Industrial Engineering

Projects
Practice and Procedures for Capital Projects in
the Engineering, Manufacturing and Process
.Industries

The Joint Development Board

An Imprint of Chapman & Hall

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 Contents
i;.
Preface

Foreword xiii
r'
1 Introduction
1.1 Owner involvement
1.2 Complexity
1.3 Management
1.4 Information control and reporting
1.5 Time
1.6 Safety, quality and environmental issues
1.7 Estimating and risk
1.8 Cost control and reduction
1.9 Terminology
1.10 Non-standard documentation
1 1.11 Conclusion
b
2 Management of engineering projects
2.1 Introduction
2.2 Project manager
2.3 Project organization
2.4 Outside influences
2.5 Corporate and co-venturer's requirements
2.6 Project execution plan (quality plan)
2.7 Project stages
2.8 Construction
2.9 Initial operations
2.10 Project risk analysis and management
2.11 Safety, environment and quality assurance
2.12 Latham and CRINE
2.13 Insurance
1 Bibliography

3 Estimating
3.1 Introduction
3.2 Initial actions
3.3 Estimating accuracy
3.4 Stages in estimate preparation
3.5 Estimate types
3.6 Hierarchical composite rates
I
I contents
3.7 Man-hour norms
3.8 Escalation, exchange rates and financing charges
3.9 Contingency allowance
3.10 Risk analysis and evaluation
3.11 Estimate content
3.12 Interfaces
3.13 Monitoring change
3.14 Control by estimate
3.15 Continued use of estimate
3.16 Coding and control
3.17 Estimate presentation
Bibliography

4 Value management
4.1 Introduction
4.2 Definition of value
4.3 VM definitions
4.4 Timing of studies
4.5 Value management methodology and job plan
4.6 Conclusion

5 Project services
5.1 Introduction

Part I Cost control

5.2 Objectives
5.3 The control estimate
5.4 Cost segregation
5.5 Approval of funds
5.6 Cost control techniques
5.7 Contingency management
5.8 Escalation
5.9 The cost control report
5.10 Other reports

Part 2 Planning and progress control

5.11 Introduction
5.12 The importance of planning
5.13 Organization
5.14 Levels of planning
5.15 Network techniques
5.16 Critical path and float
5.17 Progress measurement
5.18 Continuing control

Part 3 Document control

5.19 Introduction
 Contents 1
5.20 Main activities
5.21 Control methods
5.22 As-built drawings
5.23 Reporting
5.24 Retention of documents

Part 4 Material control

5.25 Introduction
5.26 Traceability
5.27 Coordination
5.28 Site storage
5.29 Spares
5.30 Close-out

Part 5 Coordination of procedures

5.31 Introduction
5.32 Management procedures
5.33 Design procedures
5.34 Site procedures
5.35 Production of site procedures
5.36 Typical site procedures
5.37 People and procedures
5.38 Changes to procedures
5.39 Compliance
5.40 Conclusion
Bibliography

6 Quality assurance
6.1 Introduction
6.2 Quality assurance
6.3 Total quality management
6.4 The standards
6.5 The systems
6.6 Procedures
6.7 Team quality
6.8 Subcontractor and supplier quality
6.9 Quality improvement
6.1 0 The way forward
Bibliography

7 The contract
7.1 Introduction
7.2 Types of contract
7.3 Forms of contract
7.4 Terms and conditions
7.5 Definitions and interpretations
7.6 Scope of work
1 Contents
Responsibilities
Law and statute
Damage, injury and insurance
Subcontracting
Time
Variations
Payment
Testing, take-over and liability for defects
Default and remedies
Suspension and termination
Resolution of disputes
Supplementary and special conditions

8 Indemnities and insurances

8.1 Introduction
8.2 General
8.3 Definitions
8.4 Need for indemnities and insurance
8.5 Provision of insurance
8.6 Specialist advice
8.7 Standard conditions of contract
8.8 Contractor1subcontractor
8.9 Indemnities
8.10 Drafting of clauses
8.1 1 Problem areas
8.12 Current practices
8.13 Amended documents
8.14 Non-standard conditions of contract
8.15 Sound legal advice
8.16 Insuring clauses
8.17 Conditions and warranties
8.18 Types of insurance
8.19 Other forms of insurance
8.20 Risk management
8.2 1 Constructing the team
Bibliography

9 Contractor/subcontractorselection
9.1 Introduction
9.2 Selection strategy
9.3 Establishing selection criteria
9.4 Pre-qualification
9.5 Evaluation criteria
9.6 Shortlisting
9.7 Examination of company reports and accounts
9.8 Pre-qualification interviews
 Contents
(Fi
9.9 Contracting strategy
9.10 Tendering process
9.1 1 Types of tender
9.12 EC directives
9.13 Receipt and analysis of tender
9.14 Finalization of contract documents
9.15 Conclusion

10 Procurement of materials and equipment

10.1 Introduction
10.2 Scope of procurement activities
10.3 Requisitions
10.4 The procurement cycle
10.5 The procurement team
10.6 EU regulations
10.7 Communication
10.8 Terms and conditions
10.9 Certification and certifying authorities
10.10 Material traceability
10.11 Spares and special tools
10.12 Supplier data
10.13 Quality assurance
10.14 Pre-qualification of suppliers
10.15 Tender list
10.16 Enquiries
10.17 Expediting and inspection
10.18 Shipping/transport/insurance
10.19 Progress measurement and reporting
Bibliography

11 Operational maintenance
11.1 Introduction
11.2 Planning
11.3 Estimating and budgeting
11.4 Contracting strategies
11.5 Control of costs
11.6 Contractslfinancial audits

12 Health and safety and the environment

12.1 Introduction
12.2 Historical summary of legislation
12.3 The Health and Safety at Work Act 1974
12.4 Construction (Design and Management)
Regulations 1994 (CDM)
12.5 References
 -

1 Contents
12.6 Maintenance of safety records on site 264
12.7 Statutory approvals for capital projects 264
12.8 Conclusion 267

Appendix A Glossary of terms 269

Appendix B Acts and Regulations pertinent to the
construction industry 282
Appendix C Safety records required on site 284
Appendix D Example forms 286
Appendix E The Local Government (Access to
Information) Act 1985 290
Appendix F Environmental impact assessment 292

Index 295
 Preface

The Joint Development Board (JDB), which is sponsored by The Royal

Institution of Chartered Surveyors and the Association of Cost Engineers,
is charged with raising the profile of project and commercial controls in the
Engineering Industry.
The JDB, which has previously published the Standard Method of
Measurement of Industrial Engineering Construction, noted that there was
no single source which imparted to the reader a clear, basic understanding
of the manner in which industrial engineering projects were managed from
feasibility through to commissioning and operation. The JDB also noted
that a smaller workload and reducing margin had put all sides of the engi-
neering industry under increasing pressure to improve the efficiency of
their operations and the quality of its products.
Efficiency and quality are not restricted to design and construction
activities. For a project to be a commercial success the project must be
managed and the twin parameters of cost and time must be effectively con-
trolled, by systems and procedures which are themselves subject to
continuous improvement.
It was the recognition of the need to increase the efficiency and quality
of project controls that prompted the JDB to produce this book, which aims
to bring together the knowledge, skills and day-to-day practice of the engi-
neering construction industry in the management and control of capital
projects.

The Members of the JDB (including co-opted Members) responsible for

the preparation and production of this book are:

A.E. Jackson, FRICS, MACostE

(Chairman) AMEC Process and Energy Ltd
D.R.D. Ainsley, FRICS A.L. Currie and Brown
J.H. Blenkhorn, ARICS, MACostE,
FInstPet Franklin and Andrews
K.R. Cookson, FRICS Franklin and Andrews
M.G. Leese, FRICS, FACostE,
ACIArb Bahrain Petroleum Company
M. Mitchell, ARICS British Gas plc
P.J. McBrien, FCII, FIRM
D.F. Parkinson, FRICS, Hon. FACostE Davis, Langdon and Everest
V. Thompson, FACostE
R.B. Watson, FRICS, MACostE Engineering Cost Management
R.A. Webber, MACostE Jacobs Engineering
B.G. Wheeler, FRICS, MACostE
(1 preface

On behalf of the JDB we wish to acknowledge the following for their

invaluable help and specialist knowledge:

I. McCallum, MACostE, MInstCES A. L. Currie and Brown

G. Davies, MIQA, CEng AMEC Process and Energy Ltd
R.R. Genillard, DMS, MIMgt, MCIPS AMEC Process and Energy Ltd
J. Roberts, BSc, CEng, MIMechE Independent consultant

together with

Laporte Engineering Services for the use of certain forms

and

AMEC plc for the provision of photographs

We would like to express our thanks on behalf of the Councils of the two spon-
soring bodies to all those who have contributed so much of their time and effort
in the production of this first edition and for the support of their companies.

Alec Ray Jeremy Bayliss

President President
The Association of Cost The Royal Institution
Engineers of Chartered Surveyors
 Foreword

Although the engineering construction industry is not necessarily in the

public eye to the same extent as the building or civil engineering indus-
tries, it is nevertheless responsible for providing virtually everything
demanded by a modern economy, from power generation and exploration
and exploitation of raw materials to the manufacture of goods of all types.
Economic circumstances have made it necessary to review the manner
in which all construction is undertaken in order to improve performance.
The Latham Report into the building industry and the CRINE initiative in
the offshore oil and gas industry recommend among other things a greater
degree of cooperation between Owner and Contractor, integration of man-
agement teams, reduction in risk and standardization of documentation and
procedures.
This book seeks to provide a greater understanding of the activities, sys-
tems and techniques used by members of the engineering construction
design and construction teams, which is an essential start to achieving the
changes envisaged.
It is recommended to those working in the engineering construction
sector who are certain to find that it contributes to a greater general under-
standing of the industry. The broad spread of information also makes it
suitable for students and for those intending to take up national vocational
qualifications (NVQs).

Sir John Fairclough FEng

Chairman of the Engineering
Council 1990-1995
Introduction

The stripper reboiler at

Hydrofiner plant
Grangemouth, Scotland.

Plant Owner B. P. Oil Ltd.

