Assume all the costs
of construction are proportionally
expended, as per the sketch, for
this example.

With a three-month schedule

extension and the start of
construction occurring at the
previously planned date of six
6 MO.
•15 mo.- months, then the center of
construction costs is now 13J4
months.

The general approach to escalation, then, is to take 50% of the schedule

slippage as the "escalation time period" and apply the appropriate
escalation rate to the construction costs for that time. An adjustment
may be appropriate as escalation may not apply to some minor fixed
costs (such as mobilization) which could occur in the originally planned
time period.

Escalation = Total Construction Costs x Escalation Rate x 3 months -*• 2

Use same technique for engineering costs.

Figure 3.19 Escalation calculation technique—construction labor.

losses depend on the type of work, company organization, and experience. In the
offshore industry, where shipyards traditionally work on a shift basis, losses can
be minimal or even zero.

G. Escalation Calculation Technique

A widely used method of calculating escalation is to develop a scheduling assess-

ment of the projected midpoints of engineering, procurement, and construction
and then escalate these costs with individual escalation rates from the point of
estimating to the projected midpoints. Figure 3.19 illustrates this technique with
a construction example and also provides a simple but effective method for
calculating escalation costs for a schedule extension.

H. Conceptual Database Modules

Figures 3.20A and B illustrate major equipment costs, labor unit rates (direct
labor jobhours per ton), and some dollar rates for fabrication and hookup of major
types of modules); these include:
• module fabrication (can be used if design drawings are available and detailed
quantities taken off),
60 Chapter 3

CONCEPTUAL ESTIMATING FACTORS

MAJOR EQUIPMENT, MATERIAL COST, $ per ton (U.S., 1986)
1. Vessels 2000 to 2300
2. Heat Exchangers
a) Single Pass 4000
b) Two Pass 6000
3. Packaged Boilers (saturated steam, 100 to 235 psig)
a) 30,000 Ibs/hr 5000
b) 225,000 Ibs/hr 9000
4. Fired Heaters - (dual fired, oil and gas)
a) 750,000 Btu/hr 90,000
b) 8,000,000 Btu/hr 49,000
c) 12,000,000 Btu/hr 22,000
5. Pumps (including driver) - centrifugal, single stage,
API-610, 3550 rpm
a) 10 hp, 100 gpm 14,200
b) 100 hp, 500 gpm 11,500
c) 200 hp, 2000 gpm 9,500
6. Compressors - Centrifugal Low Pressure Hiqh Pressure
a) 300 hp 13,000
b) 3500 hp 8,000
c) 2000 hp 13,000
d) 4500 hp 9,000
7. Compressors - Reciprocal 1.000 psi 6.000 psi
a) 1500 hp 16,000 22,000
b) 6000 hp 14,000 19,000
c) 12,000 hp 10,000 13,000
8. Bulk Material
a) Structural 700 to 1,000
b) Piping 1,000
c) Electrical 4,000
d) Instruments 10,000 to 20,000
e) HVAC 1,000
f) Surface Protection (per wt. of structural/mechanical) 20
g) Quarters Fittings 9,000

Figure 3.20A Conceptual estimating factors—major equipment, USA/modules.

overall module fabrication (broad data when only overall module weight
and/or category of module is known), and
• site installation/hookup (broad data when only overall module weight is
known).

As indicated in Figure 3.20A, the labor unit rates are for a 1986 European
location. The rates may have to be adjusted for a United States location due to
higher productivity levels at U.S. yards. For well-established U.S. yards (such as
those in Oklahoma and the Gulf states), the fabrication productivity (jobhours)
can be better by 30-40%, and installation/hookup by 20-30%. However, for many
Estimating Keys—Establishing a Realistic Cost Baseline 61

MODULES, direct labor jobhours per ton (Europe, 1986)

9. FABRICATION
a) Structural - Primary Steel 75
- Secondary Steel 100
- Outfitting Steel 200
b) Major Equipment 15 to 20
c) Piping Prefabrication 250
d) Piping Installation 200
e) Electrical 600 to 700
f) Instruments 700 to 800
g) HVAC 300 to 400
h) Surface Protection (per wt. of structural/mechanical) 17
• Painting 520
• Fireproofing 110
• Insulation 850
10. OVERALL MODULE FABRICATION
• Size Category
a) Larger Modules (over 2000 tons) 150 to 200
b) Small Modules (50 to 500 tons) 50 to 130
• Facility Category
c) Process Module (6000 tons) 200
d) Wellhead Module 140
e) Mud Module (6000 tons) 180
f) Utility Module (6000 tons) 150
g) Services/Quarters Module (4000 tons) 150
h) Drillers Office (1000 tons) 130
i) Helideck (1300 tons) 120
j) Air Control Module (200 tons) 200
k) Derrick (1300 tons) 45
I) Main Lifeboat Station (300 tons) 100
m) Flare Boom 200.
n) Main Pipe Rack Module 175 to 195
o) Shipping $200 to $1200
per ton
11. SITE INSTALLATION / HOOKUP
a) Large Modules (over 2000 tons) 25 to 45
b) Small Modules (50 to 500 tons) 75 to 100
c) Load Out and Sea Fasten - Labor (per wt struct/mech) 2 to 3
- Equip. Rental (per wt struct/mech) $20

Figure 3.20B Conceptual estimating factors—major equipment, Europe.

small, inexperienced U.S. yards, these improvements should not be expected. This
data applies to land-based modules as well as offshore modules.

I. General Data

The following figures illustrate historical relationships and data that can be used
in estimating: Figure 3.21, time-escalation data of the the Nelson-Farrar Cost
Index; Figure 3.22, economies of scale; Figure 3.23, an alkylation process cost
capacity curve; Figure 3.24, typical factors in shutdowns and retrofits; Figure
3.25, breakdown/factors of a good construction estimate; Figure 3.26, factors of
62 Chapter 3

Refinery construction (1946 Basis)

July June July
1962 1976 1991 1992 1993 1993 1994 1994

Pumps, compressors, etc. 222.5 538.6 1,177.8 1,216.4 1,254.6 1,254.0 1,278.6 1,278.6
Electrical machinery 189.5 287.2 548.1 550.4 555.5 555.9 561.8 562.2
Internal-comb, engines 183.4 348.3 794.4 809.2 820.6 822.6 834.0 836.5
Instruments 214.8 466.4 844.7 865.5 879.3 877.3 886.6 887.4
Heat exchangers 183.6 478.5 772.6 746.6 704.1 704.1 677.9 682.1
Misc. equip, average 198.8 423.8 827.5 837.6 842.8 842.8 847.8 849.4
Materials component 205.9 445.2 832.3 824.6 846.7 850.1 865 2 869.0
Labor component 258.8 729.4 1,533.3 1,579.2 1,620.2 1,624.8 1,660.4 1,664.9
Refinery
(Inflation) Index 237.6 615.7 1,252.9 1,277.3 1,310.8 1,314.9 1,342.3 1,346.5

Refinery operating (1956 Basis)

July June July
1962 1976 1991 1992 1993 1993 1994 1994

Fuel cost 100.9 384.5 443.8 425.9 421.5 423.6 449.0 454.7
Labor cost 93.9 145.5 280.8 281.1 286.2 275.0 260.3 261.7
Wages 123.9 314.3 787.4 824.9 868.0 855.2 871.3 871.4
Productivity 131.8 216.1 280.6 293.8 303.4 311.0 334.8 333.0
Invest., maint., etc. 121.7 252.6 511.4 519.2 524.3 526.0 536.9 538.6
Chemical costs 96.7 195.2 228.5 218.8 210.0 209.4 207.3 210.4
Operating indexes
Refinery 103.7 209.3 392.2 393.3 396.3 392.9 394.2 396.3
Process units* 103.6 267.1 418.6 415.1 416.9 414.9 423.1 426.2

RpproH.ir^H hy permission from Oil & Gas Journal, 3050 Post Oak Blvd., Houston, Texas
77056. The Nelson-Farrar refinery construction and refinery operating cost indexes are
piihlished regularly in Oil & Gas Journal.

Figure 3.21 Nelson-Farrar cost indexes.

Estimating Keys—Establishing a Realistic Cost Baseline 63

Cost-Capacity Factors

Applicable to similar projects of different capacities

Six-tenths
Factor Rule:

where: C2 = desired cost of capacity Q2

C, = known cost of capacity Q t

X = cost-capacity factor« 0.6 (average)

Note: X can vary from less than 0.3 to

over 1.0.

Example:
C2 - $8,000,000 (200,000 tons/yrr
2
{ 100,000 tons I yr t
= $12,100,000

Figure 3.22 Cost-size scaling (economy of scale).

ECONOMIC DATA

COST DA TA SHEET REFINERY UNITS

BY DATE Alkylation: A catalytic process to upgrade light gaseous

EXPONENT 0.60 hydrocarbons (propylene, butylene, or amylen e) Into high-octane

gasoline and aviation fuels, In the presence <}f sulfurlc acid.

TIME BASE MID 1 9 9 0

ALKYLATION

T O !'AL CAPITAL INVESTMENT

1OO

0
k
0 i
c
cj
"c
c

I 10
y • t

10 100

Barrels Per Day (Thousands)

Figure 3.23 Cost capacity curve—alkylation unit.

64 Chapter 3

PREPARATORY SHUTDOWN
(6-12 MONTHS) (1-4 WEEKS)

1. PRODUCTIVITY (GRASS ROOTS BASE) + 30%/50% + 70%/100%

2. LEVEL OF DETAIL WEEKS/DAYS HOURS

1 CONTROL

a) SCOPE BOOK - PHYSICAL CONDITION OF SITE/PLANT

(U.6. RUNS-OBSTRUCTIONS-ftOUTING)

INSPECTION/REPORT OF ALL EQUIPMENT TO BE

REWORKED

- OPERATING INSPECTION REPORTS

DESCRIBE DETAIL OF WORK

• REPLACEMENT
•ADDITION
•REWORK/MODIFICATION

b) PLAN EN6INEEWN6-PR0CUREMENT-C0NSTRUCT10N

c) SCHEDULE RESOURCES (LABOR-EQUIPMENT-STAFF)

d) ESTIMATE

4. SCHEDULE/PROGRESS
- PLANNING BOARD
- C . P . M . SCHEDULES

Figure 3.24 Estimating shutdowns/turnarounds, and retrofits.

ITEM ESTIMATE BASIS

1. Direct Field Labor • Quantities updated by field takeoff
• Productivity factor for time & location
• Unit jobhours per work operation
• Handling & rework by factor
2. Indirect Field Labor • Factor on dierct labor jobhours
(non-productive & lost time)
3. Field Staff • Organization chart
•• Time frame schedule
• Relocation & local living
• Replacement & training
4.Temporary Facilities • Dimensioned layouts
• Quantity takeoff
5. Construction Equipment • Listing by category & number
• Time frame schedule
• Unit rates (rental vs. purchase)
• Maintenance by factor

6. Small Tools & Consumables • Factor on direct labor

• Loss allowance

7. Field Office Expenses • Factor on direct labor

• Listing for office furniture / equipment
8. Escalation & Contingency • By judgement & formula
Note: Direct material purchase by the field is usually covered by the
material estimate.

Figure 3.25 Construction estimate basis.

Estimating Keys—Establishing a Realistic Cost Baseline 65

BASE ADJUSTED RESULTANT

FIELO LABOR X PRODUCTIVITY LABOR X COMPOSITE DIRECT FIELD
.HOURS HOURS WAGE RATE LABOR COST

1 1 1
K 0.102 x 0.147 x 0.030 xO 012

•
FRINGE
+
LABOR
1
BENEFIT BUROEN + TOOLS +
COST COST COST COST

FIELD
SUPERVISION
COST

TEMPORARY
FACILITIES
COST

CONSTRUCTION
EQUIPMENT
COST

CONSTRUCTION!
SERVICES C O S T L

DIRECT FIELD LABOR DIRECT FIELD LABOR DIRECT FIELD LABOR DIRECT FIELO LABOR
HOURS HOURS HOURS HOURS TOTAL
CONSTRUCTION
OVERHEAD COST

Figure 3.26 Construction overhead costs—cost estimating logic.

typical construction overhead costs; and Figure 3.27, historical data (direct hours
per work unit) for construction work.

J. Buildings Estimating Data

Figures 3.28 through 3.31 present a range of conceptual estimating data.

K. Productivity Guidelines (Construction)—Curves

Figure 3.32 provides general guidelines for establishing a direct-labor productivity

profile for the construction phase of a project. These guidelines cover incremental
and cumulative profiles. Since bad weather can have a significant impact on pro-
ductivity, separate guidelines are provided for incremental productivity planning.
This profile should be developed as soon as the physical site conditions are
known and a detailed construction schedule is available. The horizontal axis
should be translated from percent complete to a calendar time frame.
Direct construction labor can represent 20% of a project's total costs, so it
is important that labor productivity be tracked as early as possible. Productivity
can be measured properly only if construction progress is evaluated with physical
quantities and associated work measurement units (i.e., in an earned value system).
Application
These guidelines show incremental productivity for the major phases of construction.
The mobilization phase (the first 15%) is shown with a reduced productivity of 10%
from the construction estimate. It improves during the next two phases, by 5% dur-
66 Chapter 3

The following are typical data points for evaluating estimating levels or monitoring
project performance. This data applies to large U.S. process plants. Adjustments
should be made for overseas locations and for small plants. The following rates
do not include handling, scaffolding, testing, or rework.

Civil

• Site strip - jobhours per square yard 0.2

• Machine excavation - jobhours per cubic yard 0.5

• Hand excavation - jobhours per cubic yard 2.0

• Underground C.S. pipe - jobhours per foot (2" to 10") 1.0

• Underground plastic pipe - jobhours per foot (%" to 10") 0.5

• Concrete foundations (incl. formwork, rebar, etc.) -jobhours per cubic yard 20 to 25

Structural Steel

• Erect heavy steel (100 lbs per foot) - jobhours per ton 12

• Erect light steel (20 lbs per foot) - jobhours per ton 36

• Install platforms, ladders, etc. -jobhours per ton 40

Equipment

• Install pumps (0 to 10 hp) - jobhours per each 20

• Install pumps (10 to 100 hp) - jobhours per each 45

• Install compressors (large) - jobhours per ton 20

• Install heat exchangers (shell-and-tube) - jobhours per each 6

- jobhours per ton 0.7

• Install towers / vessels - jobhours per ton 2

• Install vessel internals - jobhours per ton 120

Piping (including pipe supports and testing)

• Prefabricate - all sizes - jobhours per ton 80 to 100

• Erect piping (0" to 2!4") - jobhours per foot 0.6 to 1.0

• Erect piping (3" to 8") - jobhours per foot 1.5

• Erect piping (10" to 20") - jobhours per foot 2.0

• Erect piping (3" to 8") - jobhours per ton 200

• Erect piping (10" to 20") - jobhours per ton 250

Figure 3.27 Typical data points—construction.

Estimating Keys—Establishing a Realistic Cost Baseline 67

Land Costs not

Included 70%
BUILDING/CONSTRUCTION

DESIGN & 5% FIXTURES,

DEVELOPMENT FITTINGS &
EQUIPMENT 4% SPECIAL
SYSTEMS

Land Costs not

Included 58%
BUILDING/CONSTRUCTION

CONTRACTOR 3% 2% SPECIAL
FEE FIXTURES, FITTINGS SYSTEMS
& EQUIPMENT

3. OFFICE BUILDINGS
^y^ 28% ^ v ^ 1% STRUCT%L/CARPENTRY
• Land/Engineering Costs
not Included / \ CONCRETE A> V 3 % SPECIALTIES
/ 24% \ JV ^X^V-2% MOISTURE PROT'r
• Furnishings & Office ^^\JH2% DOORS/WINDOWS
Equipment not
Included MECHANICAL V ^ ^ - 4-3% MASONRY

^^16%/ \ \ -4-1% SITE WORK

(r^^ /9%\
NELECTRICAI/
\ /PROFITX
\
7
-/~5% FINISHES
X I & BONDS

Figure 3-28 Typical building cost breakdowns (pie charts).

 68 Chapter 3

These specifications are typical but not all-inclusive. Division 1, for example, can vary
greatly in the services to be provided.
1. GENERAL REQUIREMENTS Summary of work, allowances, alternates/alternatives, project meetings,
submittals, quality control, construction facilities and temporary controls,
material and equipment, contract closeout.

3. CONCRETE Formwork, reinforcement, cast-in-place, precast, cementitious decks and

toppings.

4. MASONRY Masonry and grout, accessories, units, stone.

5. METALS Materials, coatings, fastening, structural framing, joists, decking,

fabrications.

6. WOOD & PLASTICS Rough carpentry, finish carpentry, architectural woodwork.

7. THERMAL & MOISTURE PROTECTION Waterproofing, vapor retarders, insulation, EIFS, fireproofing, fire stopping,
manufactured roofing and siding, membrane roofing, flashing and sheet
metal, roof specialties and accessories, skylights, joint sealers.

8. DOORS & WINDOWS Metal doors and frames, entrances and storefronts, hardware, glazing.

9. FINISHES Gypsum board, tile, resilient flooring, carpet, specialflooring,painting, wall

covering.

10. SPECIALTIES Visual display board, compartments and cubicles, louvers and vents, grilles
and screens, wall and corner guards, identifying devices, pedestrian control
devices, lockers, fire protection, operable partitions, toilets and bath
accessories.

11. EQUIPMENT Parking control, residential, medical.

12. FURNISHING Artwork, manufactured casework, window treatment, furniture and

accessories, interior plants and planters.

13. SPECIAL CONSTRUCTIONS Special security construction.

14. CONVEYING SYSTEMS Dumbwaiters, elevators.

15. MECHANICAL Basic materials and methods, insulation, fire protection, plumbing, HVAC,
air distribution, controls, testing, adjusting and balancing.

16. ELECTRICAL Basic materials and methods, service and distribution, lighting,
communications, controls, testing.

TOTAL BUILDING COST

2. SITEWORK Subsurface investigation, demolition, site preparation, earthwork, piles and

caissons, paving and surfacing, sewerage and drainage, site improvements,
landscaping.

A. LANDSCAPING & OFFSITE WORK Plants and lawn, planters, landscaping, sprinklers.

B. ARCHITECT FEES

C. ENGINEERING - Design; Acoustical; Lighting.

D. PROJECT MANAGEMENT

E. CONTINGENCY

TOTAL PROJECT COST

Figure 3.29 Conceptual estimating—office buildings—CSI division descriptions.

Estimating Keys—Establishing a Realistic Cost Baseline 69

CATEGORY SQ.FT. PERSON

1. OFFICE STAFF(General) 195-220

2. SENIOR STAFF 220-250

3. EXECUTIVE STAFF 250-650

4. PRESIDENTIAL STAFF 850-1250

5. EMPLOYEE LOUNGE, 110-130

DINING ROOM &
GENERAL FILING

6. GROSS AREA TO NET 70-75%

AREA-ACTION/OFFICE
WORK SPACES
(If only gross area is known)
These are recommended LEVELS, but some, temporary reduction
can be a ceo mod a ted for the short term. But not recommended for
the long term as "over-crowding", high noise levels and inefficient air
conditioning can lead to regulatory problems and low productivity.
OUER-CROUJOING PRODUCTIUITV LOSS CRN BE 1-5%fTot. Staff)

Figure 3.30 Conceptual estimating—office buildings—building space/personnel density.

DATA BASE - AS OF 1990 (California-State)

GENERAL. Multi story, single concrete building in an urban area.

$ Per sq. ft. BASIC, SIMPLE UTILITARIAN LUXURY H.Q.

C.S.I. Divisions SINGLE STORY 2-3 STORY "SPECIAL"
"Minimum" "Average" "Luxury"
1. General Reqm'ts 1.0 3.0 5.0
(Minimal Services)
3. Concrete 8.5 13.5 18.5
4. Masonry 4.0 5.0 11.5
5. Metals 4.5 4.5 12.0
6. Wood & Plastics 2.5 2.5 3.5
7. Therm. & Moist. Prot'n 1.5 1.5 2.5
8. Doors & Windows 3.0 3.5 6.5
9. Finishes 10.0 10.0 14.5
10. Specialties 0.5 1.5
11. Equipment - 0.5 3.0
12. Furnishing - 14.0
13. Special Constr'n - 0.7
14. Conveying Systems - 1.0 1.5
15. Mechanical 9.5 10.5 11.5
16. Electrical 10.5 10.5 13.5
TOTAL BLD'G COST $55.0 sq.ft. $66.5 sq.ft. $120.0 sq.ft.
2. Site Work(%of TBC) I 5-20% 10-25% TBD
A. Lndscp'g-Offs. Wk(%TBC) 0.1-0.5% 0.1-0.5% 0.1-0.5%
SUPPORT COSTS (% TBC)
B. Architect Fees 6-10% 6-10% 6-10%
C. Engineering- Design 0.5-0.75% 0.5-0.75% 0.5-0.75%
- Acoustical 0.2-0.5% 0.2-0.5% 0.2-0.5%
- Lighting 0.1-0.5% 0.1-0.5% 0.1-0.5%
D. Project Management 2-5% 2-5% 2-5%

TOTAL PROJECT COST

Figure 3.31 Conceptual estimating—office buildings—database—dollars per sq ft.

70 Chapter 3

CONSTRUCTION PHASE

INCREMENTAL
CUMULATIVE * <AVERAGEt»

PRODUCTIVITY
INDEX

15 25 40 80 90 100
% COMPLETE OF CONSTRUCTION
LEGEND
INCREMENTAL PRODUCTIVITY "WEATHER CONSIDERATION"
DOES NOT APPLY TO THIS
• CUMULATIVE PRODUCTIVITY PERIOD.

WEATHER CONSIDERATION (WINTER-COLD/RAIN)

WINTER SUMMER (EXCL,MID EAST)

3 MONTHS AT 1.4 6 MONTHS AT 0.85

Figure 3.32 Productivity guidelines—construction.

ing the material handling phase and by 20% during the labor buildup phase. At
labor peak (40% of construction), the incremental productivity is shown as .09, which
is still good. For the last 10% of construction, productivity rapidly deteriorates.
The cumulative curve is calculated and is shown as tracking from poor to
good and ending at 1.0. Additional factors for weather would be superimposed
on the top profile. If the winter occurred at 40% of construction, the 0.9 could be
multiplied by 1.4, resulting in a projection of 1.3 for the period. If the other periods
were as shown on the chart, then the overall productivity of 1.0 would not be
achieved. The weather consideration does not apply during the last 20% of the job.
Evaluation of labor productivity can be made early in the project, and the
method/guidelines provided here can greatly assist in monitoring and forecasting
productivity levels. It should be emphasized that a schedule/activity jobhour
Estimating Keys—Establishing a Realistic Cost Baseline 71

1. INHERENT NATURE OF THE WORK

- Punch List
- Check Out
Low Budget Value

2. OPERATIONAL / MAINTENANCE CHANGES

- No Extra Budget

3. POOR LABOR ATTITUDE

4. POOR MANAGEMENT / PLANNING

- "Crash" Program
- Over-staffing /High Costs
Figure 3.33 Productivity guidelines—poor rundown productivity.

weighting system can also produce productivity analyses, but the results are
normally of a lower quality.

L. Poor Rundown Productivity

Experience and historical data have allowed reasons for poor productivity during
the last 20% of a project to be determined, including:
• Major work during this period is punchlist/checkout work that has a lower
budget value. Thus the earned value system measures low productivity.
• Remedial work and changes required by the operational and maintenance
staff generally take place during this period. This type of work does not
usually fall into the category of official change orders, since it would then
result in increased budget.
Figure 3.33 illustrates these major elements.

M. Construction Progress—Direct and Indirect

Figure 3.34 illustrates a typical relationship between direct work and indirects.
The data it reflects have been compiled from experience. This figure shows that
the indirect curves are essentially constant throughout the execution of a project.
Early buildup for field organization and installation of temporary facilities is
matched by a late buildup for final job cleanup and demobilization.
Direct work progress is a measure of physical quantities installed, and, as
shown, the direct work curve is identical to the historical/standard construction
curve previously illustrated. Indirect construction progress cannot be assessed by
measuring physical quantities and is usually measured in jobhours. This typical
curve shows the rate at which these jobhours would normally be expended.
Indirect and direct construction curves for any project can be compared with
the curves in Figure 3.34. During construction, actual performance should be
compared with these profiles as well, since doing so can provide an early warning
that the expenditure of jobhours is deviating from the norm.
The percentage breakdowns for craft indirects, field administration, and
direct supervision can be used to check estimates and performances of individual
categories. On very large projects, individual control curves can be developed for
specific categories.
72 Chapter 3

TYPICAL CONSTRUCTION BREAKDOWN

No Workers

ORIGINAL SCHEDULE

CONSTRUCTION HOURS (DIRECT)

I
INDIRECT HOURS - 30%
I
CONSTRUCTION EQUIPMENT - 20%

1
FIELD STAFF - 15 %
J
FIELD OFFICE EXPENSES
& -35%
TEMPORARY FACILITIES
(material only)
100%
LABOR COST

Figure 3.34 Construction progress—direct and indirect.

N. Design Allowance Evaluation and Chart

A selective assessment of the major equipment carrying significant design allow-

ances should be made, and each month a forecast of the purchase orders for this
equipment should also be made. As engineering advances, the amount of DA
should decrease. Design allowances can reflect between 5% and 15% of the
estimated equipment cost and, as such, can constitute a significant percentage
of total project costs. The design allowances should be shown in the estimate.
Figure 3.35 can be used as a guideline and shows a required, overall design
allowance over the life of a project. The figure shows a design allowance of 10%,
reducing to zero by the time engineering is 95% complete. It should be emphasized
that the design allowance is a major feature of an estimate for a fast-track project.
The allowance is a known condition (not contingency) and is used to cover cost
increases of early purchases that are impacted by later engineering changes.

XXIV. ESTIMATING THE CASE OF USED VERSUS NEW EQUIPMENT

This approach is for the case of complete, single, or multiple process units and
does not apply to maintenance-replacement work. The author has been involved
Estimating Keys—Establishing a Realistic Cost Baseline 73

ENG INEE PRO JRES 5/CO UPLE TION

100 ,.
95% kr
—7* 1 at 80Z
Engineering
90

f
ENGINEERING
| l . Process.. 100.0
2. Civll/Str uctur a l / Arch'l. 90.0
80 80% 3. Vessels 95.0
4. Mechanica 1 Equipment..., 95.0
5. Ptpingdn c l . model) 75.0
70 / 6. Electrica 1 60.0
7. Instrumen tation 55.0
/ 8. General/M isc 70.0
60 *
7' INS T ENTJ ENGINEERING T 3TAL 30.0

}
ELE )AL
• • • mm
40 ST ART OF

•
MA TERI \ L
30
^PRC
PU RCH> tSINC

A
20
TANJ AGE
10
/ ™
y
0
10 20 30 40 50 60 70 80 90 100
PE CE^ T OF PRO ECT TIMl
DESI 3N A LLd\ fANC E •
100

80

60
*
%
40

20

10%

Figure 3.35 Design allowance.

in three cases of used versus new equipment. In each case, new equipment was
chosen, as the cost differential was insignificant due to:

high to exorbitant cost of the used equipment (never at scrap value);

high cost of dismantling, refurbishing, upgrading;
loss of equipment guarantees;
limitations in performance efficiencies and additional production cost;
 I !

Conceptual Estimating - Location Cost Factors

$ IMPORTED MATERIAL LOCAL MATERIAL LABOR $ LCF
Country Exch. Rate Duty - % Freight-% VAT Total IMI LMI Labor Rate Labor P F

Australia 1.38 A$ 20 15 0 1.35! 1.3 20.66 1.6 1.3

Japan 102.11 Y 7 10 0 1.2! 1.4 36.05 1 1.4
Brazil 1.09 Real 50: 10 ; 0 1,6: L? 3.05: 1.8 1.06
Venezuela 170 B 10; 10 ; 0 12; Q,9 \ 2.6, 1-7 0.9
Canada 1.38 C$ 3 5 0 1.08; 1 21.05 1.2 1
Mexico 3.36 N.P. 15 5 0 1.2; 1 .25 5.01 1.7 1.05
France 5.55 FR. 0: 5\ 0 1.05: !•?. 23.21 1.2 1.15
Germany 1.63 GM 0: 5: 0 1,0.5; 1.1 37.01 1 1.2
United Kingdom 1.54 £ . 0: 10 ; p 1,1] 1-3 25.01; 1,5 1.3
Poland 22,600 ZL 10; 10 \ 22 1.42; 0.8 10.01 1.7 0.95
India 31.13 RP so; 20 ! 0 1.7: 1.1 2.01 ; 1.15
China(Guandong) 8.7 RM 8 1C ; 17 1.35 0.7 5.01 1.05
U.A.E. 3.67 D 5 1C ; 0 1.15 1 5.51 1.6 0.95
Saudi Arabia 1 o
3.75 SR 0 15 0 1.15 1.2 5.01 1.6 0)
South Africa
Pakistan
0.229 R 2;
50:
1C):
2C):
0 1.12 0-9 12,56
4,01
1.3
2-2
0.92
i
 'Maximum rate; many duties are lower. India may grant concessional duties for major projects. Duties as low as 20% have been granted for recent m
power projects. Also, while there is no VAT tax in India, a national sales tax of 4% plus state sales taxes of 4 to 15 % apply to local material.

<Q

I
LMI - Local Material Index
1£
IMI - Imported Material Index LCF - Location Cost Factor P F - Productivity Factor cr
55"

Figure 3.36 Conceptual estimating—location cost factors. 0)

3D

g
CD
0)
76 Chapter 3

• increased maintenance risks;

• additional engineering cost because of out-of-spec and out-of-date details
from existing design standards; and
• higher risk of operational failure, sometimes catastrophic, depending on
process, impacting on operating economics and insurance premiums.
Costs should be developed for these conditions so that a full and proper cost
comparison of used versus new equipment can be made.

XXV. LOCATION COST FACTORS—INTERNATIONAL (FROM A U.S.

COST BASE)

A location factor is an instantaneous, overall, total cost factor for converting a

base project cost from one geographical location to another. This factor recognizes
differences in productivity and costs for labor, engineered equipment, bulk ma-
terials, commodities, freight, duty, taxes, indirects, and project administration.
(The cost of land, scope/design differences for local regulations and codes and
differences in operating philosophies are not included in the location factor.)
With the current rush of industries attempting to globalize, use of location
factors has become increasingly important. Location factors should be used to factor
a base estimate for comparing costs at differing locations and not for the funding
estimate for the selected location. After selection, a higher quality estimate should
be developed for project funding. However, it is common for management to lock
onto the estimate generated by the location factor program as the number. This
drives development of location factors toward methods that are accurate, flexible,
easily managed and that allow a quick turnaround. Capital costs for facilities, alone,
do not dictate if a company will build a plant at a foreign site, but they are an
integral part of the total business economics from which decisions are made.

A. Key Variables and Adjustments—Material

Many countries do not have the capability to manufacture certain specialized

equipment and routinely import this material. So the degree of local versus
imported materials and the relative cost differences need to be part of the location
factor calculation. Many companies use U.S. costs and apply percentages for
freight, import duties, and customs and broker fees. Two other issues that should
be considered are:
importing of certain items because of quality or scheduling problems; and
• importing and paying the associated costs (if local regulations so allow) ma-
terials from another country because local manufacturing costs are so high.
These items can greatly affect the material and equipment costs for an actual
project. The location factor needs to reflect the above considerations and expected
or known strategies with the factors being adjusted accordingly.

B. Key Variables and Adjustments—Labor

Local monetary rates, productivity differentials and benefits and burdens vary
enormously by individual country. Governmental employment regulations, rules
Estimating Keys—Establishing a Realistic Cost Baseline 77

for foreign workers, travel and support costs, religious and cultural differences
must be carefully evaluated. All can impact a location cost factor program. Figure
3.36 shows the detail and location cost factors for a range of countries.

XXVI. SUMMARY—BASIC SCOPE APPRECIATION

The use of historical data, typical relationships, statistical correlations, and

practical rules of thumb can greatly add to the effectiveness of estimating and
project control programs. Such information can provide guidance in:
developing/evaluating schedules,
• assessing labor requirements,
• determining appropriate productivity levels,
• improving cost/schedule assumptions,
• carrying out trend analyses,
• establishing project cost,
• evaluating status and performance of the work, and
• recognizing the scope of the work at all times.
The last item highlights the key to effective project control: scope recognition.
This equates to the ability to properly establish the scope at the outset through
use of a good estimate, and thereafter to constantly recognize the true scope of
the work as the project develops and is executed. The testing and measuring of
actual performance against experience can be a valuable source of verifying
status, determining trends, and making predictions. Naturally the application of
historical data to a specific project must always be carefully assessed.
The previous data and figures represent historical and typical cost/schedule
rules of thumb that can greatly assist in establishing and developing scope during
all phases of a project. This information is particularly useful at the beginning
of a project when engineering is at a low percentage of completion, since it results
in the generation of a broad and preliminary cost estimate and overall schedule.
Scheduling Keys—Establishing a
Realistic Schedule Baseline (Typical
and Standard Schedules)

I. INTRODUCTION

This chapter concentrates on the practical and realistic development of critical

path method (CPM) schedules through the use of standard schedules. It includes
only brief comments on CPM fundamentals. Specifically covered are three of the
most advanced and important scheduling programs:
• fast-track—economic program,
• fast-track—trapezoidal technique, and
• construction complexity—labor density program.
The success and probability of a project schedule can be greatly enhanced with
correct application of these three programs.

II. MAJOR CPM SCHEDULING OBJECTIVES

Figure 4.1 lists the major objectives of CPM scheduling. Many planning engineers
believe that the end product of their work is the schedule. This figure focuses
on the need for the schedule to be readily understood by the executing project
staff. All too often, a finished CPM schedule is complicated, badly laid out, and
incomprehensible to the user. The planner should be required to produce com-
municating schedules. Even though CPM schedules can be produced manually,
the great strength of this technique is its ease of use with computer programs.
A specific application of this principle is the use of a summary schedule to
represent the complete project schedule. Following development of CPM sched-
uling in 1958, the size of complete project schedules mushroomed to networks in

79
80 Chapter 4

• PLAN

• SCHEDULE

• CONTROL

COMMUNICATE jro THE EXECUTORS

• ORGANIZE

• IMPLEMENT

Figure 4.1 Objectives of CPM.

excess of 10,000 activities, as it was presumed that greater detail gave greater
quality of critical path analysis. It then took more than 10 years for the industry
to realize that such detail created a paper nightmare, high technique cost, plus
a resulting loss of quality and user confidence.
With skill and a scheduling database, a summary or milestone project master
schedule can first be developed and then followed by detailed networks for separate
project phases. With limited skill and no database, the project master schedule is
generally developed after the detailed networks, with a program summary technique.
Figure 4.2 shows the most widely used CPM formats.

A. Arrow Diagram

The arrow diagram tends to be preferred by management, as it was the first

method to be developed. This method is a little cumbersome, as it requires a
greater use of dummies, but it has a more visual/graphical appeal than the
precedence method.

B. Precedence Diagram

The precedence diagram is a more efficient method as it requires fewer dummies.

But its graphical content is not as good and is difficult to place against a timeframe.

C. Time-Scaled Diagram

The time-scaled diagram is a visual version of the arrow diagram and gives a clear
picture of the project schedule, as it relates to progress and completion of activities.
A vertical cursor line is drawn at each reporting period, and the activities status
of on, ahead, or behind is clearly visible. It is a favorite tool of management.
Establishing a Realistic Schedule Baseline 81

ARROW DIAGRAM

A c E G
3 I 4 I 2 I 1 I

B D F H
1
2 I 3 I 5 I I
TIME SCALED DIAGRAM
C

10 11 12 13 14 15

Figure 4.2 CPM formats.

III. TYPICAL SCHEDULING LEVELS

Throughout the industry, there is uniformity in scheduling levels of detail. Five

levels of detail are common to many full scheduling systems. Generally, owners
work up to level 3 and contractors at the full 5 levels. Figure 4.3 shows a typical
owner program, consisting of the first three levels.
Level 1. This is usually a bar chart and shows all or key company projects from
start to finish. Each project is illustrated by a simple bar, and important
milestones are represented by symbols at the planned time of occurrence.
As work is accomplished, the bar and symbols are filled in to a reporting
dateline to show achieved progress. This technique can be used for all
company projects but only for the construction phase.
Level 2—Total Project Schedule. This is usually a bar chart, with individual bars
for major phases such as permitting, funding, engineering, procurement,
construction, commissioning/start-up. Important milestones are shown as
symbols along each bar. Separate bar charts showing more detail can then
be developed for the separate phases.
Level 3—Project Master Schedule. This is usually a CPM schedule, but at a sum-
mary/milestone level, of an individual project from start to finish. The develop-
ment of large (1000 or more), totally integrated networks for the entire
project are now uncommon, as this technique has proven to be inefficient
and very costly.
The standard/typical schedules discussed below illustrate the above levels.
Many of them are based on experience. It is emphasized that summary networks
82 Chapter 4

Scope Definition and Control

Project Control
Scope Initiated Infrastructure Control

New Facilities Conceptual Planning Measurable Expectations

Existing Fad Sty Expansion Project Execution Planning Defined
Studies Risk Analysis Enhanced Scope Visibility
Minor Plant Modifications Work Breakdown Structure for Management Decisions
Facilities Startup Detailed Scheduling More Effective Utilization
Fadfities Shutdown/ Baseline Scheduling Mgmt of Resources
Turnaround -Sen. Reporting & Analysis Increased Productivity
-Process Assessment
-Performance Measurement
•Productivity Analysis

Level I
Master Milestone Schedule
(One line per Project)

Level II
Program Schedule
r (Detail of Total Project
— or Phases of a Project)

Level HI
Detailed Project Schedule
(Detailed Activites by Discipline)

Figure 4.3 Typical owner scheduling program.

Establishing a Realistic Schedule Baseline 83

SCHEDULING PROGRAM

MASTER MILESTONES SCHEDULE

LEVEL 1 SCHEDULE

APPROVED
DESCRIPTION PROJECT RESPONS CONST DESIGN FUNDING TOP NOTE MAY JUNE JULY
PACKAGE ENGR MHRS DRAFTING FCST 20
ID MHRS COST <ANK

Project

Project
ni
T
n
X7
Project

Project
•_ _

Legend

The symbols shall be consistent among all groups (or level I & II Schedules.

{ I Scheduled Beo.inningfEnd oi Project

I H The actual on-time Scheduled Beginning/End of Project

\ y Rescheduled Milestone

< ^ Rescheduled Milestone Complete

\Z Scheduled Milestones

• " Scheduled Milestones Complete

Figure 4.4 Master milestones schedule—Level 1.

showing the overall program are much preferred to bar charts, since they show
the work interfaces and critical relationships. However, bar charts are still widely
used, as CPM type networks require very high skill levels that may not be
available to many companies.

A. Level 1 Example—Master Milestone Schedule

Figure 4.4 illustrates a multiple projects bar chart schedule, with each bar
representing one project. Appropriate project information is listed, and symbols
along each bar show key milestones. This schedule, a summary of more detailed
projects schedules, is used as a senior management reporting tool. It can also be
84 Chapter 4

Activity
Description

SEP OCT NOV DEC JAN FEB MAR APR MAY JUN

PERMITS
11/19
r~l AFE Approved
FUNDING
Pilot 10/1 11/25 BldPkg 1/15 ClarHier Vendor
Test ymr \ y Comp f~l EngrComplete
ENGR/DESIGN
11/23 Order 4/14 Last
• LL Equip Q Delivery
PROCUREMENT
11/25 1/18 Contract Award Const Complete 6/9

CONSTRUCTION D D
•
DOCUMENTATION Bid and Award 6/10
Constr Contract
FCO/STARTUP
OTHER Commissioning
Complete 7/7/88
NOTES: UNIT PERFORMANCE UPGRADE

J. M. DOE - PROJECT ENGINEER

LEVEL I t SCHEDULE

Figure 4.5 Summary milestone bar chart—Level 2.

the sole schedule for multiple, small projects that are too small for individual
schedules.

B. Level 2 Example—Project Bar Chart Schedule

Figure 4.5 shows a summary milestone bar chart for an individual project. Each
bar represents major work phases and key milestones are illustrated with sym-
bols. This would be used mostly on smaller projects where CPM formats are not
necessary or are not cost effective.

IV. STANDARD—TYPICAL SCHEDULES

The following standards are mostly Level 3 schedules and provide guidance for
the overall project schedule for the execution phase (Phase 2), contract award to
mechanical completion.

A. Typical Project Master Schedule for an Intermediate Project

Figure 4.6 is a CPM schedule for an individual project and represents critical
and subcritical activities. It has a unique feature in that it sequences parts of
work, which enables the overlaps to be eliminated. This results in an efficient,
totally linked network and becomes the working project schedule from which
more detailed networks (frag- or subnets) are then developed for each work phase.
 ^(DURATION N MONTHS) ADD FACTOR FOR :
4. THE LOGIC DIAGRAM SEQUENCES 7. THERE ARE TWO KEY ELEMENTS
J IS F OR A SMALL ACTMTE& HOWEVER, MANY OF OF THIS SCHEDULE*. A) STRAIGHT THRU PROJ.+ 10/15%
J PLANT. RESOURCE THESE ACTMTCS OVB&AP AND
UTUZATON IS OTA.Y L M T B ) CONTNUE FOR LONGER THAN SHOWN. a) TO IDENTIFY EARLY ENGINEERING B) OVERSEAS - EUROPE +10/20% (MECH.& Ptf)
BY SPACE AVA1ABLE T H B t
WOULD BE LOGIC AND DURATION
BUT DURATION t O C A T H ) 6 THE T I C
REQUBED BB=OR£ THE START OF THE
AND PROCUREMENT MILESTONES C)
~* OVERSEAS - UK f 30/40% (MECH.& PIP.) m
b) TO IDENTIFY CRITICAL EQUIPMENT
CHANGES FOR SPEOFIC PROJECTS FOLLOWNG ACTMTY. D) SUBCONTRACT OF
AND REVAMPS. OFFSfTES AND AND MATERIAL ACTIVITIES AND CONSTRUCTION
UTUTES ARE NEGLJQBLE. 5. THIS SCHEDULE ASSUMES THAT MUCH COMPARE WITH PROJECTED
+ 10/20% (MECH.& PIP)
cr
DELIVERY TIMES E) REMOTE JOB SITE +65/76% (MECH.& PfP)
2. CONSTRUCTION IS BASED ON OF THE CONCEPTUAL AND PROCESS
DESIGN HAS BEEN COMPLED DURNG 8. REMOTE JOBSITES MAY REQUWE A F) REMOTE JOB SITE + 3/6M (SHIPPING)
55'
DIRECT HFE WTTH ONLY SfTE
>ARAT10N BENG PHASE I OPERATION. ***«*» LONGER CONSTRUCTION PERIOD
6. CONSTRUCTION SUBCONTRACT 9. 15% CREEP FACTOR ADDED TO (Q
a AS GOVERNMENTAL APPROVALS
AND PERMITS VARY WDELY FOR
AND OVERSEAS PROJECTS WILL EQUIPMENT VENDOR DELIVERY a)
GENERALLY REQUIRE A LONGER TIMES
EACH COUNTRY, NO ATTEMPT HAS
BEEN MADE TO SCHBXJLE THESE ACTTVITEa CONSTRUCTION PERIOD
SL
25 MONTH? ft
LEGEND

I
MATL - MATERIAL
FDN - FOUNDATION
U.G. - UNDERGROUND
PROCUREMENT
lnstruffl6nft&lk)fVA.GL SUB - SUBCONTRACT
VD - VENDOR DRAWNGS CONSTRUCTION
WP - fKHJRE, NEGOTIATE, PURCHASE
CD

Erect Rack <D

FDN&UG
in
b
CO

CONTRACT AWARD
PHASE II OR DETALED
ENGMEERMG RELEASE
TO CONTRACTOR Deiver Heaters (sections)

Detver Fin Fans, Towers & Reactors

1O-F2

— _ DeSver Compressor _ __ mmm mr^ — ,

-(•>9"(*

Figure 4.6 Typical project master schedule—intermediate project, USA, Level 3.

 N0TE8 (DURATION M MONTHS)

I. THIS 8CHEDULE » FOR A LAROE MULTI-UNIT ORASS ROOTS REFMERV

NO L M T ON RESOURCES. THERE WOULO BE LOOC AND DURATION CHANOES
FOR SMALL PROJECTS. REDUCEO OFFSTTES ANO REVAMPS.

7. THE CONSTRUCTION 0 BA8E0 ON DRECT Hf*£ WfTH SfTE PREPARATION

BEMQ SUBCONTRACTED.

CIV1DWQ& s~\ A _ROAp6 SUB BASE * 3. AS GOVERNMENTAL APPROVALS AND PERMTT8 VARY WOELY FOR EACH
COUNTRY . NO ATTEMPT HAS BEEN MADE TO SCHEDULE THESE ACTIVATES

4. THE LOOC DIAGRAM 8EOUENCE8 ACTTVrTES HOWEVER MANY OF THESE

ACTTVrrt8 OVERLAP AND CONTMUE FOR LONGER THAN SHOWN BUT THE
DURATION MDCATED B THE TME REOUffED BEFORE THE START OF THE
FOLLOW MO ACTIVfTY.

I ft. THB SCHEDULE ASSUME8 THAT MUCH OF THE CONCEPTUAL AND PROCESS
ProdttK>n-l>o« A DE8IQN HAS BEEN COMPIED DURMO A PHASE I OPERATION.

J «. THE KEY ELEMENTS OF T H » SCHEDULE ARE TWO-FOLD

A) TO DENTFY EARLY ENOMEERMO AND PROCUREMENT MLESTONES.
B) TO OENTFY CROlCAL EOUTMENT A MATERIALS ACTrVfTES AND
COMPARE WfTH PROJECTED OELrVClY TMES.

7. CONSTRUCTION SUBCONTRACT AND OVERSEAS PROJECTS W U

GENERALLY REOURE A LONGER CONSTRUCTION PERCO

« REMOTE JOSSOE8 W U REOURC A LONGER CONSTRUCTION PEnOO

_pEL^ERYMCHANQE8(6O»2.

F^ANS SJOWERS_REACTOR2# Q

A _ OEUVERY COMPRESSORS —
ADO FACTOR FOR

A) STRAOHT THRU PROJECT 10/15%

B) OVERSEAS - EUROPE 10/20% (MECH ft Pf>*G)
C) OVERSEAS - UK 30/40% (MECH ft P f M Q )
0) SUBCONTRACT OF
CONSTRUCTION 10/30% (MECH & P*>M0)
E) REMOTE JOB SfTE 55/75% (MECH t PTMG)
3/flM (SH«>PMG)
F) REMOTE JOB SITE

M A r L - MATERIAL
FON - FOUNDATION
U.a - UNDEROROUN0
® CRfTCAL PATH
ENOMEERMQ
SUB - SUBCONTRACT
— PROCUREMENT
VD - VENDOR DRAWMOS
MP - MOUVC NEOOTMTE. PURCHASE
• M l CONSTRUCTION

Figure 4.7 Typical project master schedule—large project, USA.

Establishing a Realistic Schedule Baseline 87

The part activity sequencing and durations have been determined from
considerable experience/research and assume an economic (40 hours), fast-track
approach. This standard network is for the execution phase of process plants and
should be updated as economic conditions change. The notes require full consid-
eration, since corrections must be made for subcontract construction, overseas
work, and remote job sites. Another element of this standard is the sequencing
of equipment delivery and installation, based on historical data, to provide suf-
ficient nozzles for an efficient field piping program. If the plot area is known,
the construction duration can be checked with the labor density-trapezoidal tech-
nique (LD/TT). If there are differences, the LD/TT duration is used and the CPM
durations adjusted. Nevertheless, with skill and experience, there should only be
small differences when using both techniques.
Project schedules should be drawn up as time-scaled networks. A creep factor
is applied to equipment lead times: usually +5% for Japan, +15% for the United
States, and +20 to +30% for Europe. This factor recognizes that the original
vendor-quoted delivery is rarely achieved.
The purchasing/engineering cycle, usually four months for the United States
and Europe, is determined with reference to the proposed project purchasing plan
(cost or schedule driven). The four months represent an economic program of full,
competitive bidding. The network is based on a USA (execution phase) direct-hire
operation, and the add factors are to compensate for an overseas or subcontract
operation. Environmental aspects and governmental regulations are not standard
and must be treated on a case-by-case basis.

B. Typical Project Master Schedule for a Large Project

Figure 4.7 shows the same technique as Figure 4.6 but for a large, process plant
project. It is also based on actual project experience/research. The same consider-
ations as outlined in Figure 4.6 apply:
• adjust for actual project differences,
• check the standard notes for correct application,
• use the labor density-trapezoidal technique to confirm the overall construc-
tion duration,
• assess the material creep factors,
determine if execution is on a fast-track economic basis,
• find out if construction will be subcontracted,
• identify any environmental or regulatory restraints, and
determine if all resources are available.

C. Engineering Schedule for a Large Project—Standard

Figure 4.8 shows the key relationships and durations for Phase 2 (execution)
engineering of a large, grassroots project. The database is the same as that for
the project master schedule for large projects (Fig. 4.7). The same logic applies
to small projects, but activity durations change significantly. The durations shown
indicate only the amount of work critical to the project schedule. Activities will
extend beyond the periods indicated. Engineering activity will continue through
completion of construction.
 Eng-Slte Prep, Roods & Drainage
ENGINEERING SCHEDULE (TYPICAL) - LARGE PROJECTS U.S.A
CO
LU NOTES:
1. THIS SCHEDULE IS FOR A LARGE MULTI-UNIT. GRASS ROOTS
CO PROCESS PLANT. NO LIMIT ON RESOURCES. THERE WOULD BE
LOGIC AND DURATION CHANGES FOR SMALL PROJECTS AND
REVAMPS

2. CONCEPTUAL AND PROCES8 DESIGN HAS BEEN COMPLETED

DURING PHASE 1. MCLUDING:

£
Compl BUg Design
O final process flow diagrams
final heat/material balances
equipment data sheets
utMty systems
10 water/waste treatment
she selection
Pfteck I plant site layout
Design

O
Structural Steel P&L Dwga preliminary plot plans
project design summary
NNPPVacfc Steel/
3. ENVIRONMENTAL AND PERMIT REQUIREMENTS HAVE *EEN
INITIATED DURING PHASE 1

4. ENGINEERING SUPPORT TO CONSTRUCTION WILL CONTINUE

(Model 0 0 / 7 0 % CompTj Final Model Review
UNTIL PROJECT COMPLETION

CO
LU LgpL/R Compl Piping Iso Dwgs 5. DURATIONS INCLUDE OWNER APPROVALS. WHERE
APPROPRIATE
CO
6. PIPING ENGINEERING PROGRAM IS BASED ON USING MODEL TO
DRAW ISOMETRICS. SOME COMPANIES USE MODEL AS
lflO% ENQ. KEY MILESTONE
CHECKING DEVICE ONLY
I PROVIDES ADEQUATE
^7 SUPPORT FOR MECH.
| CONSTRUCTION LEGEND
WP - INQUIRY, NEGOTIATE, PURCHASE
MTO - MATERIAL TAKE-OFF
VD - VENDOR DRAWINGS
SUB - SUBCONTRACT

o
Instr piping hook-up* & location plans UG - UNDERGROUND
FDN - FOUNDATION
PP - PUMP
CPR - COMPRESSOR ^ \
Vj) CRITICAL PATH
HTR - HEATER vj/
utH - UTILITY ENGINEERMG
instr - WSTRUMENT — — - PROCUREMENT
elec - ELECTRICAL
• H M H CONSTRUCTION
Dwgs - DRAWINGS
F'fans - FIN FANS
Bkjg - BULD1NG

-o
ELECTRICAL DWGS. power/ight/controls/groundlng :rana - TRANSFORMER
18 •w. - SWITCH
gen. - GENERAL
specs - SPECIFICATIONS

-o
COMPLETE UTILfTY DESIGN
MCC - MOTOR CONTROL CENTER
P4L - PLATFORMS AND LADDERS
>&lds - PIPING & INSTRUMENTATION DIAGRAMS

CONSTRUCTION CONSTRUCTION DURATION - 27 MONTHS

START ^
6 MONTHS

Figure 4.8 Engineering schedule—large project, standard.

Establishing a Realistic Schedule Baseline 89

Critical activities generally occurring during the engineering phase of a large

project are:
• site preparation, roads, and drainage;
receipt of critical vendor drawings;
• civil and underground pipe design;
• pipe rack design and procurement; and
• piping design.
The following factors should be considered:
The schedule represents a Phase 2 (execution) project with conceptual and
process design having been accomplished beforehand, during Phase 1.
A large, multiunit process plant may be engineered in more than one office,
and there may be multipartner joint ventures. In such instances, approval
cycles and communications may be extended and may have major impact
on engineering durations.
Environmental/regulatory permit procedures may be a major factor. Nor-
mally, appropriate applications and studies for governmental approvals will
have been initiated during Phase 1.

D. Construction Schedule for a Large Project—Standard

This standard (Fig. 4.9) should be used in conjunction with the overall breakdown
(Fig. 4.10) and the project master schedule (Fig. 4.7). These standards provide
for high-quality program development, with progress curves for engineering,
material commitments, and construction. As their underlying database has been
derived from actual experience, planned or actual project performance deviating
from this pattern is an alarm signal for trend analysis. If the deviation is
favorable, evaluation is just as important, since it can be a guide to improvement
for future projects.
A key element of this standard is the sequencing of equipment delivery and
installation to provide an adequate flow of nozzles for an efficient field piping
program. Experience has indicated equipment-piping dependencies to be:

Release of
Equipment piping work
Pipe rack 10%
First 50% of pumps, exchanges, drums 20%
Second 50% of pumps, exchanges, drums 20%
Reactors, fin fans, towers 20%
Field-erected vessels, heaters, compressors 25%
Final punch-out 5%
100%

This listing also shows the general sequence of delivery and installation. As can
be seen, the pipe rack, pumps, exchanges, and drums will enable 50% of the
 IOTE8:
OVERALL CONSTRUCTION SCHEDULE . THIS DATA IS APPLICABLE
TO PROJECTS WHICH
CONSTRUCTION HAVE EXTENSIVE SITE
<0
PREPARATION
CONCEPTUAL PROCESS
DESIGN HAS BEEN
COMPLETED DURNG
PHASE 1
sKe preparatk concrete pi >gram . THIS SCHEDULE SHOULD
programmed t be phased IN 5TALL INSTRl MENTS BE USED WITH STANDARD
undergrounc OVERALL BREAKDOWN
access for tet norary
etoctrfcalfo AND STANDARD PMS
i. MANY ACTIVmES
OVERLAP AND CONTWUE
FOR LONGER THAN
SfTE PR EPARATION SHOWN. WDICATED IS
TIME REQUIRED BEFORE
START OF FOLLOWWG
ACTIVITY
i. CONSTRUCTION
SCHEDULES OFTEN HAVE
ONSr E FDNS a U.C CHOICES AND
ALTERNATIVES FOR
DURATION AND SEQUENCE.
THIS SCHEDULE DENTITES
an early pavh CIVI. AND EQUf>MENT
program can MILESTONES FOR AN
significantly '
increase pfpfr ECONOMIC PPMG
productivity PROGRAM
T RNFANS 6. ENGMEERMG ANO
ELS TOWER MATERIAL DELIVERY
TWAES CAN THEN BE

o—o
MORE EASILY DENTIFIED
AT THE EARLY PLANNWG
STAGE WHEN
CONSTRUCTION SCOPE
IS LIMITED

SLEEPE
PUMP O
STATIC fi)
FDNS
i
Figure 4.9 Overall construction schedule.
Establishing a Realistic Schedule Baseline 91
03
CO
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92 Chapter 4

piping to be completed and are therefore critical for a maximum piping effort,
since these items are part of the first deliveries.
This standard is mainly used to provide guidance in reviewing a construction
program. A detailed analysis should include a nozzle study, in which the number
of available nozzles per piece of equipment is plotted in a cumulative curve
against time. Budget hour units can then be applied to the nozzles to adequately
plot the available piping erection work. Piping is generally the major portion of
a construction program, and therefore, is part of the critical path.

V. OVERALL BREAKDOWN—ENGINEERING/PROCUREMENT/
CONSTRUCTION FOR A LARGE PROJECT

Figure 4.10 shows the historical database for the standard schedules shown in
Figures 4.6 and 4.7. The actual project data and curves were conditioned and
then summarized into three target curves: engineering, procurement, and con-
struction. The target curves were developed for an 80% probability. However,
on-the-job experience showed the curves to have a 95% probability. This enabled
project curves and performance of projects to be analyzed and forecasted with a
high degree of accuracy.
Two of these target curves, engineering and construction, are represented
in tabular form in Figures 4.11 and 4.12. Typical estimating phases are super-
imposed across the milestone activities as a guide for estimating accuracy in
relation to engineering definition and material commitments. This standard ma-
trix of bar chart and progress curves shows the relationship of major milestones
to related progress curves for engineering, material commitment, and construc-
tion on a percentage-of-time basis. The activity bars only show the amount of
work critical to the project schedule. Engineering and construction curves show
planned physical progress with construction on a direct-hire basis. The material
commitment curve is on a financial basis.
Once the schedule duration has been established from the standard project
master schedule (Fig. 4.7), the specific project schedule and progress curves can
be verified with this data. A detailed program that lies significantly outside the
curves should then be evaluated, in detail, to determine the causes of the vari-
ation. If actual performance falls significantly below the curves, it is probable
that the project schedule will not be achieved. These three curves have a finite
relationship to each other, where the need for an adequate backlog of engineering
drawings and material is vital to support an economic construction program. As
shown in Figure 4.10, the milestone of 80% engineering is keyed to 15% construc-
tion, which is the start of mechanical work in the field. Purchasing slippage will
impact on the engineering program due to lack of vendor data and may also
delay field work. Historical midpoints of material (23%) and construction (65%)
quickly determine the escalation points for estimating.
Examples:
1. What would be the overall duration for piping engineering? Refer to horizon-
tal line 16—marked pipe spools (drawings)—90%. Pipe layouts (thin dotted
line) start at 9% project time and 90% pipe isometrics (heavy dotted line)
finish at 61%. Assume 100% isometrics is at 70% project time; therefore,
Establishing a Realistic Schedule Baseline 93
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 94 Chapter 4
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 96 Chapter 4
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Establishing a Realistic Schedule Baseline 97

overall piping design is 70% less 9%, which equals 61% project duration.
For a large U.S. project (Fig. 4.7 shows 33 months), piping design will,
therefore, be 20.
2. What would be the probable start of detailed engineering? The key elements
for the start of detailed design are approval of the process design (P&IDs)
and equipment layout (plot plans). This approval would normally occur at
about 70% of P&IDs and plot plans. Refer to lines 2 and 4 (P&IDs and plot
plans) and approval at 9% of project time. At the same time, foundation
layouts (line 14) and piping layouts (line 16) commence. This is the start of
detailed design.
The main drafting effort will begin with foundation drawings, piping isometrics,
and general arrangements.
Figures 4.11 and 4.12 illustrate the previously shown target curves of Figure
4.10 in tabular format, for engineering/project and construction durations. Note
that the engineering charts show the overall project schedule, whereas the con-
struction charts only cover the construction phase. As previously stated, these
curves have a very high degree of probability and are highly recommended as a
benchmark to monitor a project's engineering and construction progress. Each
table is laid out in the same format—with incremental and cumulative progress
percents against monthly periods. The engineering progress curve table starts at
month 8 and the construction progress curve table starts at month 1. The boxed
incremental numbers for each month show the peak period. The average percent
for this period is given at the bottom of each table.
Substantial use of these curves has shown that slippage from these stand-
ards of more than 4 weeks will probably require acceleration action/cost to
recover. However, if the slippage occurs above the 50% point, then recovery is
virtually impossible for engineering, as there is so little design work remaining;
for construction, recovery is very difficult and high cost. If recovery is not con-
sidered a viable option, then a projection of future completion, from the present
position, referring to the standard curve can predict a schedule extension with
a high degree of probability, sometimes years in advance of the original comple-
tion.

VI. OVERALL BREAKDOWN FOR A SMALL PROJECT—STRAIGHT

THROUGH

The standard network and progress chart contained in Figure 4.13 (overall break-
down, small projects) is similar to Figure 4.10 and depicts the historical relation-
ships of major activities. The data is based on 50 projects completed between
1955 and 1970, when this type of project program was popular. Today, this
program is rarely used, and it has been replaced by the phased approach; the
costs of these projects ranged from $0.5 million to $10 million. This project mode
results in later midpoints of material (29% project duration) and labor (70%).
The start of construction is also later, commencing at 32% of project duration.
When schedule durations have been established, progress curves can be
drawn using the data from this figure. Schedules that differ significantly from
the standard bar chart and progress curves should be evaluated in detail to verify
the variance. When actual progress falls behind the leading curve, it is probable
 CO
OVERALL BREAKDOWN OF ENGINEERMG. PROCUREMENT & CONSTRUCTION 00
ACTIVITY
DESCRIPTION
ENGINEERING
PROCESS - P&I DIAGRAMS
DATA SHEETS - REQUISITIONS
PLOT PLANS

MODELS

PROCUREMENT (MAJOR EQUIP.)

PIPING (ABOVE GROUND)
INSTRUMENTS
DESIGN SITE PREP. DHGS.(ISSUED)76
UNDERGROUND DWGS.(PIPE * ELECT) _

FOUNDATIONS(ISSUE)
FND. LOCATION PLANS(ISSUED)
PIPE RACKS/SLEEPERS(ISSUED)

PIPE SPOOL DWGS.

PIPE MATERIAL TAKE-OFFS
ELECTRICAL DHGS. (A.G.)

INSTRUM. DWG. (ISSUE)

CONSTRUCTION

GRADING & ESCAVATION

UNDERGROUND

CONCRETE (EXCL. PAVING)

PIPE RACKS/SLEEPERS

PIPE ERECTION

PIPE FABRICATION

INSTRUMENTATION

ELECTRICAL

EQUIP. SETTING
NOTES:
THIS DATA IS APPLICABLE TO
PROJECTS WHERE THE PROCESS
SELECTION HAS BEEN FINALIZED
SO THAT THE CONTRACTOR SCOPE
IS NOT DIVIDED INTO A PHASE I
- PHASE II OPERATION.
DETAILED PROCESS DESIGN WILL O
COMMENCE AT CONTRACT AWARD.

1
IN ADDITION, THERE IS NO
EXTENSIVE SITE PREPARATIONS

Figure 4.13 Overall breakdown—small project, straight through.

Establishing a Realistic Schedule Baseline 99

that succeeding curves will not be achieved, which could lead to a delay in
mechanical completion.
Figure 4.13 shows a very aggressive construction program. The monthly
peak rates of progress would generally be too high for large projects unless the
"size affect": is already reflected in the project duration.

VII. ENGINEERING/PROCUREMENT CYCLE FOR A LARGE

PROJECT—STANDARD

Figure 4.14 provides major milestones, logic, and durations for the engineering/
procurement cycle for equipment and bulks. Durations are based on project data/
research. Large, complex projects with worldwide purchasing, multiple engineer-
ing offices, and joint venture partners having consultation and approval require-
ments can increase the 12-18-week procurement cycle. Generally, projects with
a minimum of worldwide purchasing have a 12-14-week purchasing cycle.
To apply this standard, assess project size, complexity, joint venture require-
ments, and proposed purchasing strategy and determine the duration for the
specific project. Check against current project experience that the evaluation is
realistic.
Only the total duration of the engineering/procurement cycle is used for over-
all schedules (see the standard project master schedule, Fig. 4.7) and is normally
the activity designated inquire, negotiate, purchase (INP). Evaluation of the indiv-
idual activities will be required when analyzing and monitoring detailed schedules.

VIII. TYPICAL PHASE 1 SCHEDULE

Figure 4.15 shows the general functions, logical relationships, and average du-
rations of a Phase 1 (feasibility) operation. This Phase 1 schedule is used to
provide guidance regarding typical functions carried out in a Phase 1 operation.
Specific activities will depend on the individual project.

A. Typical Project Life Cycle—North Sea Platform

Figure 4.16 shows the major phases, logical relationships, and average durations
for a major platform project:
• feasibility study:
- field development,
technology,
- execution plan, and
- economics;
• process/conceptual design:
- optimization,
- case selection (one case), and
bid package;
• funding and contractor selection; and
 FRONT END ENGINEERING & PROCUREMENT s
CRITICAL EQUIPMENT ILONQ DELIVERY fTEMSI

SPECIFICATION PURCHASMG PLACE RQ

A DATA SHEET HOUR*
ENQJN6EWNQ MATERIAL VENDOR
OPTMtZATION REOUISmON M> PERIOD

4-8W

THE EARLY FEAS-

MUTYftOfTIMa-
AT1ON WORK Wft-
ES GREATLY FOR
EACH PROJECT. ENGINEERING PROCUREMENT
4W 12-18W

GENERAL EQUIPMENT & BULKS NOTE:

; OFCRfTICAL

PROCUREMENT- FKST EQUIPMENT PURCHASES

T2-18W
IAS PER ABOVE SCHEDULEI

o
FIRST DATA SHEETS A REQUISITIONS

8-12W

Figure 4.14 Engineering/procurement cycle—large project, standard.

 m
FEASIBILITY STUDY
PHASE II
FINALIZE PHASE II LUMP SUM BID
l
PRELIMINARY APPROVAL BID PACKAGES ALTERNATIVE ^ cr
NOTESt 6W 3/4 MONTHS ^ 55"
REQUIRED FOR
AFFILIATE DURATIONS ARE LISTED IN WEEKS & ARE INDICATED EARLY CONTRACTOR
PURCHASTNG (Q
STRATEGY FOR GUIDANCE ONLY. ACTUAL PROJECT TIMES VARY PLAN 1IDS
REPORT FOR CRITICAL
WIDELY.
S/7W EQUIPMENT THIS ASSUMES
THAT THE
s.
SITE SURVEY 3W PHASE II STAGE

I
SURVEY REPORT FINALIZE IS AWARDED TO
AFFILIATE EQUIPMENT LIST . \ THE PHASE II
'™2lv"T REVIEW 6 APPROVAL CONTRACTOR
CO.ST E.5TIMATE(S) WITHOUT

t
COMPETITIVE O
BIDDING
\ SELECT

I
PREPARE
PHASE I AFE ENVIRONMENTAL FINALIZE

r
3W 1 CONTRACTOR ENVIRONMENTAL IMPACT STUDIES SCHEDULE
SCHEDULE I m
ew 20W \
6W

2/ewmi
3W 2/4W
PERIODIC UPGRADING OF COST ESTIMATE
\ FINALIZE AFE
\ COST ESTIMATE
MANAGEMENT
REVIEW,
5"
• p n * nnos**** T
Att* ArrRK
CD
PREPARE PHASE I 6W
BID PACKAGE BIDS 0)
1
1
#••••••# M H M i i
t 3/4W r 3/4W SOIL/MARINE FINALIZE
PREPARE
PHASE II
I
s
PREPARE CONTRACTOR
SITE SELECTION REPORT PLOT PLANS AFE
SCREENING PACKAGE BID EV \LUA1ION < 7W 5W BW 4W 3W
• •
1
1
ii 2/3w[ OPTIMIZATION
6W
DESIGN
PROCESS
SPECIFICATIONS
12W
FINALIZE
8W
P&I's
CONTRACTOR
RESPONSE \
i IMMU
SUBJECTIVE EVALUATION
2W AND/OR NEGOTIATE FIELD TEMPORARY
START OF
1_J UTILITY FLOW DIAGRAMS FACILITIES, LAYOUTS
CONTRACTOR
SCREEN W
^W"J CONTRACTOR SET-UP 12W PHASE II
CONTRACTORS

i"t CONTRACTOR
ENGINEERING (BEACH HEAD STUDY)
1 1 1 STUDIES PROCESS DESIGN (PIONEER CAMP)
FAC,/PROC. ENG. INPUT < , (SHIPPING)
12W

r
COST £ SCHEDULE
1INPUT ^* AWARD
PHASE I
SPECIFICATIONS, DATA SHEETS

OWNER FRONT END

12W CONTRACTOR PHASE I
34W

Figure 4.15 Typical Phase 1 schedule.

 ro

PROCESS/CONCEPTUAL
FEASIBILITY STUDY DESIGN
PROJECT EXECUTION PHASE
12/18 month 6/12 month Generally 36/48 months to tow out for major platform

Field Development Optimization FUNDING and

Select Case CONTRACTOR

Technology
.SELECTION
Execution Plan Bid Package

Economics

DETAILED ENGINEERING(80%)
O

b MATERIAL DELIVERY
immiiiuiiiiiiiiiffiii

COMMISSION
MSF, TOPSIDES -
Steel JacketQiMHiMHO

FABRICATION/INSTALLATION fl
OFFSHORE

T
i
TOW I MINIMUM
MAT
Vv9_UT
)%ma\Cjmmm

| Weather*
Window i
Fast Track Approach

Figure 4.16 Typical project life cycle—North Sea platform.

O
0)
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(D
Establishing a Realistic Schedule Baseline 103

• project execution phase:

- steel jacket, and
- concrete structure.

B. Project Master Schedule for Steel Jackets—Standard

Figure 4.17 depicts a project master schedule for steel jacket platforms and is
based on data and experience from jacket installations in the North Sea. It shows
a straight-through project, engineered in the United Kingdom. Two major critical
paths should be evaluated:
• topsides engineering and module fabrication, and
• steel jacket design and construction.
The following are key considerations:
Basic engineering, (layouts, P&IDs, data sheets, specs, plot plans)
- new technology,
project strategy, execution plan, and size of engineering office(s),
- engineering capability and capacity (resources),
- project organization and engineering consultants,
engineering completed before contract award;
Equipment deliveries. Add a 20% creep factor to the latest equipment delivery
lead time;
Detailed engineering. Engineering needed for module quotations depends heavily
on protect strategy for module contracting. Engineering completions range
from 40% (a practical minimum for reimbursable bids) to 80% (essential for
good lump-sum bids). Unit-price bidding requires an engineering definition of
40-60%. Projects may have a mix of contracts (e.g., lump-sum for steel, unit
price for mechanical, and reimbursable for electrical and instrumentation).
For developing a relationship between project time and engineering
completion, the following method is suggested:
- Use the large project master schedule project duration from Figure 4.7
(33 months).
- Take engineering percentages from straight-through project curves
(Fig. 4.9). This reflects the situation that engineering takes longer for
North Sea projects than for onshore projects.
- Calculate detailed engineering durations before inquiry and mechanical
outfitting for module bids as shown below.
Unit-price and reimbursable bidding. Using judgment and contracting strategy,
assume 50% engineering required before inquiry.
50% engineering occurs at 44% of project time.
0% start of detailed engineering is at 15% of project time.
- Thus, 50% of detailed engineering takes 29% of project time.
- The project duration is 33 months.
- 29% x 33 months = 9.9 months (10 months) for engineering before INP.
80% engineering occurs at 59% of project time.
 Project Master Schedule - Steel Jackets - Standard
23456789 10 111 13 14 15 16 17 18 19 20 21 22 23 2 25 26 27 28 29 30 31 32 33 34 35 36 37 3U 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 61

JACKET DC TAIL
OESIG
V l N P JACKET.
I FABN JLYARO
CONTH Y PREP- PREF

.1
AWARD
ENG&
PROC "REFER TO CURVE(
INP MSF JACKET WEIGHT VS FADm
FAB'N (JACKET WT - 19.000 TO
CONTR AWARD
MSF FAB'N
CONTRACT
MODULE SUPPORT
FHAME LOAD OUT
• FABRICATE MODUL SUPPORT FRAME & SEA FASTEN
APPROVE
BID DELIVER,
TAB
AWARD FT & WELD COMPLETE
MODULE FA COMM
DEVELOP MODULE CONSTRAC
IFT& SECURE
MODULES

MODULE HOOKUP & COMM.

I i l l IIII III I 1 1 I 1 I I 111 A
v o PREP 80% 1505 14
MINIMUM DRILLING

DELIVER EOUIP OUTFIT MODULES

1*2 'WITH DRILLING
INP COMPR
GENERATOR] OELIVER COMPRESSO OUTFIT MODULES TEMPLATE INSTALLED
• « o * « * e « « « » * « • • • • • • • • • THIS DURATION IS
CONTR 20 3 MONTHS
FP DESIGN. FAB & INSTAL

N. PROCURE & FABRICATE P/L

PREP
— I CONTR DESIGN. F>
DOCS_ INSTAI ROCURE & FABRICATE SPM

INP - INQUIRY. NEGOTIATE. Pi

TEMPLATE LOAD OUT SET VD - VENDOR DATA
INITIAL DRILLING & CAP L.S. - LUMP SUM
i M.S.F. » MODULE SUPPORT FR>
4 1

Figure 4-17 Project master schedule—steel jackets—standard.

Establishing a Realistic Schedule Baseline 105

0% start of detailed engineering is at 15% of project time.

Thus, 80% of detailed engineering takes 44% of project time.
44% x 33 months = 15 months for detailed engineering before module
outfitting.
Module outfitting (two methods)
First method (for process/utility modules only):
Evaluate individual module area by adding a 10-foot perimeter
to plan dimensions. Include all additional floor levels.
Apply density level (180 sq ft per worker) to determine peak labor.
Use trapezoidal technique to determine duration.
- Second method:
Consider outfitting hours of total modules.
Using judgment, determine the peak personnel for a subcontractor.
Use trapezoidal technique to determine duration.
- Either method:
Reduce total hours by any prefabrication and support work com-
pleted away from module work/assembly area.
Check durations against recent module completions.
Consider experience and productivity of the fabricator.
Consider fabrication and delivery of first modules required for
start of module hookup activity (fabrication durations are 14-16
months for small modules and 16-18 months for large, complex
modules).
Module support frame fabrication. The project schedule is based on using a
module support frame and assumes some equipment installed in module
support frame
- Use trapezoidal evaluation technique with density level of 180 sq ft
per worker.
- Consider shift work.
- Adjust total hours to take out prefabrication and support work com-
pleted away from the deck.
Determine appropriate labor buildup and rundown.
Allow for lost time and adjust peak labor if labor availability is re-
strained.
If equipment outfitting and deck fabrication share the same working area,
outfitting labor will build up as deck labor runs down. If integrated deck sections
are used instead, increase module steel fabrication by 1-3 months. Include com-
plete outfitting activity if the module support frame requires any equipment and
outfitting.

C. Project Master Schedule for Concrete Structures—Standard

Figure 4.18 shows a schedule for North Sea offshore platforms based on a concrete
support structure. The latter part of the schedule shows the weather window
 OFFSHORE PLATFORM - PROJECT MASTER SCHEDULE - NORTH SEA
o>
A M I / A S0 N D
mm rMATIN^ WEATHER WINDOWS
110 TOW-OUT 1 Q ] ©
DESIGN DRY OOCK CONSTR. (SEE NOTE 3 )
PKCE. BIDS LN.R^ / ^ SKIRTS. BASE. LOWER iffORM UPPER DOMES & COMPL. CONCR. & | TOW TO MATt
IT IS C POSTTENSION [TOWOI/T _

A "*fOW TO MATE
ASSUMED
THAT INST. DEC! TOW OW CONDEEP TO MATING SITE)
CONCRETE CONCEPTUAL I OUTFIT SHAF
STRUCTURE DESIGN HAS
-BEEN THE DECK & OUTFITTING WORK —
COMPLETED COULD BE ADVANCED BY 4 / 5 MO.
DURING WITH A SHIFT-WORK PROGRAM
PHASE I

DECK THIS
PROJECT
EXECUTION
ASSUMES THAT -
ALL OF THE WORK
DECK WILL BE HANDLEC DECK
OUTFITTING UfJ RMNC. MODS.
OFFSHR.HK.UPl OUTFIT.®
OUTFIT 1st MODULES
MODULES
FA8.& DELY. SPM
S.P.M.
FLARE FAB.t DEIY. FLARE
(BOOM TYPE)
SUB-SEA PIPELINE I£B._£J[JJL£i?J

NOTES:
1. DURATIONS SHOWN AS? DEPEND ON 5.SCHEDULE BASED ON CONDEEP SUPPORT
SCOPE, MANNING, SHIFT PROGRAM AND STRUCTURE. U T I L I T I E S IN SHAFT.
MARKET CONDITIONS. 6. NUMBERS IN Q NEXT TO CONDEEP
2. DURATIONS ARE IN MONTHS AND ARE ACTIVITY REFER TO STEPS I N MARINE
INSHORE & OFFSHORE FOR GUIDANCE ONLY. CONSTRUCTION PROGRAM
3. WEATHER WINDOWS: 7.FLARE MAY BE INSTALLED AFTER
FLOAT
TOW TO MATE MAR - SEPT TOW-OUT IF WEIGHT LIMITATIONS OR
SCHEDULE DELAYS OCCUR.
o
E.N.A. EVALUATE, NEGOTIATE AND AWARD MATING FEB - OCT
0)

1
TOW-OUT M A Y - SEPT
• SUBCONTRACT AWARD
4 . A C T I V I S T S MARKED # ARE OMITTED
8 . REFFR TO PROCESS PLANT DATA
FOR ENGINEERING I PROCUREMENT.
I.N.P. INQUIRY, NEGOTIATE & PURCHASE FOR PLATFORMS FULLY OUTFITTED PRIOR
TO TOW-OUT.

Figure 4-18 Project master schedule—concrete structures, standard.