I Introduction
Engineering construction is a loose expression covering the design and
construction of capital projects for a broad spread of manufacturing and
energy related industries including:
gas and oil exploration and production;
chemical and process;
refining;
nuclear;
power generation;
steel production;
pharmaceuticals;
oxygen and other gases;
food and drink;
water and sewage treatment.
Some of these industries are indigenous and have developed their practices
alongside the construction sectors of other local industries, by adopting
and adapting the same basic philosophies of administration and control,
while others originated in other parts of the world.
Current practice has therefore been influenced by the nature of the pro-
jects typically undertaken and the traditional practices in the area of the
world where the industry has its roots. In addition, owners and contractors
in the above sectors are often among the world's largest companies, many
of which have made major investments both in terms of experience and
development costs in their particular method of doing business.
In spite of these historical beginnings many of the engineering sectors
manage capital projects in a similar manner due to a number of common
factors. These include:
degree of owner involvement;
remoteness of location;
complexity of the projects;
coordination of high value projects, with large multidiscipline, multi-
contractor teams;
time constraints;
lack of standard documentation;
hazardous nature of the plants being constructed;
degree of risk involved;
training of the construction professions.
The various factors that influence the economics of the completed plant
~
will have been considered in the feasibility study before the project gets the
go ahead. The plant may be competing against facilities built some years
previously which have their costs written down, and the product fiom the
new plant must match these existing prices by the use of new technology to
increase efficiency, by reducing operating and maintenance costs, and by
ensuring the lowest capital cost for the plant. This book primarily deals
with the management methods and procedures necessary to achieve this
economic success.
The project flow chart, Figure 1.1, shows the stages which are typical of
an engineering capital project from conception to completion.
161 Introduction
This book does not cover all details of specific practices in the various
sectors, but endeavours to provide an overview which has relevance to
each sector.

1.1 OWNER INVOLVEMENT

Various factors affect the manner in which a prospective owner of a plant

interacts with his design/construction team.
The typical owner involved in an engineering project tends to have
greater technical experience and expertise than his opposite number in
other construction industries in that he:
may have similar plants elsewhere;
will usually be the end user;
may have design standards and in-house design capability;
may hold a process licence;
may have a project management capability including procurement,
cost administration and contract specialists and will frequently main-
tain a supervision and coordination role;
will certainly know how the plant can best be operated.
The typical owner of an engineering project will therefore be more
involved in the day-to-day decisions and take a far greater degree of
responsibility for the project than will most owners in the building and
civil engineering industries. This involvement has a major effect through-
out the whole organization of the work and on the contractual relationships
between the various parties.
Generally, schemes take several years to implement and initially an owner
must consider plant capacity, construction costs, production slots, feedstock,
energy, transport and above all the available market and the price the product
will command in the future. This will of course call for research as to what
other organizations are constructing facilities, or planning to construct facili-
ties, which would affect the product's market or price.

1.2 COMPLEXITY

Many engineering projects are by their very nature complex and include
unique designs or processes. Owners demand the most modern tech-
nologies either to produce a new product or to ensure cost-effective
production, etc. and frequently require the finished product in a short
development period. This necessitates parallel working between the design
and construction phases and the need for multi-contractor construction
sites, with a consequent potential for delay, disruption and associated extra
costs.
The design of a plant as a whole may incorporate designs provided by
various specialist suppliers, who cannot design their component in isola-
 Management 17
1
tion from the main design, but whose design is required by that main
design. The resulting iterative procedure requires close control and exped-
iting of information that flows between the various parties, in order that all
the various designers, specialist suppliers and construction contractors
work from the most up-to-date information at all times.
The time required to manufacture some items of sophisticated equip-
ment may require that they are ordered ahead of any contract being
tendered for their installation. Furthermore, bulk materials, e.g. pipe,
valves, electrical and instrumentation cables, etc., may be purchased by the
owner or the owner's managing contractor for reasons of compatibility or
buying power. This gives rise to construction contracts where some or most
of the materials are provided as 'free issue' to the contractor, which
requires controls to be introduced into the manner in which those materials
are purchased, issued and used.
On large projects, it is unlikely that any one main contractor will have
all the necessary skills and resources needed to fabricate and construct the
entire project. The result is the need to coordinate site access, availability
of design and the free issue of materials and equipment, with the parallel or
sequential working of a number of major construction contractors, sub-
contractors and equipment manufacturers.
Following construction, the plant will be pre-commissioned and finally
commissioned and test run to verify the plant's performance. Some of this
work may be undertaken by the owner, some by the management contrac-
tor and some by the construction contractors, subcontractors or equipment
suppliers.
The impact of design complexity, the coordination of the design, pro-
curement and construction activities and parallel working, is a major
management function which highlights the need for tight control in terms
of cost, time and information.

1.3 MANAGEMENT

When approval is given for a major project to proceed, many people are
employed for months or years and many millions of pounds (or dollars,
dinars, etc.) are expended.
The success of such a project rarely depends on a single individual.
However, one single inadequate person at a sufficient level of influence can
bring failure, overspend or delay (often all three).
The very term 'project manager' leads to a misunderstanding of the role
of managers, and indeed it encourages the belief that projects can be 'man-
aged' by an individual, whereas they can only be run by a team. The
project manager is the leader of the team and as such must have adequate
knowledge of the engineering issues, safety regulations and the law as it
relates to the project, together with lots of common sense, the skills of a
diplomat, an ability to face unpleasant issues quickly and enough respect
from the team to get maximum effort and cooperation from them at all
times.
181 Introduction
1.4 INFORMATION CONTROL AND REPORTING

Understanding the importance of appropriate reporting is essential if a pro-

ject team is not to be buried by the mountain of information generated by a
typical major project. Large projects are too complex to allow project man-
agers to regularly do any of the detailed work themselves, but a project
manager does require relevant information to be provided in a condensed
form in order to maintain an overview of the project and its key activities.
The project will therefore need to have a bespoke service to give intelligble
information in report form, supported by further detailed levels of informa-
tion available to be examined, adapted and acted upon as required.
Unless the distribution of the large amount of information and reports
generated by a project is controlled by a system which ensures that each
member receives only what is required, the project management team can
be overwhelmed by sheer volume of paperwork containing information
which is constantly changing and developing. Moreover, unless such infor-
mation is coded and correctly archived, the possibility of its successful
recovery is remote.
Information control is therefore a significant activity on engineering
projects, not only to ensure that all the various project members are
working from the most up-to-date documentation and data but also to
ensure that drawings and other documents are available to the owner
which accurately reflect the as-built condition, since once completed the
plant is an ongoing operation requiring maintenance and possible future
development.

1.5 TIME

Time on a project is fiequently all important, given the need to meet

market expectation and customer demand; and in some cases the earlier
earning capacity will outweigh any increased cost of accelerating the
design and construction process. Time on all projects becomes increasingly
critical as more of it passes. When the project is in the feasibility stage, a
project completion and commissioning date perhaps five years in the future
may seem a long way ahead; but when approval to proceed is finally
received a year can have elapsed, but the completion date rarely moves. If
the project becomes the subject of environmental objections further delays
can accrue.
Notwithstanding environmental issues, the development of the design is
the first stage of the project to feel the increasing pressure exerted on it by
the passage of time; but the proposed completion date may still appear a
long way off.
Further pressure is exerted on the design team as the procurement activ-
ity starts to demand design criteria and performance requirements in order
that tenders can be sought for the purchase of long lead items. There ik now
an increasing awareness that time is indeed passing and that the time left to
completion and commissioning is a little tight.
 Safety, quality and the environment Ir l
When at last fabrication and construction commence, time may have the
whole project team by the throat. The time required for the logical sequential
progression through the work may no longer be available. Design may have
overrun and procurement be delayed as a consequence, but the end date
remains cast in stone. The consequences of this are not difficult to predict.
When the programme slips, the reasons are often various or not specific.
The need to accelerate the programme usually requires further expenditure
by the owner over and above the original contract which, not surprisingly,
he may not be too keen to incur. There will be a temptation to delay
unpalatable decisions in the hope that subsequent events will make up any
previous delays to the programme.
The overall effect of a delay to an owner may be loss of earnings and
possible loss of markets and the owner will have to balance his options
in deciding whether to accept the delay or bear the cost of accelerating
the work.
The importance of the planning engineer's function in ensuring that the
project is completed on time cannot be overemphasized. The many activi-
ties needed to design the work, procure equipment and materials, award
contracts, coordinate contractors and suppliers, construct and commission
the plant and set it to work needs to be carefully sequenced and progress
monitored, and remedial actions need to be taken immediately to overcome
problems.
The planning engineer will be faced with the difficult task of producing an
overall project programme showing what is required, of whom and when,
and then ensuring that all other parties involved in the project work to sched-
ules which are compatible with this master programme.

1.6 SAFETY, QUALITY AND ENVIRONMENTAL ISSUES

Safe construction and safe operation is the subject of numerous Acts of

Parliament and quality assurance is now generally used throughout the
whole of the engineering industry. Similarly, the growing environmental
lobby has also made owners and contractors alike more aware of the need
to operate in an environmentally acceptable manner.
While health and safety is particularly important to the engineering
industries in view of the danger inherent in any major industrial plant, if
the desired quality is not achieved maintenance costs, guarantee of produc-
tion and environmental protection can all be adversely affected.
It is now often the case that an operating or manufacturing company will
demand that any contractor or subcontractor employed on a project must
have quality assurance and quality control (QA/QC) procedures consistent
with the requirements of IS0 9000, and that they also have an environmen-
tal policy. If a company does not have such controls internally, then it is
unlikely to be considered when tender lists are prepared.
Environmental considerations are crucial to the programme. If the pro-
ject is the subject of environmental objections during its development and
goes to public inquiry, this may take 18 months, and a judicial review will
11 Introduction
take a similar period, while planning consents or emission licences will
take about six weeks each time the project goes to committee. If, at the end
of this period, another site has to be selected and purchased, this process
will start again, with calamitous effects on the programme.

1.7 ESTIMATING AND RISK

Many engineering projects are of high capital value, and are possibly car-
ried out in remote locations; many use processes at the limits of current
technology, and many are unique or sufficiently dissimilar to each other to
make it difficult to use a standard, high-level, cost database.
As a result estimates are required to be produced to a far greater degree
of detail than in other construction industries in order for them to be suffi-
ciently flexible to meet the demands of each unique environment and to
enable the project manager to identify, analyse and closely manage the sig-
nificant risks involved through the project period.
Large projects have special features which make them different and,
when things go wrong, more expensive. Reasons can vary but include the
following:
The management of major projects is often undertaken by bespoke
teams of specialists brought together for that one project and dis-
banded, after completion, with subsequent loss of team relationships
and experience of working together.
Unique items of plant may be ordered months, sometimes years
before installation. Any mistakes or delays in the provision of this
plant cannot be resolved by a trip to the local builders' merchant to
purchase additional quantities or a replacement.
The requirement to employ large numbers of specialist fitters,
welders, etc. can deplete the resources of the locality, necessitating
the investigation of the various options for off-site fabrication, impor-
tation of labour, etc.
Separate disciplines and specialist suppliers may be designing their
contributions in isolation, hence the possibility of error or change
increases unless good coordination is practised.
Engineering projects are site-specific, bespoke products and some-
times incorporate untried technology.
This list may have the effect of putting most of the contractors and team
members, however experienced, on a 'learning curve' at all stages of the
project.
Although there will always be a drive to improve management and pro-
ject controls, the significant risks associated with engineering projects
cannot be totally eradicated. It is widely recognized in the engineering
industry that risk estimating techniques are essential and powerful tools,
particularly during the early phases of a project. They are therefore used to
aid the understanding of the risks and to identify areas where management
attention is most needed to mitigate their effects.
I Cost control and reduction I( 11 (

The risks mainly arise from the complexity of the plant, the remote
nature of the typical site, the urgency with which the plant is required to be
completed and the areas of new and untried technology, all of which will
test the most experienced estimator.
Although the aim should always be to improve performance and use 'fit
for the purpose' designs and specifications, the decision to reduce cost by
reducing specification has to be taken against the background of a realistic
estimate which includes a proper consideration and evaluation of the pro-
ject risks. To realize late in a project that features that were part of the
original brief but omitted to reduce cost, could have been accommodated
within the original budget will not endear the estimator to colleagues or
employer.

1.8 COST CONTROL AND REDUCTION

The reality of a project will mean that unless effective cost control is exer-
cised costs will escalate and the efforts of the most experienced of
estimators using the very best of information will be wasted.
Control is not the passive role of merely monitoring and accounting for
cost, nor is it limited to the cost of material and construction. Cost control
is an active role, which commences on day one of the project, with the con-
trol of management and design, and it continues through procurement of
materials and construction of the plant, to completion and settlement of all
accounts. Cost control is undertaken by cost engineers whose function is to
ensure that the work is undertaken in the most cost-effective manner, by
seeking economic solutions, monitoring expenditure, analysing perfor-
mance, identifying problem areas and recommending preventive or
remedial action. The position of cost engineer may be filled by one who is
by profession a cost engineer or quantity surveyor; however the term quan-
tity surveyor is not widely used in the engineering industries.
Company costs can be reduced by various means including elimination
of waste, removal of unnecessary requirements or by increased efficiency.
Costs can also be reduced by reducing capability or specification, but
whether this constitutes a 'saving' may be a matter of opinion since the
owner is receiving less for his money.
Waste to be eliminated includes poor performance, lack of coordination
and change for its own sake, all of which causes disrupted working and
delay. The use of non-standard items, be they items of equipment, contract
documentation, procedures or certification requirements, rather than an 'off
the shelf' fit for the purpose, again incurs unnecessary additional cost or risk.
The CRINE (Cost Reduction Initiative for the New Era) report high-
lights many of these features in connection with the offshore oil and gas
industries and emphasizes the savings that it considers could be enjoyed if
the traditional confrontational forms of contract were replaced by a cooper-
ative relationship between contracting parties.
Time will tell whether the objectives of the report and the Latham Report
into the UK construction industry can be translated into the savings
( Introduction

Figure 1.2 Potential for making savings and incurring additional costs during the
life of a project

demanded and whether similar initiatives are equally valid in other con-
struction environments.
It is sometimes necessary to challenge whether something perceived as
essential to a project is in fact necessary. The removal of unnecessary con-
tent, or overspecification, from a project is a genuine saving and the use of
the techniques of value engineering described in Chapter 4 challenges
every aspect of a project and the components within that project. Value
engineering is a technique which requires a systematic review of each ele-
ment of the project and of every item of equipment within the project,
questioning purpose and cost in order to identify savings.
Figure 1.2 shows that while the ability to make savings reduces as the
project progresses, the effect of change and delay increases. This clearly
demonstrates that to obtain best effect any cost saving reviews must be
started sufficiently early. It also demonstrates that, during this same early
period, management structures, controls and procedures must be estab-
lished to improve and maintain performance and avoid the cumulative
effects of change, delay, rework and disruption.

1.9 TERMINOLOGY

The lack of standardization within the industry is evident when looking at a

list of apparently interchangeable terms which at best cause misunder-
standing and at worst contractual error, dispute or other difficulty.
The need to fully understand the terminology used is obvious. A term
apparently in common use may be given different definitions on different
projects. For example, in this book the person for whom the project is
being undertaken is referred to as 'the owner' while elsewhere the terms
'employer', 'client', or 'operator' are commonly in use.
Similarly the generic term 'change' is used to describe the following
terms which are in general use to describe a change to the design, specifica-
tion, means of construction, or timing of the work:
 Conclusion
lW
engineer's instruction;
variation order;
trend notice.

Even greater difficulties relate to the term 'project manager', which is used
in this book to describe the person in overall charge of the project. Some
owners use the term project manager, while others refer to 'the engineer',
as do some published standard conditions of contract.
To add to the confusion, some conditions of contract require both the
owner and contractor to appoint project managers, while others may appoint
a project manager to be in charge of the overall project, but use forms of
contract which refer to the person ultimately responsible for a contract as
being 'the engineer' or the 'owner representative'. Contractors and subcon-
tractors may in turn appoint a project manager for their parts of the whole.
In considering alternatives in general use it is therefore important to
consider not only the project as a whole but also the various contracts
placed within that project. The function of a particular person or document
should not be assumed without reference to a more precise definition pecu-
liar to that project.

1.10 NON-STANDARD DOCUMENTATION

A major element having a significant effect on administration within the

industry is the lack of standardization of contract documents, administra-
tive practices, methods of measurement, etc.
This lack of standardization affects the efficiency of the industry in var-
ious ways:
It reduces the possibility of amassing and exchanging data between
projects and companies.
It causes error in the understanding of requirements and requires ten-
derer~to search through documentation to find potential contractual
hazards and contractors to fall foul of clauses which they had misun-
derstood.
It requires personnel to acquaint themselves with the systems and pro-
cedures for each project.

1.11 CONCLUSION

As in all endeavours teamwork and cooperation are vital ingredients to the

success of engineering projects. An owner will rely on his project manage-
ment team; they in turn will be reliant on contractors, subcontractors and
suppliers who have been chosen for their experience and suitability.
However, each member of this greater team is dependent on others and the
procedures, systems, contracts and controls must allow the benefits of
cooperation to come through.
1 Introduction
Such a balance is best achieved through an appreciation of the require-
ments of other members of the project and it is hoped that this book will
help each project member understand how the other disciplines do their
work and thereby assist them in achieving the cooperation and efficiency
we all strive to obtain.
Owners and contractors involved in industrial engineering projects are
constantly seeking new ways of undertaking capital projects in order to
increase the efficiency of the industry, to improve the economics of work-
ing and to adapt to the changing safety and environment requirements
around the world.
Therefore, while every effort has been made in this book to ensure the
accuracy of the information presented, the Joint Development Board
cannot take responsibility for any personal opinions, errors or superseded
information since statutory requirements are constantly changing and prac-
tices and procedures vary from company to company.
Any person taking a position of responsibility within an engineering
project is strongly advised to acquaint himself with the general require-
ments of a particular company and the specific requirements of a particular
project since no book can cover the multitude of differences in style and
definition in use worldwide.
of Engineering
Projects
I Management of engineering projects
2.1 INTRODUCTION

Project management in one form or another exists in every creative activity

involving more than one individual. The term 'management' generally
implies organizing people to achieve specified objectives; however, project
management has the additional implication of being related to a particular
project and hence has a specific start and completion date.
This chapter outlines the role of project management, some of the tools
used by the project management team and identifies some of the factors
that the project management team have to consider during the course of a
major project.
Project management for anything other than the simplest of tasks is not
an optional activity; it is a key management activity whose function is to
either obtain or use available resources of labour, equipment and material
to supervise and achieve defined objectives within stated restrictions of
time, cost and quality. This is achieved by formulating and implementing
plans to meet the defined objectives, by monitoring performance against
those plans and by taking any corrective action deemed necessary.
Management style is peculiar to an individual project manager and
influenced by the circumstances in which the manager and his organization
are required to operate. The principles of good management practice, how-
ever, apply to all circumstances, and while styles may vary the
fundamental requirements of good management remain.
In the same way that individuals have a management style, organiza-
tions have their own cultures, values and operational policies that govern
and influence the way in which they and their personnel operate their busi-
ness. These cultures, values and policies may:
be highly commercial;
have a social or environmental impetus;
be focused on industrial relations;
be influenced by external perceptions - the public, financial institu-
tions, etc.;
be largely driven by statutory or regulatory requirements.
Such matters are subtle, but have a far reaching impact. They must be
understood by the management team and addressed in the execution of the
project if that execution is to be effective.
Owners will appoint a project manager to take overall responsibility for
their project and each major contractor or supplier will appoint a manager,
who may also be titled 'project manager', to take responsibility for its
share of the project. Although this chapter is generally addressing manage-
ment by the prospective owner, the majority of the principles described are
also applicable to the contractor's side of engineering project management.