Establishing a Realistic Schedule Baseline 107

sensitivity of some activities: tow to mate, mate, tow-out, install the single point
mooring, and install the subsea pipeline. Durations marked "?" depend on the
scope, labor allocation, shift work program, contracting strategy, work location,
and delivery of equipment.
One major relationship relates as well to offshore platforms as it does to
onshore process plants, that is, the relationship between engineering completion
and the start of mechanical outfitting. For a process plant, historical data indi-
cates that 75-80% completion of engineering is required before the start of field
mechanical work begins in order to adequately support a construction program
on a fast-track approach. Anything less than this can result in construction delays
through lack of drawings and material. This relationship can also be applied to
a platform. The equivalent basis would be 75-80% engineering completion for
the start of the mechanical outfitting of the deck and modules.
A unique element in platform scheduling is the degree of onshore and
offshore installation. Some tasks, such as towing and mating, can take place only
in good weather (the weather window). Each activity has its own historical
weather window. This is dependent on degree of difficulty, location (onshore or
offshore), and financial risk (i.e., mating, February through October; tow-out,
May through September; etc.).

D. Use of the Standard Schedule

After definition of the labor hours, labor availability, shift work program, con-
tracting strategy, and equipment delivery, a project master schedule can be
developed by evaluating values for the unknown durations. Construction dura-
tions can be calculated by using the labor density/trapezoidal calculation method.
Several factors can necessitate an additional allowance to calculated durations,
including new technology, prototype engineering, multiple engineering offices and
construction sites, heavy government involvement, and restrictive labor practices. If
these factors are significant, an experience factor of 25% should be added to all
calculated durations. This can be reduced to 15% for offshore construction activities.
The following comments relate to durations for the major work elements:
Design—concrete structure. The duration depends on the amount of design work
done before contract award. Information from the designer can help deter-
mine the schedule.
Construction—concrete structure, general. Use information from the concrete con-
tractor when available. This is specialized construction, and historically
schedules have been maintained. The durations indicated are for a very
large concrete structure (100,000-150,000 m3).
Prefabricated cell decks. Consider the number and size of the decks, the degree
of prefabrication, and the total labor hours.
Installing decks, outfit cells, and shafts. Assume a density level and calculate
shaft area and peak labor. The degree of complexity and effectiveness of
labor classify North Sea platforms in the 200-250 sq ft per worker density
category. However, due to schedule criticality, a density of 150-200 sq ft per
worker is used in practice. The resulting reduction in productivity is traded
off against an improved schedule.
Also consider regulatory guidelines, which may restrict the number of
108 Chapter 4

workers within the shafts. Assume a shiftwork program and calculate the
work month (effective labor hours per month). Determine the duration using
the trapezoidal method. Shaft outfitting may not be completed before tow
to mate in order to meet weather window limitations. In such a case, break
the outfitting activity for tow to mate, and allow demobilization and remobil-
ization time in the mating duration.
Equipment deliveries. Add a creep factor to equipment delivery lead times.
Basic engineering (layouts, P&IDs, data sheets, and specifications). Consider the
degree of experience with previous platforms, the number and location of
engineering offices, project organizations, and the magnitude of Phase 1
engineering. The duration can vary from 4 months for proven technology to
8 months for new design concepts.
Detailed engineering, 80%. Use the onshore project master schedule (large proj-
ect) and adjust the project duration for the overseas-UK site by reference
to add factors at the bottom. This will require an add factor of 30-40% for
mechanical-piping work. For example, for a standard project duration of 33
months and onsite piping of 16 months, the adjusted durations are:
- 33 months + 40% of 16 months = 40 months
From "Overall Breakdown," Figure 4.4:
- 80% engineering occurs at 43% of project time;
- 0% (start) of detailed engineering occurs at 9% of project time;
- thus, 80% of engineering takes 34% of 40 months = 14 months.
If required, add 25% experience factor to obtain the engineering duration:
- 14 months x 1.325 = 17.5 months (use 18 months)
Deck fabrication and erection. Use the trapezoidal technique with a density level
of 180 sq ft per worker; consider shift work. Reduce the total hours for
prefabricated work and support work completed away from the deck; eval-
uate the appropriate labor buildup and rundown; make allowance for lost
time, and adjust peak labor if labor is not available. Add a 25% experience
factor if appropriate. Concurrent equipment outfitting will impact on deck
fabrication if both activities share the same working area. Outfitting labor
will build up as deck labor runs down.
Deck outfitting. Use the same method as for deck fabrication. Where outfitting
cannot be completed before a mating date, cut off labor with a sharp rundown
(1-2 months) and carry over the remaining labor hours to onshore-offshore.
Module outfitting. There are two methods. The first method is to evaluate the
module area by adding a 10-foot perimeter to the plan dimensions. Appli-
cation of the density level (180 sq ft per worker) will determine the peak
labor. Use the trapezoidal technique to determine the duration. The second
method is to consider the outfitting labor hours of total modules, divide the
work among several or many subcontractors, and, by judgment, determine
the peak labor for a subcontractor. Then use the trapezoidal technique to
determine the duration. The total hours should be reduced for prefabrication
and support work completed away from the module saturation area. If
appropriate, add a 25% experience factor to give the activity duration.
Consider the fabrication and delivery of the first modules required for the
Establishing a Realistic Schedule Baseline 109

start of the module hookup activity. For guidance, module fabrication dura-
tions are 14-16 months for small modules, and 16-18 months for large
and/or complex modules, assuming a 40-hour workweek. Several modules
in the same shop may require additional time (15-20%).
Module hookup. This starts after the first module lift. It may occur at the deck
site, onshore after mating, and/or offshore. Use the trapezoidal technique to
calculate the durations. The saturation labor is obtained by assuming that
40% of the module area is available (this varies with the degree of module
completion). Apply 180 sq ft per worker. Buildup is short, limited only by
the ability to staff and plan the work. If work is carried onshore, break the
trapezoid abruptly during mating when work ceases—no rundown and build-
up for simplicity. Labor hours carried onshore should be adjusted for lower
productivity. This also applies to deck outfitting labor hours, which should
be combined with hookup labor hours for one calculation. By judgment,
assess the labor level. Labor hours carried offshore require further produc-
tivity adjustment. Further productivity reduction may occur due to drilling
interference (concurrent drilling and construction). Labor buildup and peak
are limited by available accommodations (temporary living quarters, hotels,
permanent quarters). The use of high-cost hotels can greatly increase the
availability of craft labor and reduce the schedule. The available beds must
be discounted for the number of nonconstruction personnel (operational
support, drilling, management, catering). Of the total platform beds, about
50% are available for construction craft labor. The workweek is seven 12-
hour days less 5% absenteeism, etc. Module hookup (and outfitting) should
be evaluated separately from commissioning, since peak labor cannot be
used on commissioning work. Use the trapezoidal technique to determine
the duration. If appropriate, add a 25% experience factor to onshore dura-
tions and 15% to onshore and offshore durations.
Mating and tow-out. Towing the gravity structure to the mating site, mating,
and tow-out are all subject to weather limitations. Weather windows for
these activities are:
Tow to mating site March through September
Mating February through October
Tow-out May through September (the latest start of tow-
out is the first week in August)
To minimize risk, it is desirable not to have all mating and tow-out operations
in the same year. It is preferable to schedule tow to mate in the year before
mating and tow-out. Mating durations of 1 month and tow-out of 2 months
include weather contingency.
Minimum drilling. This is the time required to complete the drilling required for
start-up. Eleven months are required to drill 3 wells, including the conductor
driving. Further time will be required to drill all wells for full production.

IX. THE FAST-TRACK PROGRAM AND TRAPEZOIDAL TECHNIQUE

As development of the fast-track approach in the early 1960s became a major

operational program by 1970, it led to massive schedule failures, and project
110 Chapter 4

schedule slippage became routine. The major reason for this failure was lack of
understanding on fast-track relationships between and within engineering, pro-
curement, and construction. When properly applied, the fast-track project sched-
ule produces the shortest economic program.

A. Fast-Track Economic Program

Figure 4.19 shows the progress curves for engineering, procurement, and con-
struction in the fast-track relationship for the execution phase of a project. This
is the same data, in summary form, that was established by Figure 4.10. The
economic basis is:
all purchasing and contracting is on a competitive basis;
• construction is executed on a regular 40-hour workweek;
• apart from spot overtime, there are no acceleration procedures; and
• cost is the number 1 project objective.
This project program is the most widely used of all programs.

B. Fast-Track Trapezoidal Technique (TT)

Figure 4.20 illustrates this technique for the construction program. The TT is
another form of a progress curve, shown as a form of triangle. As illustrated,
there is a build up of labor to a peak of labor, followed by a run down of labor
to work completion (mechanical completion). The area of the trapezoid is the
scope of work in labor hours.

C. Fast-Track Schedule and the Trapezoidal Technique

Figure 4.21 shows the scheduling relationship between engineering and construc-
tion for a project on a fast-track program. The schedule relationship/duration
only covers the execution phase, which is sometimes referred to as Phase 2. Phase
1 covers the conceptual design studies and case selection.
As previously stated, the schedules are illustrated as trapezoids. This data
base is extremely important, since it shows that all complex work, at a total
level, is executed within a buildup, a peak period, and a rundown. The specific
relationships (ratios or parts) of these 3 periods has been developed from histor-
ical data for both engineering and construction programs. This base then forms
one of the best methods for determining the overall construction duration, as
shown in the following paragraphs. Work classified as simple (i.e., the task is
performed by a single crew or squad) has no buildup or rundown; Figure 4.22
illustrates/compares the simple and complex arrangements.

D. Schedule Basic—Simple Versus Complex Task

Figure 4.22 depicts engineering and shows the calculation of peak personnel
rather than calculation of the duration. The same process can be followed for
construction if the duration is known. The buildup and peak are shown as 22%
and 38%, and in the database of Figure 4.19 these percentages have been rounded
to 20% and 40%.
FAST TRACK - ECONOMIC (Execution Phase) Economic - all competitive bidding m
IOTES : CD
1. ACTUAL PROGRESS PLOTTED AGAINST COMPANY HISTORICAL EXPERIENCE . - 40 hour workweek
2. EARLY CONSTRUCTION START REFLECTS A PROJECT WITH EXTENSIVE SITE PREPARATION
^ 3 . CONCEPTUAL DESIGN HAS BEEN COMPLETED DURlNfi A PHASE 1 OPERATION . - non acceleration (/>'
IT
100-
ESTIMATE H (Q
"QUALITY"" 0)
30
40/25% 5 I
MATERIAL &
: | SUBCONTRACT
C_O_MITMENIS
a
o
0)
(D

a
J5"
I IW ,A GO
fl)
0)
<D

• -mm / u ^ (D
/ boNSTRUCTIONJ

mr i i
IF i i

ADVANCE COMITMENTS T
OF CRITICAL MATERIAL U T
CAN BE MADE IN PHASE
30 40 50 60

PROJECT DURATION -%
CONCEPTUAL PHASE EXECUTION PHASE
PHASE 1 PHASE 11

Figure 4-19 Fast-track economic program.

112 Chapter 4

CONSTRUCTION DURATION

Figure 4.20 Fast-track trapezoidal technique.

Establishing a Realistic Schedule Baseline 113

THE FAST TRACK SCHEDULING RELATIONSHIP (TRAPEZOIDS).

For Full Scope*. EPC Projects - Execution Phase.
* Full Scope Total responsibility for EPC, from Contract Award to
Mechanical Completion, for a Managing Contractor.
•Completion
of Conceptual
Study. Project Execution Phase

• Process
Release. Ratio/Parts of Overall Duration
• Case
Selection 1(20%) 1(20%) 3(60%)

Build Up Peak Run Down

Engineering Peak
(& Procurement) Men

ENGINEERING & PROJECT SCHEDULE

• 2 0 % if major Site Prep.

• 3O% if minimal Site Prep.
20%/30%\ 7 0 % / 8 0 % Overall Duration

Peak
Men

2(50%) 1(25%) 1(25%)

Build Up Peak Run Down

Ratio/Parts of Construction Duration
CONSTRUCTION SCHEDULE

This Data is historically baaed on many projects, 187O-94 and is 'Typical" for process projects. Each
protect application should be individually assessed. These diagrams are known as Trapezoids and this
"Relationship" is also called, the Trapezoidal Tachniquerrn.Sce "Progress Charts" for TT(%) numbers.

Figure 4.21 Fast-track schedule and the trapezoidal technique.

Figure 4.22 shows the calculation formula for a simple engineering task of
400 hours and the error of then applying that formula to a complex task of 20,000
hours. As shown, the calculation error of 25 engineers instead of 41 engineers is
significant and results in schedule slippage.
For complex work, an alternative method to the trapezoidal calculation is
to use the simple formula and multiply the result by a peak factor (usually
1.6-1.7). This is a common practice of senior professionals and usually produces
adequate results. However, it will not show the required buildup of personnel
over the project schedule.

E. Construction Duration for the Trapezoidal Technique

Figure 4.23 shows the trapezoidal technique for the construction phase. The
calculation procedure shows two formulas:
• Formula 1 is used to determine the peak duration, X, on the basis that the
following information is known or assumed:
- scope in labor hours,
- effective monthly hours per person,
114 Chapter 4

SIMPLE
1. A small engineering task - 400 hours - is required
to be completed in 2 weeks. How many workers
are required?

2. Calculation method is:

(jobhours) + Q'obhours per week x no. of weeks) =
(400) + (40 x 2) = 5 workers
COMPLEX
3. Task increases 50 times in size. 20,000 hours
is now required to be completed in 20 weeks.

Calculation: (20,000) + (40 x 20) = 25 workers

Is this correct? NO!

4. Calculation principle: Trapezoidal technique for

simple to complex tasks.

= 41 workers
( or peak is average x 1.6 )

Figure 4.22 Schedule basic—simple versus complex task.

CONSTRUCTION DURATION
(Trapezoidal Technique)

PEAK
WORKERS AREA = SCOPE (Jobhours)

(X)

BUILD UP PEAK RUN DOWN

(months) (months) (months)
Calculation procedure

scope in jobhours
(1)
effective monthly jobhours

buildLJ
P • peak workers \X. peak workers} peak workers

(2) peak workforce = battery limits area

peak density level

Solve for peak duration, X

Figure 4.23 Construction duration—trapezoidal technique.

Establishing a Realistic Schedule Baseline 115

buildup (usually developed from standard schedules or judgment),

- rundown (half of the buildup), and
- peak workers as determined by Formula 2.
Formula 2 covers the calculation of the peak workers if the battery limits
area (plot plan) is known. By evaluating a labor density level (usually in
the range of 150-300 square feet per worker), the peak number of workers
can then be determined.
This schedule/labor evaluation technique is a very powerful method of de-
veloping or checking overall construction duration. The key assumption, which
requires good judgment, is assessing the labor density level (discussed later). If
this assessment is good, then the resulting evaluation is of a high quality. This
technique, however, can only be used on single projects. For smaller areas of
work, the calculation may need to be modified.

F. Trapezoidal Technique—Statistical/Standard

Figure 4.24 shows the same earlier data transposed so that the X is now the
overall construction duration, instead of the peak period. The figure shows the
standard trapezoid for large projects (those above 5000 sq ft), and the standard
for small projects (those below 3,000 sq ft). As illustrated, on small projects the
buildup and rundown shortens, and the peak period lengthens. This is due to
the small number of workers required.

G. Trapezoidal Technique—Worked Example, Trapezoidal Density

Method

Assessing the density level is extremely important. Figure 4.25 contains a work-
ing example of the trapezoidal density method. The first step in the calculation
process is to properly assess the labor hour scope. As shown, allowances were
made for indirect labor working in the same area as direct labor and for the
estimating allowance. An allowance for better subcontract productivity and a 12%
absenteeism allowance were also made.
The buildup duration was determined from a standard schedule that showed
the peak labor period would be reached at 30% of the piping duration. This activ-
ity was preceded by foundation work (3 months) and equipment installation
work (2 months). The total piping duration was 15 months. In the case of sub-
contract labor, the labor hours are reduced to reflect a better productivity rate
than with the direct hire workers (possibly as much as a 10% improvement).

H. The Trapezoidal Technique and Claims

The impact of schedule delays can be determined with the use of the TT. For
many years, the owners and contractors adopted different positions in the appli-
cation of the TT to schedule-related claims. Owners, some with a vested interest,
stated that the delay occurred at the rundown period, where the cost impact was
the lowest. Contractors opposed this position and stated that most construction
schedule delays were caused by multiple changes/additions, occurring throughout
the construction period. This was referred to as the ripple effect of change, and
116 Chapter 4

PROJECTS ABOVE 5000 SQ.FT.

STATISTICAL/STANDARD TRAPEZOID
STANDARD FORMULA (with construction duration as x)

WORKERS / ! ! V jobhours
jobhours per period per worker
workers ( 0.625*)
0.5x 0.25x 0.25x

PROJECTS BELOW 3000 SQ.FT.

STANDARD FORMULA (with construction duration as x)

WORKERS / \ J \ jobhours
jobhours per period per worker
workers ( 0.8A- )
0.2x 0.6 x 0.2x

As site/project gets smaller, the

Peak Period increases, as shown.

Figure 4.24 Trapezoidal technique—statistical/standard.

Establishing a Realistic Schedule Baseline 117

Refinery FCC unit:

• Plot area = 320 ft x 200 ft = 64,000 ft2
• Scope (direct hire) = 445,000 jobhours
• Allowance for indirect labor in area (10%) = 44,500 jobhours
• Estimating allowance (15%) = 66.700 iobhours
556,000 total scope for evaluation

Consider two cases: Case 1, direct-hire labor, and Case 2, subcontract labor.

Assumptions:
• Due to criticality, use density of 250 (but 300 is more probable)
• Allow 12% absenteeism to estimate effective jobhours
• Buildup duration from standard schedule (foundations + equipment + piping buildup)

Case 2 - Subcontract Labor. The project strategy, based on experience, is that

local subcontractors are more productive than prime contractors (direct hire).

Scope = 556,200 jobhours for direct hire less 10% productivity adjustment for
local subcontractor labor = 500,600 iobhours

r,' i / ! Scope =
Peak X ! 500600

workers / ; jobhours

1 / Buildup Peak, X2 Rundown

1. Labor availability: No restraint, no adjustment to staffing level.

2. Peak density level: U.S. large project, subcontract labor (from curves) =
250 ft2 per worker.
3. Peak staffing = 64,000 ft2 - 250 ft2 per worker = 256 workers.
4. Effective jobhours per worker-month = 40 hours per week x 88% x 4.35 weeks per
month = 153 hours.
5. Buildup (by judgement) = 3 + 2 + 5 = 10 months.
6. Rundown (by judgement) = 6 months.

Solve for peak, X2:

500,600 = 1 ^ * 2 5 6
153

X2 = 4.8 (say 5) months

Therefore total construction duration (subcontract labor) = 10 + 6 + 5 = 21 months

Figure 4.25 Trapezoidal technique—worked example.

118 Chapter 4

1. ORIGINAL OWNER'S POSITION

a) Scope lncrease(single or multiple)

Assuming increased workers

/ limited-not possible due to
labor saturation.

Original Schedule Schedule Extension

b) Schedule Delay Due to Slow Build-up

Assuming Increased Workers Limited

Lack of Drawings, or
Lack of Free-Issue Material

Original Schedule Schedule Extension

2. COURT'S POSITION

chedule Extension - Occurs at Peak

Period , which leads
to Maximum Cost

f + + + I 4 • • t
Multiple Changes - Cause RIPPLE Effect
of Inefficiency of Program,
due to constant Rdjustment
of more Resources

Figure 4.26 Trapezoidal technique—schedule extension for claims, direct labor.

contractors claimed the total impact of the ripple effect was a schedule delay at
the peak period. Figure 4.26 illustrates these two positions. The courts finally
held for the contractor's position and, consequently, for the greater cost impact.
Figure 4.27 shows a family of curves that illustrates the historical relation-
ship of construction directs and indirects. This relationship was again examined
by the courts in claims cases, and the judgment was that costs of indirects due
to schedule delay would be directly proportional to the schedule extension.
Figure 4.27 shows that the indirect curves are essentially constant through-
out the execution of a project. Early buildup forfieldorganization and installation
of temporary facilities is matched by a late buildup for final job cleanup and
demobilization.
Direct work progress is a measure of physical quantities installed, and, as
shown, the direct work curve is identical to the historical/standard construction
curve previously illustrated. Indirect construction progress cannot be assessed by
measuring physical quantities and is usually measured in craft labor hours. This
typical curve shows the rate at which these hours would normally be expended.
Indirect and direct construction curves for any project can be compared with
these curves. During construction, actual performance should be compared with
these profiles as well, since doing so can provide an early warning that the
expenditure of hours is deviating from the norm.
The percentage breakdowns for craft indirects, field administration, and direct
supervision can be used to check forecasts and performances of individual categor-
 m
0)
2
TITU
CONSTRUCTION PROGRESS - DIRECT & INDIRECT (PROJECT S T A N D A R D
55

(Q
03

100 -| 1 1 1 1 .

i
A
CRAFT INDIRECTS INCLUDE

a
Oft -
TEMP. CONSTRUCTION BLDGS 10%
TEMPORARY UTILITIES 10%
80 - OTHER TEMPORARY 13% o
^ F.A.D.S. 1NDIRECT C/>
WATER BOYS & CLEANUP 28% HOURS

I
7 ft _
CONSTRUCTION EQUIPMENT 20% o
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PERCENT OF CONSTRUCTION TIME

Figure 4.27 Historical cxirves—construction directs and indirects.

120 Chapter 4

1. HISTORICAL-STANDARD CURVES

FROM THESE CURVES, CONSTRUCTION

INDIRECTS (craft & Staff) ARE SHOWN AS HAVING
A MINIMAL BUILDUP AND RUNDOWN.
THIS IS REPRESENTED BY THE FOLLOWING
TRAPEZOID.

2. ORIGINAL OWNER'S POSITION

Indirect Craft Labor
Field Staff
Constr. Eqpt. Rental
Field Office Expenses
Temporary Facilities

Original Schedule ^Schedule Extension

5. COURT'S POSITION
RS THERE IS MINIMHL BUILDUP & RUNDOWN.
TREHT RS H RECTRNGLE. WHERE THE COST DUE TO
SCHEDULE EXTENSION. WILL NOW BE DIRECTLV
PROPORTIONHL.

ORIGINRL SCHEDULE
I sciedule Extension

$ COST = ORIGINflL COST K EXTENSION

ORIGINflL SCHEDULE

Figure 4.28 Trapezoidal technique—schedule extension for claims, indirects.

ies. On very large projects, individual control curves can be developed for specific
categories. Figure 4.28 shows the indirects TT and the resulting court position.

X. PROJECT DURATION CHART

The chart contained in Figure 4.29 enables instant generation of an overall project
duration, based on construction direct labor hours. The result is not of high
quality, however, but is intended only to provide a preliminary schedule during
the early development or feasibility stage of a project.
The chart provides add factors for straight-through and overseas projects,
as well as curves for projects that were built in the 1950s and 1960s and for
Norwegian-based projects. Additional curves can be developed for other overseas
locations if necessary.
Of interest is the fact that project durations of the past (the 1950s and
1960s) cannot be repeated today. Following are some of the reasons for this:
reduced engineering and construction productivity, which cannot always be
compensated for by additional personnel;
• greater complexity for the same capacity (such as higher temperatures and
pressures);
• increased engineering due to environmental/regulatory requirements;
Establishing a Realistic Schedule Baseline 121

PROJECT DURATION VS. CONSTRUCTION JOBHOURS

(U.S. Basis)
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NOTES:
1. Project duration is for Phase 2 only (ehgineering/procurement/construction)

2. Durations are based on conceptual design and process selection

being completed during Phase 1

3. Duration factors (for general guidance) Small / Larger

a) Straight through projects plus 1 0 / 1 5 %

b) Construction subcontract plus 5/10%

c) U.K. projects plus 20 / 30 %

d) European projects plus 10%

e) LDCs (ie, Saudi Arabia, Indonesia, etc) plus 50 / 60 %

4. Construction is on economic basis - no acceleration

Figure 4.29 Project duration chart—1960s to 1990s.

122 Chapter 4

poor project management/poor planning;

poor application of the fast-track approach;
longer equipment delivery times (1970 through 1983);
lack of labor (1970 through 1983); and
increased use of reimbursable-type contracts.

XL CONSTRUCTION COMPLEXITY AND LABOR DENSITY

Figure 4.30 illustrates a typical relationship between construction complexity and

labor density. Judgment is required in assessing the appropriate levels for the
specific project. The data is divided into four general categories:
• simple unit,
• average unit,
• complex unit, and
• process modules.

A. Complexity

Complexity is automatically generated by a company's standard design guides.

This factor is based on the number of direct labor hours (within the plot) divided
by the plot area (battery limits). As noted, this assumes that there is no pre-in-
vestment in the design basis. Pre-investment is a fairly common practice and is
carried out when forward company planning has determined that the plant will
need to be expanded within a few years although, at present, the planned (design)
capacity is sufficient. Design pre-investment, therefore, usually includes extra
area in the plot for future installation of equipment. This extra area, while open
at the moment, would give an incorrect assessment.

CONSTRUCTION COMPLEXITY & LABOR DENSITY

• Only applicable to complete process units (small or large)

• Assumes an economic design - preinvestment
• Based on average U.S. labor productivity (California/union)
COMPLEXITY (direct iobhours / sq ft)
Simple unit 4 to 5
Average unit 6 to 7 x2
Complex unit 8 to 10
PROCESS MODULES
LABOR COMPLEXITY (sq ft / person)

Tied to above complexity data

Simple unit (4 to 5 jobhour / sq ft) 150 to 180
Average unit (6 to 7 jobhour / sq ft) 180 to 250
Complex unit (8 to 10 jobhour / sq ft) 250 to 300
PROCESS MODULES 180 to 200

Figure 4.30 Chart of complexity—density factors.

Establishing a Realistic Schedule Baseline 123

This data can be used to quickly provide a reasonable labor hour estimate
when only the plot/building area is known. However, good judgment is required
in selecting the appropriate labor hour/square foot rate. Current studies indicate
that module complexity is twice that of land-based plant projects. This factor (2)
is shown on Figure 4.30 and applies only to process or utility modules. The
module area (sq ft) would include all levels and allowances for mezzanines. Also,
to allow for workers occupying space immediately adjacent to the module frame,
a perimeter of 10-15 feet is added to the design module area.

B. Guide for Selection of Complexity Factor

Figure 4.31 is based on historical data and provides guidance in selecting a

complexity factor for a specific project.

C. Density

From Figure 4.30, the density (sq ft per worker) is based on the maximum/eco-
nomic total number of craft laborers working at peak (supervision is not included).
The data is based on historical experience, and the factor is then tied to the

The following information allocates types of processing facilities and industries, in

general, to the three categories of complexity. Judgment, is then required to determine
the low or high end of the range (consider location and productivity impact).

1. COMPLEX (Petro-chemical-heavy)
Fluid Catalytic Cracker Ammonia
Hydrocracker Ethylene
Hydrotreater Methanol/Ethanol (L)
Containment Building (nuclear pwr. stn.)

2. AVERAGE
Crude (H) Coker L.D. Polyethylene
Reformer (H) Alkylation (H) H.D. Polyethylene
C.H.D. tsomerization Platformer (H)
Unsats Gas Sulfur Refiner
Sat. Gas Amine Pretreater
Light Chemicals Industry
Pulp and Paper (partial)
Breweries (partial)
Pharmaceutical Industry (partial)
Mechanical Building for Buildings Complex (partial)

3. SIMPLE
. Small Process Additions (subject to temp. & press.)
. Major Pump Stations . Shipping & Loading Facilities
Food Industry
Materials Handling Facilities (many industries)
Pulp and Paper (partial)
Mechanical Building for Buildings Complex (partial)
Breweries (partial)
Pharmaceutical Industry (partial)
Note: With additional technical features and/or difficult site conditions, any
of the above "Category Allocations" can change (higher).

Figure 4.31 Guide for selection of complexity factors.

 124
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Establishing a Realistic Schedule Baseline 125

same categories as previously shown for complexity. As complexity of an area

increases, the number of people who can work in that area decreases. In practical
terms, this indicates that greater complexity has more equipment, hence more
work (more labor hours) per square foot, thus taking up space in which people
can work. As with the complexity data, good judgment is essential in selecting
the appropriate density level from the illustrated range. The density level for
process/utility modules is shown as a narrow range of 180-200 sq ft per person.
When this range of density data is not known, a single and widely accepted
number is 200 square feet per person.

XII. CRAFT MIX BY ACCOUNT

Most construction estimates are prepared on an account basis. Scheduling labor

resources at a detailed level therefore requires a craft breakdown of labor by
account. Figure 4.32 shows a typical breakdown of craft labor by major account
for the United States. Overseas labor practices often will not conform to this mix
of labor.
Value Management"

I. INTRODUCTION

Every owner wants to get the greatest value possible for every dollar spent on
capital construction. To reach this goal requires the application of total cost
management (TCM) techniques throughout a project's life cycle. Economic anal-
yses are used before any money is committed to determine the feasibility of
pursuing the project. Value engineering (VE) may be used to select the apparently
best design concept. Operability, maintainability and reliability reviews fine tune
designs to make them user-friendly (and usually more cost-effective) for operators
and maintenance personnel during a facility's operating days. Constructability
reviews look at designs with the goal of making actual construction safer and
more cost effective. Many other TCM tools come into play during actual design
and construction—planning and scheduling, estimating and budgeting, change
management, cost and schedule control and risk management to name a few.
Once a facility is in operation, TCM techniques such as planning, scheduling,
budgeting, and cost control continue to be used.
There are several TCM techniques which focus on the design itself, the goal
being to create the most cost-effective design which meets all owner requirements.
These are called value management techniques. This chapter describes these
techniques.

By Dr. James M. Neil, PE CCE, Boise, Idaho.

127
128 Chapter 5

II. VALUE MANAGEMENT STUDY TYPES

A. Value Management

This is an umbrella term which encompasses the entire field of value studies.

B. Formal Value Engineering

In its purest sense, VE is a proactive, multidiscipline, highly-structured form of

decision analysis which has as its objective the development of a design concept
for a facility or item which will yield least lifecycle costs or provide greatest value
while meeting all functional, safety, quality, operability, maintainability, durabil-
ity, and other criteria established for it. However, the term is often used to
describe what is more properly called value analysis.

C. Value Analysis

This is a structured review of a partially completed or completed design to

determine if it could be improved to better meet cost or other objectives. It may
or may not be as formalized as pure value engineering.

D. Value Engineering to Cost

This is a reanalysis of a partial or complete design whose estimate of cost or

construction bids exceed available budget. The objective is to validate/revise
functional and other requirements and redesign the facility to be within budget
while meeting revised requirements.

E. Constructability Analysis

These analyses use construction knowledge and experience to make designs more
constructable. Specific goals are:
• to reduce total construction time,
to reduce labor requirements,
• to reduce costs of construction equipment and tools,
• to reduce materials costs, and
• to incorporate features in designs which promote construction safety.

III. TYPES OF VALUE

When one speaks of value, there is a tendency to think only in terms of cost.
But there are other types of value that must be considered in any value man-
agement study. These types of value are found:
Cost value. This is the amount of money (or monetary equivalents) that must
be spent to produce or procure an item.
Exchange value. This is the value of an item on the open market should one try
to sell or trade it. The exchange value of a new car drops in comparison to
its cost value as soon as the new owner takes the car from the showroom.
Value Management 129

Use value. This is the value of an item to the user because of the functions or
services it provides. A well-maintained, basic, old car may have little ex-
change value, but just as much use value to the owner as a newer, fancier
car. That use value would equal the cost value of equally reliable replace-
ment transportation.
Esteem value. This is a value "in the eyes of the beholder" or a consequential
value derived from some investment. A gold bracelet has a definite cost
value, its exchange value is usually less than its cost, it has no use value,
but it has an esteem value to an individual who loves jewelry. The esteem
value of a company's reputation can be converted into monetary terms only
if someone sought to buy the company.
Worth. This term is sometimes used as a synonym for value. What is that
painting worth (exchange value)? What is your reputation worth (esteem
value)? However, value is the preferred term.

IV. LIFECYCLE COSTS

Value engineering is concerned with the lifecycle costs or value of the facility or
item. Following are potential elements of a facility's lifecycle cost:
• feasibility studies,
• engineering,
• real estate,
• permits and licenses,
• special consultant fees,
• construction,
• legal fees,
• furnishings,
• operating costs,
• maintenance costs,
• insurance,
• rebuild/upgrade costs,
interest payments,
• time-value-of-money on committed capital,
• demolition costs,
• salvage costs, and
• remedial action costs.
There may be value concerns that are not directly translatable into cost but
which will be incorporated into a VE study and given a weighting factor. Exam-
ples are:
• aesthetics (exterior and interior),
• ease of future upgrading or expansion,
• convertibility to other function,
• maintenance and operator "friendliness," and
• working atmosphere for occupants.
130 Chapter 5

V. FORMAL VALUE ENGINEERING

Formal VE is a very structured process. However, it is really only an application

of a well-recognized decision analysis process used in many business, military,
and personal endeavors. Here are the steps:
• state goal or describe problem,
assemble all facts pertinent to the situation,
• list assumptions necessary to proceed,
• identify all options for accomplishing goal or solving problem,
• develop a short list of most reasonable options,
• establish criteria for comparing options,
analyze and compare available methods, and
• select best option.
A formal VE program within an engineering organization calls for the cre-
ation of a team to evolve and critically evaluate alternative design concepts. The
team is led by a facilitator who:
• understands and is skillful at facilitating team brainstorming;
• understands the methodology of VE;
• is a neutral party, not a stakeholder, with respect to the subject of the study;
and
• has an educational and/or experience background which relates to the sub-
ject.
Other members of the team will be the sources of ideas. They should be
individuals from different design engineering disciplines, cost engineering staffs,
and operations and maintenance staffs. Having a construction expert also will
be helpful.
Formal VE studies require dedication of team members to the process for
considerable periods. This becomes an added cost line item for design engineering
and should be recognized in the design contract as a reimbursable expense.
Unfortunately many owners balk at additional upfront costs and do not authorize
formal VE. If not, the principles of VE can still be practiced to some degree.
Basically, VE is built on the principle that two or more heads are better than
one, and there may be a better approach. In other words, do not leave design
decisions totally within the hands of a single person, since that person's experi-
ence may be limited and not lead to greatest value. Hence, the idea is to brain-
storm ideas before putting pencil to paper. Many companies have gained
considerable experience in team brainstorming through their total quality man-
agement programs and can take on VE as long as the team leader understands
VE methodology.
The facilitator of the group needs to establish a time and place that the
group can meet without interruption. He/she establishes the rules for brainstorm-
ing sessions and provides general direction but must not be dictatorial, impose
his or her ideas on the group, or otherwise constrain the open exchange of ideas.
The facilitator normally acts as recorder.
The keys to good brainstorming are:
individuals who are willing to participate,
Value Management 131

an atmosphere of open-mindedness, and

• a firm rule of no criticism of others' ideas.
A group member should feel comfortable saying whatever comes into his or
her mind even though the idea may appear ridiculous to some. The reason is
that a far-out idea may stimulate someone else to think of an idea that would
not have come forth without the stimulation of the first idea. This is why 4 people
working in a group can produce more ideas together than 4 people working
independently. The size of the brainstorming group can vary depending on the
magnitude of the problem, but groups of 3-5 are normal.

VI. FORMAL VALUE ENGINEERING PHASES

Formal VE follows a structured sequence of actions. The various authorities on

VE group these into phases, and, depending on the authority, from 4-8 phases
may be listed. Whatever their categorization, the total included actions are
essentially the same. Following, under seven headings, are these phases.

A. Goal Definition Phase

Clear definition of the goal, boundaries, and authorities of the VE study is an

essential first step so that effort will not be wasted.

B. Information Gathering Phase

In this phase all information providing the basis for the project and relating to
the specific location is assembled. Examples are:
• operational requirements (output, space, etc.);
• project budget;
• client-need dates;
• major equipment commitments already made or intended;
• proprietary processes or systems involved;
• client's design standards;
• design criteria;
• design calculations to date;
• alternatives already identified;
technical memoranda pertaining to the project;
• permit requirements;
• environmental, zoning, and other regulations;
applicable building/construction codes;
• maintenance requirements;
• other facilities potentially affected by this project;
equipment data sheets, process flow sheets, etc.;
• cost estimates to date;
• subsurface investigation data; and
• site constraints (size, shape, existing structures and facilities, access, etc.).
132 Chapter 5

C. Functional Analysis Phase

Next, the basic and secondary functions to be provided by the facility are identified.
Functions are described in a generic fashion using an action verb and a noun to
invite visualization of various options. Other typical verb-noun combinations are:
• transmit load,
• illuminate room,
• convey liquid, and
• heat building.
A basic function is a primary function under study. A secondary function is a
consequential or potential additional function. The basic function of a lamp is to
provide illumination; a secondary function may be to decorate the room.
Questions to be asked by the team in this phase include:
What basic functions are involved in meeting facility/product requirements?
• Which secondary functions are associated? Which are essential?
• How is the function accomplished?
• What is the value of a function?

D. Creative Phase

Different ideas for performing the various basic or secondary functions are iden-
tified and listed, based on the functional analysis. For example, heating require-
ments for a structure can be satisfied by any number of options—heat pump, gas
furnace, oil burner, space heaters, fireplaces, electric baseboard heaters, or solar
panels. As another example, transport coal leads to the options of conveyor belts,
trucks, rail, slurry pipeline, etc. It is not uncommon to have 5-25 ideas proposed.
It is worthwhile in this phase to itemize obvious advantages and disadvan-
tages of each idea as a basis for initial screening in the analytical phase,

E. Analytical Phase

Some authorities recommend that only the group leader from the creative phase
continue in the analytical phase. The reason for this is that, if the members of
the team brainstorming an item know they may be required to evaluate its
feasibility and costs associated with the idea, they may be reluctant to add too
many ideas to the list or propose an idea that is difficult to evaluate. This phase
begins with a summary review of the ideas from the creative phase to reduce
the initial list to 2-5 ideas that are worthy of detailed evaluation.
With each remaining idea, the need for each function is validated and each
option for performing a function is examined individually as to feasibility, cost,
and value received. Then, various combinations of these ideas are tested as a
system against the governing criteria for the facility. The most feasible combina-
tions are isolated and given more detailed study. The combination with most
favorable balance of cost and value is further refined through more detailed study.
In this process, the value engineers will employ various combinations of economic
analysis, lifecycle costing, trade-off analysis, sensitivity analysis, estimating, and
other cost engineering tools.
Value Management 133

While total lifecycle cost may be the primary criterion used to rank options,
this is not always true. Another approach, when everything cannot be reduced
to monetary terms, is to list various criteria, weight those criteria, and then
grade each option against them.

F. Proposal Phase

In this phase, the team's recommendations are summarized for presentation to

the decision makers. This presentation must have a written version that details
the basis for the recommendation. There also may be an oral presentation.
This phase may be weakest phase if the preparers assume that the reader
knows as much as the preparers and fail to provide the information needed to val-
idate a recommendation, or the proposal is so voluminous that the executives with
decision-making authority would have difficulty finding time to read and digest it.
When preparing a proposal, assume that the reader has no background about this
idea and logically build the proposal one step at a time. If there is a lot of information
involved in the proposal, prepare an executive summary and put backup detail in
appendices so the reader can get the flavor of the proposal very quickly and still
have detail available if needed. Ensure that the proposal answers these questions:
• What criteria were being satisfied?
• What solution or solutions are proposed? If more than one are presented,
provided detailed advantages and disadvantages of each.
• What will each option cost?
What value is anticipated, cost and otherwise?
• What other options were seriously considered but not selected?

G. Implementation phase

The client's selected option is implemented. Considerable follow-up may be re-

quired with architect/engineering personnel to ensure their understanding of
concepts developed.

VII. VALUE MANAGEMENT AFTER DESIGN BEGINS AND DURING

CONSTRUCTION

Even though a design concept has been established through formal VE in the
conceptual design phase, the principles of VE should continue during detailed
design. A typical area for VE effort during design is with specifications. All too
often, it is found convenient to utilize specifications directly from a computer
database without questioning the need for them as written. Each should be
questioned as to its need in its present form and the most cost-effective specifi-
cation derived. During detailed design, various design simplifications may also
result from continued value analysis.

A. Value Engineering Clauses in Construction Contracts

Some clients include value engineering clauses in their contracts for construction.
These clauses typically set up a procedure whereby, after review of the construe-
134 Chapter 5

tion documents, the contractor may submit proposals for more cost-effective
designs than those of the contract drawings. If the VE proposal is accepted, the
savings are shared with the contractor. As mentioned previously, such studies
are more properly called value analysis studies since they come after completion
of design.

B. Constructability Analyses

Constructability analysis is a value management technique that is most effective

if initiated during the conceptual design stage and continued through detailed
design and construction phases. Constructability analyses are focused on the
construction phase. Basically, the intent is to save construction time and cost
without compromising any other project objectives. Thus, constructability deci-
sions are oriented toward:
reducing total construction time by creating conditions which maximize
potential for more concurrent (rather than sequential) construction, and
minimize rework and wasted time;
• reducing jobhour requirements by creating conditions which promote better
productivity or creating designs which demand less labor;
reducing costs of construction equipment (and tools) by reducing require-
ments for such equipment, creating conditions which promote more efficient
use of that equipment, and minimizing need for high-cost, special purpose
equipment.
• reducing materials costs through more efficient design, use of less costly
materials, and creation of conditions which minimize waste;
• creating the safest work place possible since safety and work efficiency go
hand in hand.
A common view of constructability is that it only involves:
• determining more efficient methods of construction after mobilization of field
forces,
allowing construction personnel to review engineering documents periodi-
cally during the design phase,
• assigning construction personnel to the engineering office during design, and
• developing a modularization or preassembly program.
Although each of the above is part of constructability, each is only a part.
Only through the effective and timely integration of construction input into
planning and design as well as field operations will the potential benefits of
constructability be achieved.
Who performs constructability analysis? Obviously, it must be someone fa-
miliar with the construction process. Ideally, the contractor will be allowed to
co-locate construction personnel with the client's engineer. But, this has a cost
and will not always be possible because of the client's handling of design and
construction contracts. In such cases, reliance must be placed on the client's
architect/engineer. Of course, continuing constructability analysis in the field
should be a standard feature of effective project management in furtherance of
its goal to provide the most cost-effective management of the project.
Value Management 135

VIII. VALUE ENGINEERING TO COST

There are occasions when a client's available budget is less than the most recent
cost estimate or less than the selected contractor's cost proposal. In these situ-
ations, the contractor may be asked to join the client in re-examining the designs
for the purpose of value engineering them to fit within budget. In studying these
designs, attention should be initially focused on components or features of the
project which have greatest cost reduction potential:
If an item or function is nonrevenue producing, could it be eliminated
without compromising basic functions?
• If an item or system is complex, is there a simpler way?
• If an item or system has a significant cost, what are the components of this
cost and can any be reduced through redesign or substitution?
If a design for providing some function is new, is it still the best approach?
• If an item has negative constructability (including safety) implications, what
can be done to make it safer or more constructable?
If a design will force hiring of high-wage craft trades in the field, could it
be redesigned to utilize workers from trades with lower wage scales?
• If specifications were copied from other projects, could they be tailored to
fit this project's situation?
• If specially engineered components are involved, could off-the-shelf equip-
ment be substituted?
Additionally, consider the following:
• combining multiple structures into fewer structures,
• using an existing structure or system instead of constructing a new one,
and/or
using modularization or shop fabrication to reduce field labor costs.

IX. SUMMARY

Value management provides a family of useful tools to help assure lowest cost
and/or greatest value for a project. It is not a discipline like structural or
mechanical engineering; rather, it is a series of techniques available to all dis-
ciplines. Applying them takes additional time and money at the time, but advo-
cates are convinced that the returns are many times greater than the initial
investment. All cost engineers should include these techniques in their total cost
management tool bags.

X. VALUE ENGINEERING BIBLIOGRAPHY

A. J. Dell'Isola, Value Engineering in the Construction Industry, 3rd Ed., Van Nostrand
Reinhold, New York, 1982.
C. Fallon, Value Analysis, 2nd Rev. Ed., Triangle Press, Southport, NC, 1980.
Federal Construction Council, Consulting Committee on Value Engineering, Elements of
an Effective Value Engineering Program, Technical Report No. 92, National Academy
Press, Washington, D.C., 1990.
136 Chapter 5

General Services Administration, Value Management Handbook, PBS P 8000.1 A, Wash-

ington, D.C., October 31, 1978.
S. J. Kirk, and K. F. Spreckelmeyer, Creative Design Decisions: A Systematic Approach to
Problem-Solving in Architecture, Van Nostrand Reinhold, New York, 1988.
H. E. Marshall (ed.), Roundtable on a Standard Method for Value Engineering: AACE
International Annual Meeting June 21, 1994, Cost Engineering 37(3):9-21 (1995).
L. D. Miles, Techniques of Value Analysis and Engineering, 2nd ed., McGraw-Hill Book
Company, New York, 1972.
D. Mitten, Value Management for Quality and Cost Effectiveness, Project Management
Services, Inc., Rockville, MD, 1991.
U.S. Environmental Protection Agency, Office of Water Program Operations, Value Engi-
neering for Wastewater Treatment Works, 430/9-84-009, Washington, D.C.
L. W. Zimmerman, and G. D. Hart, Value Engineering: A Practical Approach for Owners,
Designers, and Contractors, Van Nostrand Reinhold, New York, 1981.

XL CONSTRUCTABILITY BIBLIOGRAPHY

Constructability: A Primer, Construction Industry Institute Publication 3-1, Austin, TX,

July 1986.
Constructability Concepts File, Construction Industry Institute Publication 3-3, Austin,
TX, August 1987.
Constructability Implementation Guide, Construction Industry Institute Publication 34-1,
Austin, TX, May 1993.
Guidelines for Implementing A Constructability Program, Construction Industry Institute
Publication 3-2, Austin, TX, July 1987.
Preview of Constructability Implementation, Construction Industry Institute Publication
34-2, Austin, TX, February 1993.
Implementing Constructability, Construction Industry Institute Training Package EM-11,
Austin, TX, 1993.
Economic Evaluation in the Process
Industries'"

I. PURPOSE OF AN ECONOMIC EVALUATION

The purpose of an economic evaluation is to select the investment of wealth that

will do one of the following:
• maximize the financial return on the investment, generally measured in
profit;
• cost the least to correct (environmental); or
• generate the most goodwill for the least cost.
Successful management of money requires that the amount of money at the
end of the year be greater than the amount of money at the beginning of the
year. The greater the increase, the better the perceived management. The rewards
for increasing the wealth are usually in proportion to the amount of the increase.
Many opportunities exist to make money; yet many more opportunities exist
to lose money. The successful manager finds that investment that will return the
most money at the end of the year. One method used by successful managers to
select good investments is performing economic evaluations of the investment.
Unfortunately, not all funds expended by a business or a person result in
a return or a profit. An example of this is the environmental expenditures many
companies face. With the large increase in regulatory requirements, few of which
return any profit, an economic evaluation is meaningful in finding the best way
to meet the requirements of the law with the least expense. These evaluations

* By Dr. Klane F. Forsgren, PE, Vice President-Engineering, Sinclair Oil Corporation, Salt Lake City,
Utah.

137
138 Chapter 6

involve the same principles of comparison used for selecting investments, and
also can suggest ways to evaluate options that minimize loss.
Another important decision faced by management is the building of good
will and a good name for the company. In most instances, developing good will
requires a monetary investment. The techniques used to select the best invest-
ments can also be used to evaluate the best options for developing goodwill.

II. METHODS OF EVALUATION

The method described in this chapter relates to the time value of money. The
concept is that the use of money over time has a value and that a person should
be compensated for the use of the money for that period of time. The method
described shows ways to compare the value received for the use of the money.
This value is important, since the return on an investment may be postponed
for some years, is not the same every year, and may be bunched at the front or
the end of the time spectrum under consideration. The method described in this
chapter will help you consider many variables and put them all on an equal
footing for comparable evaluation.
In order to understand the methodology of the time value of money, we must
define some terms typically used in economic discussions. The textbook, Economic
Evaluation and Investment Decision Methods, by Franklin and John Stermole,
has been referenced extensively in developing the definitions. The author's exper-
ience in the oil and power industry serves as the basis of the examples.
The important definitions needed to discuss economic evaluations are the
following:
cash flow;
• rate of return, internal rate of return, or discount rate;
• present value;
• future value;
annual value; and
• breakeven.

A. Cash Flow

Cash flow is the difference between the cash received (income) and the cash paid
out (expenses). Cash received can come from several sources, including sales
revenue, interest on money invested, and services performed. Cash out goes to
expenses such as materials, labor, utilities, taxes, interest, buildings, etc. The
successful business will have more cash in than cash out, or a positive net cash
flow.
In most instances, the cash flow is negative for the first few years of the
operation of a new business or a new process. To adequately perform the economic
evaluation, the business must take this negative cash flow into consideration.
The methods discussed show how to consider the total cash history of the venture
in the evaluation.
A second consideration in evaluating cash flow is that the value of money
changes from year to year due to inflation and deflation—like the difference
between a 1995 dollar and a 1985 dollar.
Economic Evaluation in the Process Industries 139

B. Rate of Return

Rate of return is the interest rate that you would receive if you invested the
amount of money under consideration in a bank and received the same positive
net cash flow as was developed by the investment. The net cash flow occurs over
a period of time, and the time value of the cash flow over that time must also
be considered. Discounting implies reducing the value of something. Future val-
ues are discounted by a factor—the interest rate or discount rate—to their present
worth or present value.

C. Present Value

Present value is the value of the investment over time in today's dollars. It
includes all of the cost of the project, including management costs to get the
project completed, and the hard costs for purchase of equipment, buildings,
material, etc.
Net present value (NPV) is the cumulative present worth of the positive and
negative cash flows where the specified discount rate introduces the time value
of money. A positive NPV means that the future cash flows of the project are
higher than the minimum return established for the project. A negative NPV
means that the future cash flows are not enough to maintain the return estab-
lished for the project. A person or company would be better off investing in an
alternate project.

D. Future Value

Future value is the value of the cash flow in the future in future dollars. This
value is used in comparisons and discount rate formulas, which are available in
tables of interest rates.

E. Annual Value

Annual value is the amount of annual payments, similar to a mortgage payment.

The annual value is also used in discount rate formulas.

F. Breakeven

Breakeven is the time that the net positive cash flow pays off the full cost of the
project. The faster a project reaches breakeven, the better the investment, or the
more money that was returned in a shorter time. The time to reach breakeven
can be used as a good rule of thumb in evaluating investment options, as will
be seen later. Table 6.1 shows how cash flows are developed.

III. DISCOUNTED CASH FLOW METHODOLOGY

The method presented in this chapter to compare the return on an investment

is the discounted cash flow (DCF) method. Discounted cash flow puts all invest-
ment options on a common basis of handling the time value of money with
140 Chapter 6

Table 6.1 Example of How Cash Flow is Developed. The Cash in is Shown by Positive
Values, the Cash out by the Negative Values. The Net Cash Flow is the Difference Between
Cash in and Cash out.

Year 0 1 2 3 4 5 6

Invest -200 -100

Income 170 200 230 260 290
Costs
Operating -40 -50 -60 -70 -80
Tax -30 -40 -50 -60 -70
Net CF -200 -100 100 110 120 130 140

compounded interest rates. It involves taking the annual cash flow from the
business, either real or projected, and applying an interest rate to each year's
flow, while accumulating the previous year's cash flow with associated accumu-
lated interest. This is the value of using compounded interest rates in the
calculations.
The discount rate becomes the minimum return or interest rate acceptable
for investment. The owner of the project usually establishes the minimum return
or interest rate or the discount rate. What determines the selected minimum
return or discount rate? There are several factors:
the interest rate available in the money market at no risk;
alternate investments and their return potential;
• risk associated with the project;
accuracy of the economic analysis, generally based on the quality of the data
available for analysis;
• corporate policy; and
• personal preference.
An investor can normally put money into a very safe investment, such as
a certificate of deposit with a strong government, or into a very stable bank, and
receive a guaranteed return on that investment for the investment period. Since
the return on the money is guaranteed, the interest rates are usually low. This
value would be the least return on investment that one would accept for any
business proposal, since it is guaranteed. The return on another form of invest-
ment may not be guaranteed, and therefore carries risk that the investment may
lose money.
In most instances, several projects compete for the same investment capital.
Within a corporation, for example, several different corporate sites may be trying
to add new process equipment. These projects are in competition with those who
want to buy out complete companies or expand into a new market by building a
completely new facility.
In this situation, a corporation will prepare a financial package, a proforma,
with the projected profit for several years. Then the company will determine the
DCF for each competing project. The project with the highest internal rate of
return (IRR) will normally be selected for funding.
Economic Evaluation in the Process Industries 141

In preparing the proforma or financial package, companies must make

several assumptions in order to predict the future cash flow. These assumptions
include:
• the initial cost of the project;
the sales projections for several years which will lead to revenue;
• the sales price and inflation over time;
• the cost of materials over time;
the cost of operating the facility, including salaries, fringes, and management
costs;
• taxes; and
the cost of borrowing the money to complete the project.
The accuracy of the financial analysis depends on the quality of the data
in the assumptions used. The poorer the quality of the input data, the greater
the risk that the analysis will be incorrect. If the risk is high, then the return
required in the financial analysis must be higher. This allows for error in the
analysis or for the poor quality of the input data.
In many instances, the IRR is established by the corporation or the owner
based on the above factors and on experience. For instance, some major corpo-
rations will not consider a project unless the return on investment (ROD is at
least 20% averaged over the life of the project (i.e., the IRR is 20%). When the
interest rate for certificates of deposit is 6%, a 20% ROI seems large. But
corporate experience has shown that many of the projects that promised to return
good profits did not, in many instances due to conditions beyond the control of
the corporation.
For example, when the oil embargo occurred in the early 1970s, everyone
thought that oil prices would remain high. Several companies spent millions of
dollars to develop alternate sources of oil or fuel, such as the oil shale of Colorado
or the tar sands of Canada. The financial projections showed great profit so long
as the price of oil was above $30 per barrel. History now shows that the price
of oil did not stay above $20 a barrel, and the value of the investment in oil
shale and tar sands was lost.
The nuclear industry is a prime example of cost of installations getting out
of hand. It became so costly to build nuclear power plants due to increased
governmental regulations that many were shut down when only 30-40% com-
pleted. The investment was lost.

A. How Does DCF Work?

Most business computers have DCF programs built in. You only need to obtain
the net cash flow for the project for a period of several years, put that data into
the computer program, and let the computer develop the DCF. The more years
of cash flow available, generally the better the DCF analysis.
The computer program invests each year's cash flow at the established
interest rate for the established period of time. The sum of the net profit and
accumulated interest from the net cash flow is compared to the income produced
by putting that same amount of money into a bank at the prescribed discount
rate. The two sums are compared to determine whether the project meets the
standard set by the corporation or the owner.
142 Chapter 6

Table 6.2 Impact of Net Cash Flow on Internal Rate of Return (IRR) and Net Present
Value (NPV)

Investment life Case 1: 3 year Case 2: 6 year Case 3: 9 year

Project DCF IRR 37% 21% 14%

Project NPV @15% $135.20 $54.70 -$11.70
+ Cash flow $600 $600 $600
Investment $300 $300 $300

B. What Impacts DCF Calculations?

Several factors affect DCF analysis, but four major factors are:
the amount of the investment,
• the amount of net cash flow,
• the timing of the investment, and
• the timing of the return.
Control of these items will greatly improve the return on investment sought
by the investor. The greater the cost of the project, the higher the net cash flow
must be to repay the debt and to return an increase to the investor. It is also
more difficult to get a good cost estimate. This is primarily because few examples
of complex projects exist, and the company is more susceptible to missing an
important piece of the puzzle. To compensate for these difficulties, the net cash
flow and rate of return would normally have to be higher to be acceptable.
The higher the net cash flow, the faster the debt is retired and the greater
the rate of return. Table 6.2 shows three different cash flows with the corre-
sponding net present value at 15% interest and the corresponding IRR.
In Table 6.2, all three projects have the same initial investment of $300,000
spent in 2 years. Case 1 returned $600,000 over just 3 years. Case 2 returned the
same $600,000, but over 6 years. Case 3 returns the same $600,000 over 9 years.
Cases 1 and 2 have IRR values above the 15% standard for this investment and
show a positive net present value. Case 3, with 9 years required to receive the
$600,000, did not meet the 15% standard and thus had a negative net present value.

IV. A CASE STUDY: CONSTRUCT OR CONTRACT?

A good way to understand how this method of economic evaluation can be used
effectively is to do a case study. The United States Environmental Protection
Agency (EPA) recently required that all vehicles that traveled mainly on paved
roads would have to use low-sulfur diesel (0.05 wt%). This required a decision
by the refiner between these two choices:
Should the company spend the money to build a new hydrotreater in its
own facility to reduce the sulfur in the diesel fuel?
• Should the company make a contract with another refinery to have the
diesel fuel produced on a contract basis?
Economic Evaluation in the Process Industries 143

The numbers used in this example are numbers representative of the real world,
but are not intended to represent actual practice.

A. Construction Option

The following assumptions were made about the construction option:

cost to construct is $40,000,000; $15,000,000 in the first year;
• time to construct is 2 years;
• operating time is 24 hours a day, 350 days a year;
• plant capacity is 14,000 barrels a day;
selling price for the low sulfur diesel starts at 10 cents above regular sulfur
diesel, but declines as shown over 7 years; and
cost for operating the hydrotreater starts at 3 cents a gallon and reduces
as the operators become more acquainted with the equipment and are able
to optimize the operation.
The annual cost and income in U.S. dollars are shown in Table 6.3 for a
7-year period. Subtracting the cost line from the income line gives the net cash
flow for this option (Table 6.4). If we set the minimum return as 15%, the net
present value (NPV) of the cash flow stream is $6.93 million. The internal rate
of return is 20.8%. Thus if the minimum return that is acceptable is 15%, this
project should be accepted for construction. But the purpose of this evaluation is
to see whether it is better to build or to contract the desulfurization. We need
to run the other option and see how it compares financially.

B. Contract Option

The contract option uses the following assumptions:

• cost to construct transfer system and transportation to get diesel to the
contractor is estimated to be $5 million;

Table 6.3 Construction Option for Case Study. Over 7 years, the income is substantial
enough to offset the yearly cost.

Cost to construct $40,000,000

Time to construct 2 years
$15MM first year; $25 MM second year
Operation time 350 days/year

Annual cost and income ($US)

Year 1 2 3 4 5 6 7

Price A ($/gal.) 0.10 0.09 0.08 0.075 0.07 0.07 0.065

Income ($MM) 20.6 18.5 16.5 15.5 14.4 14.4 13.4
Cost ($/gal.) 0.03 0.025 0.02 0.02 0.02 0.02 0.02
Cost ($MM) 6.2 5.1 4.1 4.1 4.1 4.1 4.1
144 Chapter 6

Table 6.4 DCF Analysis for the Construction Option. Over the 7-year option, the income
is substantial enough to support construction, but how does this option compare to con-
tracting the desulfurization?

Year

0 1 2 3 4 5 6 7 8

Cash flow ($MM US) -15 -25 14.2 13.4 12.4 11.4 10.3 10.3 9.3

NPV @15% = $6.93 MM; IRR = 20.8%

time to construct is one year;

• operating time is 24 hours a day for 350 days a year;
• selling price is the same as in the construction option; and
cost for hydrotreating and transporting the product is set by the contract
and known transportation costs. For this example, the cost of hydrotreating
starts at 9 cents per gallon and decreases slightly because competition will
drive the price of diesel down.

The annual cost and income from the contract option is shown in Table 6.5.
Since the construction time is only one year, we have taken the annual cost and
income statement for 8 years. Thus the comparison takes into consideration the
timing of the projects and the timing of the expenditures, as noted before.
Comparing the two options shows which option will provide a better return
on investment and potentially make more money for the owner. Comparing the
analysis shown in Tables 6.4 and 6.5 gives the following:

Table 6.5 Data for Contract Option for Hydrotreating Diesel Fuel

Cost to construct $5,000,000

Time to construct 1 year
Operation time 350 days/year

Annual cost and income ($US)

Year 1 2 3 4 5 6 7 8

Price A ($/gal.) 0.10 0.09 0.08 0.075 0.07 0.07 0.065 0.065
Income ($MM) 20.6 18.5 16.5 15.5 14.4 14.4 13.4 13.4
Cost ($/gal.) 0.09 0.085 0.075 0.07 0.065 0.065 0.06 0.06
Cost ($MM) 18.5 17.5 15.4 14.4 13.4 13.4 12.3 12.3
NCF ($MM) 0.1 1 1.1 1.1 1 1 1.1 1.1

NPV @15% = -$1.10 MM; IRR = 8.82%

Economic Evaluation in the Process Industries 145

Option NPV@ 15% IRR

Construct option $6.93 MM 20.8%
Contract option -$1.10 MM 8.8%

When the difference is great, the decision can be quite simple and easy.
When the difference is small, you consider other factors in making the decision.
The contract option only returns 8.8% on the invested dollars, and the construc-
tion option provides a 20.8% return. This suggests that the construction option
should be selected.
Before a company will accept the results of the analysis, especially when
the comparisons are close, it will check the quality of the input data. In order
to make this as easy as possible, it helps to know which data has the greatest
impact on the analysis. This is referred to as a sensitivity analysis.

C. Sensitivity Analysis of the Comparison

With the projects set up in the DCF format, you are in a position to modify the
initial assumptions and determine what will be the impact. Some variables have
a major impact on the financial analysis, while others have little effect.
The impact of changes to five items will be evaluated:
• impact of selling price,
• impact of initial cost of the project,
• impact of production cost,
• impact of inflation on both selling price and costs, and
impact of taxes to show value of tax breaks to the viability of the project.

7. Impact of Selling Price

Selling price is often something you cannot control with the project. If your
product is a mature product in the marketplace, the selling price has been
established by history, and the likelihood of changing that price much is limited
(though the oil companies have been successful at increasing prices by creating
perceived shortages). Competition is likely to cause pressure on the price and
make it less than you would like. Therefore, your economic analysis should
consider what would happen to the project if the selling price were to be less
than the projected price. Table 6.6 shows the construction option with a 2-cents-
a-gallon lower selling price for the low sulfur diesel than initially projected. The
costs, however, remained the same as initially projected.
This analysis shows that the IRR is just under 11%, and therefore the sys-
tem will not meet the 15% standard established. The analysis would recommend
not making this investment based only on the rate of return. The same analysis
can be done for the contract option to find out the sensitivity to selling price.

2. Impact of Initial Cost of the Project

Table 6.7 shows the construction option with a $50 million initial cost rather
than $40. The first year cost was $25 million instead of $15 million. The project
then drops from meeting the 15% return criteria to only 12.9%. The investor
146 Chapter 6

Table 6.6 Impact of a 20% Reduction in Selling Price on the Construction Option

Annual costs and income ($US)

-1 0 1 2 3 4 5 6 7

Selling price ($/gal.) 0.08 0.07 0.065 0.06 0.06 0.055 0.055
Income ($MM) 16.5 14.4 13.4 12.4 12.4 11.3 11.3
Costs ($MM) 6.2 5.1 4.1 4.1 4.1 4.1 4.1
NCF ($MM) -15 -25 10.3 9.3 9.3 8.3 8.3 7.2 7.2

NPV @15% = -$4.74 MM; IRR = 10.78%

would receive $3 million dollars less with this investment than with an option
that will meet the 15% criteria.
3. Impact of Production Cost
An increase in the operating cost of the project—it costs more to produce the
product than was projected—has the same general impact as does having a lower
selling price. In both cases the net cash flow will be decreased, thus decreasing
the net present value of the cash flow over time. You can run this option to see
how much the decrease is, though the proof is not shown here.
4. Impact of Inflation on Both Selling Price and Costs
Table 6.8 shows the construction option with the lower initial selling price but
now adds a 5% per year inflation rate for the selling price and the costs. Because
the selling price is generally more than the cost, an inflation increase will help
the project because the difference between selling price and cost will continue to
increase as inflation increases. Under this scenario, the project that was not
acceptable now becomes acceptable. The IRR is just above 15%, barely meeting
the criteria standard set for the project.
5. Impact of Taxes to Show Value of Tax Breaks to the Viability of
the Project
The impact of taxes is the same as modifying the cost of production. Taxes must
be taken from the cash stream, and serve to reduce the value of the net cash
flow. If you can, obtain some type of tax break from the local, state, or national

Table 6.7 Impact of a 25% Increase in the Initial Cost of the Construction Option

Year

0 1 2 3 4 5 6 7 8

Annual cash flow ($MM US) -25 -25 14.2 13.4 12.4 11.4 10.3 10.3 9.3

NPV @15% = -$3.07 MM; IRR = 12.9%

Economic Evaluation in the Process Industries 147

Table 6.8 Impact of a 5% Inflation Factor Applied to Both Selling Price and Costs

Annual cost and income ($US)

-1 0 1 2 3 4 5 6 7

Selling price ($/gal.) 0.08 0.07 0.073 0.077 0.08 0.085 0.09
Income ($MM) 16.5 14.4 15.0 15.8 16.5 17.5 18.5
Costs ($MM) 6.2 5.1 5.4 5.6 5.9 6.2 6.5
NCF ($MM) -15 -25 10.3 9.3 9.6 10.2 10.6 11.3 12.0

NPV @15% = $0.48 MM; IRR = 15.

governments that adds net income to the cash flow, thus improving the perfor-
mance. Usually the tax break has a limited time that it is in place. Thus this
method of DCF could be projected to beyond the time that the tax break is allowed
to determine the impact on overall project viability.

6. Comparing the Changes

Comparing the results found from Tables 6.6, 6.7, and 6.8, we learn which
variables have the greatest impact on the economic viability of the project. A 20%
reduction in selling price has more impact than a 25% increase in the initial
cost. Therefore, selling price is more critical.
A 5% inflation rate takes a project with a lower initial selling price, which
did not meet the 15% IRR criteria, and converts it to an acceptable project. Again,
inflation impacts selling price as well as costs, while the initial investment stays
constant. We impact selling price with inflation while initial investment remains
noninflated.

V. RELIABILITY OF THE DCF METHODOLOGY FOR ECONOMIC

EVALUATION

The DCF methodology has great versatility; it quickly helps to evaluate several
alternatives and to determine how sensitive the alternatives are to variations in
the data used in the analysis. However, the system is very dependent on the
quality of the data used in the analysis. This dependence bears the impact of
cost of the process, selling price of the product, and cot of manufacture. In
establishing any economic evaluation, ensure that the numerical values used in
the process are as close to the real world as possible. Getting an accurate cost
of the project and determining the correct selling price are generally the two
places that economic evaluations fail.
When determining the cost of the project, make the costs equivalent between
competing options. The project manager of the economic evaluation must demand
that the project costs are complete, current, and realistic. The manager must
define the total extent of the process being considered. In the case study, the
desired hydrotreater must be carefully defined in terms of size, location in the
148 Chapter 6

refinery, needed operational flexibility, type of construction material, and unique

process considerations.
The project definition must include supporting processes. For instance, the
hydrotreater that removes sulfur from the diesel must have a place to deposit
it. You must consider the unit size and use. You must analyze the amine system
to ensure that it is adequate. Do you have hydrogen to do the treating? All of
the costs of the supporting process changes must be included into the analysis
to make it meaningful.
Review all of the utility needs of the new process to be sure that adequate
steam, water, power, etc., are available. You will also need to review environmen-
tal issues and include waste treatment upgrades or additions, if needed.
Ensure that you include all costs in the project cost, such as professional
costs of consultants, financing costs if they apply, and start-up costs, including
the cost of fuels and materials needed to start up the new process.
A final caution on determining project or plant costs for the analysis: the
source of the cost estimate is important. Some estimates are done from handbooks
and general industry rules of thumb. These estimates are appropriate in initial
screening estimates, but when the analysis approaches the decision stage, the
estimates must be more accurate.
Many site-specific costs will impact the project, and you must consider them.
Rules of thumb are no longer adequate. In the estimate, make refinements to
the estimates based on such things as union versus nonunion labor, local labor
versus imported labor, and new equipment versus used equipment.

VI. SELLING PRICE OF THE PRODUCT

Earlier in this chapter, information on determining the selling price was dis-
cussed. Developing good selling price information is crucial to the success of a
project analysis. To help you develop good information, you will also need to
consider the following:
commodity versus new product pricing,
reaction of the competition,
• government impact,
availability of product, and
• raw material costs.
The selling price of an existing product class is established by the market.
The likelihood of increasing the selling price of the product to the consumer is
limited. However, tougher regulations may demand more of businesses without
allowing them to pass some of the costs to the consumers. Currently, oil compa-
nies are required to add oxygenates to gasoline that is sold into ozone nonattain-
ment air quality areas. The oxygenates are added by blending ethanol or a
chemical called MTBE (methyl tertiary butyl ether) into the gasoline. These
additives cost 50-75% more than the gasoline. The additive can be as much as
10% of the total blend, yet the oil company cannot get enough for the oxygenated
gasoline to cover the increased cost. The consumer is used to paying the estab-
lished price for the product regardless of the improvements to the product.
Economic Evaluation in the Process Industries 149

The whole purpose of these examples is to require that the economic eval-
uator pay special attention to the selling price used, and basically assume lower
prices. Lower selling prices are true more often than the higher prices promoted
by marketing personnel.
If the product for sale is a new product, you have more price flexibility, but
again the analysis should look at generally lower prices than projected.
In established markets, economic analysis should evaluate how the compe-
tition will react. The competition will fight to keep their market share. The fastest
way to respond to new competition is to lower prices. In some instances, the
competition will take a loss for a period of time to keep new competitors out.
The government can have a major impact on selling price. Complaints from
the public on price fixing can lead to expensive, time-consuming defense. Gov-
ernment requirements to modify a product for environmental reasons but with
no opportunity to increase the selling price can be detrimental.

VII. NONFINANCIAL FACTORS

In performing an economic evaluation, you must be aware of the nonfinancial

factors that affect the final outcome of an analysis of options. In the case study
in this chapter, several nonfinancial considerations exist.
If the corporation's policy does not want the debt required to own the
manufacturing facilities that do their processing, the analysis becomes one of
showing such an overwhelming argument for the construction option that it will
change corporate policy. Thus the criteria for this evaluation of the construction
option is much higher than just to provide the best IRR. Here it would just be
to see that the contract option meets the minimum requirements of the company.
The availability of quality contractors is a consideration. If the only manu-
facturers are new to the market with a limited track record, then look around
more carefully for the construction alternative.
Transportation and transfer problems arise, perhaps with governmental par-
ticipation. For instance, the ability to ship nuclear waste between states is being
limited and costs much more.
Does the company want to risk the investment of $40-$50 million on a
market that may not be real for the long term? There is a viable $5 million
option. Admittedly, the IRR is greatly reduced, but the company's position in the
low-sulfur diesel fuel is protected without so much money being risked on a new
plant.

VIII. SUMMARY

Economic evaluations are developed to help us make the best investment choice
of the options available. Discounted cash flow analysis, which uses compound
interest rates to determine the new present value of a future net cash flow, is a
versatile tool; it compares many alternatives and helps to determine which eco-
nomic factors provide the greatest change in the analysis.
Keys to Controlling and Reducing
Environmental Costs*

I. OBJECTIVE

Few people realize how costly environmental cleanup is and how costly it may
be to prevent environmental problems in the future. The U.S. cost of complying
with environmental regulations from 1972-1992 was about $1.4 trillion. The cost
will be about $1.6 trillion in the remainder of the 1990s.
This chapter identifies proven methods for remediation and discusses the
expected costs attached to each method. It also identifies the role and attitude
of the governmental regulators and illustrates how to save expenses through
initial negotiations with the regulators. It identifies cost reduction options for
closure and postclosure care.
Finally, it provides some basic guidelines to estimate remediation costs. It
is extremely difficult to estimate remediation costs because a project always
changes as it progresses. Still, it is important to estimate costs well to develop
budgets and to adopt and monitor cost control activities.
This chapter is based on remediation activity to be conducted under the
Resource Conservation and Recovery Act (RCRA) and Underground Storage Tank
(UST) guidelines. These guidelines are similar to other remediation strategies
and illustrate the methods proposed below for cost control of remediation projects.

By Dr. Klane F. Forsgren, PE, Vice President-Engineering, Sinclair Oil Corporation, Salt Lake City,
Utah.

151
152 Chapter 7

II. PLAYERS IN THE ENVIRONMENTAL ARENA

To be an effective manager, a person must understand the rules of the game or

realize the elements of the arena of competition.
The environmental arena has become a major political playing field. This
has led to the enactment of more environmental legislation on both levels. With
each new federal regulation, lawmakers assign a federal agency to interpret the
law and develop a new set of statutes to enforce. Also, each state wants to control
its own destiny. Each must pass its own laws that are in accord with or more
stringent than federal laws. In many instances, state laws and state administra-
tion are at odds with federal laws and control. Sometimes business interests get
caught in feuds between the state and the federal agency.
Since the government has taken responsibility for regulating many activities
that affect the environment, the regulation process suffers from problems of
extensive governmental paperwork, heavy public involvement in reviewing pro-
posed legislation, long approval processes, overkill, cross-purposes, lack of fund-
ing, and inefficiencies.
However, these problems also provide opportunities to reduce costs. The
main goal of the regulators is to be successful. They do not like to read large
documents any more than anyone else. They generally like to be team members
and be part of the solution.
One final understanding will be helpful. All the legislative and statutory
rules and regulations were developed by governmental agencies that interpreted
congressional law. Guidance documents provided by government agencies on how
to comply with the law are large and complex. The sheer size and complexity of
the rules and regulations have frightened business managers, leading them to
get outside consultants to help them comply with the law.
Some regulators leave government service after a number of years and
become consultants. This is their career plan. The incentive for the regulator-
turned-consultant is to help the client cover all the requirements and to keep
the client out of difficulty. While this approach is appropriate, many consultants
do not attempt to simplify the process for their clients. Instead, the consultants
produce large, comprehensive studies, permit applications, and reports. They are
more likely to choose sophisticated and expensive remediation options, and agree
with agency requests for comprehensive chemical testing. The comprehensive
approach is the safest approach, but it is also the most expensive. The key to
controlling cost is to do only what needs to be done to solve the problem. The
purpose of this chapter is to provide guidance to do just that.
On the federal level, the National Environmental Policy Act (NEPA) of 1970
imposes a trustee of the environment duty on each generation of American people
and requires federal agencies to evaluate the environmental impact of major
projects and actions. The National Environmental Policy Act is managed primar-
ily by the Environmental Protection Agency (EPA), which requires EPA to pro-
mulgate and enforce most environmental regulations. Table 7.1 lists specific
legislative actions that EPA enforces, with a brief description of each action.
Other related environmental laws include:
Federal Environmental Pesticides Control Act, 7 U.S.C. 136 (FEPCA)
Hazardous Materials Transportation Act, 49 U.S.C. 1801 (HMTA)
Keys to Controlling and Reducing Environmental Costs 153

Table 7.1 Legislation the EPA Enforces

Regulation Description

TSCA Toxic Substance Control Act, 1976, 15 U.S.C. 2601

Requires manufacturers, processors, users, and distributors of chemical sub-
stances that present an unreasonable risk of harm to pretest and notify
EPA of risks before commercial production starts. Specifically restricts the
manufacture and use of chlorofluorocarbons (CFCs), PCB, dioxin, etc.
RCRA Resource Conservation and Recovery Act, 1976, 42 U.S.C. 6901;
amended by HSWA (Hazardous and Solid Waste Amendments), 1984,
42 U.S.C. 3251
Requires cradle to grave management of characteristic and listed hazard-
ous wastes. Generators, transporters, and storage facilities must obtain
permits for the active treatment, storage, and disposal of hazardous
wastes. Also regulates underground storage tanks.
CERCLA Comprehensive Environmental Response, Compensation, and Lia-
bility Act (Superfund), 1980, 42 U.S.C. 9601; amended in part by
SARA (Superfund Amendments and Reauthorization Act), 1986, 42
U.S.C. 11001
Requires the generator to clean up inactive hazardous waste sites.
EPCRA Emergency Planning and Community Right-to-Know Act, 1986,
Title III of SARA (Superfund Amendments and Reauthorization Act),
1986, 42 U.S.C. 11001
Requires all appropriate businesses to have response plans for any type
of emergency that could occur and make the plan public. Requires
communities and facilities to coordinate emergency planning for and
notification of hazardous releases.
CWA Clean Water Act, 1977, 33 U.S.C. 1251, amending Federal Water Pol-
lution Control Act, 1972, as amended by Water Quality Act, 1987, and
Oil Pollution Act, 1990 33 U.S.C. 2701
Prohibits the deterioration of surface water quality by requiring Spill
Prevention, Control and Countermeasure plans and National Discharge
Elimination System, NPDES permits.
CAAA Clean Air Act Amendments, 1970, 42 U.S.C. 7401, amending the Air
Quality Act, 1967; amended by the Clean Air Act amendments of 1977
and 1990
Sets national ambient air quality standards in terms of allowable concen-
trations levels for five criteria pollutants: carbon monoxide, sulfur
dioxide, nitrous oxide, particulates, and volatile organic compounds.
Sets technology-based standards for reducing emissions. Requires each
state to have its own implementation plan to reach clean air goals.
SDWA Safe Drinking Water Act, 1974, 42 U.S.C. 300f, enacted as Title XIV of
Public Health Service Act
Requires that suppliers of water to residents meet EPA quality stand-
ards and prevents degradation to the groundwater. Sets standards for
culinary or drinking water and monitors the systems through permits
to ensure the water meets the standards.
OPA Oil Pollution Act, 1990, 33 U.S.C. 2701
Primarily resulting from the Valdez accident in Alaska, this act requires a
company to certify that it has the ability to respond to a worst case
oil spill in navigable waters. The plan must be updated annually and
be prominently displayed at all locations where applicable.
154 Chapter 7

Migratory Bird Treaty Act, 16 U.S.C. 703 (MBTA)

Endangered Species Act, 16 U.S.C. 1531 (ESA)
In addition to the pollution control acts, the federal government has also passed
health and safety regulations that require emergency response plans. These
regulations are administered by the Office of Safety and Health Administration.
Each state has a mirror organization at the state level to administer each
of the above regulations. Each state government must qualify to operate the
federal program on the state level. This requires the state to write implementa-
tion plans for federal approval. It requires the state legislature to specifically
authorize and fund the state agency to perform a certain function.
In many cases the desires of the individual states and the desires of the
federal government are not consistent. This leads to conflict between the state
and federal forces (i.e., the federal government wants to push one aspect of
regulation and perhaps be lenient on another, but the state wants to push another
aspect of the same regulation), often with the business caught in the middle.
In many instances, the state is more stringent than the federal agency. In
other cases, the states are not proceeding fast enough in getting primacy, or the
authorization to run the program; EPA then controls the regulations, monitoring,
and penalties for noncompliance. Thus businesses end up serving two masters—in
some instances two masters who are at odds with each other.

III. CREATING AN ENVIRONMENTAL REMEDIATION STRATEGY

A. General Environmental Procedure

One good point about the procedure for environmental remediation is that cleanup
is basically the same regardless of which act applies—RCRA or the Comprehens-
ive Environmental Response, Compensation, and Liability Act (CERCLA). For
ease of discussion, the remediation activity will be based on the environmental
media affected.
For cleaning contamination in soil or in groundwater, the remediation pro-
cedure (Fig. 7.1) includes the following:
1. Report any release of contaminants. A release can be identified by seeing a
spill or deposit of waste, finding contamination in groundwater, discovering
contamination during excavation, or suspecting contamination exists be-
cause of how the site looks or from knowledge of past activities on the site.
2. Investigate the site for contamination. Determine if contamination exists; if
so, explore the extent of contamination. Write a report and submit it to the
controlling agency for approval.
3. If contamination is found, conduct a further investigation to determine how
widespread it is. A written report is provided to the agency for approval.
4. Once the extent of contamination is identified, write a remediation plan and
submit it to the controlling agency for approval. The approval process usu-
ally includes public hearings.
5. Implement the approved plan according to a negotiated time schedule.
6. After reducing the contamination to acceptable levels, formally close the
remediation work.
7. Monitor the site to ensure that it remains clean.
Keys to Controlling and Reducing Environmental Costs 155

REPORT OF
CONTAMINATION

NO
PRELIMINARY CONTAMINATION f
SITE
INVESTIGATION

CONTAMINATION

BELOW
REMOVE EXTENT THRESHOLD
AND OF
STOP CONTAMINATION

EXTENSIVE

REMEDIATION
PLAN

CORRECTIVE
ACTION

NEW RELEASE CONTAMINATION

DETECTED REBOUNDS

CLOSURE
PLAN

CLEAN
NO FURTHER REPORT AND
AGENCY APPROVAL
ACTION

Figure 7.1 Remediation flowchart.

The Environmental Protection Agency and each state establish guidelines

and regulations outlining how to complete each of these phases. The agencies
also reserve approval rights on each phase. If the agency does not approve the
proposed work on a particular phase, the site owner is required to rework the
plan or complete agency additions to the phase before it is approved.
For the Clean Water Act (CWA) and Safe Drinking Water Act (SDWA), EPA
now requires the site owner to test the water delivery system for contaminants,
such as lead, copper, and chemical constituents. For air issues, there is little
historical cleanup to do. The air regulation primarily controls what is being emit-
ted today and will be emitted in the future. Operating systems require permits.
The states are required to submit State Implementation Plans (SIPs), to show
how the state will reach an air quality condition that is safe for the inhabitants.
Each industry is required to limit emissions in accordance with the SIP.

B. Elements of the Environmental Project

Reported releases generally result from readily apparent evidence. A neighbor

may find oil in a water well, a city may find gasoline in a sewer system, a jogger
may notice a foul smelling material seeping out along a creek bank, a property
owner may find he cannot grow grass in his front yard, etc.
156 Chapter 7

GROUND LEVEL

GROUNDWATER
FLOW DIRECTION DISSOLVED PLUME
V/////////A
SATURATED ZONE

Figure 7.2 General path of contaminant that is released into the soil with groundwater
present.

In many instances, the owner is aware of a potential pollution situation. A

major spill may occur due to a tank breaking or overflowing, or a service station
owner may find a leak in an underground storage tank. All instances of a major
release must be reported to the state or EPA within a few hours.
Once a release has been noted, the owner must determine if it could cause
endangerment to human health and the environment. This normally requires
monitoring how far any hazardous materials have traveled towards a potential
receptor. Figure 7.2 illustrates a typical flow path of liquid waste that leaks into
the ground or is spilled on the ground. The monitoring can be done by extracting
and testing samples for the presence of a hazardous material. These samples
generally are taken from monitoring wells (a typical well is shown in Fig. 7.3)
that are drilled to intersect the contaminant plume. Data on the samples must
be analyzed and understood. The results of the analysis are presented in a report
to the state or EPA.
Substantial effort may be required to determine how far the contamination
has moved towards a receptor, either in the soil or in the groundwater. Normally
the agencies will require evidence that the farthest point of contamination has
been found. This means that a clean sample has been taken in each direction.
The type and size of remediation is determined by the analysis of the extent
of contamination.

C. Remediation Options

Many remediation options are available, some more successful than others. In
order to organize the options, this section will deal first with soil remediation
options and then with water remediation options. As indicated, air problems tend
to be fugitive and control of pollutants is generally done by process changes. Thus
there are generally no remediation problems with air pollution.
1. Soil Remediation
Soil remediation strategies can be divided into two general categories: treatment
by removal or treatment in situ (on site).
Keys to Controlling and Reducing Environmental Costs 157

LOCKING STEEL PROTECTIVE CASING

4' PVC SLIP CAP
CONCRETE APRON

GROUND SURFACE

- CONCRETE SURFACE SEAL

9.6' BOREHOLE
BENTONITE SEAL (VOLCLAY OR
BENTONITE GROUT)
4" SCHEDULE 40 PVC WELL CASING
(FLUSH THREAD)

1/4' BENTONITE CHIPS

(2' MINIMUM)

4' SCHEDULE 40 PVC SCREEN

(FLUSH THREAD, 0.020' SLOT,
UP TO 20' PER WELL)

FILTER PACK MATERIAL («3

. MONTEREY SAND OR EQUIVALENT
TO EXTEND ABOVE SCREEN
MINIMUM OF 2')

TOTAL 4" PVC BOTTOM CAP/SEDIMENT

DEPTH TRAP (6' LENGTH)

Figure 7.3 Construction of a monitoring well. (Construction of other types of wells is

similar.)

a. Treatment by Removal. Contamination at a site can be removed by physi-

cally excavating the contaminated soil and removing it to a location licensed to
receive the material or to remove it to a treatment process that is licensed to
treat the material. The excavation is refilled with clean material or the treated
material can be replaced if it meets the cleanliness requirements of the state.
The locations that can handle removed soil are licensed landfills. The ma-
terial may be used for cover. This applies to material that is not considered as
hazardous or medical waste. They can also be disposed at licensed landfills where
the material is deposited in a disposal area that has double impermeable liners
to prevent leaching of pollutants. This is required for hazardous materials that
meet EPA established land disposal restrictions.
Hazardous excavated materials may also be treated to stabilize them so the
hazardous material does not escape in high enough concentrations to be of
concern. These stabilized materials are generally land disposed.
The removed material may also be incinerated at temperatures above
1800°F. This procedure destroys any organic pollutant and generally oxidizes
metals to insoluble oxides that cause no problem. A variation of incineration is
vitrification where the contaminated material is heated with minerals at high
temperature to form glass. The pollutant is thus encapsulated. The encapsulated
material does not leach out and has been rendered harmless.
Soil washing is as the name suggests. The soil is excavated, put into a
washing facility, and then returned to its original place after washing (see Fig.
7.4 for a schematic diagram of a soil washing system). Often detergents or
solvents are needed to remove the contaminant from the soils. A major problem
158 Chapter 7

CONTAMINATED
SOILS

u—i

Figure 7.4 Schematicflowsheetof soil washing system.

is that the water or solvent used to complete the washing must be disposed of.
If the level of contamination is low and the materials removed by washing are
acceptable to the local public treatment plant, disposal can be fairly simple. If
the materials removed are not compatible with the local public treatment plant,
water treatment may also be needed, driving the cost up very quickly.

b. In Situ Treatment: Volatile or Biodegradable Contamination. Treating the

soil in the ground or adjacent to the contamination has obvious economic advan-
tages, but also has very strict requirements imposed by EPA and/or the state. If
the contaminant is volatile or subject to biodegradation, there are four basic
systems available: land treatment, soil venting, soil washing, and biodegradation
in slurry. Permitting is generally required in all cases.
Land treatment involves spreading the soil out in 6-12-inch layers on top
of the ground. The areas must be fenced, bermed to control runoff, and signed
to keep the general public out. Access to the air will allow some of the volatile
and semivolatile materials to escape to the atmosphere, but at a low enough rate
as to not impact the air quality. Access to air also enhances the biodegradation
that will occur naturally. Biodegradation can be enhanced by keeping the soils
moist, adding fertilizer, and tilling the soils occasionally to keep the oxygen level
high at the surface of the soils. Land treatment normally takes several months
depending on the level of contamination and the cleanup criteria required. It is
low cost, requires a lot of land, requires maintenance, and the soil is generally
removed after the treatment is completed.
Vapor extraction involves leaving the soil in place. Wells are drilled at
designed locations with the well screens being placed at the proper depth to be
adjacent to the contaminated soil. Wells are an important part of remediation
activities. Monitoring wells (as illustrated in Fig. 7.2) and pump and treat wells
are similar in construction. A vacuum is drawn on the wells mechanically. The
air is drawn from the wells bringing along the volatile materials from the adjacent
soils that naturally vaporize into the adjacent air. Depending on the type and
concentration of the volatile materials removed, the emissions may have to be
further treated by condensation or by incineration. In low concentrations, the
Keys to Controlling and Reducing Environmental Costs 159

EXHAUST

AIR

FLOW

EXTRACTION WELL
V7
SATURATED ZONE

Figure 7.5 Vapor extraction system.

materials are allowed to go directly to the atmosphere. Figure 7.5 shows a

complete vapor extraction system.
A second benefit to vapor extraction is that the movement of air in the zone
of contamination also increases the oxygen content in the zone. This increases
the biological activity in the zone and reduces the overall time of cleanup. Some
claim that more remediation occurs biologically than mechanically in this type
of system. The system is moderately priced and has no additional waste streams
to treat, but does take months to complete the cleanup.
Bioslurry technology involves extracting the contaminated soils, putting
them into a mixing container and introducing biological activity or enhancing the
natural biological activity by proper chemistry. The system is generally agitated
continuously to keep maximum contact with air, fertilized to keep maximum
growth, and heated to keep maximum activity. This system works well for heavy
contamination and restricted amounts, though some systems have been built that
handled several thousands of yards of contaminated material.

c. In Situ Treatment: Nonvolatile and Nonbiodegradable Contamination.

There are two primary methods for treating this type contamination: fixation and
extraction. The extraction process is similar to soil washing except that the
extraction vehicle is a solvent instead of water. Metals can be removed by acid
leaching, or leaching with other material such as cyanide solutions. In these
instances the chemicals used in the extraction process must then be handled.
Again the disposal problem has only moved from one media, soils, to another,
liquids. Generally there must be an economic return from recovering the metal
for this system to be justified.
Fixing the contaminant in the soil by use of cement or some other long-term
chemical binder has been used very successfully (see Fig. 7.6 for a schematic
representing soil fixing). The contaminated soils are treated with 10-20% of the
160 Chapter 7

CONTAMINATED STABILIZER
SOIL

COMPACTED - ^ PLASTIC LINER

Figure 7.6 Schematic representation of soil fixation.

binder and left in place. The binder sets up and reduces access to the contaminant.
In this fashion, the contaminant is held and will not escape into the groundwater
or move any further in the soil. Generally the location of this disposal area must
be located on the plat map of the site so that any future purchaser of the property
knows there is a solidified waste deposit on the land and its exact location.
2. Groundwater Remediation
Treating groundwater is difficult, time-consuming, and costly. If the contaminant
is a hydrocarbon, with limited solubility, the contaminant will float on the water
as well as dissolve in the water. If the contaminant is metal, it generally has
low solubility and must be removed chemically. If it is organic and heavier than
water as some chlorinated solvents are, then it almost has to be removed mechan-
ically and treated. There are many variables that can impact the cleanup and
they are generally not controllable. Some general categories of remediation tech-
nologies are listed next to give the reader some idea of the methods that are
used. A more thorough discussion of methods can be found in most textbooks on
remediation. The methods used most are pump and treat, vapor extraction, air
sparging, air sparging in conjunction with vapor extraction, and bioremediation.
Pump and treat has been used most historically, but has not been able to
clean up the contamination to acceptable levels. Experience suggests that only
about 30% of the contamination can be cleaned up with this method. Its main
value is in hydraulic control to keep contaminated water from flowing onto other
property.
Pump and treat systems involve installing wells around and in the contam-
inated area. Pumps are installed and the water is pumped to the surface. This
creates a cone of depression in the aquifer. If there is free hydrocarbon on top
of the groundwater, this cone allows free hydrocarbon to accumulate in greater
depth at the cone. A pump can then remove the free water and product into a
tank (see Fig. 7.7 for a schematic diagram of a pump and treat system). An
alternative is to place two pumps into the well. The first pump causes the water
cone and pumps only water. The second pump removes only free product.
The water removed by the pump is contaminated and must be treated before
it is disposed. Treatment can be with air strippers that will remove the contam-
inant if it is volatile or semivolatile. It can be a rapid sand filter or settling basin
if it can be chemically treated and precipitated. It can be in an aerated lagoon
Keys to Controlling and Reducing Environmental Costs 161

AIR (TREAT?)

OIL/WATER
SEPARATOR

A WATER
GROUND LEVEL ^ DISCHARGE

LNAPL
GROUND
WATER

Figure 7.7 Schematic flowsheet for pump and treat system.

or basin if the material is biodegradable. Again, treatment of the extracted

material becomes a major problem that generally is expensive.
Vapor extraction systems are installed in the same way as for soil treatment.
Free hydrocarbon floating on the groundwater will volatilize and be removed with
the air. If there is no free product some of the dissolved contamination will escape
into the air and be removed. The enhanced biological activity in the soils adjacent
to the water table will remove some of the dissolved contamination also.
Air sparging involves pumping air into wells that have been drilled into the
groundwater table. Sparging may be used alone or it can be used in conjunction
with vapor extraction. Wells are strategically located to introduce air into the water
table and to remove it. As the air bubbles up through the water table, it picks up
the dissolved contaminants. Also, as the bubbles come through the contamination
layer on top of the groundwater, they pick up product. The air and vapors are
extracted by natural convection or by the vacuum. The increased oxygen available
increases the biological activity both in the water and in the soils adjacent to the
water. See Figure 7.8 for a complete air sparging/vapor extraction system.
Bioremediation of the groundwater in place is accomplished by increasing
the oxygen concentration in the water and adjacent soils. In rare instances the
naturally occurring biological activity must be augmented by inoculation of ad-
dition bacteria that have been developed specifically for the contaminant in the
water. In most instances the native bacteria is already acclimatized to the sur-
roundings and are best able to neutralize the contaminant. In many instances
the natural biological activity can be enhanced by adding nutrients that are used
as food. These nutrients are generally readily available in the form of commercial
fertilizers. Chemical analysis of the aquifer conditions can determine the need
for oxygen and nutrients.
162 Chapter 7

EMISSION
CONTROL
UNIT

SATURATED ZONE
AIR
FLOW

Figure 7.8 Schematic diagram of a vapor extraction/air sparging system.

D. Controlling Cost of Corrective Action Requirements

Control of remediation costs starts very early in the process. Cost savings begin
with the studies that are completed to define the nature and extent of the
contamination. Cost saving methods are discussed for each of the phases of the
remediation process.

E. Controlling Cost Through Front-End Management

Remediation activities are almost always done with the approval of the respon-
sible agency, EPA or state. Normally a remediation plan is submitted and ap-
proved before any activity is allowed to proceed. The plan that is approved
controls what will be required and must be negotiated with great care.
In most instances, the agency will follow the guidance manuals prepared by
EPA. These guidance manuals have been developed by regulators who have not
had much actual experience or by consultants who want to be sure they have
covered all the possible conditions. Accordingly, the guidance documents tend to
be very conservative and will overkill rather than miss something. It is wise to try
to negotiate a scope of work that will accomplish the necessary objectives with the
minimum amount of expense. Some specific examples are discussed below.

F. Managing Sampling and Analytical Expenses*

During the study phase of a remediation project, the analytical costs can be 40%
of the total cost. Therefore the number of samples taken and the amount of

Cost figures cited in this chapter are 1995 costs.

Keys to Controlling and Reducing Environmental Costs 163

chemical analysis required on each sample are very important. Also the method
of taking the samples can make a great difference. Drilling wells will cost between
$50 and $75 per foot. Alternatives are pushing a probe into the aquifer to take
a sample and then removing the probe. No further sampling is required and the
cost is about 25% of drilling. Another option is digging a hole with a backhoe to
test groundwater. It is much less expensive than drilling. Also, the geotechnical
analysis is more complete and easier as it comes from visual observation of the
complete area rather than visual observation of core samples.
If there is a well on the site, the regulator will want it sampled, generally
on a quarterly basis and occasionally on a monthly basis. If there is no well, no
sampling can occur.
The cost to perform an analysis of volatile materials such as benzene, ethyl
benzene, toluene, and xylenes is about $100. The cost to test eight metals nor-
mally required for RCRA investigations is about $100. These two samples will
tell about all that is needed initially for hydrocarbon contamination. The agency
people are told in the guidance documents to require a complete Appendix IX
chemical analysis; this includes about 222 chemicals that EPA has designated
for testing in groundwater monitoring. This will cost about $1,000 per sample.
If the requirement from the agency also requires toxicity characteristic leaching
procedure analysis of the soils, the total cost will be about $2,000 per sample.
With this in mind, the number of sampling sites, the method of obtaining
the samples, the types of chemical analysis required, and the type and frequency
of sampling over the term of the study and remediation are very important. It
is not uncommon for the agencies to approve a lighter sampling and analysis
plan after the initial sampling is done. For example, they may require an Ap-
pendix IX analysis for the first sampling event and allow tests the next three
quarters for only those contaminants found in the first round or expected because
of the nature of the process causing the contamination.
The agency may require the complete chemical analysis again at the start
of the second year. Following these sampling events, they may allow analyzing
only for the contaminants found for the rest of the sampling and analysis work.
This approach can reduce the cost of analytical work to 25% of the cost recom-
mended in the guidance manuals.

G. Writing Reports

Historically the reports sent to the agencies have been very large and very
involved—and thus very expensive. The agency is no more excited about reading
these large documents than the author is about writing them. In many instances,
the original plan of action includes much background information on the site and
the contamination. This background information may cover geological informa-
tion; surface water and groundwater location and use; location of receptors and
pathways to reach them; previous work at the site; potential to emit contami-
nants; and general information.
The guidance manuals suggest that even though this information does not
necessarily change, it should be included in each subsequent report. Discussions
with the agency people during the acceptance of the plan of action can often lead
to reductions in report size by referencing the previous work. This is especially
true with data that has been generated and reported previously.
164 Chapter 7

The final report for a major study can be an accumulation of reports written
after each phase of the study. Normally the agency will require interim reports
outlining the progress of the work. These interim documents should be written
so they become various chapters of the final report thus reducing dramatically
the cost to assemble the final report.
The use of electronic methods to report data is becoming more widespread.
Baseline data used in assessing cleanup or in establishing permit conditions can
be reported by disc rather than written page. Eventually, extensive volumes of
data will be handled by computer disc.

H. Writing Permits

The same comments apply to permit applications as to report writing. The

guidance documents require many sections that give the background and previous
history and data of the site to be included in the permit application. Discussions
with the agencies can lead to allowing references to documents rather than
reproducing them again in the permit application. This can reduce a six-volume
permit application to one or two volumes.

I. Providing Financial Assurance

Providing financial assurance for the cleanup or permitting activities is a major

task that few people realize must be completed. The financial implications of the
financial assurance requirements are very large. The Environmental Protection
Agency uses multipliers in determining how much financial assurance is neces-
sary. Normally the cost of the study, cost of remediation, and cost of postclosure
care are required to be assured by some financial instrument. The Environmental
Protection Agency uses a multiplier of the actual cost to determine the amount
of the instrument. This multiplier can be six times actual cost. This multiplier
is to cover the guarantees that fail or to cover costs that were underestimated.
In many instances, the consultant will establish the cost to complete a study
or to clean up a site based on literature data or rules of thumb. These costs are
always high in order to cover the difficult conditions that can occur. It is critical
to review the cost estimates proposed and reduce them where ever possible as
the savings will be multiplied.

IV. ESTIMATING THE COST OF REMEDIATION

The cost to perform remediation of a hazardous release is extremely site-specific.

It depends on the quality of the negotiations completed during the assessment
phases of the project, specifically during risk assessment. While conserving costs
during the assessment phase is important, an incomplete survey and analysis
can lead to major unnecessary work with its attendant costs.
For example, an oil company determined the extent of contamination at a
site and estimated cleanup at $3,000,000. During the cleanup work, they discov-
ered another area, larger than the original area that had to be cleaned up. The
company had already agreed with the state agency to excavate and remove the
contamination. When they completed the total excavation the cost had escalated
Keys to Controlling and Reducing Environmental Costs 165

to $17,000,000. Had they known the full extent of contamination at first, they
would have chosen an in-situ stabilization approach or a no-action approach.

A. Cost Estimates for Simple Sites (Less than One Acre in Size)

Simple sites can be defined as those areas smaller than one acre. These sites
may be service stations or underground storage tanks. Such sites tend to be
similar and not very complicated. In these simple sites, there may be two to
three levels of assessment. Assessment costs generally run $2,000-5,000 for the
initial assessment and $20,000-25,000 for the verification assessment (which uses
4-6 ground monitoring wells). If additional extent of contamination work is
needed, it may require additional wells and will likely cost between $15,000-
25,000 more. By the end of the assessment phase, the best remediation method
will be determined and the total cost of the cleanup can be estimated.
Wells for product recovery and/or monitoring usually cost $50-75 per linear
foot of depth. Vapor extraction wells or soil venting wells will be a little more
expensive, generally $60-80 per linear foot of depth. If air sparging is added to
the system, more wells are needed and air sparging will generally add an addi-
tional $20 per well for existing wells. About $100 per foot is a typical cost for a
new combination vapor-extraction, air-sparging system.
Analytical work for simple sites such as Leaking Underground Storage
Tanks can generally be limited to those analytes anticipated either due to process
knowledge or previous analytical data. Testing for any additional chemicals is
expensive and adds nothing to the study. Table 7.2 gives examples of analytical
costs that are usually involved in remediation activity. Installation of pump and
treat systems generally costs about $16,000 per operating well. Operating costs
generally run about $1,500 per well, per year.
Installation of vapor extraction with no air treatment will cost about $4,000
per well. The cost for addition of air treatment to vapor extraction will range
between $40,000 and $100,000 per site. The annual operating costs for vapor
extraction and air sparging are generally about the same and range between
$1,200 and $1,500 per well, per year.
Cleanup costs at smaller sites will generally run from $10,000 (no remedi-
ation) to $500,000 (major remediation) and average about $150,000.

B. Cost Estimates for Sites Larger Than One Acre

Table 7.3 compares the various elements of a remediation project for medium-
and large-sized sites with simple sites. The estimate should include all of the

Table 7.2 Analytical Costs

Method of analysis $US/sample (1995)

Full TCLP 1,800

Appendix IX 1,200
Skinner's list (modified Skinner's list) 800
BETX 90
BOD/COD/TSD 50
166 Chapter 7

Table 7.3 Estimating Remediation Costs ($1000 US)

Phase of remediation Simple Medium Large

Assessment
Initial 2-5 5-15 20-50
Second 20-25 50-75 100-200
Extended 15-20 40-60 100-150
Pilot test 15-20 15-20 20-40
Analytical
Initial 1 3 5
Second 10 30 50
Extended 10 30 50

elements shown. The following rules of thumb can be helpful in estimating the
cost of the remediation.
• The assessment will involve determining the extent of contamination, which
will likely involve monitoring wells. Establish enough to locate all potential
releases. The wells will cost the amounts shown previously.
Analytical work will generally run about $2,000 per well for the first sam-
pling event. Later events will be less. Knowledge of the site history and the
processes on the site can help establish the possible analysis. From this cost
laboratory work costs can be estimated.
• The cost of consultants is generally 50% of the total cost of the work in the
assessment phase. With the number of wells estimated and the laboratory
costs estimated, the total cost of the assessment phase can be determined.

C. Current Remediation Costs for Various Disposal Options

Table 7.4 is a summary of the cost of disposal in today's market. The trend in
cost of disposal has been declining as the industry becomes more competitive
with more disposal sites and available disposal ideas. Get price information from
several sites before deciding on the contractor or the method. Most disposal
systems will negotiate on price.
Once the extent of contamination and the components of the contamination
are understood, the remediation methods can be evaluated and cost estimates
made.

D. Selecting Disposal Sites and Methods

Of major importance is the selection of the disposal site if one is used. There are
ample case histories of improper disposal at sites that required the original
suppliers of the hazardous waste to clean up the site. A company in Utah was
accepting waste oil, solvents, and other volatile organic compounds for disposal.
The site was licensed with the state so everyone using the site felt it must be
okay. The truth was that the hazardous material was not being handled according
Keys to Controlling and Reducing Environmental Costs 167

Table 7.4 Unit Cost for Various Remediation Options

Option 1995 unit cost ($)

Incinerate:
Liquid wastes $0.60/lb plus shipping and analytical costs
Solid wastes $l/lb plus shipping and analytical costs
Used as fuel for $0.22/lb plus snipping and analytical costs
power generation
Excavate and move $35/ton for nonhazardous materials, plus shipping and
analytical costs
$100-$300/ton for hazardous materials that meet land disposal
regulations, plus shipping and analytical costs
Vitrify $l/lb plus shipping and analytical costs
Stabilize in place $60-$100/ton plus analytical costs

to regulations. The site was finally shut down by EPA. The disposal company
went broke, the owner was indicted, and there was no company money to clean
up the site. The Environmental Protection Agency required the site to be cleaned
up under CERCLA jurisdiction. As a result, each company that deposited any-
thing there is legally responsible for its share of the remediation costs. With the
addition of legal and attorney fees, the problem became very expensive.
Before selecting a disposal site, it is crucial to evaluate the site carefully.
The evaluation should include but not be limited to the following:
Contact the state and EPA about condition of the disposal site's license. Ask
if the site has had any violations in the last 3-5 years.
Check the financial strength and insurance of the site in case of failure to
perform.
• Visit the site and perform a personal audit or evaluation to ensure that the
site is well managed and in compliance.
• Negotiate a contract that gives as much protection as possible.

E. Estimating Closure Costs

Estimates of closure costs are also site-specific. Closure usually involves capping
the waste in place, stabilizing in place, or a combination of the two. Table 7.4
gives the cost to stabilize. The cost of capping can be determined by classical
civil engineering estimating once the permeability of the cap has been decided.
Engineering costs for closure activities usually run about 20% of the total cost
due to the need for certification of the closure and the extra supervision required.

F. Estimating Postclosure Costs

Postclosure care for sites that have affected the groundwater can go on for 30
years. If the closure is without impact on the ground or groundwater, then the
sampling is usually completed in less than 5 years. If the site is in-between, then
the monitoring can go on for several years.
168 Chapter 7

The costs of postclosure are analytical, reporting, and maintenance of the

site. Again, these are site-specific. Usually the analytical costs can be reduced
over time as the results become more predictable. It is important to negotiate a
reduced testing load as time goes on. Analytical costs generally run about $2,000
for each well at the beginning of the postclosure period. Sampling for the first
year will probably be quarterly. After a site history is developed, sampling can
be reduced to semi-annual and then annual periods. The analyte list can also be
reduced to bring laboratory costs to less than $500 for each well.
The high cost of postclosure care is great incentive to remove the contami-
nated materials from the site. New waste treatment facilities should be built in
such a manner as to clean close them. Clean-closed sites require only one year
of monitoring, whereas other sites that leak contamination need to be monitored
for several years.

V. CONTROLLING COST IN REMEDIATION

A. Site-Specific Risk Analysis and Cleanup Standards

Before selecting a remediation method, an understanding and agreement on the

risk posed by the site should be reached with the agencies. Always insist on a
site-specific risk assessment to determine the risk.
Many states do not understand risk assessment or what it means. They
have adopted a single set of cleanup standards based on literature values or
research done in other parts of the country which have little bearing on any
specific location. This may drive the cleanup to a level higher than is necessary
and on a time frame that is unnecessary.
Risk assessment is a process to review the nature of the contamination,
understand its pathway, recognize the potential receptors of the contamination,
and determine how much of an increase of the contaminant there is to the natural
background which may increase the harm to human health and the environment.
Cleanup levels for contamination are generally driven by the potential con-
tamination of the groundwater. Contaminated soil must be cleaned to a level that
will keep the contaminant from leaching to the groundwater.
Once the water is contaminated, the cleanup level is generally driven by
the use of the water. In most instances, the standard will be drinking water
standards or maximum contamination levels. These are very high standards and
in many instances cannot be reached very quickly or can only be reached with
the help of dilution.
Therefore, cleanup standards may need to be based on what the technology
can deliver rather than some other standard. One example of this approach is
to treat groundwater until there is negligible improvement in the aquifer. At that
time, the cleanup system can be shut down for a while, operating it again as
needed until no further improvement occurs. It is important to have a way to
trigger no further cleanup action required by the agency. Otherwise the cleanup
can go on and on with no real improvement to the environment.
Negotiate with the agencies the point of compliance for the remediation. Try
to establish the compliance point at the edge of the property so that the critical
cleanup is from the property line out. If there is low risk outside of the property,
Keys to Controlling and Reducing Environmental Costs 169

the agency may allow use of nature to help without causing harm to human
health or the environment. The remediation activity that occurs on the property
can then be integrated with other normal operational activities and dramatically
reduce the cost.
Once the above activities are complete, the remediation method for the site
can be selected. The time frame required, the points of compliance, and the levels
are now known. If time permits, the remediation may be implemented in phases.
For example, hydrocarbons may exist as a free product and as dissolved constit-
uents in the groundwater. If the groundwater is not moving very quickly, a vapor
extraction system may be implemented first to see how it performs. If the cleanup
is too slow, the system can be enhanced by introducing air sparging. If vapor
extraction will do the job alone, why include air sparging or a skimming pump?
The remediation method can be simple and still accomplish the task.

B. Selecting Contractors

The same principles used in selecting contractors for normal construction work
apply for seeking contractors to perform studies, design and install remediation
systems, and run analytical tests. In the case of environmental work, additional
sets of safety issues must be addressed, especially if the hazardous materials are
highly toxic. Remediation work may require special and expensive clothing, res-
pirators, and equipment. If the contractor is not sure what will be required, the
bid price may be increased to cover these unknowns. Therefore, invite the contrac-
tors that bid on the project to see the site and have a clear understanding about
the work.
The whole market for environmental work has developed much slower than
most expected. There are several treatment, storage, and disposal (TSD) facilities
that were built expecting very large projects and large amounts of material to
be handled. They expected their services to be very important and unique, and
therefore charged high prices to cover the many unknowns they faced. Because
of good management by industry, these markets have grown slowly and are very
competitive. The costs to use TSD facilities continue to fall. It is important to
compare options and find the best fit for the company.
The cost of professional services are more likely to be negotiated now than
a few years ago. The conditions change, but by discussing the project with a
contractor and then working with the consultants to define a scope of work that
fits the needs, costs can be reduced. The cost can be negotiated based on the
work and the time frame needed to accomplish the work.

C. Controlling Cost in Closure and Postclosure

Part of the remediation work may be closing sites that were used in the past to
dispose of hazardous materials. The purpose of the closure is to stop any hazard-
ous material that may be deposited on the site from leaching into the groundwater
or from contaminating adjacent soils.
Regulations require that the cost of performing the site closure be estimated
as if an outside contractor would do the work. This will ensure that if the cleanup
must be managed by an agency, the agency will have adequate monies to complete
the work. Unfortunately, many consultants perform the cost estimates using
170 Chapter 7

standard methods and rules-of-thumb rather than dealing with specific sites. This
leads to excess costs for mobilization, per diem expenses, earth moving, etc. The
cost hurts twice as it is used to determine the size of the financial instrument
used for financial assurance.

D. Renegotiating Closure or Postclosure Scope

Postclosure care is required for most sites, even in facilities that continue to
operate. If a hazardous disposal site is taken out of service, or if the agency
requires a site to be closed according to regulations, a postclosure care plan will
be required. Normally this requires a series of monitoring wells be placed around
the closed site to determine if a release of hazardous materials occurs from the
site in the future. The monitoring frequency and the chemicals monitored become
critical to the cost and to the amount of financial assurance needed.
The location of the facility and the site-specific risk assessment should be
central to renegotiating closure and postclosure activities. Agencies can be per-
suaded to follow a less aggressive program or allow leniency in the time frame
to reach cleanup standards when they are convinced that the project is being
well-managed and is under control. Closure and postclosure plans need to em-
phasize the management plan and how it will keep the site from becoming a
hazard to human health and the environment in the future.

E. Renegotiating Frequency of Sampling

After the first few years of monitoring, a reduced level of sampling and a reduced
chemical list can be negotiated with the agency, based on one or two years of
data that show that nothing is happening. If the agency will not agree in the
initial plan, sample for one or two years, gather good data, and obtain a revision
of the postclosure care plan to reduce the level of analytical work required.

VI. NOMENCLATURE

Appendix IX A list of approximately 222 chemicals designated by the

Environmental Protection Agency to be tested for in
groundwater monitoring
BETX Benzene, ethyl benzene, toluene
BOD Biological oxygen demand
CAAA Clean Air Act Amendments
CERCLA Comprehensive Environmental Response, Compensation,
and Liability Act (Superfund)
CFC Chlorofluorocarbon
COD Chemical oxygen demand
CWA Clean Water Act
EPA Environmental Protection Agency
EPCRA Emergency Planning and Community Right-to-Know Act
ESA Endangered Species Act
FEPCA Federal Environmental Pesticides Control Act
HMTA Hazardous Materials Transportation Act
Keys to Controlling and Reducing Environmental Costs 171

HSWA Hazardous and Solid Waste Amendments to RECRA

LUST Leaking underground storage tank
MCL Maximum containment level
Modified Skinner's list of chemicals reduced to less than 55 chemicals
Skinner's
list
MBTA Migratory Bird Treaty Act
NEPA National Environmental Policy Act
NPDES National Pollution Discharge Elimination System
OSHA Occupational Safety and Health Administration
OPA Oil Pollution Act
PCB Polychlorinated biphenyl
RCRA Resource Conservation and Recovery Act
SARA Superfund Amendments and Reauthorization Act
SDWA Safe Drinking Water Act
Skinner's list A list of 55 chemicals specific to hydrocarbon contamination
TCLP Toxicity characteristic leaching procedure
TSCA Toxic Substance Control Act
TSD Treatment, storage and disposal
UST Underground storage tank
8
Contracting—Front-End Risks, Key
Contract Administration, and
Cost-Schedule Considerations

I. GENERAL OBJECTIVES

It is essential that contract administration and management result in reducing

risks, maximizing cost savings, minimizing claims, and improving economic re-
turn. These results can only be achieved through effectively managing contract
risks by developing tough but fair contract documents, engaging in aggressive
negotiating practices, and using outstanding communication skills.
The process of reaching a contract requires a specific sequence of steps. In
taking these steps, the project manager must make a series of choices between
priorities for project objectives, degrees of risk to be assumed by the contracting
parties, control over project activities, and the cost of achieving selected goals.
This process must first be fully understood by the project manager, then be
tempered by experience, and finally be expanded into the ability to reach a
contract through the exercise of negotiating and communications skills.

II. WHAT IS A CONTRACT?

A contract is a mutual business agreement recognized by law under which one

party undertakes to do work (or provide a service) for another party, for a
consideration. Contracting arrangements cover such subject as:
• contract conditions,
• commercial terms and pricing arrangements,
• scope of work (technical), and
• project execution plan.

173
174 Chapter 8

III. WHY HAVE A CONTRACT?

A written contract is the document by which the risks, obligations, and relation-
ships of all parties are clearly established, and which ensures performance of
these elements in a disciplined manner. For the owner, the contract is the means
by which the contractor can be controlled, and ensures that the work and end
product satisfy the owner's requirements. For the contractor, the contract speci-
fies risks, liabilities, and performance criteria, and outlines the terms and con-
ditions of payment.

IV. PARTIES TO THE CONTRACT

Most projects are executed under a three-party contractual relationship among:

• the owner, who establishes the form of contract and general conditions;
the engineer, who can have the following three roles:
- designer: carrying out the detailed engineering work and purchasing
equipment and material on the owner's behalf,
- arbitrator: acting as the owner's agent in administering the contract,
and impartially deciding on certain rights of the parties under the
contract, and
- project manager: handling design, procurement, and construction or
construction management/services; and
• the contractor, who responds to the risks and liabilities of the general
conditions.
The normal contractual relationship among these three parties on a single
project is for the owner to have one contract with the engineer for design,
procurement, and other services, and a separate contract with the contractor for
the construction work. No contractual relationship exists between the engineer
and the contractor. This is usually referred to as a divided or split responsibility
arrangement. In an alternative arrangement called single responsibility, a general
contractor is awarded total responsibility for engineering, procurement, and con-
struction. This is known as an engineering, procurement, and construction (EPC)
turnkey or design and build contract.
The project manager must carefully decide on a specific contracting arrange-
ment as outlined in the "Contracting Strategy" section.

V. CONTRACT RESPONSIBILITY

The project manager should be responsible for the contract strategy that is
developed as part of the project strategy. However, the proposed division of work,
contracting arrangements, forms of contract, and bidder's lists should be devel-
oped in conjunction with the company's contracts department and the engineer-
ing/construction groups.
In the contracting process, dividing responsibility between the project man-
ager and the contracts department can lead to inefficiencies, disagreements, and
delays, since the organizational conflict can have a negative impact on the project
Contracting 175

cost and schedule. Close coordination and effective communications must exist
among all groups to ensure complete agreement and commitment to the proposed
contracting program. This is particularly important in all submissions to contract
committees and/or senior management.
The project manager must obtain agreement from the company's legal,
contracting, and insurance departments before committing to contractual lan-
guage regarding liability, indemnity, or insurance.

VI. ASSESSING RISK AND COST LIABILITIES

Engineering and construction contracts can be drawn up in any number of

formats, depending on the project objectives, the skills and resources of the
company, and the skills, resources, and financial resources of the contractor. The
most successful contracts have at least one fundamental in common: thoughtful
and thorough preparation by the company before the contract is let. Figure 8.1
depicts a flowchart of typical contracting arrangements and illustrates the major
steps in this process.
Project complexity, changing and increasingly costly legal/insurance require-
ments, and difficult business environments mandate a correct contracting ar-
rangement, even though contracts must be made early in the life of a project.
Yet failure to institute quality front-end planning is common and often leads to
poor contracting arrangements. To develop proper contracting arrangements
while simultaneously providing for the risks of uncertainties, gaining improved
performance, and promoting innovation, is a major challenge for both company
and contractor.
Risk is defined as the possibility of financial loss or personal injury. It can
mean delay in schedule, with a resultant loss of market and poor quality of
engineering and construction. Both parties must approach contracting with the
aim of meeting their respective goals, recognizing the interests of the other, and
allocating responsibility for risks in according with the ability of each to control
or minimize those risks.
All projects have at least three goals: achieving the most economical (but
not necessarily the cheapest) cost, quality, and schedule. These goals are not
always fully attainable in any one contract, so compromise is usually necessary
to achieve a balance. The contractor needs to make a profit on the contract, but
may well have other goals, such as long-term needs for survival, growth, a greater
share of the market, and to keep competitors out.
Allocation of risk must be carefully considered. It should be based on the
degree of liability, the potential profit from proper risk management, incentive
provisions to perform the contract more effectively, and the relative ability of the
parties to protect themselves against risks. Naturally, risk is a two-way street,
since exposure to economic loss is balanced by possible extra gains through proper
risk management.
The underlying philosophy of any contracting program should be that the
contract provides the means to manage and allocate risk. The contracting strategy
needs to be built around a recognition of the relationship between contract terms
and conditions, and the accompanying risks and cost impacts. The type of contract
and specific language should flow from this analysis.
 176 Chapter 8

WORK/PROJECT
INITIATION • GOOD SCOPE DEFINITION
Identify
a Need
DEVELOP • QUALITY PLANNING
QUALITY
Conceive Solutions S.O.R.
and Son:
• EFFECTIVE APPROVAL/DECISION MAKING
Estimate and Feasibility I ???
Analysis
Large Project Approach

!• EPCTURNKEY CONTRACT*.
DESIGN
CONTROL
POINT "0 General Contractor • *

Lump Sum •/-.•'.

• Small Project I Estimate I Engineering Only Reimbursable *
D.c.0.8 •••••••••••• I,L. ,i.., I L L I 777 _
Detailed Engrg. fcj
and Specification | - |« .'.Subcontractors: / 1

Estimate

Work By Own Forces =•——; 1

Requisition ^ ^ ^

Construction
Only

Invoicing

Expenditure

• ORGANIZATIONAL COMMITMENT

• PROJECT "DISCIPLINE"? ? ? ? ?

Figure 8.1 Contracting arrangements.

Contracting 177

Failure to manage risk can result in project cost overruns of a catastrophic

magnitude. One study of major U.S. owners and contractors concluded that
contracting practices alone can result in cost impacts equivalent to 5% of the
total project costs. These impacts can be positive or negative, and, in a buyer's
market, could be even greater than 5%.
In a competitive and inflationary economy, project managers must become
increasingly risk conscious in order to survive. They need to be able to recognize
risk elements, understand risk accountability, know the capabilities required to
manage risk, and be able to properly share risk through adequate contractual
arrangements.
Since the overall financial responsibility for any project rests initially with
the company, it is logical that the company take the lead in risk evaluation. This
activity should cover every element of the engineering and construction process
that can be characterized as a potential cost. Figure 8.2 contains examples of
typical potential risks requiring contractual coverage.
Initially, all risks are the company responsibility. It is only after a contract
is consummated that some of the risks become the contractor's responsibility. It
is therefore important that the project manager understand how accountability
varies with the type of contract. For example, the cost impact of labor productivity
is the contractor's risk in a fixed-price contract, yet it is the company's risk under
a reimbursable arrangement. Figure 8.2 also identifies accountability for various
risk elements under fixed-price and reimbursable contract arrangements.
After identifying the risks associated with a particular project, the project
manager must decide which risks the company should assume. If experienced
personnel are available, the project manager may decide to use a reimbursable
contract for schedule reasons. Likewise, if the workload is high or the company
does not have sufficient experience or resources, the project manager may select
a fixed-price contract, which will transfer the risk to the contractor and use the
contractor's expertise. The main objective is to match capability and accounta-
bility with project objectives and to avoid the mistake of assuming risk accounta-
bility without the resources for effective risk management.
It is important that both company and contractor understand and accept
the concept that effectively managed projects should reward both parties. Con-
tracts that facilitate risk management benefit the company through lower costs
and shorter schedules. Acceptance of accountability and superior risk manage-
ment by the contractor should result in additional profit.

VII. PROJECT EXECUTION STRATEGY

An essential decision in execution strategy is whether to contract and to what

extent. Before developing an execution plan, the scope of work must be estab-
lished. This starts with identifying the type of facility, the required operational
date, desired project life, reliability, necessary supporting facilities, a statement
of the scope of work, and a preliminary work sequence can be developed for use
in preparing a bid package.
A prerequisite for achieving the best contract is the project manager's commit-
ment to thorough project planning. It is crucial that all project support groups
be represented in the planning so that all constraints and trade-offs are considered.
 Cost Cost Impact Cost Cost Impact Cost Cost Impact
Accountability to Owner Accountability to Owner Accountability to Owner

Fixed Reim- Fixed Reim- Fixed Reimb- Fixed Reim- Fixed Reim- Fixed Reim-
Price bursible Price bursible Price bursible Price bursible Price bursible Price bursible

Labor Productivity L H Safety M M Project Management L L

a. Management of workforce C 0 a. Training C 0 a. Adequate design drawings O/E O/E

b. Timing and quality of O/E O/E b. Contractor's minimum c 0 b. Timely procurement and O/E O/E
engineering data and standards delivery of materials and
equipment c. Owner's mandatory 0 0 equipment
c. Quality assurance 0 0 standards c. Limitation of number of O/E O/E
d. Quality control C 0 d. Regulatory standards c c changes and revisions to
(OSHA, etc) drawings and specifications
Scope H L e. Industrial hygene S s d. Quality of fabrication of O/E O/E
materials and equipment
a. Initial scope definition O/E O/E Schedule H H
b. Changes in scope O/E O/E
a. Manufacturer's promised c 0
Indirect Costs L H deliveries
b. Owner-supplied material C 0
a. Staff C 0 c. Contractor-supplied material C 0
b. Consumables C 0 d. Personnel resource C 0
c. Support crafts C 0 e. Personnel productivity C 0
d. Materials management C 0 f. Scheduling techniques C 0
g. Schedule duration 0 0
Quality Construction M M h. Extended overtime or shifts 0 0 LEGEND

C - Contrac or
a. Complexity of design O/E O/E Labor Relations L L
b. Completeness of O/E O/E
E - Engineer
engineering drawings a. Jurisdictional disputes C 0
S - Shared
c. Construction procedures C O/E b. Illegal strikes and walkoffs C 0
and methods c. Contract expiration strikes C 0 L - Low
KA KAckri'n tm

d. Construction schedule O/E O/E d. Jurisdictional disputes c 0 m - Medium

e. Experience of crafts C 0 between contractors H - High
f. Training of crafts C 0
g. Supervisory personnel C 0
h. Construction equipment and C 0

i. Quality control procedures C 0

Figure 8-2 Cost impact of controllable risks.

Contracting 179

VIII. CONTRACTING STRATEGY

A. Introduction

Once the decision is made to contract, there is a wide variety of single or multiple
contracts from which the project manager may select a contracting strategy. These
fall into two major categories: fixed-price, in which the contractor has primary
cost responsibility, and cost-reimbursable, in which the company has primary cost
responsibility. Variations and combinations of these two types can be formed,
depending on the degree of risk assumed by either party. The three objectives of
cost, time, and quality must be placed in an appropriate priority, since tradeoffs
will probably be necessary in deciding on the specific contract.
If the contractor is to assume direct cost responsibility, a fixed-price contract
is appropriate. However, the total project time is usually longer with this type
of contract, since the project drawings and specifications must be more complete
before bids are solicited. The bidding time is longer as well.
Cost risks must be balanced against the need for speed—an increasingly
important aspect if borrowed funds are being used to finance construction in an
era of high interest rates. With a cost-reimbursable contract, it is more difficult
to predict the final cost, but shorter construction schedules can usually be a-
chieved. The schematic drawing contained in Figure 8.3 illustrates the wide range
of schedule tradeoffs that project managers must consider in formulating a con-
tracting strategy. The project manager can also specify the particular quality
objectives or other performance goals that are desired. Under either type of
contract, the level of quality must be established through the specifications.
In addition to the company's goals, the contractor's objectives should be
considered. On large and long-term projects, for example, a contractor is reluctant
to accept the risk of a fixed-price contract. On the other hand, if there is vigorous
competition for work due to economic or other reasons, contractors may readily
accept fixed-price contracts, which should result in lower bid prices.

B. Summary of Contract Strategy

As covered in the project strategy, the following are major considerations when
developing a contract strategy for the project:
When and how will the work be divided up? Should it be EPC turnkey or
separate EPC?
• How will the division of work affect client/project team/main contractor/ven-
dor/subcontractor interfaces? This division enables the project coordination
procedures to be properly prepared.
• What type of contract should be used? Segment the project into discrete
work packages to facilitate management, and subject the work packages to
available resources. Consider the contract philosophy, the type of contract
best suited to the project, contract interfaces, bid evaluation techniques, and
bid documentation. This enables the contract strategy to be produced in
liaison with the contracts department.
What roles are licensors and consultants expected to play? This allows
arrangements to be made for prequalifying suitable contractors, issuing
invitations to bid, evaluating bids, and making award recommendations.
180 Chapter 8

©L
• ENGINEERINC
r /

©1
f
1 REQUIRED /
• TO START
H CONTRACT
1
1
©1
¥
-1m
H
-ST/5 RTOF CONTRACT

f
f\
oon tct*T

I \ COMPLETION

1
(T)m 1
PROJECT DURATION

1 COST REIMBURSABLE W / % FEE

2 COST REIMBURSABLE W / FIXED FEE
3 TARGET PRICE
4 GUARANTEED MAXIMUM PRICE
5 LUMP SUM FIXED PRICE

Figure 8.3 Project schedule duration versus type of contract.

Are there potential conflicts of interest with other owner projects in con-
tractor offices, vendor workshops, or fabrication yards? Such conflicts can
have an impact on the bidder's list.
What is the availability of skilled labor? What is the local industrial rela-
tions climate at fabrication yards and the construction site? Lack of labor
can delete a contractor from the bidder's list.
What is the quality and availability of personnel to develop, evaluate, and
administer the required type of contract/contract conditions?
What is the total financial risk to bidder's financial strength?

IX. CONTRACTING ARRANGEMENTS

Three principal types of contracts exist: reimbursable, measured (unit price), and
lump-sum. The following forms of contract are typical of these types:
• cost-reimbursable (time and materials),
• cost-reimbursable with percentage fee,
• cost-reimbursable with fixed fee,
• cost-reimbursable plus cost/schedule bonus and/or penalties,
• measured unit price (mostly construction),
• guaranteed maximum price, and
• lump-sum/fixed-price.
The objectives of cost, time, quality, risks, and liabilities must be analyzed and
prioritized, since tradeoffs will probably be necessary in deciding the type of
contract to be used.
Contracting 181

A. Reimbursable-Cost Contracts

These require little design definition but need to be drawn in a way that allows
expenditures to be properly controlled. The major advantage of a reimbursable-
cost contract is time, since a contract can be established during the early stages
of a project. This type of contract presents a disadvantage to an owner, however,
since poor performance by the contractor can result in increased costs and be-
cause final costs are the owner's responsibility. Further, the final or total invest-
ment level is not known until the work is well advanced.
Reimbursable-cost contracts can contain lump-sum elements such as the
contractor's overhead charges and profit, which is usually preferable to calculat-
ing these costs on a percentage basis. Reimbursements may be applied to such
items as salaries, wages, insurance and pension contributions, office rentals, and
communication costs. Alternatively, reimbursement can be applied to all-inclusive
hourly or daily rates for time spent by engineers on the basis that all office
support costs are built into these rates. This form of contract is generally known
as a fixed-fee or reimbursable-cost contract, and can be used for both engineering
and other office services as well as for construction work.
Such arrangements give the owner greater control over the contractor's
engineering work, but reducing the lump-sum content of the contractor's remu-
neration also reduces its financial incentive to complete the work economically
and speedily. Further, it lessens the owner's ability to compare and evaluate
competitive bids, since only a small percentage of the project cost is involved.
Finally, it is possible that the best contractor may not quote the lowest prices.
1. Requirements

competent and trustworthy contractor,

• close quality supervision and direction by the owner, and
• detailed definition of work and payment terms covered by lump sums and
by all-inclusive rates.
2. Advantages

• flexibility in dealing with changes (which is very important when the job is
not well defined), particularly if new technology development is proceeding
concurrently with the design;
• early start can be made;
• useful where site problems such as trade union actions such as delays or
disruptions may be encountered; and
• owner can control all aspects of the work.

3. Disadvantages

• final cost is unknown;

• difficulties in evaluating proposals (strict comparison of the amount quoted
may not result in selecting the best contractor or in achieving the lowest
project cost);
contractor has little incentive for early completion or cost economy;
182 Chapter 8

• contractor may assign its second-division personnel to the job, make excessive
use of agency personnel, or use the job as a training vehicle for new personnel;
owner carries most of the risks and faces the difficult decisions; and
• biased bidding of fixed-fee and reimbursable rates may not be detected.

B. Target Contracts (Cost And Schedule)

Target contracts are intended to provide a strong financial incentive for the
contractor to complete the work at minimum cost and within minimum time. In
the usual arrangement, the contractor starts work on a reimbursable-cost basis.
When sufficient design is complete, the contractor produces a definitive estimate
and project schedule for owner review, mutual negotiation, and agreement. After
agreement is reached, these become targets. At the end of the job, the contractor's
reimbursable costs are compared with the target and any saving or overrun is
shared between the owner and the contractor on a pre-arranged basis. Similarly,
the contractor qualifies for additional payment if the contractor completes the
work ahead of the agreed-upon schedule. The main appeal this form of contract
has to the contractor is that it does not involve competitive bidding for the target
cost and schedule provisions.
1. Requirements
• competent and trustworthy contractor,
• quality technical and financial supervision by the owner, and
• competent estimating ability by the owner.
2. Advantages
• flexibility in controlling the work;
almost immediate start on the work, even without a scope definition;
economic and speedy completion (up to a point) encouraged; and
• contractor is rewarded for superior performance.
3. Disadvantages
• final cost initially unknown;
no opportunity to competitively bid the targets;
• difficulty in agreeing on an effective target for superior performance;
variations are difficult and costly once the target has been established
(contractors tend to inflate the cost of all variations so as to increase profit
potential with easy targets); and
• if the contractor fails to achieve the targets, it may attempt to prove that
this was due to owner interference or to factors outside the contractor's
control; hence, effective control and reporting are essential.

C. Measured (Unit Price) Contracts

These require sufficient design definition or experience in order to estimate the

unit/quantities for the work. Contractors then bid fixed prices for each unit of
work. The time and cost risk is shared, with the owner responsible for total
Contracting 183

quantities, and the contractor assuming the risk of a fixed unit price. A quantity
increase greater than 10% can lead to increases in the unit prices.
/. Requirements
adequate breakdown and definition of the measured units of work,
good quantity surveying/reporting system,
• adequate drawings and/or substantial experience for developing the bill of
quantities,
• financial/payment terms that are properly tied to the measured work and
to partial completion of the work,
• owner-supplied drawings and materials must arrive on time,
• quantity-sensitivity analysis of unit prices to evaluate total bid price for
potential quantity variations,
ability to detect biased bidding and/or front-end loading, and
contractor experience with this contracting arrangement.
2. Advantages
good design definition is not essential (typical drawings can be used for the
bidding process);
very suitable for competitive bidding and relatively easy contractor selection
subject to sensitivity evaluation;
• bidding is speedy and inexpensive, and an early start is possible; and
• flexibility (depending on the contract conditions, the scope and quantity of
work can be varied).
3. Disadvantages
final cost is not known at the outset, since the bills of quantities have been
estimated on incomplete engineering;
• additional site staff are needed to measure, control, and report on the cost
and status of the work; and
• biased bidding and front-end loading may not be detected.

D. Lump-Sum/Fixed-Price Contracts

In this type of contract, the contractor is generally free to employ whatever

methods and resources it chooses in order to complete the work. The contractor
carries total responsibility for proper performance of the work, although approval
of design drawings and the placement of purchase orders and subcontracts can
be monitored by the owner to ensure compliance with the specification. The work
to be performed must be closely defined. Since the contractor will not perform
unspecified work without requiring additional payment, a fully developed speci-
fication is vitally important. The work has to be done within a specified period
of time, and the owner can monitor status/progress to ensure that completion
meets the contractual requirements.
The lump-sum/fixed-price contract presents a low financial risk to the owner,
and the required investment level can be established at an early date. This type
of contract allows a higher return to the contractor for superior performance. A
184 Chapter 8

good design definition is essential, even though this may be time-consuming.

Further, the bidding time can be twice as long as that for a reimbursable contract
bid. For contractors, the cost of bidding and the high financial risk are factors
in determining the lump-sum approach.

7. Requirements

• good definition and stable project conditions,

• effective competition in a buyer's marker,
• several months for bidding and appraisal, and
• minimum scope changes.

2. Advantages

• low financial risk to owner since maximum risk is on the contractor;

• cost and project viability are known before a commitment is made;
• minimal owner supervision (mostly quality assurance and schedule monitoring);
• contractor will usually assign its best personnel to the work;
• maximum financial motivation of contractor (maximum incentive for the
contractor to achieve early completion at superior performance levels);
contractor has to solve its own problems and do so quickly; and
contractor selection by competitive bidding is fairly easy, apart from deliber-
ate low price.

3. Disadvantages

variations are difficult and costly (the contractor, having quoted keenly when
bidding, will try to make as much as possible on extras);
• an early start is not possible because of the time taken for bidding and for
developing a good design basis;
contractor will tend to choose the cheapest and quickest solutions, making
technical monitoring and strict quality control by the owner essential; sched-
ule monitoring is also advisable;
contractor has a short-term interest in completing the job, and may cause
long-term damage to local union relationships by doing such things as
setting poor precedents/union agreements;
bidding is expensive for the contractor, so the bid invitation list will be short;
technical appraisal of bids by the owner may require considerable effort;
• contractors will usually include allowances for contingencies in the bid price
and they might be high; and
• bidding time can be twice that required for other types of contracts.

E. Conditions of the Contract

While the same risks/liabilities can be established for most forms of contract, the
price for those risks/liabilities can vary significantly, depending on contracting
skills and the business environment/market place.
Contracting 185

F. Typical Forms of Contract

1. United Kingdom
Institution of Civil Engineers (ICE). Mainly for civil and construction-only contracts.
Federation Internationale des Ingenieurs-Conseils (FIDIC). Primarily for offshore
and overseas work.
Institution of Mechanical Engineers (IMechE). Primarily for design and erection of
mechanical plants).

2. United States
American Institute of Architects (AIA). Mainly for engineering work and project/
construction management; the architect/engineer usually functions as the
owner's agent on a fee/reimbursable basis;
Associated General Contractors (AGC). Mainly for construction work and con-
struction management; the contractor usually functions as an independent
contractor on a lump-sum/fixed-price basis;
The Engineers Joint Contract Documents Committee (E JCDC) Standard Agreement
Contract Documents. Issued jointly by the National Society of Professional
Engineers, American Consulting Engineers Council, American Society of Civil
Engineers, and Construction Specifications Institute, Inc., and approved by the
Associated General Contractors; often used by many engineering firms. In
addition, it is becoming more prevalent for an owner to develop a form of
contract that is specifically customized to fit its particular needs. Similarly, an
engineering/construction contractor may develop its own form of contract for
use on projects where it acts as the construction/project manager for the owner.
At least two basic options exist:
- use one of the standard contracts and customize it to fit a particular
project; and
use the boiler plate or front-ends developed by the engineer/contractor
for use on projects where it is responsible for preparing the bidding
documents and where the owner does not have its own form.

G. Summary of Contracting Arrangements

It is possible to devise a form of contract with appropriate terms and conditions

to suit many different circumstances. Some basic considerations leading to the
best choice are listed below.
• There must be a clear definition of each party's contractual responsibilities.
Shared responsibilities are unsatisfactory, although they are unavoidable in
some circumstances.
• A lump-sum form of contract provides the best financial risk for the owner,
gives the contractor the maximum incentive for early completion, and pro-
duces the greatest benefit of competitive bidding. Conversely, reimbursable
contracts provide no such incentives. It is dangerous, however, to attempt
to use a lump-sum contract if the essential conditions are not satisfied—no-
tably, a clear and complete definition of the scope of the work.
186 Chapter 8

The owner must have the contractual right to exercise control adequate to
ensure the success of the project, but the temptation to assume excessive
control should be resisted.
Control and responsibility go together—the greater the owner's control, the
less responsibility is carried by the contractor.
Additional liability/risk should result in greater profit to the contractor.
Finally, the form of contract must be decided early in the course of project
development, and the choice must be made known to the engineers before
they write the specification. Obviously, the specification will be much more
precise and comprehensive if it is to be used for a lump-sum contract than
would be required for a reimbursable contract.

X. CONTRACTUAL AND LEGAL REVIEW (FOR COST IMPLICATIONS)

The risks accepted by the contractor through the contractual language can be
difficult to define in absolute terms. Still, the implied risks in practically any
contract, if not tempered by insurance, can drive a contractor into bankruptcy if
the risks become realities. A wide range of expertise in developing contracts,
coupled with the many vicissitudes of give and take in contract negotiations, can
yield contract provisions that range from minimal impact to possibly catastrophic
consequences for contractors. Thus, an owner's project manager can unwittingly
increase the project costs by being overly protective when using contract language
to require a contractor to assume risks over which the contractor has only
minimal control at best. Apart from refusing to bid, the contractor's only defense
is to carefully evaluate the risk and potential cost of the over-protection, and to
increase the cost of the proposed services accordingly. The market place, of course,
has an important bearing on risk and liability. When work is in short supply, it
is possible to get contractors to accept greater risks due to a very competitive
buyer's market. This also means that the buyer (owner) can dictate the contrac-
tual conditions to a much greater degree than usual.
Development of the form of contract and the contractual language may be
the direct responsibility of the contracts department, working under direction of
the project manager. In many cases, bid proposals will be reviewed by two groups
of company personnel—the project team and contract/legal personnel. The project
team has total evaluation and selection responsibility, but concentrates on the
contractor's project execution capability. This leave contracts/legal personnel to
advise on contract conditions, language, liability, guarantees, and other pertinent
areas.

A. Contract And Legal Review

Assuming the bidders are allowed to take exceptions and/or offer alternatives,
this essentially covers the following two objectives:
• detecting any deviations from the prescribed bid basis that would require
resolution before award of the contract, and
analyzing the contractor's exceptions to the proposed contract that could
affect the selection.
 187
Contracting

The review will involve detailed analysis of the proposed exceptions/alternatives

and their associated impact on risk, liability, and cost. It is possible that signifi-
cant deficiencies and/or exceptions could disqualify a contractor.
Since many business and contractual conditions can have cost implications,
it is important that close cooperation exist between the contract and project cost
personnel.

B. Cost Aspects Of A Reimbursable-Cost Agreement (EPC

Contract)

The allocation of costs to the fixed-fee and reimbursable categories can vary in
a contractor's proposals. Even though the bid documents specify the required
division of costs, it is very difficult to cover every detailed cost element. Contrac-
tors will therefore provide terms and conditions that are clearly different or
ambiguous so as to allocate items as reimbursable when, in fact, they were
intended by the company to be part of the fixed fee. Following are examples of
areas in which this can occur.
1. Home Office Services
Contractor personnel policies should be thoroughly reviewed in relation to
the conditions outlined in the contract agreement. Are training and recruit-
ing reimbursable, or are they part of the fee? Are contractor-quoted salary
ranges fixed for the duration of the project, or are salary increases auto-
matically passed on to the company? Are travel expenses and proposed trips
subject to company approval before the fact or afterward? Are transfer and
assignment of overseas personnel subject to approval by the company?
• A common point of contention is payment for home office engineers tempo-
rarily transferred to the job site. The overhead on field personnel is generally
half that of home office personnel. What rate should apply?
• Is there adequate identification of the personnel and services that are in-
cluded in the fee and those that are reimbursable?
• Purchasing policies, vendor service personnel, insurance, duties, inspection,
and expediting services are costly items. Are adequate procedures contained
in the contract agreement?
Payment for reproduction and computer services should be thoroughly re-
viewed. Payment of costs for resident company personnel should be clearly
outlined. These would include offices, equipment, services, secretarial, and
typing assistance.
2. Construction Services
Personnel policies for construction staff are quite different from those for
home office personnel and need to be clearly stated in the contract agree-
ment. Such topics as jobsite allowances, home leave, completion bonus,
family and bachelor status, relocation, and replacement should be clearly
outlined, particularly on overseas projects.
Payment conditions for construction equipment, maintenance, small tools,
and consumables should be clear and not left open to interpretation, since
they can become points of contention. What is the relationship between
188 Chapter 8

construction equipment rental rates and transportation costs? Does rental

start on dispatch from the storage yard or at the date received on the job
site? Are there adequate buy-out clauses? Are the terms for major and minor
maintenance clearly stated?
• Payment for construction services is often fixed at a unit cost per field job-
hour. Again, what field jobhour? Direct and indirect, direct hire, subcontract
and field staff? The costs on differing jobhour bases can be considerable.
• Contractual conditions should be specific. If they are not, contract and cost
engineers should estimate potential costs against each item and collate the
information on the bid evaluation form. Subsequent negotiations will then
determine the status of all exceptions, alternatives, and anomalies.

XI. COST ASPECTS OF A LUMP-SUM AGREEMENT (EPC

CONTRACT)

A. Quality Owner Contract Package

There must be a complete definition of facilities, site working conditions, and

contract scope in order for bidders to accurately program the project and estimate
its cost. There are four main sections in owner contract/bid packages and con-
tractor proposals:
design basis/services,
• commercial terms,
• contract conditions, and
• execution program requirements.
For an EPC turnkey contract, the owner's scope of work or design basis is the
key element. A poor design package can only result in poorly drawn proposals
from contractors.

B. Proper Risk Analysis

Both parties need to carefully develop, evaluate, and agree on all risks that are
required and contained in the proposed contract terms and conditions. From the
owner's viewpoint, the major thrust will be to develop contract risks and liability
for poor performance/schedule slippage. As detailed in the contractor's proposal
section, the contractor must carefully review all documentation to fully under-
stand the scope of work, services to be provided, working conditions, and the
proposed reporting requirements/owner involvement. There must be strong com-
petitive market conditions for EPC turnkey contracts, which requires that a
sufficient number of qualified and competitive contractors be willing to bid.
Beyond these, the activity level in the relevant contract market must be such
that contractors need more work than is available to them under other, lower-risk
contracts. Then there is the people risk consideration: it is one thing to identify
the risks inherent in a specific project, but it is quite another matter to properly
analyze the competence of company personnel to properly handle those risks.
Recognizing personnel capabilities and limitations is essential with an EPC turn-
key contract, especially from the contractor's viewpoint.
Contracting 189

Project size must be acceptable so that contractors have the financial strength
to bear the risks. There must be stable economic, political, and social conditions
at the project location, as well as for the relevant materials, equipment, and
labor market conditions. This is required in order to minimize the need for
bidders to include large risk contingencies.

C. Estimating Capability

The ability to produce a ±10 to 15% estimate is essential. This requires historical
experience/data, a quality estimating program, and experienced estimators. Own-
ers will use the estimate to evaluate the contractor's proposed price, and con-
tractors will use the estimate to establish the price.
An appropriate, detailed execution program is essential in developing a
detailed estimate. The anticipated working conditions should be carefully evaluated,
and organization requirements and schedules should be developed. The estimate
should be based on quotations for all major equipment. Bulk materials should
be estimated with quantity takeoffs from plot plans, P&IDs, layout drawings,
and specifications. Engineering jobhours and costs should be based on numbers
of drawings/documents. Direct construction labor should be estimated from equip-
ment/material quantities multiplied by unit jobhours multiplied by jobhour labor
rates. Construction indirect such as construction equipment, supervisory/admin-
istration staff, and field office expenses, should be individually estimated.

D. Cost of Bidding

Engineering, procurement, and construction turnkey bids are expensive to pro-

duce. A contractor has to carry out engineering in order to develop bulk quantity
takeoffs, seek quotations for all major equipment, obtain subcontract bids for
portions or all of the construction work, develop schedules, define organizational
requirements and staffing levels, and develop a detailed execution plan.
Experience shows that with established technology, EPC turnkey proposals
cost about 3-5% of the total project cost. Where new technology is significant or
the bidder's experience is minimal, the proposal cost could rise to 5-7% of the
total project cost. Therefore, a serious consideration in seeking or entering into
EPC turnkey contracts is the question of companies being able to bear the cost
of bidding. Failure to gain profitable work can lead a contractor into financial
difficulty if there is no offset against proposal costs.

E. Key Contractor Considerations

A buyer's market or a soft market can expose a contractor to difficult conditions

and risks such as:
• breakeven or below-cost pricing levels,
• buying the job in order to maintain/employ resources,
• overprotection of contract conditions by owner,
higher risk conditions of lump-sum/turnkey contracts,
schedule penalty arrangements,
• poor owner-contractor relationship,
190 Chapter 8

reduced or poor negotiating position,

establishing an aggressive claims operation, and
• going bankrupt or out of business.
From the legal viewpoint, the most appropriate method of surviving is to
carefully review all owner requirements (as expressed in the owner contract
documents) and attempt to negotiate away those requirements as necessary. The
owner-contractor relationship is not (or should not be) an adversary one. To the
extent that, at the commencement of a project, the parties can fully understand
and agree on the things that are really required and what the contractor's price
does cover, the more likely the relationship will remain as intended. This under-
standing I agreement is established through the process of certainty.
Experience suggests that the best approach to achieving the desired result
is for the contractor to assemble as much in-house expertise as possible (such as
project management, engineering, procurement, estimating, and cost control) and
to thoroughly review the owner's requirements. This is important because it
enhances everyone's understanding of the requirements: not just those stated in
the contract, but those contained in the specifications, drawings, and project
procedures as well.
The contractor team should, in essence, educate itself to the point that all
involved realize the impact on price and schedule of owner inspection, reporting,
and other requirements. The key with an EPC turnkey project is to get all
requirements defined as specifically as possible. Otherwise, a contractor can find
itself in the unenviable position of being selected as the winning bidder and
realizing early on during the course of the project that there is very little
opportunity to make money.
With the advantage of a buyer's market, owners should nevertheless con-
struct contract conditions (risks) and negotiate in a responsible manner. In the
long run, contractor financial hardship/bankruptcy is not in the owner's best
interests. The rationale by some owners that "it's now our turn" is a poor excuse
for good business practice.

XII. PAYMENT OF THE FIXED/TURNKEY PRICE OR THE FIXED FEE

(OF A REIMBURSABLE CONTRACT)

Payment should never be based on a fixed, periodic payment schedule. In the

past, this was a common practice, but it often happened that all payments had
been made long before a project was complete. Thus, payments should be based
directly on physical completion of the work.
Progress values for engineering, material commitment, and construction
should be developed, and these should then be weighted together to develop an
overall progress figure. This will be the percentage figure, less retention, that
will be applied to thefixedprice for payment. Engineering and construction progress
can be measured according to a physical measurement system. Material commit-
ment progress could be based on the number of purchase orders or requisitions
where a weighted progress is determined as work is completed in stages: engineer-
ing issue, inquiry issue, purchase order issue, vendor fabrication, and jobsite
receipt. Planned and actual progress curves can be developed as an owner require-
ment to provide project status information as well as the system for payment.
Contracting 191

Since these systems can sometimes take many months before they become
effective, it is possible that a certain percentage of the lump-sum price or fixed
fee could be made available at contract award. The contractor may propose the
figure and provide an explanation to justify it.

XIII. BIASED BIDDING

Biased bidding is a deliberate pricing strategy used by a bidder. It poses a

significant cost threat to the purchaser and must be detected as soon as it is
practiced. The following are examples of biased bidding.

A. Fixed-Fee Reimbursable Contracts

The majority of these contracting arrangements are based on a minimal design

package, so it is possible that the final scope will be greater due to changes and
poor scope definition. An experienced bidder can recognize these increases, and
may take profit out of the fixed fee and add it to the reimbursable jobhour rates.
This results in greater profit if the scope of work increases as anticipated by the
bidder. A negotiation of this bias can result in a proper distribution of profit to
fee and rates, as specified.

B. Unit-Price Construction Contracts

The most efficient use of this contracting arrangement is in time management,

with the work quantities (unit prices) being developed by the purchaser on an
estimated basis. As the size of the contract increases, so does the difficulty of
developing accurate estimated quantities increases. Significant errors, usually
underestimating, can occur on individual work items. An experienced bidder can
detect such errors, taking profit out of correctly estimated items and adding it
to underestimated items. As the work quantities increase, the resulting extra
profit can be considerable. As previously outlined, a quantity sensitivity analysis
can identify such a situation, and negotiation to rebalance this practice can reduce
and/or eliminate this profit enhancement technique.

C. Front-End Loading

This practice applies to unit-price contracts where the purchaser adds more profit
to the early work activities by reducing the profit of later work items. As the
work starts and progresses, the bidder earns additional profit and greatly improves
its cash flow. There is also an added work risk to the purchaser, in that if the
bidder defaults on the contract, the remaining funds are insufficient to complete
the work. Again, negotiation should attempt to reduce or eliminate this practice.

D. The Deliberate Low Bid (Buying the Job)

There are two forms of low bidding: the deliberate low bid, and a low bid produced
by lack of experience and/or a poor purchaser bid package (see next section). By
definition, a low bid is less than the purchaser estimate by 20% or more. Since
192 Chapter 8

it is assumed that the purchaser has developed a reasonable or good quality

estimate, a deliberate low bid is thus a premeditated pricing strategy. This
strategy is often referred to as buying the job, and may be employed for any
number of the following reasons:
Survival. In times of low business activity and intense competition, a purchaser
can decide to bid for work at a low price, with little or no profit built in,
so as to keep its existing staff employed;
Reducing or eliminating competition. Low bidding can be used to maintain a
purchaser's market share and/or to reduce competition by other companies;
Breaking into a new market. Without a proven track record in a specific industry
or category of work, the major way a company can secure work in that
industry is to attract a new purchaser by submitting a low price. It is
assumed that a general technical capability and company resources are
available and that a company can get onto one of the purchaser's existing
bidder's lists; and
Detecting significant errors in the purchaser's request for quote. If the purchaser's
request for quote contains significant errors, there is a chance for the
contractor to earn additional revenue. The contractor must first, however,
be successful in getting the job through a low bid and an accompanying
claims program.
Each instance of possible deliberate low bidding has to be evaluated carefully to
prevent companies from developing poor financial, quality, and scheduling results.
The greatest risk can be a company defaulting on the contract.

E. The Low Bid Through Lack of Experience

Apart from performance problems, there is the legal risk of the process of cer-
tainty, which requires that the purchaser make certain that the other party fully
understands the scope of work. When there is a lack of experience, lack of
certainty can be a direct result. Thus, clarification meetings and further technical
analysis of the proposed bidder's programs are essential. If lack of certainty is
present, the award of a low bid can be rescinded or can lead to successful claims
by the bidder.
Cost and Schedule Trend Analysis-
Forecasting of Baselines

I. DEVELOPING REAL COST CONSCIOUSNESS—NO SMALL TASK

A. Project Manager Responsibility

The project manager is directly responsible for creating an environment that will
enable project control to be properly exercised. Thus the project manager must
seek counsel, accept sound advice, and stretch cost/schedule personnel to the
extent of their capability. Team building and team stretching are key elements
of successful project management.
On smaller projects, where the project manager is also the project control
engineer, it is essential that the project manager possess project control skills
and/or motivate the supporting/service groups to provide the quality information
that is needed for creative analysis and effective decision making.

B. Establishing Project/Cost Consciousness

Effective project control requires the timely evaluation of potential cost and
schedule hazards and the presentation of recommended solutions to project man-
agement. Thus the cost/schedule specialist must be a skilled technician and also
be able to effectively communicate at the management level. Sometimes, an
experienced project control engineer's performance is not adequate because of
poor communication skills. Technical expertise will rarely compensate for this
lack. As in all staff functions, the ability to sell a service can be as important as
the ability to perform the service. On larger projects, project teams are usually
brought together from a variety of melting pots, and the difficulty of establishing
effective and appropriate communications at all levels should not be underesti-
mated. In such cases, the project manager must quickly establish a positive

193
194 Chapter 9

PROJECT COST CONSCIOUSNESS

A People & Team Responsibility

V-it —

\ V
\

Figure 9.1 The Bean-Counter syndrome.

working environment where the separate functions of design, procurement, con-

struction, and project control are welded into a unified, cost-conscious team.

C. The Bean-Counter Syndrome

This is a widespread practice, where effective cost control is absent or greatly

diminished. This practice has two major contributing factors. Firstly, the project
manager does not want an aggressive, creative, analytical function for the cost
engineer and, therefore, relegates the work to a retroactive, record-keeping function
(hence the term bean-counter). Secondly, the cost engineer can be directly respon-
sible for this practice, as the individual may not possess the essential analytical
skills or may not believe in an aggressive trending approach and/or may not pos-
sess the essential people/communication skills. The cost engineer may, in fact, be
content with a bean-counting role. Figure 9.1 illustrates the bean-counting func-
tion. There is a much wider acceptance today of the need for dynamic, proactive
cost engineering-trending, and it is to be hoped that the function will become a
pivotal project role, as effective cost trending is essential for project success.
After a lifetime of project work, the author has learned this fundamental
truth:

Projects are designed and built by people, not companies. People do it

singly or in multiple groups, and if there are good people relationships,
Cost and Schedule Trend Analysis 195

there is a chance of success. If the relationships are poor, there is little

chance of success.