2.2 PROJECT MANAGER

The term 'project manager' is in common use in the engineering indtistries
and is the term used in this chapter to describe the most senior position in a
 Project manager
IW
project. The term 'engineer' is also in common use, particularly in compa-
nies that have an affinity with civil engineering and is a term frequently
referred to in many standard forms of contract to describe the person who
has full authority to act on all matters under a particular contract.
The engineer when referred to in a contract may also be the project
manager, or indeed any capable person nominated to that position. There
may be both a project manager and an engineer on a single project; in
such cases the project manager may be in overall charge and the engineer
be a consultant acting independently on design and possibly contract
matters.
It is generally accepted that any project must ultimately be the responsi-
bility of a single person and the activities described in this chapter relate to
this 'ultimate' project manager.
Subject to prescribed limits defined by the owner or co-venturers, the
project manager will have the authority to decide how the project will be
implemented and will typically be given the following responsibilities:
to discharge the delegated authority received from the owner or co-
venturers;
to act as key focal point concerning the owner, co-venturers and
external statutory authorities;
to report to the owner bodies at specified points;
to build and lead the project team;
to set and expedite the project objectives;
to manage all activities relating to the project;
to manage any conflict of interest.
Whether the project manager is employed by an owner or by a contractor,
he or she must serve the requirements of both the owner and his own pro-
ject team and ensure that all decisions within his or her authority are made
and communicated expeditiously. The project team is entitled to expect the
owner andlor project manager to respond with the same degree of urgency
to which they are subject.
The project team will provide expertise in the planning, estimating,
designing, procuring, constructing, cost control, quality control and com-
missioning of the plant, but the project manager will look to the owner for
a clear directive as to any mandatory requirements that the owner's organ-
ization may wish to impose on the project, including:

provision of the project brief;

development of the brief, as necessary;
identification of corporate policies and standards;
identification of reporting and approval requirements;
identification of interfaces within the owner organization.

The project manager must be able to motivate the various groups within a
work environment and to make personnel aware of and concerned with
achieving the overall project objectives and not simply those limited
responsibilities that fall within his sphere.
1 Management of engineering projects
2.3 PROJECT ORGANIZATION

The project manager will build and lead the project management organiza-
tion that acts as the focal point for the project and manages and oversees
the execution of the work. A strong effective project organization is critical
to the success of any large venture and the most efficient project organiza-
tion comprises a team of dedicated professional managers working
together from inception to completion of the project.
A strong organization is not necessarily a large organization as strength
can come from the close working relationship of a small, highly motivated
team. Owners have at times used large project management teams but it is
generally considered that such teams can be difficult to control and can
result in considerable 'opinion engineering' with resultant cost escalation
and lack of time control.
Many owners now wish to see smaller project management teams and
while many projects maintain relatively traditional organizational relation-
ships, the latest thinking is to form a single integrated team comprising
owner's and contractor's personnel chosen on a 'best for job' basis. This
approach aims to avoid the all too common adversarial approach to con-
tracting but clearly affects the contractual relationships between the
parties.

2.3.1 Nature of project organization

The following are the five basic types of project organization commonly in
use:
owner based project team;
owner based project team supplemented by a contractor provided
project services team;
management contractor;
main contractor;
alliancing/partnering.

2.3.2 Owner based project team

~
Where an owner has a unique technology that he wishes to retain in house,
or has significant design and construction experience with appropriate per-
sonnel available, the owner may opt to provide the whole of the project
team (see Figure 2.1). In such circumstances the owner's project team will
allocate packages of design or construction work to contractors, will super-
vise and control the various interfaces between work packages and
possibly carry out some preliminary design work in house. The owner's
team may also procure items which are critical with regard to delivery or
design requirements and provide such items on a 'free issue' basis to a con-
struction/installation contractor. The owner team will be in direct contact
with suppliers, designers and construction contractors, etc.
Owner ,-----b Corporate management Direct management -
Ensure compliance ---- --

I
I
L-- T------------ T------------- r------------ ------ r------------
r------ 7
I I I
I I I I

I 1 4 &
I
4
I

4 &
I

Operations
I Procurement Project Project
accountant manager manager
I manager services
I I I
I
I Purchasing Planning contract placement Accounts Design1 sne operations Operational malters
Value engineering Contract Payments Design approval Operational and
I Expediting maintenance
I Inspection Cost control administration AudR
Document control Quantity surveying Foreign currency manuals and
1 Shipping
I Material control Estimating
Material control*
requirements training
I
I
'ResponsibilHy
varies

Figure 2.1 Typical owner organization

UI Management of engineering projects
2.3.3 Owner based project team with a project services contractor

Project services comprise those disciplines that are essential to the proper
control of time and cost of a project, including document control and mate-
rial control. This service may be provided by a project services contractor
whose scope will typically include those services shown in Figure 2.2. The
scope may also, in some cases, include contract management. This type of
organization is commonly used where an owner does not have sufficient, or
experienced resources to provide a full project team but nevertheless
wishes to retain direct control. The intention will be to construct an effec-
tive integrated project management team from the complementary
strengths of the owner's organization and that of the project services con-
tractor. Packages of design or construction work will be allocated as in
section 2.3.2. The project services contractor will be in direct contact with
suppliers, designers and construction contractors in connection with those
matters for which the project services contractor is responsible.

2.3.4 Management contractor

Under the concept of a management contract the owner contracts the man-
agement of the project to a management contractor who controls and
coordinates the work carried out by suppliers and design and construction
contractors, for and on behalf of the owner. The scope of work may there-
fore include design approval, planning, cost engineering, procurement,
contract engineering, quality control and administration of the project and
the various purchase orders and contracts.
The owner/management contractor organization is shown in Figure 2.3.
Under this arrangement the owner supervises and controls the management
contractor but he has little direct contact with suppliers, designers and con-
struction contractors.

2.3.5 Main contractor

Under the main contractor (see Figure 2.4) approach the owner contracts
the entire project, or substantial parts of the project, to a single contracting
entity. The main contractor has sole responsibility for the execution of the
work, which may include design and which the contractor may undertake
using its own resources or those of subcontractors. On a major project there
may be a number of main contracts, each dealing with separate and distinct
sections of the work (i.e. process unit, tank farm, loading jetty, etc.), in
which case the owner may use any of the previous management types to
control and coordinate the overall project.

2.3.6 Alliancing and partnering

In traditional contracts the objectives of the contracting parties are diamet-
rically opposed, the owner wishing to hold the contractor to a contract
value that might have been based on the minimum of information and the
contractor seeking to maximize his profit by aggressively seeking changes
 Corporate management Direct management -
Owner ----
C Ensure compliance

Health and
+ manager

safety assurance
I I I

Engineering Construction
manager I !
I

+I
I I
Design/ Site operations Operational matters
I
I Design approval Operational and
v maintenance
I Project manuals and
I accountant 1 manager I training

Accounts Contract placement*

Payments Contract administration'
Auda Z)uantity surveying'
Foreign currency Responsibility
requirements varies

I I I I

r--i
I I

v
I
.t 9 $.
Suppliers
-I-
Contractors/suppliers
Design
contractor
- - --
,- ~onstntction !
contractors_i
-- - -

Figure 2.2 Typical owneriproject services contractor organization

 Owner Direct management
Ensure welfare1QA compliance ------
Ensure technicalladministrational ...............
compliance

1 1 I I
I I
I
I Project Engineering Construction
I accountant
I Accounts Operationalmatters i Design approval i
I Payments Operational and :
I Audit maintenance ;
I Foreign currency manualsand ;
! reauirements trainino

Construction
Contractorslsuppliers contractor contractors

Figure 2.3 Typical ownerlmanagement contractor organization

1 1 Management of engineering projects
and claims. The net result is a serious diversion of management effort into
defending the various contractual positions rather than seeking efficient
and economical solutions.
The concept of an alliance or partnering relationship is based on the
belief that cost can be saved and profit enhanced when the strengths of the
various parties involved in a project are formed into a cohesive team that
has the single objective of completing the project on time, within set cost
limits and to the required quality.
The resulting organization is a single integrated team comprising per-
sonnel from the owner and various contractors chosen on a 'best for job'
basis with no distinction made between owner and contractor personnel. It
is hoped that such relationships will align objectives and remove con-
frontation, thereby improving efficiency and reducing costs.
A typical arrangement for such a relationship stresses mutual dependence
by reducing contractual risk to a minimum through the use of primarily
reimbursable types of contract and linking profit directly to reductions made
in out-turn costs. Work subcontracted by the contractor is usually reim-
bursed at cost, but such subcontracts may be let on a lump sum, measure
and value, or on a similar incentive basis to the main contract.
Although the two terms are frequently interchanged, 'partnering' is a
term used by some companies to describe an ongoing relationship over a
number of projects, while an 'alliance' is formed for a single project.

2.3.7 Selection of project management team

The size, shape and composition of an organization is clearly important,
but what is vital is the manner in which an organization allows the various
teams within it to work together.
One of the first actions of the owner is to appoint a project manager to
take responsibility for the project. The early appointment of the project
manager and other key members of the project team should ensure con-
tinuity in the important transition from early development to project
execution. The project manager will organize and coordinate the various
viability studies necessary before the owner makes the final decision to
undertake the project. Such studies may, alternatively, be undertaken by the
owner's organization or by consultants.
Once a decision to proceed has been taken, the project manager first
develops a contracting and management philosophy followed by a prelimi-
nary staffing plan and the selection of a project team.
The structure of the project management team depends upon:
the project contracting strategy;
the capabilities of people available to form the project team;
the form of contracts to be used;
whether responsibility for design is placed with a separate design
contractor.
Although the basic shape of the organization will remain throughout the
project its content will change from time to time to suit the requirements
particular to the stages of the work.
 Project organization I El
Factors that influence team and individual effectiveness include:
utilizing the owner's and contractor's strengths;
minimizing the size of the project team;
minimizing duplication;
establishing clear team objectives and individual roles;
establishing manageable and managed interfaces between account-
able persons;
arranging single point accountability for discrete parts of the work.
One of the key management skills required of a project manager is the abil-
ity to identify those members who need to be involved in management
discussions and decisions. The familiar statements 'this is not my problem'
and 'this problem does not concern my department' must be avoided at all
cost. This is particularly so on engineering projects which require very
diverse project teams.
There is an inherent possibility for conflict within the project team since
each participant sees the project from a particular viewpoint. It is therefore
necessary for a project manager to decide upon issues where two or more
parties disagree on particular actions and to facilitate a solution to the
problem.

2.3.8 Roles and responsibilities

Project organizations need to reflect the matters for which the owner or the
contractor is responsible. The various responsibilities of the contractor and
the owner should be defined at an early date and the nature of the various
interfaces identified throughout the organization.
Considerable time can be wasted and expense incurred through poor
coordination. Where there is no single management responsibility for an
interface between, for example, design disciplines or between procurement
and construction activities, a coordinator should be identified and given the
responsibility for ensuring that communication between the parties at the
interface is effective.
A schedule of all the interfaces and the responsible coordinators should
be prepared during the early stages of the work and reviewed as the project
develops.