D. Project Control Defined

Effective project control consists of a process that:

• identifies potential hazards well in advance of their occurrence;
• evaluates the impact of such hazards and, where possible, proposes actions
to alleviate the situation; and
provides constant surveillance of project conditions to effectively and eco-
nomically create a no surprises condition, except for force majeure situations.

E. A Cost-Effective Program

All project control programs must live up to their own principles and be cost
effective. Many large and allegedly sophisticated architect/engineering firms and
contractors over-control and over-report. This occurs because of the ever-present
tendency, as projects become larger or more complex, to create additional levels
of control, reporting, and personnel. Yet more is not necessarily equivalent to
better. Project managers and project control supervisors must carefully evaluate
their company's program against project needs, eliminating all instances of over-
control and over-reporting.

II. BUSINESS DECISION MAKING VERSUS TECHNICAL DECISION

MAKING

Three important steps must be taken to ensure effective project control.

A. Business Decision Making

The initial step is to ensure that key decisions makers—the project manager, the
engineering manager(s), the procurement/contract manager, and the construction
manager—base their decisions on sound business practice. When these people
are not motivated by a solid business ethic, cost overruns and schedule delays
become both common and inevitable.

B. Business Information/Analysis

The second step is to ensure that all information needed for making sound
decisions is available at the right time and in the right place. All too often, the
information necessary for analyzing options and alternatives is not available or
simply hasn't been developed. Yet much of this information can be found in a
firm technical scope of work, a quality estimate, and a good schedule. When these
items are not available, decision-making may be flawed or ineffective.
The early stage of a project is often the time when significant business
decisions have to be made; consequently, having quality information is vital at
that point. Yet firm information may not be available at this point: technical
196 Chapter 9

options are still being considered, and execution plans and contracting strategies
are still being developed. Creative analysis and experienced judgment is, there-
fore, essential to bridging this gap, sometimes referred to as the blackout period.
This is discussed at greater length later.

C. Communication Channels

The third step involves the project manager's responsibility for actively promoting
project consciousness with all involved departments and key personnel. This
ensures that the project team and/or service groups work toward the agreed
project objectives and execution plan. Active and open communication channels
are also critical to properly coordinating and interfacing with the client to estab-
lish a positive atmosphere for making decisions and obtaining approvals. Limits
of authority, lines of communication, degrees of responsibility, and approval re-
quirements must be clearly established in the project coordination procedures.
Personnel motivation and leadership skills are essential qualities in a project
manager if project consciousness and effective communication channels are to be
established.

III. TIMELY COST ACCOUNTING/REPORTING

A. Typical Program

An accounting program is an integral part of cost control, as it specifies levels

of approval, billing and payment procedures, banking arrangements, accounts
numbering systems, and all functions necessary for project financial reporting.
Tracking the status of financial objectives and providing a base for developing
cost predictions is essential to project success. Thus, the key element in cost
control is timely and accurate reporting of commitments and expenditures.
Delayed payments or lost invoices inevitably cause poor cost predictions.
Further, many control techniques are based on unit costs, which can be greatly
distorted if the cost-to-date is inaccurately reported or if the information is
reported late. On smaller projects, an accurate accounting/cost report should be
available no more than two days after the cutoff date; on larger projects, avail-
ability in no more than five days is essential.

B. Project Accounting Group

As most operating company accounting systems are commodity based, they are
unsuitable for project accounting. Therefore, an effective organizational arrange-
ment is to establish a project cost accounting group within the general accounting
department but with a cost coding system that is project driven. The group
concentrates solely on accounting for capital projects and reports directly to
project management for day-to-day activities. It is, however, often difficult to
establish such a group, as accounting managers, fearful of losing authority, may
resist the project approach. A more common and less efficient approach is to have
the project group develop a second set of books and associated coding system,
which is then maintained by project/cost personnel. It is to be hoped that such
Cost and Schedule Trend Analysis 197

management failures/abuses will be corrected as TQM cultures become common-

place in the construction industry.

IV. EFFECTIVE TRENDING SYSTEM

A. The Blackout Period

A difficult time for cost control occurs during the transition from the feasibility
estimate to the full funding estimate. This is often called the blackout period,
during which time the estimate is upgraded to a higher quality (but is still a
conceptual estimate) and on large projects this period can last six months or
longer. During this time, many engineering decisions are made without full
recognition of their cost impact. Accordingly, having an effective and cost-conscious
project team is absolutely vital, so that full and proper trending of project-design
development and project change is generated by all to all. Cost-consciousness,
especially on large and complex projects, can only be achieved by direct leadership
of the project manager, in conjunction with a highly effective team building
program. The weekly trend meeting then builds on this program with detailed
development and analysis of all change.

B. Owner Trending System Versus Contractor Trending System

On larger reimbursable-type projects, it is common for an owner to maintain an

independent trending program. In contracts with a small owner project task force,
a large contractor's operations and organization can be cumbersome, inflexible,
and slow to respond. In such cases, an owner trending program can be more
current, accurate, and responsive to changing circumstances. It should be a
beneficial, not adversarial, program that works positively with a contractor from
the same project data-experience and shares information as trends are detected.
There is also a question of owner oversight, especially on reimbursable projects,
and also there can be a lack of contractor skills that make owner independent
analysis essential.

C. Typical Trending Situations

On reimbursable-type projects the risk of design change is higher than on lump-

sum projects, and it is common for a greater proportion of key engineering
decisions to be initiated by owner-engineers. In addition, design and project
discipline is less prevalent with owner engineering personnel. It is, therefore,
vital that cost engineering change control ensures that communication channels
are properly developed with both owner and contractor engineers to constantly
provide an accurate assessment of the developing design. General design speci-
fications and equipment specifications should be monitored for conflict, preference
(that adds cost), and "gold plating". All changes to engineering specifications,
scope, procurement, subcontracts, etc. should be recorded, via a design log pro-
gram, as they occur or as they are being considered by the engineering groups.
Figure 9.2 illustrates typical trending situations, and Figure 9.3 is an example
of a trend report.
198 Chapter 9

I ALL SCOPE CHANGES

2. DESIGN CHANGES /DEVELOPMENT

• Especially During Early Design Phase
• Owner Engineers
• Contractor Engineers
• Design Change Log
• Cost/Schedule Consciousness
• "Gold Plating"

3. SCOPE REDUCTION PROGRAMS

4. PROJECT/CONTRACTUAL CONDITIONS
• Plant Operations
• Breach of Contract
• Site Conditions

5. EXECUTION PLAN CHANGES

• Priority of Project Objectives
• Schedule Acceleration

& APPROVED TRENDS

• Formally Authorized By Project Manager

7. POTENTIAL TRENDS
• Early Identification Can Prevent OR
• Assessment of Cost Increase/Schedule Slippage

Figure 9.2 Typical trending situations.

Changes to the project execution plan—whether they are contractual, envi-

ronmental, regulatory, or schedule oriented—should be included as well. Potential
and approved trends should be reported, and preparation of related cost estimates
should be routine. Approved trends are those that have been formally authorized
by the project manager. Potential trends include items verbally approved and
items that the cost engineer, through discussions with task force personnel,
believes are likely to occur. Potential changes should be shown separately from
approved trends.

D. The Weekly Trend Meeting

Of the many meetings held during the execution of a project, the weekly trend
meeting is probably the most important. This is not a decision-making meeting
but a time when information is gathered and shared by key technical/services
specialists. The project manager generally leads the meeting, and the project cost
engineer often serves as secretary. All current and potential influences, changes,
extras, and trends are reviewed and discussed. The key meeting objective is the
 o
I
a

I
Description
(All Costs Shown in 1.000's)

i
a
>

(/>
55'

Figure 9.3 Trend report example.

CD
CO
200 Chapter 9

common sharing, gathering, communicating, and coordinating of all project influ-

ences that are developing at the time. Each party to the contract should hold its
own weekly trend meeting, followed up by a joint meeting of the main parties
(i.e., the owner-engineer and general contractor).

V. ACCURATE COST AND SCHEDULE FORECASTS

The end products of an effective project control program are accurate cost and
schedule forecasts. These forecasts generally consider:
• current trends of time and money;
• scope deviations, changes, and claims;
• changes in project conditions;
• changes to the project execution plan;
• rundown/usage of contingency;
• failure to meet contractual conditions;
• engineering and construction progress/productivity;
• subcontractor dollar performance;
• equipment/material bid experience (under and over budget);
• actual versus planned commitment levels;
• cost escalation factors;
currency exchange rates; and
• impact of changes in governmental-environmental regulations.

VI. KEY PROJECT CONTROL TECHNIQUES—OVERALL PROJECT

The following techniques are at summary, intermediate, and detailed levels. Their
use will depend upon the contracting arrangements and associated risks to the
parties (owner, general contractor, subvendor) in conjunction with each party's
skills-capability and the need to work at summary or detailed levels. It is some-
times the case that a project need is not matched by a party's skills or, alterna-
tively, abundant skills can result in over-control and reporting.

A. Contingency Control and Rundown

1. A Slush Fund
On many projects the contingency is the largest single cost item. It should,
therefore, be an item that is constantly and carefully evaluated. Rarely is this
the case, as too many project managers treat contingency as a slush fund. This
occurs when a project manager uses the contingency to balance the monthly plus
trends, without properly evaluating the plus trends with a good risk analysis
program. To reduce the contingency by the amount of the plus trends in order
to maintain the previous monthly cost forecast can be a dangerous technique. In
such cases, it is quite common for the contingency to be spent well before the
project ends. Contingency is, essentially, to be used for unknowns, and these
unknowns only become known when commitments are made. It is then that the
cost reality and validity of the estimate-project budget becomes apparent.
Cost and Schedule Trend Analysis 201

The calculation process shows a rundown which is calculated on the

basis of uncommitted and unspent costs and is computed as follows:

Cost Prediction Committed

Uncommitted (%) but
Major Cost Center Unspent (%)

a) Material and Equipment 10 5

b) Labor 20 15
c) Labor Subcontracts 20 15
d) Material and Labor Subcontracts 15 10
e) Home Office, Engineering and Fee 10 5
f) Field Indirects and Temporaries 10 5
g) All other costs 10 5
h) Owner Costs 10 5

This simple but practical method covers risk on work yet to be com-
mitted and work committed but not yet paid for.

Figure 9.4 Contingency control—simple method.

2. Rundown Routine
Figure 9.4 represents a simple but effective calculation routine to run down the
contingency over the life of a project. The calculation process shows a rundown
that is calculated on the basis of risks inherent in uncommitted and unspent
costs. The computations are made as shown in the figure.
This simple and practical method covers risk on work yet to be committed
and work committed but not yet paid for. The basic presumption is that, until
the last and final invoice has been paid, there is still a risk that cost increases
will occur, quite often due to late, missing, or lost invoices. Construction labor
and subcontracts are usually the most volatile items and, as shown in Figure
9.4, carry the greatest contingency percentage. The maximum contingency that
this set of numbers will develop is 13%, and such a low percentage is too low
for controlling a conceptual estimate/project budget. Alternatively, if the project
had a detailed estimate with a 10% contingency, then the illustrated percentages
should be reduced. This set of numbers, which is based on historical data, is
appropriate for use in a project control estimate where the contingency is gen-
erally in the 12-15% range.

3. Startup/Commissioning
A further risk consideration is the amount of contingency required at mechanical
completion to ensure that funds are available for late changes, commissioning
202 Chapter 9

accidents, material startup requirements, and final invoices or claims that were
not anticipated earlier. If adequate funds have already been allowed in the
estimate for these considerations, then further hold-back would be unnecessary.

B. Cash Flow Evaluation/Control

7. General Objectives
The major objective of cash advances and the bank handling procedures is to
ensure that the project is funded by the responsible party in accordance with the
contract. On reimbursable-type contracts, a cash flow forecast is usually prepared
for a two-month period and presented on a biweekly basis for cash advances. A
good forecast should generate no more than a 5% excess requirement. Payments
terms for a lump-sum contract usually require an initial payment (approximately
10% of the contract value) at contract award, followed by monthly payments
directly tied to the physical progress of the work. Progress is mutually verified
and agreed upon.
2. Documentation (Reimbursable-Type Contract)
As soon as practical after the last day of each month, the contractor should
prepare a complete statement of the amounts actually paid. This is supported by
copies of invoices, payrolls, bank statements, and properly executed waivers of
lien for each contractor and subcontractor.
3. Banking Arrangements (Reimbursable-Type Contract)
A commonly used banking arrangement is the zero bank account system. This
assumes that the contractors do not finance the project and that owners are
required to advance sufficient funds (in accordance with the cash flow forecast)
to the contractor's bank. Interest accruals will be credited to the owner. This
procedure should form part of the contractor's proposal and should specify pen-
alties to the owner for failure to provide timely funding.

C. Cash Flow Curve

Figure 9.5 depicts a typical format for a project total cash flow curve, showing
planned and actual cumulative curves on a monthly basis. The planned curve
should be evaluated every month to ensure accuracy of the short-term (three-
month) forecast compared with the overall budget. This curve, plus appropriate
backup, should be presented for approval on an agreed periodic basis.

D. Earned Value System for Fixed Budgets

1. Overview
When overall percent complete for a combination of unlike work tasks or for an
entire project must be determined, an essential technique called the earned value
system (EVS) is used. (The terms achieved value, accomplished value, or physical
quantity measurement can also be used). A project's budget is expressed in both
jobhours and dollars, and earned value is keyed to the project budget. Most
projects are constrained by fixed budgets; others have floating, or variable, bud-
Cost and Schedule Trend Analysis 203

PROJECT
PROJECT CASH FLOW CURVE
JOB NO.

REPORT NO.
DATE

REVISE BUDGET ,

BUDGET
1
{
REPORT
DATE
1
FORECAST y / S

$ MECHANICAL
COMPLETION

>
TO DATE / g
PLANNED / J

. • i ^ ^ ^ T O DATE
^ ^ ^ ^ ACTUAL

1 1 1 1 1 1 1 1
TIME • (PROJECT DURATION)

REMARKS
EXPENDITURES

THIS PERIOD

TO DATE

(TO DATE) % COMPLETE

CURRENT BUDGET

FORECAST

Figure 9.5 Project cashflowcurve format.

gets. Earned value techniques can be applied in both situations, although differ-
ences exist in the detail of application.
2. The System
When developing a control system, a project should be segmented into its con-
trollable parts. A work breakdown structure (WBS) is developed, which includes
all work tasks to be used in determining project progress. Each task should have
its own dollar and jobhour budget. A project cost breakdown structure (CBS) is
204 Chapter 9

created by adding to the WBS all other project accounts that have either a cost
or a cost and jobhour budget, but which are not used to measure progress (e.g.,
management, quality control, or administration). In other words, the WBS is
incorporated within the CBS.
Under an earned value system, a direct relationship is established between
percent complete of an account and the budget for that account. This relationship
is expressed by the following formula:
Earned value = (Percent complete) x (Budget for the account)
As can be seen from this equation, a portion of the budgeted amount is earned
as a task is completed, up to the total amount in that account. One cannot earn
more than has been budgeted. For example, if $100,000 and 600 jobhours have
been budgeted for a given account, and the account is 25% complete, $25,000 and
150 jobhours have been earned to date.
Since progress in all accounts can be reduced to dollars and earned jobhours,
earned value provides a way to summarize multiple accounts and to calculate
overall progress. The formula for doing this is:
p f if Earned jobhours or dollars all accounts
Budgeted jobhours or dollars all accounts

E. Cost and Schedule Performance

1. Introduction
The concepts just discussed provide a system for determining the percent com-
plete of either single or combinations of tasks. The next step is to analyze the
results and to determine if the work is proceeding according to plan. The earned
value system allows such an analysis.
2. The System
To the budgeted and earned jobhours or dollars must be added actual jobhours
or dollars, since it is a combination of these three measures that provides a full
analysis. The earned value system defines these terms as follows:
• budgeted jobhours or dollars-to-date represent what is planned to be done.
This is called budgeted cost of work scheduled (BCWS).
• earned jobhours or dollars-to-date represent what was done. This is called
budgeted cost of work performed (BCWP).
• actual jobhours or dollars-to-date represent what was paid for. This is called
actual cost of work performed (ACWP).
Schedule performance is a comparison of what was planned to what was done.
In other words, jobhours were budgeted and earned. If the budgeted jobhours are
less than the earned jobhours, more was done than planned, and the project is
ahead of schedule. The reverse would place the project behind schedule.
Performance against budget is measured by comparing what was done to
what was paid for. To do this, earned jobhours are compared to actual jobhours.
If more was paid for than was done, the project is over budget.
Cost and Schedule Trend Analysis 205

The following relationships can be expressed as formulas:

a u A i • /OTA Earned jobhours or dollars
Schedule variance (SV) = =—^—. j . , , r-n

or Budgeted jobhours or dollars

= BCWP-BCWS
n 4- - /mn Earned jobhours or dollars
or Cost variance (CV) = - — — r u u T-TJ
Actual jobhours or dollars
= BCWP-ACWP Earned jobhours or dollars-to-date
Cost performance index (CPI) =
Actual jobhours or dollars-to-date

or = BCWP + ACWP
A positive variance and an index of 1.0 or greater denotes favorable performance.
Figure 9.6 a plot shows the relationships between BCWS, BCWP, and ACWP
Other earned value systems are covered later in this chapter.

F. Design or Development Allowance

This allowance, identified as a separate line item in the estimate, is not part of
contingency. It is a known condition that is very common on fast-track projects
and represents money that will be used to cover design changes after an equip-
ment purchase has been made. The fast-track approach requires early placement
of all critical equipment, even before the design has been completed. As the design
advances to completion, changes can and do occur to the already-committed
equipment. This, then, leads to change order requests from the equipment ven-
dors. The design allowance is used to cover these added costs.

^—»••—»**<>

^ ^

Budgeted - BCWS
3
O
#™
3r Work-r

I SV

j cv

sv = Schedule Variance
cv = Cost Variance
AT = Time Variance

Time, Days
Figure 9.6 Relationships between BCWS, BCWP, and ACWP.
206 Chapter 9

DESIGN ALLOWANCE
ENG INEE *ING PRO IRES 3/CO WPLE TION
—100
95% I X at 8C
90 ENGINEERING * £"oinee ring
1. Process lOO.O

80%
f ^ 2. Clvll/Structural/Arch'l. 90.0
80 3. Vessels <»«; n
4. Mechanical E q u l p a e n t . . . , 95.0

f
5. P l p l n g d n c l . model) 75.0
70 6. Electrical 60.0
7. Instrumentation 55.0
8. General/Misc 70 0
60
J' INS ENT ENGINEERING TOTAL JiO.O

% 5 0 1 I
ELE :TRI /AL
•;••• ST ART OF

l-
40

MA TERI \ L
30
£ES \ EQI *
• « • • PU RCH> ,SINC
20

10 "/I TANJ AGE • A

y
0
10 20 30 40 50 60 70 80 90 100

PE CEN r OF PRO ECT TIMI

DESI 3N A LLC}\ IAHC •
100

•
80

60

%
40

20

0
V.V.V.V.V.V.V.V.V.'.V.V.V.
10%

Figure 9.7 Design allowance requirements.

With a full, but economic, fast-track program (i.e., no schedule acceleration),

it is customary to start purchasing major equipment when engineering is only
20% complete. In such cases, the design allowance is:
• 5-15% of individual equipment categories, and
8-10% of total estimated equipment cost.
The amount of design allowance directly depends on the degree of engineer-
ing completion and the associated risk of design change. Figure 9.7 shows two
Cost and Schedule Trend Analysis 207

curves for a full, economic fast-track program. The top curve shows the historical
engineering progress curve, with separate material category bars for the start of
purchasing. The lower curve is a guide to indicate the percent of design allowance
that should be available as engineering advances. The example assumes that
design allowance has been estimated at 10% (of total equipment), and the curve
shows the allowance being run down to zero at 95% completion of engineering.
At that stage, no risk of design changes should exist. The control of design
allowance is by both procurement and engineering. This technique is also covered
in Chapter 3 as it relates to estimating.

G. Project Rundown Control (Reimbursable Contract)

1. Purpose
As construction approaches mechanical completion, an efficient rundown can be
difficult to achieve, especially if a contractor has low workload and does not want
to lay off staff. On large projects, this situation can be particularly serious and
lead to increased costs. Moreover, the earned value system is ineffective at this
point, since the weight of accumulated performance now obscures incremental
performance. As punchlists and completion lists are generated, it is difficult to
ascribe a measurable scope of work to a multitude of different items, many having
top priority for completion. One effective technique for reducing these problems
is shown in Figure 9.8. It involves preparing a detailed estimate of the remaining
work items, with work activities/punchlists, and then individually controlling, by
item, on a daily/weekly basis. The figure graphically depicts a rundown program
for direct labor on a reimbursable project. In addition to field labor, other costs
must be considered as well.
2. Material
At this stage, field-purchased material usually reaches a peak, due mainly to
design changes and rework. An estimate of these expenditures should be made,
with planned dollar expenditure curves drawn for major categories and actual
expenditures plotted.
3. Subcontracts
Direct-hire forces can be replaced at this time, and the remaining work completed
under subcontracts. The subcontracts are often awarded on a time-and-material
basis, making dollar expenditure curves the only way to retain proper control.
There is also the need for closing out the regular construction subcontracts, many
of which may require settlement of claims and extras. Resolution of these items
requires time and attention.

4. Design Changes and Startup Problems

At the commissioning stage there can be significant design changes, due, in part,
to the insistence by the maintenance and/or operations departments that their
requested changes are necessary. It is probable that most of these changes are
preference items, and the project manager can take a hard position and refuse
the changes, especially if the work is to the approved drawings and specifications.
This situation, of course, depends on the power of the project manager and the
208 Chapter 9

Figure 9.8 Labor rundown control program.

Cost and Schedule Trend Analysis 209

project discipline of the maintenance and operations departments. In practice it

should be a give-and-take situation, and it is the wise project manager who tries
to accommodate the maintenance and operations departments and at the same
time observe project fiscal responsibility.
A field change log can help identify the scope of this work, and designation
of the initiator can assist in a proper allocation of costs. Thus, on large projects,
it is vital that personnel, jobhours, and costs be tightly controlled through the
rundown stage.
The same rundown control system can also be effectively used to close out
engineering.

H. Monthly Cost Report

Figure 9.9 depicts a typical monthly cost report. This is a summary report and
should list major accounts or cost centers. Columns 1 and 2 contain committed
and expended costs. Columns 3, 4, and 5 cover the original budget, updated with
approved changes. Columns 6 and 7 carry the forecast and variance of forecast
to the current budget. The same format can be used for detailed as well as
summary-level reports. The monthly cost report is a key management document
and, as such, should be timely, accurate, and readily communicate an overall cost
evaluation.

I. Commitment and Expenditure Report

Figure 9.10 contains an example of commitment and expenditure curves. Curve

formats are far more conducive to developing forecasts than a tabular report. A
curve shows the trend of performance to date and can, with a good database and
good judgment, be developed to a final prediction. This format is particularly effi-
cient, as it shows the development of the control budget and forecast against time.
The example in Figure 9.10 shows an original control budget of $80 million
developed in mid-1990 and, with scope changes, increasing to $94 million by
1994. The forecast starts at $90 million in 1991 and rises to approximately $120
million by 1994. With a good database, it would be fairly obvious in mid-1991
that with commitments of $45 million and a mechanical completion in late 1994,
a forecast of $90 million would be unlikely. Historical experience would indicate
a straight-line profile to end in 1992, followed by a gradual rundown to mechan-
ical completion. The status is reported as of April 1994, with commitments of
$113 million and a forecast of $118 million.
This technique can be used for detailed elements as well as for the overall
project.

J. Home Office Jobhour Expenditure Curve

Figure 9.11 shows incremental and cumulative curves for overall home office
jobhours. Planned curves should be developed, and actual experience plotted on
a monthly basis. This example shows a significant overrun against the plan as
of month nine. Evaluations of individual elements of the home office confirm that
the overrun is irrecoverable; therefore, a final overrun is forecast. With a curve
format, this trend was really discernible in month six. Depending on the accuracy
 ro
©

PROJECT
JOB NO
PERIOD

ALL n c u M i . PROJECT COST REPORT SHEET OF

1 2 3 4 5 6 7
CONTROL BUDGET
CODE ITE M / DESCRIPTIO N COMMITTED EXPENDED INITIAl(AFE) APPROVED REVISED CURRENT VARIANCE
TO DATE TO DATE BUDGET CHANGES BUDGET FORECAST (6) - ( 5 )

Figure 9.9 Project cost report.

i
CO
Cost and Schedule Trend Analysis 211

PROJECT
PROJECT FINANCIAL REPORT
JOB NO.

REPORT NO.
COMMITMENTS AND EXPENDITURES
DATE

PROJECTION
120
FORECAST mmmmmmm0
mmut ••••

r
_i_j-

1
100
Q .;
CO CONTROL BUDGET g.J

v
A
- \ / CURRENT BUDGET
\ \ "
8 f

V /K
COMMITMENT f
f

40

/ EXPENDmJRE

20 /
/ /

1990 1991 1992 1993 1994

YEARS

Figure 9.10 Project commitment and expenditure curves.

of the planned curve, a potential overrun, evident in month six, becomes a reality
by month nine.
Nevertheless, in this particular example, a jobhour overrun does not neces-
sarily mean a cost overrun. It is possible (though not probable) for an underrun
in expense budgets and personnel costs to compensate for an overrun in jobhours.
Consequently, it is also important to monitor jobhour costs as well as jobhours.

K. Home Office Costs and Expenditure Curve

Figure 9.12 shows planned and actual expenditure curves of home office costs.
Planned curves are developed by judgment and historical experience and can be
compiled from profiles of more detailed elements.
 CONTRACTOR'S NAME

JOBHOUR EXPENDITURE CURVE [PROJECT STANDARD

OVERALL HOME OFFICE

*| FORECASTED
( OVER-RUN
JOBHOUR
ESTIMATE

PLANNED

CO

o
MECHANICAL
Id
> COMPLETION

3 PLANNED
ACTUAL
FORECAST

Rev Dofe No..

File No.
By Dot<
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Sheet No
PROJECT DURATION (MONTHS) PROJ ECT

CD

Figure 9-11 Jobhour expenditure curve. "S

(D
<0
 Cost and Schedule Trend Analysis 213

PROJECT

HOME OFFICE COSTS JOB NO.

REPORT NO.

DATE

FORECAST PROJECTION

CONTROL BUOQET

•
!
i—
\ j
CURRENT BUDGET

A
*•••'

i
DOLLARS

/
PLANNED / f ACTUAL

1990 1991 1992 1993 1994

Figure 9.12 Home office cost curves.

This example shows the actual expenditure curve consistently underrunning

the planned until the end of 1992 where it continues straight on instead of commenc-
ing to run down. A trend was discernible in mid-1992 and, in fact, a forecasted
overrun had been made in the third quarter of 1991. A further overrun was made
in the first quarter of 1993 due to failure of the curve to commence a rundown.
Home office costs typically consist of:
• project management;
project control;
• procurement services;
computer, reproduction, and communication;
• home office construction; and
accounting, clerical, and administrative.
214 Chapter 9

Trend curves are widely used, as shown in the engineering, procurement, and
construction sections that follow.

L. Monthly Cost and Progress Report

This report is The Report, as it contains the total status of the project, current
problems and future predictions. It needs to be comprehensive, but concise and
dynamic so as to fully recognize all aspects of the work. An effective and efficient
monthly report requires much experience and skill to produce. It should include
a list of current problems, critical activities and narratives of cost and schedule
status, progress curves, productivity curves, and personnel histograms for engi-
neering, procurement, and construction. The composition of the monthly progress
report is so important that it should be a matter of much discussion and agree-
ment between all the major project parties immediately following contract award.
As this report is generally the direct responsibility of the managing contractor,
its contents should have received attention during the precontract negotiations.
If the contract were lump-sum, the negotiations should have been very detailed
and the report contents a matter of contractual agreement. On reimbursable
projects, the discussions and agreement can take place after contract award.
Narratives for the reporting period should include status, trends, and crit-
icality. Significant cost and schedule deviations should be highlighted. Actions
should be proposed for remedial action. Where recovery is not possible, a cost
and schedule impact evaluation should be made.
A minimum package for the monthly report should include:
• executive summary;
• project cost report;
• project status report:
- engineering progress,
- material commitment progress,
- construction progress,
- engineering productivity and personnel curves, and
- construction productivity and personnel curves;
• project master scneauie;
• subcontracts report (if the project has major subcontract elements);
• trend report; and
• contingency rundown curve.
A brief narrative should:
• outline the progress for the period, the cost status, deviations, and trends;
• highlight critical activities; and
• provide a forecast of cost and probable schedule completion.
The executive summary is the key to a quality report; it must be short,
sharp, and attention-getting. Also, maximizing graphical content of the monthly
cost and progress reports will enable management to more quickly absorb the
status, trends, and forecast for the project.
Cost and Schedule Trend Analysis 215

M. Monthly Executive Progress Report

In addition to a weekly activity report (major and critical items) and the detailed
monthly cost and progress report, a brief monthly report should be produced for
executive management. This is a vital document as it is probably the only project
document that is studied by senior management and it can, therefore, obtain or
lose executive management attention and support. Figure 9.13 illustrates a suitable
one-page report. The report should be written in a terse style and should include:
• concise, but complete, financial statement;
• brief report on project progress versus predicted schedule; and
• description of any anticipated delays.
• If appropriate, the executive summary of the monthly cost and progress
report can be added to this report.
Each monthly report should reflect a complete statement of project status
and should not rely on previous reports for a detailed picture of the financial
and schedule status. Actual versus planned progress curves for engineering and
construction should be known.

N. Backcharge Register

Charges against vendors or contractors for extra work can be significant. Backcharges
result from poor vendor-contractor workmanship, schedule delays, lack of resources,
failure to clean up, etc. Accurate record-keeping and documentation are vital.
Several important points should be observed regarding backcharge admin-
istration:
Documentation. All pertinent costs associated with backcharges should be re-
corded and updated regularly;
Early notification. The vendor or contractor should be advised in writing of a back-
charge, including an estimate of the associated cost, as soon as possible; and
Cost forecast. The actual cost should be discounted when taking credit for po-
tential recoverable backcharges in a cost forecast, since full recovery is very
unlikely, often falling in the range of 20-40%.
Figure 9.14 illustrates a typical backcharge register. The data compiled on this
form can be used for:
• assessing the financial impact on project costs as backcharges are settled
with vendors, and
highlighting problem vendors and contractors for quality control purposes.

VII. KEY PROJECT CONTROL TECHNIQUES FOR DESIGN

ENGINEERING

A. Engineering Cost Control—Overall

The greatest proportion of design changes (in-scope and out-of-scope) will occur
during the engineering phase. These changes can impact on all or many phases
216 Chapter 9

MONTHLY EXECUTIVE PROGRESS REPORT

PROJECT
LOCATION JOB NO. DATE

SCOPE (Brief Description)

FINANCIAL
AFEEST1MA T E - DATE
REVISED A F E - DATE
REVISED A F E - DATE

SCHEDULI
ORIGINAL A FE SCHEDULE REVISED TO DATE
REV6EDTC DATF.. REVISED TO DATE

CONTRACTOR

CONTRACT BASIS

PROJECT STATUS-COMMENTSJ

_E NF:FF [fyj 9r pi IP N
1Afl

90
80
70
60
50
40
30
20
10

CURRENT STATUS/FORECAST ORIGINAL PLAN

MECHANCAL COMPLETION DATE
OPERATIONAL COMPLETION DATE
ENGWEERWG % COMPLETE
PROCUREMENT % COMPLETE
CONSTRUCTION % COMPLETE
AFE COMMITED TO DATE FORECAST LAST PEROO FORECAST THIS PERIOO
PROJECT COST
OWNER PROJECT MANAGER CONTRACTOR PROJECT MANAGER

Figure 9.13 Monthly executive progress report form.

 o
PROJECT
o
JOB NO. a
BACKCHARGE REGISTER
REPORT NO. a
DATE

NO. DATE P.O. NO, COMPANY DESCRIPTION OF BACKCHARGE

WORK
ORDER
REF.
ESTIMATED /ESTDA FORECAST ACTUAL
COST 1 RECOV. / COST RECOV'D. I
I
>
I
en

Figure 9-14 Backcharge register. ro

218 Chapter 9

Project Impact Of Engineering Development

$ ... $ ... $ ... $

PROJECT COST

ESTIMATE

COST CONTROL

PROJECT SCHEDULE

PROCUREMENT

CONTRACTING
STRATEGY

CONSTRUCTION

METHOD OF CONTROL - Manual } Engineering

— Computer > Change Log

LEVEL OF DETAIL — Cost Effective

— Experience of Personnel
— Management Commitment

Figure 9.15 Engineering development flowchart.

of the work, such as reduced engineering productivity, increased material costs,

different contracting arrangements, additional construction hours, more field re-
sources, etc. Figure 9.15 is a flowchart that illustrates these elements.
It is, therefore, vital that these changes/development be identified and
tracked from the earliest possible moment. The tracking can be accomplished
with a trending/design change log procedure. The bases for control purposes are
the drawing and requisition registers or indexes, where the first listings are
developed through the experience and estimates of the lead design engineers.
The quality of these estimates can be enhanced with good historical databases.
As the drawings and requisitions indexes are refined, so too is the quality of
control refined. In addition, the use of an earned value system, with the moni-
toring of engineering productivity analysis of actual against budgeted levels, can
show deviations of jobhours and costs.
Figure 9.16 shows a flowchart of an engineering cost control system and displays
typical control methods. If applicable (depending on the contractual basis), owner design
Cost and Schedule Trend Analysis 219

JOBHOUR EXPENDITURE CURVES

1. BY MAJOR GROUPS AND TOTAL

2. ESTIMATED , PLANNED , ACTUAL

3. HISTORICAL EXPERIENCE

EXPENSES EXPENDITURE CURVES

1. BY MAJOR CATEGORIES AND TOTAL

2. ACTUAL V ESTIMATES
3. TRAVEL , REPRODUCTION . COMMUNICATIONS

AVERAGE RATE
BUDGET
1. BY MAJOR GROUPS AND TOTAL

2. ESTIMATED V ACTUAL

QUANTITY CONTROL
— :
- 1. BY MAJOR CATEGORY

2. EARLY ASSESSMENT AS ENGINEERING

EARTH WORKS | DESIGN DEVELOPS
CONCRETE | 3. RANDOM SAMPLING
PIPING |

Figure 9.16 Engineering cost control flowchart.

specifications should be carefully evaluated for conflicts with contractor specifi-

cations. During the early engineering phase of the project, cost engineers should
ensure that effective communication channels are set up with design personnel,
provide prompt and accurate cost estimates, and develop cost consciousness within
all groups. This requires people skills in addition to technical expertise.

B. Engineering Change Log

The objective of the engineering change log (see Fig. 9.15) is to track changes
and their cost impact. This log is a vital part of the project trending program
220 Chapter 9

and should be maintained-issued by the lead design engineers on a weekly basis.

It should cover all changes from the original approved scope, including changes
to specifications, requisitions, and drawings. All changes, both in-scope (normal
engineering development) and out-of-scope, should be numerically recorded and
reflected in the weekly report. Cost analysis should then determine whether the
changes should be included in the project trend report, if the engineering changes
are not covered by the estimate.

C. Bulk Quantity Control (Engineering Phase)

Tracking bulk quantities (such as earthwork, concrete, and piping) should be

carried out from the process design phase through detailed engineering to me-
chanical completion. On large projects, it is common for the original quantity
estimate to greatly increase. Therefore, it is recommended that quantity sampling
be instituted during process design and continued during detailed engineering.

D. Equipment Bid Evaluation (Technical)

Good evaluations and quality bid tabulations are essential for effective cost
control. Preference choices with accompanying cost additions should be thoroughly
investigated. Compatibility with existing plant equipment, ease of maintenance,
and operating costs are appropriate requirements for equipment selection. All
cost differences generated during the technical review should be brought to the
cost engineer's attention.

E. Engineering Jobhour Control

The following is an excellent technique when an earned value system is not

possible, such as in the case of a small project. Figure 9.17 shows typical examples
of jobhours tracking or trend curves. It is emphasized that this technique does
not control effort and measure performance but rather shows a trend and fore-
casts a final position. If there are trend deviations, then further detailed analysis
is necessary to determine the cause and impact.
As of the reporting period, this example shows an overrun in process design
(completed), an overrun in the civil plan, and is on target with piping design but
with a different profile. The overall cumulative forecast is overrun. Projecting
forward at a rundown profile similar to the plan will give a forecasted overrun
at completion. However, it could be that this reported overrun is because work
is ahead of the plan and is not, in fact a cost overrun. For appropriate size
projects, target curves should be developed for individual engineering disciplines
(such as process, civil and structural design, equipment and mechanical, piping,
electrical, and instrumentation).
Historical data can assist in developing accurate planned curves. However,
development will require skill and experience. In practice (especially on large,
reimbursable-type projects), recycling of engineering, causing increases in job-
hours, can be due to owner changes. Such situations can be controlled with the
jobhour tracking curves and the following jobhour rate profiles.
 o
o

PROJECT
JOB NO.
JOBHOUR EXPENDITURE CURVES - ENGINEERING

—
REPORT NO.
DATE
POTENTIAL
| OVER RUN

_ BUDGET
REVISED ESTIMATE
REPORT PERIOD §
i
a
MECHANICAL >
COMPLETION

1
1
55"
t REVISED ESTIMATE
JOBHOUR
TOTAL ACTUAL A

y
^' ' ^^ORIGINAL PIPWG PLAN

^'S , - REVISED ESTIMATE

, * * . V • * * * "ORIGINAL CIVIL PLAN

f *

£ROCESS ACTUAL

PROCESS DESIGN PLAN

TIME (PROJECT DURATION)

Figure 9.17 Jobhour expenditure curves—engineering. 10

10
222 Chapter 9

F. Engineering Jobhour Rate Profile

This technique is generally used in conjunction with jobhour tracking curves

and/or an earned value system. The earned value system tracks productivity/job-
hours, and the rate profile tracks the jobhour cost.
Figure 9.18 shows cumulative planned and actual profiles of an engineering
jobhour rate. Deviation of actual versus planned can indicate a potential cost
overrun. Rate overruns can occur because of different mixes of salary levels,
unanticipated increases in salary levels, changes in benefits and burdens, and
premium costs for overtime. The figure shows an estimated rate of $20, with
tracking curves starting at $23-26, dropping to $17-18, and finishing at the
estimated level. It reflects high-salaried personnel at the start of the project
(department managers, project management, process engineers), followed by a
lower-priced drafting operation, with higher-salaried engineers returning for
punchlist work and plant startup.
The planned curve can be developed from historical data and/or by evalu-
ating rate curves for each major discipline, and then adding them together on a
weighted jobhour basis.
G. Engineering Cost Expenditure Curve

This method is used on small projects where separate curves and jobhour rate
profiles are not cost effective. Figure 9.19 shows planned and actual trend curves

PLANNED RATE
ACTUAL RATE

^^

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 2 4
I 1993 I 1994
MONTHS
Figure 9.18 Engineering jobhour rate curve.
Cost and Schedule Trend Analysis 223

PROJECT
ENGINEERING COST CURVES
JOB NO.
REPORT NO.
DATE

BUDQET

FORECAST/ / 1

•'•'A
/ /
MECHANICAL
COMPLETION
$

' / TO DATE
TO DATE M / PLANNED
/

REPORT
DATE

1 1 1 1 1 1 1 1
TIME m* (PROJECT DURATION)
REMARKS
EXPENDITURES

THIS PERIOD

TO DATE

(TO DATE) % COMPLETE

CURRENT BUDQET

FORECAST

Figure 9.19 Engineering cost curves.

for total engineering costs. A planned curve should be developed with judgment,
using the engineering schedule and related historical data.
This example shows actual expenditures following a similar profile as planned
but consistently at a higher level. It is, therefore, reasonable to predict a final
overrun with a projection following the same rundown profile but starting from
the actual value (overrun) at the month twelve reporting date.
224 Chapter 9

H. Engineering Status Report

Figure 9.20 illustrates a very efficient and concise format for reporting the status
of engineering. The report graphically depicts the trends of the three significant
control elements: physical progress, productivity, and labor. Because of its strong
graphical message, this is a powerful report for senior management and other
project supporting groups. The same report format would be effective for major
design disciplines on large projects.
Figure 9.20 shows progress slipping, leading to a possible schedule overrun
and added costs. The actual labor requirement has greatly exceeded the planned
level in conjunction with a low level of productivity. It is probable that engineering
jobhours will overrun substantially.

I. Engineering Scheduling Overall

The key elements for effective control of engineering are a firm process design,
jobhour estimate based on the number of drawings, labor curves, and a physical
earned value measurement system that tracks progress and productivity. Figure
9.21 contains a flowchart of an engineering scheduling system that is based on
these key elements and is a recommended program for larger projects.

J. Measurement of Engineering Progress/Productivity

The earned value system is the most effective method of all project control tech-
niques, but it is also the most expensive. As such, it is only used on intermediate
or large projects. Figure 9.22 shows a typical format of an engineering progress
and productivity report. In this example, the columns (by number) contain:
Column 4. An assessment of physical completion of drawings and documents, by
discipline and/or department, where work in progress is evaluated using the
guide outlined below;
Column 5. Weighted factor, based on budgeted hours for each discipline or de-
partment (weighting will not change for minor revisions to the budget);
Column 6. Weighted percent complete, determined by multiplying physical com-
pletion times the weighted factor (Column 4 x Column 5); addition to the
bottom line total will give overall engineering progress;
Column 7. Earned jobhours, an allocation of budgeted hours based on physical
completion (Column 3 x Column 4);
Column 8. Jobhours expended, the actual jobhours charged to the work;
Column 9. Productivity, the actual jobhours divided by earned or budgeted hours
(Column 8 -s- Column 7); and
Columns 10, 11, and 12. Used for historical records if necessary.

K. Guide to Completion of Design and Drafting

The stages of completion given in Table 9.1 are a guide to determining the percent
complete of specifications or drawings. These percentages are determined by
discipline supervisors. The guide covers only drawings and specifications. Other
items (such as coordination and supervision) within the engineering scope are
 PROJECT

JOB NO.

REPORT NO.
ENGINEERING STATUS REPORT DATE

PLANNED PROGRESS

ACTUAL PERCENT
PROGRESS

HISTORICAL Performance improving Flattening out

CUMULATIVE > due to weight of
accompftshmer
accompiehfnent
/

BUDGET

«-u^ _, CUMULATIVE
Initialy poor performance ACTUAL
due to learning experience

Revised
O due to poor performance * ^~ ~^N

V-
LAB

PLANNED
LABOR N
r \
>
X
v. ACTUAL \ % v
LABOR %%% \

Figure 9.20 Engineering status report.

226 Chapter 9

7. FRONT END SCHEDULES (Level IV)

A) ENQRa-PROJECT-CONSTR
-I B) MANUAL BAR CHART
I C) BSUED WmflN 2 MO. OF OA
| D) ISSUED BHWEEKLY
| E) MJ*HSSUED BY BJGRGL

8. HOURS - LABOR - STATUS §,

A) MAJOR BJGRO/DRFT. DISCPLMES
B) OVERALL ENGRGL/DRFT.
C) BY EACH UNTT AND AREA
D) COMPUTER REPORT
E) ISSUED WEEKLY

PROGRESS 9. LABOR DISTRIBUTION CHARTS

IN TOTAL A) MAJOR ENGROyDRFT. DISCFlfCS
fe) BY AREA/DISCtPUNE B) OVERALL ENGRG/DRFT.
b ISSUED WEEKLY/MONTtM C) OTHER COMMTTMBfTS
D) LOST TME-VACAT1ON
E) ISSUED WTTHN 3 MO. OF C A
THESE CAN BE SEPARATE REPORTS OR
COMBINE) WTO ONE R B W T

PRODUCTIVITY 10. ENGRG PROGRESS REPORT

A) IN TOTAL PT09B66 By
B)BYD6CPUNE A) USTS ALL DWG&ZDOCs
hours And B) SUMMARY BY SECTION
|b) BSUED WEEKLY/MONTHL\| Physical
Measurement O MANUAL CONTROL
D) 6SUED WEEKLY/MONTHLY

T
THESE PRODUCBJ FOR (pWTCAUPEAKlPERKX) ONLY

UST OF CRTTTCAL
VENDOR DWGS. * 18. 17. 16.

I WEEKLY
ByUnfXnd
Tofal Weekly
h
II
II
By Unit
•-n 11
j By Section Weakly j
I OrBHWeeklytoauel
I I
, 11 •« i
LABOR REPORT
CONCRETE CURVES SO CURVES

Figure 9.21 Engineering scheduling system flowchart.

 o
o
ENGINEERING PROGRESS & PRODUCTIVITY REPORT PS*»D PROJECT
1 2 3 4 5 6 7. 8 9 10 11 12
WBQHTED- EARNED ACTUAL BUDGET ACTUAL HR8. a
BUDG. % WTO. HOURS PROOUCTTVITY
NO. OF
HOURS PER D W a
A/C SECTION % HOUR8
HRS. FACTOR DWQ8. PER DWO.
we. CUM. MC. CUM. INC. CUM. NC. CUM. INC. CUM. MC. CUM.

i
a

t
0)

TOTAL

Figure 9.22 Engineering progress and productivity report. to

3
228 Chapter 9

Table 9.1 Stages of Completion

%
complete

Specifications
Complete draft 20
Write specification 70
Check specification 85
Issue for approval 85
Issue for construction 85
Issue revisions as required 95-100
Architectural drawings
Complete sketches and general arrangements (GA) 15
Issue sketches and GA for approval as required 25
Complete drawing 75
Issue for approval 85
Issue for construction 90
Issue revisions as required 95-100
Civil drawings
Complete preliminary site plan (building locations and site elevation) 10
Issue preliminary site plan for approval as required 25
Complete design calculations 30
Complete drawing 80
Issue for approval 85
Issue for construction 95
Issue revisions as required 95-100
Concrete and foundation drawings
Complete design calculations 25
Complete drawing 60
Check drawing 85
Issue for approval 90
Issue for construction 95
Issue revisions as required 95-100
Steel and superstructure drawings
Complete design calculations 25
Complete drawing 60
Check drawing 85
Issue for approval 90
Issue for construction 95
Issue revisions as required 95-100
Cost and Schedule Trend Analysis 229

Table 9.1 (Continued)

complete

Electrical drawings
Complete design calculations 15
Complete drawing 75
Check drawing 85
Issue for approval 90
Issue for construction 95
Issue revisions as required 95-100
Instrumentation drawings
Complete design calculations 50
Complete drawing 70
Check drawing 85
Issue for approval 90
Issue for construction 95
Issue revisions as required 95-100
Mechanical general arrangement drawings
Complete design calculations 15
Complete preliminary GA drawings 20
Issue preliminary GA drawings for approval 40
Complete drawing 65
Issue for approval 75
Issue for construction 80
Issue revisions as required 95-100
Mechanical and piping drawings
Complete design calculations 10
Complete drawing 65
Check drawing 85
Issue for approval 90
Issue for construction 95
Issue revisions as required 95-100
Flow sheet drawings
40
Complete design calculations
60
Complete drawing
70
Check drawing
80
Issue for approval
95
Issue for construction
95-100
Issue revisions as required
230 Chapter 9

not so easily quantified. These should be treated as below the line items and
given the same measure of completion as the quantified work.

L. Engineering/Drawing Status Report

Figure 9.23 shows a detailed and efficient format for reporting the status of
engineering/drawings. The report covers progress, schedule, and jobhours. It
provides source information for the project report documents and for evaluating
engineering progress. Individual drawing and document status is evaluated by
discipline supervisors. Due to schedule pressure and over-optimism, it is common
for engineering supervision to overstate the progress of the work, therefore it is
essential that the numbers be verified.

M. Engineering Progress (Curves)

The curves shown in Figure 9.24 monitor overall cumulative engineering prog-
ress. Actual and forecasted progress are shown relative to the original or revised
schedule curves. Overall progress is compiled from the individual curves devel-
oped for each engineering discipline. Progress should be physical measurement
based on completion of drawings and engineering documents, in accordance with
the techniques outlined above.
Work unit tracking curves for production drawings provide a substantial
part of the data needed to assess overall engineering progress. Jobhour expendi-
ture can be a poor basis for reporting progress; it is, however, a temporary
alternative that can be used until drawing and document quantities are known.

N. Engineering Productivity (Curves)

An estimated productivity profile should be developed as early as possible. It

should be based on historical data and specific project conditions. Such a profile
can provide an early warning of potential overruns if actual productivity varies
significantly from the anticipated curve.

1. Engineering Productivity Profile or Index

Figure 9.25 shows a typical cumulative productivity profile. Productivity is as-
sessed by comparing earned value, which is based on percent of budgeted jobhours
complete, against the number of actual jobhours expended:
_> T ,. ,A Physical completion x budget
6 jobhours
Productivity
J = —* r*r—, . u , —J
Actual jobhours
This example shows productivity during the initial stage of engineering to
be unusually low, due to unproductive jobhours expended at kickoff meetings,
setting up project controls, recycling of the process design, abortive layout work,
etc. Productivity should improve and stabilize during production engineering, and
gradually decrease over the latter phases of the project when more jobhours are
required for engineering rework and closeout. For ease of reporting, progress and
productivity curves may be combined on a single report.
 * DATE

IAT" 1
ENGINEERING/DRAWING STATUS REPO RT
A?
COMPUTION DATES % COMPLETION XJDGE1 ACTUAL
ACCT. ACT./ ACTIVITY START REMARKS
ORCNa DATE ORKL REV. flEV. 10 20 30 40 50 60 70 80 90 100 HOURS HOURS
CO

I
s o
A
S

s <5"

S
A
S
A
S
a)
A
S 3'
A

s
A
S
A
S
A
S
A
S
A
S
A
S
A
S
A

is:HIED FOR: CONTRACT NO. SECTION REPORT NO. STATUS AS OF TOTAL THIS SHEET
4 -/mwu
c - COKSTWCTKH CUSTOMER
1- K S i C N GRAND TOTAL
M DRAWING NO. SHT.NO. DATE DEPT.
t -rmausi PLANT compled by
Q-ownnoii

Figure 9.23 Engineering/drawing status report.

 to
CO

ENGINEERING PHYSICAL PROGRESS

irUHI

90
X^-^FORC •CAST
RE VISEC> SCI-EDUL E —-i J

fr 1
/
cRiGir IAL_S CHEO ULEr:
f
ACTl AL !

% PHYSICAL PROGRESS
I
/
|
MONTHS"

Figure 9.24 Engineering physical progress curves.

Q)
 o
o

E.
0)
O
(D
a
o
1 i i
Ia
1
i
0 UGIN AL F 3REC AST
i Si
• • • • • • •

"- 1 1
••••••a
1.
o • * * * •!**
— • —
0)
o i !
o
ES TIMA rE BASE
ACTUAL • REVISED .FORECAST

MONTHS

Figure 9-25 Productivity index profile.

ro
CO
CO
234 Chapter 9

2. Engineering Productivity Report

Figure 9.26 shows another form of productivity report. This format covers perform-
ance data and forecasted jobhours in addition to the productivity curve. The example
shows sharp deterioration. As a result, the cumulative curve drops below the
historical curve, and an overrun (poor productivity) forecast is made.

O. Personnel Allocation

The planned personnel and progress curves are drawn by weighting together
curves for individual disciplines. Comparing them with historical standards can
validate the assessment. Overall and individual personnel curves based on the
engineering budget and the Level II schedule should be developed. Figure 9.27
shows such curves. Since early control is essential, these curves should be drawn
up as soon as possible. As it is probable that these curves will be developed by
project/scheduling personnel, concurrence and commitment of engineering super-
vision must be obtained.

P. Engineering Workforce Report

As stated previously, personnel curves should be developed as soon as practical.

In the early stages and at critical periods, a report of the type shown in Figure
9.28 is recommended; it shows engineers and drafters, by discipline, assigned for
the week and for the following week. Lost days are also reported. Differences
between the actual and the planned can indicate lack of personnel or lack of
work, which can result in schedule slippage.
The major use of this report is to ensure that the engineering department
properly allocates the right personnel to the job at the right time and, thereafter,
maintains the correct program. It also is used to maintain a check on lost time
allowances, such as absenteeism, sickness, and vacation. It is common at the
start of projects for personnel allocations to be slow and/or the wrong mix. This
technique can provide the data to prevent this problem.

Q. Engineering Material Requisition Curve

In conjunction with developing the process design, plot layouts, and engineering
specifications, the requisitioning of equipment is normally on the critical path.
Thus, plotting the actual issuance of requisitions against time can provide an
excellent overview and control of the work.
Figure 9.29 shows an engineering material requisition control curve. Tabu-
lated data can be detailed further by showing material categories if desired. This
example shows that actual issues are behind the planned curve. If the planned
curve has been drawn from the detailed engineering schedule, the situation could
be serious and require further investigation at the detailed level.
The curves represent the planned and actual issues of material requisitions
from the engineering department to the procurement department. The procure-
ment department will then require another two to four weeks to add the com-
mercial sections and issue the completed inquiry package. A curve representing
the later issue is shown in the procurement section of this chapter.
 o
o
TITLE: ENGINEERING PRODUCTIVITY REPORT
MONTHLY CUMULATIVE FORECAST TO COMPLETE TOTAL FORECA8T
a
NO DATE EARNED ACTUAL
PROD
EARNED ACTUAL
PROD
EARNED ACTUAL EARNED. ACTUAL
PROD
a
OOMP H H OOMP H H COMP H H H H

SL
1.

' " • " « - . . . . . CUMULATIVE HISTORCAL

QOOD

MONTHLY ACTUAL ,*' ^ ••/"*" *

b

I f ^ ^ S * ~ CUMULATIVE ACTUAL ^
PRODU

FORECAST ^ *
POOR
1

Figure 9.26 Engineering productivity report form.

O1
NUMBER OF
PERSONNEL

COMPLETE PLANNED PROGRESS

1

\ PLANNED PERSONNEL
\

DURATION

Figure 9.27 Typical personnel and progress curves.

REPORT NO. PROJECT

PERIOD JOB NO.

ACTUAL PLANNED DAYS LOST LAST PERIOD

THIS NEXT DUE TO
SECTION COMMENTS
PERIOD PERIOD VACATION SICK OTHER

SUPERVISION & COORDINATION

PROJECT MANAGEMENT
PROJECT CONTROL

ENGINEERING DISCIPLINES .

TOTAL

CUMULATIVE TOTAL

Figure 9.28 Engineering—force report.

Cost and Schedule Trend Analysis 237

NOTE : ISSUE OF MATERIAL REQUISITIONS FROM ENGINEERING TO PURCHASING WILL GENERALLY

BE DEPENDANT ON COMPLETION OF DATA SHEETS AND SPECIFICATIONS .

ISSUED FOR INQUIRY + ^ ^ ^ \

NUMBER
OF
REQNS.

DURATION - ^

A^ ,,
T SCHEDUL ED ~
ACT UAAL — ACTU

~ * - ^ _ ^ PERIOD
ACCOUNT * ^ - ^ _

^ "

^y^ ^ y ^ ^ y ^ ^ y ^ ^ y ^ ^ y ^ ^ y ^ y ^ ^ y ^

^ * ^ y ^ / ^ ^ ^ y ^ ^ y ^ ^ y ^ ^ y ^ ^ y ^ ^ y ^

^ ^ ^ y ^ ^ y ^ ^ y ^ ^ y ^ ^ y ^
S ^

^ y ^ ^ y ^ ^ y ^ ^ y ^ ^ y ^ ^y<^ ^ y ^ ^ ^ ^ ^ ^ y ^

^ y ^ ^ y ^ ^ y ^ ^ y ^ ^ y ^ ^ y ^ ^ ^ ^ y ^ ^ y ^ ^ y ^

^ y ^ ^ y ^ ^ y ^ ^ y ^ ^ y ^ ^ y ^ ^ ^ ^ y ^ ^ ^ ^ y ^ ^ y ^

^ y ^ ^ y ^ ^ y ^ ^ y ^ ^ y ^ ^ y ^ ^ y ^ ^ ^ ^ y ^ y ^ ^ y ^

^ ^ ^ y ^ ^ y ^ ^ y ^ ^ y ^ ^ ^ y ^ ^ y ^ ^ y ^ ^ y ^

^
y

y
^

^ ^ ^ ^ y ^
[/^
^ y ^
y ^ ^ y

^ y ^
^

^ ^
^ y ^ y

J l
^

y^
y

^ y ^
^

^ y ^

TOTAL ^ y ^ ^ y ^ ^ y ^ ^ y ^ ^ y ^ ^ y ^

CUM. TOTAL y ^ y ^

Figure 9.29 Engineering material requisition curve.

The number of requisitions approved by engineering for purchase may also

be tracked, with the curve normally being three to four months later than the
inquiry curve.
The total number of requisitions should be estimated as early as possible
and should be updated as engineering progresses. The curves are key techniques
for use in evaluating the overall progress of the engineering-purchasing cycle.
Delays in issuing material requisitions can result in late ordering and corre-
238 Chapter 9

PERFORMANCE
X . PLANNED
^^W A CUMULATIVE

UNIT BUDGET
RATE
\ • •* ^ v .
^ * V V ACTUAL
<^ CUMULATIVE
INCREMENTAL

| 1 1 1 TIME 1

PRODUCTION
NO. ~
*"*"^-'^y ^^^^f^ ^^V^ PLANNED
COMPLETE-
^ T ^ ^ CUMULATIVE

^^^ . • i INCREMENTAL
^rf i - - - -n
-

1 1 1TIME

PERIOD
PERIOD PLANNED NO.
ACTUAL NO.
CUM. PLANNED NO.
ACTUAL NO.
PERIOD PLANNED RATE
ACTUAL RATE
CUM. PLANNED RATE
ACTUAL RATE

Figure 9.30 Engineering work unit tracking curves.

Cost and Schedule Trend Analysis 239

spondingly late delivery of materials and equipment to the job site. Feedback of
the vendor's information to engineering is also affected, which in turn can delay
the engineering program. For these reasons, careful monitoring and control of
the material requisition program is essential.

R. Engineering Tracking Curves

Production of concrete foundation drawings and piping isometrics usually require

careful monitoring. Both disciplines use a high proportion of engineering jobhours
and are usually critical to the project schedule. Curves such as those shown in
Figure 9.30 can be used to monitor the work.
Productivity curves (shown in the top diagram of Figure 9.30) record monthly
and cumulative values for jobhours spent per drawing. The histograms (shown
in the center diagram) indicate planned and actual numbers of drawings issued
each month. Cumulative totals are also plotted. Statistical data is tabulated at
the bottom of the form. This technique can be used for any significant element
of work. During critical periods, the frequency of monitoring would be increased
from monthly to bi-weekly or even weekly if necessary.

S. Piping Design Activities and Progress Curves

Since piping design is often the critical path, detailed schedules and programs
should be developed for this work. Figure 9.31 provides an example of a curve
for this work. It shows a typical relationship among major piping design activities
for a single unit and weights them together for overall progress. Personnel
resources should be applied to the individual activities.
Projects can vary considerably in their process design, plot layouts and
detailed engineering philosophies, so this typical schedule should be adjusted for
project-specific circumstances. Project-specific schedules should be drawn against
a calendar base. The typical schedule shown is based on return data and can
therefore be used to develop a project-specific schedule.

T. Vendor Drawing Control

An engineering schedule can be affected by the lack of vendor drawings. Foun-

dation design and piping design depend on vendor drawings for details of foun-
dation bolts, bearing loads, nozzle orientation, pressure, and capacity data. Thus
an effective vendor drawing control system is essential for planning and sched-
uling engineering work. A bid tab evaluation should cover the issue of vendor
drawings, and the successful vendor should be monitored thereafter to ensure
compliance with promised or need dates. This is essential in the case of critical
vendor drawings. A vendor material expediting program should also cover the
supply and issue of vendor drawings. Schedule engineers should coordinate this
effort with the expediting department.
Figure 9.32 shows a form that can be used to control critical vendor draw-
ings. The same format can be used for all vendor drawings; however, critical
drawings should be identified separately.
 10
PIPING DESIGN - PHASE II
ASSUMPTIONS:
1. UNLIMITED LABOR 100 100
PLOT DE\ ELOPMQ T
2. MINIMUM AMOUNT OF LAYOUT
CUSTOMER INTERFERENCE
•90
3. CONCEPTUAL PROGRESS VESSEL ORIENT
DESIGN HAS BEEN COMPLETED MODEL
DURING PHASE 1
80 -80
KODELRV Y&FKUP
THIS SCHEDULE DOES NOT Ufc X3GROL
COMPREHEND COMPLETION 70 •70
OF "AS BUILT" DRAWINGS AND istMTO
FIELD CHANGES WHCH OCCUR
SPOCX & A R R C
AT THE PUNCH OUT A*©
PRECOMMBSONNG STAGE 60
SPOOL ISSUE

STEA4TRACE* HYDROPtCKAQES
50
JOBCLIXNUPOFINGNEERtQHOLDS

40 40

30 30

20

30 40 50 60^
TIME (%) - 70% OF PHASE II PROJECT DURATION
o
0)

Figure 9.31 Piping design progress curve.

i
CO
 o
o
DATE | CRITICAL VENDOR DRAWING LIST [PROJECT a
P.O. FOR APPROVAL FINAL
EQUIPMENT VENDOR VENDOR DRAWING
NO REQ'D o
I
REQ'D REC'D RET'D REC'D

>
Si.

55

Figure 9.32 Critical vendor drawing list.

242 Chapter 9

VIII. KEY PROJECT CONTROL TECHNIQUES FOR PROCUREMENT

A. Procurement Cost Control—Overall

Project purchasing strategy should specify a proposed split of domestic and

international purchasing. In the control budget, escalation rates and design al-
lowances should be established by prime account. Use and coordination of over-
seas purchasing offices should be specified. Project conditions such as schedule
acceleration, national purchasing preferences, and special owner requirements
need to be evaluated for their cost impact.
Figure 9.33 displays a flowchart of a purchasing cost control system and
shows methods by which cost control can be exercised. A purchase order commit-

P.O. COMMITMENT REGISTER

EQU1PMENT AND
BULK MATERIAL 1. COMMITTED VERSUS BUDGET

2 . DESIGN ALLOWANCE CONTROL

3 . BY MAJOR ACCOUNT

I DESIGN ALLOWANCE
4. FREIGHT , DUTY & SALES TAX
CURRENCY FLUCTUATIONS
5. P.O. SCHEDULE / DATES

BID TAB ANALYSIS

1. PURCHASING TRENDS

2 . COMMERCIAL REVIEW

3 . TECHNICAL REVIEW

4. SCHEDULE EVALUATION

COMMITMENT CURVES
1. BY MAJOR ACCOUNT

2. ACTUAL V BUDGET

Figure 9.33 Procurement cost control flowsheet.

Cost and Schedule Trend Analysis 243

merit register should be maintained by prime account and separated for the
following major categories:
• firm-price equipment orders,
open-ended bulk material orders, and
• field-purchased materials.
Curves showing actual versus planned commitments should be considered for
these categories, for larger projects and where schedule/progress is critical.
Generally, bid groupings exceeding the control budget by 20% should be
thoroughly investigated. Such deviations could signal a fat design, poor bid
documents resulting in a high bid, tight market conditions, or a poor estimate.
Several major considerations must be taken into account when planning for
procurement cost control:
• optimize commercial terms by taking advantage of cash discounts for quan-
tity and by making prompt payments;
• on large projects, maximize discount terms by ordering similar items on a
single purchase order;
• minimize import duties and taxes by requesting special waivers from host
countries or by reclassifying items to lower duty categories;
• minimize freight charges by careful selection of carriers; and
• after evaluating potential quantity increases, make a sensitivity analysis of
unit price bids to verify that an apparent low bidder is in fact still lowest.

B. Purchasing Plan for Critical Material

Material on a critical path could require premiums for vendor drawings and
shorter delivery. Alternatively, special expediting arrangements, such as teams
resident in vendor shops, can be required, as can air freight and special handling.
Such requirements often lead to additional costs. Refer to the section later in
this chapter on procurement scheduling for additional information on the pur-
chasing plan for critical material.

C. Bid Tabulation Procedure

The bid tabulation procedure should cover preparation, control, review, and ap-
proval requirements of bid tabulation documents. Levels of approval should be
defined, and instructions for opening of tenders and evaluations of tender docu-
ments should be given. Budget comparisons should be made, and a negotiations
philosophy stated. Bid tabulations should also contain information based on
knowledge of or experience with specific bidders if this may have a bearing on
their selection.

D. Purchase Order Commitment Register

Figure 9.34 shows a purchase order commitment register listing purchase orders
placed, date placed, vendor, value, currency, and delivery date. Design allowances
should be carefully reviewed against the latest supplement to a purchase order.
 PROJECT
JOB NO.
8
REPORT NO.
PURCHASE ORDER COMMITMENT REGISTER DATE

1 2 3 4 5 6 7 11 12
REQD. DESIGN VARIANCE
REQN. P.O. DATE
P.O. ALLOW. FORCAST
NO. NO. PO. ITEM VENDOR COMMITTED EXPENDED FORECAST
DATE BUDGET BUDGET

Figure 9-34 Purchase order commitment register.

i
Cost and Schedule Trend Analysis 245

As engineering advances, so the need for design allowance reduces. Freight costs,
duties, and taxes should be segregated and monitored.

E. Cost Forecasts of Major Purchase Orders

The purchase order commitment register just discussed may become voluminous.
For this reason, it is recommended that the major cost purchase orders be segre-
gated and reviewed each month for a final cost forecast. Design allowances for
fast-track projects are of particular importance, and currency fluctuations, esca-
lation, and delivery conditions should all be carefully considered.

F. Equipment Cost Curves

Figure 9.35 illustrates a monetary commitment curve for equipment. The curve
tracks actual cumulative commitments relative to a planned profile, but only
indicates a trend of total commitments. The curve can be used:
• as a graphical representation of work status, and
• as a guide for procurement progress, assuming the planned curve reflects
the current schedule.
Significant deviations of actual versus planned values can provide a trend
for schedule and cost deviations. Separate curves should be drawn for equipment,
bulk material, and major package units that are supply and install.
Figure 9.35 shows an overrun of commitments versus the plan, although
the overrun could simply be that commitments have been made ahead of the
plan and not that costs are overrunning. Alternatively, a schedule check can
reveal that the work is on or behind the plan, which would indicate a potential
cost overrun. As shown, there is a revised budget (increase), indicating that cost
was a problem.

G. Procurement Scheduling—Overall

Major elements for effectively scheduling purchasing work are an accurate ma-
terial requisition list, a purchase order schedule, and a viable purchasing strat-
egy. Figure 9.36 illustrates key techniques and shows methods by which effective
control can be exercised:
equipment purchase schedules (level IV),
• material requisition curves for inquiry and purchase,
• short-range purchase plan,
• material status report,
list of critical vendor drawings, and
• material logistics schedule.
The key activities are developing and using:
• a purchasing plan for critical material;
• a project buying strategy and purchasing program (i.e., quality worldwide
purchasing and the use of overseas satellite offices);
• effective vendor lists;
246 Chapter 9

PROJECT
JOB No.

REPORT No.
EQUIPMENT COST CURVES DATE

— _R EV|S ED_ BUD GET ^ ^ j .

BUDGJET I . — •-"""•""-"""""""" •

0 4
FORECAST ~ * * \ \ ' * * ^ - - " '

MECHANICAL
COMPLETION
PLANNED /
COMMITMENT
if Men '
$
/
i/

TIME (PROJECT DURATION)

' ' • '
COMMITMENTS REMARKS

THIS PERIOD

TO DATE

(TO DATE) % COMPLETE

CURRENT BUDGET

FORECAST

Figure 9.35 Equipment cost curves.

 o
o
a
EQUIPMENT PURCHASE SCHEDULES (LEVEL IV) 0)

MANUAL LIST OF P.O. DATES

BY EQUIPMENT CLASS
BY EACH UNIT & AREA
ISSUED BI-WEEKLY. <D
BID TABULATION
MR. - ISSUED FOR INQUIRY.
|_M.R. S JN< _ _ MR • ISSUED *OR PURCHASE CHECK BID TAB FOR
I M.s/TuRCHASE SCHEDULE EVALUATION

I SHORT-RANGE PURCHASE PLAN

EARLY PURCHASE PLAN >

CRITICAL EQUIPMENT
OVERALL STRATEGY
SUBCONTRACTS NOT COVERED
INSPECTION AND
UPDATE WEEKLY/BIWEEKLY
EXPEDITING REPORT
ISSUED WITHIN 2 MO OF C.A.
3'
© A) CHECK REPORT FOR
MATERIAL STATUS
MATERIAL STATUS REPORT AND DELIVERY FORECAST
LIST OF DELIVERY INFO
BY EACH UNIT & AREA
PER EACH PIECE OF EQUlPT
ISSUED MONTHLY

MATERIAL LOGISTICS SCHEDULE

Figure 9.36 Procurement scheduling flowsheet.

ro

5
248 Chapter 9

• bid tabulation procedures;

• a subcontracting strategy and subcontracting control procedures;
• inquiry and purchase order control procedures; and
• lead times for material delivery durations.
The schedule engineer, in conjunction with the project purchasing manager,
should establish an implementation plan for the listed items. The plan should
include personnel allocations and completion dates to accomplish the work. Fur-
ther, the time impact of specific owner-approval requirements should be carefully
evaluated.

H. Equipment Purchase Schedules

Detailed activities from requisition to purchase order commitment and corre-

sponding dates should be listed. The purchasing schedule tends to be a very large
document, requiring considerable research to check out status and criticality. It
is vital that the purchasing schedule be current and up to date, since the status
of equipment purchasing is essential to the evaluation of criticality.

I. Purchasing Material Requisition Curves

Tracking material requisitions through engineering and purchasing can provide

a meaningful assessment of the status of the engineering-purchasing program.
On large projects, easy visibility of the overall purchasing effort is helpful in
quickly determining status and performance. This can be achieved with the use
of requisition curves.
The curves in Figure 9.37 represent the number of requisitions issued for
quotation and purchase. The purchase curve should normally follow the quotation
curve by eight to twelve weeks. Planned curves are developed from front-end
engineering schedules, the overall network program, and/or historical data. Pur-
chasing curves are sometimes plotted against monetary value instead of the
number of orders placed. Several engineering requisitions may be combined into
one purchasing inquiry and vice versa. Since slippage can have many causes,
detailed analysis will be necessary to pinpoint specific causes.

J. Short-Range Purchase Plan

The short-range purchase plan concentrates on critical and long-lead-time equip-

ment. This program should cover a two-to-four-week period and should show
equipment items to be committed during that time frame. During critical pur-
chasing periods, weekly meetings should be held to determine the status and the
need for any remedial action. Project managers should attend these meetings.

K. Material Status Report

Like the purchasing schedule, the material status report is voluminous. Again,
special abstracts and summary information are essential in achieving effective
control. The most important information contained in the material status report
is the anticipated date equipment will arrive at the job site.
 Cost and Schedule Trend Analysis 249

NOTES : 1. THE QUOTATION ISSUE CURV E SHOUL D GENERALLY FOLLOVH THE ENGINEERING MATERU
REQUISITION CURVE BY 2 - 3 WEEKS.
2. THE PURCHASE ISSUE CUFT/ E WILL GENERALLY REQUIF E THAT ENGINEERING
UPDATE THE DATA SHEET,5 AND SPECIFICATIONS PRIO R TO PURCHASE UND ER
COMMITTMENT .

ISSUED FOR QUOT/kTION

NUMBER OF
MATERIAL
REOJ5.

R PURCHASE

/
DURATION *•-
SCHEDULED . - - - - SCHEDULED
ACTUAL
ACTUAL — — —

^ ^ * — ^ ^ ^ PERIOD
ACCOUNT ^ - ^ ^ ^

y ^
^y^ ^ ^ ^y^
^y^

^ ^ y^ ^ ^ ^y^ ^y^

^ ^ y^ ^ ^ ^y^\ ^y^

^y^ y^ ^ ^ ^ ^y^ ^yy^

^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^y^ ^y^

^ ^ ^ ^ ^ ^ / ^y^ ^y^ ^y^

^ ^ ^ ^ ^ ^ ^ y ^

^ ^ ^ ^ ^ ^ ^ ^ ^ ^ y^ ^y^

^y^ ^ " ^ ^ ^yy^

y^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^y^ ^ ^

y ^ ^ ^ ^y^ ^y^ ^y^

TOTAL y ^
CUM. TOTAL

Figure 9.37 Purchasing—material requisition curves.

250 Chapter 9

L. Bid Tabulation

Bid tabulations should include schedule evaluations. When schedule is more im-
portant than cost, the schedule evaluation should then reflect the probability of
quoted delivery dates being accurate. The evaluation should also cover the delivery
of vendor drawings. The schedule engineer should participate in vendor review
meetings to check out schedule details with vendors of all critical equipment.

M. Inspection and Expediting Reports

Inspection and expediting reports should be reviewed by schedule engineers for

the status of critical equipment and general equipment delivery trends. Schedule
engineers should visit vendor shops during the manufacturing process to check
on the status of critical equipment.

N. Material Logistics Schedule

On large projects in remote locations, material logistics can be a major problem.

Material tonnage histograms should be prepared and evaluated against the ca-
pacity of proposed handling and unloading facilities. Figure 9.38 is drawn by
taking material and equipment weights from the estimate and placing them
against the scheduled onsite delivery dates. However, early estimates and sched-
ules may not be sufficiently detailed to provide the necessary information, so that
site handling facilities must then be based only on historical data (if available)
and personal judgment.
As shown in this specific project example (Fig. 9.38), the historical data was
not available and the personal judgement of the construction staff was poor. The
figure shows a peak delivery of 4000 tons per week when the dock capacity is
only 2000 tons per week. This represents an error in barge dock design that will
have a direct and negative impact on deliveries and will lead to delays in the
construction program.

IX. KEY PROJECT CONTROL TECHNIQUES FOR

CONSTRUCTION—DIRECT HIRE

A. Construction Cost Control—Overall

The ability to effectively control and forecast construction costs starts with the
quality of the field budget. Too often, a lack of care and attention to construction
work begins as early as the project control estimate. This lack becomes particu-
larly evident in the field indirects estimate. Factors are applied to direct-labor
costs instead of developing quantity takeoffs. This requires drafting layouts for
temporary facilities, developing a detailed organization for the field staff, and
preparing detailed construction equipment lists as well as time-frame schedules.
Many projects experience overruns in field indirects due to a poor estimate rather
than a lack of control and poor site management.
 o
o

8000- (D
a
7000-

6000-
PEAK DELIVERY
OF MATERIALS
TONS
5000-
1
0)

4000" CONSTRUCTION 4000 TONS PER WEEK

EQUIPMENT
AND TEMPORARY
FACILITIES
3000

BARGE DOCK CAPACITY

2000 TONS PER WEEK
2000

III mill
1000

TIME DURATION

Figure 9.38 Material logistics schedule.

252 Chapter 9

Establishing detailed (quantity) estimates for small tools, consumables, and

field office expenses is a difficult task, normally accomplished by a unit or factored
basis method.
A quality construction estimate has a number of key elements:
• direct field labor:
- original quantities (during engineering) updated by field takeoff,
- productivity factor for time, location and specific project conditions,
- unit budgeted hours per work operation (by construction cost codes),
handling, rework and hydro-testing by factor;
• indirect field labor (productive and lost time)—factor on direct labor hours;
• field staff:
- organization chart,
- time-frame schedule,
- relocation and local living, and
- replacement and training;
• temporary facilities:
- dimensioned layouts,
- quantity takeoff,
- unit rates (dollars per square foot), and
- maintenance by factor;
• construction equipment:
listing by category and number,
time-frame schedule,
- unit rates (rental versus purchase), and
- maintenance by factor;
• small tools and consumables:
- factor on direct labor (dollars per hour), and
- loss allowances;
field office expenses:
- factor on direct labor (dollars per hour), and
listing for office furniture and equipment; and
• escalation and contingency—by judgment and formula.
The major elements for controlling construction costs are early identification
of quantity variances, labor productivity, and craft rates, and continuous evalu-
ation of field indirects. A quantity field budget, showing clearly defined units of
work, is essential. On large, reimbursable-type projects, it is recommended that
a separate labor rundown control system be instituted for the last 20% of the
project. Figure 9.39 is a flowchart of a cost control system and shows key cost
control techniques.
Cost and Schedule Trend Analysis 253

DIRECT LABOR REPORT

MANUAL OR COMPUTER 1. WEEKLY fSSUE
2. QUANTITIES - EARNED BUDGET
3. ACTUAL HOUR8
HOUR REPORT
4. PHYSICAL PROGRESS
6. PRODUCTIVITY
6. HOUR FORECA8T
PRODUCTIVITY CURVE8
7. CRAFT MIX - AVERAGE RATE
J 8. BY ACCOUNT . AREA & TOTAL
CRAFT AVERAGE RATE

SUBCONTRACT REPORT
SUBCONTRACT 1. BY INDIVIDUAL SUBCONTRACT
COST REPORT 2. MONTHLY OR Bl WEEKLY I8SUE
3. QUANTITY OR WORK ELEMENT COMPLETION
4. 8COPE AND CLAIMS ALLOWANCE

PERFORMANCE CURVES 6. PROFITABILITY EVALUATION

6. CO8T FORECAST

INDIRECTS REPORTS
INDIRECT8 EXPENDITURE
1. TEMPORARY FACILITIES
CURVES 2. FIELD OFFICE EXPEN8E8
3. 8MALL TOOLS & CON8UMABLE8
4. CONSTRUCTION EQUIPMENT
TEMPORARY FACILITIES
FIELD STAFF 6. FIELD 8TAFF
CONSTRUCTION EQUIPMENT 6. INDIRECT LABOR & MATERIAL

INDIRECT LABOR

Figure 9-39 Construction cost control flowsheet.