2.3.9 Personal objectives

The project execution plan described in section 2.6 describes the
owner's need to focus the project on specific objectives. Groups within
the project organization and individuals within the groups need to be
able to identify their own objectives and to understand how their per-
sonal objectives link through the group objectives into those adopted by
the project.
All members of the project management team should be identified
against positions shown on a project organization chart with a clear
description of their roles and responsibilities. Such roles and responsibili-
ties should not duplicate those of other members of the team.
I Management of engineering projects
Most problems start at the detail level and most solutions can be found
there. A team that has clear objectives, communicates freely and gets the
members fully involved will build up a degree of trust that allows for early
identification of problems and their correction.
Project team members should be empowered with the responsibility and
authority for achieving the project objectives in their respective areas of
the work. Empowerment means accountability for ensuring that a given
task is completed as required. Empowerment does not mean that the
accountable person is himself responsible for undertaking the various spe-
cialist tasks necessary to carry out the activity.

2.3.10 Confidentiality
Industrial engineering projects invariably involve the manufacture of a
product to meet a market need and make a profit. The economics and
means of manufacture are therefore commercially sensitive and it is fre-
quently the case that contractors and subcontractors are required to sign
confidentiality agreements covering a broad range of information and doc-
umentation produced in connection with the project.
Such agreements may cover not only information provided by the owner
but also information produced or developed by the contractor, subcontrac-
tors and suppliers, on behalf of the owner.

2.3.11 Operations support

A representative of the owner's operating company or division should be
assigned to the project team as operations coordinator to advise on operational
issues through early input to the design and to maintain continuity of support
through commissioning and into the operation or manufacturing stage.
It is essential that a designer fully appreciates the end user's require-
ments of the facility before undertaking design work. Operations
responsibility therefore spans not only that of the traditional 'owner' in
ensuring that the finished facilities perform the intended function, but
also involves the input of experience of operational issues to ensure that
the design takes due account of the need for safe, efficient operation and
maintenance. These issues include engineering, operational maintenance,
warehousing, product and waste management, information technology,
logistics, etc. Organizing this variety of inputs within the framework of a
project needs careful consideration, particularly with regard to timing.
Early input to design at a time when the cost of change is at its lowest is
to be preferred. Operational input should therefore be made available before
the commencement of detail design. Many examples exist of operations per-
sonnel requiring extensive changes to be made after seeing the proposed
facility for the first time at handover and of operations groups having
reviewed designs immediately before issue for construction and requiring
change, with consequent delay or disruption to construction activities. Late
involvement reduces the benefits that the operations group can bring to a
 Outside influences 1( 29 (

project, significantly increases the cost of any required change and is the
principal cause of conflict between project and operations groups.
Operations groups typically have the following responsibilities:
to provide single point contact for the project team on all operational
issues including the effective operation of emergency services, etc.
and to ensure the effective transfer of such information to the project
team;
to consider all issues relating to the operation of the facility including
operability, maintainability and logistics;
to ensure timely input of operational experience and functional
requirements into the design, in order to provide facilities which mini-
mize safety hazards and operating breakdown and maintenance costs;
to provide guidance and resources on the testing and commissioning
of the plant;
to assist the project team in the performance of hazardous operations
analysis, quality audits and safety case reviews;
to provide information on the limitations and constraints from adja-
cent or interconnected plant operations;
to provide information on existing site conditions including under-
ground services, disused foundations, etc.;
to provide information on sensitive local issues of which the designer
or contractor may be unaware;
to identify requirements for the storage or warehousing of incoming
supplies, outgoing product or by-product, waste, etc.;
to develop and coordinate all necessary operation and maintenance
training and documentation;
to review and approve operations and maintenance manuals;
to consider any issues related to eventual decommissioning.

1 2.4 OUTSIDE INFLUENCES

The project must gain an understanding of the influence and potential effect
of governmental and market conditions and of the environmental lobby;
these can all have a substantial impact on the success of a project. Additional
factors may be the impact on the project of other projects competing for local
resources, or product market competition, where being first with a new prod-
uct, or increasing production of an existing product, is all important.
The project team must obtain this understanding through discussions
with the groups involved and by gathering and analysing data on resources
and completed projects that provide an insight into future trends.

2.4.1 Government influence

A major effort must be directed towards obtaining and maintaining accu-
rate information on legislation, regulations and documentation require-
1[XGnagementof engineering projects
ments. It should be remembered that fiscal policy changes, budget changes
and changes of government may affect the commercial viability of a pro-
ject. Many of these aspects will be considered before the owner makes the
decision to commence with the project.
The Department of Trade and Industry (DTI), the Health and Safety
Executive (HSE), the European Union (EU) and local government councils
as appropriate, should all be contacted and the contact maintained to iden-
tify requirements and any changes in requirements, that may affect the
project.
In particular the project team must be fully aware of all matters requir-
ing consent or approval by outside bodies, since approval requirements can
have a major impact on:
programme;
engineering resources;
outside specialist support;
scope changes and cost.

2.4.2 Resource markets

By comparison with the building and civil engineering sectors the number
of owners and contractors in the engineering industry is quite small and
there are certain key areas in which a near monopoly exists.
To avoid such problems the project must identify and keep track of any
critical resources and determine the number and type of projects that are
competing for scarce resources in the same geographical area.
Many major engineering projects are sited in remote areas. Local
resources may not be available in the required numbers, or may not possess
the requisite skills, thus involving the importation of labour or heavy plant,
the construction of accommodation for the imported labour or perhaps off-
site prefabrication of parts of the plant.
A review of labour resources, customs and practices and labour and
management relations in those areas of anticipated project activity should
be maintained.

2.4.3 Patents and licences

The method of production, be it a chemical process or manufacturing tech-
nique, may in whole or part be the subject of a patent taken out by its
inventor. Projects which involve such patented processes will require the
owner to seek a licence for their use, and in addition the design contractor
may be required to subcontract that part of the design which relates to the
patented process to a designer who either owns the process or who is itself
licensed to use the design.
It is often the case that owners will make it their contractual right to
claim ownership of 'inventions' made during the design and development
of their project.
 I I)
--

I Corporate requirements

2.5 CORPORATE AND CO-VENTURER'S REQUIREMENTS

Although a project team may be seen as a 'stand-alone' organization, it will

still be required to conform with certain requirements of the owner or co-
venture partners.
Any venture that is undertaken in association with partners will call for
special arrangements in communication, reporting, decision making,
approval and funding. The obtaining of approvals is the key to maintain-
ing progress on a multi-owner project and the project team should
establish, at an early date, the information required by corporate depart-
ments of the owner's organization and co-venturer partners for project
approvals and their anticipated timing. These groups should be contacted
early and often, since their needs are constantly changing and any changes
must be monitored. Where possible, early review and approval of the pro-
ject's strategy and concepts should be obtained which will help prevent
redesign and delays.
Items to be approved may include:
design philosophies;
procurement and contract strategies;
approvals for expenditure;
design solutions;
development plan and budget;
contract plan and bid lists;
contract awards.
Co-venture partners should be contacted early in the project to address:
what they wish to approve on the project;
what information is required for approval;
how much time is required for approval;
what are the reporting requirements.
Not only will co-venturers require to be convinced of the viability of the
project before authorizing expenditure, but they may also require to
approve funds for each stage and to be kept informed of all major project
activities and given reasonable access to the project team.
Co-venture partners and corporate departments outside the project
should be requested to give a very high level of contracting authority to
the project team. The project team may, for example, develop a contract-
ing plan during preliminary engineering that specifies bid lists, contract
type, approximate value, timing, evaluation requirements, etc. Approval
by the corporate departments and co-venture partners, with the under-
standing that if the contracting plan is followed the project team will not
be required to request intermediate approvals, will allow the team to keep
the project moving at a steady pace without the wait for further
approvals. Such authorization will not preclude auditing or otherwise
checking to ensure that the project is progressing in accordance with the
approved plan.
I Management of engineering projects
2.6 PROJECT EXECUTION PLAN (QUALITY PLAN)

Due to the sheer size of many engineering projects, the number of persons
involved and the variety of their contributions, the necessity for teamwork
has to be emphasized and an environment created in which an efficient
team can evolve.
The project execution plan is the pinnacle of the project quality system;
it states the broad requirements of the project and translates these into a
detailed and coherent strategy. In addition, it initiates other documents that
expand, implement or show the results of what is described in the exe.cu-
tion plan.
Project execution plans are produced by the project team to cover its
main activities. Similar plans will be produced by each major contractor
for their activities that will relate to the project execution plan prepared by
the project team.
Quality assurance is covered in more detail in Chapter 6 on quality
assurance.

2.6.1 Development of the project execution plan

The draft project execution plan is normally developed during the concep-
tual stage with the final version being issued before commencement of
detail design. This states the main objectives of the project team and the
strategies, project management processes and activities necessary to the
achievement of these main objectives. Generally it will not state how the
processes or activities should be camed out, as these will be developed
subsequently in separate more detailed documents.
The project execution plan should reference detailed planning docu-
ments such as the procurement and contract plan, organization charts, etc.
These describe how the project is to be developed, the resources required,
the timing and so on, and should be structured so that the project can mea-
sure its performance against the project execution plan.
The project execution plan is the main strategy document for the project
and should outline the basic structure of the project including:
project objectives;
project management;
project organization;
project programme;
project control strategy;
quality plans;
safety and environmental policy;
procurement strategy;
contracting strategy;
budgets;
resource strategy.
Where a company has adopted mission and vision statements, the project exe-
cution plan will also contain such statements that are relevant to the project.
 Project execution plan I
Organization charts within the project execution plan should identify the
positions to be filled, their roles and reporting links. Individual and group
responsibilities and authority levels should be clearly defined as should the
divisions of work and interfaces. Detailed job descriptions and individual
scopes of work may also be required.

2.6.2 Project objectives

One of the major factors in establishing a good team is to focus attention
on the desired result by providing an understanding of what will be consid-
ered to be a successful project.
The project objectives are a statement of what must be achieved if the
project is to be considered a success. The project objectives should provide
a focus towards the fundamentally important aspects of the project and
should either be a measure of its success or should encourage behaviour
leading to that success. Typical project objectives relate to operational
requirements, project completion milestones, safety goals, product quality
and cost. Project objectives should be reasonably small in number, such
that each one can be remembered and be seen as important. They should
consist of clear, unambiguous, memorable simple statements that can be
identified by the project team and those who support it. Objectives should
be realistic and achievable; the inevitable failure to achieve impossible
objectives rapidly destroys morale and quickly disillusions the team.