254 Chapter 9

B. Recording and Reporting Extra Work

Due to the volatile nature of conditions at a construction site, change is a constant

companion. A field trending system that reflects costs due to changes and extra
work is therefore essential. The system would typically capture:
specification changes,
• design errors,
• field errors,
• vendor errors,
• owner changes, and
• changed or unusual site conditions.
A procedure should be developed to cover extra work initiation, approval and
authorization, reporting, and closeout.

C. Material Control on Site

Failure to properly handle material can result in additional costs. Breakage,

damage, and trouble reports should be routed to the field cost engineer for
assessment of the cost impact. Small tools and field consumables usually require
close attention. Cost evaluations of surplus materials, spares, and startup re-
quirements should be made as construction draws to a close.

D. Machinery Protection

Long schedules and schedule extensions can cause additional costs for equipment
maintenance. Further, failure to properly protect machinery can result in serious
cost increases and scheduling delays. Vendor recommendations should be written
into an overall procedure to protect machinery from the time it leaves the factory
to the time of operational acceptance. It is important that vendors be advised of
the length of time their equipment will remain unoperated, since this could affect
packaging specifications, costs, and guarantees. The field staff should identify
instances of additional protection or winterization requirements.

E. Construction Progress/Jobhour and Budget Reports (Earned

Value System)

1. Progress/Jobhour Report
Figure 9.40 depicts a format for reporting actual jobhours and earned budget
value in the earned value system (EVS). Progress is measured by budget jobhours.
Ajobhour prediction is based on a judgment analysis of productivity versus actual
hours. Productivity is derived from actual hours expended versus budget hours
earned. Indirect jobhours should be shown separately. Indirect jobhours are not
quantity based. It is recommended that an indirects budget or equivalent earned
value be based on direct work progress and judgment for each major indirect
jobhour account.
 Cost and Schedule Trend Analysis 255

JOB NO:
REPORT N O :
UNIT:
SUMMARY REPORT (PRIME ACCOUNT) PERIOD:

HOURS SPENT BDGT. FOR WORK DONE TOTAL I PRODU TIVITY TOTAL
THIS TO THIS TO BUDGET COMPL. THIS TO PREDICTED
DESCRIPTION CLASS WEEK DATE WEEK DATE WEEK DATE HOURS

EARTHWORK
FOUNDATIONS
HEATERS

1
SUBTOTAL DIRECT

TEMPORARY FACILITIES
TOOLS ft EQUIPMENT
UNALLOCABLE
SUBTOTAL INDIRECT

Figure 9.40 Jobhour summary report.

The earned value system is not an absolute productivity measure, since it

is based on the estimate. A poor estimate means a poor productivity measure-
ment, although progress is not similarly affected.
2. Budget Report
Figure 9.41, an earned budget report, collects quantities as the work is completed
and predicts total quantities based on a field takeoff made from construction
issue drawings. These quantities are then converted into an earned value of
budget hours, which are subsequently entered on the jobhour report as previously
illustrated.

F. Construction Productivity Report (Direct Labor)

Accurate measurement of overall productivity is essential to good craft labor

planning and jobhour-cost forecasting. One widely used method, called the earned
budget hour, or earned value, approach, is illustrated in Figure 9.42. This method
requires:
• budgeted construction hours,
actual jobhours expended (monthly and cumulative), and
physical progress (percent complete, monthly, and cumulative) or earned
budget hours (monthly and cumulative).
Productivity is simply a ratio or yardstick to measure performance by using
actual jobhours versus budgeted or estimated hours. Poor performance can be
 ORIGINAL PREDICTED UNIT QUANTITIES DONE EARNED BUDGET

ITEM CLASS QUANTITIES QUANTITIES UNIT RATE THIS WK. TO DATE THIS WK. TO DATE REMARKS

BY
INDIV.
WORK
CATEGORY

Figure 9.41 Earned budget report.

O

i
CO
 TITLE: CONSTRUCTION PRODUCTIVITY
9
0)
MONTHLY CUMULATIVE FORECAST TO COMPLETE TOTAL FORECAST

NO DATE % EAflTCD ACTUAL

PROD
% EAWGJ ACTUAL % EARNED ACTUAL
PROD
EARNS) ACTUAL a
HOURS HOURS HOURS PROD HOURS HOURS
DOMP OOMP HOURS OOMP HOURS HOURS

I
o

2L
1

' • • " • • — . . . . CUMULATTVE HBTORCAL

QOOD

MONTHLY ACTUAL, • ' ^-~£J " *

crivrrY

f ^ ^ * ' * ° CUMULATIVE ACTUAL >

i
5

FOHBCAST ^ *
POOR
1

to
Figure 9.42 Construction productivity form.
258 Chapter 9

due to deficiencies in the estimate or to poor labor productivity. Productivity is

computed as follows:
o , .... Earned budget hours
Productivity = — — — . °
Actual jobhours
This formula is the same for both monthly and cumulative time periods. Using
the formula, good productivity will be > 1.0; conversely, poor productivity will be
< 1.0. Productivity can also be measured by an inverse calculation.
Productivity measured by this method is not true or absolute productivity
of the labor force, because if no budget exists or if the estimate is bad, the
productivity measurement will simply be zero or poor. Alternatively, a fat estimate
will produce an artificially high productivity that is no more representative of
true productivity than is a low estimate. Absolute productivity can only be mea-
sured on a unit-jobhour basis. This is often referred to as the work unit, labor
unit, or jobhour unit.
G. Construction Jobhour Curve (Direct Labor)

Apart from progress-productivity reports that measure jobhours, major methods

for controlling labor costs are the jobhour expenditure curve and the jobhour rate
curve/profile. These curves enable a trend pattern to be readily discerned and a
forecast to be made based on cumulative performance.
Figure 9.43 shows a set of incremental and cumulative curves for direct
labor hours. Planned curves should be developed from the field estimate and
construction schedule. Actual experience is plotted on a weekly-monthly basis.
The actual jobhour status is tabulated on the form, together with a current
forecast.
The example contained in the figure shows a slight overrun of actual versus
planned values. This trend has been evident for many months and improvement
is not likely, so an overrun is possible. However, a jobhour overrun does not
necessarily mean a cost overrun of the labor budget. It is possible for an underrun
in estimated labor jobhour cost to compensate for an overrun in actual jobhours.
Hence, it is important to monitor the cost of jobhours. This can be accomplished
with an hourly rate profile, (discussed in the next section). The jobhour expen-
diture curve does not have to be used when an earned value system is in place,
so it is widely used on small projects where an earned value system would
probably not be employed (since earned value systems are not cost-effective under
such circumstances).

H. Direct Labor Hourly Rate Profile

Figure 9.44 shows cumulative planned and actual profiles of the direct-labor
hourly rate. This rate represents total labor costs divided by total direct hours.
The monthly status is tabulated as shown. Significant deviation of actual versus
planned values can indicate a potential overrun. Rate overruns can occur because
of different craft mixes, union contract changes, governmental regulation changes,
and excess premium costs for overtime and shift work. This example shows the
curves tracking closely for the first six months, then an underrun is apparent.
If this trend should continue, a significant cost savings would be possible.
Cost and Schedule Trend Analysis 259

PROJECT
JOB NO.
REPORT NO.
CONSTRUCTION JOBHOUR CURVE DATE

REPORT
DATE
/

/ TO DATE MECHANICAL
/ PLANNED COMPLETION

TO DATE
ACTUAL

- (PROJECT DURATION)

INCREMENTAL

Figure 9.43 Construction jobhour curve.

Abrupt changes in a cumulative profile do not generally occur when the job is
well advanced, since there is too much weight of past performance to allow instant
or abrupt change. A turndown or underrun can indicate the use of lower-paid crafts,
escalation lower than anticipated, or failure by trade unions to achieve pay demands.
The following elements are typical for profiles of process projects:
low at first due to low-skill civil workers (laborers);
• increasing to peak due to highly paid equipment operators, millwrights, pipe
fitters, and electricians; and
a slight downturn due to lower-paid insulators and painters.
260 Chapter 9

PROJECT
JOB NO.
REPORT NO.
LABOR RATE CONTROL CURVE
DATE

NOTE : CRAFT R ATE INC LUDE8 FRIN GEJ9 AND BENEFITS,

BUDGIET
L

COST
PER HOUR "
r*
- CONTRACT
ERMINATION

UNION AGREEMENT
PLAN NED t ^"^ INCREASE

^ ^ -f
ACTUAL
i

1
CURRENCY-

PERIOD

PERIOD RATE

CUM. RATE

BUDGET RATE
REMARKS

Figure 9-44 Labor rate control curve.

Cost and Schedule Trend Analysis 261

A/G PIPING ERECTION (TOTAL!

7.0

6.0

HOURS
PER UNIT CUMULATIVE
5.0

^INCREMENTAL

4.0

3.0
TIME

Figure 9.45 Typical work unit tracking curve.

Jobhour expenditure and rate profile curves could also be used to monitor indirect
labor costs.

I. Work Unit Tracking Curves

Another strongly recommended approach to measuring productivity is recording

actual direct hours (incremental and cumulative) against physical units of com-
pleted work (e.g., lineal feet of piping, cubic yards of concrete, tons of steel, etc.).
These direct hours per unit are an absolute measure of productivity in contract
to the relative measure previously outlined.
Figure 9.45 shows typical tracking curves for above-ground pipe erection.
Incremental and cumulative performance is monitored. This example shows a
budgeted level of 5.4 direct hours/unit and a current cumulative rate of 5.1—cur-
rently a good performance. Based on this performance and judgment of future
conditions, a good final forecast could be made. As above-ground piping is the
major element of a field budget, piping tracking curves are important control
tools. As indicated by the figure, the incremental rate can vary widely; thus the
focus should be on the cumulative number.
When work unit tracking curves are needed, they should be prepared early
in the construction phase. Significant cumulative deviations (e.g., ±10%) from the
budget should be investigated.
The following list represents major work categories and associated work units:
Civil:
262 Chapter 9

- excavation/backfill (hours per cubic yard of soil), and

foundations (hours per cubic yard of concrete);
• Piping:
- field fabrication (hours per ton or lineal foot), and
field erection (hours per lineal foot, by pipe size, or hours per ton);
• Electrical:
- conduit (hours per lineal foot),
- wire and cable (hours per lineal foot), and
- test, connect and check out (hours per connection);
• Instrumentation:
install (hours per instrument),
local-remote loops (hours per loop), and
- calibrate and test (hours per instrument).
• Structural steel (hours per ton);
• Insulation (hours per square foot and hours per foot of piping); and
• Painting (hours per square foot).
Selection of individual work units for control will depend on need, the size of the
project, the amount of money involved, and the ease of gathering data. This type
of data is also very useful for historical purposes.

J. Indirect Labor Jobhour Curves

As indirect labor budgets are often poorly estimated, tracking curves should be
developed for major indirect categories. The technique described in this section
would be appropriate for use on larger projects. Figure 9.46 shows a typical
indirect jobhour tracking curve. Hours and hourly costs should be tracked sepa-
rately. A separate curve for average hourly rate can be drawn, or, alternatively,
the hourly rate can be entered on the jobhour chart. The monthly status is
tabulated as shown, and forecasts are shown. Forecasted hours multiplied by the
anticipated hourly rate will give forecasted costs.
As shown by the example, and as is often the case, a significant jobhour
overrun exists. The overrun started in month ten and escalated further in month
thirteen. A significant overrun was evident at that time. The hourly rate is also
shown to be overrunning.
Indirect labor covers hourly paid labor not directly involved in the construc-
tion of permanent facilities; indirect activities can comprise as much as 30% or
more of direct labor, and can include:
• erection of temporary buildings, roads, etc.;
• erection and maintenance of temporary utility systems;
• site cleanup during and after construction;
• materials handling and preservation (warehouse operation);
scaffolding;
• equipment maintenance;
lost time (weather, union allowances, training, etc.);
 o
o
sa
a
CO
o

TO DATE | 466,000 \
HOURLY RATE
BUDGET, ACTUAL
I
5"
1400 14.50
ACTUAL TO DATE ] 560,000 1

TOTAL FORECAST | 737.270 1 >

TOTALBUDQET | 567,820 [
I
0)

MONTHLY

FtAWED

ACTUAL

FORECAST

PLAftJED
/ FORECAST

CONSTRUCTDN DURATDN,

Figure 9.46 Typical construction indirect labor jobhours tracking curve.

CO
 PROJECT

JOB NO.

REPORT NO.
INDIRECT COST REPORT
DATE

COMMITTED EXPENDED

COOE DESCRIPTION BUDGET PERIOD CUM. PERIOD CUM. FORECAST VARIANCE

1 2 3 4 5 6 7 8 9

O
Figure 9.47 Indirect cost report.

i
CD
Cost and Schedule Trend Analysis 265

• coffee breaks, walking time, etc.; and

• winterization.
K. Indirect Cost Report (Material)

Indirect material costs generally do not require curve techniques and can be
monitored with a monthly status report. Figure 9.47 illustrates a typical monthly
status report of field indirect material costs. Individual items are identified by
account code; commitments, expenditures, the budget, forecasts, and variances
are reported.

L. Field Staff Control

In preparing a detailed control estimate, the construction department should

provide a field staff organization chart showing all necessary job functions. A
listing should then be prepared, showing field staff positions, both permanent
and local hire, and indicating planned arrival and release dates as well as budget
hours or months. Figure 9.48 is such a typical listing and is a basic control
document for allocation of field supervision. This document should be constantly
updated. The contract agreement will outline the basis of charging for the con-
struction staff.

M. Construction Equipment

1. Equipment Cost Report

On large projects, the cost of construction equipment is substantial. The report
shown in Figure 9.49 serves much the same function as the construction super-
vision listing. It defines the plan for assigning equipment and provide for the
monitoring and control of that plan during construction. The list should show
actual versus planned arrival and release dates, and the rental rate (or purchase
price, if bought), and should compare the total forecast equipment cost versus
the budget. Timely arrival and release of equipment is of schedule and cost
benefit. Thus, major deviations from the original (i.e., budgeted) plan warrant
close scrutiny.
A detailed evaluation should be made of the construction equipment rental
agreement to ensure that terms and conditions are economically acceptable. In
the United States, rental rates are usually stated as a percentage of a nationally
accepted price list. Factors to investigate are buyout conditions for equipment,
terms for regular maintenance versus heavy repair, arrangements and costs for
transportation from a particular area, and the date on which the rental will
commence.
2. Equipment Utilization
An effective technique for controlling construction equipment costs is a compar-
ison of actual costs per labor direct hour against budget and/or a historical profile.
This technique would be appropriate for use on a large project. Figure 9.50 shows
a typical format for control profiles.
 8
PROJECT
JO8NO.
REPORT NO.
FIELD SUPERVISION LISTING & SCHEDULE DATE

SCHEDULE BUDGET FORECAST HOURLY FORECAST

POSITION NAME RATE
$ HOURS $

O
Figure 9.48 Field supervision listing and schedule. fi)

CO
 PROJECT o

CONSTRUCTION EQUIPMENT COST REPORT

JOB NO.

PROJECT NO.
I
0)
DATE

BUDGET FORECAST COST

MOBILN. MONTHLY
EQUIPMENT SUPPLIER NO. OF NO. OF
COSTS RATE
MONTHS COST COST PERIOD CUM.
MONTHS
1 2 3 4 5 a 7 8 9 10

5"

1.

Figure 9-49 Construction equipment cost report.

to

3
 s
ro
PROJECT
JOB NO.
REPORT NO.
CONSTRUCTION EQUIPMENT - RATE CONTROL CURVE DATE

REPORT DATE
MECHANICAL
- INCREKIENTAL
COMPLETION
ACTUAL

N \ > \ CUMULATIVE

EQUIPMENT COST
\ > C \ ACTUAL FORECAST
t BUDGET
PER DIRECT f OVERRUN
S BUDGET RATE
LABOR HOUR

PLANNED (HISTORICAL)
CUMULATIVE

TIME

Figure 9-50 Typical construction equipments—rate control curve.

2
(P

CO
Cost and Schedule Trend Analysis 269

INDIRECT COST CURVES PROJECT

JOB NO.

REPORT NO.

DATE

REVISED m

BUDGET i

MECHANICAL
COMPLETION

I I (PROJECT
I DURATION)i I i i i i r
EXPENDITURES REMARKS

(TO DATE) % COMPLETE

CURRENT BUDGET

Figure 9.51 Indirect cost curves.

This record of monthly and cumulative rental costs against direct labor hours
could give an evaluation of equipment commitments in relation to labor buildup.
This could indicate that equipment was brought to the site too early or that a
projected labor buildup was not achieved. In either case, equipment was underused.

N. Indirect Cost Curves

For cost elements that are not quantifiable (such as temporary facilities, small
tools, consumables, and field office expenses), financial expenditure curves can
provide meaningful evaluations. Planned curves, based on history or judgment,
270 Chapter 9

can be developed and actual costs plotted against these curves. Figure 9.51 shows
incremental and cumulative expenditure curves. Actual costs are plotted against
planned costs.

O. Construction Scheduling—Overall

Many years of on-the-job experience have led to widespread industry agreement

that detailed (level V) scheduling of the entire construction program is a costly
waste of time and effort. The best approach is to develop an overall summary
schedule for the total program and then schedule the work in greater detail with
short-term schedules. Such a program is shown in Figure 9.52 as the "Short
Cycle Program."
It must be emphasized that developing effective and efficient overall sum-
mary schedules requires considerable skills and much experience. These sched-
ules are further covered in the scheduling sections of this book. Key elements
for an effective construction scheduling operation are:
• construction preplanning, during early engineering;
• constructability program, during early engineering;
• quantity-based field budgets;
• detailed weekly work program (larger projects);
• physical measurement system based on quantities (earned value system);
• productivity measurement (earned value system);
effective schedule levels: overall summary and short-term detailed (Levels
II-V); and
• adequate personnel resourcing.
At the start of a project, the construction group is often slow in carrying
out detailed construction investigations. Preplanning and constructability studies
are absolutely essential. Figure 9.52 shows a construction scheduling system and
the methods by which effective control can be exercised.

P. Construction Preplanning

Construction Industry Institute studies have shown that construction preplanning

is one of the most important elements for project success and that it is also one
of the most neglected programs of current industry practice.
Preplanning for construction at the early stages of a project is absolutely
essential. At an early stage, detailed planning is restricted by lack of scope
definition. However, there are areas where preplanning can be reasonably defi-
nite, such as work accessibility, traffic patterns, laydown areas, rigging studies,
preassembly and modularization, material selection, temporary facilities, and
overall personnel resources.
A path of construction should be developed at this early stage, outlining the
major flow of work from site preparation, to foundations, steel work, equipment
installation, and pipe erection on an area and subarea basis. The schedule engi-
neer, in conjunction with construction personnel, should establish priorities for
the early and critical construction work, such as:
path of construction (earthwork/concrete/mechanical/piping),
Cost and Schedule Trend Analysis 271

CONSTRUCTION SCHEDULING SYSTEM

CONSTRUCTION PRE-PLANNING CDurtig Engheethg Phase)
PATH OF CONSTRUCTION
T10N CONTRACTNG STRATEGY
FELD ORGANIZATION
TEMPORARY FACLmES-MATBFVAL CONTROL-TRAFFIC PLAN
LABOR RESOURCES
CONSTRUCTION EQUPMENT
» CONSTRUCTION PLANNNG AND 8CHEOUUNG
FBJD CONTROLS AND REPORTNG

11. CONSTRUCTION BAR-CHARTS (Level IV)

A) MANUAL BAR-CHARTS
B) BY EACH UNIT & AREA
C) BY PRIME ACCOUNT
D) ISSUED BI-MONTHLY
E) ACTUAL PROGRESS V PLAN

yr 12. SHORT-TERM CONSTRUCTION SCHEDULES

A) MANUAL BAR-CHARTS
B) FOR NDMDUAL WORK TASKS
C) TME AND LABOR ONLY (No O's)
D) ISSUED WEEKLY

H a BHWEEKLY WORK PROGRAM (Level V)

A) MANUAL LIST OF WEEKS WORK
B) BY CRAFT AND PER UNTT / AREA
C) LABOR ESTIMATED
D) WORK NOT OUANTFED
E) 1ST WEEK PRM - 2ND WEEK TENTATIVE

^r 14. PROGRESS-COST REPORT

A) COMPUTER PROCESS-
COST REPORT
B) BUDGET SCOPE & HELD
TAKE-OFF
C) HOURS &
QUANTTTES
D) WEEKLY/MONTHLY
E) RELD TERMWAL BY AREA

16. SUBCONTRACT CONTROLS

A) QUANTITY CONTROL
B) LABOR & PROGRESS
O FMANC1AL ANALYSIS (Money Per MJJ

PRODUCTIvTrY PROFLES

Figure 9.52 Construction scheduling system flowchart.

272 Chapter 9

• construction organization and personnel assignments,

• detailed layouts for temporary facilities,
• labor resource studies and training programs,
material handling/logistics studies,
construction equipment requirements,
rigging studies,
• construction permits and environmental matters,
• site preparation and early fieldwork,
• subcontract strategy, and
• field control procedures.

Q. Construction Progress Bar Charts

A major method for illustrating construction progress is the bar chart. The bar
chart is also a technique for totalling the progress requirements and achievements
in individual areas. Figure 9.53 shows a construction progress bar chart for
process units. It is used to monitor progress and to evaluate total project (job)
progress requirements, which can then be used to develop a construction progress
S-curve. In this example, progress figures for two process units and offsites are
combined to determine total planned progress and actual, reported job status.
Total job progress is computed by aggregating the weighted percentage
completion for each process unit and total offsite. Weighting is based on budgeted
jobhours. The total job progress values obtained are then used to develop the
overall project curve. In this particular example, the barlines have been revised
to indicate completion two months later than originally scheduled. The status of
each section is indicated by the position of the progress barline relative to the
vertical report dateline. Section progress is the addition, on a weighted basis, of
individual lower-level activity progress figures.
Overall progress can also be determined or verified with historical data. It
would be unlikely that historical experience could be used for lower-level activities
such as shown in Figure 9.54. The mechanical erection of an equipment account is
shown in this illustration. In addition to a relative weight breakdown, activities are
defined by quantities and jobhours. This chart also tracks scope definition as quan-
tities and/or jobhours are revised during field operations. The example shows the
work being ahead of schedule, with overall progress at 38% versus a plan of 30%.

R. Short-Term Construction Schedules

These are detailed area and/or discipline schedules and cover a two-to-three-month
period of the total schedule program; however, they are expanded and modified to
show current requirements. They could be CPM networks or bar charts, showing
detailed activities, duration, and labor requirements. It is vital that this slice of the
overall program be updated to reflect changed circumstances and current require-
ments. Major changes may require an update of the overall schedule.

S. Construction Weekly Work Program

The technique described in this section is a very detailed program and is only
cost effective on larger projects. It is the most effective of all detailed work
 o
o

CONSTRUCTION PROGRESS BAR CHART - PROCESS UNITS I

5T
? : t i SKStg JAN FEB MAR APR MAT JUN JUL AUC SEP OCT HOY DEC FCB MAT JUN JUL AUC
JAW MAR APR
0
31.9 39.4 47.2 53.6 6Q.4 67.2 73.9 80.3 86 91.1 94.7 97.1 98.6 99.4 99.9 100
TOTAL JOB 100 .. I .. 20.2 25.5 31.9 39.* ' 53.6 60.4 67.2 73.8 80.3 86 91.1 ^4,7 97.1 98.6 99.4 99.9 100
- A •HOT • • M

1
1.
M 0)
" 1 I | I I- - - - - O 29.7 36.3 44 51.9 6O.7 69.4 77.9 85.6 52.2 97 99.3 100
VACUUM UNIT 35 : •:: - - - - - R
- A
18.9 24.0 29.7 36.3 44 51.9 60.7 69.4 77.9 92.2 97 99.3 19°
19.0 24,0 30.0
- - - - - N 36.3
— : : . . i::::© 42.3 49.8 55.3 61.1 100
FCC UNIT 50 ....
- A
_ - - . - N 23.0 26,0 30 34,6
L - - - - O 28.1 36.8 45.8 51.6 57.5 63.4 69.9 77.1.. 83.1 J U L 94.4 97.3 99.4 100
—
OFFSITES ft 16.3 20,1 28.1 36.8 45.8 51,6 57.5 63.4 69.9 77.1 83.1 89.1 94.4 97.3 99.4 J00

1 III [
N 22,0 29.0 36.0 45.8
o
R
A
N

Figure 9.53 Typical construction progress bar chart.

3
CO
 PROJECT

JOB NO.

REPORT NO.
CONSTRUCTION PROGRESS BAR CHART - WORK CATEGORY
DATE
PROGRESS CATEGORY

QUANTTTES KXJR3 TO DATE MECHANICAL ERECTION

WT,
CODE DESCRPTION OF ACTUAL WT.
UNTT ORG. ORKX PERIOD
HRS.

REVB, CUM,

VERTICAL VESSEL 3JB KQ

53.200 600 140
0*2 3*
2 3 42
ff 100
232 47 fci.
70.000 700 60 10 60 0 0 100
HORIZONTAL VESSEL 5.3 60 25.0 1.3 26
2.500 250 8 3 100
TRAYS FOR D153 1.8
500 20 100
V—
DRUM ffTERVALS 0.1
63.300 \800 560 35 60 95 100
FtiFANS 13.8 560 48.4 6.7 48
11.500 600 10 5 0 100
PUMPS 4.6
15.000 1,000 50 8 6 100
COMPRESSORS 7.7
80.000 600 345 44 100
HEATERS 4.6 666 100 4.6 ag 100
23.300 580 258 35 100
HEAVY STEEL 4.3 500 59.8 \8 45 60
10.000 550 223 16 4 0 100
LIGHT STEEL 4.2 223 58.1 2.4 58
3.000 150 67 100
t—
MISC. 1.2
Mi •••
42,600 600 60 hoo
ELECT. EQUf>. 4.6

364300 7,350 1.586 10 30 63 86 06 100

OVERALL 56 KQ £.241 37.8 21.2 13 3 8 O
0)

Figure 9-54 Typical lower-level activity construction progress bar chart. i

CO
Cost and Schedule Trend Analysis 275

programs, but requires considerable skills and full commitment and discipline
from the construction supervision. In practice, it can use a computer program.
The weekly work program is a two-to-four-week forecast, supported by an
overall schedule and detailed estimate. With proper supervisory support, it is a
very efficient method of achieving control. It readily adapts to a dynamic con-
struction environment where priorities, material deliveries, craft hour content,
site conditions, resources, and weather can change very rapidly.
The essential requirement is identifying and itemizing specific pieces of work
through the use of:
• quantities of measurable units,
• application of budgeted unit hourly rates,
• adjustment for current productivity,
craft labor assessment,
planning of extra work and rework (hours and craft labor), and
reconciliation of weekly program to overall plan.
The flowchart contained in Figure 9.55 shows the elements of the weekly
work program. It also shows the flow of information, including the overall sched-
ule for the month's work, the budget estimate for the work in labor-unit direct
hours, together with quantity takeoff sheets for detailed scope. This is for direct-
hire work; subcontractor work is shown separately.
Work lists are then drawn up, usually by construction personnel, (assisted
by the field planning group) who then ensure that material and engineering draw-
ings are available. The look-ahead list will be in less detail than the current week's
program, and a good system will define 80% of the work for the second week, 60%
of the work for the third week, and 40% of the work for the fourth week. Control
of subcontractor work depends on the contractual agreements and the capability
of the subcontractors. Subcontractors can be controlled on a milestone schedule
and craft labor basis alone, or by full incorporation into the weekly work program.
The field planning group should work with the work list to evaluate required
hours and craft labor and to coordinate direct-hire work and subcontract work.
Figure 9.56 shows a typical report format for the weekly work program. The
following explanations refer to the use and function of each numbered column:
1.
Check that all engineering information is available;
2.
Check that all material is available;
3.
Abbreviated description of work items;
4.
Total quantities of measurable units for work item;
5.
Budget direct hour rate for this piece of work;
6.
Quantities of measurable units for work planned for week;
7.
Budgeted hours for the planned weekly work (Column 6 + Column 7);
8.
Extra work and/or rework (rework many times has no measurable quantities
or hourly rates; in such cases the work should be estimated and entered in
Column 8);
9. Remarks on priority, constraints, resource requirements, and crew sizes are
appropriate;
10. Planning reconciliation (when the weekly program has been calculated and
finalized, it is necessary to compare the projected output of the weekly program
against the overall progress requirement, both weekly and cumulative);
 OVERALL SCHEDULE SUBCONTRACTOR SCHEDULES
ONE MONTH LOOK AHEAD 1. GREATER DETAL WfTHN MLE8TONE8 OF
FOR FORWARD PLANMNG PfttME CONTRACTOR OVERAU. SCHEDULE
2. NPUT TO WEEKLY WORK UST
3. N P W TO WEEKLY PROGRAM IS DEPENDOIT
ON DEGREE OF CONTROL OF
SUBCONTRACTORS

WEEKLY WORK LIST

1. RESPONSBLTTY OF CONSTRUCT** PBRSOtUEL (ASSISTH) BY PUUMNQ GROUP)
2. PRIORITY UST FROM OWNER
BUDGET ESTIMATE a DBITFCATCN & ESTA4ATE OF EXTRA WORK/REWORK
WORK SCOPE & BUDGET 4. MATERIAL & BJGNEERNG CHECK (USUALLY BY AREA BNGWEERS)
UNTTH0URRATE8

WEEKLY WORK PROGRAM

1. QUANTTTES OF WORK
2. BUDGET H0UR8
1 MONTH LOOK BYWSOPLNE a PROOUCTMTY ADJUSTMBiT
AHEAD UST
OR 4. LABOR ASSESSMBiT
PRWE ACCOUNT 5. EXTRA-WORK

QUANTITY TAKE OFF

OFF CONSTRUCTION BSUE DRAWWGS
BY MEASURABLE WORK UNTTS
WEEKLY WORK SUMMARY
SUMMARGES NDIVDUAL D6CPUNE
OR PRME ACCOUNT WORK
PROGRESS/PRODUCTIVITY REPORT /
/
NCREMEKTAL& CUMULATIVE REPORTNG
BY OQCFLNETCOTAL JOB
• PROGRESS
• PRODUCTIVITY
• LABOR LABOR

Figure 9.55 Construction weekly work program flowchart.

 PROJECT
WORK CATEGORY WEEKLY WORK PROGRAM JOB NO.
03

17 TOTAL FORECAST — HOURS

REPORT NO.
a
DATE

I
STATUS SCOPE THIS PERIOD
BUDGET EXTRA
BUDGET
QUANT. QUANT. HOURS WORK
RATE REMARKS
5T

CD

f
0)

LABOR
PLANNING RECONCILIATION 10 BUDGETTEO WEEKLY PROGRAM 11 12
1. WEEKLY PLAN WORK TEAM
2. WEEKLY PROGRAM 13 CURRENT PRODUCTIVITY ADJUSTMENT % 14 TOTAL LABOR
3. PLANNED CUMULATIVE
TOTAL WEEKLY PROGRAM 15 16
A ACTUAL CUMULATIVE

Figure 9-56 Weekly work program form.

278 Chapter 9

11. Total budgeted direct hours;

12. Total estimated hours for extra work;
13. Current productivity may differ from budgeted productivity; if the difference
is significant, budgeted work (Column 11) should be adjusted to reflect
current experience (Column 13);
14. This is the total direct hours required to do the budgeted work after adjust-
ing for current productivity (Column 11 x Column 13 = Column 14);
15. Total direct hours required for budgeted work plus extra work (Column 12
+ Column 14 = Column 15); this number is used to calculate the craft labor
requirements; and
16. The craft labor assessment, arrived at by dividing the total planned direct
hours by the weekly hours; a statistical craft breakdown can then be applied
to arrive at the number of workers by craft.

WEEKLY WORK SUMMARY

WEEK NO.
SITE MANAGER DATE

DISCIPLINE OR PLANNED TOTAL

PRIME ACCOUNT HOURS LABOR
L C % R W % E

10

11

12

TOTAL

PLANNED RECONCILATION TOTAL FORECASTED MANHOUR

11 WEEKLY PLAN % 31 PLANNED CUMULATIVE %

21 WEEKLY PROGRAM % 41 ACTUAL CUMULATIVE %
(LAST PERIOD!
REMARKS:

Figure 9.57 Weekly work summary form.

Cost and Schedule Trend Analysis 279

Note that when craft labor is a restraint, either not available or fixed due to a
lack of accommodations (as in offshore work) or saturation, the calculation process
is worked backward.
Figure 9.57 is a weekly work summary report. This document summarizes
individual discipline programs. Planned direct hours and total craft labor are the
same numbers shown on individual work programs marked in Columns 15 and 16.
The craft breakdown is derived by applying a historical labor standard for ap-
propriate disciplines.
The planning reconciliation provides for evaluation of the weekly program
against the overall program.
In summary, this weekly work program is the most effective of all detailed
work programs. When properly developed and operated, it will be a major contrib-
utor to the success of the construction effort. However, it requires a high degree
of construction-scheduling skills and the full and constant support of construction
supervision. In fact, construction supervision must lead and direct the program.

T. Construction Progress and Productivity (EVS)

S-curves (Fig. 9.58) can provide more meaningful analysis of progress than bar
charts, since deviations are more easily recognized and trends or recovery plans
can be more easily developed. The planned curve can be determined by using
judgment, historical data, and the bar chart evaluation.

10

^*- » • * /

80
F FP )R1 INC D TE Llh F - / ^

1 /
f
FOI EC \ST R :coMJL\ Y »LAN

o PL AN 4EC PR OG $-
o

1 >
«^— - - A CTl AL PI OG tES s

20
/ 1

WEEKS

Figure 9-58 Typical construction progress S-curve.

 PROGRESS SUMMARY REPORT £!?
innm REPORT NO.
^t BASED ON BUDGET OR FORECAST PERIOD

% COMPLETE
CODE EARNED ACTUAL PROD. FORECAST
ACCOUNT BUDGET
HOURS
WEIGHT
ACCOUNT PROJECT
( 4+S)
HOURS
( 3+ 5 )
HOURS £xioo
3
9
%
1 3 5 8 9 10

100 CIVIL 440 20 50 10 220 200 110 400

200 STEELWORK 100 4 20 0.8 20 16 125 80

300 MECHANICAL 200 11 10 1.1 20 22 90.9 220

400 PIPING 600 33 5 1.6 30 34 88.2 680

500 ELECTRICAL 160 7 - 140

600 INSTRUMENTS 200 10 - 200

700 INSULATION 220 11 220

800 PAINTING 80 4 - 80

TOTAL PROJECT 2000 100 - 13.5 290 272 106.6 2040

O
ft)

Figure 9.59 Typical progress summary report. •a

(D
CO
Cost and Schedule Trend Analysis 281

Table 9.2 Example of Percent Complete Calculation Based on Estimated Jobhours

Cubic Weighted %
Discipline yards Weight % % Complete complete
1000 - civil (1) (2) (3) (4)

Foundation for C102 8 20 100 20

Foundation for D104 4 10 50 5
Foundation for P101 2 5 100 5
Foundation for P102 2 5 — —
Foundation for P103 4 10 — —
Pipe rack foundations 20 50 40 20

Total account 50

There are two essential requirements for effectively measuring construction

progress: a quality critical path method schedule with appropriate detail, and an
accurate way to measure progress. Measuring and reporting construction progress
are usually variations of two basic approaches:
• measurement of physical quantities (EVS), and
• labor hours assessment.
The physical quantity measurement (EVS) is the better method, since con-
struction progress can be expressed simply as:
Physical quantities installed ., __„,
Total scope (qualities) of project
Figure 9.59 shows an overall progress report. It lists major accounts and shows
labor hours, percent complete, and productivity. It also forecasts final labor hours.
Each discipline is assigned a weighting (Column 4) based on the hours allocated
in the construction budget (Column 3). Each discipline is further broken down
into measurable quantities of work, which are then given a weight based on the
estimated jobhours, as shown in Table 9.2.
During construction, the total scope forecast can change due to better def-
inition, extra work orders, or other changes. When scope changes are sufficiently
large, a reweighting of construction activities may be necessary.
The percentage completion of each discipline is calculated by totaling the
weighted percentages in Column 4 of Table 9.2. The total is used in Column 5
of the summary report to calculate the overall project completion. The level of
quantity measurement and progress reporting depends on the detail of the work
measurement system, type of contract, and whether construction is subcontract
or direct hire.

U. Guide to Field Progress Reporting

Accurate assessment of work in progress is essential, and good judgment is

needed in order to assess the status of partially completed work. The guidance
282 Chapter 9

contained in this section covers major categories of work. Each discipline is listed,
and work items are broken down into major tasks and recommended percentages
for completion of the work are shown :
Site preparation and earthwork: report by percent of total cubic
yards involved
Earth tank pads
percent of compacted earth in place 85% (85)
final dressing 100% (15)
Concrete: report by percent of total cubic yards involved, with
the following allowances:
rebar in place 20% (20)
forming complete 70% (50)
concrete poured 80% (10)
stripping complete 95% (15)
dressed and patched 100% ( 5)
piles: report by number in place as percent of total required
paving: report by square feet installed against total square
feet required
sewers and access holes (prefabricated)
access holes and catch basins installed 65% (65)
hookup and connections complete 90% (25)
test and checkout complete 100% (10)
Steel structures, piping supports, and miscellaneous steel
report by tons erected in place 90% (90)
bolting tension checked and completed 100% (10)
Buildings (excluding foundations)
shelter-type (no interior work)
steel erected 50% (50)
walls and roof complete 90% (40)
checked out complete 100% (10)
masonry-type
walls erected 30% (30)
roof framing complete 50% (20)
doors and windows installed 65% (15)
interior complete 100% (35)
Equipment installation
columns and vessels
shop-fabricated, no internals
set in place 60% (60)
secured and grouted 90% (30)
tested and bolted up 100% (10)
shop-fabricated, with trays or internals
set in place 25% (25)

The first number represents cumulative percent of the job. The number in parenthesis represents
the incremental percent for the indicated step.
Cost and Schedule Trend Analysis 283

secured and grouted 35% (10)

internals complete 90% (55)
tested and bolted up 100% (10)
field-fabricated: report by number of prefabricated sections or rings
and internals installed; allow appropriate percent complete
for partly completed work elements
storage tanks, field-fabricated: report by base, number of rings
installed, roof, and internals from subcontractor erection
schedule; allow appropriate percent complete for partly com-
pleted work elements
exchangers
shell and tube (per unit)
set in place 60% (60)
secured and grouted 90% (30)
tested and accepted 100% (10)
fin-tube (per unit)
set in place 60% (60)
secured and grouted 90% (30)
tested and accepted 100% (10)
fin fans (per unit)
steel structure erected 20% (20)
housing erected 30% (10)
fan and driver assembled 50% (20)
coils installed 70% (20)
run-in and fan balance 90% (20)
tested and accepted 100% (10)
heaters
vertical heater (package unit)
heater set in place 50% (50)
stack erected 70% (20)
secured and grouted 90% (20)
tested and accepted 100% (10)
heater (field-assembled)
substructure complete 20% (20)
refractory installed 55% (35)
tubes installed 75% (20)
stack and breeching installed 85% (10)
burners installed 90% ( 5)
tested and accepted 100% (10)
pumps and drivers
pump set in place 40% (40)
aligned and grouted 90% (50)
run-in and accepted 100% (10)
compressors and drivers
package compressor (with driver)
set in place 50% (50)
secured and grouted 90% (40)
284 Chapter 9

run-in and accepted 100% (10)

package compressor (with driver separate)
compressor in place 25% (25)
driver in place 50% (25)
unit coupled and aligned 85% (35)
secured and grouted 90% ( 5)
run-in and accepted 100% (10)
Piping*: percent complete in this account can be reported in the
following categories by the method indicated:
fabricated pipe spools: as completed by count, tons, or feet
pipe spools installed: as installed by count, tons, or feet
straight run racked pipe: by percent of linear feet installed
underground lines: by percent of linear feet installed
steam tracing: by percent of linear feet installed
hangers and supports: as completed by count or percent
allowance
hydrotesting: by subsystem or by holding back 10% of pipe
spools for hydrotest and punchlist work
handling: laydown to work area, percentage basis (by judg-
ment)
2.5 inch and less in diameter: by feet, screwed or socket
weld, by size
3-inch and more in diameter: by each fit-up and tack, by
size, schedule, and type of material
weld out: by cubic inches of weld plus per operation
hydrostatic test: percentage basis or by subsystem
punch out: percentage basis (by judgment)
rework: percentage basis (by judgment)
pipe fabrication, pipe supports, and hangers: unit jobhours
Electrical
power and control equipment: as installed, by count
lighting equipment (pole assemblies): percent installed, by count
underground conduit and duct: percent of linear feet installed
above-ground conduit (power): percent of linear feet installed
above-ground conduit (lighting): percent of linear feet installed
power and control wire: percent of total feet pulled
power connections: percent of total complete
grounding: percent of feet installed
lighting wire: percent of feet installed
push-buttons and receptacles: percent of total installed
communications: by system complete
Instrumentation of control panels (including shop-mounted instruments)
install panels 25% (25)
hook up and connect 85% (60)

* This section outlines a simplified piping approach; many systems use more detailed approach
to measuring completion of pipe erection.
Cost and Schedule Trend Analysis 285

test and check out 100% (15)

Instruments and instrument materials
wire and conduit: percent of linear feet installed
pipe and tubing: percent of linear feet installed
field-mounted instruments: percent installed, by count
control and relief valves: percent installed, by count
racks and supports: percent of linear feet installed
hookups: as completed, by count
loop check: as complete, by system
Insulation
vessels and towers: percent of square feet installed
piping: percent linear feet installed
Painting
vessels, tanks, towers, and structural steel: percent of square
feet installed
piping: percent of linear feet covered
Good systems will be based on quantities, earned value, and a productivity
assessment based on actual hours versus earned hours.

V. Construction Status Report

Figure 9.60 shows a status report by total project or unit-area. The top section
of this figure shows planned and actual cumulative progress curves. Backup data
for the curves would be obtained from construction progress bar charts. The
center section shows planned and actual incremental and cumulative productivity
curves. The bottom section shows planned and actual cumulative craft labor levels.
The report shown in Figure 9.60 enables an overall evaluation of current
status and future predictions to be made quickly and accurately. It is an excellent
management report, since it graphically shows the overall status of the project
on a single sheet of paper. The labor histogram should be prepared from the
progress curve and labor hour budget. Appropriate allowances should be made
for lost time.
For areas of limited labor resources and for larger projects, detailed labor
resource evaluations are essential (a part of construction preplanning). They
should evaluate both other and future work and cover:
• local labor availability;
travelers and imported labor;
local practices and regulations for labor;
• infrastructure (housing, transportation, medical, educational, religious);
• training requirements; and
• wage rates and allowances.

W. Work Unit Tracking Curves

Installing concrete foundations and fabricating and erecting pipe spools are often
critical areas of construction and should, therefore, be carefully monitored. Work-
unit tracking curves, shown in Figure 9.61, are strongly recommended for this
monitoring.
 286 Chapter 9

PROJECT
JOB NO.
REPORT NO.
STATUS REPORT
DATE

PLANNED PROGRESS

ACTUAL PERCENT
PROGRESS

Performance Improving
p Rattening out Lack of measured work
due to wetf* of as work moves Into
HISTORICAL / 1 * work moves Irom accomptshment rework* punch Hst
CUMULATIVE N / temporartes to <*sct and checkout.

due to leaning experience

and work on temporary fadtles
often undeieelfcuated and dlfffcu* to meaaure

due to poor performance

PLANNB)
LABOR

Figure 9.60 Typical status report.

Cost and Schedule Trend Analysis 287

PERFORMANCE
HOURS

PER

UNIT

ACTUAL
CUMULATIVE
INCREMENTAL

i i iir i TIME
I I I 1 IT

PRODUCTION

NO. ' . ¥ ^ _ PLANNED

COMPLETE] S CUMULATIVE
ACTUAL
CUMULATIVE

-J 1 INCREMENTAL

1 1TIME 1 1 II II

PERIOD PLANNED NO.

ACTUAL NO.
CUM. PLANNED NO.

ACTUAL NO.
PERIOD PLANNED RATE
ACTUAL RATE

CUM. PLANNED RATE

ACTUAL RATE

Figure 9.61 Typical construction—work unit tracking curves.

288 Chapter 9

Monthly and cumulative hourly rates and quantities completed are plotted.
Numerical data for the reporting period is tabulated at the bottom of the form.
The reporting frequency may be increased from monthly to biweekly or weekly
during the critical periods of control. This technique is recommended for any
critical item that can be readily quantified.

X. Material Control

Labor productivity is highly dependent on the efficiency of the field material

control system. A major scheduling responsibility is ensuring adequate material
supply for the weekly work program. Identification, storage, and issuance of
materials are the responsibility of field personnel. Tagging and marking of equip-
ment and bulk materials, and bagging fittings and fixtures are common techniques.

Y. Construction Equipment Planning and Cost Reporting

The construction equipment account is a major cost item and detailed cost control
is recommended. Making optimal use of construction equipment depends on many
factors, and good planning is one of them. Adequate construction preplanning
should identify major requirements. Thereafter, monitoring numbers of equip-
ment, timing, and effective short-term planning should ensure an adequate supply
and proper use. The following are recommended techniques to monitor the cost
of the construction equipment.
1. Typical Cost Report
Figure 9.62 shows a typical listing for scheduling and monitoring construction
equipment allocations and their associated costs. All construction equipment,
other than small tools, is listed by type and number against a time frame. Since
cranes are generally the most important item, they should be separated and
individually controlled.
Planned periods should be evaluated against the construction schedule and
staffing plan. Numbers and types of equipment should be evaluated against the
control budget. An average crane usage would be in the 60-70% range.
2. Overall Cost Analysis
Figure 9.63 is an excellent type of chart as it plots the total cost (monthly, $1000)
of construction equipment against the buildup (monthly) of labor and, therefore,
should show if the buildup of costs is compatible with the buildup of its user,
the labor. In this example, earthmoving equipment costs and associated labor are
excluded as the work was subcontracted. This case shows, graphically, a potential
loss due to construction equipment being brought on to site too far in advance
of the workers; the actual requirement is not indicated by the figure. This case
shows mismanagement, however, since the overall monthly equipment cost is
being significantly reduced as labor is increasing. This should not occur, since
equipment cost should be compatible with labor buildup. Equipment building
should just lead labor so that labor is not held up and that the cost of wasted
equipment is contained.
Project control personnel should ensure that the planning and scheduling
of construction equipment is compatible with the labor program. This is a difficult
 PROJECT 2
JOB NO..
REPORT NO.
CONSTRUCTION EQUIPMENT COST REPORT a
i|
DATE
SCHEDULE (PLANNED VERSES ACTUAL) PURCHASE PRICE TO DATE FORCA8T FORFCAST
EQUIPMENT BUDGET
OR RENTAL RATE COST PERIOD COST

i
a
>

Figure 9-62 Construction equipment cost report form.

ro
oo
CO
290 Chapter 9

EQUIPMENT COSK > LABOR

\
.* 1700

/
400 •^ /
1600

1500

E A / \
;s^^
1400

1300

300 *^ 1200

^*
>

\t * • * /
f \ / 1100

$k \. /
\ r
/

1000

t: ^>T
900

200 800

tft*>/
700

600

500
V
100 400

DUE TO POOR SITE 300

f\ MRNHGEMENT
200

100

J F M A M J J A S O N D J F M A M

Made up mainly of:

BOILERMAKERS, PIPEFITTERS, ELECTRICIANS
(EARTHMOVING WAS SUBCONTRACT)

Figure 9.63 Analysis of equipment versus labor.

task, because equipment utilization is variable and dependent on numerous

factors, including:
quality of supervision,
• size of job site/number of workers,
• scheduling efficiency,
maintenance capability, and
• weather/site conditions.

3. Use of Welding Machines

Some categories of construction equipment, such as welding machines, have a
direct relationship with labor. Such categories are easily tracked if such tracking
is appropriate and required. Figure 9.64 is an actual case, showing a numerical
relationship problem between welding machines and welders. As this is a direct
relationship between workers and machines, the oversupply of welding machines
was detected and remedial action taken by removing some of the machines from
the job site. This technique can be used when assessing the schedule for other
Cost and Schedule Trend Analysis 291

WELDING MACHINES
500 e g geTjL>—.i»4>, T
OVER SUPPLY OF MACHINES OR
DELAY IN LABOR BUILDUP

400

300

200

100 DUE TO POOR SITE

MflNflGEMENT

AUG SEP OCT NOV DEC JAN FE6 MAR APR MAY

Figure 9.64 Welding machine utilization analysis.

construction equipment as well. Without additional data, the appropriate rela-

tionship of welding machines to welders could be 430/340 = 1.26.
As in the previous case, this shows additional cost due to poor site man-
agement. In both cases the use of these cost control techniques identified the
problem and enabled remedial action to take place, resulting in mitigation of the
cost problem.
Z. Piping Control

Piping erection is usually a major part of construction, so having an effective

control system is essential. Figure 9.65 illustrates a typical control sheet that
can be used to record installed piping quantities. The unit of measurement is
usually feet of pipe. Five columns are shown for different pipe sizes but for the
same piece of work. This is necessary because many piping drawings can have
several pipe diameters for the same line or piping system. As work is completed,
drawings should be marked up, and a weekly tally of installed quantities should
be maintained. This control sheet shows the unit rate (direct hours per foot, etc.),
total estimated quantities (Q), and quantities this period and to date. Quantities
can be easily converted to earned hours.
 REPORT NO. I PROJECT to
PIPING CONTROL SHEET PERIOD 1 JOB NO.
SIZE UNIT HATE SI£C UNII HATC &UX- _ UNIT HATfc tfI£C UN11 HA I c S4£C UNI 1 HA IE
DRAWING OR
CODE
SPOOL NO. TOTAL THIS TO TOTAL THIS TO TOTAL THI8 TO TOTAL THIS TO TOTAL THIS TO

9 PER. DATE PER. DATE PER. DATE PER. DATE PER DATE

Figure 9.65 Piping control sheet. i

Cost and Schedule Trend Analysis 293

X. KEY PROJECT CONTROL TECHNIQUES FOR

CONSTRUCTION—SUBCONTRACT

A. Introduction to Subcontract Control

This section is based on the assumption that a general contractor is responsible

for all subcontract work and, therefore, is directly handling the program discussed
next. Much of the reporting is the direct responsibility of the subcontractors, with
some expert analysis being carried out by the general contractor. If there is no
general contractor, then the owner is responsible for the analysis.
It must be recognized that many subcontractors do not use experienced project
control personnel and often do not operate with detailed control systems. The key
to success, therefore, is to develop a simple, practical method of control and to require
that subcontractors include adequate personnel costs in their bids to use the system.
Effective subcontract control is based on the following essentials:
good contractual documents and agreements,
an adequate system for documenting changes and amendments,
an acceptable scheduling system (critical path method or bar chart),
• an effective progress measurement system,
• an effective cost trending and forecasting system, and
• an adequate performance measurement system.
Most of these elements should be identified in the bid documentation.

B. Control Specifications (Large Subcontracts)

This section assumes that work will be done in several or many areas.
Immediately after the contract is awarded, the subcontractor should be required
to carry out the functions, prepare the reports, and monitor progress as follows:
quantities (on unit price subcontracts)—report monthly:
- report installed quantities by geographical area,
- report installed quantities by total subcontract,
- predict final quantities;
• hours—report weekly: total hours by total subcontract;
• craft labor—report daily: daily workforce report;
scheduling—report monthly:
- overall critical path method or milestone schedule bar chart,
progress curves (area and total),
- craft labor curves (area and total), and
- quantity progress curves for designated work categories.
These reports and progress updates should be issued five days after the cutoff
date. Progress curves can be developed on a financial basis and/or a weighted
craft hour basis.
One of the objectives of this specification is to have subcontractors do the
reporting and to avoid situations where the general contractor and/or the owner
has to carry out this function. Subcontractors should be required to state in their
 ro
2

SUBCONTRACT PROGRESS REPORT

CONTRACT: SUBCONTRACTOR: OESCRFTON: CONOENSATE TANKS WffiK ENWNGt

ACTIVITY PERFORMANCE SCHEDULE

VALUE WBGHT TARGET ^«i -too

CIIOOGt WBGHT % %COMPL %COMPL HR8. —— * ^
MQBUTATION —• jT
BOTTOM PLATE / -00
ANNULAR WELD
/
1ST COURSE
2ND COURSE
3RD COURSE _ _ /
4TH COURSE •—— 1 -70
5TH COURSE / •

OTH COURSE
7TH COURSE
8TH COURSE
9TH COURSE / — -60
10TH COURSE
ROOF
1 —
TESTMQ
f
PAtffMQ
• MMMMT -30
DEMOBUZATON

J
1
* -10

- TOTAL
COMMENTS: TWO TANKS ONLY NDtCATED ON THS SfCET

Figure 9.66 Typical subcontract progress report. O

i
CD
Cost and Schedule Trend Analysis 295

proposals that they will meet the criteria of this specification or that any objec-
tions will be stated in writing.

C. Subcontract Progress Report

Figure 9.66 breaks down the major operations, on a financial weighted basis, of
a tankage subcontract. Individual activities are scheduled, and an overall planned
completion curve is drawn based on the weighting. Physical completion of the
activities is measured, and target jobhours are recorded. The addition of actual
and planned labor levels completes the status picture.

D. Subcontract Status Report

This report is usually prepared by the general contractor from subcontractor basic
information. Figure 9.60 shows a typical status report of actual progress, perfor-
mance, and staffing against planned or historical data. This type of report applies
equally well to a total project or to a subcontract. It is an excellent visual tool
for correlating the status of the three variables and evaluating the requirements
for a specific completion date or, alternatively, a likely completion date based on
the current trend.
The anticipated performance profile (in dollars) is based on historical data;
as shown in Figure 9.60, early poor results are due to initial learning experience
and work on temporary facilities, but performance quickly improves as the pro-
portion of direct work increases. The curve will then flatten out due to the weight
of work accomplished and it is normal for the performance/productivity to then
gradually reduce, due to the low value of the final punchlist and checkout work.
See the performance evaluation method (discussed on p. 299) for details of
applying this technique.

E. Quantity Progress Report

The quantity progress report is an efficient visual tool for scope trending and
evaluating schedule performance, and can be used for many categories of work.
Another technique would be to correlate the craft direct hours to the quantity
and evaluate performance on a unit-hour basis. This also provides historical data
for estimating purposes.
Figure 9.67 shows the quantities of mass excavation and fill for a large
grassroots site. The original quantities are scheduled, and actual field installation
is plotted. It is interesting to note that in this example the scope quantities
increase by 20-30%. Additionally, the actual progress shows a schedule slip of
nine months.

F. Measurement

As stated previously, the key element in progress measurement is quantities.

This is particularly true with unit-price subcontracts. Lump-sum subcontracts
also need to be evaluated for progress on a quantity basis. Field measurement
can be greatly facilitated when quantity takeoffs are prepared for construction
drawings. It is then a relatively simple matter in the field, as the work is
296 Chapter 9

SUBCONTRACTOR... _ 1
IOR NO 1
QUANTITY PROGRESS REPORT REPORT NO

MASS EARTHWORKS - EXCAVATION

2500
Schedule 2,270

Forerast .— _ •> S 2.07C

2000 • • • " • . '-" # ^ ^ ^ ^ ^

1.750 ..;•././_ '*• ; < r / ' ^ ^ ^

ters

<u • • ' ' ' "• M

2 1500 -
u
S
o
o
.3 1000 -
3
3

500

Q
N D j F |M|A jM j J J A S O| N| D J|F|M|A|M|J|J

MASS EARTHWORKS - ENGINEERED FILL

1500
Scheduled 1.435
" Actual _ _ 1
^ I X 1.237
1.200#
Met ers

o
".o / • • • • • • ' • v ^

<J
/::•"> ••::•:. i/
o
sands

o / • . ' • . * " /

x:
J-
•*. -x . - * "-X

Q
N | D J | F ] M | A |M J J|A S]O|N D J |F M1 A M]J|J

Figure 9.67 Typical quantity progress report.

Cost and Schedule Trend Analysis 297

completed, to use these quantities for payment and measurement of progress,

together with field changes as construction proceeds.
It is important that field measurement of work in progress be recorded
properly on marked-up drawings or on quantity lists so the financial billings to
subcontractors can be adequately checked. It is necessary that the subcontractor's
billing be checked by field construction personnel to ensure that billing reflects
work completed and is for the correct facility.
At subcontract award, or before the start of construction, mutual discussions
with the subcontractor on methods of progress measurement and payment should
take place. At these meetings, agreements should be reached for the weighted
breakdown of lump-sum subcontracts and agreements for measuring partial com-
pletion of unit prices. The frequency of reporting and the method of measurement
is a worthwhile item for agreement at this early date.

G. Cost Control—Overall

The first step in cost control is evaluating the contractual documents and the
contract agreement. The evaluator should look for contractual anomalies, pricing
discrepancies, and conditions that might lead to future cost risk. Careful consider-
ation should be given to schedule commitments, warehousing agreements, laydown
and material handling requirements, and whether previously stated commitments
can be maintained during execution of the subcontract. It is particularly import-
ant that a review of associated interface work by others, job-site areas, free-issue
material supplies, and services be made, since these items often provide the
source for major claims.
A log should be maintained of all engineering and contractual changes that
have taken place in the agreement. All changes and appropriate cost trends of
such changes should be recorded. These potential cost deviations should be esti-
mated as definitively as possible for use in future negotiations with the subcon-
tractor.
The following sections discuss procedures and provide examples of recom-
mended cost control techniques.

H. Subcontract Cost Control and Forecast

Major subcontracts should be evaluated individually and tracked from the orig-
inal contract price to the final cost forecast. Figure 9.68 shows a form that a
general contractor can use to document such tracking. Costs are broken down
into material and labor components. The control sheet shows the price of the
original agreement, accumulates current experience, assesses outstanding work,
and forecasts a final predicted total cost. The form is vertically divided into two
parts, the top portion showing the physical scope of the work, and the bottom
portion covering claims. This enables progress measurements to be made based
on a financial assessment of the labor scope of the work.
Separating material and labor of lump-sum bids allows higher-quality esti-
mating evaluations to be performed. It also enables future assessment of labor
claims and conditions that do not affect material prices. The definition of scope,
type of work, current conditions, and contractual agreement will largely deter-
 to
CONTRACT FOR : PROJECT CO
SUBCONTRACT COST REPORT JOB NO.
00
CONTRACT NO.
CONTRACTOR REPORT NO.
ORKIINAL CONTRACT PRICE
(LABOR & MATERIAL) CURRENCY DATE

LABOR MATERIAL

PREDICTED COST % PREDICTED TO DATE

ITEM TO DATE TOTALCO8Tj CO8T REMARK8
TOTALCOST

1 MAIN CONTRACT

2 WORK OUTSIDE SCOPE OF CONTRACT

(a) MAJOR CHANQE8

(b) ADDITIONAL BID ITEMS

(O

3 OPEN COST WORK

4 OTHER (SPECIFY)

(a)

(b)

DIRECT WORK 8/T

M
1
5 CLAIMS (SPECIFY)

(a)

(b)

(c)

TOTAL O

Figure 9-68 Subcontract cost report form. i

CO
Cost and Schedule Trend Analysis 299

mine the makeup of the items listed on the form. Claims generally will fall into
one of several categories:
• change in original scope of work,
• schedule delays caused by others,
drawing and material delays,
• interference by others, and
• changes in site conditions or site regulations.
Some subcontractors tend to greatly exaggerate adverse conditions and submit
inflated claims. Consequently, it is essential that such items as daily logs, sched-
ules, and work programs be maintained for all major subcontracts.

I. Subcontract Growth Allowances

On unit-price subcontracts (those developed with a minimum of engineering

definition), factors of 20% each for scope increases and claims should be added
to the original contract price (labor only). Factors for lump-sum contracts would
be 5% each.

J. Subcontract Low Bids

By industry definition (custom and practice), a low bid is a bid that is under your
estimate by 20% or more, assuming your estimate is a good estimate. If an evalua-
tion indicates a low bid, a further allowance should be made for covering the prob-
ability of future poor performance, financial difficulties and/or default by the
subcontractor. A low bid can result from ignorance and/or a subcontractor buying
the job. Subcontractors sometimes turn in a survival bid to attempt to break into
a new market or to try to block competition. Perhaps they have found deficiencies
in the contract conditions which they can turn to their financial advantage, but
they first have to get the contract with a low bid. Such situations can result in
low bids that can, in turn, lead to serious cost and schedule consequences for an en-
tire project if the subcontractor gets into financial difficulties and/or performs badly.
The opinion is often expressed that a subcontractor in financial trouble will
maximize its field effort to finish early and get out. Yet the opposite is usually
true: a subcontractor in financial trouble will generally reduce its field effort to
a minimum in an attempt to improve its unit costs. This results in low levels of
construction equipment and supervision and often leads to schedule extensions
and poor quality. Apart from specialty subcontracts, most categories of work
require subcontractors to stay until the end of the project. Thus it is rarely
possible for major civil and mechanical subcontractors to finish early and get out.
7. Performance Evaluation (Dollars)
This section describes a powerful method of assessing a subcontractor's financial
performance, which can then lead to a determination of future work performance
and associated problems. Where there is a poor financial return, the risk of poor
performance, contract default, or claims is high. Thus, a subcontractor's financial
problem can,' very quickly, become the general contractor's or owner's problem.
Performance evaluation is a technique for measuring and monitoring a subcon-
tractor. Poor subcontractor financial performance increases the risk for potential
300 Chapter 9

schedule slippage, poor quality, claims and, ultimately, contract default. When this
performance evaluation technique is used properly, it provides an early warning
of potential problems and then allows time for developing alternative solutions.
2. Performance Evaluation Method:

Performance factor (labor) = — j ~ r = Dollars per hour

Hours expended
2. Assess the subcontractor's operation cost by building up field costs, equip-
ment costs, overhead, etc., onto the base labor cost, dollars per hour. (This
does not include profit).
3. Ensure that billings truly represent work accomplished.
4. Ensure that the labor hours report is accurate.
5. If the subcontract has a material supply, evaluate it for additional profit on
material to add to the profit-loss of the labor element. Check for biased bidding.
If the billing rate is significantly lower than the estimated rate, and if it remains
so as work proceeds, then the risk of adverse action is high. This can lead to
schedule extensions and claims. This is a relatively simple procedure. It requires
up-to-date billings, an estimate of the subcontractor's all-in labor cost, accurate
recording of labor hours expended, and an assessment of profit on material supply
and biased bidding.

K. Subcontract Quantities (Unit Price Contracts)

On major subcontracts, tracking quantities from initial takeoffs through inter-

mediate takeoffs to final field takeoffs is absolutely essential. Figure 9.69 is a
report which illustrates such a tracking technique. The listing should show all
bid items, and separate sheets should be used for labor and material. The contract
column shows original contract quantities and the forecast column shows the
current assessment of quantities. The difference between the contract and fore-
cast columns is entered in the differential column. The deviation can be trended.
Quantities installed to date, actual labor hours, and status are also shown.

L. Subcontract Performance Report

Figure 9.70 shows a report of a simple tabulation of financial performance per

labor hour of each subcontract. In conjunction with the performance curve shown
on the subcontractor's status report, this data can provide a good basis for overall
cost prediction. Individual performance curves can be developed for critical sub-
contracts.

M. Subcontract Forecast Summary/Report

All subcontracts should be listed, in total, on the progress report shown in Figure
9.71. The report summarizes current cost and forecasted final values and iden-
tifies scope, claims, and potential trends. The figures are taken from predictions
shown on the subcontract cost report (Fig. 9.68) which is a technique recommended
for major subcontracts. Should this report not be used for small subcontracts,
then allowances should be changed, as appropriate, to reflect small contracts. It
 PROJECT
JOB NO.
REPORT NO. OS
SUBCONTRACT QUANTITY REPORT a
g
DATE

TO DATE

I
CONTRACT FORECA8T VARIANCE
UNIT
ITEM UNIT RATE QUANT. CO8T QUANT. CO3T QUANT. CO8T QUANT. CO8T

i
a
>
1
0)

Figure 9-69 Subcontract quantity report form.

 PROJECT 8
JOB NO.

REPORT NO.
SUBCONTRACT PERFORMANCE REPORT DATE

SUBCONTRACT $ EARNED PER LABOR JOBHOUR (CUMULATIVE) E8TD.

RATE
P.O. NO. WORK 8COPE CONTRACTOR

O
fi)
Figure 9.70 Subcontract performance report form. "2
<D

CO
 PROJECT
JOB NO.
REPORT NO.
I
fi)
SUBCONTRACT SUMMARY REPORT DATE a

I
ORIGINAL CHANGES
CONTRACT
CONTRACT &
NO.
CONTRACTOR WORK SCOPE BUDGET VALUE EXTRAS CLAIMS FORECAST COMMD. EXPEND.

Figure 9-71 Subcontract summary report form.

o
GO
304 Chapter 9

is recommended that assessments of changes/extras and claims be made at

contract award.

N. Field Changes and Extra Work

A procedure should be developed for efficiently evaluating, reporting, and esti-

mating the field changes and extra work that occur during construction. The
objective of this procedure is to identify all changes from approved drawings, to
evaluate impacts on the cost and schedule, and to authorize the work.
Often, field changes and extra work are required on an urgent basis; how-
ever, if an efficient estimating and authorization procedure is in place, it will not
delay the work. Too often, changes are requested on a crash basis where little
thought has been given to the need or cost impact of the change.
During the punchlist and checkout phase at the end of construction work,
changes can be required to meet operability and safety standards. These changes
should be carefully assessed, as operations/maintenance staff are sometimes overly
critical of the design and can be guilty of "gold plating."
Field contracts administration personnel have primary responsibility for
maintaining subcontractor performance so as to ensure that previously accepted
contractual commitments are met. However, contractual commitments in such
areas as scope, quality, schedule, and cost often change, and an effective proce-
dure will allow work to proceed in a timely, efficient, and orderly manner. All
such changes should be identified as field changes and should be initiated,
approved, and recorded in a way that will minimize the extra costs and loss of
time associated with such changes.

XI. SUMMARY

The most powerful and effective techniques for monitoring and controlling pro-
jects are effective:
front-end planning, and
trending programs.
Such techniques require real business skills, analytical ability and efficient
project control techniques. If we get it right at the front end, we have a chance
of success, though it is not guaranteed. If we do not get it right, then we have
no chance of success. This is then followed with the constant evaluation of
changing circumstances and their impact on cost and schedule.
This chapter illustrates a comprehensive and wide range of analytical-trend-
ing techniques and skills that, when properly applied, will lead to success and
result in the desirable condition of no surprises.
Front-end planning is covered separately in Chapter 5.
10
Change Control and Risk Analysis

I. INTRODUCTION

Changes in the project cost and schedule baselines are as much political problems
as technical problems. Even with high-quality trend analysis, as illustrated in
Chapter 9, changing the baseline requires the understanding, support, and com-
mitment of all parties to the project, especially the client or customer. This
support and commitment can only be achieved when both project manager and
project control analysts have competence, credibility, and effective communication
channels with project parties. It is recommended that when current baselines
are no longer realistic, revised baseline targets should be developed. There can
be endless discussions about the definition of "realistic," but the setting of pro-
grams to unrealistic or impossible baselines is to be avoided, since it leads to
reduced management credibility and poor project morale.

II. INCREASING THE COST BASELINE

Common industry practice is the company requirement that projects be completed

within +10% of the approved funding. In practice, this means project cost fore-
casts that are over the 10% limit require a supplemental funding request. Such
requests then require all appropriate justification and full backup analysis to
support this position.
When quality trending is first developed on a potential basis, it is vital that
the project manager, when increasing the forecast, strike the right balance between
cost forecast accuracy and the need for management to know about significant
cost problems. If the trend meeting is correctly implemented, all key project parties
will be constantly updated about all project problems and variations, so a formal
cost overrun situation would then be more routine than alarming. However, the
actual numbers or forecasts, developed from potential trending, can still cause

305
306 Chapter 10

major political problems and result in loss of confidence, low project morale, and
defensive engineering. This would be especially true if attempts were made to
improperly assign blame for such problems. Consequently, carefully analyzing the
cost forecast and carefully selecting the timing of publication are critical.

III. INCREASING THE SCHEDULE BASELINE

Industry practice and company policy are not as consistent with schedule perfor-
mance as with cost performance. Very few companies have a specific schedule
quality that is a companion to the funding requirement of contingency (probability
and accuracy). A funding schedule of 80% probability is recommended. When such
a schedule is slipping, and trend analysis shows that appropriate acceleration
options have low probability, then the schedule baseline should be revised. It is,
of course, possible that a major cost problem has a companion schedule problem.
Trying to force a program to impossible completion requirements is of little value
and often results in added costs with no schedule advantage.

IV. SCOPE INCREASES

Major industry studies have shown that the majority of cost increases and sched-
ule slippages have been directly due to scope increases (after funding approval).
Poor early definition, lack of design control, poor project interfaces, and conflicting
objectives are major contributing factors to this situation. It is recommended that
true scope increases, as distinguished from normal design development, should
be processes for additional funds and schedule adjustment. With a lump-sum
contract liability, this would be normal in a contractor operation. With owner
operation, however, it is common for senior management to require that scope
increases be covered with the project contingency; such poor practices are common
and should be eliminated.

V. SCOPE REDUCTION

In most instances, scope reduction occurs when cost trending at the early project
stage shows a cost overrun situation. Such reductions are effective during early
project development, and it is essential that when the project scope and funding
have been reduced to acceptable levels, the reductions are not then allowed to
be reinstated. It is a common practice that operations/maintenance personnel will
agree to the reductions and then, as design proceeds, will attempt to slip in the
previously agreed reductions. True engineering enhancements that result in sub-
stantial economic advantage should always be properly considered, but preferen-
tial engineering and gold plating should be strictly controlled.

VI. MANAGEMENT FINANCIAL RESERVE (DOLLARS)

This reserve is not contingency, even though senior management mistakenly

classifies these funds as such. A rating or risk analysis program should properly
develop the appropriate contingency. Management reserve is an added allowance,
Change Control and Risk Analysis 307

controlled by management, to cover risks on projects that would have major

impact on the total company financial strength if cost overruns occur.

VII. RISK ANALYSIS (PRINCIPLES, PROCEDURES, AND PROGRAMS)

Risk analysis is a tool or method for quantifying uncertainties and their inherent
risk. It is a formalized structured approach defining the uncertainties and as-
sessing the probability of risk associated with each uncertain item and/or event.
Performing a risk analysis allows the project manager to qualify and quantify
the sensitivity of risk to the major facets of a project and to include appropriate
cost and time allowances as necessary.
The tools of risk analysis vary from intuition or "gut feeling" and judgment,
to simple manual models, to computerized simulation models. Regardless of the
tools used, it is usually very effective to obtain a broad review of the risks by
available third parties. Other project leaders and involved groups (e.g., construc-
tion, purchasing, and facility planning) can provide valuable insights from a
different perspective regarding the distribution of risk factors and elements.

A. Risk and Business Skills

The identification and proper management of risk is a vital ingredient of suc-

cessful project execution. Many studies that have been performed conclude that
today's project managers have inadequate business skills, resulting in poor deci-
sion-making capability and inadequate risk management.

B. Decision-Making Process

The decision-making process consists of certainty, risk, and uncertainty.

• Certainty only exists when the exact conditions and circumstances can be
specified during the period of time covered by the decision. This is rare in
the project business.
Risk occurs when it is possible to specify a degree of probability for a number
of likely outcomes. For example, in oil and gas exploration, there is an 80%
chance that the well will be dry, 15% chance that the well will be medium
sized, and 5% chance that the well will be large. It is common for probabilities
to be made with historical data or, in its absence, by personal experience.
• Uncertainty is present when it is not possible to specify the relative likeli-
hood of any outcome. This occurs in areas such as research and development,
where there is no historical data available, or when the task is outside the
experience of company personnel.
Most individuals operate in an area of some certainty, but where many
decisions have an element of risk. Throughout a person's life, the element of risk
is a common occurrence, and many decisions require taking some risk. With a
family, the risks involve such items as the purchase of a house, education of the
children, potential job prospects, etc. These are not considered big risks because
there is a known history: we are not venturing outside our normal experience.
308 Chapter 10

Yet consider the following unknown situations: accepting a job in a country

where the culture is unknown and taking our family with us; taking up race car
driving; starting a business; getting married. These are all situations that are
usually outside our experience; they can be dangerous and harmful. Thus they
need to be treated differently from our usual and normal risks.
In industry, risk normally involves personnel safety and the financial bal-
ance sheet. From the financial point of view, many decisions are of a potentially
disastrous nature in that they could affect both the project and the future
profitability of the company. For example, foreign investments, oil and gas ex-
ploration, design and new technology considerations, methods of construction,
and contracting of major work all fall within this category. Because of their
magnitude, some form of risk analysis becomes essential.
All projects have degrees of risks. The key to successful project management
is not to wish them away, be frightened by them, or be too optimistic about them.
Rather, they must be recognized and identified. Then the problem and its poten-
tial impact on the project can be quantified, and a course of action for dealing
with the problem if it arises can be determined. It is unlikely that all risks will
be identified by any one form of decision analysis. Further, the process of decision
analysis does not minimize the likelihood of the risk occurring. Its purpose is to
properly identify, quantify, and assess the cost of the risk occurring. This leads
to good decisions.

C. Decision Analysis

Decision analysis methods provide a comprehensive way to evaluate and compare

the degree of risk and uncertainty associated with each investment choice. The
objective is to let the decision maker know the likely outcome of any decision. It
must be understood that decision analysis does not eradicate risk, nor does it
substitute for management judgment: it merely enables alternatives to be com-
pared and informed decisions to be made.
Decision analysis involves:
• defining the possible outcomes for each alternative,
• evaluating the profit or loss of each alternative,
estimating the occurrence probability of each alternative, and
using this information to calculate the weighted average of each alternative.
This process should be carried out in a systematic way because it leads to other
benefits as well: it forces a more detailed review of the project, it highlights
sensitivities, and it tends to eliminate emotion and prejudice. Among the more
popular decision evaluation techniques are expected monetary value, breakeven,
and Monte Carlo simulation.

D. Expected Monetary Value

Expected monetary value (EMV) considers a number of alternative solutions to

a problem, calculates the worth of each alternative, and applies an estimated
probability factor to each alternative. The sum of all the probabilities at any
given item is equal to either unity or 100%. The EMV is the product of multiplying
the probability by the worth.
Change Control and Risk Analysis 309

A simple illustration of this method would be spinning a coin and betting

on the result. In theory, every time the coin is spun, the chance of it coming up
heads is 50%, and over sufficient time the spinning relationship works out to
50:50. If a person won $10 for each time it came up heads and lost $8 for each
time it came up tails, should the bet be taken? Using EMV sets the value for
purposes of decision-making:
Outcome Probability Worth EMV
Heads 0.5 +10.0 +5.0
Tails 05 - 8.0 -4.0
1.0 +1.0
The EMV shows that accepting the gamble leads to winning, on average,
$1.00 as opposed to earning nothing by not betting. With acceptance of the
gamble, the expectation is to win $10.00, but analysis shows an average of $1.00.
Where does this figure come from? The bet is either a win of $10.00 or a loss of
$8.00; however, the probability of each event is 0.5, so the EMV of each is half
the worth. The net EMV is the sum of all EMVs. This is another cornerstone of
EMV analysis: it never gives the exact answer to any one question, but offers
the following basic rule:

If the decision-maker bases all decisions on the highest possible EMV,

the total gains from all decisions will be greater than selecting any
alternative action.

Another aspect of EMV analysis is the magnitude of the risk for considerations
of investment cost and cash flow. For example, since it is not known how long
the 50:50 probability will take, the question arises whether the investor can afford
the time it will take for the odds to even out. Consider the stakes being raised:
$100.00 (win) to $80.00 (loss)
$1,000.00 (win) to $800.00 (loss)
$10,000.00 (win) to $8,000.00 (loss)
There may come a time when an individual or a company can no longer afford
a very good business gamble because of the high investment level and because
the return will not occur for several/many years. The decision rule for EMV
choices is to select the alternative that gives the largest positive EMV. Any
number of alternatives can be selected, so long as the probability for all alter-
natives adds up to 1 or 100%. The worth should always be of a monetary nature.

E. Decision Trees

Decision trees graphically and logically show decision and chance options in the
form of a logic diagram, as shown in Figure 10.1. The diagram shows four options,
each with its own costs (net present value, NPV) and probability, and the final
EMV. The diagram shows two types of nodes—the square and the circle. The
square denotes a decision node: work or no work. The circle denotes a chance
310 Chapter 10

PROBABILITY NPV EMV

0 2
— 50 10

DECISION I /(2) O4 __
4 0 16
NODE \ / >

5
°75
015

— (20) (5)
4-21.75 M$

Figure 10.1 Decision tree.

node: a decision was made, and this is the possible result when the risks of the
various options are assessed.
Decisions tree analysis is one of the few instances of working backward to
solve a problem. The process begins by calculating the NPV for any given con-
dition, and then working from the final outcome to the commencement of the
work, applying the appropriate factors. Totalling the individual EMVs gives a
positive $21.75 million, indicating the work decision to be favorable, depending
on further analysis of investment funds and cash flow considerations.
Combining EMV analysis with the decision tree method results in a powerful
and graphical program that is a favorite tool of senior management. The most
crucial aspect of the process is the probability factor: if it is not realistic, then
the analysis will be useless and misleading to the decision maker.