2.6.3 Mission and vision statements

Some owners and contractors adopt mission and vision statements for their
company or project above the level of project objectives. Such statements
comprise a short, sharp, precise statement of intent that acts as a focus
towards which the objectives and critical success factors are directed.
The mission statement is the 'bottom line' and is a statement of what the
company, or project is seeking to achieve in 'hard' terms, i.e. 'to do some-
thing by a set date or within a stated cost'. The vision statement is a 'vivid
picture' of an ambitious, desirable future state that is better in some impor-
tant way than the current state, i.e. 'to be seen by our customers as being
best in class'.

2.6.4 Critical success factors

Critical success factors are those which describe how the project objectives
will be achieved. Some critical success factors which are common to all
projects include, for example:

obtaining input from the operations group prior to commencing detail

design;
provision of a safe working environment;
development of a high quality integrated project management team;
completion of design of a section before commencing construction.
11 Management of engineering projects 1
Each project will have unique circumstances dependent upon the primary
objectives of the project which may make some commonly accepted fac-
tors inappropriate.

2.6.5 Project programme and milestones

Planning is the sequencing, scheduling, monitoring and reporting of
events, activities, milestones and resources and provides the datum against
which the project status, progress and changes can be measured.
The project programme incorporated into the project execution plan will
ideally be the level 2 programme. Milestones or target dates identified in
the project schedule mark critical events such as key decisions or
approvals, or important interfaces between dependent activities and focus
special attention on the project pressure points.
Planning is covered in more detail in Chapter 5, Part 2 on planning.

2.6.6 Procurement strategies

Since a high proportion of the project funds are expended on materials and
contracted work, the development of a sound procurement and contracting
strategy is one of the most critical elements in the project execution plan.
Procurement is usually controlled against a procurement plan that
identifies all materials and equipment to be purchased by the party pro-
ducing the plan and possible sources of supply. Particular reference will
be made to items which come under the requirements of EU and UK reg-
ulations governing competition and tendering. The procurement plan is
also a document against which procurement activities are monitored and
controlled.

2.6.7 Free issue equipment and materials

Circumstances on a project may dictate that certain materials (a term
intended here to include equipment) are to be issued to the contractor by
the owner on a free issue basis, notably vessels, electrical and mechanical
equipment, instruments, etc. together with bulk items such as pipework,
electrical cable and the like.
The decision to provide materials on a 'free issue' basis is made for var-
ious reasons including:

design information being required from the specialist supplier in

order to complete the overall design;
items being of a specialist nature and requiring very exacting stan-
dards of performance and specification;
items being on an extended delivery and the contractor being unable
to obtain the materials in a period anticipated by his construction pro-
gramme for that element of the work;
the buying power of the owner;
 Project execution plan
IW
the requirement to match materials or equipment already in use on an
owner's existing installations;
the owner already owns or produces the material.

Where a supplier is required to design the equipment, agreement must be

reached as to the documentation to be produced, the programme for its pro-
duction and the approval cycles required. Such information is vital to the
principal design effort and interfaces between the supplier and designer
must be managed effectively if the design is to proceed in an efficient
manner.

2.6.8 Supplier (vendor) engineers

Specialist equipment may require specialist assistance during installation
and commissioning in order to ensure its correct operation and to ensure
that any guarantee regarding performance or quality is preserved. This
requirement for supplier (or vendor) engineers must be identified early in
order that it can be anticipated in purchase orders for equipment supply
and in contracts which include the installation and commissioning of the
equipment. The appreciable costs involved must also be included in bud-
gets and the procedures produced for their control.

2.6.9 Contracting strategies

In the context of this chapter a contract strategy is the breaking down of the
project into packages of work and deciding on the most suitable method of
payment for each package.
The nature of the work packages is dependent on a number of factors
including:

length of the overall construction programme. Is it necessary to com-

mence site clearance ahead of completion of the main design?
similarity of the work with other parts of the project. Are there a
number of similar 'structures', how do they relate geographically and
in terms of programme, can they be combined into a single package?
single point responsibility. Is it possible to avoid dispute by making a
single contractor ultimately responsible for the whole?
status and availability of design at enquiry and award stages and
during the construction period. Is a lump sum contract possible, is
availability of design likely to cause ongoing problems of delay and
disruption?
early specialist input to design. Is it necessary to appoint a contractor
ahead of design being available in order to provide an input to the
design or advise on constructability, etc.?
benefits of scale. Will the 'overhead' costs of site management and
plant utilization, etc. for a large package produce more economical
results than a number of smaller packages?
[TiI Management of engineering projects

Once the nature of the various contract work packages has been decided
the type of contract will be reviewed.
The type of contract and the manner in which the contractor is to be paid
depends on the nature of the work and on the status and availability of
design and materials at enquiry, at award and during the construction
period - can a lump sum be requested or will the likelihood of interference
(change, delay disruption, etc.) from other parallel contracts, the owner or
his designer, require the use of a reimbursable form of contract?
The control of the preparation, bidding and award of contracts is against a
contracting plan which is similar to the procurement plan in that it identifies
the work to be contracted (or subcontracted) by the party, together with
information relating to programme requirements and to the anticipated value
and type of contract to be used, e.g. lump sum, measure and value, etc.
As with the procurement plan particular reference is made to items
which come under the requirements of EU and UK regulations governing
competition and tendering.
Prospective contractors may be listed in the contracting plan and any
screening requirements identified, with an allowance made in the pro-
gramme for this pre-qualification process.

2.7 PROJECT STAGES

Historically, projects have been broken down into a series of stages.

Owners use various terms for the stages of a project and each project
develops its own definitions of the required stages, which may typically
include:
1. design:
feasibility stage;
conceptual design;
preliminary design;
detail design and procurement;
design deliverables;
2. construction;
3. initial operations:
pre-commissioning;
commissioning;
initial start-up;
4. operation.
A project may choose to combine or subdivide the above stages to suit its
particular requirements.

2.7.1 Feasibility stage

The feasibility stage of a project will comprise studies undertaken on a
very generalized basis to evaluate the technical and commercial benefits
that the plant will provide to the owner.
 Project stages
1m
2.7.2 Conceptual design

Conceptual design may be carried out in house by staff engineers perhaps

supplemented by temporary personnel or by specialist design contractors.
Although the greatest impact on final cost can be made during the con-
ceptual design phase, owners and their advisers too often plan this phase
poorly and allocate insufficient time and financial and human resources to
these vital early stages of a project. Pressure to initiate a new project
quickly can result in subsequent inefficiencies and costly errors.
During the conceptual design stage any new technology is identified,
studies carried out, outstanding information incorporated and the design
philosophy developed. The decision to incorporate and use new technology
can greatly affect a project and must be a balance between potential cost
savings attributable to new technology and the risk of likely cost overruns
due to their development.
The purpose of the conceptual design stage is to:
confirm that all the engineering solutions proposed are technically
and economically feasible;
ensure all critical technical issues have been identified and
addressed;
seek limited planning consents;
plan preliminary engineering.

2.7.3 Preliminary design

The details of the conceptual design are reviewed by the team and their
preferences defined and incorporated, or otherwise eliminated from consid-
eration.
The operations group's major contribution to the project will occur
during preliminary design. During this phase the operations group should
review and approve all deliverables. As the project progresses through pre-
liminary engineering the results of the feasibility and conceptual design
stages are incorporated into equipment and package specifications and the
basis of design produced for detail engineering.
Constructability of the facilities is verified during preliminary design.
Contractors and especially offshore module fabricators have different
methods or sequences of construction. Where constructability is likely to
be an issue, potential contractors should be invited to review the design
and their comments considered for incorporation therein.
In certain extreme cases, i.e. where a specialist technology is required
or where early completion is paramount, it may be necessary to select a
contractor before the completion of preliminary design. A contract
awarded early in the design stages will not have a well-defined scope of
work and is contrary to the traditional and recommended practice of
awarding contracts based on a fully developed work scope. The solution
to this dilemma may require some innovative thinking in the contracting
strategy.
I Management of engineering projects

The purpose of preliminary design is to:

mobilize the project team, design team and project services;
conduct studies to optimize and define design requirements;
increase the accuracy of planning and cost information;
conduct safety and environmental studies;
develop process and instrumentation diagrams, single line diagrams
and layouts;
investigate constructability;
confirm new or innovative technology;
arrange provision of supplier data, and place purchase orders as nec-
essary to meet the programme;
seek approvals and planning consents.
Management of additions and changes becomes more important as the
design progresses and the project team will use a formal procedure of
change control during preliminary design. The increasing importance
placed on the control of changes to the design, their cost and effect on the
programme, serves to emphasize why options should be considered in full
during the earlier phases.

2.7.4 Detail design

Change control becomes even more critical during detail design. Changes
should be avoided wherever possible, but if changes have to be made, they
should be challenged and if considered acceptable should be incorporated
as soon as they are discovered so that their effect can be minimized.
Changes may include not only changes to the design, but changes to pro-
gramme, cost, delivery times, etc.
The activities during detail design are to:
develop details and finalize drawings and specifications for construc-
tion and commissioning work;
procure materials, plant and equipment and construction contracts;
ensure design complies with any safety case requirements and envi-
ronmental assessment;
obtain certification agreement.
Detail design will frequently be undertaken by an engineering contractor,
with the owner's role being to stipulate project requirements, to approve
specified key aspects of the design, to identify the operational requirements
and to manage the interfaces with outside groups such as co-venturers and
government agencies. The owner's role should not be to mark the contractor
man for man, or to check the contractor's work in detail, or to lead the
design process. The owner's role should rather be to ensure that his require-
ments relating to quality, performance, operability and safety are met, while
allowing the engineering contractor to use his experience and expertise in
the efficient design and construction of a complex project. This requirement
makes it essential that experienced and competent contractors are selected.
 Construction
11391
2.7.5 Design deliverables

Each stage of a project and each work package within a project will be
required to produce something tangible, i.e. layouts, general arrange-
ments, specifications, enquiry documents, equipment and materials on
site, process guarantee test certificates, etc. The physical results of design
and other management activities are frequently referred to as 'deliver-
able~'.It is the deliverables that provide the basis for reporting project
design status and for recognizing achievement. The main documents or
deliverables resulting from the various design stages are covered in
Chapter 3 on estimating.