F. Developing the Probability

Probability is a complex subject. It is essential that whatever probability is

developed, it should be the best available. The following methods will help in
obtaining good probability evaluations:
• using past success ratios (make sure that the same factors apply),
meeting and discussing with the "experts" to gain an understanding of the
method they have used in assigning a probability range,
• reviewing other companies' success rates, and
• making use of mathematical models if they are available and relevant.
It must be remembered that any number obtained by any method is not a
scientific certainty. There are no absolutes in risk analysis.

G. Breakeven

A planning tool developed at the beginning of the century, the breakeven chart,
plots the relationship between cost, revenue, and profit. Figure 10.2 shows two
scales, both expressed in dollars and with an identical value. The horizontal scale
represents sales volume (revenue), and the vertical scale represents expenses.
Change Control and Risk Analysis 311

BREAKEVEN POINT
$400 OF SALES

#
^-T , , -H 1 •—r
100 200 300 400 500 600 700
SALES VOLUME
Figure 10.2 Breakeven chart.

The first element to plot is fixed cost, such as rent, which is shown as a horizontal
expenditure and which does not change with sales. Then variable costs can be
plotted over the fixed costs. Again, if there is no deviation in the proportion of
variable costs to sales, this would be shown as a 45° line. Finally, the revenue
line is drawn. Where the revenue line crosses the combined expenses line, the
breakeven point occurs. This is the point of zero profit, or where losses stop and
profits begin.
Breakeven is not a pure form of risk analysis but is more a form of economic
analysis. It also lends itself very well to management decisions, since the normal
output of the breakeven method is a graph.

VIII. RISK ANALYSIS OF AN ESTIMATE

In applying a formal risk analysis technique to an established base estimate (an

estimate without contingency), the following steps are recommended:
1. Divide the estimate into groups that reflect its major disciplines (such as
major equipment, bulk materials, labor directs/indirects, design costs, etc.).
2. List the variable elements that affect each item identified in Step 1 (such
as major equipment pricing, piping quantities, craft productivity, etc.).
3. Estimate a range of values for each variable element identified in Step 2, and,
within that range, its likelihood of occurrence (e.g., 1 chance in 4, 1 chance in
10). Essentially, a probability curve is being constructed for each variable.
4. Develop a model that assigns each identified and assessed variable to the
estimate disciplines identified in Step 1.
312 Chapter 10

Base Adjusted Estimate

Estimate (50-50 Point)

Total Project Cost ($)

Figure 10.3 Risk analysis results.

5. Use a computerized program to apply Monte Carlo simulation techniques

using random number tables. The computer program simulates the project
to determine the many possible cost outcomes by using random sampling
applied to the variables. The model is solved many times to provide a set
of output samples large enough that its statistical properties approximate
the desired solution set.
The results of the risk analysis run described in Step 5 is shown in Figure 10.3.
Computerized risk analysis models generally go through between 500 and
1000 iterations to generate the total project cost. The plot of these total cost
calculations is shown as a probability distribution (i.e., the number of times the
result was observed). In Figure 10.3, the distribution shows that the base esti-
mate has more risk of overrun than of underrun. In other words, more values
fall to the right of the bare estimate line. The adjusted estimate is the base
estimate plus contingency, since there is now an equal number of values falling
to the left as to the right of the adjusted estimate line. A more detailed description
of both manual and computerized risk analysis techniques is contained in the
following sections. Range estimating, a sophisticated application of Monte Carlo
techniques and probability analysis to prediction of probability of estimate over-
run and underrun, is discussed in Chapter 11.

A. Manual Technique and Example

The risk analysis method discussed in this section represents a simplified manual
technique combining several of the steps discussed earlier. Because the approach
is simplified (when compared with the Monte Carlo technique), the results ob-
tained are inflated, especially at the extremes of the probability distribution.
Whereas the Monte Carlo technique uses a random number generator, the manual
method simply adds the probabilities of underrun and overrun of the several
variables; thus there is no randomness in the calculation. Nevertheless, the
assessment of the base estimate value as to whether it lies to the left or right
of the adjusted estimate (the 50:50 point) is a valid conclusion.
Manual risk analysis involves the following steps:
Change Control and Risk Analysis 313

1. The base estimate is divided into components, each representing a discrete

piece of the estimate. Basically, the estimate is broken down in the same
way it was built up. Each component is assigned its dollar value.
Major equipment (labor and materials) $1000
Piping labor 2000
Electrical labor 500
Piping materials 500
Electrical materials 200
All other labor 200
All other materials 100
Design costs 500
Total $5000
2. Each component is evaluated as to the probability of overrun/underrun at
the 90/10 (90/10 meaning a 90% chance of overrun and a 10% chance of
underrun), 75/15, 25/72, and 10/90 points. At each probability point, the
most likely dollar value is recorded.
Probability of actual value being
(over or under) amount shown value Base
estimate
component (90/10) (75/25) (25/75) (10/90) value
Major equipment $ 800 $ 900 $1200 $1500 $1000
Piping labor 1500 1750 2500 3000 2000
Electrical labor 300 400 600 900 500
Piping materials 300 400 750 1000 500
Electrical materials 100 150 250 300 200
All other labor 100 150 250 300 200
All other materials 50 50 150 200 100
Design costs 450 450 800 1000 500
Total $3500 $4250 $6500 $8200 $5000
3. The sum of the dollar values at each probability point is summed and plotted
as shown in Figure 10.4.
4. The intersection of the plotted values at the 50:50 point yields the contin-
gency required to produce an estimate with an equal chance of overflow. In
the above example, the 50% point in approximately 5250, which yields a
contingency of 250 (i.e., 5250 - 5000 = 250).
Technically, this manual technique is not entirely correct, in that it assumes
all of the elements to be 100% dependent, allowing for the various (90/10, 75/25,
etc.) components to be summed. Since this is not correct, the outer bounds will
tend to be skewed, providing a smaller overall contingency. However, the error
is small.

B. Monte Carlo Analysis

Monte Carlo simulation replaces the randomness and dependency of the manual
method. Monte Carlo risk analysis begins with constructing a model made up of
314 Chapter 10

0
10
20
^ - ^ ~ ~ ~ ~
30
% 40 Base Estimate^. y<
Probability 50
/
of Cost
Overrun
60
70
7 Base Estimate and Contingency
at the 50/50 Point
80
90
100
3000 4000 5000 6000 7000 8000
. Contingency = 250

Figure 10.4 Risk analysis probability curve.

TARGET
EXPECTED VALUE)

8
O

time

Figure 10.5 Cost/schedule risk analysis.

 O
D)
CUMULATIVE PROBABILITY (Q

o
O
Completion Cost/Schedule
$240 Risk Envelope |
maximum cost S231M
a
$200- expected cost $196M
o

fi)
$160--

SIS
39% Probability of
Attaining Cost
$120- >-
fc
=J
CD
<
CD

t
$ 80- O
100%

IVE
80%
$ 40- 60%
11% Probability 40% -j

Attaining Schedule
Target 20%
0% O

Figure 10-6 Cost/schedule performance graph.

CO

Oi
316 Chapter 10

the various parts of an estimate. This procedure uses a computer to solve the
model a number of times (typically between 100 and 1,000) based on different
random values generated within the distribution. The Monte Carlo process sum-
marizes the results from all the model solutions, allowing probability statements
to be made about the analysis. Through Monte Carlo simulation, an interactive
modeling language incorporates risk analysis into an automatic model. It requires
no restructuring of estimates, and the estimated value is replaced with distribu-
tion ranges, which are themselves a part of the modeling languages.
A probability distribution function describes a distribution range. For each
Monte Carlo iteration, the system obtains a random value from that range and
applies it to each defined function. In most systems, there is a range of from 100
to a maximum of 1,000 iterations that can be run on any single model; the more
iterations, the more accurate the analysis is. The most accurate form is the Monte
Carlo 1000.
Once a Monte Carlo simulation has been run, the results must be interpreted
from the output tables. These include the frequency table, which contains the
10% and 90% range numbers; the sample statistics table, which contains the
mean that is used to calculate contingency (mean or most probable = contingency);
and the histogram (which is the data values plotted in graphic form). The data
on these tables indicate whether there is a normal distribution of values or if
the values are skewed to one end or the other, and if the results can be accurately
used for risk analysis. Figures 10.5 and 10.6 provide examples of Monte Carlo
analysis probability curves.
11
Range Estimating"

I. THE TRUTH ABOUT RANGE ESTIMATING

Many organizations are just beginning to learn that sophisticated software pack-
ages do not necessarily create sophisticated users. People often understand a
package's functions but not the underlying decision technology. This is particu-
larly true with Monte Carlo Simulation (MCS). Range estimating was developed
to correct the deficiencies as well as to capitalize on the strengths of MCS in
order to bring the benefits of risk analysis to nonstatisticians—without compro-
mising the validity of the technique.
Since it was first coined in 1970, the term range estimating has been widely
misinterpreted. To some, range estimating includes any attempt to measure un-
certainty with ranges rather than single-point numbers (i.e., estimating ranges).
To others, range estimating is MCS itself. Both interpretations are wrong.
In 1970, range estimating was defined as a combination of the good part of
MCS (the sampling process), an active application of Pareto's law (defined later)
and, most importantly, powerful heuristics which make the entire process easy
to apply. A computer and range estimating software are needed—it cannot be
applied manually.
The key differences between range estimating and basic MCS are:
range estimating's simplified inputs, as ranges and probability factors are
used rather than traditional probability density functions (PDFs) and their
parameters; and,
• range estimating's ability to identify, quantify, and rank critical elements
according to their contributions to bottom line risk and opportunity.

*By Michael W. Curran and Kevin M. Curran, Decision Sciences Corporation, St. Louis, Missouri.
Copyright 1995 by Decision Sciences Corporation. All rights reserved. Reprinted by permission.

317
318 Chapter 11

Monte Carlo Simulation (MCS) Puts User at Risk

Am I a statistician?
i

YES NO
| I
Proceed with caution. Good Luck!
Determine which elements are critical
I
Select the proper probability density function (PDF) for each
Selecting the incorrect PDF or
assigning a PDF to a noncritical element
will likely lead to iatrogenic risk
I
1A 9
Uniform Triangular Normal Step Beta, E>iang>
ixponential,
Gamma, etc.
1
Input parameters for each PDF
1
Mean Standard Varianc e I
Deviation etc.
[± or X

Range Estimating Protects User from Risk

Range Estimating's Heuristics Simplify
Input and Detect Iatrogenic Risk

A HIGHLY SKEWED EXAMPLE: p i 150 (High)

95SK chance that the actual -- -100 (Target)

value will occur in this zone LJ 90 (Low)
(Probability Factor)

Figure 11-1 The differences between MCS and range estimating.

Range Estimating 319

These differences are illustrated in Figure 11.1.

II. RISK, OPPORTUNITY, AND UNCERTAINTY

In economics, both negative and positive characteristics are ascribed to risk—high

risks promise high rewards. However, this contradicts common usage of the term
"risk." For example, most dictionaries (Webster's and others) define risk as the
possibility or probability of loss, harm, or injury. In other words, there is nothing
good at all about risk.
Range estimating uses practical (i.e., common) definitions. Several profes-
sional organizations are also moving away from the economist's definitions and
toward the dictionary definitions:
• Risk: an undesirable potential outcome and/or its probability of occurrence;
• Opportunity: a desirable potential outcome and/or its probability of occurrence;
• Uncertainty: all potential outcomes (i.e., uncertainty is the parent of both
risk and opportunity).

III. NUMBERCLATURE

Everyone knows it is virtually impossible to predict the bottom line exactly. What
then does the decision maker strive to do? Manage uncertainty, that's what. But
uncertainty can only be managed if it is measured and monitored!
The proper tool must be selected when measuring. The spreadsheet is a
poor tool for measuring uncertainty. To select the proper tool, one must first
understand the nature of the number to be measured. The are three categories
of numbers: knowns, known-unknowns, and unknown-unknowns.

A. Knowns

A known is a number whose value is certain. The number of degrees in a circle is

an example of a known. There is no doubt that this value is 360. Since a known
has no associated uncertainty, a single-point number is used to measure it.

B. Known-Unknowns

A known-unknown (UNK) is a number whose value is uncertain—a number whose

value is known to be unknown. The exact number of inches of rain which will
fall worldwide in the year 2017 is an UNK. Many UNKs contain insignificant
amounts of uncertainty and therefore pose no problems for the decision maker.
A small number of UNKs, however, contain significant uncertainty. These few
UNKs can cause plans to go awry, sometimes dramatically. Thus the need for
risk analysis.
For the majority of UNKs—those with little uncertainty—nothing more
complex than simple arithmetic is needed. However, simple arithmetic can prove
disastrous if it is applied to the small number of UNKs with high degrees of
uncertainty. Clearly, these need to be measured in a different way—with a range!
320 Chapter 11

Knowns are best measured by ^ Single-points

Moncritical UNKs are best measured by ^P Single-points

Critical UNKs are best measured by

i
• Ranges

UNK-UNKsare best measured by -( \L Clairvoyance

mm,
Figure 11.2 Types of numbers.

C. Unknown-Unknowns

An unknown-unknown (UNK-UNK) is a number (or entity or event) whose exis-

tence cannot be imagined. An UNK-UNK cannot be predicted unless, perhaps,
with a crystal ball. Once the UNK-UNK's existence is known, it is no longer an
UNK-UNK. By definition, it is then either a known or an UNK. It is therefore
impossible to give an example of an UNK-UNK
The UNK-UNK is not the major culprit in planning. True, an UNK-UNK can
wreak havoc at the bottom line. But history shows this does not happen that frequent-
ly. Far more often, plans fail because of UNKs—just a few UNKs with high leverage
move in the wrong direction and push the bottom line over the edge (Fig. 11.2).

IV. PARETO'S LAW

Assume a decision maker has prepared a cost estimate for a project with hun-
dreds or thousands of cost elements and a bottom line target of $1,000,000. In
that estimate there is an item of equipment for $145,000. Due to a contractual
arrangement with the equipment manufacturer, the decision maker is assured
that the actual cost will be exactly $145,000. This cost element is a known—it
contains no uncertainty. If there is a cost overrun on this project, it won't be due
to this element!
In this same project, 800 meters of material must be installed. The estimated
labor cost for this is $22 per meter, and the decision maker's experience indicates
it could go as low as $15 or as high as $29 per meter. In other words, the potential
variability of this labor cost translates into a potential variability of $5,600 (plus
or minus) at the bottom line.
The crucial issue is an element's variability, not its magnitude. Since a range
is used to measure the uncertainty in UNKs, and since most of the elements in
a plan are UNKs, does that mean that most of the elements in the plan require
ranges? No!
Range Estimating 321

Not all elements have the potential for changing the bottom line by a
significant amount. In fact, just as few elements will account for the largest
percentage of the bottom line's magnitude, it is also true that few elements will
account for the largest percentage of the bottom line's variability. This phenom-
enon is called the law of the significant few and insignificant many, the 80/20
rule, or Pareto's law.
Vilfredo Pareto, a sociologist/economist, discovered that most of the wealth
in a nation is concentrated in a small percentage of the population. This same
phenomenon occurs in planning. A few elements account for the vast majority of
the bottom line's potential variability. Typically, these elements number between
10 and 20—regardless of the bottom line's magnitude or the nature of the decision
process. This has been demonstrated innumerable times in decisions up to $12
billion.
Those few UNKs which can cause substantial changes in the bottom line
are called critical elements. (All other UNKs and knowns within the plan are
called noncritical elements.) Unfortunately, a majority of critical elements behave
adversely with predictable regularity and thus spoil plans. That's why even good
plans often produce poor decisions and poor outcomes. That's also why the vari-
ability of each critical element must be measured by a range.

V. CRITICAL ELEMENTS

Extreme care must be taken not to apply ranges to too many, or the wrong, ele-
ments. If significantly more than 20 elements are ranged, it is highly likely that an
understatement of true risk will result. Understating true risk is a risk in itself.
In simplest terms, the risk analyst adds risk by understating true risk. Such
analyst-induced risk is called iatrogenic risk and is a frequently encountered pitfall
for many MCS users. Range estimating actively guards against iatrogenic risk.

A. Critical Versus Noncritical

Each UNK contributes to bottom line uncertainty. But how much change to the
bottom line must an UNK be capable of generating to qualify it as a critical
element? Seven years of research during the late 1960s and early 1970s resulted
in the development of a highly effective and easy-to-apply critical variance matrix
for identifying critical elements. The use of this critical variance matrix depends
upon the type of bottom line (expense or profit) and the type of planning process
(detailed or conceptual).
• Expense versus profit. Determining the type of bottom line is a simple
matter. If increasingly larger values of the bottom line are undesirable, it
is an expense type bottom line. If increasingly larger values of the bottom
line are desirable, it is a profit type bottom line.
• Detailed versus conceptual. If a plan measures all that it can be reasonably
expected to measure, it is a detailed plan. Otherwise, it's conceptual.
Each percentage in the critical variance matrix (Fig. 11.3) defines the amount of
change to the bottom line which an UNK must be capable of generating in order
for it to qualify as a critical element. This hurdle, whether stated as a percentage
322 Chapter 11

BOTTOM LINE DETAILED CONCEPTUAL

EXPENSE (a) 0.2% 0.5%
PROFIT (b) 2.0% 5.0%
(a) increasingly larger values are undesirable
(b) increasingly larger values are desirable
Figure 11.3 Critical variance matrix for identifying critical elements.

shown in the matrix or expressed in units of the bottom line, is called the critical
variance of the bottom line.
While it may appear that use of the critical variance matrix will uncover
many critical elements, such is not the case. Typically* there are 10-20 critical
elements—regardless of the type of plan or the magnitude of its bottom line!
There are exceptions, of course, but they are infrequent and nonviolent; once in
a great while there may be as many as 25 or so critical elements.
The critical variances in the matrix have been successfully applied in thou-
sands of decisions since 1972. Therefore, use of the values contained in the matrix
is strongly recommended. The critical variances in the matrix are minima. They
should never be made smaller since this will incorrectly classify noncritical
elements as critical and will likely introduce iatrogenic risk.
Occasionally, there may be a desire to increase the critical variances in the
matrix to reduce the number of critical elements to fewer than 10-20. This is
not likely to introduce significant error if the critical variances are increased to
no more than twice their values shown in the matrix; however, this is not a
guarantee. The best advice is to adhere to the original critical variances in the
matrix. (When the bottom line target is zero or near zero, the critical variance
matrix guidelines for identifying critical elements do not apply. Good judgment
must be used to locate the typically 10-20 critical elements.)
The critical variance, in bottom line units, is determined by multiplying the
bottom line target by the critical variance percentage in the matrix. For example,
a conceptual plan having a bottom line expense target of $1,000,000 has a bottom
line critical variance of $5,000 (found by multiplying $1,000,000 by the 0.5%
critical variance in the matrix). In this example, a critical element is:
• one which can vary enough—either higher or lower—to cause the bottom
line to vary (higher or lower) by $5,000 or more, and
one which is not composed of any other element that can do the same.

B. Finding the Critical Elements

Critical elements can be located quickly and reliably by applying the pyramid of
criticality method (Fig. 11.4). All of the elements in the plan are imagined in the
form of a pyramid with the apex representing the bottom line target. Critical
elements are found by a downward search of the pyramid, starting at the apex.
In effect, the search is a series of successive questions and answers predicated
on the critical variance matrix.
Range Estimating 323

PYRAMID

OF CRITICALITY

MUST BE RECOGNIZED

ELSE IATROGENIC RISK WELL

LEAD TO FAULTY DECISION MAKING

Figure 11.4 Pyramid of criticality.

Continuing with the $1,000,000 conceptual expense plan previously cited,

the first question is asked at the apex of the pyramid: Is it possible that the
bottom line itself could vary—either up or down—by at least $5,000? If the answer
is negative, the search is terminated—the uncertainty is minimal, there are no
critical elements, and a cost risk analysis is not warranted.
On the other hand, if the answer is positive, the downward search is
resumed at the next lower level in the pyramid—where the components of the
$1,000,000 total expense repose. Assuming the plan is an engineering cost esti-
mate, the total expense might be composed of $600,000 in total labor, $300,000
in total equipment, and the remaining $100,000 in total materials. At that next
lower level, the question is asked: Is it possible that the $600,000 in total labor
could vary—either up or down—such that the bottom line could vary (up or down)
by at least $5,000? If the answer is negative, the downward search in the labor
portion of the pyramid is terminated; for all practical purposes, no single labor
element can vary the bottom line up or down by $5,000 or more if the total labor
figure cannot do so. If the answer is affirmative, the downward search is resumed
at the next lower level in the pyramid—where the components of the $600,000
total labor reside.
If, during the downward search, a lower level containing no critical elements
is found, that means that the element on the level immediately above is the
critical element. If the downward search reaches an element having no supporting
information below it, then that element is a critical element. In other words, a
critical element is an element which can change the bottom line by an amount
equal to or greater than the bottom line's critical variance but no number in
support of that element can do so.
It must be noted that, to be classified as critical, an element need not itself
vary by the bottom line's critical variance. Rather, it must have the capability of
varying the bottom line by that amount. Escalation, inflation, tax rates, and other
components of the plan may further compound the effect. (In one actual case, a
324 Chapter 11

potential variation of $1 per unit exploded into a $17,000,000 variation at the

bottom line!)
A range estimate is often a combination of building-block critical elements
and noncritical summary level totals. (Inclusion of noncritical summary level
totals is necessary in order to calculate the correct bottom line.) For this reason,
range estimates tend to look unusual. In a cost estimate, for example, one line
of the range estimate might be a critical element called "Material—Tubing Unit
Cost" with a target of $1.09 per meter, whereas another line might be a noncritical
summary level total called "Material Cost—Category B" with a target of $326,490.
The best range estimates are those which portray real-world uncertainty as
faithfully as possible. More often than not, such a portrayal will be a mixture of
building-block critical elements and noncritical summary level totals. Such range
estimates permit more precise management of the plan's critical elements.
With a little experience, performing a range estimate takes a surprisingly
small amount of time. It is not unusual to identify the critical elements, establish
their probability factors and ranges, develop the corresponding model, perform
1,000 or more simulations, and evaluate the results—all within a few hours.

VI. RANGE ESTIMATING INPUTS

Once the critical elements have been identified, the variability (uncertainty) of
each must be quantified. If one were using MCS, each critical element would
have to be specified in terms of a PDF (e.g., uniform, triangular, normal, beta,
etc.) along with its parameters (e.g., mean, standard deviation, shape variables,
etc.). Using range estimating, all such tedium is eliminated without impairing
the quality of decision making. For each critical element, the user supplies the
target, the probability factor, and the range.

A. Target

In the traditional plan, each critical element has a single-point value. It may be
called an estimate, budget, plan, forecast, etc. In range estimating, it is called
the target.

B. Probability Factor

The probability factor, expressed as a percentage between 0% and 100%, is the

probability that the actual value of the critical element will materialize be-
tween its target and lowest value. For a critical expense element, it is the
probability that its actual value will materialize in the favorable portion of its
range—at or below its target. For a critical profit element, it is the probability
that its actual value will materialize in the unfavorable portion of its range. In
other words, the probability factor is always interpreted as the probability that
the critical element's actual value will fall at or below its target, regardless of
whether it is an expense or profit type of critical element. The probability factor
is a measure of the degree of optimism or pessimism and is expressed as an
increment of 5%.
Range Estimating 325

Probability factors of 0% and 100% are valid. Such a value indicates that
the target is located on a boundary of the range or that it lies outside the range.
A target located on one of the two boundaries is rare; it is highly unlikely that
the critical element's lowest or highest value will be identical to its target. On
the other hand, a target which lies outside the range is not unusual. This
frequently occurs in cost-to-complete estimating. For example, a target estab-
lished earlier may become infeasible. As time progresses, the range may shift
completely above a critical expense element's target.

C. Range

A range of possible values is specified for each critical element in the plan by
specifying the lowest and highest values the critical element can assume. These
lowest and highest values are set so far apart that there is greater than a 98%
probability that the actual value of the critical element will materialize within
the resulting range. Specifically, the "lowest" value is set so low that there is
less than 1 chance in 100 that the actual value will be any lower; similarly, the
"highest" value is set so high that there is less than a 1% probability that the
actual value will be any higher. If there is substantial uncertainty about the
actual value of the critical element, its range will be quite broad. A lesser degree
of uncertainty will be reflected as a narrower range for the critical element.
The lowest and highest values are independent of the probability factor. It
is quite possible that a given critical element could have a fairly small difference
between its target and lowest value and yet have a high probability of its actual
value materializing in that narrow part of the range. Examples of this often occur
in expense elements where it is not unusual to have a very small chance of the
actual exceeding the target but, if it does, the amount by which it can exceed it
is very large.
Some people have difficulty with the idea of supplying a range; some even
claim that the range is nothing more than a lot of guesswork. But that's precisely
why the range is valuable in decision making; it involves a lot of educated
guessing by qualified people. On the other hand, the single-point value involves
only a little guessing—so little that it can lead to serious errors in decision
making. There is nothing wrong with guessing; Nobel prizes have been awarded
for shrewd guessing!
The number of people involved in preparation of the range can vary from
one to several dozen. The collective effort of a group of knowledgeable people—a
group devoid of dominant personalities capable of introducing bias into the pro-
cess—tends to produce the best range. Such a group is likely to steer clear of
the chief pitfall—developing a range which is too narrow! The varied perceptions
of a group's members translate into a wider range, one more apt to capture all
of the possible values of the critical element. However, if only one person is
qualified to specify the range, that is better than no one doing it!
The need to make the range wide enough to capture over 98% of all possible
values cannot be over emphasized. People tend to make the range far too narrow,
particularly on that side of the target which represents adverse performance! Feeling
comfortable about a range which is too narrow is a mistake which is easy to make.
Besides using the group approach, this problem can be minimized by challenging
questions. For example, if the proposed lowest value is $500, the challenging ques-
326 Chapter 11

tion could be, "Can it possibly go as low as $490?" Such challenging questions
often produce ranges which are much wider than they otherwise would be.
A wide range should not be interpreted as a lack of expertise. Experienced
planners are not omniscient. They cannot consistently predict actual values of
critical elements with high degrees of accuracy. In fact, it can be argued that
their most important contribution in decision making is their understanding of
what they don't know as well as what they know. A wider, more realistic, range
reflects a professional judgment and not a lack of knowledge on the part of the
professionals who developed it.
In the world of cost estimating, the range is nothing more than basic
contingency for the element. For a cost element, that part of the range above the
target is the positive contingency for that element whereas that part below the
target is its negative contingency. Range estimating combines the ranges (basic
contingencies) of all such elements to determine the proper basic contingency for
the bottom line.
If the traditional cost estimate includes a separate line item for basic con-
tingency, that amount must not be included in the bottom line target of the range
estimate. Otherwise, basic contingency will be accounted for twice and thus will
produce an inappropriately higher bottom line.

D. Frozen Values

There are two types of noncritical elements: the known and that sort of known-
unknown (UNK) which cannot cause the bottom line to vary, either up or down,
by at least the bottom line's critical variance. Since such elements have little or
no variability (uncertainty), they are not ranged. Each is frozen at its target,
unless there is a likelihood that its actual value will be different than its target.
In that case, the noncritical element is frozen at that other value.
Although noncritical elements are frozen rather than ranged, more often
than not they are frozen in groups rather than as individual noncritical elements.
The reason for this stems from the manner in which critical elements are iden-
tified—in the downward search through the pyramid of criticality. In the process,
a group of numerous noncritical elements will often be collectively accounted for
in a single balance or summary level total figure.

VII. SIMULATION

During simulation a random value is selected from the range for each critical
element, and these random values are combined with the frozen values of the
noncritical elements to determine the value of the bottom line. Each such oper-
ation is a single simulation of what the real world holds in the way of bottom
line results. There are many synonyms for the word simulation, including itera-
tion, trial, sample, and scenario (the most popular). Many scenarios are evaluated
in order to obtain a reliable bottom line profile.
Ideally, when a risk analysis is performed, a truly random number process
should drive the results. However, probabilistic computer simulation typically makes
use of what is called a pseudorandom number generator (RNG). A properly designed
RNG will produce numbers which, when subjected to stringent statistical tests,
Range Estimating 327

would be capable of convincing a statistician that such numbers were likely the
result of a truly random process. Most RNGs require a seed before they can produce
their pseudorandom numbers (i.e., the seed number is a primer); the RNG produces
the same sequence of random numbers when the same seed number is used.
It is useful to know that the results obtained in 1,000 simulations will, in
fact, be identical to the results obtained from a second set of 1,000 simulations—
as long as all input values are the same, the same number of elements are
simulated in the same order, the same number of simulations performed, and
the same seed number used. Although changing the seed would indeed produce
different bottom line results, those results would not be statistically different
than the first set of results. In range estimating, the same seed number is always
used to ensure that differences in results are 100% attributable to differences in
inputs—not statistical noise!
Range estimating never allows selection of a value outside of the specified
range—this is contrary to some MCS applications and PDFs. Second, range
estimating honors the probability factor in the selection process. For example, if
the probability factor is 25% for a given critical element, there will be 3 chances
in 4 that the value selected will be greater than the critical element's target.
Third, range estimating's heuristics tend to select numbers closer to the target
rather than farther away (if the target is feasible, of course)—the chance that
the actual value will materialize near either end of the range is less than the
chance it will materialize elsewhere in the range.
Whether basic MCS or a hybrid technique such as range estimating, elements
in the simulation are assumed independent of one another. If this assumption contra-
dicts reality, steps must be taken to include any significant interdependencies in
the simulation. For example, if reinforcing bar (rebar) is directly related to con-
crete, the dependent variable (rebar) should be expressed as a percentage of the
independent variable (concrete). The application of more sophisticated formulae
to relate interdependent elements will likely produce little more than increased
frustration and confusion in communicating the results to decision makers.
Most range estimates require no more than 500-800 simulations to reach
stability. However, to preclude nonproductive discussions between planners and
decision makers about sampling theory and to further ensure stability, a total of
1,000 simulations is highly recommended. If the results fail to stabilize after
5,000 simulations, it is extremely likely that there is an inordinate and inappro-
priate amount of detail in the range estimate, and the results are almost certainly
afflicted with iatrogenic risk.

VIII. FIVE KEY QUESTIONS

The purpose of range estimating is to provide answers to five key questions

related to the bottom line:
1. "What's the chance of coming out of this 'smelling like a rose'?" In other
words, "What's the probability of success (or failure)?"
2. "If things go wrong, how bad can it get?" In other words, "What's the
exposure in this decision?"
3. "What can be done now to improve the outcome?" In other words, "Which
controllable critical elements contribute the highest amounts of risk and/or
328 Chapter 11

opportunity at the bottom line and what can be done about them today to
increase the probability of success and/or reduce the exposure in this decision?"
In the case of expense bottom lines, range estimating also provides answers to
these two questions:
4. "How much contingency is needed to cover unacceptable bottom line risk?"
In other words, "How much contingency must be added to (or subtracted
from) the bottom line in order to achieve a desired level of confidence of not
experiencing a cost overrun?"
5. "Where should the contingency go?" In other words, "How can the total
contingency be distributed back into the critical elements based on each
critical element's risk and opportunity contributions?"

A. What is the Probability of Success?

The 1,000 simulations are performed and the resulting 1,000 bottom lines re-
tained for analysis. The number of bottom lines which are at least as favorable
as the target bottom line is expressed as a percentage of the total number of
simulations. In 1,000 simulations, for example, if there are 220 bottom lines at
least as favorable as the target bottom line, range estimating reports a 22%
probability of success, as shown in Figure 11.5 . If the bottom line is an expense,
that means a 78% probability of a cost overrun.

B. How Bad Can Failure Be?

The exposure in the decision is determined by comparing the bottom line's target
with the bottom line's worst value. But, what does "worst" mean? Does it mean
the absolutely farthest out bottom line value the critical elements could generate—
a theoretical worst, so to speak? Or does worst mean a bottom line not that far
out but highly improbable nonetheless—a practical worst, for lack of a better term?
A theoretical worst bottom line value is calculated by setting each critical
element at the most unfavorable value in its range, combining those values with
the frozen values for all the noncritical elements and then determining the bottom
line. What chance is there that this worst case scenario will occur in the real world?
Consider a decision in which there are 10 independent critical elements, each
with 1 chance in 100 that the most unfavorable value in its range will materialize.
In such a case, the probability of the theoretical worst case bottom line scenario
occurring is 1 chance in one hundred quintillion (100,000,000,000,000,000,000).
Obviously, the chance is vanishingly small that the actual bottom line will
approach the theoretical worst case bottom line. In other words, the theoretical
worst case bottom line (and best case bottom line for that matter) is so far out
that it is useless for decision making. For this reason, the practical worst case
bottom line is used to define the exposure.

* Figures 11.5 through 11.7 were created with the use of the range estimating program for personal
computers (REP/PC). REP/PC is a product of Decision Sciences Corporation, Box 28848, St. Louis,
MO 63123; phone: 314-739-2662; fax: 314-536-1001.
Range Estimating 329

The JPractical^Higji Js ^7,133,629

$7,000- The Practical Exposure is $960,999

(Practical High minus Target)

^Q* $6,800-

O $6,600-

sz
to
O $6,400-
O
|
h- $6,200-

2 * $6,000-
CL

$5,800-

$5,600-

10 20 30 40 50 60 70 80 90
% Probability of Success
Figure 11.5 Probability of success (Key Question 1) and practical exposure (Key Question 2).

In the case of an expense type of bottom line, the practical exposure is the
difference between the target bottom line expense and the highest bottom line
value found in simulation—the practical worst case bottom line. In the case of
a profit type of bottom line, the practical exposure is the difference between the
target bottom line profit and the lowest bottom line value found in simulation.

C. What Can Be Improved?

Although it can provide answers to the first, second, and fourth of the five key
questions, MCS cannot answer the third or the fifth question. In other words,
MCS can determine if there is a problem and how large it could be, but it cannot
determine the steps needed to be taken today to improve the chance of success
and/or reduce the exposure in the decision.
330 Chapter 11

CRITICAL ELEMENT UNIT RISK OPPORTUNITY

Designs & Program Development hrs

Programmers' Wage Rates $/hr
Designs & Program Development hrs
Systems Analysts' Wage Rates $/hr
Process Instrumentation $
Part Recognition Technology $
Mixed Civil Crew $
Local Area Networks (LANs) $
Definition thru Functional Specs hrs

Figure 11.6 Ranked list of critical elements (Key Question 3).

The answer to the third key question is provided by range estimating's

heuristics. These heuristics identify, quantify, and rank the critical elements
based on their individual risk and opportunity contributions to the bottom line.
This ranking is not the result of traditional types of sensitivity analyses, regres-
sion analyses, or correlation ranking—methods which fail to take into account
some significant factors of risk and opportunity. Range estimating's heuristics
consider each critical element's relation to the bottom line, the maximum deviation
from the element's target, the element's probability factor, and other contributing
characteristics. The result is a priority list directing the decision maker's atten-
tion to those critical elements which contribute the most of bottom line risk and
opportunity. One example is shown in Figure 11.6.
Having this information, the decision maker is prompted to search this list
for controllable critical elements in order to develop alternative strategies or
tactics to improve the bottom line result. Once any such alternative is identified,
the ranges which are affected are altered to reflect the alternative and another
range estimate is performed. Thus, by answering the third key question range
estimating plays a vital role in the decision making process.

D. How Much Contingency Is Needed?

Very often, decision makers wish to reduce the chance of a cost overrun by adding
a contingency to the target bottom line. If 1,000 simulations are performed and
the 1,000 bottom line results placed into an array in order of magnitude, the
array can be imagined as a ladder with 1,000 steps. The lowest bottom line found
in simulation occupies the first step and the highest bottom line found in simu-
lation occupies the 1,000th step.
The range estimating user supplies a desired level of confidence in not
having a cost overrun. Range estimating first locates the bottom line value in
the ladder of results required to attain that goal. If 80% is the desired level of
confidence, for example, the required bottom line value is found at step 800 in
the ladder—20% (200) of the simulated bottom lines were greater than this value.
In other words, there is an 80% chance the actual will materialize at or below
the bottom line value found at step 800. The amount of total contingency is the
difference between the located bottom line value and the target bottom line.
Although uncommon, negative contingencies, where the target bottom line is
Range Estimating 331

Target Confidence Required Needs This Target With

Estimate of No Overrun Confidence Contingency Contingency
$6,172,630 22% 80% $330,954 $6,503,584

ALLOCATION OF CONTINGENCY
Critical Element Percent Add This Unit

Designs & Program Development 54.3 5,067.44 hrs

Programmers' Wage Rates 19.7 1.67 $/hr
Designs & Program Development 0.0 0 hrs
Systems Analysts' Wage Rates 9.2 1.07 $/hr
Process Instrumentation 0.0 0 $
Part Recognition Technology 6.3 1,677.47 $
Mixed Civil Crew 2.8 1,192.88 $
Local Area Networks (U\Ns) 5.6 1,192.86 $
Definition thru Functional Specs 2.1 16.10 hrs

Figure 11.7 Contingency required (Key Question 4) and allocation (Key Question 5).

reduced rather than increased, are possible, especially in overly pessimistic es-
timating and aggressive competitive bidding.

E. Where Should Contingency Be Applied?

Range estimating suggests the portion of the total contingency each critical
element should receive, thus distributing the total contingency back into the
critical elements (Fig. 11.7). Range estimating bases its suggestions on the an-
swers provided by the third question (the prioritized list of critical elements) and
the fourth question (the total contingency).
The portion of the bottom line's contingency which each critical element
receives is based on that critical element's net risk contribution (i.e., the differ-
ence of its risk contribution and its opportunity contribution). In other words, if
a critical element contributes three times as much net risk as another, the first
critical element receives three times as much contingency as the second. To
further facilitate this allocation, range estimating determines the necessary ad-
justment to each critical element's target value to reflect its suggested amount
of contingency. This information is crucial in contingency management and line-
item bidding decisions.

IX. RANGE ESTIMATING ADVANTAGE

MCS poses a number of serious implementation problems, especially for the

nonstatistician. Range estimating delivers the power of MCS without the statis-
tical baggage and major pitfalls (e.g., iatrogenic risk). The user of range estimat-
ing need not understand classical probability theory and statistics in order to
achieve excellent results.
332 Chapter 11

X. BIBLIOGRAPHY

Anonymous, Range Estimating Provides an Edge in Running the Race Against Risk,
Engineering News-Record, 198(25):94-99 (1977).
Anonymous, Range Estimating Gains Support, Engineering News-Record, 213(12):106 (1984).
K. M. Curran, and W. P. Rowland, Range Estimating in Value Engineering, Transactions
of the American Association of Cost Engineers, pp. G.3.1-G.3.5, 1991.
K. M. Curran, Range Estimating: User-Friendly Risk Analysis, Proceedings, First Congress
on Computing in Civil Engineering, American Society of Civil Engineers, Washington,
D.C., 1994.
M. W. Curran, Range Estimating: Conquering the Cost Overrun, BE Technology, 49(3):10-
14 (1988).
M. W. Curran, Range Estimating, Cost Engineering, 31(3):18-26 (1989).
M. W. Curran, Range Estimating Reduces Iatrogenic Risk, Transactions, American Asso-
ciation of Cost Engineers, pp. K.3.1-K.3.3, 1990.
L. Lewis, Range Estimating—Managing Uncertainty, AACE (American Association of Cost
Engineers) Bulletin, Nov.-Dec.:205-207 (1977).
L. Lewis, Range Estimating, Advanced Management Journal, 45(Spring) (1981).
M. R. Weaver, Improved Estimating Practices using Range Estimating Decision Technol-
ogy, M.S.C.E. thesis, University of Maryland, Baltimore, MD, 1989.
H. J. Welker, Range Estimating: An Owner's Experience, Constructor, 59(8):20-22 (1977).
H. J. Welker, Range Estimating as a Project Management Tool, Engineering and Contract
Record, June:26-27 (1978).
12
Contracting—Claims and Extras

I. THE REALITY OF CHANGE

A. High Probability of Change and Claims

It is extremely difficult to properly and fully define the scope of work, technical
quality, risk, and liability in any contract. This leads to a high probability that
extras and claims will occur. Further, the inherent dynamics of any project on
which scope and costs are estimated means that those estimates are always at
risk as the realities of the work become known. Technical changes, material price
variations, and construction conditions are rarely fixed and stable elements. In
order to pass on some of these risks to the contractor, owners enter into lump-sum
contracts, where many of the risks are included in the pricing agreements. In
turn, contractors must properly estimate the cost of these risks and include them
in their pricing proposal.

B. Change and Trending

During execution of projects, work realities can result in changes. An efficient

trending program is therefore essential to detecting out-of-scope trends and changes
that will result in claims. Thus cost engineers must ensure that communication
channels with all design and project engineers constantly provide an accurate
assessment of the developing work scope. General design specifications and equip-
ment specifications should be monitored for conflict and gold plating. All changes
to such items as engineering specifications, scope, procurement, contracting pro-
grams, and construction plans should be recorded as they occur or are being
considered. Changes to the project execution plan (whether contractual, environ-
mental, regulatory, or schedule-oriented) should be included as well.

333
334 Chapter 12

The following list, while not all-inclusive, illustrates common changes, some
of which often result in disputes as to whether or not they are scope changes:
• all scope changes;
• design changes/development, such as:
- in early design phase,
by owner engineers,
by contractor engineers,
- in design change log,
- in cost/schedule consciousness, and
by gold-plating;
• scope reduction programs;
• project/contractual conditions, such as:
in plant operations,
- in breach of contract, and
- in site conditions;
execution plan changes, such as:
- in priority of project objectives, and
- in schedule acceleration.
C. Definition of Claim and Extra

By simple definition, a claim or extra occurs because an item of cost was not
covered in the contractor's estimate and the item can be demonstrated to be
outside the contractor's work scope and/or terms and conditions.

D. Quality Estimating

The key to reducing claims and extras is quality estimating: the ability to properly
identify all scopes, responsibilities, liabilities, and unknowns (contingency) and
to then properly put a cost/price on these items. Quality estimating for lump-sum
bidding is absolutely essential.

E. Litigation—Estimates As Cost Baseline

In claims disputes that result in litigation, the detail and quality of the estimates
often form the cost baseline from which to measure damages caused by project
changes. It is therefore highly recommended that lessons learned from all litiga-
tion/estimate analyses should be fed back into the estimating process to ensure
that system weaknesses and technical or data errors are eliminated.

II. CLAIMSMANSHIP

Owners say that contractors devote too much effort and personnel resources to
pursuing additional revenue rather than to efficiently executing the work. Con-
tractors justify this activity by responding that owners place unfair and unpriceable
Contracting—Claims and Extras 335

risks on them, especially in a buyer's market. Spurious and exaggerated claims

and disputes are wasteful and irritating, often diverting productive engineering
and construction personnel from creative working functions to the chores or argu-
ing, arbitrating, and litigating. This activity is often referred to as claimsmanship.
Managing claims and changes is certainly at the heart of effective contract
administration. From the contractor's viewpoint, it means ensuring that claims
and their associated costs are properly and fully identified. From the owner's
viewpoint, it means to prevent or reduce contractor claims and their associated
costs through efficient oversight and quality management.

III. RECORDS—DOCUMENTATION

The key to effectively meeting the objectives of both the contractor and the owner
is records. There can be no substitute for accurate documentation, which should
start at the precontract stage and continue to the final certificate of contract
completion. Logs, diaries, minutes of meetings, memoranda, letters, notices, tel-
exes, faxes, reports, and other such items should be current, efficiently collated,
and filed for easy access and retrieval. Developing an effective filing system,
which usually is included as part of the project coordination procedure, is a
demanding task. Special notices and attention must be given to changes, delays,
extra work, and all matters that appear to be out of the ordinary and that are
therefore potential items for a future claim.

IV. KNOWLEDGE OF CONTRACT LAW FUNDAMENTALS

A. Common Lack of Knowledge

It has been the author's experience that many projects are executed where the
project and construction personnel have little or no understanding of the contract
conditions. This experience applies to both owner and contractor personnel, but
especially to owner personnel. In large contracting and owner companies, it is
common for contracts to be developed and negotiated by a contracts department.
At contract award, the contracts are then handed to the project team for execu-
tion. The lack of continuity and the project team's lack of knowledge about
front-end activities are significant failures of the contracting process that can
directly result in claims of negligence and breach of contract situations.

B. Key Fundamentals of Contract Law

The following list, while not all-inclusive, outlines the more important legal
relationships, liabilities, and risks inherent in the United States, United King-
dom, and Napoleonic legal systems.
General Contractor liability. Of the three parties—owner, architect/engineer, and
general contractor (owner, A/E, and GO—the GC is legally considered to be
the expert. As such, the GC is legally required to foresee every and all
reasonable situation that can occur to the work from start to finish. If the
GC fails to foresee, it is liable for the consequences of its failure.
336 Chapter 12

Noninterference, owner liability. The risk of liability assumed by the GC means

that the owner, the A/E, and others are not allowed to interfere with the
work operations of the GC. This applies to all contracting arrangements.
Acceptable interference may be allowed, as outlined in a set of agreed-to
general conditions. The epitome of interference is the equal partnership
relationship clause that is appropriate for reimbursable contracts but not
acceptable for lump-sum contracts.
Offer and acceptance. The offer and acceptance theoretically leads to a binding
agreement, although situations can exist (described later), that negate the
binding.
Consideration. A binding agreement requires an element of a bargain. It does
not have to be a good bargain (e.g., the price can be low), but free agreements
are not binding.
Good faith. All parties to the negotiations and the resulting contract must act
with good faith (i.e., responsibly, properly, and fully).
No legal defects. There can be no legal defects, either in the agreement itself or
in the process of reaching the agreement. A defect may be, for example, lack
of good faith, fraud, misrepresentation, economic duress, criminal acts, drunk-
enness, or mental illness. Within the United States, differences in state legal
systems may exist, causing an act or condition to be legal in one state but
illegal in another.
Agency. The parties must be duly authorized agents of the parties to the contract.
Capacity. The parties must have agency and must be acting within the limits
of their authority. They must be authorized by company policy to act and
to sign on behalf of the company.
Verbal agreements. Verbal agreements are binding if there is agency and capacity.
If disputes arise and the agreement has only two parties, a court or an
arbitrator must decide who, if anyone, if telling the truth. Failure to be
truthful can result in the case being dismissed. Thus it is always wise to
reduce verbal agreements to writing.
Nonperformance. Nonperformance by any party can result in contract recision
by the performing party. There can also be damages awarded for failure to
perform.
Certainty. Certainty is one of the most powerful requirements for a binding
contract. The law requires that the purchase or owner make certain that
the other party fully understands the scope of the work and its associated
risks/liabilities. If the purchaser fails to make certain by using quality
contract documents and full discussions/clarifications if necessary, there is
then a high risk of recision, since the contract can then be considered
nonbinding. Lack of certainty is one of the most common disputes with
regard to questions of a binding contract.
Common usage of language. This is an important facet of certainty and of appor-
tioning liability in a dispute.
Bid errors. Bid errors, either in price or in contract conditions, are binding. If,
however, an owner has express and direct knowledge of an error, it is illegal
for the owner to enter into an agreement without disclosing this knowledge.
Experience, skill, suspicion, or evaluations by the owner are not considered
to be knowledge. Further, the owner or purchaser is not required to find
errors.
Contracting—Claims and Extras 337

Meeting of the minds. Whether there is a meeting of the minds is a decision

made by the court when considering whether a contract is binding. If the
court decides that all requirements for binding are present, then the decision
will be that a meeting of the minds took place. If the requirements were
not met, the opposite would be true. Meeting of the minds generally requires
certainty, consideration, capacity, and no legal defects.
Intent of the parties. Under United States and Napoleonic law, the intent of the
parties is equal to the written terms and conditions. In the United Kingdom,
intent has a much lower value and, on occasion, has no value at all.

V. UNDERSTANDING/AVOIDING BREACH OF CONTRACT

CONDITIONS

Generally, a breach of contract can only occur when the following three conditions
are present:
the item must be contrary to the contract terms and conditions;
the item must be contrary to the intent of the parties; and
• the injured party must actually sustain additional or excess costs; if there
are no additional costs, there is no breach even though the action might
have been contrary to the contract terms.
In most cases, breaches of contract result in claims rather than legal action. The
project manager must, therefore, ensure that neither the project manager nor
any member of the project team creates a situation that breaches the contract
and leads to a claim.
The following breach categories should be carefully evaluated and under-
stood by all contracts officers, construction managers, and project managers to
ensure the associated liability and risk are properly covered in the contract terms
and conditions. The list represents the claims and damages items or situations
that are most commonly experienced on engineering and construction projects.
Acceleration, constructive. The contractor actually incurs additional or excess
costs because of accelerating the schedule when the need for schedule ac-
celeration is not due to the contractor's poor performance.
Access denied. Every contract allows the contractor an implied right to enter,
leave, and occupy the work site as required to reasonably perform the work.
Certainty, lack of. Genuine misunderstanding of scope, uncertainty of meaning,
or lack of understanding/agreement based on intent and logical interpreta-
tion of the contract terms and conditions.
Damages, punitive. Damages assessed only to serve as punishment to a party
that maliciously or fraudulently causes a breach of contract. Also serves as
a deterrent to others. Actual malice must be proven for successful recovery.
Damages, special. Those costs that follow directly from the breach itself but
which result directly and as a consequence of the breach. Recovery is granted
if such damages were foreseeable by the parties at the time the contract
was executed.
Delay, compensable . Delay caused by actions or omissions of the owner and
which entitle a GC to an adjustment in price and/or an extension of time.
338 Chapter 12

Delay, concurrent . Two or more delays in the same time frame such that the
owner and GC are each responsible for delay in completing the work. If the
court can properly allocate the costs to each party's delay, the recovery is
then apportioned to each party. Recovery is denied and the case dismissed
if each party's delay costs cannot be properly determined.
Delay, excusable . A delay that is caused by forces beyond the control of and
without the fault of negligence of the GC.
Delay, inexcusable. Delay that is within the GC's control and which thus bars a
GC's request for an adjustment in price or time.
Differing site conditions. Some of the significant construction contract risks/un-
knowns that can be experienced by a new GC are the site and working
conditions. Nevertheless, careful study of the contract documents, a site visit
with a careful evaluation of existing conditions, and the application of good
construction experience to the conditions and job requirements, should great-
ly reduce the risks and unknowns.
Most contract conditions require GCs to assume the risks of site con-
ditions, particularly where the work is in an operating plant. Under some
conditions, excessive standby time due to delays in work permits might be
allowed on fixed-price contracts. Extreme conditions, such as those found in
the offshore industry, might also be considered excusable.
As can be seen, a claim based on differing site conditions could be
justified (for example, an unusual ground condition that could not be fore-
seen on a grassroots site project). On new offshore platform projects, detailed
investigation and research is usually undertaken, so such claims rarely
occur. Nevertheless, conditions on existing offshore platforms change con-
stantly due to weather and operating requirements, and claims based on
differing site conditions may still arise.
Frustration ofpurpose I commercial frustration . This excuses a contractor's non-
performance whenever the purposes or objectives of the contract have been
so frustrated that performance by the parties no longer has value to them.
This situation applies regardless of whether actual performance is easier or
more difficult than the parties had expected. (See Impracticability.)

* These categories, particularly "Delay, compensable," form the major portion of total claims presented
by contractors for schedule delay. Therefore, these categories should be fully understood and all
claims carefully evaluated as to merit and applicability. More important, owner-to-GC and GC-
to-subcontractor activities should be reviewed constantly to prevent situations that may lead to claims
and damages.
Most contracts specify that a contractor/subcontractor is excused from liability for delays due to
changes in the work force majeure, major labor problems, and owner negligence/misconduct. However,
if a delay results from a foreseeable situation (such as a labor dispute) and action by the GC could
have prevented the delay, then the delay is inexcusable. The following are typical owner actions/
negligence that can lead to compensable delays: failure to meet promised material supply dates;
quality of material is out of specification; failure to meet promised drawing issue dates; delay in
engineering reviews and approvals, work permit delays; failure to notify of changing site con-
ditions, lack of site access; poor overall management/coordination of multiple, prime contractors;
and scope changes of +10% of contract price.
It should be recognized that even though the completion date is achieved, a GC/subcontractor
can still successfully pursue a claim for owner negligence when an owner delays the work from
earlier completion. A GC can justifiably claim that its price was based on a completion earlier
than the contract completion.
Contracting—Claims and Extras 339

Impact or disruption costs. The additional costs resulting from changes in the
work over and above the direct costs of the original work. The entire basis
for recovery of an impact or ripple claim is that the effect of changes can
and does create costs beyond those attributable to the changes themselves.
Impact costs may be viewed in two ways: 1) those arising out of each change
viewed individually, or 2) those that result from the cumulative impact of
changes. These costs often result in a GC claim and is generally referred
to as a disruption claim.
Impossibility . The inability to meet contract requirements because the event
is physically incapable of occurring. This is otherwise known as actual impos-
sibility and is a common law doctrine accepted by all United States courts.
Impracticability . The inability to perform because of extreme and unreasonable
difficulty, expense, injury, or loss involved. This is sometimes called practical
impossibility. It is a matter of difficulty of performance, as opposed to
frustration, which is a matter of the value of the performance.
Interference. Conduct that interrupts the normal flow of operations and impedes
performance. Every contract contains the implied condition that neither
party will do anything to interfere with progress of the other party or
parties. Actions by owners often lead to GC claims of owner interference or
wilful misconduct.
Interference, contract I intentional I malicious. These changes of interference refer
to actions of third parties that impact on the contractual relationship or
bidding process of an owner and GC. The GC will claim that the party is
acting outside its responsibility and is, therefore, interfering with the con-
tract or the prospective contract. This typically occurs when an A/E or a
consultant offers advice or proposes actions in an owner/GC dispute. If the
third party has no clear responsibility or contractual right to involvement,
then the GC's claim of interference may stand up in court. This type of
interference is also known as prospective advantage.
Malpractice. This is usually a charge brought against an A/E for incorrect engi-
neering work or when an engineer moves out of the design responsibility
into contracting and construction execution matters (assuming the engineer
has no project or construction management responsibility). It is difficult for
GCs to successfully prosecute this charge, since engineers have a protected
position in most legal systems.
Material difference. As used on changed conditions situations, a deviation from
that expected or expressed in the contract to such a degree that it can
provide the basis for recovery under the changed conditions clause of the
contract.
Misrepresentation. This occurs mostly during the contract proposal stage, when
any of the parties can misrepresent either their capability or the scope of
the work (e.g., differing site conditions). Misrepresentation can result in a
claim for legal defect or fraud, which can in turn lead to voiding the contract.

These three conditions form the legal doctrine that excuses a GC for nonperformance. However,
the courts require that the GC clearly demonstrate the extreme nature of the condition. Mere delay
or circumstances that are very difficult or very hard are not usually sufficient for a claim of this
nature to be successful.
340 Chapter 12

Wo Damage'9 clause. A contract provision limiting the owner's liability in the

event of certain specified delays, regardless of fault, provided the owner is
not guilty of interference or willful misconduct. The important issue here is
that the certain specified delays must have been foreseeable at the time the
contract was executed.
Pricing, forward (prospective). An equitable adjustment made to the contract
before the work is actually performed. Forward pricing is based on estimates
rather than actual cost figures. This method is now being used in claims
evaluation and agreement.
Pricing, retrospective (actual). An adjustment priced after the work has been
completed. Actual costs of the changed work are used to determine the
amount of the change. This method is used when prior agreement on the
cost is impossible to achieve.
Reasonableness standard. Costs considered reasonable if they are generally ac-
cepted in the industry and do not exceed the amount incurred by a prudent
contractor. Two factors on which a determination of reasonableness is based
are: 1) recognition of the costs as ordinary and necessary, and 2) restraints
imposed by law, contract terms, or sound business practices.
Repudiation. Annulling or abrogating a previously made agreement.
Recision of contract. Annulling or abrogating a previously made agreement.
Responsiveness. The conformity of a bid to the requirements stated in the invi-
tation to bid. In the public sector, lack of responsiveness is used to eliminate
bids and/or bidders.
Substantial completion. The point where progress on the work can allow the
project to be turned over the owner but where some punchlist items may
remain incomplete.
Termination of contract, convenience. A contract clause that provides the owner
with the right to terminate the contract, in whole or in part, irrespective of
the liability of the GC. In exchange for this privilege, the owner is usually
obligated to compensate the GC for the reasonable costs connected with the
contract termination.
Termination of contract, default. A permanent suspension of the GC's work by
the owner due to some material breach by the GC in failing to carry out its
obligations.
Time extension. A lengthening of the contract period prompted by negotiations
between the parties or the occurrence of events triggering a time extension
under the terms of the contract.
Time of the essence/liability. A requirement that the work be completed within
the time limits contained in the contract, with failure to do so considered a
breach for which the injured party is entitled to damages.
Truth in negotiations. A term used to refer to United States Public Law 87-653,
whose purpose is to require contractors to submit accurate, complete, and
current costs or pricing data.
Waiver. The intentional or voluntary relinquishment of a contractual right.
Warranty, express. A promise explicitly written in the contract that a proposition
of fact is true.
Warranty, implied. A promise not explicitly written in the contract but which is
nevertheless recognized by the courts based on the action of the parties to
the agreement.
Contracting—Claims and Extras 341

VI. CLAIMS MITIGATION AND REDUCTION—ESSENTIAL ELEMENTS

The successful contracts administrator has a combination of personal skill and

several favorable project conditions:
A. Personal Skills

• project experience in engineering and construction,

• contractual knowledge,
• business skills,
contractual knowledge,
cost and schedule analytical ability, and
people and interpersonal capability.

B. Correct Contracting Arrangement

The selected contracting arrangement must properly represent the scope defini-
tion and project objectives, and must be fully subjected to the process of certainty
before the contract is awarded.

C. Quality Contract Conditions

Drafting contractual terms and conditions requires great skill and experience to
ensure that all risks, responsibilities, liabilities, and guarantees are properly
defined and correctly assigned to all parties to the contract.

D. Effective Contract Monitoring Program

An accurate assessment of project status at all times is essential to contracting

success. Depending on the form of the contract, this covers cost and schedule
state, resources requirements, financial performance evaluation, and, above all,
trending analysis. The cost and schedule analytical skills outlined above are
necessary if this is to be done effectively. Any trends indicating poor GC financial
performance often result in increased claims and extras activities.

E. Effective Negotiating Skills of the Parties

If a claim is substantiated, the final cost agreement can depend on the negotiating
skills of the parties.

F. Stable Project and Site Conditions

A force majeure condition can create changes and can lead to claims at any time. Even
the highest degree of skill cannot forecast the possibility of force majeure conditions.

G. No Contractual Surprises

One of the most significant factors of good contract administration is that no

surprises occur. An effective program will be able to constantly monitor and
342 Chapter 12

evaluate the performance of the GC so that the status/forecast of scope, changes,

costs, progress, and claims will always be known. This requires good working
relationships within the project team and with the contractors so that all trends
can be promptly identified and appropriate action initiated.

H. Establishing Good People/Contractual Relationships

Developing good working relationships should be a significant objective of the

project team. Nevertheless, a good relationship can be adversely affected by
aggressive negotiating and tough contract terms and conditions. Even so, a good
relationship can be developed if it is based on mutual respect, cooperation, trust,
and the recognition by each party that other parties may have differing objectives.
With reimbursable projects, it is sometimes difficult to establish this good
relationship. The owner should ensure that the contract documents contain lan-
guage referring to the equal partner relationship between the parties. In practice,
this means the owner will have a resident project team in the GC's office so that
owner and GC personnel can work closely together. This also allows the owner
to monitor the GC's work. To this end, the proposal bid package should contain
a requirement that the GC will provide office accommodations and services for
the owner's project team at the location where the work is being executed.
On lump-sum contracts, a good relationship can be established, but it must
be one at arm's length to allow the GC its legal right to noninterference. None-
theless, the contracting documents should specify the owner's project control and
reporting requirements, particularly in respect to progress measurement of the
work and schedule/status information. On cost matters, the working relationship
is centered around the contract changes provisions of the contract agreement.
Low bids should be evaluated very carefully, since an award of a deliberately low
bid can lead to an aggressive claims program by the GC, which can obviously
jeopardize a good people/contractual relationship.
Whether the contract is reimbursable or lump-sum, an adversarial or legal-
only relationship should be avoided if at all possible.

I. Effective Communication Skills

Effective communication skills are needed by all parties if good people/contractual

relationships and successful negotiations are to be achieved. This is generally
accomplished by having the following skills:
• understanding basic human behavior so as to relate to an individual's hopes,
needs, and objectives;
writing well and developing the skills of good structure, style, and discipline
in the use of words, since verbosity or a poor vocabulary and lead to poor
communication;
• reading critically; balancing speed with retention and understanding;
• speaking effectively and paying careful attention to the proper use of hands,
eyes, voice, and presence; and
• listening thoughtfully and bridging the communication gap by focusing on
the need to develop a good listener at the other end of the speaking chain.
Contracting—Claims and Extras 343

A person who communicates well both orally and in writing should be

interested in others, be sensitive to the feelings and emotions of others, and
understand their perspectives and needs (although these need not be accepted).
A good communicator is both a persuader and a motivator. Similarly, a skilled
negotiator can hide all personal biases and emotional characteristics, even under
the most extreme conditions.
13
Managing Small, Shutdown, Retrofit, or
Outage Projects

I. INTRODUCTION

There is similarity and overlapping in the execution programs for maintenance

projects and small capital projects, with all operating plans having maintenance
and plant engineering groups. As a result, company policy and practice must
differentiate between maintenance and plant engineering projects. Not only size,
but other criteria, such as engineering content and project criticality, can designate
the category. Projects that are very small in size (having a range of between $1,000
and $100,000) are usually classified as maintenance projects. Those between
$100,000 and $10 million are often classified as multiple small project programs.
Figure 13.1 shows a project breakdown, by project size, which is typical of large
operating and contracting companies. Four categories are shown—small, inter-
mediate, large, and mega. Hours are listed for engineering, home office, and con-
struction direct labor. These hours are generated using the illustrated historical
breakdown. The hours relate to the cost of a project case in each category, as listed.
This chapter and this book do not address the handling of very small
projects, which are usually included in a maintenance planning program. How-
ever, many of the techniques covered here can be considered for the top end of
maintenance projects and critical, small-value projects where timing is of the
utmost importance.

II. THE GENERAL PROBLEM (PERCEPTION AND ORGANIZATION)

In large operating companies, there is often a wide gap in the skills, experience,
and management effort between the large project programs and the small project
programs. To some degree, contractors have a similar situation, since they often
assign less experienced personnel to a client's small projects. While numerous com-

345
346 Chapter 13

Project Size Jobhours, 1000s

Engineering: 10% TIC @ $45/hr
Home Office: 3% TIC @ $45/hr
Construction: 21 % TIC @ $22/hr (direct) Home Months
TIC = Total Installed Cost Engineering Office Construction Duration
1. Small:
$100,000 to $10 million 11 3.3 48 18
($5 million case)

2. Intermediate:
$10 million to $100 million 110 33 480 23
($50 million case)

3. Large
$100 million to $500 million 550 165 2400 33
($250 million case)

36
4. Mega: Execution
2200 phase to
Above $500 million 660 9600
mechanical
($1000 million case) completion.

Figure 13.1 Typical EPC projects—full scope contractor execution.

panies have experienced engineering groups that use sophisticated project manage-
ment programs on large projects, a significant number of them do not appear to
recognize that many of the same skills and programs are also needed on the smaller
projects being handled by their plant project engineering departments. It is possible
that this gap exists for two reasons: first, plant management is largely made up of
production people and not project people, and second, the capital project budget
forms only a small part of the plant operating budget. So, a lack of understanding
of the project business often leads to a poor commitment by management to sup-
port an effective project management program. Many times there is also a failure
to recognize the very real economic benefits that a quality program can bring.
Beyond the lack of management commitment to the modern project approach,
however, there is often a lack of skilled personnel assigned to the smaller project.
Too often, plant operations and maintenance personnel are assigned to the project
engineering group without the experience of project work and without having
been through adequate training in effective project management procedures.

III. SMALL DOES NOT MEAN EASY

A common fallacy is that small projects are simple and easy to manage. Project
plant engineers faced with the not uncommon situation of a lack of personnel
may have to personally handle many aspects of estimating, scheduling, cost
control, contracting, construction, and project management. In other words, they
need to be more versatile than their counterparts on large projects, where many
of these tasks are handled by separate, individual experts.
Managing Small, Shutdown, Retrofit, or Outage Projects 347

IV. THE ORGANIZATIONAL ANSWER (PARTLY)

First, training and educating plant managers in project management will resolve
many of the problems outlined in the preceding paragraphs. Career development
and/or rotational assignments through plant operations, maintenance, and project
engineering can also reduce and eliminate these problems.
Second, the project engineering group can be divided into "small" and "large"
project departments. This division, however, can create a secondary problem:
quality of assignment. Project professionals may believe that their careers may
be damaged if they remain in the small project department too long. They may
think that the large project environment more quickly expands their skills,
experience, and (above all) management recognition. It is therefore recommended
that careful career planning be developed for all personnel as they proceed
through the two departments.

V. PROJECT DURATION

Many small projects have schedules of between 3 and 6 months, which not only
allows minimal time for program development but for reaction to and resolution
of problems as well. It is essential, therefore, to have a project control program
that can easily, quickly, and accurately provide information and performance data.
A computerized reporting program is usually the answer, but developing a
new computer program requires careful planning. Thus the recommended method
is to first develop a manual program and to then computerize it with a proven
software package.

VI. PHYSICAL MEASUREMENT SYSTEMS

On larger projects, the most effective method of project control is the proven
program of physical measurement/quantities/earned budget/actual hours/produc-
tivity/progress. Another program is the cost/time/resource (CTR) approach, which
integrates cost and scheduling and can provide equally good results.
Nevertheless, both programs require time to develop and are the most
expensive of all methods for effectively managing and executing a project. It is,
therefore, most probable that such programs are not suitable for managing small
projects.

VII. JOBHOUR CONTROL

Jobhour control programs are probably best suited to small projects, but it must
be recognized that jobhour methods have significant weaknesses, particularly in
measuring progress. These inherent weaknesses can be properly handled with
an adequate system of checks and balances, based on good personnel experience,
adequate historical data, and with reference to the scheduling program.
348 Chapter 13

VIII. PERSONNEL SKILLS AND TEAM BUILDING

Another successful program for application on small projects is to transform the

engineering department into a project team. It requires ensuring that the inter-
faces between all the supporting groups (engineering, procurement, construction,
project, contractors, and others) are unified into a cohesive group where all
projects, at all development stages, are considered equally. This, of course, is one
of the major objectives of total quality management (TQM). There is no question
that a unified team can make up for lack of sophisticated project techniques, be
technically effective, and be cost effective in managing small projects.
In the construction industry, however, matrix interface problems with TQM
are common. When the project team approach is used, there is often a lack of
clear-cut responsibilities, an inadequate listing of personnel duties and objectives,
and poor company policies. These tend to increase matrix interface problems. The
problem is who does what and when, which is typified by the lack of clear-cut
responsibilities of engineering, procurement, and construction personnel. Ques-
tions such as the following arise:
• Who is responsible for reporting and forecasting costs, progress, and sched-
ule completion of engineering and construction?
• Who is responsible for developing and managing the schedule?
• Who is responsible for material purchasing and forecasting?
Who is responsible for material deliveries?
Who is responsible for quality assurance?
In addition to clear functional and organizational responsibilities, it is vital that
good communication channels be developed. Due to short reaction times on many
small projects, fast and accurate communications are essential.
Projects are assigned on a multiple basis to project engineers and managers.
In many cases, a small project service group (estimating, cost control, scheduling)
then provides the specialist functions to each project engineer. Since service
groups are often understaffed, priorities for their services have to be determined.
Where service groups do not exist, the project engineers provide the services
themselves.
Project engineers must be versatile, flexible, and have good, all-around
experience, since they manage many projects at the same time. An ongoing
training program is therefore essential to upgrading both the person and the
program.

IX. A STANDARD PROJECT MANAGEMENT/CONTROL PROGRAM

An historical, five-year review of a company's annual small project programs

generally will show a typical pattern of project type and size. Following this
analysis, standard programs can be developed, based on the simple premise that
increasing project size will require additional control and reporting. The key to
a cost-effective program of this type is identifying the major and critical items
of work, and then concentrating on controlling/reporting only these items.
As each project is approved and funded by management, it is recommended
that a project execution plan form part of the supporting documentation for
Managing Small, Shutdown, Retrofit, or Outage Projects 349

ENGINEERING PROJECT

SCOPE EXECUTION PLAN

PROJECT
CONDITIONS ESTIMATE
I CONTRACT
STRATEGY

10%

cost control PROJECT CONTROL schedule

PLAN
routine approach
supplementary CPM
TIME-SCALED
TREND REPORT NETWORK
computer

HOUR PROGRESS
- EXPENDITURE CURVE(S)
CURVECS)

engineering |
construction |
y
PERSONNEL
MONETARY
EXPENDITURE HISTOGRAM(S)
CURVE(S)

PROGRESS
REPORT
COST REPORT

computer
SUBCONTRACT
CONTROL

schedule

changes &
extra work

Figure 13.2 Project control of multiple, small projects.

project approval. This execution plan would outline the project management/con-
trol program or plan to be used. A project control flow chart is shown in Figure
13.2. The program is indicated as the "Project Control Plan."
In addition, a range of supplementary techniques should be developed, which
in turn may be used for the larger small projects or for those projects that have
critical needs and/or unique features. The standard program should be formalized
into a written document (project manual) that contains guidelines for using the
350 Chapter 13

supplementary techniques. Since the size of small project varies ($10,000-

10,000,000), a good practice is to structure the formal program by groupings of
project size. The written procedure should show specific examples of estimate
formats, cost control reports, and typical schedules. A section containing blank
report forms should be included.

X. THE 80:20 RULE

The 80:20 rule (Pareto's Law) is a common and proven statistic of the project/con-
struction business, and shows that 80% of the total costs for all projects or
programs are found in 20% of the projects. Similarly, for each individual project,
80% of the total cost is found in 20% of the major items (usually material).
Based on this experience, it is recommended that the major project man-
agement effort be concentrated on the 20% of projects (normally the larger size
grouping), with the minimum of attention paid to the other 80%. This recom-
mendation is based on the practical reality that most companies' small projects
programs are understaffed. An exception to this approach is a small value project
that is essential to the operating efficiency of the plant.
Development of the standard program outlined in this section would, then,
be built around this statistic so that the program has a minimum and maximum
degree of control, plus intermediate levels, for the dollar size grouping of projects.

XI. QUALITY ESTIMATING PROGRAM

One of the principal requirements for effective jobhour/schedule control is a good

estimate, usually of the quality ±10%. A good estimate is also necessary to check
and negotiate subcontract proposals, many of which may be on a lump-sum or
unit-price basis. It is common practice to designate the amount of contingency,
as the quality of an estimate. Therefore, a 10% quality estimate would have a
10% contingency. This is generally the highest quality of estimate that is produced.
The most widely used approach to executing small projects is to first com-
plete the engineering and then form discrete design packages for the different
categories of work. This design can be carried out with company personnel and/or
contracted personnel on a lump-sum or reimbursable basis. The design packages
then form the basis for obtaining lump-sum, competitive bids for construction.
With an 80% (or greater) design completion, it is possible to obtain quality
lump-sum bids for the construction work. Material purchases are generally car-
ried out by company personnel.
The project control program described in the section that follows illustrates
the maximum approach of the standard program.

XII. PROJECT CONTROL PLAN (MAXIMUM)

The use of computers is strongly advocated, but care must be exercised to ensure
that the software programs are user friendly, simple to run, and require a mini-
mum of personnel resources. Figure 13.2 shows the major techniques for project
control on the top end of a small projects program (i.e., the maximum approach).
Managing Small, Shutdown, Retrofit, or Outage Projects 351

A. Project Control Plan

The project control plan shows the routine program, including any supplementary
techniques that are required. It is part of the project funding and approval
documentation.
B. Trending Program

A formal trending report should be issued, showing all deviations (costed out) to
the reporting cutoff date. The report should be accurate and timely. Responsibility
for the report and the inputs from all groups and departments should be clearly
established. The evaluation of potential trends should be emphasized. The trend
report is then a key source for the project cost report and for all decision making
and cost forecasts.

C. Expenditure Curves (Hours)

Figure 13.3 represents a control for a contractor's total home office budget, in
cumulative and incremental hours. This includes engineering and all other sup-
port groups. The effectiveness of this technique is directly dependent on the
accuracy of the planned curve. The curve can be developed from schedule analysis
of the component groups and/or historical data. The example contained in Figure
13.3 shows a consistent overexpenditure of hours from the beginning. This need
not result in a budget overrun, since the work might be ahead of schedule. A
schedule status evaluation and analysis of the component parts should determine
ahead of schedule or overrun of hours. In most cases, overrun is the more likely
alternative, which is what the forecast shown in the figure indicates.

D. Monetary Expenditure Curves

Figure 13.4 covers the overall project budget, showing actual cumulative curves
for commitments and expenditures. This case was estimated at $8 million, but
the high value of commitments at an early stage was matched by an increasing
forecast to $10 million in year one, and $12 million in year two. The changes to
the control or current budget, barely averaging $1 million, did not properly reflect
the rapidly increasing commitment curve. This indicates a project with a poor
estimate or a case with many changes, where additional budget is not being
allowed. Nevertheless, the trending and forecasting program is properly showing
the true costs.

E. Project Cost Report

The project cost report is usually produced on a monthly basis using a compu-
terized program. Committed costs and expenditures are provided by the account-
ing group. Budgets and forecasts are the responsibility of the project engineering,
with assistance from the project services group and/or the engineering, procure-
ment, and construction departments. Figure 13.5 illustrates a typical project cost
report format. The keys of this report are an accurate forecast, identification of
variances, and reporting on time.
 CONTRACTOR'S NAME ro

JOBHOUR EXPENDITURE CURVE PROJECT STANDARD

OVERALL HOME OFFICE

|FORECASTED
I OVER-RUN
JOBHOUR
ESTIMATE

PLANNED

MECHANICAL
COMPLETION

PLANNED
ACTUAL
FORECAST

3 45 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Sheet No .
PROJECT DURATION (MONTHS) PROJECT

O
fi)

Figure 13.3 Jobhour expenditure curve. i

CO
Managing Small, Shutdown, Retrofit, or Outage Projects 353

PROJECT
PROJECT FINANCIAL REPORT JOB NO.

REPORT NO.
COMMITMENTS AND EXPENDITURES
DATE

PROJECTION
120
FORECAST
...i 8 : » . ' \m
mm
a ^V -^ ^ ^
1 :""
• aaaaaaaaal
r T :
aaaaaal
100
a

a
a
CO CONTROL BUDGET

'A
/ CURRENT BUDGET

v/
- \
f

/
60

40

20 /
\/EXPENDmJRE

YEARS

Figure 13.4 Project financial report.

 PROJECT
JOB N°
PERIOD
PROJECT COST REPORT SHEET OF
1 2 3 4 5 6 7
CONTROL BUOGET
CODE ITEM/DESCRIPTION COMMITTED EXPENDED NITIAL(AFE APPROVED REVISED CURRENT VARIANCE
TO DATE TO DATE BUDGET CHANGES BUDGET FORECAST (6) • (5)

1
2

3
4

5
6
7

9
10

11

12

13
14

15
16
• •" in • I . •• — 1 — ^
17 • •••!••! '• —^" —-
O
Figure 13.5 Project cost report. 0)

(D
Managing Small, Shutdown, Retrofit, or Outage Projects 355

R Timely Cost Reporting

An important part of cost control (commitment, expenditure, accruals, estimated fin-

al cost, escalation, and contingency) is collecting and timely reporting of comittments
and expenditures. This information is needed to track the status and progress of
cost objectives and also to provide a base for developing cost predictions. The project
manager must ensure that commitments and expenditures are reported accurately
and in a timely manner. Delayed payments or lost invoices can cause poor cost predic-
tions. Many control techniques are based on unit costs, which can be greatly dis-
torted if the cost-to-date is inaccurately reported or if the reports are submitted late.

G. Critical Path Method Schedule

Figure 13.6 contains an example of a time-scaled critical path method (CPM)

network for a $1 million project. Only the construction phase is shown. Sixteen
activities effectively show the critical path and overall construction duration.
Another good feature of this diagram is its illustration of the calculation routines
(hours and crew size) for the critical activities.

H. Progress and Personnel Curves

Figure 13.7 shows a combined set of progress and personnel curves. These are
cumulative curves with planned and actual profiles. The CPM computer program
could be used for progress measurement, with subjective evaluation of the prog-
ress of individual activities. The effectiveness of this program is dependent on
the accuracy of the estimated hours and the level of detail of the activities.
Progress and personnel curves can be part of the computer program, but
again, dependent on the level of detail. For effective computer application, there
needs to be sufficient activities to properly represent the total work and total
estimate. This requires a balance between increasing detail and the increasing
cost of the program.
The example shown in Figure 13.7 indicates an increasing personnel level
versus the plan, and also indicates a failure to make the planned progress. This
situation would be due to increasing scope of work and/or poor productivity. A
detailed evaluation would be required to pinpoint the cause.

XIII. SUBCONTRACT CONTROL

A. A Reasonable and Simplified Approach

It must be recognized that small subcontractors do not use experienced project

control personnel and do not operate with detailed control systems. The key to
success, therefore, is to develop a simple, practical method of control and to
require that subcontractors include adequate costs in their bids to use the system.
Effective subcontract control is based on several essentials:
good contractual documents and agreements;
• an adequate system for documenting changes, amendments, and claims;
• an acceptable scheduling system (usually a bar chart);
 s
GO
W.W.T CONSTRUCTION SCHEDULE
NOTE: ALL ACTIVITIES ARE SIMPLE TASKS - USE SIMPLE CALCULATION TECHNIQUE

SCHEDULE Foundations, jobhours

ASSUMPTIONS 1. Pumps (3 cy x 10) = 30 hrs Piping for Vassels / Pumps = 1000 hours
2. Vessels (8 cy x 12) = 96 hrs Duration = 1000 + (12 x 37) * 2.5 weeks
3. Tower (10 cy x 12) = 120 hrs
Fast Track
Tower Foundation, duration
Economic Assume crew of 4 =
120 + ( 4 x 37) • 1 week

40 Hour Week
(discounted)

(1000 Hrs. )
INSTALL PIPING

RELEASE PIP
CREW.(i) TO
VESSELS
AND PUMPS

Tower Piping
TOWEJRS PIPE ERECTION
Assume 2 pipe crews of 6
or 1 pipe crew of 12

Tower Piping = 2000 hrs

Duration = 2000 + ( 1 2 x 37) « 5 weeks

o
I
Figure 13.6 Construction schedule.
Managing Small, Shutdown, Retrofit, or Outage Projects 357

PLANNED PROGRESS

ACTUAL PERSONNEL
NUMBER
OF

PERSON «

DURATION

Figure 13.7 Progress and personnel curves (typical).

a realistic progress measurement system; and

• an effective cost trending and forecasting system.
B. Low Bids—Risks

A low bid can result from ignorance and/or a subcontractor buying the job.
Subcontractors sometimes turn in a survival bid, attempting to break into a new
market or to block competition, or perhaps they find deficiencies in the contract
conditions. Such situations can result in low bids that can, in turn, lead to serious
cost and schedule consequences for an entire project if the subcontractor gets
into financial difficulties.

C. Claims

Subcontractor claims require detailed analysis and in most cases are a combination of:
• change in scope,
• schedule delays caused by the owner and/or the main contractor,
• drawing and material delays,
• interference by others, and
changes in site conditions or site regulations.
The subcontractors may greatly exaggerate adverse conditions and submit in-
flated claims. Consequently, it is necessary that daily logs, plans, work schedules,
contractual situations, etc., are maintained by project/site staff for all major
subcontracts. It is essential that project/site staff respond promptly to claim
submissions. It is also important to consider all related claims together, or there
may be common influences and consequential impacts.
358 Chapter 13

D. Subcontract Summary Report

All subcontracts should be listed, in total, on the control form shown in Figure
13.8. The form summarizes current cost and forecasted final values and identifies
scope, claims, and potential trends. The figures are taken from prediction cost
summary reports (for major contracts) and individually assessed for small con-
tracts. It is recommended that assessments of changes/extras and claims be made
at contract award.

E. Field Changes and Extra Work

A procedure should be developed for efficiently evaluating, reporting, and esti-

mating the field changes and extra work that occur during construction. The
objective of this procedure is to identify all changes from approved drawings, to
evaluate impacts on the cost and schedule, and to authorize the work.

XIV. PROJECT CONTROL PLAN (INTERMEDIATE)

An intermediate approach would eliminate much of the detail of the maximum

approach, concentrate on major cost items, and rely on the skills of the project
engineer to properly manage the project. A simple bar chart would provide the
schedule control.

A. Key Cost Items Control/Report

This method concentrates on high-cost items (usually material and construction

contracts) and evaluates the budget versus the commitments for these items on
a continuous (monthly) basis. An initial review of the estimate should reveal the
high-cost items, which should be identified on the report. The report should be
issued monthly to show the cost situation of these items. The forecasts will
probably be developed by the project manager.

B. Schedule Control—Bar Chart

Figure 13.9 illustrates a simple but adequate format for the complete project.
The major phases of the work are shown with individual bars, and starts and
finishes are indicated against a calendar time frame. Key milestones are identi-
fied with separate symbols. Status updating takes place monthly, and a vertical
cursor is drawn at the reporting date to show the status of each bar. As milestones
are achieved, the respective symbol is blacked in.

XV. PROJECT CONTROL PLAN (MINIMUM)

This is sometimes known as the zero approach. Again, based on the assumption
that the 80:20 rule applies, this approach is applied to a major portion of the
many small projects.
After preparation of the authorization for expenditure (AFE) estimate and
associated schedule bar chart, the major effort is to review and approve all
 Managing Small, Shutdown, Retrofit, or Outage Projects
O
eo
REPORT NO. I
1 SUBCONTRACT SUMMARY REPORT 1DATE 1

t
ORIGINAL CHANGES
ONTRACT
CONTRACT
NO.
CONTRACTOR WORK SCOPE BUDGET VALUE EXTRAS CLAIMS FORECAST COMHD. EXPEND.

359
 Activity
Description

SEP OCT NOV DEC JAN FEB MAR APR MAY JUN
Draft 9/5 11/5 12/4
Issue Permit
PERMITS
11/19
f~J AFE Approved
FUNDING
Pilot 10/1 11/25 BidPkg 1/15 ClarHier Vendor
Test Comp Q Engr Complete
ENGR/DESIGN
11/23 Order 4/14 Last
Q LL Equip Q Delivery
PROCUREMENT
11/25 1/18 Contract Award Const Complete 6/9

CONSTRUCTION D D
a
DOCUMENTATION Bid and Award 6/10
Constr Contract
FCO/STARTUP
OTHER Commissioning -n
Complete 7/7/88

NOTES: UNIT PERFORMANCE UPGRADE

AFE#
J. M. DOE - PROJECT ENGINEER

LEVEL I I SCHEDULE

o
Figure 13.9 Level II schedule.
1
Managing Small, Shutdown, Retrofit, or Outage Projects 361

commitments. There is no periodic trending and forecasting except at the 80%

committed point (total project). At this point, the project engineer will review the
progress to date and carry out an estimate to finish. This plus the commitments
to date comprise a forecast of the final costs. The schedules forms part of this
estimate.
Since cost reporting/accounting is usually done on a monthly basis, it is
possible that the 80% point may be considerably greater from one month to the
next, indicating the presence of an overrun situation. This is a risk that must
be accepted by management with the varying level approach.

XVI. MAJOR SHUTDOWNS, RETROFITS, AND OUTAGE PROJECTS

As previously outlined, this chapter does not cover maintenance planning. This
section emphasizes major shutdowns of 1 or more weeks, and on retrofits with
schedules of 3 months and greater.

A. Key Considerations

These projects are very difficult to estimate and, as a direct result of work/scope
uncertainty, can be difficult to plan, schedule, and manage, especially as they
increase in size. Successful execution of shutdowns, retrofits, and outage projects
(SROs) requires a thorough investigation months in advance of the work to be
performed. As construction is often the major cost center, this is particularly true
of all construction work. In addition to problems of scope definition, a further
key consideration is the type of management for these projects. Due to lack of
project experience, many plant managers assign the management responsibility
to an inexperienced engineer or maintenance supervisor.
The project and construction management of SROs, especially as they get
larger, is one of the most difficult and demanding of project assignments. It
requires intensive, creative, and careful evaluation to develop a quality project
management program and execution plan. Contracting considerations require
detailed analysis to ensure that both the project and the company receive the
best business arrangement.

B. Major Activities—Front-End Planning

As soon as plant management has determined the need and timing for a SRO
and has completed the basic engineering that evaluates the need, the information
should be transmitted to the project engineering or construction group with a
formal request to execute the work. At this early stage, it is vital that plant
management allows sufficient time to properly develop the work scope to execute
the project. Poor plant management planning and/or lack of project understanding
can lead to inadequate time to properly plan and execute a SRO.
As soon as the notice or request for a SRO is received, the following major
activities need careful evaluation and immediate development:
project objectives,
preliminary execution plant,
work scope,
362 Chapter 13

• project management program,

• contract program, and
• key estimating/planning factors.

C. Project Objectives and Program Planning

It is important that all prospective architect/engineers (A/Es) and subcontractors

have experience at the plant and also with the specific categories of work to be
performed. In most cases, the local subcontractors have a limited engineering
design capability and so it would be normal to bring in an outside designer. It
is strongly recommended that the design for major SROs be carried out at the
site. This will increase the engineering cost, but the benefits of immediate access
to site layouts and conditions outweigh the extra cost.
The current trend is for owners to carry out basic design and act as their
own project manager; for an A/E to handle detailed engineering; and for construc-
tion to be divided between the company maintenance department for specialized
work, with individual local subcontractors and/or a prime contractor handling all
or part, or solely acting as a construction manager.
For most projects, economic considerations are a top priority, but with SROs,
time is usually of the highest importance. The priority of project objectives is
usually time first, then quality, then cost.
It is essential that the plant be brought back on stream according to plan,
or earlier if possible. Sometimes quality, and certainly cost, will be sacrificed in
order to meet the operational date requirement. The estimated cost can increase
greatly when unplanned schedule acceleration is required to meet the planned
operational date. Typical acceleration costs are to be found in labor overstaffing,
overtime, shift work, oversupply of construction equipment, inefficient/out-of-se-
quence work, extra supervision, etc. One of the main reasons for extra costs/
schedule acceleration is a poor estimate of the work scope or work scope increases
and changes by plant management during execution of the SROs.

D. Preliminary Execution Plan

As soon as the SRO date has been set or a plant request is received, a preliminary
execution plan (PEP) should be developed. This plan should be developed in
conjunction with plant management to ensure correct timing, design basis, avail-
ability of plant personnel; coordination with operations personnel; and identifi-
cation of regulatory requirements and the contracting program for the planned
division of the work.
A preliminary schedule similar to the one shown in Figure 13.10 should be
developed in conjunction with the PEP. In fact, the schedule could actually be
the PEP. At its very earliest stage, the PEP should then be approved by plant
management to ensure their full commitment to the proposed program. Securing
such a full commitment means that plant management will allocate adequate
plant personnel, time, and resources to the program.
A major decision that must be made during the early stage is delegating
responsibility for managing, contracting, and inspecting the construction work.
Most companies and plant organizations have separate maintenance and engi-
neering departments, either of which can be responsible for the construction work.
 SHUTDOWN / TURNAROUND 0)

2
THIS PROGRAM IS BASED ON THE CONCEPT OF HIRING A CONTRACTOR
(Q
WELL IN ADVANCE OF THE SHUTDOWN SO AS TO USE THE CONTRACTOR (/>
IN ASSISTING WITH THE FINAL, DETAILED PLANNING OF THE WORK* ft)
THIS ACTION SHOULD GIVE THE CONTRACTOR A GOOD UNDERSTANDING
OF THE WORK SCOPE.
PRELIMINARY PREPARE CONTRACT
EXECUTION PLAN (PEP^PACKAGE
CONTRACTOR B I D S &
.^CONTRACT AWARDS
I
2/3 Mos. 1/2 Mos
i
DEVELOPED IN CONJ?
WITH PLANT
MANAGEMENT.
PREPARATION AND FINALIZE FINAL/DETAILED
PLANNING OF WORK ESTIMATE & \ PLANNING WTffl
SCOPE _ -WORK SCOPE. CONTRACTOR
2 / 3 M o s . 1 1/2 M o s . 1/2/3 IMos.
1/2/3
Wk. = weeks
Mos. = month DEVELOP PROJECT (D
yMDJOR REVISIONS
MANAGEMENT PROGRAM
S
By OWNER
BASIC
1 Mo.
I
0)
PLANT
ENGINEERING f A P P ' i ? M A N A G B E W /FlWDING/APPICWaL REGULATOFY/PEFMITS

DETAILED
JLL Wk.
FINALIZE ENGINEERING t
L.
ENGINEERING
By A / E MATERIAL AND EQUIPMENT DELIVERY

Figure 13.10 Shutdown/turnaround preliminary schedule/program.

CO
O)
CO
364 Chapter 13

Plant management can make a serious mistake by delegating the construction

responsibility of larger SROs to maintenance supervision. Maintenance personnel
can be effective with small, hourly, or l-to-2-day SROs, but larger SROs are
usually beyond their experience and capability. An exception to this general
observation can exist where an experienced construction group is part of the
maintenance department. It is normal for some specialist work to be given to the
maintenance group.

E. Work Scope Development

This activity is absolutely essential to providing a good estimate of the work.

The key to developing a good scope of work is allocating qualified personnel to
the take. Depending on the size of the SRO, the allocated personnel or team is
part- or full-time during this activity. A proper development of work scope can
take many months on larger SROs.
The work scope team usually consists of one or two senior maintenance
personnel, one or two construction engineers and estimators, and a schedule
engineer. Specialists from operations and engineering groups are used as re-
quired. The construction engineer is usually the team leader, as it is only the
construction engineer who will be part of the project management program during
execution of the work. It is important that plant management allocate experienced
maintenance personnel to this effort.
As the work scope team identifies the physical work to be carried out, the
work should be carefully detailed in a work scope book (WSB), which essentially
covers all construction work needed for the complete project. Detailed investiga-
tions of the physical condition of operating equipment and of the appropriate site
area should be made. It is quite common for existing plant drawings to be out
of date. Underground obstructions should be re-evaluated, and new routing runs
for cable and piping should be carefully reviewed by walking the route. All
equipment requiring rework should be described in detailed inspection reports.
Some equipment can only be opened up and inspected during the actual shut-
down. For these items, operating reports often indicate problems, from which an
estimate of the work can be developed, but with larger contingencies allowed.
The work breakdown structure (WBS) should clearly and accurately de-
scribe, in detail by work item, all construction work to be performed. Work per-
mit requirements, operating hazards, and safety procedures should be clearly
identified. A detailed execution plan, schedule, and estimate should then be
developed from the WBS. The work scope should be developed on an area and
system basis, as appropriate. All work on existing equipment and the installation
of new equipment is on an area basis, as developed from the equipment list (a
major source document). Major plant equipment (both process and utility) have
specific reference numbers by which are used to identify them in the WSB,
estimate, and schedule. Changes to existing systems (piping, electrical, instru-
mentation, etc.) and the installation of new systems can be on an area and system
basis.

F. Project Management Program

This program consists of:

Managing Small, Shutdown, Retrofit, or Outage Projects 365

• project organization,
• project control/reporting,
• schedule(s), and
• worker resource histograms.
As shown on the PEP (schedule) contained in Figure 13.10, the project manage-
ment program should be developed within one month after approval of the PEP.

G. Project Organization (Owner)

Structure of the owner's organization will depend on whether or not the actual
construction work is contracted out. As previously stated, the assumption of this
program is that this is the case. Again the organization will depend on the
contracting arrangement with (and the responsibility of) the contractor. A full
responsibility, fixed price contract based on a well-defined scope-of-work, let to a
competent contractor, requires a reduced project organization. Conversely, a reim-
bursable or unit rate contract (which is usually the case), requires a full project
organization. In such instances, the project management responsibility and lia-
bility is with the owner. Depending on the contract terms and conditions, a fixed
price contract may still place the liability for schedule with the owner. In sum-
mary, the project organization is directly affected buy the terms and conditions
of the contract agreement.
As engineering and purchasing are the responsibility of the owner and/or
the A/E, the project organization will require allocation of specialist engineering,
purchasing, contracting, construction, estimating, cost control, and scheduling
resources. The personnel allocation is a combination of part- and full-time work-
ers. During the actual shutdown period, the construction staff greatly increases
from the staff level during the preparatory period.
For larger projects, the project manager should be selected carefully. Good,
all-around experience in the plant, engineering, contracting, planning and schedul-
ing, and construction are desirable. The personal attributes of dedication, leader-
ship, creativity, and a calm nature are essential. For SROs, a project manager
needs to be a workaholic. During the potential 24-hour workdays of an SRO, the
project manager has to be mentally prepared for any and all things to occur. Crisis
management, risk analysis, and decision-making skills are essential capabilities.
Figure 13.11 shows an organization chart for a $6 million SRO. The chart
outlines the organizations for the owner, a separate A/E responsibility for detailed
engineering (15,000 hours), and construction being handled by one subcontractor
(50,000 hours) for the three-week, two-shift shutdown program. The construction
organization for the earlier five-month preparatory program is not shown.

H. Project Control/Reporting

Generally, this consists of two distinct phases. First comes design, procurement,
and construction preparatory work. All construction work that is not constrained
by the actual shutdown should have been completed before shutdown. This earlier
construction work is often scheduled on a daily or weekly basis, and the engineer-
ing/procurement on a weekly or bi-weekly basis. Second, the actual construction
shutdown work should be scheduled on a hourly basis, with work being performed
 366 Chapter 13

Project Scope | Hours | Duration | No. Men

1. Owner basic engineering J- - 5000 - -- 4 m o . - - - - 8 I
2. A/E detailed engineering --1- 15,000 - - - 5 mo. - - I - 3 K P F . 1 . 6 ) I
I | i
^. 50,000 — - -
3. Construction contractor -- i ^~,— 3 wk.
.....- T ' 2 3 0 shift '
(reimbursable contract) j_ | 2 shifts | 1_
4. Overall schedule - - - 6 mo.
(5 mo. preparatory, plus)
(3 wk. shutdown)
Accounting, finnancial and I P l G f . MGR. Note:
clerical not shown. (yj\
Construction Manager
and one of the Shift
Supervisors in
ENG. MGR. 1 BUS. MGR. 1 \ OOHSTR. MGR. |
I
Preparation Team
. (s)
Proc. -1 Purch. -i P .t
Mech. -1 Contr. -ip.t
shift shift
-1" Estg. -ip.t
ELect. -1 Cbst -i 1- Civil Work Civil -1
Instr. -1 Sched. -i 1- Mech. Mech. -1
Direction g. -2
Misc. -1 2- Pipg-
DraftTr -1 1- Elect. and Elect.-1
1- Instr. Instr.-1
Inspection
1- Misc.- Misc.—1
t1
OWNER TEM* - 15 during Prep, stage
I
i
V
I - 21 during Constr. stage

ENG. MGR. CONSTR. MGR.

A/E. Contractor

Proc. -1
Mech. -1
Cost &
Sched. -1
Acts. -1
SUPVR.
1 shift
SUPVR.
2 shift
1ADMIN. 1
Elect. -1 Clei3!. -1 Sched. -2
Instr. -1 1- Civil Civil -1 Engg. -1
Misc. -3 2- Mech. Mech. -2 Proll. -1
7- Pipg. -7 Mat'l. -1
3- Elect. Elect.-3 Act's. -1
D'men 3- Instr. Instr.-3 Clerl. -2
Safety included-• 3- Misc. Misc. -3
20 in misc.
Labor Labor
A/E. TEAM - 34*
230 230
CONTRACTOR TEAM - 50 (excl. labor)

Figure 13.11 Turnaround/shutdown typical project organization.

Managing Small, Shutdown, Retrofit, or Outage Projects 367

on a two-shift basis. Planning and scheduling is the main project control program,
with cost reporting and analysis being carried out as an accounting function.
It is common for work to be executed on a work order system, with CPM-type
schedules and planning boards showing plan and progress of the work. In most
cases, jobhours identify scope of the work and are also used to measure progress.
This requires accurate jobhour estimates for effectively planning resources and
measuring progress. All work orders are individually estimated, and the field
accounting system allocates and collates actual jobhours to each work order.
Prompt analysis of deviations of actual versus estimated hours is necessary for
an effective project control program. A field computer system is necessary to
provide timely and accurate commitments, expenditures, and jobhour data.
Scheduling of shutdown work should allow for unforeseen circumstances,
with overstaffing factors and additional construction equipment forming part of
the resource calculations.
Engineering and procurement activities should be generally scheduled with
a simple method. However, it should be recognized that engineering design also
has a retrofit nature, with field investigations providing input to actual design
drawings. On major SROs, a field design office is often essential to effectively
progress the engineering effort.
Apart from an overall program, it is very difficult to use detailed CPM
schedules/computer systems during the shutdown period. Due to the rapid time
changing of work tasks per individual shift, such changes and the required dis-
play flexibility are best accommodated with a large, manual planning board. This
board is usually mounted on a wall in the project office and is the focal point of
the planning and execution program. Work tasks/orders are mounted on magnetic
tape and placed on the board by priority for each shift. Thus they are highly
visible for all to see. As new work is identified, the work tasks/orders are mounted
in a different color so that the accumulation of new work can be clearly tracked.

I. Overall CPM Schedule

An overall CPM-type schedule covering the complete project duration can be an

effective tool. It is relatively easy to increase the detail of the PEP schedule (Fig.
13.10) and to work on a weekly basis for actual versus planned progress. This
can be very effective in ensuring the A/E's engineering performance meets the
purchasing and construction program. Figure 13.12 illustrates an overall CPM
schedule for the construction phase of a $9 million shutdown.

J. Personnel Curves

These should be generated by key discipline for the A/E's engineering program
and the construction shutdown work. A planned and actual progress curve for
the work might be needed or useful to show overall progress against plan.

K. Contract Program

A lack of good scope definition severely limits contracting options, which are also
affected by the current financial state of the marketplace. SROs, by their very
nature of cut-and-fit, operational unknowns, schedule acceleration, and overstaff-
 368 Chapter 13

INITIAL STRESS
ALIGN FINAL RELIEVE
SET ALIGN PIPING
PUMPS & GROUT PUMPS / FLOAT
K2
(9)

INSTALL
PIPE (1000)
SUPPORTS F L 0 A < VESSELS/PUMPS PIPING FLOAT
2. ^>a&\ 8 (5)"
BLIND AND (400)
GAS FREE FOUNDATIONS VESSELS/PUMPS
ELECTRICAL
1 3 & INSTRUMENTS

j (680)
TOWERS ELECTRICAL FLOAT
TOWERS P&L, & INSTRUMENTS
SUPPORTS
REMOVE
PACKING
AND C/O (2000)
TRAYS TOWERS P I P I N G

Figure 13-12 Shutdown critical path schedule sub area IV.

Managing Small, Shutdown, Retrofit, or Outage Projects 369

ing, are difficult to estimate. This difficulty has a direct impact on the contracting
process. As a result, the reimbursable type of contract is widely used. With this
form of contract, it is also quite common for the owner to take responsibility for
management and execution. Thus the contractor acts as a labor broker, supplying
labor, construction equipment, and supervision under direction of the owner's
construction management. If a good scope definition can be established, and if
project conditions (such as unplanned acceleration) remain firm, then a fixed
price and/or unit price contract is possible.
The following are typical reimbursable contracting arrangements:
1. Reimbursable Hourly Rates
This is the simple (low contractor risk) form of contract, since the contractor
quotes all-inclusive rates (including overhead and profit) for labor, supervision,
and construction equipment. The rates may be on an hourly or weekly basis.
Miscellaneous services and expenses are reimbursed at cost. The number of
resources is specified by the owner. This is known as a time and material (T/M)
type of contract. Purchasing is carried out at cost, with a percentage markup
added to the cost to cover the contractor's administrative costs.
2. Fixed Fee/Reimbursable
This is similar to the T/M contract, except that the contractor's overhead and
profit are removed from the hourly rates and included in the fixed fee. The
fixed-fee/reimbursable contract has a higher risk than the T/M contract, since
the contractor takes a risk on the fixed-fee portion.
The fee does not change with a change of the reimbursable hours, so the
contractor will not recover its overhead or an a profit if the scope of work is
underestimated. Most SROs experience an increase rather than a decrease in
hours, so the contractor must evaluate this risk carefully. Many contractors will
not accept the risk and will attempt to negotiate it away. This can be achieved
by a formula, or percentage, arrangement that ties the fixed fee to the reimburs-
able hours or the total cost.
3. Adjustable Fee/Reimbursable
This arrangement is a risk compromise of the full, fixed-fee arrangement. The
fixed fee is determined on estimated or target jobhours and then adjusted on a
percentage basis for jobhour variations. There also may be additional bonus/shar-
ing on jobhour underruns and a penalty on jobhour overruns, such as an hourly
rates reduction on a percentage basis.
4. Percent Fee/Reimbursable
This arrangement is similar to the adjustable fee/reimbursable form of contract,
except that the fee is determined as a percentage of the total reimbursable costs.
There are usually no bonus/penalty arrangements. The problem with this ar-
rangement is that there is an incentive for the contractor to increase the costs,
which will result in a larger fee.
All reimbursable-type contracts have the general problem for the owner that
poor contractor performance will increase the jobhours and costs, resulting in
greater profit to the contractor. Obviously, poor performance should not be re-
warded.
370 Chapter 13

Overtime Recreation facilities Geographical area

Prefabricated assemblies Schools Climate
Specifications Permanent community Site access

Local codes Schedule Soil conditions

Procurement Inflation Earthquake factors

Origin of materials Escalation Site elevation

Origin of equipment Currencies Offshore platforms

Export packing Financing Environment

Construction facilities Overseas premiun Attitude of community

Temporary facilities Cost of living Political climate

Housing Cost of traveling General business climate

Logistics Taxes Prime contractor

Communications Insurance Joint venture

Warehousing Legal assistance Unionized labor

Guard service Government agencies Qualified labor pool

Site fabrication facilities Letters of credit & bonds Recruiting & training

Construction equipment Language problems Labor productivity

Medical facilities Local cultures Labor contracts

Food & catering Sanitary facilities Labor cost
Experience and Imagination

RETROFIT / REVAMP
Hazards - work limitations Health factors Security
• Workers Contractor training Clearance
• Equipment Standby allowance Permits

Figure 13.13 Pre-estimating survey.

L. Key Estimating/Planning Factors

In addition to the difficulty of recognizing the work to be carried out, a further

problem is that many companies do not possess a formal jobhour database to
apply to the units of work. Developing such a database is a substantial and costly
task, where a comprehensive code of accounts has to be established. It then takes
several/many years of tracking of actual jobhours to ensure a reliable database.
A faster, less costly and reasonable method is to purchase a jobhour estimating
system (e.g., Richardson Engineering Services, R.S. Means, etc.) and adjust the
data to the specific on-the-job application, based on actual work experience. As
such estimating systems are generally based on new construction work and fixed
conditions; the impacts of geography, weather, plan operating conditions, and
SROs on labor hours/costs require individual adjustment.
Managing Small, Shutdown, Retrofit, or Outage Projects 371

When using commercial estimating programs designed for new construction

work, it is recommended that factors of 1.5-2.0 be used against these jobhour
databases for SROs. Judgment is required in the application of this factor range
and generally 1.5 applies to work during plant operations and 2.0 applies during
a shutdown. These factors recognize the hours necessary for unknown conditions
and productivity losses for overtime, shift work, overstaffing, and schedule acceler-
ation. Indirect labor/nonproductive hours will also increase for SROs as compared
to an open, grassroots or new-site conditions. The norm for new construction is
30% and for SROs a figure of 40-50% is probable. Note that commercially
published systems do not generally cover engineering design hours and costs.
As the published systems generally can only be used for the installation of
new facilities, another method must be developed for the cut-and-fit, repair,
demolition, retrofit, refurbish, and rearrangement-type work of the SROs. The
most commonly used method is to determine the number of workers and the time
required to carry out the work. This determination requires considerable practical
experience, plus knowledge of the working conditions for such estimates to be
accurate. The development of good jobhour estimates is essential for the effective
planning and scheduling of the work.

XVII. SUMMARY

A successful multiple small projects program requires informed plant manage-

ment, skilled project personnel, a varying level of control/reporting (structured
and preplanned), quality estimating, and extensive early planning for SROs. With
all these ingredients in place, success is not guaranteed, but it has a good chance.
Figure 13.13 lists many of the items that need to be considered when a detailed
estimate is being prepared.
14
Project Closeout—Lessons Learned and
Historical Data

I. INTRODUCTION

The major emphasis of this chapter is on the project control function, not on
project management, where assessments of all facets of project execution are
outlined. In essence, at the end of a project, a detailed assessment should deter-
mine the success, or otherwise, of the following key factors:
• project objectives achieved,
• personnel skills of all key players,
• project organization (project control),
team building,
techniques and procedures,
project cost consciousness (trending),
• lessons learned,
• failures,
• recommendations for change, and
• historical data.
This list is not all-inclusive and can be modified for application to specific projects.
The resulting information should be included in a confidential report, since some
of the issues would be sensitive and, perhaps, critical.

II. PROJECT OBJECTIVES ACHIEVED

The project control objectives, by simple definition, are completing the project on
time and within the approved cost appropriation. Achieving early completion and
a cost underrun may be clear evidence of superior project performance. Unfortu-
nately, current studies clearly show that cost overruns and schedule slippage are
373
374 Chapter 14

the norm, although most companies have the policy that a cost deficiency of up
to 10% equates to successful within-budget completion.
A detailed analysis of final costs versus the approved estimate will identify,
at the operating code of accounts level, the individual variance as well as the
total value.

III. PERSONNEL SKILLS OF KEY PLAYERS

An assessment will focus on all major parties and individuals: owner, engineer,
contractor, and subcontractors. The assessment should cover key individuals
directly responsible for the estimating, cost control, and scheduling operations.
The report should name individuals and their positions, with assessments of their
skills and experience.

IV. PROJECT ORGANIZATION—PROJECT CONTROL

This evaluation should cover the effectiveness of the total project control group,
since specific individuals should be included in the preceding section.
The evaluation should include factors such as sufficient project control per-
sonnel; project relations; communication channels; work done in engineering
offices and at the construction site (separate analyses); the interface between
engineering and construction; the coordination of contractors at the site; and the
interface with procurement.
Of great significance is the interface with the project manager. Was it direct
or otherwise? Did the cost engineers consider themselves bean counters or did
they feel they were strong, active contributors throughout the project? Was the
cost control effort properly coordinated with the cost accounting group?

V. TEAM BUILDING

In relation to the preceding comments, was the project control group an active
participant in the team building effort of the total project organization? Did it
obtain the right information at the right time? Within the group (depending on
the size of the project), did appropriate team-building efforts take place to ensure
that all required inputs and all necessary outputs were effective?
One of the keys for successful cost and schedule control is the proper
development of relationships and contacts so that a full and steady stream of
information is obtained. Without this information, effective trending is impossible.
Did the responsible project control personnel attend all appropriate progress and
status meetings, both within the project and within the company?

VI. TECHNIQUES AND PROCEDURES

This part of the report should focus on all major techniques and procedures,
listing them with appropriate descriptions of their use, application, and effective-
ness. The assessment should cover the range and level of techniques and proce-
Project Closeout—Lessons Learned and Historical Data 375

dures as well as their quality. However, with large contractors and sophisticated
owners, there is always the tendency to over-control and over-report.
Management and leadership skills, especially on large projects, are required
to ensure a cost-effective program. Particular care should be given to assessments
of computer programs.

VII. PROJECT COST-CONSCIOUSNESS— TRENDING

After completion and acceptance of a quality estimate, proper trending of the

work is then the major requirement. As previously discussed, trending can only
occur by turning data into useful and useable information.
• The cardinal principle of no surprises should be considered. Was it achieved,
apart from force majeure items?
• Were changing scopes of work and project conditions properly identified and
correct impact studies carried out in time? If so, the result would be a good
potential trend report.
• Were potential claims identified well in advance of their occurrence?
• Was there a conscious effort to establish and maintain a cost-consciousness
project culture?
• Was a claims prevention program established?
• Correct trending leads to accurate forecasting. Was this the case?
• Was a weekly trend meeting held?
• Did the correct individuals attend the meeting?
• Were weekly progress meeting held at the site?
Specific examples of key techniques and efforts should be highlighted, as should failures.

VIII. LESSONS LEARNED

This section should deal with positive issues, covering items that were modified
and deficiencies that were covered. Such items could include personnel, organi-
zation, techniques, or procedures. The items should be of significance, so that
lessons learned would then become standard operating procedures in the future.
The analysis needs to be as objective as possible.

IX. FAILURES

This section, as with lessons learned, covers only items of significance. It assesses
individual and/or company performance, methods, techniques, procedures, and
organization, and should focus on situations that should not recur on future
projects. This is a sensitive area, so care is essential in properly identifying these
items, especially if some of them reflect poor performance by an individual.

X. RECOMMENDATIONS FOR CHANGE

The major issues identified in the "Lessons Learned" and "Failures" sections are
further evaluated, resulting in a series of specific recommendations to change
376 Chapter 14

current practices, procedures, and company policies. There is always a reluctance

to change, so all recommendations need to be properly evaluated for future
application as well as for the impact of change on the current operation.

XL HISTORICAL DATA

Before project startup, all project control feedback data should be properly iden-
tified. This includes both estimating/cost data and scheduling information.
Since this information can be voluminous and therefore costly to compile,
care should be taken to ensure that the data is actually needed. It is normal for
estimating and cost data, at the detailed code of accounts level, to be required.
However, further analysis is probably required to obtain accurate costs for each
equipment item and category of material. As far as it is practical and cost
effective, identifying feedback requirements enables a cost accounting system and
scheduling program to all these items to be reported when the system is being
established.
15
Project Management Fundamentals—Key
Essentials

I. INTRODUCTION

In today's difficult and challenging business environment, it is vital that the

management of projects results in:
• identifying risks,
maximizing cost savings,
minimizing time delays, and
improving economic return.
These results can only be achieved through:
effective management of people,
• tough but fair project objectives,
• efficient business techniques, and
• outstanding leadership skills.
The following project management chapters cover these subjects in considerable
detail. The roles, functions, and interfaces of company management, project
management, engineering management, construction management, and support-
service groups are explored. Overall relationships and personnel relationships,
essential for successful project execution, are outlined. Throughout, the emphasis
is on practical approaches and the relationships of personnel in the project team.
The emphasis is on the need for and substance of early project planning
and the related scheduling of time and development of costs. The material con-
centrates on the need for every project leader to be an effective professional
project manager—to be an organizer, a planner, a motivator, a communicator,
and a businessperson.
Current studies of state-of-the-art project management methodology by the
Construction Industry Institute (CII), have shown that the top category for
377
378 Chapter 15

successful project execution is front-end planning/project organization. The stud-

ies have concluded with the following simple but true premise:

If we get it right at the front end, we have a chance of success, though not
guaranteed. If we do not get it right, then we have no chance of success.

The following material, mostly flowcharts, illustrates the major factors,

functions, and project phases of the project lifecycle. Full understanding of all
these elements can ensure effective communication channels, tight schedules, low
cost, and a clear path for efficient decision-making and economic actions.
But it is in these very elements where many problems develop and become
impossible to solve or reduce as the project progresses. The result is more money
is spent than is necessary, more time is consumed than is needed, and there is
a constant recycling of options and alternatives that have been eliminated at an
earlier stage. Project ignorance, lack of skill, poor cooperation, and refusal/reluc-
tance to participate properly are commonplace. Biases, prejudices, and personal
interests are also part of the equation. All of these elements are compounded by
industry-wide lack of up-to-date project training.

II. DEFINITION OF A PROJECT

A project can be defined loosely as an item of work which requires planning,

organizing, dedication of resources, and expenditure of funds in order to produce
a concept, a product, or a plant. This chapter focuses on plant projects, all of
which require design engineering, the purchase of material, and the installation
of that material to the previously completed design engineering.

III. PROJECT MANAGEMENT FUNCTION

Almost all companies have personnel who are trained, skilled, and dedicated to
the execution of projects for the company. The individuals who lead these efforts
are called project engineers and/or project managers. Supporting these project
managers are such personnel as design engineers, procurement personnel, con-
tracts officers, estimators, cost engineers, planners, construction managers, and
a variety of technical specialists.
In many cases, the type, size, and complexity of projects vary greatly and,
therefore, the skills and experience of project engineers, project managers, and
support personnel similarly can vary in capability.

A. Major Factors

Figure 15.1 shows the essential major factors for the successful execution of projects.
1. Cost Management
Many projects have project cost as the top objective and this, then, requires the
project to be completed at, or less than, the budgeted cost. Adequate business
skills are essential to meet this objective.
Project Management Fundamentals—Key Essentials 379

Critic*) Path

Engineering
• Procurement ( EPC )
Construction
Figure 15.1 Major factors essential for successful project execution.

2. Time Management
To meet the cost objective, it is necessary to manage time efficiently. This means
the predetermined schedule, upon which the cost was based, must be met and
met economically. Some projects may have schedule as the top objective. In such
cases, acceleration programs are planned, and it is probable that there will be
corresponding cost increases to the economic-based project.

3. Human Resources
Of all the resources required for plant projects, the people resources are the most
difficult to manage. Interpersonal skills and the effective motivation of people,
at all levels, are essential for successful project execution. Lack of human re-
sources, plus a corresponding lack of the correct mix of people skills, are becoming
380 Chapter 15

.Affiliate
COMPANY ^Operations
PLANNING ^Maintenance
ANNUAL
FIVE YEAR
J

ENGINEERING
REQUEST
(See Detail)'

ENGINEERING
DEPARTMENT!
PLANT
PROJECT
CENTRAL |
DEVELOPMENT BUDGETING I
(See Detail
& I
MANAGEMENT
APPROVAL |
(See Detail)*
PROJECT
EXECUTION
Small Projects Larger Projects
• COST PLUS ENG'G • E.P.C.
• L.S. CONSTR'N • L.S. or COST PLUS

Figure 15.2 Projects lifecycle—functions flowchart.

an increasing feature of the project business. One of the most abused people
resource concepts is the 'lean and mean" program. The management intent is
that a reduced group of people, through advanced skills, can execute as effectively
as a larger group and, therefore, reduce costs by reducing staff. There is some
merit in this concept but in many cases it is a device used by poor management
to cut costs. If there is a significant lack of people, there is almost certain to be
a corresponding inefficiency in project execution, coupled with an increase in costs.
4. Communications
A formal and informal structure of effective communications is absolutely essen-
tial for successful project execution. In addition to weak people skills, many
company organizations and cultures have poor administrative practices that also
form barriers to project success. These barriers are common to all companies and
are generally referred to as matrix interface conflicts (MICs). The conflicts or
barriers are caused by departmental jealousies, rivalries, and failures by man-
agement to create a culture where project consciousness and esprit-de-corps are
common to all personnel. The total quality management programs sweeping the
industry are an attempt to solve these problems.
Project Management Fundamentals—Key Essentials 381

'""ENGINEERING I
I I
| REQUEST I
I . 1 SOLVE
PROBLEMS
UPGRADE-
QUALITY
ADDITION-
QUANTITY

ENVIRONMENTAL

STAY-IN-
BUSINESS

ENGINEERING

DEPARTMENT '

Figure 15.3 Engineering request—functions flowchart.

B. Overall Company Projects Lifecycle

Figure 15.2 shows the general steps common to all plant projects. Experience in
this process, recognition of each company program's individualities, and the skills
of bridging the MICs, are necessary for project success. Getting the front-end
planning right is the key to success.
C. Engineering Request

Figure 15.3 illustrates the major factors that generate the capital project work.
Timely and quality assessments of plant requirements are difficult to achieve but
are essential for company profitability. Such assessments result in formal engi-
neering requests for the project work.

D. Project Development

Figure 15.4 shows the major components for developing the scope of each project.
Each of these components (technical, project conditions, regulatory, cost, econom-
ics) is then further defined and prioritized. It is vital that the priority be clearly
established.

E. Budgeting and Management

Development of the scope in terms of risk, cost, time, and resources is followed by
approval, partial approval, or rejection of each proposed project. Figure 15.5 shows
382 Chapter 15

r PROJECT

r
1
DEVELOPMENTi
I , I
TECHNICAL

PROJECT
CONDITIONS

REGULATORY

CONCEPTUAL
COST ESTIMATE

ECONOMICS

BUDGETING &
MANAGEMENT
• APPROVAL.

Figure 15.4 Project development—functions flowchart.

T BUDGETING"^!
MANAGEMENT L
APPROVAL J
FPHASED

L APPROACH
PARTIAL-FULL
FUNDING
ESTIMATE
QUALITY
EXECUTION
STRATEGY
PROJECT
RESOURCES

PROJECT

EXECUTION

Figure 15.5 Budgeting and managementsfunctions flowchart.

 13

3
(D
O

0)
0)
(Q
<T)
(D

r~ 1 a
PHASES

r~
PROJECT
a>
MAJOR — OCMMISSION

r~
J
1 Ifor/cscope EfiTAIL OCKSTEUCT &
Project Deficit DESIGN & ION START UP

r Design
r Case
Selection £
Execution £
Contracting
ion

BASIC
PROCUKEMBM
ENT
6
7

Company and Options £ Optimization

U1
PROJECT DESIGN 5

Market Cases CONCEPTUAL PIANNING

Strategy ST&D*
3
DEVELOPMENT STUD* 2
PLANNING |

Figure 15.6 Major time phases flowchart.

CO
384 Chapter 15

THE
BEAN-COUNTER
SYNDROME

TOTAL QUALITY MANAGEMENT(TQM)

MATRIX INTERFACE CONFLICTS(MICs)

Figure 15.7 The company team.

the budgeting and management process, which is closely followed by the devel-
opment of the project strategy and project organization. The correct assessment
of the people resources, especially the key people, is essential at this early stage.

F. Typical Project Lifecycle

The time and interface relationship of major project phases is shown in Figure
15.6. Assuming a fast-track program, most of these phases will overlap, and the
degree of overlapping will depend on the work content of each phase and the
efficiency of decision-making present in the project.

G. Project Organization (Culture)

Finally, Figure 15.7 poses the question of company personnel working as a team.
Without question, this matter has become the vital issue to profitability, especially
as companies downsize and reduce the core. Greater personnel efficiency and
increased operational quality are essential requirements in today's difficult busi-
ness environment. The bean-counter syndrome is highlighted. This dangerous and
unacceptable practice is covered in Chapter 9.
16
Managing the Feasibility Study
(Preproject Planning)

I. INTRODUCTION

The management of the first phases of a project requires outstanding communi-

cation and people skills. The task is to take multiple sets of ideas, rough notes,
sketches, and somebody else's thoughts and develop the information into a rec-
ognizable design scope (with options) and to develop an associated cost and time
budget. As there is often little definition to the thoughts and ideas of others, the
ability to motivate others to a firm and common approach is, essentially, a people
problem.
Figure 16.1 illustrates the schematic relationships of these first project
phases and the major elements of a feasibility study.

II. TYPICAL FEASIBILITY PROJECT APPROACH

This discussion is based on the typical approach to feasibility studies for larger
projects, where a combined owner-contractor team is executing the work, usually
on a cost-reimbursable basis. The project manager is generally from the owner's
engineering group, and most of the work is coordinated with the owner's internal
operating groups. Due to the number, independence, and lack of project experi-
ence of these groups, the coordination of the work with them is normally far
more difficult than is the working relationship between owner and contractor
personnel.

III. OVERALL OBJECTIVE

Preproject planning is required to ensure that early evaluations, discussions, and

overall planning properly interpret the owner's requirements and lead to ade-

385
386 Chapter 16

I Project

I Case
Execution &
Contracting

Company &
I Design
Options &
Cases
Selection &
Optimization
CONCEPTUAL
PROJECT
PLANNING

STUDY 3
Market FEASIBILITY
Strategy STUDY 2
DEVELOPMENT
PLANNING 1

1O OVERALL OBJECTIVE

2. TYPICAL PROBLEMS

3. WORK INITIATION

4. STATEMENT OF REQUIREMENTS (SOR)

5. FEASIBILITY STUDY COSTS

6. KEY DELIVERABLES
Figure 16.1 Early project phases and major elements of a feasibility study.

quate work scopes, preliminary plans, and necessary resources. This, then, de-
velops into basic engineering with a resulting conceptual cost estimate, schedule,
and assessment of project visibility for owner review and approval.
The deliverables of the feasibility-conceptual design study are:
technical program (preferably, a single case),
cost estimate for funding or further development,
• associated risk analysis, and
• preliminary execution plan (schedule, project organization, etc.).

IV. TYPICAL PROBLEMS

This early work needs to be of the highest quality, as many significant problems,
such as poor scope definition, inadequate planning, lack of resources, organiza-
tional and owner-contractor-A/E conflicts occur at the early stage of a project.
If these typical early problems can be identified, prevented, or reduced, then the
subsequent execution of detailed engineering, procurement, contracting, and con-
struction is greatly enhanced. In other words, the project manager should set up
the project at the earliest stage, with proper planning, quality organization,
skilled/experienced personnel, good owner relationships and effective communi-
Managing the Feasibility Study (Preproject Planning) 387

cation channels. This will not necessarily guarantee success but will greatly
increase the probability of success.
The following breaks down typical problems encountered by the project
manager in the preproject planning stage:
• poor owner scope definition,
failure of owner and engineering division to recognize that each party has
a differing interpretation of the project requirements,
• unclear priorities and priority conflicts of project objectives,
• inadequate planning,
• lack of resources,
organizational difficulties of the matrix,
• internal owner conflicts,
• inexperience/lack of understanding of involved parties,
• new/changing technology, and
difficult project conditions (site, operating plant).
It is essential that these typical early problems be clearly identified, prevented,
or reduced by the project manager.

V. PROJECT MANAGER AS COMMUNICATOR/MOTIVATOR

The project manager must assume the leading role in developing effective communi-
cation channels and good working relationships with all interested groups. Lack
of proper liaison and poor coordination, especially in the early stages of a project,
will add to the preceding problem list and, during project execution, lead to:
• lack of commitment and support,
• lack of discipline during project execution,
• poor personnel relationships,
• ineffective approval/signatory procedures, and
• inadequate owner-contractor relations.
Prior to contract agreement for the execution phase, owner communications,
reporting requirements, authority levels and approval procedures should be out-
lined in the project coordination procedure, so that contractors can properly
respond during the bidding period.

VI. OPERATIONS INTERFACE AND SCOPE DEVELOPMENT

The project manager must work very closely with operations/maintenance to en-
sure proper technical definition (a precise, unambiguous definition of requirements)
and project scope definition leading to an approved statement of requirements
(SOR). Thereafter, the project manager must maintain an effective interactive
working relationship to gain the operator's full understanding, acceptance and
commitment to the project strategy, project objectives and implementation plan,
including development of the project finance memoranda (FMs) and authoriza-
tions for expenditure (AFEs).
The most cost sensitive part of virtually any project is changes to the scope.
Such changes can easily arise from early failure to allocate total corporate at-
388 Chapter 16

tention to the project scope in general and scope control in particular. Scoping
must not be solely confined to the producing facilities (e.g., oil/gas/chemical/food
production) but must also include all major peripheral facilities, such as power,
water, shipping, storage, communications/telemetry, fire protection, flares, build-
ings, roads, regulatory/environmental, etc.
It is also important to note that, during development of the SOR, many
potential impediments are likely to arise, particularly in scoping minor facilities.
It is essential to avoid all unimportant delaying factors and to allow small
uncertainties to be covered by the estimating methodology and incorporated into
the contingencies element of the overall cost estimate. It is probable that the
project will gain from early release of an approved SOR document rather than
delay to await clarification of minor areas of uncertainty.

VII. OWNER AUTHORITY AND APPROVAL

The roles of the various owner groups in authorizing, approving and decision-
making must be clearly established as early as possible in the life of the project.
Until the project coordination procedure has been developed, these approvals may
have been determined by verbal discussions and agreements. It is good practice
for the project manager to confirm such verbal agreements with an internal
memorandum, copied to all involved parties.

VIII. OWNER PROJECT DISCIPLINE

Sometimes individual owner groups deviate from the agreed project and contract
procedures, change priorities, develop additional scope, delay decision-making,
work directly with the contractors and/or other groups, and then, after the fact,
inform the project manager of these actions. Such behavior can be very damaging
to the effective execution of the project and to the establishment and maintenance
of firm contractual and technical control. Cost increases, schedule slips, and lower
morale due to poor working relationships can rapidly develop. The project man-
ager must therefore work to eliminate or reduce the potential for poor owner
project discipline.

IX. GOVERNMENTAL AND LOCAL AUTHORITY PERMITS

These requirements need to be promptly identified and properly established at

the earliest stage of the project. Good community relationships, as well as conform-
ance to governmental regulations and permit requirements, are essential. The
role of the owner and/or other parties in these activities must be clearly outlined.
It should be noted that project costs may be seriously underestimated unless
full account is taken of the stated health, safety, and environmental requirements
of the local, state, and national governmental authorities. The project manager
must also be aware of the full practical implications for consequent redesign of,
for example, licensor' packages that do not properly follow these requirements.
Allowances should be made for any likely upgrading and tightening of such
requirements by local and governmental authorities.
Managing the Feasibility Study (Preproject Planning) 389

X. COMPANY SERVICE DIVISIONS—WORK INITIATION

The required inputs and relationships with service divisions inside and outside
of an engineering division (ENG) in support of the project must be properly
developed, established, and coordinated. Project work undertaken by an ENG on
behalf of an owner should be initiated by the universal service request (USR)
system, which also provides a means of monitoring and controlling the work.
A project normally commences when ENG receives a USR from an owner,
along with a statement of requirements (SOR), which may be a broad outline at
this stage. These requests are handled by the engineering/development group
whose responsibilities include the preparation of feasibility studies and engineer-
ing proposals to establish preliminary project programs and cost estimates (con-
ceptual technical definition). At this stage of project development an overall
project strategy is prepared together with the consolidation of the SOR, as agreed
by all parties. Approval and funding, via the AFE control system, will then enable
the project front-end engineering design to be implemented. Before full funding,
management may require further front-end engineering design to be developed
to give a clearer technical definition and identification of risks.

XI. STATEMENT OF REQUIREMENTS

A preliminary SOR is prepared following the preproject stage discussions with

ENG and is submitted with the USR. It may be only a broad outline if feasibility
studies are required. On completion of these studies and the engineering propos-
als, ENG will assist the operations group in preparing a more comprehensive
SOR. In subsequent stages, the number of options will have been reduced and
management will have made a decision on a particular option.
The engineering/development group would normally take the lead in pre-
paring the SOR. As a preliminary document from which the project specification
will be developed, the SOR takes a broad overall view of requirements, referring
where appropriate to process and plant specifications. It is important that this
is a full and complete record, as any subsequent amendments or additions could
lead to confusion, delay, and extra costs.
The SOR should include:
• introduction;
scope (marketing requirements to be met, including production flowrates
and product specification; for technical and safety projects, the SOR would
include the justification requirements);
• site selection or location;
outline design parameters and engineering requirements, including associ-
ated facilities, utilities, services, and chemicals applicable;
• technical definition appropriate to a conceptual cost estimate and a forecast
of expenditure to meet the development requirements;
• timescale with any production constraints and access problems (such as
seasonal weather windows);
applicable codes and standards;
level of quality assurance, inspection, and testing;
external approvals certifying and statutory authorities;
390 Chapter 16

commissioning;
safety, environmental and hazard studies; and
project strategy requirements:
- organization,
- communications,
reporting,
- mobilization for engineering design and construction,
- contracts, and
- spares policy.

XII. FEASIBILITY STUDY COSTS

One of the earliest and most critical project decisions revolves around the follow-
ing key questions:
• How much front-end engineering (FEE) do we need, to select the best
technology?
• How much FEE do we need for an acceptable estimate?
• How good an estimate do we need to properly assess the financial risk?
How much should this FEE cost?
Should we contract out this FEE?
There are no simple, or single answers to these questions. The answers very
much depend on a company's technical strength, estimating skill, management
bias and preference to a specific process and, ultimately, on the skill to properly
balance technical viability with economic need. Time consciousness and discipline
are vital as the project program is being formulated. Of equal importance is the
ability of management to authorize full funding from preliminary design project
cost information and market strategy.
From the project viewpoint, there is a direct correlation between the quality
of technical-project information and estimate quality. However, the continuous
funding for further engineering development to improve the estimating and hence
lower the financial risk, has a point of zero or minimal cost return. In general,
industry practice has established two approaches.
Approach 2. Develop a minimum design package and execute the project on a
cost-reimbursable basis. This method assumes that the economic return of
the shorter execution period is worth the risks that are inherent in the
cost-reimbursable arrangement. With lack of adequate front-end engineering
definition, it is difficult to obtain good or acceptable lump-sum bids. Many
companies have reduced the inherent reimbursable risk by developing a
strong company project management capability, to contain this risk. This
minimum design package is usually referred to as a basic design package.
However, the degree of definition can vary widely.
Approach 2. The second approach is to develop a maximum design package and
execute the project on a lump-sum, turnkey, basis. With a better design
package, a much greater identification of risk/cost is possible, and contrac-
tors will generally respond positively, subject to current/future market con-
Managing the Feasibility Study (Preproject Planning) 391

ditions and the size of the project. This maximum design package can be
referred to as front-end engineering design (FEED).
There can be other considerations which can increase the time and/or add
to the cost of both approaches. New technology, with a higher risk of engineering
changes, would favor Approach 1. Management with a top priority of low cost
risk, would favor Approach 2. Inappropriate and/or unnecessary cases would add
to the cost of both approaches. Lack of coordination between operations, mainte-
nance engineering, owner, contractor and management can add substantially to
the costs of both approaches.
Figure 16.2 illustrates the cost of feasibility studies for Approach 1, where
process design is categorized at 20%. Add factors for cost (30-40%) and time (2
months) are shown for Approach 2, where process design is shown as 60%.

XIII. KEY DELIVERABLES

Figure 16.3 (see p. 393) shows a typical arrangement of the major project phases,
overall key deliverables, and an overall schedule for Approach 1. Figure 16.4 (see
pp. 394-395) is a list of detailed key deliverables (31 items) for Approach 1, where
process design is approximately 20%. Figure 16.5 (see pp. 396-397) is a similar
list for Approach 2, where process design is approximately 60% (FEED).
 GO
CO

FEASIBILITY STUDY COSTS - % of Capital AFE or Base Proj. Cost

See Figure 17.4, Key Deliverables, for Work Content with 20% Process Design
For quality Reimbursable Bidding - For LS. Bidding(if required), add costs as shown below.
>
6

4
% OF AFE
•
N
•
>
3
• (
•*•
mm
• i\ "5 • •"
1-

1 2 3 4 5 7 10 20 30 40 50 IOC 3OG 600 1000 1400

160C )
Total installed cost, millions of dollars 1 BOO
2000

• Includes Contractor and Owner services.

• Confidence level at plus/minus 30% with 80% probability, as work depends on no. of
processes, new technology, no. of cases and extent of "project" work(early purch. etc.)
9
For L.S. Bidding, recommend Process Design at 60% and add 30-40% cost & 2 mo. time.

Figure 16.2 Feasibility study costs. o

o
 Managing the Feasibility Study (Preproject Planning) 393

CONCEPTUAL, PLANNING, BASIC DESIGN PHASES

KEY DELIVERABLES
mASCS I
PROJECT
r~
r~
MAJOR COMMISSION

r Project
Execution *
Horkscopo DETAIL
Deflnit
Ion
DESIGN S.
PRXURB1EM
CONSTRUCT
ION
it
START UP fi

r Case Contracting 7

r
Design Selection £ BASIC 6
Company andOptions * Optimization PROJECT DESICN 5

Market Cases OGNdsfrUAL. PLANNING 4

Strategy STUDY
FEASIBILITY 3
DEVELOPMENT STOW 2
PLANKDC j

1. SELECT "BEST" CASE 3. EXECUTION PLAN (Preliminary)

. TECHNICAL
. ECONOMIC
. RISKS 4. PROJECT ORGANIZATION (Execution)
• OTHER

2. PROJECT OBJECTIVES 5. AFE ESTIMATE -20% (Execution)

. CLIENT
. COST
.SCHEDULE 6. DESIGN/BID PACKAGE

SELECT
ENVIRONMENTAL FINALIZE
CONTRACTOR ENVIRONMENTAL IMPACT STUDIES SCHEDULE
6W

FINALIZE AFE
PERIODIC UPGRADING OF COST ESTIMATE COST ESTIMATE

SOIL/MARINE FINALIZE
SITE SELECTION REPORT PLOT PLANS
8N
PROCESS
OPTIMIZATION DESIGN SPECIFICATIONS FINALIZE PHI'S
•••
6W 12W 8W FINALIZE
BID PACKAGE
FIELD TEMPORARY
UTILITY FLOW DIAGRAMS FACILITIES, LAYOUTS] EARLY
12W PURCHASING
PLAN
FOR CRITICAL
(BEACH HEAD STUDY) EQUIPMENT
ENGINEERING
STUDIES PROCESS DESIGN (PIONEER CAMP)
(SKIPPING)
12W
EQUIPMENT LIST

SPECIFICATIONS, DATA SHEETS

12W
32W

Figure 16.3 Key deliverables.

394 Chapter 16

Process Design about 20% Complete

Feasibility-Conceptual Study

GENERAL

1. Environmental impact study Completed and under review by EPA

2. Surveys All soil, topographical, and hydrological surveys

completed

3. Major equipment quotations Received and evaluated

ENGINEERING

4. Basis of design Defined

5. Process description Defined

6. Process design All heat and material balances completed

7. Process control system All heat and material balances completely

defined

8. Process data sheets for equipment Completed for major equipment

9. Process flow diagrams Completed (including control mode)

10. Process P&IDs 25% complete. Line and control valve sizing,
control loops, and instrumentation indicated

11. Utility and offsites facilities Defined

Steam and condensate balance complete
Steam generation and distribution complete
Water resource and treatment 25% complete
Cooling water system 25% complete
Plant and instrument air 25% complete
Effluent control 25% complete
Storage and terminal facilities 25% complete

Figure 16.4 Key deliverables: 20% process design.

Managing the Feasibility Study (Preproject Planning) 395

12. Utilities and offsites P&IDs 20% complete

13. Location and site plan 65% complete

14. Plot plans and elevations 45% complete

15. Grading, paving, and drainage plans Preliminary drawings

16. Structural and foundation design Design sketches; estimated quantities

17. Building requirements Preliminary drawings

18. Equipment list Major equipment complete

19. Mechanical data sheets Completed for major equipment

20. Engineering specifications Completed for major equipment

Job specifications for piping, civil, electrical
Instrumentation 75% complete

21. Engineering guides Appropriate sections included

22. Above ground (A/G) and underground (U/G) Approximately 15% complete
piping layouts

23. Piping takeoff Estimated from P&IDs and layouts

24. Line and valve sizing material and selection 45% complete

25. Instrument schedule (including control Control valves sized

valves)

26. One line electrical diagrams Complete

27. Electrical equipment list Preliminary

28. Electrical takeoff Based on one line diagrams

29. Painting and insulation Quantities factored

30. Fire protection 25% complete

31. Tie-ins Existing facilities surveyed and measured to

verify scope of tie-ins and valving

Figure 16.4 (Continued).

396 Chapter 16

High Quality Design Specification for EPC Lump Sum Bidding

(Equivalent to FEED)
Process Design about 60% Complete

GENERAL

1. Environmental impact study Completed and under review by EPA

2. Surveys All soil, topographical, and hydrological surveys

completed

3. Major equipment quotations Received and evaluated

ENGINEERING

4. Basis of design Defined

5. Process description Defined

6. Process design All heat and material balances completed

7. Process control system All heat and material balances completely

defined

8. Process data sheets for equipment Completed for major equipment

9. Process flow diagrams Completed (including control mode)

10. Process P&IDs 75% complete. Line and control valve sizing,
control loops, and instrumentation indicated

11. Utility and offsites facilities Defined

Steam and condensate balance complete
Steam generation and distribution complete
Water resource and treatment 75% complete
Cooling water system 75% complete
Plant and instrument air 75% complete
Effluent control 75% complete
Storage and terminal facilities 75% complete

Figure 16.5 Key deliverables: 60% process design.

Managing the Feasibility Study (Preproject Planning) 397

12. Utilities and offsites P&IDs 6 0 % complete

13 Location and site plan Complete

14. Plot plans and elevations Complete

15. Grading, paving, and drainage plans Preliminary drawings

16. Structural and foundation design Design sketches; estimated quantities

17. Building requirements Preliminary drawings

18. Equipment list Major equipment complete

19. Mechanical data sheets Completed for major equipment

20. Engineering specifications Completed for major equipment

Job specifications for piping, civil, electrical
Instrumentation 75% complete

21. Engineering guides Appropriate sections included

22. Above ground (A/G) and underground (U/G) Approximately 50% complete
piping layouts

23. Piping takeoff Estimated from P&IDs and layouts

24. Line and valve sizing material and selection 75% complete

25. Instrument schedule (including control Control valves sized

valves)

?6 One linri electrical diagrams Complete

27. Electrical equipment list Preliminary

28. Electrical takeoff Based on one line diagrams

29. Painting and insulation Quantities factored

30. Fire protection 75% complete

31. Tie-ins Existing facilities surveyed and measured to

verify scope of tie-Ins and valving

Figure 16.5 (Continued).

17
Front-End Planning and Project
Organization

I. INTRODUCTION

In today's difficult, global business environment it is vital that the management

of projects results in identifying risks, maximizing cost savings, minimizing
schedule delays and improving economic return. This can only be achieved with
a quality program of front-end planning and project organization (FEPPO).
The most comprehensive study done to date of the construction industry
was carried out by the Construction Industry Institute (CII). They concluded that
the No. 1 category of project management methodology is FEPPO. (Note that CII
refers to it as strategic project organizing). To state the principle very simply:

If we get it right at the front end, we have a chance of success, although

it is not guaranteed. If we do not get it right, then we have no chance
of success.

The following are the major constituents of FEPPO:

• project organization,
establishing objectives,
scope definition control,
• communication and information utilization, and
• constructability planning.
Careful attention to the details of these constituents will provide a good start to
any project.

399
400 Chapter 17

II. PROJECT ORGANIZATION

It is an obvious, but not well understood fact, that it is people in single, medium, or
large-size groups who design and build projects, not companies. Therefore, there
must be a consistent and long-term interest in people needs, their development,
and their training. When there is little interest, or the interest is not genuine,
the long-term success of the company is unlikely. The entire total quality man-
agement (TQM) program is built around the needs and development of people, and
there is unanimous acceptance by industry that TQM is the key to success. In
essence, develop the people and, in turn, the people will develop the profits.

A. Should the Owner Be Its Own Project Manager?

A very fundamental consideration in today's world of company re-engineering is

the question of the owner functioning as its own project manager. Too often
owners arrive at an affirmative answer, through poor analysis. It is a matter of
having experience with the specific project (particularly size), having adequate
in-house or consulting resources (skills and numbers), and having a good project
management program with controlled costs.
This is currently a major consideration with many operating companies as
they downsize their operations. Many companies confuse the issue due to tech-
nical/engineering considerations. Having competent engineering personnel, they
take the project management responsibility but without adequate project experi-
ence or project resources. Engineering design competence does not necessarily
translate into project capability.
This question was a major issue during the early development of the North
Sea (1972-1977) oil resources. The answer, at that time, was an emphatic "No"
from all the large oil companies (as all had limited resources), except for the rare
case where contractors declined to bid due to lack of capacity. This problem of
limited contractor resources and inadequate technical and engineering expertise
was resolved with a project services contract (PSC) and ultimately partnering and
integrated project teams. With a PSC or reimbursable form of contract, owners
can direct engineering.

B. Does the Organization Structure Fit the Contracting Arrangements?

Different skills and different numbers of personnel are directly related to con-
tracting arrangements (i.e., lump-sum, reimbursable, unit price, PSC, agent,
independent contractor, etc.). From an owner's perspective, reimbursable con-
tracts can require three times as many owner personnel as a lump-sum contract
and require personnel with extensive analytical skills. For a lump-sum contract,
a good design package and strong project discipline (with no/little design changes)
are essential. Often there is a mismatch of people resources in relation to contract
arrangements. Having both the wrong contract and the wrong organization/people
is a recipe for disaster. Also, a poor management application of the "lean and
mean" principle will result in a serious lack of resources, leading to poor project
execution and cost overruns/schedule slippage.
Figure 17.1 is a flowchart that outlines the major work activities and
associated decision points.
 Front-End Planning and Project Organization 401

WORK/PROJECT
INITIATION . GOOD SCOPE DEFINITION
Identify
tNNd
DEVELOP! . QUALITY PLANNING
QUALITY!
Conceive Solutions
8.O.R.
and Sort
. EFFECTIVE APPROVAL/DECISION MAKING

Large Project Approach

Cost Estimate
and
Alternate Sort Expectation

DESIGN
CONTROL
Decision to Proceed
\U EPCi TURNKEY CONTRACT ' * •
J
Develop Design j ) 9 General Contractor • *
POINT Basis
• **•»• • • • • ^ • (
\ to Lump 'Sum /••/.• ..;
• SmaP Project | Estimate [ Engiiu
Approach t ~"
Detailed Engrg.
and Speciffcation

Work By Own Forces

Construction
Only
MatVEqp't I Purchase Order
Purchase

. ORGANIZATIONAL COMMITMENT

. PROJECT "DISCIPLINE"? ? ? ? ?

Figure 17.1 Contracting arrangements.

402 Chapter 17

C. Is the Project Manager Qualified?

The answer should address the technical expertise, project experience, business capa-
bility, leadership ability, and people skills of the proposed person. Project, business,
and people expertise should have greater consideration, especially for larger projects.
On smaller projects and feasibility studies, technical skills are more important.

D. Does the Owner Project Manager Report to the Client or

Projects/Engineering?

In contractor groups this is not normally a problem. In owner organizations it is

often a problem as the owner project manager normally reports to both groups.
The author's recommendation is to report to the internal company client so as
to follow the financial responsibility and to projects/engineering for direction on
technical methods.

E. Should the Project Task Force Approach Be Utilized?

Significant experience has now shown that the project task force (PTF) is more
efficient for larger projects. The close working relationships allow more efficient
communication channels and a more efficient decision making process. The chal-
lenge of welding together many individuals from many parts of the company is
a substantial task. The organization structure should follow the current state-of
the-art, which has added the new function of a business manager.
F. Business Management Receiving the Correct Emphasis

On economically based projects, the emphasis should be on business considerations.

There has to be a correct balance of technical versus business (i.e., estimating,
cost control, scheduling, purchasing, contract preparation, contact/construction
administration), with emphasis on business considerations.

G. Efficiency and Effectiveness of Project Team

There is often the conflict of quality versus quantity. On large projects it is easy
to make the mistake of over-substitution of numbers of people to satisfy lack of
skill. It is a question of degree as some substitution is commonplace. In most
cases, lack of good contracting personnel is a major problem.
Personnel planning (to project team) needs to be early, resulting in effective
scheduling of all required personnel. Careful consideration should be given to the
timing of all key managers and supervisors.

H. Project Organization Structure—Owner Team (Reimbursable

Contract)

On a reimbursable project, the owner should have a directing position in order

to contain the risk of a contractor taking advantage of the reimbursables and
manipulating day-to-day execution to enhance profitability. This risk has been
well documented by owners and its practice is a key technique of large international
Front-End Planning and Project Organization 403

contractors. The balancing force to contain this risk is the quality and skill of
the owner's project team, both in the precontract activities and the postcontract
work execution program. An equal partner relationship (EPR) is an essential
requirement and should be built in to the agreement with the appropriate con-
tract clause.
These precontract activities should be undertaken by the project team; they
are to ensure that contractor provides competent personnel. It is a contractor
practice to train new/inexperienced personnel on their client's reimbursable pro-
jects since the major cost risk is to the client.

I. Precontract Activities for Contractor Evaluation

• Evaluate the quality of contractor's program, using individual criteria for

technical, project management, commercial/pricing, project control, contrac-
tual, and construction.
• If the project is of a substantial size, interview key personnel (previously
nominated).
• Ensure that correct contracting arrangement/conditions are in contractor's
proposal, especially the EPR clause. Assess the required liability of agent
or independent contractor.
Evaluate contractor proposal program/execution plan and key interfaces of
local, corporate, and governmental entities.

J. Project Organization Charts

These charts should be dynamic, up-to-date documents, used to identify owner

and contractor positions. During execution of the work they will constitute the
current and future personnel plan, as generally agreed in precontract meetings.
These charts need to be properly recognized and the organization clearly under-
stood by all project team members. The use of formal job descriptions and duties
is recommended.

K. Project Manager Authority

The individual must have full authority to make both design and cost decisions,
with appropriate limits of authority and management reporting requirements.
On reimbursable projects, the authority of the contractor project manager must
be adequate so as to allow efficient day-to-day operations.

L. Project Control Function Reports Directly to Project or

Business Manager

Many hold the concept that cost control should be an audit function of the project
and, therefore, report to higher/senior management. The author does not support
that concept as it can lead to an adversarial relationship and dilute the trust
and cooperation that is absolutely essential in the cost effort in the project. There
are always independent, periodic cost reviews by senior home office personnel
that should be more than adequate for a management audit need.
404 Chapter 17

III. ESTABLISHING OBJECTIVES

In many cases, the process of developing objectives can also assist in building
team commitment and understanding. Objectives will always be a compromise
among quality, cost, and schedule and are used as a guide to make decisions.
These major objectives then guide development of more detailed goals, procedures,
technical criteria, cost targets, and individual milestones. Ideally, a common set
of objectives should guide owner, engineer, and constructor. These objectives
provide the work direction to all parties and, as such, have to be compatible and
acceptable. The key to successful acceptance by all parties is a set of well-defined
objectives.

A. Client Satisfaction

Criteria and a measurement program acceptable to the client should be developed

to produce a periodic and timely report. Client satisfaction should be the single
most important objective; reports, showing poor performance against this objec-
tive, should receive top management attention and immediate resolution.

B. Scope Objective

The objective is that the technical and project scope, as identified in the approved
project budget appropriation, will be achieved. A well-written, but brief, scope
definition is developed for issue to all.

C. Cost and Schedule

Overall and intermediate milestone objectives should be developed. A risk anal-

ysis program should identify the ranges of risk for both cost and schedule.
Chapter 11, "Range Estimating," describes an effective way of assessing risk. The
responsibility and management of contingency should be clear and precise. It is
the author's judgment that project contingency should be the project manager's
responsibility and not be treated as a management reserve, which it is not.

D. Quality

Clear and unambiguous criteria should be developed and be fully acceptable to

all project parties. The criteria need to be measurable so that a status/progress
report can be issued on a regular basis. Quality of project operations, as well as
quality of design and construction, needs to be covered.

E. Other

Training, technology transfer, and other necessary considerations must be fully

defined.
Front-End Planning and Project Organization 405

F. Prioritizing, Documenting and Communicating the Project

Objectives to the Project Team

If project objectives are not properly organized and constantly maintained, then
acceptance leading to commitment will be lacking. Establishing clear priorities,
with each objective having its relative priority, will allow the multiple groups to
work in harmony with each other. Thereafter, a constant effort (part of team
building) must be made to keep the project objectives viable.

G. Effective Project Team Building

Assembling a group of individuals, especially on large projects with large com-

panies, does not make a team. Personnel can come from different locations
(worldwide) and different cultures. Time is needed for individuals to recognize
and control their individualities, as appropriate, and learn to work together.
Individuals usually accept project assignments hopefully, but with little or no
knowledge of the individuals with whom they will be working or the work itself.
It is, therefore, essential that management and project leaders (in all groups)
develop a team building program and maintain it throughout the life of the
project. Working togetherness, project commitment, cost consciousness, personnel
satisfaction, etc., are the deliverables. The cost for this activity should be a
recognized budget item.

H. Effective Community Relations—Local and/or Overseas

There is an ever-increasing opposition from local communities to process projects,

due in part to the hazardous nature of many of these projects. An effective and
positive public relations effort, in conjunction with direct financial investment in
local matters, is necessary and essential.

IV. SCOPE DEFINITION CONTROL

This is a matter of project discipline and design control to prevent or identify

scope changes that are all too common on fast track projects. A CII study reports:
Poor scope definition and loss of control of the project scope rank as the most
frequent contributing factors to cost overrun.

A. Effective Interface with Operations and Maintenance for

Scope Approval

Achieving proper design input from all project parties is a formidable task. This
work is usually the direct responsibility of the project engineering manager,
strongly supported by the project manager. If there is no project team, then it
is the responsibility of the project manager.
All parties (and especially the design decision makers) must reach consensus
and full understanding, as well as approval, of the design basis. The design basis
must be shared openly with all participating parties. When the design basis is
sensitive or proprietary, security procedures must be established. In addition to
406 Chapter 17

design, the project execution plan and financial program must be part of the
approval process.

B. Defining Scope Before the Start of Detailed Engineering

The purpose of the feasibility study is to develop a well-defined scope (see Chapter
16, "Managing the Feasibility Study," for greater detail). However, the quality
and extent of the early design and project work is a matter of management
decision and can vary widely. A poor design package at the start of detailed
engineering will result in significant change, rework, and substantial cost in-
crease.
The major deliverable of the feasibility study is the basic design package—
statement of requirements (SOR). It should consist of well-written documents
that properly define the technical requirements and have sufficient depth to
provide clear direction for all major design issues. The package should clearly
communicate the intent to the designers and set appropriate boundaries on the
project design for detailed decision making.
The scope document should cover:
• project description:
project justification, project objectives;
- economic justification, if pertinent; and
- facilities description;
• design basis and specifications:
- process definition:
description of process,
process flow diagrams,
tabular heat and material balance,
process conditions/special conditions,
materials of construction, and
startup and shutdown requirements;
- mechanical definition:
P&ID preliminary sizing and tie-ins,
preliminary plot plan,
preliminary general arrangement, and
preliminary equipment list;
- instrument definition:
defining primary control points and purpose, and
defining instrument set points/low-level alarms, etc.;
- safety system:
hazards analysis (hazops),
list of safety devices and their design criteria, and
interlock logic description and diagram;
Front-End Planning and Project Organization 407

• project location (elements):

engineering and construction productivity factors (versus database),
- logistics reviews and delivery to/at site,
- infrastructure requirements at site, and
- weather concerns and impacts;
• project conditions:
- offshore installations/suppliers,
- prefabrication and modules,
- operational restraints/conditions, and
- site and access problems; and
• estimate (definition):
- work quantities and takeoffs,
- engineering and labor/staff hours,
- contingency and budget limitations, and
- risk analysis and identification.

C. Timely Decisions on Scope

Timely decisions on scope can only be achieved if there is a cohesive, dynamic

trending program. Effective communication channels and working togetherness
are direct contributors. Management approval process is also a factor.

D. Dynamic Design Change Control—Formal Program

Project trending and reporting systems, such as the design change order log, are
essential. The weekly trend meeting and regular progress meetings provide much
of the early identification of change. An effective design control program is
centered around an engineering milestone, called the design control point (DCP).
If the feasibility study is extensive the DCP could be operational at the end of
the study and, thereafter, all changes would be formally documented. If the
feasibility work was minimal, then the DCP would be established at the early
part of the project engineering phase. The DCP is reached when the project's
original scope is properly defined, agreed and approved by all parties. As this
approval is reached, the project manager will inform all appropriate parties that
the DCP has now been implemented. On very large projects there can be multiple
DCPs. It is emphasized that the DCP is not a design freeze as viable design
changes should always be an option.
Figure 17.2 illustrates the format of a design change order.

V. COMMUNICATIONS—INFORMATION UTILIZATION

The requirement is to turn data into useful and useable information. Current
computers and software systems make the gathering and collation of data a
relatively simple task. Thus, correctly establishing the available input data re-
sults in obtaining the required output and information. With the establishment
408 Chapter 17

SCOPE CONTROL - DESIGN CHANGES

(Post Design Control Point)

Facility Engineering & Construction DCO No.

Design Change Order

Project.. Y N
Within Scope • D
No./AFE_ Value Added D •
Funding Revision Required • •
Location^

Originated by__ Date

To: Endorsement Comments Signatures/Date

Discipline Engr. •
Constr. Engr.
•
Operations •
Other D
Brief Description of Change:_

Estimated Cost and Schedule Changes:

Cost ($) Project Forecast including this Change ($)_

Funding AFE Upper Limit ($M)

Schedule Impact (Weeks)

Reason/Justification for Change:

Originator Project Control

Project Leader Approved by

Figure 17.2 Scope control—design changes.

Front-End Planning and Project Organization 409

of effective communication channels, the information is then directed to the

correct recipient.

A. Execution Plan—A Formal Written Program

The execution plan should be a dynamic document, being revised and updated
as conditions/scope change, with proper/timely inputs from all parties. Commit-
ment to the plan must then be achieved with all project parties and, especially,
management.
These are the three major categories of a good execution plan:
What is the scope of work? (discussed earlier),
• How is the work to be executed? and
• When is the work to be carried out?
1. How is the Work to be Executed?
• statement of project objectives;
• proposed division of work:
- in-house,
- work contracted out, and
- development of work packages;
• contract strategy:
required scopes and degree of definition,
- forms of contract, and
- risk allocation versus cost of liability;
• detailed engineering;
• procurement program:
- competitive,
domestic and international,
single source, and
- plant compatibility and spares requirements;
• construction:
- preplanning program (critical highlights),
- prefabrication/modules, and
precommissioning and testing program;
• commissioning and startup;
• quality assurance—control and inspection;
• project organization (described earlier); and
• project coordination procedure (as follows).

2. When is the Work to be Carried Out?

schedule and probability:
economic versus acceleration, and
critical path and float analysis;
410 Chapter 17

• resource analysis:
engineering/construction availability, and
- skills and trade union climate;
marketing interface (limitations or constraints);
• cash flow limitations;
• access problems (weather windows, traffic limitations); and
• shutdown (retrofit program).