2.8 CONSTRUCTION

Construction will be carried out by one or more main contractors each of

which will employ various specialist subcontractors. Responsibility for
coordination between the main construction contractors will rest on the
project organization, as chosen by the owner and headed by the project
manager.
Expenditure increases rapidly during the construction stage due to
the high levels of labour, plant and materials involved in the work. Any
disruption to the efficient use of these resources will result in signifi-
cant cost overrun. Serious damage can be done to the project
programme and budget by change, delay and disruption. However, the
project manager must be vigilant that attempts to increase progress or
reduce expenditure do not jeopardize safe working practices or the
quality of work performed.
The project manager will rely on the project team to keep him appraised
of progress and cost and will scrutinize weekly or monthly reports, hold
regular progress meetings in order to resolve current difficulties and antici-
pate and resolve anticipated logistical and contractual problems. The
project manager will also wish to ensure that sufficient records are being
maintained by the team to safeguard the owner's contractual position and
to satisfy the requirements of the statutory and certifying authorities and
the eventual operators of the plant.
The project manager should insist that progress reports do not simply
report progress achieved, but that they deal adequately with activities that
have not happened, since it is these 'negative' aspects of the report that
provide early warning of future problems.
Completion of construction work typically means that the contractor has
erected the plant in accordance with drawings and specifications, completed
any specified pre-commissioning work and completed the final clean up.
However, as-built drawings, operations manuals and handover of other
specified documents will be required before the full contract is deemed
complete.
I Management of engineering projects
2.9 INITIAL OPERATIONS

Initial operations is a term used to describe the entire process of pre-

commissioning, commissioning, initial start-up and production and
performance testing of a plant.
Various terms are used by different companies to cover the activities
required to fine tune a plant and bring it into production and the terms and
definitions used here are indicative only. The sequence of activities leading
to commissioning and acceptance of a process plant will typically be as
follows:

Construction
u

Mechanical completion
u
Commissioning
u
Mock operation
u
Initial start-up
U
Check product specification
u
Check production performance
u
Acceptance of plant

2.9.1 Pre-commissioning and mechanical completion

Pre-commissioning activities are those which have to be undertaken prior
to operating equipment such as adjustments, cold alignment checks on
machinery, etc. performed by the construction contractor prior to cornrnis-
sioning and without which the installation cannot be said to be
mechanically complete.
Mechanical completion of a plant or any part of a plant occurs when
the plant or a part of the plant has been completed in accordance with
the drawings and specifications and the pre-commissioning activities
have been completed, to the extent necessary to permit the owner to
accept the plant and begin commissioning activities. Mechanical com-
Project risk analysis
Irn
pletion will typically be deemed to have been achieved on completion of
the following:
hydrostatic testing of all pipework and equipment;
testing of electrical systems and specialist equipment packages;
cold alignment of machinery;
loop checking of instruments;
flushing of pipework;
acceptance of all documentation in accordance with the procedures,
drawings and specifications.

2.9.2 Commissioning
A plant, or any defined part of a plant, is ready for commissioning when the
plant has achieved mechanical completion.
Commissioning activities are those associated with preparing or operat-
ing the plant or any part of the plant prior to the initial start-up and are
frequently undertaken by the owner or a joint owner/contractor team.
Commissioning may involve mock operations which are commissioning
activities conducted to allow operational testing of the equipment and
operator training and familiarization.
At the completion of commissioning, the plant will be fully ready for
production operation.

2.9.3 Initial start-up

Initial start-up occurs when feedstocks are introduced to the plant for the
express purpose of producing a saleable product for the first time, often
referred to as 'oil-in' in the hydrocarbon processing industry.

2.10 PROJECT RISK ANALYSIS AND MANAGEMENT

2.10.1 Risk analysis

Extreme happenings, such as force majeure, cannot be ignored when

making a decision to sanction a project. Although on a straightforward pro-
ject such risks can be considered without elaborate calculation, on a major
project the degree of uncertainty connected with cost, time, location, tech-
nology and quality and the complex manner in which the various risks
interact to magnify or extinguish each other, can only be fully explored,
substantiated and presented by undertaking a comprehensive analysis of
the full range of risks involved. The very process of undertaking the analy-
sis provides significant help in minimizing risk since it focuses the project
team on those areas requiring greatest attention.
Risk analysis is a tool that provides a formalized approach to the identi-
fication and evaluation of a complex series of uncertainties, their
I Management of engineering projects

probabilities and interdependencies and provides a logic and focus for the
continuing management of risk. Because risk analysis includes in its
assessment the probability of the event occurring and presents this infor-
mation in a manner from which the decision makers can undertake their
cost and benefit analysis, it is capable of handling provisions against all
types of risk, including force majeure and other extreme eventualities that
would not normally be included in a traditional contingency allowance.
The increasing use of computers has encouraged the development of
sophisticated techniques for the analysis and management of risk on construc-
tion projects. While these techniques are of undoubted value to a project, their
use has to be anticipated at inception since it requires amendments to the way
in which decisiofis are made and the time required to undertake the analysis
must be allowed in the programme established for the project.
As with a traditionally calculated contingency allowance, the provision
for risk can be a very significant amount within an estimate and not only
deserves to be handled in a manner appropriate to a major cost element, but
also requires the analyst to be able to explain the basis on which risk was
calculated and the probability of likely occurrence of the subject event.

2.10.2 Identification of risk

The first step in solving a problem is knowing that the problem exists and
in risk management the most important phase is the identification of areas
of potential risk. The various risks can initially be identified by:
reference to a checklist;
subjecting the project team to a brainstorming session;
collating lists prepared by individuals or departments;
the analyst from personal experience.

2.10.3 Evaluation techniques

There are three types of risk analysis in common use:
1. elementary;
2. sensitivity; and
3. probability analysis.
Each type of analysis offers differing degrees of sophistication and each
corresponds to the particular requirements of the project at the time of
analysis.

Elementary risk analysis

Elementary risk analysis is based on the judgement and experience of those
undertaking the analysis and simply comprises the subjective judgement of
the effect of the most obvious major risks anticipated on a project.
Elementary risk analysis is normally used on an uncomplicated project or
at the appraisal stage of a major project. I
Sensitivity analysis
Project risk analysis
Irn
Sensitivity analysis considers the impact that varying degrees of a single
element of risk may have on the project, by analysing and evaluating its
effect on the programme or budget assumptions.
A sensitivity analysis is frequently presented graphically, or as a series
of figures, but its weakness is that it treats each element of risk individually
and does not pay attention to the complex impact on parallel, or later,
activities. Sensitivity analysis is frequently used later in the project life
when evaluating tenders and considering the impact on cost of design or
time changes, etc.

Probability analysis
A probability analysis will take account of the many elements of risk
within a project and will apportion a degree of probability and range of
values to each. In this way an assessment can be made of the most probable
result, with statistical spread of other results. In its most sophisticated form
a probability analysis addresses the consequential impact on the ongoing
activities and risks.
Although a summation of the most probable results can be made, it is
unlikely that in practice the most probable result will be achieved against
each element of risk; who is to say that they are the most probable results?
To an extent it is a lottery which risk occurs and to what degree. The power
of the computer may therefore be used to generate a large number of
random scenarios, based on the assessed probability factors, to provide a
most likely final result. It is not surprising that this technique is referred to
as a Monte Carlo simulation.

2.10.4 Assessing probabilities and values

In order to provide the basic information for the analysis, design engineers,
cost engineers, construction managers and others experienced in their dis-
ciplines may be asked to accept or amend a list of possible risks, to state a
base assumption and the likelihood in percentage terms of achieving that
base. The risk analyst will then discuss with the engineer the most appli-
cable shape of distribution covering the spread of possible results before
feeding the information into the computer. The risk analyst will use the
planning network to consider the impact that the various categories of risk
will each have on the other, while taking care not to duplicate risk by
including an individual risk that is partially covered by other risks. An
example is the risk of time overrun in the fabrication of a part of the work,
which may be identified as such in the analysis; but part of this risk may be
due to delay in delivery of materials, which may be a separately identified
risk item.
A probabilistic risk analysis will produce values and related confidence
levels on an 'S' curve, ranging from the certainty that the project cannot be
completed below a stated figure and total confidence that it will be com-
I Management of engineering projects
pleted within a further figure. In the mid-range of the 'S' curve there will be a
range of projected final values, each with a related confidence level. The
decision to proceed with a project, or its next stage, may be taken at a budget
figure that has a confidence level of 50%, i.e. where there is an equal chance
of underrunning or overrunning the figure. Alternatively, and depending on
the expected return or other benefit that the project will provide, the decision
may be taken to sanction the project at a lower budget, but with a low level
of confidence that this low figure can be achieved, or vice versa.
A full probabilistic risk analysis can therefore provide decision makers
with a greater understanding of the possible result of the decisions taken
and means of judging more accurately the greater risk that may be accept-
able on a lucrative project.

2.10.5 Risk management

One of the main responsibilities of the project team is the management of
risk. Risk can be managed by transference of risk to others, by avoidance
of risk, or by controlling the factors causing the risk.

Transfer of risk
Risk can be transferred by placing the responsibility for its outcome on
others, e.g. by utilizing insurance or by requesting fixed prices rather than
paying for increased costs as they occur. Risk is therefore usually trans-
ferred at a cost.

Avoidance of risk
Where risk is due to a factor that can be changed the opportunity exists to
avoid the risk by changing the factor, e.g. by changing from new untried
technology to a tried and trusted alternative, or moving a sensitive opera-
tion from winter to summer.
Risk is therefore usually avoided by accepting what may be seen as a
less attractive project option.

Control of risk
The first step towards the control of risk is the identification of the major
risk areas and their initial evaluation followed by continuing control. This
control is exercised through the normal project control procedures of regu-
lar progress measurement and comparison against a defined base, the
identification and implementation of required corrective actions and the
monitoring and reporting of results of the action taken.

Risk register
Once identified the various risks will be incorporated into a risk register
which typically contains the following information against each risk item:
 Safety, environment and quality assurance
11451
the likely impact of the risk in terms of cost;
a brief statement regarding the anticipated means of mitigating the
risk;
the name of the person or department responsible for mitigating the
risk.