B. Other Requirements

• All scope-cost matters are routed through the project manager to ensure
project consciousness and dynamic trending.
A team cost culture is developed on the project and is essential for inform-
ation utilization.
• An internal project charter program is a method for motivating working
togetherness. It is a one- or two-page document, signed by all parties, lists
all major parties and their responsibility/accountability as well as the project
objectives.
• All project parties need to maintain open communication lines at all times
to foster effective organization, project commitment, working togetherness,
and leadership.
A project coordination procedure (PCP) clearly defines communication chan-
nels to all. It includes:
- limits of authority,
- responsibilities of parties,
- correspondence procedures,
- filing and reporting codes,
- document and action schedule (for all drawings, documents, and re-
ports),
- public relations procedures,
- security and safety procedures, and
- project close-out report.
Weekly trend and progress meetings are a must for the project manager.
They are a vital communications tool and are detailed in Chapter 9.
• The project management information system needs effective levels of detail.
Information must be accurate, timely, and useful. Because unnecessary de-
tail can easily be generated with today's computer, a vigorous screening
effort is called for.

VI. CONSTRUCTABILITY PLANNING

Constructability and construction preplanning are often used interchangeably to

describe the function of each category. Constructability is largely concerned with
technology, methods of installation, and the associated cost. Preplanning is largely
to do with scheduling of resources, organization, site access, and infrastructure.
Front-End Planning and Project Organization 411

The purpose of constructability is to reduce costs by considering alternative

design and/or installation methods. Typical examples are steel or precast concrete
for a building and, for process plants, greater prefabrication and preassembly,
even modularization.

A. Early Economic Path of Construction Program

This is an evaluation of the physical sequence of construction work to produce

the lowest cost. Many factors are involved, such as:
physical site conditions and weather;
restraints of drawings, material delivery, and schedule critical path sequences;
• economics of crew sizes and supporting resources; and
• plant operations, safety regulations, etc.
With such early planning, design or material alternatives can be considered at
little or no additional cost.

B. Formal Constructability Programs

Formal constructability programs are an integral part of project execution. They

ensure that the early initiative, as outlined above, is maintained to project
completion.

C. Relationship of Front-End Planning and Construction Input

It is essential that capable and experienced construction personnel are assigned

to the project at this early stage and that their constructability and preplanning
evaluations are a proper part of project development. Sometimes, owners are not
prepared to pay for this service and do not appreciate the cost benefit of this
early work.

D. Construction-Driven Scheduling as the Key to the CPM

Program

Construction-driven scheduling is also known as backwards scheduling, meaning

that the project CPM schedule is structured around the construction schedule,
assuming that the construction schedule has been developed on a best economic
basis. Engineering and material deliveries can then be matched to the economic
construction program, at no cost penalty.

VII. SUMMATION

It is again emphasized that FEPPO, as reported by CII, is the number one activity
on any project, and when this work is properly executed, the dollar payout is
immediate and substantial.
If a project is started with a good scope definition and good organization
and all parties are committed to working togetherness, then project success is a
reality.
412 Chapter 17

Current Average/Percent Utilization

Areas for Improvement
Owner A/E Contractor
Constructability Planning 56 52
Contract Incentives 37 33
Using Design Evaluations 60 60
Implementing QA/QC Systems 76 66 66
Quality Effectiveness Analysis 62 51 54
Use of Work Force Motivation Programs 40 52
Site Training 51 43
Substance Abuse Programs 55 27
Materials Management Systems (Planning and Utilization) 63 58 62

Constructability planning is utilized at only a moderate rate on projects.

This includes the use of both formal constructability programs and incor-
porating construction input early in project planning and design. Case
studies have clearly shown large payoffs from practicing constructability
planning, yet early design and construction interaction remains low.

Prepared by
The Construction Industry Institute A Special CM Publication
Strategic Planning Committee April 1990

Figure 17.3 Potential areas for increased utilization.

The Construction Industry Institute also reports that this program, FEPPO,
is the least used of major project management methods; current research shows
its utilization at an average rate 54%. Figure 17.3 is a chart of the CII study.
18
Managing Engineering—Project Control
Keys/Interfaces

I. INTRODUCTION

Effective management of engineering must be equally concerned with:

• proper technology development, and
• efficient and cost-effective management of design program.
Obviously, the design has to be of sufficient quality so that the plant will start
up and operate at the required performance levels. However, ultra-conservative
and/or overdesign practices are common and can result in added costs. There has
to be a balance between design quality and the cost of that quality, where project
economic requirements have equal consideration. These issues are covered in
detail in Chapter 16, "Managing The Feasibility Study," and Chapter 17, "Front-
End Planning and Project Organization."
Efficiently managing the design program requires the achieving or under-
running of cost and schedule budgets and the constant trending of the work to
identify change and project status, leading to accurate and timely forecasts.
The project manager/engineer should take the lead in developing a quality
statement of requirements (SOR) and, thereafter, motivate the design engineering
group to an economic design program. Technical responsibility is divided between
the design groups (discipline chief engineers) and the project manager. Ultimately,
technical integrity cannot be a shared arrangement; final responsibility will
generally reside with the chief engineers.
The project manager/engineer must ensure that constructability, plant op-
erability, and maintenance considerations are properly interfaced into the early
stages of design and are developed on an economic basis.

413
414 Chapter 18

II. EARLY ENGINEERING PHASES

Engineering design generally falls into the following successive phases.

A. Conceptual/Feasibility Definition

As discussed in Chapter 16, studies are undertaken to establish the potential

technical and economic viability of the various options to a plant addition or
production problem. Each option is then evaluated for cost, schedule, technical
risk, the required resources, and the availability of these resources.
After eliminating the unattractive options, the next objective is to produce a
detailed evaluation of the attractive options in order to choose the best case. During
this phase, it is normal for the nucleus of the future project team to emerge.

B. Front-End Engineering Design

With complex projects, the best case requires a great deal of design effort in
order to properly ascertain the time and cost to complete the project and to
develop clearer technical definition. This front-end engineering design (FEED)
phase can equal 10% of the total design effort. The work is led by an owner
project team and often involves the assistance of an A/E or engineering contractor.
In addition to efficiently determining the best case, another major objective
is to provide a good design basis that will enable lump-sum bids to be sought
for the final engineering phase. However, a lump-sum approach requires good
project discipline in limiting design changes as the work proceeds. If there is a
significant probability of design changes, then a reimbursable approach is recom-
mended.

III. PROPER TECHNOLOGY DEVELOPMENT

The major development of design occurs during the early engineering phases with
selection of the best case, associated process-utilities technical base, and subse-
quent optimization of the selected technologies. Thereafter, the technology devel-
opment takes the technical base through detailed engineering, where economic
engineering becomes the main issue.
A management control, measuring, and reporting system must be developed to
show that the correct balance is being achieved among the three major components:
technology requirements,
economic considerations, and
• operational efficiency (design works).
A proper control and reporting system covers the following key considerations.

A. Design Document Accuracy and Degree of Changes

Both design document accuracy and degree of changes are measured by the cost
reporting program. Cost codes should be established for tracking design rework
Managing Engineering—Project Control Keys/Interfaces 415

due to design error, normally about 5% of total design engineering hours, and
for field design rework due to construction error, again about 5% of total design
engineering hours. It is common for this rework to be hidden or under-reported.
Accurate records are essential for proper tracking. Design and scope changes are
easier to track as design contractors doing the work will ensure that these are
fully recorded.

B. Usability of Design Documents

Usability of design documents is a requirement of the reporting of field supervi-

sion, for example:
• Did field supervision find the issued-for-construction (IFC) drawings:
Excellent Good Adequate Poor?
• Were there significant discipline design errors? If so, give details.

C. Constructability Of Design Consistently Carried Out

Carrying out the constructability of design in a consistent manner is vital, as

significant cost efficiencies can be achieved from this work. Refer to Chapter 17,
"Front-End Planning," and to Chapter 20, "Managing Construction," for detailed
information.

IV. DETAILED ENGINEERING/PROCUREMENT

The final part of engineering design is the development of the conceptual design,
resulting from FEED, into full working drawings. This then allows procurement
activities and construction planning to commence. This detailed design work may
be done in-house by the owner, by an A/E, or an engineering contractor.
Detailed design packages are then developed to match construction work
packages which can then be contracted on a lump-sum basis, insofar as is
possible. This can only be achieved with quality construction preplanning.

V. ENGINEERING DESIGN/PROJECT MANAGEMENT INTERFACE

As the design engineering group has the primary responsibility for design integ-
rity, the role of the project manager is mostly that of business management and
project direction, as follows:
• working with operations/maintenance to develop a quality SOR,
• ensuring an economic design (no "gold plating"),
managing/limiting the impact of operations/maintenance design changes,
• motivating the engineering group to work to the schedule,
ensuring that the design/estimating interface is effective,
• ensuring that the design/procurement interface is effective,
• ensuring that the design/construction interface is effective, and
• ensuring that the design/contracting interface is effective.
416 Chapter 18

VI. EFFICIENT AND COST-EFFECTIVE MANAGEMENT OF DESIGN

PROGRAM

The realization of this objective is found in the following benchmark evaluations.

A. Cost of Design, Actual Versus Estimated

From the cost control system, a constant assessment is made of actuals versus
budget for:
• engineering productivity, through an earned value system;
• hourly cost;
• expense and other support costs;
design cost as percent of total cost (typically 10%);
• total engineering hours per drawing (typically 120-150);
hours per P&ID (typically 400-500 for high process severity); and
• hours per piping isometric (typically 4-5 for CAD systems).
The status of these criteria will, in turn, demonstrate the status of this bench-
mark. Chapter 9, "Cost and Schedule Trend Analysis," fully illustrates techniques
that will determine these assessments.

B. Economy of Design—Overdesign, "Gold Plating" and

Pre-lnvestment

Full application of this category is in the exercise of value engineering and the
application of a quality assurance program. The ongoing design needs to be
constantly evaluated for design characteristics that are not part of the originally
approved design basis and/or are preference items.

C. Performance Against Original Schedule

As with the cost benchmark, the engineering schedule must also be constantly
assessed for actual progress against plan. Overall progress should always be
measured and on larger projects, individual disciplines should also be measured.
The following are key milestones that should be assessed:
Were IFC drawings issued to schedule?
If not, what was the slippage (by discipline)?
• Did design packages meet purchase order dates?
If not, what was the slippage (by discipline)?
Did design slippage cause material delivery delays?
If so, give details.
• Did design delay cause delay in letting contracts?
If so, give details.

D. Ease of Start-Up

This benchmark is assessed by comparing the actual cost and schedule of com-
missioning against the estimated or budgeted numbers. On larger projects there
Managing Engineering—Project Control Keys/Interfaces 417

is an individual group or crew for commissioning and start-up, and the effective-
ness and interaction of this group with the regular construction staff can also be
part of the assessment of this benchmark.
The following are key milestones that should be assessed:
• Did start-up program meet schedule?
If not, give details.
Did start-up costs meet budget?
If not, give details.
Was the assigned start-up team adequate (numbers and skills of personnel)?
If not, give details.

VII. CORRECT BALANCE BETWEEN TECHNICAL AND

PROCUREMENT CONSIDERATIONS

The cost of equipment and material can be more than 50% of the total project
cost. As such, it is vital that full and proper business considerations be in place
in the selection of all equipment and materials. It is very common for engineers
to select on a technical preference basis or for operations/maintenance personnel
to ignore capital costs and select on compatibility (existing equipment), spares
availability, maintainability and operating characteristics. Both technical and
business considerations are equally important, and their relative priorities should
have been properly identified as part of the value engineering-quality assurance
program.

VIII. ENGINEERING-PROCUREMENT CONTRACTOR/PROJECT

MANAGEMENT INTERFACE

When using an engineering contractor, it is essential that the specified technical,

maintenance, and operational design requirements are being met. This can be
achieved by checking and approving key drawings and documentation produced
by the contractor. It is also necessary to provide the contractor with backup
guidance on the standards being used where such explanation will enable the
design intent to be more clearly understood.
On lump-sum contracts, the project team must ensure that such explanation/
guidance does not lead to scope changes and/or contractor claims for delays, due
to owner interference or negligence.

IX. EFFECTIVE CONTRACTOR ENGINEERING-PROCUREMENT

PERFORMANCE

An effective and/or acceptable contractor engineering/procurement performance

results in the design (drawings/specifications) and purchased equipment fully
meeting the project specification. In addition, the work is on time and to the
approved hours and/or financial budget.
418 Chapter 18

A. Lump-Sum Basis

As the contractor has most of the financial risk, the major activities of the project
team (subject to contract conditions) are:

approval of specified drawings (design quality),

• technical review of equipment/material bid packages,
• monitoring detailed contractor schedule,
• monitoring engineering progress/staffing levels,
monitoring equipment delivery time/purchase order placement,
• ensuring design is structured to planned construction packages,
• change order review and approval of all scope changes, and
• progress payment verification.

With lump-sum contracts, the major emphasis of the project team is on

quality and schedule, plus the tracking of any scope changes. It is assumed that
the contractor's design basis/specification was fully reviewed and approved during
the proposal evaluation program.

B. Reimbursable Basis

As the owner has the major financial risk, the contractor monitoring effort is
much more detailed, and the contractor requires the following major procedures:
• detailed cost control/reporting system;
engineering change log (weekly) maintained by design groups to show design
changes from the approved for expenditure (AFE) design basis and then
evaluated by the cost group for possible impact on project cost/schedule;
• detailed planning and scheduling, complete with the progress/completion
curves, staffing histograms and productivity profiles;
earned value progress/productivity measurement system (larger projects);
• hours tracking program/curves (small projects);
• purchasing/procurement plan;
quality equipment bid summary procedure; and
• trending system/weekly trend report.

The key to an effective contractor monitoring effort is to have the contractor

develop a full and effective system, subject to the contract arrangement, so that
the owner project team has a review, analysis, and approval role.
Major attention should be given to:

• progress measurement,
productivity analysis, and
• trending and forecasting.

On reimbursable projects, the daily interaction of the design group with the
contractor personnel should achieve the desired quality of design/procurement.
Managing Engineering—Project Control Keys/Interfaces 419

X. TYPICAL DESIGN PACKAGE FOR CONSTRUCTION WORK

PACKAGES

When required, engineering/procurement contractors structure their work into

design packages to match a predetermined breakdown of construction work pack-
ages. In some cases, the engineer assists in determining the packaging of the
construction work. The quality of these design packages should be sufficient for
lump-sum construction contracts, subject to schedule considerations.
A typical design package includes:
• index;
• summary;
• general work scope;
• design/operating conditions;
• design regulations/standards/codes;
• construction standards (safety procedures, etc.); and
• detailed work scope, by discipline, for example:
list of all drawings;
- bills of material (if unit price subcontracting);
equipment list (major or tagged items);
paint, insulation, corrosion specifications;
weight penalty, for offshore work;
- material information (free issue);
- inspection and testing;
- documentation/certification;
- manuals/spare parts lists; and
drawings (shot-down size).

XL FULL SANCTION AND CLASS II COST ESTIMATE

With most companies, projects are executed with a phased approach, and the
funding of the execution phase of a project is often referred to as full funding.
The early development stage of a project is usually funded by the operations/
production group from its own budget or from company expense.
Full sanction requires a specified quality of cost estimate so that manage-
ment can evaluate the financial risks when approving/authorizing the funds.
These funding or appropriation estimates generally range from 10-20%. The
manufacturing industries normally require a 10% quality estimate for full sanc-
tion, whereas the petrochemical industry normally requires a 20% estimate. This
lower quality estimate is accepted because of the larger size of projects, plus the
need to execute these projects with the fast-track approach. The fast-track method
works from a lower degree of engineering definition and, therefore, only allows
a lower quality of cost estimate.
A quality feasibility study and FEED will allow a Class II (+20%) or better
cost estimate to be completed for subsequent application for sanction (manage-
ment approval) of full funds. To obtain a Class I (+10%) cost estimate, the
engineering and procurement has to be greater than 80% complete. Work carried
out in producing the feasibility study and FEED are funded by the client division
ESTIMATING QUALITY vs STATUS OF E.P.C. - PHASE 11. PROJECT
NOTES : TYPICAL ESTIMATING CATEGORIES
1. Proratlon (40/25%)
1. ACTUAL PROGRESS PLOTTED AGAINST COMPANY HISTORICAL EXPERIENCE . 2. Cost Capacity Curves (30/20%)
2. EARLY CONSTRUCTION START REFLECTS A PROJECT WITH EXTENSIVE SITE PREPARATION . 3. Equipment Ratio (20/15%)
3. CONCEPTUAL DESIGN HAS BEEN COMPLETED DURING A PHASE 1 OPERATION . 4. Quantitv/Unit Cost (10/5%)

I g:;||| /_ CONSTRUCTION!

ADVANCE COMITMENTS
OF CRITICAL MATERIAL I
CAN BE MADE IN I

PROJECT DURATION - %
CONCEPTUAL PHASE EXECUTION PHASE O
PHASE 1 PHASE 11 Q)
-a
Figure 18.1 Estimating quality versus status of EPC.
oo
Managing Engineering—Project Control Keys/Interfaces 421

from the sanction of a Class III (+30%) or better cost estimate. Figure 18.1
illustrates the historical quality of the cost estimate in relation to completion of
engineering and procurement.

XII. TECHNICAL APPROVALS AND HANDLING PROCEDURES

All required technical approvals must be prompt and/or meet the required con-
tractual timing if the work is contracted. Likewise, the associated handling
procedures must be effective to prevent delays. This is to ensure that the con-
tractor cannot accuse the owner of compensable delays and/or negligence, as these
are common claims.
19
Managing Procurement—Project Control
Keys/Interfaces

I. INTRODUCTION

Effective procurement means getting the right material to the right place at the
right time at the right price. Procurement comprises the three functions of pur-
chasing, expediting, and inspection. The work is carried out in accordance with
the contract and procurement strategies developed by the project manager during
the preproject stage and in compliance with corporate purchasing policies. Figure
19.1 illustrates these essentials.

II. POLICY—VALUE AND PRICE NEGOTIATING

The best procurement policy within the private sector obtains the best value for
the lowest cost. In addition to price and delivery, best value takes into account
other commercial and services considerations, as follows:
• appropriate quality of materials and equipment as per the technical speci-
fications (i.e., reduce/eliminate extra quality);
• terms of payment, conditions of purchase, performance guarantees, quantity
discounts, import duties and taxes, etc.;
• availability and cost of vendor services, startup support and spares;
• quantity sensitivity analysis of unit price tenders to evaluate total tender
price;
• standardization/compatibility with existing plant and equipment; and
• potential for future price increases due to changing specifications.
There are two distinct policies in relation to price negotiations. The first is
a sealed bid/lowest competitive price, which precludes price negotiating if there
are not technical/contract condition changes. Price negotiations, then, are only

423
424 Chapter 19

1. Right Material, to
2. Right Place, at
3. Right Time, and at
4. Right Price
5. Procurement Program
• Purchasing
• Inspection
• Expediting
6. Pre-Project Strategy & Execution Plan
7. Compliance with Corporate Policies

Name some extraordinary efforts to

achieve "right time."
• ELIMINATE LATE BIDS • ADDITIONAL EXPEDITING
« SINGLE SOURCE • "RESIDENT* ENGINEERS
• NEGOTIATED PURCHASE • AIR FREIGHT
• SELECT FOR BEST SCHEDULE, REGARDLESS OF PRICE
» OFFER PREMIUMS-INCENTIVES FOR SCHEDULE

Figure 19.1 Essentials for managing procurement.

allowed if there are technical or contract condition changes. However, companies

having this policy sometimes have a double standard as price negotiations are
undertaken with attractive bids which do not meet the conditions and with all
scope changes, extras, and claims. This can cause problems, as the company
personnel are not skilled in price negotiations.
The second is an open policy, which allows price negotiations at any time,
even if there are no technical/contract condition changes. This approach is some-
times referred to as price-alone negotiating and must be carried out on an ethical
basis. For example, this would require that quoted prices are never disclosed to
other parties. It is also important that price-alone negotiating be carried out with
good business practice and judgment. To negotiate a price at or below the other
party's costs is rarely good business and often results in poor project execution,
bad quality, aggressive claimsmanship, and default of contract.
Normally, companies use competitive bidding for the placing of orders and
contracts. Major bids are usually invited in two parts, commercial and technical.
As appropriate, the responsibility for maintaining the confidentiality of such bid
documents rests with either the contracts engineer or procurement coordinator.
They will ensure that access to the documents is limited to project management,
those undertaking bid analysis, and those executing the work.
Managing Procurement—Project Control Keys/Interfaces 425

III. PROCUREMENT RESPONSIBILITY

For intermediate and large projects, it is normal to establish a project procurement

coordinator (PPC) within the project team. When working with engineering con-
tractors, the responsibility of the owner's PPC is to ensure that the contractor's
procurement effort is effective and that the owner's interests and project objec-
tives are being realized. This provides a full service to the project manager and
project team to ensure the timely, economic, and coordinated supply of all plant,
equipment, and materials to the job site. If the owner is directly handling the
procurement function, then the PPC will be working directly with corporate
purchasing to ensure that the project objectives are being realized.
The PPC's scope of responsibility is to manage, direct, monitor, and overview
all procurement and materials control activities.
For all projects it is important that the PPC or the procurement function
be involved at the preproject stage for formulating the contract and procurement
strategies. This ensures that the procurement systems and staffing are appropri-
ate. In addition, the PPC/procurement function should be involved in prequalifica-
tion of design and procurement contractors.
One early and important procurement/project activity is the development of
a purchasing plan for all critical material.

IV. MATERIALS PROCUREMENT AND CONTROL ESSENTIALS

The following activities, illustrated by Figure 19.2, are essential for a quality procure-
ment program. Such activities are necessary for effective execution and control:
developing a purchasing plan for critical material;
establishing a current and approved bidders list;
• using sealed bids and/or price-alone negotiating;
• preparing quality bid summaries;
• issuing material requisition and purchase orders in a timely and proper
manner;
• using effective vendor drawing control;
expediting items adequately, including material status reports;
maintaining close liaison with planning engineer on delivery times and
MSRs;
• keeping to an inspection schedule;
keeping an efficient material receiving and inspection system;
• having adequate material documentation/control system;
• forecasting final costs of major purchase orders/contracts;
• maintaining close liaison with cost engineer on prices and bid summaries; and
evaluating carefully spare parts for plant startup.
The most difficult, and in many respects, the most important of the above
activities is forecasting the final cost of major purchases. This activity requires
considerable skill in developing accurate forecasts and should be a regular part
of the monthly project cost forecast. Figure 19.3 shows and emphasizes these key
elements.
426 Chapter 19

Essentials
1. Critical Material Purchasing Plan
2. Current Approved Bidders List
3. Formalized Price Negotiating Policy
• Sealed bid and/or price alone
4. Quality Bid Summaries
5. Effective MR & PO Procedures/Timing Issue
6. Good Vendor Drawing Control
7. Coordinated Expediting & MSR's
8. Close Liaison with PlannerOn Delivery Times
9. Inspection Schedule
10. Efficient Material Receiving
& Inspection System
11. Adequate Documentation/Control System
12. Periodic Forecasting of Costs of Major PO's
13. Close Liaison With Cost Engineer on Prices
14. Careful Evaluation of Spare Parts

Figure 19.2 Essentials for effective procurement execution and control.

1. Most Difficult of Purchasing Control Effort

2. Most Important of All Activities
3. Requires Considerable Analytical Skill
4. Requires Close Coordination
With Engineering
5. Should Be Regular Monthly Cost Activity
• Part of trending and cost report

See Case History

Figure 19.3 Forecasting final cost of major purchases.

Managing Procurement—Project Control Keys/Interfaces 427

A. Contractor as Owner Purchasing Agent

With a reimbursable-type design and procurement contract, the contractor is

responsible for procurement of the majority of the project materials. If the con-
tractor acts on behalf of the owner, then the contractor is acting as the owner's
agent. This relationship carries no liability to the contractor, other than normal
responsibility for reasonable performance and professional competence. To protect
the interests of the owner, the owner's PPC has full authority to review and
approve all procurement activities carried out by the contractor. A further feature
of the agent relationship is that the owner is also responsible for and liable for
the contractor's actions. This is the form of contractual liability preferred by A/Es.
It should be noted that A/Es and contractors can function as an independent
contractor on reimbursable forms of contract. The cost, of course, will be signif-
icantly different for these two forms of contractual liability.

B. Contractor as Independent Contractor

With a lump-sum design and procurement contract, the contractor is fully liable
and responsible for the quality and cost of all the materials and subcontracts.
Full liability and responsibility is termed an independent contractor relationship.
However, quality should be carefully monitored to ensure that all materials meet
specification and that checks are made on the progress, schedule, and execution
of the work.

C. Owner's Project Buyer

The project buyer is a buyer from corporate purchasing who has been assigned
the purchasing function for a specific project. The individual is resident in the
corporate office. This provides the project with the facility for fast-track purchas-
ing when the work is being done in-house.

D. Owner's Corporate Purchasing Division

Corporate services and expertise are generally utilized on small projects. Alter-
natively, corporate services can be required by the owner's PPC due to high
workload problems or the need for specialist services. When there is no assigned
project buyer, the lack of designated responsibility can result in purchasing delays
and a poorly coordinated program. The impact on the project(s) can be disastrous.
Using corporate purchasing division services can result in more advanta-
geous terms being obtained for price, delivery, conditions of purchase, terms of
payment, maximum net discounts for volume and bulk purchases, etc. It also has
the added advantage of enabling other owner project material surpluses to be
assessed for compatibility with the project materials requirement.

E. Construction Contractor

As required, the construction contractor or a subcontractor may purchase materials,

using approved purchasing procedures and be closely monitored and controlled
428 Chapter 19

by the construction manager. Detailed attention to specification and certification

is required, particularly when discovered shortages are required urgently on site.
It is quite common for a construction contractor to provide the bulk materials
that they are going to install, but it is not common for them to provide major
equipment, unless they are also the engineer. Major equipment is more efficiently
purchased by the party that is producing the specifications and data sheets.

V. PROCUREMENT PROCESS

Procurement normally follows a process of inquiry, bids comparison, ordering,

expediting, inspection and delivery. Figure 19.4 is a schedule that shows the
purchasing steps and the time, based on historical experience, that are required
to carry out the work. These durations are for a normal level of activity and the
durations could be reduced, with special action, for critical situations. As shown
in Figure 19.4, the typical/average time for the purchasing cycle is 3-4 months
(12-18 weeks) after the preparation of design documents and material specifica-
tions by the engineering group.

A. Inquiry

Inquiries should only be issued to companies with adequate and proven capability.
These companies should be shown on the current bidders list. The practice of seeking
bids only for budget/estimate checks is to be avoided if at all possible. If there is no
serious purchasing intent, the supplier/contractor costs increase due to the cost of
spurious bidding, and the business credibility of the company is impaired.
The project bidders list should be developed by the PPC, in conjunction with
corporate purchasing and approved by the project manager.
The technical requirements contained within a material requisition should
be as complete as possible in terms of specification, inspection documentation re-
quirements, etc. The information should be stated in a concise and unambiguous
manner to obtain quality bids from suppliers. Requisitions should be properly
checked against the control estimate, prior to authorization by the project manager.

B. Bidding Strategy—Bids Comparison—Quality Evaluation

Bidding strategy has the following major considerations:

• competitive open bids,
• competitive negotiated bids,
single-source competitive (as perceived by supplier) bid,
• single-source negotiated bid,
• competitive sealed bids, and
single-source sealed bid.
As previously stated, the bidding strategy will largely depend on the company
negotiating policy.
 |
0)
CRITICAL EQUIPMENT (LONQ DELIVERY ITEMSl (Q

<Q
SPECIFICATION PURCHASMG PLACE *O.
* DATA SHEET
ENGJNEEWNG MATERIAL **CKAGE VENDOR
OPTIMIZATION REQUSmON BOPERKX)

(D
2W 2W 2W 4-8W

THE EARLY F € A S -
WLJTYAOPnMC-
ATION WORK VIR-

1
E S GREATLY FOR
EACH PROJECT ENGINEER*** PROCUREMENT
4W 12-18W

o
s
GENERAL EQUPMENT & BULKS

FWALISE PAr» FOR APPROMM.

8-T2W

PLOT PLANS A LAYOUTS

8-t2W

PROCUREMENT- FKST EQUIPMENT PURCHASES

T2-18W
(AS PER ABOVE SCHEDULE)
EQUPMENTUST

8-T2W

FIRST DATA SHEETS A REOUISmONS

8-12W

is>
Figure 19-4 Front-end engineering and procurement. CO
430 Chapter 19

Competitive open bids solicit supplier's best prices and a satisfactory price is then
achieved through the open negotiating technique, after bids are received and
evaluated.
Competitive negotiated bids follow the same procedure as above, except that the
negotiating commences immediately following receipt of the inquiry docu-
ments by the suppliers. This method saves the time of waiting for the formal
bids and also forces the suppliers to prepare their bids quickly. The method
is used when time is critical.
Single-source competitive bids are solicited from a single supplier, without the
supplier being aware that it is the only bidder. The open negotiating tech-
nique is then used.
Single-source negotiated bids are solicited from a single supplier, with the supplier
knowing that it is the only bidder. The opening negotiating technique is
then used to obtain the best deal in the noncompetitive situation.
Competitive sealed bids require all bids to be sealed on submission by the sup-
pliers and opened simultaneously in the presence of a company's confidential
bid committee. The bids will then be recorded and signed, timed, and dated
by the committee members. There may be little or no price negotiating.
Single-source sealed bids follows the same procedure as above, except there is
only one bid, and the bidder may not be aware of that fact.
Subsequently, a bid tabulation should be prepared summarizing the evaluation
of the bids on a technical, delivery, financial, and commercial basis and including
an award recommendation. A final cost forecast should be part of the evaluation,
and this analysis should consider potential changes that might occur in the future
due to design development and/or project and site conditions changes.

C. Ordering

Following approval of the bid evaluation by the appropriate project authority, the
order is placed promptly. Any negotiations between receipt of bids and placing of
orders should be carried out with the involvement of the appropriate procurement
personnel (i.e., PPC, project buyer, corporate purchasing, or contractors).

D. Overseas—Offshore Supplies Office

In all European Community countries where oil development and production

takes place, oil companies are obliged or encouraged to purchase equipment from
the countries' suppliers. Most of these countries have established a governmental
department, often called the Offshore Supplies Office (OSO), to ensure that the
companies follow this policy. For example, in the United Kingdom, the govern-
ment-appointed OSO applies pressure on oil companies to buy within the UK.
To comply with the OSO directive, companies are obliged to obtain OSO
clearance for all bid lists and bid summaries for any purchases, with anticipated
value in excess of 250,000 pounds sterling. The procedure applies whether the
item is contractor- or owner-generated, and prior to inquiry or order placement.
Equipment suppliers are obliged to complete, when submitting a tender, a "State-
ment of UK Contents" form to assist this process.
Managing Procurement—Project Control Keys/Interfaces 431

Many other countries have a similar program, and such restrictions should
be recognized in their cost estimate, project schedule, and purchasing program.

E. Expediting

Expediting covers both the delivery program and the submission dates for draw-
ings and certification. This requires a close liaison between the project planning
engineer and the expeditor. Construction frequently takes over the progress
chasing materials where critical site delivery problems are anticipated.
Project materials status reports (MSRs) are produced regularly by suppliers,
contractors, and corporate purchasing. These are collated and updated by the
PPC and distributed to appropriate members of the project team for input and
action. The prime purpose of MSRs is to highlight potential problem areas so
that appropriate action can be taken.

F. Inspection

The degree of inspection is determined by the quality control program in con-

junction with the design specifications. Some companies use a criticality rating
system which automatically establishes the quality/inspection requirements for
the equipment and materials being purchased.
Project materials and equipment inspection will be coordinated by the PPC
and the quality assurance engineer in liaison with those responsible for the
procurement to ensure that the established requirements are satisfied in full.
This would include any third party inspection required by statutory legal require-
ments and the supply of all certification and documentation.

G. Delivery

The method of delivery and delivery responsibility must be clearly defined when
ordering. Equipment and goods must be properly checked by the site materials
controller against the order details for correctness, completeness, and transit
damage. A goods receipt notification is then issued and the goods, if not im-
mediately required for installation, should be suitably protected before being
consigned to stores.

VI. EQUIPMENT SPARES AND OPERATING DOCUMENTATION

It is essential at the inquiry stage to include the requirement for suppliers to

provide equipment spares lists, operating and maintenance instructions and illus-
trated parts manuals. Also recommendations from the suppliers for spare parts
for startup and their associated cost. The project manager, in conjunction with
startup specialists, should approve the purchase of these spare parts. Failure to
properly investigate the need for startup spares can be very detrimental to an
orderly plant startup. On the other hand, an oversupply of spare parts can be
very costly.
432 Chapter 19

VII. SURPLUS MATERIALS

The lack of materials during construction can have a disruptive and costly effect
on a project; it is equally important that project funds are not wasted by over-
ordering. Disposal of surplus materials normally recovers only a small fraction
(typically 5-10%) of the original cost of the materials. In order to minimize the
amount of surplus materials, the project manager and his team need to take the
following steps:
1. When possible, ensure early completion of detailed engineering and accurate
materials takeoff prior to purchase.
2. When accurate materials takeoff cannot be achieved at the time materials
must be ordered, take particular care to ensure the accuracy of the estimated
quantities.
3. Use manufacturers' standard products and stock materials wherever possi-
ble. This approach will:
- reduce purchasing lead time and costs,
- render surplus materials attractive to a wider market, and
- increase the potential recovery from sales of surpluses.
4. Carefully monitor the contractor's procurement to prevent excessive over-
ordering.
5. During the course of the project, undertake periodical reviews of bulk ma-
terials to identify any that are unlikely to be used or are clearly surplus.
This should be done by the PPC.
6. Dispose of surplus material early to increase the chances of higher rates of
cost recovery as the opportunities to sell these materials to the operations
group, other company projects, or third parties are likely to be most favor-
able.
7. Transfer surplus materials available during and at the end of a project to
other company projects at, or approaching, the purchase value, provided:
- they are required,
- they are in good condition, and
- necessary certification is available.
20
Managing Construction—Project Control
Keys/Interfaces

I. COST-EFFECTIVE BUSINESS MANAGEMENT OF CONSTRUCTION

As construction is a major part of the project costs, it is imperative that all

construction work be executed on a good business basis, as well as to required
quality standards. Too often, construction managers ignore sound business prac-
tice in order to push the installation of the work. The project manager must
ensure that good business management is practiced by construction management.
Cost-effective management is equally important as efficient planning and
coordination of the site and craft labor.
With most economic path of construction (EPC) projects, construction costs
represent 40% of the total project cost. Failure to manage construction properly,
therefore, can be extremely costly. Many owners make the serious mistake of
completely underestimating the needs and demands of an effective construction
management program. Leading contractors rarely make this mistake and their
construction managers are among the most senior members of their organization.
Figure 20.1 illustrates a benchmarking evaluation of cost-effective construc-
tion management, where the major categories are weighted to 100%. As item 1
of this figure can be difficult to measure, this category is broken down into greater
detail, as shown in Figure 20.2. With accurate assessments of the criteria shown
in Figures 20.1 and 20.2, an overall evaluation can be made of the cost effective-
ness and business management of the construction team.

II. CONSTRUCTION PREPLANNING

Preplanning for construction at the early stages of a project is vital. At an early
stage, detailed planning is restricted by lack of scope definition. However, there
are areas where preplanning can be effective, for example:

433
434 Chapter 20

% Wt'd
Wt. Actual %

1 Construction Manager 20
Properly Motivated by
Business Considerations

2 Economic Construction Path 20

Program Fully Functioning

3 Cost of Construction 35
vs. Estimate

4 Performance Against 25
Original Construction Schedule

TOTAL 100%

Remarks:

Figure 20.1 Benchmarking assessment: cost-effective business management of con-

struction.

• work accessibility—operations limitations,

traffic patterns—material staging,
• laydown areas—support services,
• rigging studies—heavy lifts,
preassembly and modularization,
weather window constraints,
• material selection, and
temporary facilities.

There are, in addition, many other interdependent activities that require early
attention. For instance, the payout of quality preplanning, in improved construc-
tion efficiency and productivity, is very significant.
Many companies are now developing the project schedule/execution plan back-
wards. This means concentrating on the construction schedule and developing at
this early stage, the most economical construction program possible, usually referred
to as the EPC. Engineering and material delivery requirements are then matched
to the construction program. The matching must not be a force-fit, as such an
action would render the program invalid by producing an impossible schedule.
On EPC projects the typical relationship between engineering and construc-
tion labor hours (direct) is the ratio of 1:6. Thus, the deliberate attention to
Managing Construction—Project Control Keys/Interfaces 435

Was C M . involved in preparation

of construction contract RFQ's?

2. Was C M . part of all contractor

bid reviews and negotiations?

3. Was there an effective bid evaluation

program for major contracts, with
appropriate criteria for selection?

Was CM. required to approve

all bid recommendations?

5. Did C M . ensure that Site Team fully

met Owner/M.C's contractual obligations?

6. Did construction supervision know and

understand general contract conditions?

Remarks:

Figure 20.2 Benchmarking assessment: construction manager motivation.

preplanning and constructability at an early design stage can reduce the ratio
and save construction labor hours. The potential cost saving is substantial.
The following is not all-inclusive but is typical of major preplanning consid-
erations:

construction organization—personnel assignments,

detailed layouts for temporary facilities,
labor resource studies—training program,
labor productivity evaluations,
material handling—logistics studies,
site survey—soil report—weather window limitations,
rigging studies—onshore/offshore,
construction permits—environmental matters,
site preparation and early fieldwork,
contract strategy,
construction management procedures,
construction planning and coordination program,
construction project control and reporting program,
site and safety regulations, work permits and clearances, and
436 Chapter 20

labor contracts and site agreements.

Refer to Chapter 17, "Front-End Planning and Project Organization," for more
information on early planning activities.

III. OWNER/CONTRACTOR COORDINATION

When the work is contracted out, the owner project team function:
provides overall site coordination,
• ensures an acceptable quality of construction,
ensures that work is installed to the drawings and specifications,
• evaluates the contractor performance,
• interfaces with the operating group, and
institutes correct handover procedures.
On small projects, the owner construction management function is often handled
by the project manager. However, this dual function is rarely effective on inter-
mediate/larger projects, as the construction manager responsibility is too demand-
ing. It is strongly recommended that owners only assign experienced, professional
construction managers to larger projects.
It is now widely accepted that today's construction managers need to be
professional project managers. They need to be:
• organizers,
planners,
• motivators,
leaders,
communicators, and
• business-oriented.

IV. CONSTRUCTION MANAGER/PROJECT MANAGER INTERFACE

The construction manager should be the project manager's representative onsite

and in this context is directly responsible to him/her for completing the works to
the drawings and specifications, on time and within budget. To reinforce this rela-
tionship, project managers are now residing at the construction site to strengthen
the day-to-day business relationship with the construction manager. The day-to-
day execution of the work and management of the site is the direct responsibility
of the construction manager. Therefore, the function of the project manager is to
direct and support the construction manager in all business matters.
The construction staff varies in composition and strength and is, essentially,
determined by the contractual arrangement. A reimbursable contract requires a
larger staff, particularly in the project control function so as to maintain full
financial control.
Generally, the technical side is covered by various discipline engineers with
ability to monitor/control their counterparts employed by the contractor(s). Sim-
ilarly, schedule and cost control can be monitored/controlled with site planning
Managing Construction—Project Control Keys/Interfaces 437

and cost engineers. Quantity surveyors are also used in measuring work done
and administering contracts based on measured work/unit prices, usually sup-
ported by one or more contracts officers/administrators.

V. CONSTRUCTION MANAGER/OPERATING STAFF INTERFACE

The project manager, construction manager, and staff have a sensitive and im-
portant interface with the existing or future (on grassroots sites) operating staff,
particularly on matters of safety and handover. The sensitivity occurs at the
precommissioning stage when the project/site team and operating staff have a
joint responsibility for an efficient plant start-up. At this stage the site team has
the task of full cooperation with the operating staff and, at the same time, must
resist excessive changes requested by the operating staff. This, therefore, requires
sensitivity and tact to meet the project cost objectives and maintain a good rela-
tionship with the operating personnel. An effective way to enhance a good working
relationship is the early assignment of an operating individual to the site team
to act as a permanent liaison/coordinator for all operating/plant matters.

VI. CONSTRUCTION MANAGER/REGULATING AUTHORITIES

INTERFACE

A further interface takes place with external regulating authorities and bodies
in the implementation of national and local regulations, work permits, environ-
mental reports, etc.

VII. EFFECTIVE OVERALL SITE COORDINATION AND SAFETY

When the work is contracted out, the construction manager has a coordination
role which, if not properly executed, can lead to serious legal implications and/or
contractor claims. In this coordinating position the construction manager has to
ensure satisfactory overall management of the project schedule, site safety, and
labor relations. The safety and security of the site or location as a whole is his/her
responsibility. Although each contractor will be responsible for the safety and
security of its own working area, it is necessary to ensure that common and
adequate standards are observed by all site contractors.
As the project manager's representative onsite (particularly on remote and
large multicontract sites), the construction manager has an overview of all aspects
of the works and their relative priorities. Thus the construction manager may
directly administer those contracts covering general site services such as staffing
buses, catering, medical facilities, and camp accommodations.
An owner can assign this coordinating liability to a managing contractor/con-
struction manager, but the owner must step back and allow this representative
full, total, and day-to-day management of the site.
438 Chapter 20

1. Number and value of contractor claims for

poor access or site coordination problems?

2. Were weekly Progress Meetings held

with all key & major contractors?

3. Were weekly Trend Meetings ..

held with Site & Project Teams?

4. Did Owner/M.C. Site Team have

"official" Safety Engineer?

5. Did major contractors have

Safety Engineers?

6. Was safety a problem?..

Remarks:

Figure 20.3 Benchmarking assessment: efficient site management and multiple con-
tractor coordination.

VIII. INDUSTRIAL RELATIONS

The industrial relations (IR) policies/programs, especially on multicontractor sites,

are usually determined by the construction department/project manager before
the construction phase commences and should be reflected in the various con-
struction contracts. The construction manager is then responsible for ensuring
that the agreed IR policies are implemented by the contractors in an orderly and
productive manner. The main factors to be considered are:
• specific application of national agreements regulating the terms and condi-
tions of employment and the procedure for resolving disputes;
• provision of suitable amenities and facilities for the workforce;
recruitment of competent and reliable labor and their induction into site
safety and IR provisions;
• overall coordination and control of site IR through main or managing con-
tractor and/or site contractors committee; and
Managing Construction—Project Control Keys/Interfaces 439

1. Did Owner's/M.C. RFQ require a labor.,

resources chart for all major contracts?

2. Did Owner/M.C. Site Team then properly

evaluate theses charts (for resource adequacy)?

3. Did lack of resources cause any

significant schedule problems?

4. Were there any significant ...

construction quality problems?

5. Was labor productivity

assessed by Owner/M.C. Site Team?

6. What was level of labor absenteeism?..

Remarks:

Figure 20.4 Benchmarking assessment: correct labor resources as to skill and number
workers.

management by each contractor of its workforce with particular reference

to working practices, disciplinary procedures and handling of disputes.

IX. EFFICIENT MANAGEMENT OF SITE AND CRAFT LABOR

The realization of this objective is found in the following benchmark evaluations:

adequate organization (i.e., quality and numbers of staff),
• efficient site management and multiple contractor coordination (Fig. 20.3),
• correct labor resource planning (i.e., number and skills of workers; Fig.
20.4),
effective work planning and scheduling at all levels (Fig. 20.5),
• efficient materials management and warehousing program,
effective monitoring of contractor(s) performance,
independent trending analysis/report (multiple contractors),
440 Chapter 20

1. Was the "overall" construction planning

by Owner/M.C. adequate?

2. Was the "planning" properly fed to

the contractors?

3. Was contractors detailed

scheduling adequate?

4. Was the critical path(s) and

float always evident?

Remarks:

Figure 20.5 Benchmarking assessment: effective work planning and scheduling at all
levels.

properly functioning industrial relations, and

cost/schedule/progress reporting (multiple contractors).
Figures 20.3, 20.4, 20.5 are benchmarking reports for some of the above items.

A. Effective Monitoring of Contractor(s) Performance

The contractor monitoring/reporting requirements will vary according to the type
of contract (i.e., lump-sum, measured/unit price, and reimbursable).
1. Lump-Sum
As the contractor has most of the financial risk, the major activities of the owner
construction manager/team, subject to contract conditions, are:
• overall site planning/coordination;
• inspection of construction work to assess quality;
Managing Construction—Project Control Keys/Interfaces 441

checking that work is to drawings and specifications;

• monitoring construction progress/staffing levels;
• punchlist, checkout, and acceptance;
• progress payment verification; and
• change order review and approval of all scope changes.
With lump-sum contracts, the emphasis of the construction manager/team is on
quality, meeting the design requirements, schedule, and the tracking of scope
changes and claims.
2. Measured/Unit Price
With these contracts, the owners assume the risk of quantity change, and the
contractor assumes the financial risk of unit price. The major activities of the
owner construction manager/team, subject to contract conditions, are:
• overall site planning/coordination;
• inspection of construction work to assess quality;
• checking that work is to drawings and specifications;
• monitoring construction progress/staffing levels;
• evaluation of quantity (bills of materials) changes/forecast;
• punchlist, checkout, and acceptance;
quantity and payment verification (by quantity surveyors); and
change order review and approval of all scope changes.
With measured/unit-price contracts, the emphasis of the construction manager/
team is on quality, meeting the design requirements, schedule, tracking/verifying
quantities and payment, and the tracking of scope changes and claims.
3. Reimbursables
As the owner has the major financial risk, the contractor monitoring effort is
much more detailed and requires the following major procedures:
• detailed cost control/reporting system;
detailed schedule/program, completion/progress curves, staffing histograms,
and productivity profiles;
• physical progress/productivity measurement system (large projects);
labor hour tracking program/curves (small projects);
• inspection and quality control system;
• purchasing plan/system;
• quality material bid summary procedure; and
• trending program/weekly trend meeting/report.
The key to an effective contractor monitoring effort is to have the contractor
develop a full and effective system subject to the contract arrangement so that
the owner construction manager/team has a review, analytical, and approval role.
Major attention should be given to:
inspection and quality,
• progress measurement,
• productivity analysis,
• staffing expenditure and approval, and
trending and forecasting.
442 Chapter 20

Of the many effective monitoring techniques, as listed, the single most effective
technique is the weekly trend meeting and trend report.

B. Independent Trending Analysis/Report

On large multiple contractor projects, the construction manager/team has the

overall management/coordinating role. As such, a weekly trend analysis/report
should be developed to cover current influences, problems, variations, changes,
and claims that could have cost and schedule impacts. Early identification of
potential trends can provide time to prevent harmful situations and provide
valuable input for accurate forecasts.

X. QUALITY CONTROL AND DOCUMENTATION

It is the construction manager's responsibility to monitor the quality control

function onsite and to witness and approve all site testing. He/she must also
ensure that all documentation referring to quality control and testing is recorded
and maintained in an orderly manner.

XI. PRECOMMISSIONING—MODULES AND PRE-ASSEMBLIES

On offshore projects, in order to minimize/reduce expensive onsite and offshore

work, it is essential that a good precommissioning system be developed during
the engineering stage. This system will, essentially, involve the design and con-
struction groups in engineering a physical testing program that will adequately
check out the operational state of the facility prior to load-out.
With major pre-assemblies and modules, it is planned that the degree of
completion at load-out, be in the 95-98% range. This can only be accomplished
with an effective precommissioning system. It has been common for modules to
be loaded out in a less complete state, resulting in additional offshore work and
at a significant cost addition.

XII. HANDOVER OF CONSTRUCTION WORKS

The three stages between the start of construction work and plant operation are:
• construction (erection and physical testing),
• precommissioning (functional testing and preparation for operation), and
• start-up (introduction of feedstock).
As the project moves from construction to precommissioning, the commissioning
superintendent progressively takes on overall responsibility for the site from the
construction manager and the contractors as various areas and systems reach
mechanical completion. Although regular work is still done by the contractor,
much of the precommissioning work will be undertaken with the assistance of
the operating company's staff. This provides a means of familiarizing operations
staff with the plant prior to the introduction of process feedstock.
Managing Construction—Project Control Keys/Interfaces 443

XIII. HANDOVER CERTIFICATES

To ensure that the transition from each stage is clearly defined for any particular
section of the project, a series of certificates is used, typically referred to as:
• mechanical completion certificate,
• takeover certificate,
performance certificate,
• certificate of completion, and
• final acceptance certificate.

XIV. SAFETY DURING PRECOMMISSIONING/COMMISSIONING

The potential hazards arising during the changeover from construction through
precommissioning to commissioning are probably greater than at any other time
during construction or subsequent fulltime operation. This reflects the transfer
of responsibilities, the involvement of commissioning and operating personnel
unfamiliar with the plant, and the introduction of potentially hazardous materials
into previously safe areas.
It is, therefore, essential at this stage that the responsibilities of all parties
for complying with safety requirements are clearly defined and understood. Fur-
thermore, it is also essential that the permit to work system, to cover the safe
use of utility systems during precommissioning activities, is taken over at the
appropriate time by the operating company in order to cover all plant systems.
Index

Acceleration, constructive, 337 Backcharge register, 215, 217

Access denied, 337 Backwards scheduling, 411
Actual cost of work performed, 204-205 Bar chart schedule, 84
Actual pricing, 341 BCWP (see Budgeted cost of work performed)
ACWP (see Actual cost of work performed) BCWS (see Budgeted cost of work scheduled)
AFE (see Authorization for expenditure) Bean-counter syndrome, 194-195, 384
AGC (see Associated General Contractors) Benchmarking, 1-8
Agency, 336 in project control, 5
Agreements, verbal, 336 process for, 4-5
AIA (see American Institute of Architects) Bent, James A., 13
Air quality act, 153 Benzene, ethyl benzene, toluene, 165
Alkylation process BETX (see Benzene, ethyl benzene, toluene)
cost capacity curve for, 61, 63 Bidding, 428, 430
Allowances biased, 191
design, 72-73, 205-207 competitive, 428, 430
developmental, 28, 205-207 cost of, 189
growth, 28 evaluation, 220
subcontract growth, 299 low, deliberate, 192
American Consulting Engineers Council, low, lack of experience, 192
185 single-source, 428, 430
American Institute of Architects, 185 subcontracts, 299-300
American Society of Civil Engineers, 185 tabulation, 220, 242-243, 250
Annual value, 139 Bid errors, 336
Appendix IX Chemical Analysis, 163, 165 Bid tabulation, 220, 242-243, 250
Arrow diagram, 80 Biological oxygen demand, 165
Associated General Contractors, 185 BOD (see Biological oxygen demand)
Authorization for expenditure, 359, 387 Bonus/penalty contracts, 180-182

445
446 Index

Breach of contract, 337 Clean Water Act, 153, 155

Breakeven, 139, 308-311 Client satisfaction, 404
chart, 311 COD (see Chemical oxygen demand)
Budget estimates, 22 Commissioning, 201-202, 442-443
Budgeted cost of work performed, 204-205 Commitment
Budgeted cost of work scheduled, 204-205 curves, 242
Budget reports, 254-256 register, 242-245
Buildings, 28 report, 209, 211
conceptual data for cost estimating, Communications skills, 342-343
67-69 Community relations, 405
Bulk materials, 28-31 Completion, substantial, 341
Bulk quantity control, 220 Comprehensive Environmental Response,
Business decision making, 195-196 Compensation, and Liability
Business Roundtable, 57 Act, 153-154, 167
Buying the job, 192 Conceptual estimates, 22
Conceptual estimating factors
CAAA (see Clean Air Act Amendments) major equipment—US, 60
Capacity, in contracts, 336 modules—Europe, 61
Cash flow, 138 Concrete, 28
curve, 202-203 Consideration, 336
evaluation/control, 202-203 Constructability
CERCLA (see Comprehensive Environ- planning, 410-411
mental Response, Compensation, Constructability analysis, 128, 134
and Liability Act) bibliography, 136
Certainty Construction
in contracts, 336-337 benchmarking, 434-436
in risk analysis, 307 commissioning 442-443
Change control, 305-316 complexity, 122-123
cost baseline, 305-306 construction manager/operating staff
management financial reserve, 306-307 interface, 437
schedule baseline, 306 construction manager/project man-
scope changes, 306 ager interface, 436-437
Change log, 219-220 construction manager/regulatory
Cheapest source program, 28 authorities interface, 437
Chemical oxygen demand, 165 economic path of, 433
Chemicals equipment, 34 equipment, 32
CII (see Construction Industry Institute) handover, 442-443
Claims industrial relations, 438-439
claimsmanship, 334-335 management, 433-444
definition of, 334 overall site coordination, 437-438
disruption, 339 owner/contractor coordination, 436
litigation, 334 precommissioning, 442-443
mitigation, 341-343 preplanning, 433-436
probability of, 333 progress, 71-72
quality estimating, 334 quality control, 442
records and documentation for, 336 safety 437-438, 443
reduction, 341-343 site and labor management, 439-442
subcontracts, 357 staff, 32
trapezoidal technique applications, Construction, direct hire, 250-252, 292
116-118, 120 budget reports, 254-256
trending, 333 cost control, 250, 252-253
Clean Air Act, 153 direct labor report, 253
Clean Air Act Amendments, 153 earned value, 254-255
Index 447

[Construction, direct hire] [Contract law]

equipment, 265, 266-269, 288-291 intent of the parties, 337
extra work, 254 legal defects, 336
field progress reports, 281-285 meeting of the minds, 337
field staff control, 265-266 noninterference, 336
indirect cost curves, 269-270 nonperformance, 336
indirect labor, 262-265 offer and acceptance, 336
indirect material, 265 verbal agreements, 336
indirects reports, 253 Contracts
jobhour curve, 258-259 acceleration constructive, 337
labor rate profile, 258, 260-261 access denied, 337
machinery protection, 254 administration, 173-192
material control, 254, 288 arm's length, 342
preplanning, 270, 272 arrangements, 176, 185-186
productivity report, 255, 257-258, breach of, 337
274-281 certainty, lack of, 337
progress bar charts, 272-274 commercial frustration, 339
progress/jobhours reports, 254-255 communications skills in negotiating,
progress S-curves, 279 342-343
scheduling, 270-272 conditions of, 185
status reports, 285-286 controllable risks, cost impact of, 178
subcontract report, 253 cost aspects of, 187-191
weekly work program, 272, 275-279 cost liabilities in, 175-178
welding machines, 290-291 cost reimbursable, 180-182
work unit tracking, 261-262, 285, cost and schedule, 182
287-288 damages, punitive, 337
Construction Industry Institute, 7, 15, damages, special, 337
17, 377, 399, 405, 411-412 definition of, 173
Construction Specifications Institute, 185 delay, compensable, 337
Construction Users Anti-Inflation delay, concurrent, 338
Roundtable, 57 delay, excusable, 338
Contingency, 11, 39-42 delay, inexcusable, 338
control of, 200-202 disruption claim, 339
estimating, 39-42 disruption costs, 339
in range estimating, 330-331 engineering/procurement/construction,
Contracting 187-188
arrangements, 180-186, 341 equal partner relationship, 342
claims, 333-343 fixed fee, 180-182, 190-191
extras, 333-343 fixed price, 180, 183-184, 187-190
lump-sum, 12 force majeure, 342
practices, 15-16, 18 forms of, 185
quality conditions, 341 frustration of purpose, 339
strategy for, 179-180 guaranteed maximum price, 180
Contract law impact costs, 339
agency, 336 impossibility, 339
bid errors, 336 impracticability, 339
capacity, 336 interference, 339
certainty, 336 legal-only relationship, 342
common usage of language, 336 legal review of, 186-187
consideration, 336 lump-sum, 180, 183-184, 187-190
fundamentals, 335-337 malpractice, 339
general contractor liability, 335 material difference, 340
good faith, 336 measured, 180, 183
448 Index

[Contract law] [Cost control]

misrepresentation, 339 procurement, 242-250
monitoring program, 341 subcontract, 297-299
negotiating, 341 Cost factors, construction, 66
"no damage" clause, 340 Cost indexes
parties to, 174 Nelson-Farrar, 61-62
pricing, 341 Cost management, 378
project execution strategy, 177 Cost/schedule (see Cost and schedule)
reasonableness standard, 341 Cost/time/resource approach, 347
reasons for, 174 Cost value, 128
recision, 341 CPM (see Critical path method)
reimbursable cost, 180-182, 187-188, Cracking equipment, 34
190-191 Critical path method, 79-81, 411
responsibility in , 174-175 arrow-diagram, 80
responsiveness, 341 precedence diagram, 80
risk in, 175-176 shutdown schedule, 356, 367
shutdowns, 367, 369 time-scaled diagram, 80
site conditions, 338, 342 Criticality rating, 431
substantial completion, 341 CSI (see Construction Specifications In-
target, 182 stitute)
termination of, 341 CTR (see Cost/time/resource approach)
time extension, 341 Curran, Kevin, 312
time and materials, 180-182 Curran, Michael, 312
time of the essence, 341 Currency exchange, 43
truth in negotiations, 341 CWA (see Clean Water Act)
turnkey, 190-191
types of, 180-186 Damages
unit price, 180, 183, 191 punitive, 337
waiver, 341 special, 337
warranty, express, 341 DCF (see Discounted cash flow)
warranty, implied, 341 Decision analysis, 308
Cost accounting, 196-197 Decision Sciences Corp., 312
Cost and schedule Decision trees, 309-310
baselines, 193-194 Delay
considerations, 173-192 compensable, 337
contracts, 182 concurrent, 338
forecasts, 200 excusable, 338
performance, 204-205 inexcusable, 338
risk analysis, 314-316 Design
trend analysis, 193-304 allowance, 72-73, 205-207
Cost baseline, 21-76, 305-306, 334 constructability, 415
engineering/construction relationship, documents, 414-415
53-54 effectiveness, 15-16, 18
Cost breakdown log program, 198
buildings, 67 project management interface, 415
prime contractor, 41 Detailed estimates, 22-24
typical, 51-53 fudging of, 24-25
Cost capacity curves, 22-23, 55-56, 61, 63 Developmental allowances, 28, 205-207
Cost capacity scaling, 63 Difference, material, 340
Cost consciousness, 193-195 Discounted cash flow, 139-148
Cost control case study using, 142-145
construction—direct hire, 250-253 methodology for calculating, 139-142
engineering, 215, 218-242 reliability of, 147-148
Index 449

[Discounted cash flow] [Engineering]

sensitivity analysis of, 145-147 vendor drawing control, 239, 241
Disruption, 339 workforce report, 234, 236
Drawing control, 239, 241 Engineering division, 387
Engineering/procurement/construction,
Earned value system, 202, 204, 254-255 13-15, 26, 36, 52, 91-97, 179,
Economic evaluation, 137-149 345-346, 379, 420
methods of, 138 contracts, 187-190
nonfinancial factors, 149 overall breakdown for small projects,
purpose of, 137-138 97-99
Economic path of construction, 433 Engineering/procurement cycle, 99
Economy of scale, 61, 63 Engineers Joint Contract Documents
80:20 rule (see Pareto's Law) Committee, 185
EJCDC (see Engineers Joint Contract Environmental Protection Agency, 152-
Documents Committee) 157, 162-164, 167
Electrical work, 30 Environmental remediation, 151-171
Emergency Planning and Community cleanup standards, 168-169
Right-to-Know Act, 153 closure costs, 167, 169-170
EMV (see Expected monetary value) closure/postclosure scope, 170
ENG (see Engineering division) contractor selection, 169
Engineering, 215, 218-242 controlling cost of, 162
approvals, 421 estimating cost of, 164-168
bulk quantity control, 220 financial assistance, 164
change log, 219-220 groundwater remediation, 160-162
conceptual estimating of, 33-39 laws and regulations, 152-154
cost control flowchart, 219 postclosure costs, 167, 169-170
cost control—overall, 215, 218-219 sampling and analytical expenses,
cost expenditure curve, 222-223 162-163
costs of 34-36 sampling frequency, 170
design, 414-419 site-specific risk analysis, 168-169
design documents, 414-415 soil remediation, 156-160
design and drafting guide, 224, 228- writing permits, 164
230 writing reports, 163-164
development flowchart, 218 EPA (see Environmental Protection
early phases, 414 Agency)
equipment bid evaluation, 220 EPC (see Engineering/procurement/con-
hours, 40 struction; see also Economic
jobhour control, 220-222 path of construction)
jobhour rate profile, 222 EPCRA (see Emergency Planning and
managing, 413-421 Community Right-to-Know Act)
material requisition curve, 234, 237-238 EPR (see Equal partner relationship)
personnel allocation, 234-236 Equal partner relationship, 403
piping design, 239-240 Equipment
procurement, 417-418 bid evaluation, 220
productivity, 224, 227, 230, 232-235 construction, 265-269
productivity curves, 230, 233-235 cost curves, 245-246
progress curves, 230, 232 cost report, 265, 267, 288-289
progress measurement, 224, 229 engineered, 28
request functions flowsheet, 381 engineering hours, 34
scheduling system, 224, 226 installation, 31
scope review, 33 major, 28
status report, 224-225, 230 operating documentation, 431
tracking curves, 238-239 purchase schedules, 248
450 Index

[Equipment] [Feasibility study]

ratio curves for, 22-23 operations interface, 387-388
spares, 431 owner authority, 388
used vs. new, 72-74 permits, 388
utilization, 265, 268 project manager of, 387
welding machines, 290-291 scope development, 387-388
ESA (see Endangered Species Act) statement of requirements, 389-390
Escalation, 43 typical problems in, 386-387
calculation of, 59 universal service request, 389
Esteem value, 129 Federal Water Pollution Control Act, 153
Estimates Federation Internationale des In-
bases in construction, 64 genieurs-Conseils, 185
budget, 22 FEE (see Front-end engineering)
categories of, 22 FEED (see Front-end engineering design)
checklists for, 47-51 FEPPO (see Front-end planning and
conceptual, 22, 33-39 project organization)
cost capacity, 22-23 FIDIC (see Federation Internationale
detailed, 22-25 des Ingenieurs-Conseils)
equipment, 22-23 Field
instrumentation, 30-31 changes in subcontracts, 304, 359
keys for 21-76 office expense, 33
order-of-magnitude, 22 progress reports, 281-285
piping, 29-30 staff, 265-266
proration, 22 Financial reserve, 306-307
purpose of, 22 Fireproofing, 28
quality of, 21-22, 25-26 Fixed fee contracts, 180-182, 190-191
quantity, 23-24 Fixed-price contracts, 180, 183-184
ratio, 22-23 FMs (see Project finance memoranda)
risk analysis of, 311-316 Food equipment, 34
subcontracts, 55 Force majeure, 243
unit cost, 23-24 Forecasts
EVS (see Earned value system) cost and schedule, 200
Exchange value, 128 subcontracts, 297-299
Execution plan, 409-410 Forsgren, Dr. Klane F., 137, 151
Executive summary, 214 Forward pricing, 341
Expected monetary value, 308-310 Foundations, 28
Expediting, 431 Front-end engineering, 101, 390
Expenditure report, 209, 211 Front-end engineering design, 391, 396—
Extended work week, effect on productiv- 397, 414-415
ity, 47, 55, 57-59 Front-end loading, 191
Extras (see Claims) Front-end planning, 15-16, 18
shutdowns, 361
Fast track, 11, 28, 79, 110 Front-end planning and project organiza-
economic program, 110-111 tion, 399-412
schedule, 110, 113-118 contracting arrangements, 401
trapezoidal technique, 110, 112-120 organization, 399-412
Feasibility study, 385-397 project organization, 400
company service divisions, 389 Front-end risks
costs, 390-392 in contracting, 173-192
front-end engineering, 390 Frustration
front-end engineering design, 391, commercial, 339
386-397 of purpose, 339
key deliverables, 391-397 Future value, 139
Index 451

Good faith, 330 Labor

Groundwater contamination, 156 costs of, 31-32
Groundwater remediation, 160-162 direct construction, 31-32, 253
air sparging, 161-162 indirect jobhour curves, 262-265
bioremediation, 161 peak construction, 44-45
pump and treat, 160-161 rate profile, 258, 260-261
vapor extraction, 161-162 Labor density, 122-125
Growth allowances, 28 Labor rundown (see Rundown)
Language, common usage of, in con-
Hazardous Materials Transportation tracts, 336
Act, 152 Legal defects, 330
HMTA (see Hazardous Materials Trans- Lessons learned, 375
portation Act) Liability
Home office general contractor, 335
breakdown of, 38 owner, 336
expenditure curves, 209, 211-214 time of the essence, 341
expenses, 37-39 Life cycle costs, 129
hours, 37 Litigation, 334 (see also Contract law)
Human resources, 379-380 Location cost factors
Human resource management, 15-16, 18 international, 74-75
Lump-sum contracts, 180, 183-184, 188-
Iatrogenic risk, 321, 331 190
ICE (see Institution of Civil Engineers)
IMechE (see Institution of Mechanical Machinery protection, 254
Engineers) Malpractice, 339
Impact costs, 339 Management financial reserve, 306-307
Impossibility, in contracts, 339 Master milestone schedule, 83-89
Indirect construction costs, 32-33 Material
Indirects bulk, 28-31
cost curves, 269-270 control, 254, 288
jobhour curves, 262-265 logistics schedule, 250-251
material, 265 requisition curves, 234, 237-238, 248-
reports, 253, 264-265 249
Inspection, of procurements, 431 status report, 248, 425, 431
Institution of Civil Engineers, 185 surplus, 432
Institution of Mechanical Engineers, 185 Materials management, 15-16, 18
Instrumentation, 30-31 Matrix interface conflicts, 10-12, 380,
Instrumentation estimates 384
detailed, 30-31 Matrix theory, 9-12
factors for, 30 MBTA (see Migratory Bird Treaty Act)
per loop, 30 Means, R.S., Co., 370
per unit, 30 Measured contracts, 180, 183
Insulation, 31 Mechanical handling equipment, 34
Intent of the parties, 337 Meeting of the minds, 337
Interference Merox equipment, 34
contract, 339 Metals equipment, 34
intentional, 339 MICs (see Matrix interface conflicts)
malicious, 339 Migratory Bird Treaty Act, 154
Internal rate of return (see Discounted Mining equipment, 34
cash flow) Misrepresentation, in contracts, 339
Mobil Oil Corporation, 13
Known, 319 Monte Carlo simulation, 43, 308, 312-
Known-unknown, 319 313, 316-318
452 Index

Monthly cost report, 209-210, 214 Personnel skills, 348

MSRs (see Materials status reports) cost benefits, 17-18
impact of, 9-19
National Discharge Elimination System Petrochemicals equipment, 34
NPDES permits, 153 Pharmaceutical equipment, 34
National Environmental Policy Act, 152 Piling, 28
National Society of Professional Engi- Piping design, 239-240
neers, 185 Piping estimates
Negotiations, truth in, 341 by length, 29
Neil, Dr. James M., 127 by ratio, 29
NEPA (see National Environmental Pol- by unit cost, 30
icy Act) by weight, 29
Net present value, 309 Planning, preproject, 385-397
"No damage" clause, 340 Political considerations
Noninterference, 336 in estimating, 47
Nonperformance, 336 Pollution control (see Environmental re-
North Sea platforms, 99, 102-109 mediation)
concrete structures, 105-107 Precedence diagram, 80
standard schedule, 107-109 Precommissioning, 442-443
steel jackets, 103-105 Pre-estimating survey, 47-51
NPDES (see National Discharge Elimina- for shutdown projects, 370
tion System) Preliminary execution plan
NPV (see Net present value) shutdowns, 362-363
Preproject planning, 385-397
Offer and acceptance, 336 Present value, 139
Office buildings Pricing, in contracts, 341
CSI division descriptions, 68 Prime contractor cost breakdown, 51
space/personnel density in, 69 Process industries
square foot costs, 69 economic evaluation in, 137-149
Office of Safety and Health Administra- Process projects, large, 35-36
tion, 154 Procurement, 101, 242-250, 423-432
Offshore supplies office, 430 bid tabs, 242-243, 250
Oil Pollution Act, 153 commitment curves, 242
Oil refineries commitment register, 243-245
jobhours per barrel, 56 cost control, 242-243
OPA (see Oil Pollution Act) criticality rating, 431
Opportunity, 319 delivery, 431
Order-of-magnitude estimates, 22 equipment cost curves, 245-246
OSO (see Offshore supplies office) equipment operating documentation, 431
Outage projects (see Shutdown projects) equipment purchase schedules, 248
Overhead costs equipment spares, 431
construction, 65 expediting, 250, 431
Overtime, effect on productivity, 47, 55, forecasts, 245
57-59 inspection, 250, 431
Owner performance, 19 material requisition curves, 248-249
material status report, 248, 425, 431
Painting, 31 materials, 425-428
Pareto's law, 320-321, 350 materials logistics schedule, 250-251
Paving, 28 ordering, 430
PEP (see Preliminary execution plan) overseas, 430-431
Percentage fee contracts, 180-182 process, 428-431
Personnel curves program, considerations in estimat-
shutdown, 356, 367 ing, 49
Index 453

[Procurement] [Project management]

purchase orders, 243-245 function of, 378-384
purchasing plan, 243, 248 fundamentals of, 377-384
responsibility, 425 human resources, 379-380
scheduling, 245, 247-248 key categories of, 15-16
surplus materials, 432 of major shutdown projects, 364
value and price negotiating, 423-424 matrix interface conflicts, 380
Productivity, 31, 43-37 project culture, 384
effect of job size on, 47 project development, 381-382
engineering, 224, 227, 230, 232-235 project lifecycle, 380-381, 383-384
guidelines in construction, 65, 70 project organization, 384
loss with extended workweek, 47, 55, program for, 14
57-59 of small shutdown projects, 348-350
reports, 255, 257-258, 279-281 time management, 379
weather considerations, 70 Project manager
worldwide factors, 46 authority, 403
Progress curves for feasibility study, 387
contractor engineering, 93-94 reporting, 402
contractor construction, 95-96 qualifications, 402
shutdown, 356 responsibility of, 193
Progress/jobhour reports, 254-255 Project objectives
Progress reports, 214-215 client satisfaction, 404
executive, 215-216 cost and schedule, 404
Project quality, 404
closeout, 373-376 scope objective, 404
condition analysis, 43-45 Project organizing, strategic (see Front-
conditions review, 26 end planning)
engineering, 33 Proration estimates, 22
cost accounting, 12 Prospective pricing, 341
definition of, 378 Pseudorandom number generator, 326-327
duration chart, 120-122 PTF (see Project task force)
executive strategy, 177 Public Health Service Act, 153
life cycle, North Sea platform, 102 Pulp and paper equipment, 34
task force, 402 Purchasing, 11
team, 402-403 Purchase order
Project control, 15-16, 18 commitment register, 243-244
construction, 433-443 forecasts, 245
definition of, 195 Purchasing plan, 243
engineering, 413-421 short-range, 248
key techniques, 200-217
of major shutdown projects, 365, Quality, management of, 15-16, 18
367 (see also Total quality management)
of small shutdown projects, 348-356,
359-360 Range estimating, 317-332
procurement, 423-432 advantage of, 331
Project finance memoranda, 387 bibliography, 331-332
Project management contingency, 330-331
budgeting and management, 381-382, critical elements, 321-324
384 critical variance matrix, 322
communications in, 380 frozen values in, 326
cost management, 378 iatrogenic risk, 321, 331
engineering request, 381 inputs, 324-326
estimating responsibility, 25 key questions, 327-328
454 Index

[Range estimating] [Rundown]

knowns, 319 poor productivity during, 71
known-unknowns, 319-320
opportunity, 319 Safe Drinking Water Act, 153, 155
Pareto's law, 320 Safety, 15-16, 18
probability factor in, 324-325 SARA (see Superfund Amendments and
pseudorandom number generator for, Reauthorization Act)
326-327 Schedule
pyramid of criticality, 322-324 baseline, 79-125, 306
ranges in, 325-326 conditions, effect on prices, 28
risk, 319 construction, 89-92, 270-272
simulation in, 326-327 control, shutdown, 359
target, 324 engineering, 87-89
uncertainty, 319 EPC, 91-97
unknown-unknowns, 319-320 equipment purchase, 248
Rate of return, 137 master milestone, 83-84
Ratio estimates, 22-23 procurements, 245, 247-248
RCRA (see Resource Conservation and project bar chart, 84
Recovery Act) shutdown, 356, 367
Reasonableness standard, 341 typical, 84-94, 101
Recision of contract, 341 Scheduling, 79-125
Reimbursable-cost contracts, 180-182, levels of, 81-84
187-188, 190-191, 207-209 objectives of, 79-80
Remediation Scope
flowchart, 155 changes, 306
options, 156-162 control, 405-408
Resource Conservation and Recovery definition, 405-408
Act, 151, 153-154 development, for feasibility study,
Responsiveness, in contracts, 341 387-388
Retrofit projects (see Shutdown projects) engineering, 33
Retrofits, factors for, 64 objective, 404
Retrospective pricing, 341 review, 27
Return on investment, 141 S-curve
Richardson Engineering Services, 370 construction, 279
Risk, 307, 319 SDWA (see Safe Drinking Water Act)
iatrogenic, 321 Selling price
Risk analysis, 42-43 of products, 148-149
breakeven, 308-311 Sensitivity analysis, 145-147
cost and schedule, 314-316 Shutdowns, factors for, 64
decision analysis, 308 Shutdown projects, major, 361-370
decision-making process, 307-308 contract program, 367, 369
expected monetary value, 308-310 estimating/planning factors, 369-371
decision trees, 309-310 front-end planning, 361
in lump-sum contracting, 188-189 personnel curves, 367
manual technique, 312-313 pre-estimating survey, 370
Monte Carlo simulation, 308, 312- preliminary execution plan, 362-363
313, 316 program planning, 361-362
probability curve, 314 project control/reporting, 365, 367
RNG (see Pseudorandom number generator) project management of, 364
Roads, 28 project objectives, 361-362
ROI (see Return on investment) project organization, 365-366
Rundown, 200-202 work scope development, 364
control of, 207-209 Shutdown projects, small, 345-370
Index 455

[Shutdown projects, small] [Subcontracts]

authorization for expenditure, 359 quantities, 300
cost reports, 351, 353-356 reports, 253, 294-297, 300-304
estimate to finish, 359 specifications, 293-295
expenditure curves, 351-353 summary report, 358-359
jobhour control, 347-348 Substantial completion, 341
Pareto's Law for, 350 Superfund (see Comprehensive Environ-
personnel curves, 356 mental Response, Compensa-
physical measurement system, 347 tion, and Liability Act)
progress curves, 356 Superfund Amendments and
project control plan, 349-356, 359-360 Reauthorization Act, 153
project control program for, 348-350
project management program, 348-350 Target contracts, 182
quality estimating program for, 350 TCLP (see Toxicity characteristic leach-
schedules, 356, 360 ing procedure)
subcontract control, 357-359 TCM (see Total cost management)
trending program, 351 Team building, 374, 405
Sinclair Oil Corporation, 137, 151 Temporary facilities, 32
SIPs (see State implementation plans) Termination of contracts, 341
Site conditions, 338, 342 Time management, 379
Site preparation, 28 Time and materials contracts, 180-182
Skinner's list, 165 Time of the essence, 341
Soil remediation, 156—160 Time extension, in contracts, 341
biodegradable contamination, 158-159 Time-scaled diagram, 80
in situ treatment, 158-160 Tools, 32
nonvolatile/nonbiodegradable contami- Total cost management, 127
nation, 159-160 Total quality management, 1-8, 11-13,
soil fixation, 160 19, 348, 384, 400
treatment by removal, 157-158 reasons for failure of, 2-4
vapor extraction system, 159 Toxicity characteristic leaching proce-
volatile contamination, 158-159 dure, 163, 165
Soil washing system flowsheet, 158 Toxic Substance Control Act, 153
SOR (see Statement of requirements) TQM (see Total quality management)
SROs (see Shutdown projects) Tracking, work unit, 261-262, 285, 287-
Startup, 201-202, 207, 209 288
State Implementation Plans, 155 Trapezoidal technique, 79, 110, 112-120
Statement of requirements, 387, 389- Treatment, storage, and disposal, 165, 169
390, 413 (see also Scope) Trend analysis, 193-194
Status report Trending, 197-200, 351, 375
construction, 285-286 blackout period, 197
material, 248 design log program, 198
Structures, 28 owner vs. contractor, 197
Subcontracts 253, 293-304 trend meetings, 198, 200
administration, 57 trend reports, 194
claims, 358 typical situations, 197-198
cost control, 297-299 Truth in negotiations, 341
estimating, 55 TSCA (see Toxic Substance Control Act)
field changes, 304, 359 TSD (see Treatment, storage, and dis-
forecasts, 297-299 posal)
growth allowance, 299 Turnarounds (see Shutdown projects)
low bids, 299-300, 357
performance evaluation, 299-300 Uncertainty, 307, 319
project control, 293-304 Underground storage tanks, 151, 165
456 Index

Unit cost estimates, 23-24 Value management, 127-136

Unit price contracts, 180, 183, 191 during construction, 133-134
Universal service request, 389 VE (see Value engineering)
UNK (see known-unknown) Vendor drawing control, 239, 241
Unknown-unknown, 319 Verbal agreements, 336
UNK-UNK (see Unknown-unknown)
Use value, 129 Waiver, in contracts, 341
USR (see Universal service request) Warranty
UST (see Underground storage tanks) express, 341
Utilities equipment, 34 implied, 341
Water Quality Act, 153
Value, types of, 128-129 Welding machines, 290-291
Value analysis, 128 Wells, monitoring, 157
Value engineering, 127-128 Work scope
bibliography, 135-136 shutdowns, 364
to cost, 135 Work unit tracking, 261-262, 285, 287-
formal, 128, 130-133 288
phases of, 131-133 Worth, 129