As the project develops, new risks will be identified and earlier risks will
change in status. The project team will therefore be invited periodically to
re-evaluate old risks and to identify new ones for incorporation into the
register.
Once the risk register is issued the responsible person will use it to pri-
oritize his attention on those risk items which need to be placed into
'intensive care' in order to keep their effects to a minimum.

2.11 SAFETY, ENVIRONMENT AND QUALITY ASSURANCE

Safety, environmental and quality requirements need to be established and

planned very early in the life of a project.
Safety is important both in construction and operation; it is the subject
of extensive legislation which is covered in detail in Chapter 12 on health
and safety. Safety has to be planned, in terms of safe design and in the
choice of contractors who are capable of working safely.
Environmental protection policies are under constant review, which
makes prediction of requirements in this area that much more difficult and
far more project specific.
Considerable attention is therefore necessary not only to get the safety
and environmental matters right, but to comply with the changing legisla-
tive regime.
It is essential that a manager who is knowledgeable of the legislation is
made responsible for these concerns on a project. Such a role may well
conveniently include the quality assurance role as they are closely inter-
related.

2.11.1 The Construction (Design and Management) Regulations

1994
The accident rate in the UK construction industries has historically been
high when compared to other industrial sectors and the Construction
(Design and Management) Regulations (CDM), which apply to most
design work and construction projects, were introduced by the Health and
Safety Executive to improve on the performance of the industry. They
came into force on the 3 1 March 1995.
The regulations proceed on the basis that health and safety responsibili-
ties in construction should be coordinated and shared among all the parties
involved, be they owner, designer, contractor or subcontractor. These regu-
lations, which are described in detail in Chapter 12, are frequently referred
to by the acronym CDM. They apply to the design and construction of pro-
1 Management of engineering projects

jects including demolition and affect the various persons and organizations
associated with them including owners, designers, contractors, subcontrac-
tors and suppliers.
The regulations concern the management of health and safety; while
they do not apply to every project or everyone all of the time, most projects
and people involved in projects will be affected.

2.11.2 CIMAH and Safety Case Regulations

The Piper Alpha and Flixborough disasters resulted in regulations being
introduced that have prompted considerable change to the design and oper-
ational requirements of projects. Regulatory requirements such as CIMAH
(Control of Industrial Major Accident Hazards) for onshore projects and SI
2885 (Safety Case Regulations) for offshore projects continue to be devel-
oped and the EU is actively producing safety directives that will eventually
become UK legislation.
The CIMAH and Safety Case Regulations are similar regulations in that
they require the preparation and delivery of a concept and pre-operations
safety case for a project. Fundamental to this safety case will be the ability
to describe the management system that is in place and which ensures that
'the installation will be designed, selected, constructed and .commissioned
in a way that will reduce the risks to health and safety to the lowest level
that is reasonably practicable'.
The regulations are legal requirements and should contain the informa-
tion necessary for the Health and Safety Executive (HSE) to undertake a
safety audit.
The objectives of the safety case are:
to describe at the highest level, how the project management team
manages safety;
to describe hazard identification and hazard mitigation and to provide
the quantitative demonstration of endurance standards and the total
installation risk;
to describe how a facility is or will be built and to describe the plant
and equipment, emergency systems and the process arrangements;
to describe, in the project development phase, how project safety is
managed;
to describe, in the operational phase, how the installation safety man-
agement system operates;
to verify that the safety case meets the requirements of the proposed
safety case regulations.
Design will be demonstrated as being safe by use of qualitative and quanti-
tative tools, sound engineering practice, experience and verification
including quality assurance audit.
Project safety must continue with a strategy that ensures that safety is
incorporated into every stage of project work, from concept to decornmission-
ing. By this strategy, all options for development will have been designed to
 Safety, environment and quality assurance 1 [ 47 1
be safe and demonstrated as being safe. No option will be recommended for
further development that prejudices the safe operation of the plant.

2.11.3 Safety plan

The strategy necessary to meet the requirements of the safety regulations
will be embodied in a safety plan that drives the development of the major
safety activities. The safety plan has the purpose of detailing the major
safety activities (studies and responsibilities) at each phase of project
development. As each new stage is reached the safety issues become more
specific, the safety plan will, therefore, develop with the project.
The objectives of the safety plan are:
to indicate the major safety activities;
to define group responsibilities;
to initiate studies and monitor the work;
to assess studies and disseminate the conclusions, recommendations
and actions.

2.11.4 Safety philosophy

The safety philosophy is a high-level document and is the starting point in
describing how safe design, construction, operations and maintenance will
be achieved.
The objectives of the safety philosophy are:
to provide clear statements and direction for the development of
'safety requirements';
to ensure that safety is incorporated into all design work;
to initiate positive thinking of hazard elimination;
in the case of offshore installations to initiate the provisions for evac-
uation escape and rescue (EER), and temporary safe refuge (TSR).
The philosophy should be hierarchical in approach and should examine
safety to people fiom the global issues through position, orientation,
layout, equipment and safety systems.

2.11.5 Safety requirements

The safety requirements are established by adding detail to the safety phi-
losophy and will be a document that will be used by the design contractor
and the project team to monitor safety design work. The objectives of the
design safety requirements are:

to provide a document which in clear tangible terms details the safety

requirements for the planned installation;
to provide a springboard from which individual discipline engineers
can take responsibility for the safety requirements specific to them
and to develop them into the design.
1 1 Management of engineering projects
2.11.6 Environmental impact assessment

The environmental impact assessment, where required, provides manage-

ment and statutory bodies with a formalized and standardized means of
ensuring that the installation performs within legislative and corporate
environmental standards.
. It assesses the total environmental impact of potential discharges,
including the degree of risk and potential severity of accidental release of
pollutants. It also addresses the relevance, practicability and effectiveness
of plant and equipment, procedures and personnel in the prevention of
environmental damage and the mitigation of the effects of all discharges
whether accidental or operational.
Reference should also be made to the approvals required under the
various statutes as stated in Appendix C.

2.11.7 Quality assurance

Quality management applies to all products and all services and an accred-
ited quality assurance/quality control system is becoming increasingly
necessary in order to demonstrate that a company is capable of achieving a
consistently high quality of work.
The objective of the quality control process is to provide a system that
supports the quality assurance plan for the project, and ensures compliance
with regulations covering the installation. These activities are described in
detail in Chapter 6.

2.11.8 Certification requirements

The certification requirements for onshore and offshore projects vary con-
siderably. The project should develop a project specific certification and
regulatory requirements schedule listing all the requirements, together with
details for the appropriate legislative body or representative and lead times
for approval submissions.

2.12 LATHAM AND CRINE

Questions have been raised in a number of quarters concerning the effi-

ciency of the UK construction industries, which have resulted in the
Latham Report, which primarily concerns the building and civil engineer-
ing industries, and the CRINE Report on the offshore oil and gas
industries. The basic recommendations in both reports are similar:

the use of fair contracts;

the encouragement of cooperation rather than confrontation;
the development and use of standardized documentation anh pro-
cedures. 1
I Latharn and CRINE I
2.12.1 Latham

Sir Michael Latham published his final report on the procurement and con-
tractual arrangements in the UK construction industry in July 1994. The
report was commissioned to seek ways in which productivity and effi-
ciency could be improved. The review covered contract conditions and
documentation, contracting strategy, payment arrangements, the construc-
tion team and settlement of disputes.
The principal matters covered by the very extensive report include:
Contract conditions: Latham comments that the most widely used
forms of contract in the industry reflect arrangements which rarely
apply on site, e.g. design complete prior to commencing on site,
acceptance by both parties of the architectlengineer as being impartial;
he advocates the use of fair contract conditions which reflect the reali-
ties of a modern construction project. The report suggests that the New
Engineering Contract, issued by the Institution of Civil Engineers,
contains a fair balance of risk and recommends that owners should not
be allowed to amend standard clauses to gain an unfair advantage.
Team working: cooperative, non-confrontational working is recom-
mended using integrated teams not only between owner and main
contractor but also between main contractor and subcontractor.
There should be greater use of coordinated contract information.
Trust accounts: the report recommends the establishment of trust
accounts to guarantee interim payments to main contractor andlor
subcontractor in the event of the insolvency of a company higher up
the payment chain. Funds should be placed in trust accounts at the
commencement of each 'stage' of the work.
Retention bonds: retention bonds, decreasing in value as the work
progresses, should be used in place of the common practice of with-
holding part of the due payment until satisfactory completion.
Alternative dispute resolution: a mechanism for dispute resolution
should be incorporated into the contract conditions.
A construction contract Bill should be introduced to give statutory
backing to newly amended standard forms and to introduce recom-
mendations of the working party on construction liability law.

2.12.2 CRINE
The CRINE Report (Cost Reduction Initiative for the New Era) has been
published against a background of low oil prices and rising costs of devel-
opment of oil and gas discoveries in the North Sea. It is feared that unless
costs are reduced significantly within a short time the development of the
remaining reserves in the UK sector of the North Sea will be in serious
jeopardy. The report makes recommendations that it suggests will have the
effect of reducing capital costs by at least 30% thereby improving the eco-
nomics of present and future fields and extending the life of the UK
continental shelf development.
I Management of engineering projects
The six major recommendations are as follows:
to use standard equipment;
to use functional specifications;
to use criticality to determine documentation requirements;
to simplify or clarify contract language and eliminate adversarial
clauses;
to rationalize regulations on certification, production consents,
pipeline works authorizations and field development programmes;
to raise the credibility of quality qualifications.

2.13 INSURANCE

Insurance is a specialist subject and as such is covered in Chapter 8 on

insurance and indemnities.
The types of insurance required on a major engineering project are nor-
mally very extensive and the scope, sums insured and limits of indemnity
have to be carefully assessed, requiring a complex policy statement. A typ-
ical engineering construction project is complex, of high value and requires
the appointment of more than one major contractor. It is therefore fre-
quently the case that the owner will specify in the contract conditions that
he will arrange certain specified insurances.
Such insurances are likely to cover as a minimum the provision of an all
risks policy on the permanent works, including material loss or damage to
the work undertaken and at the same time protecting the interests of the
owner and his contractors. In certain cases, and especially where work is
being undertaken in and around existing plant of high value, the owner
may also accept responsibility for arranging third party insurance.

2.13.1 Project insurance

An owner's all risks policy will cover the permanent works, materials for
incorporation therein and will sometimes extend to temporary works, con-
structional plant and equipment. The cover will apply on the site of the
works, material and equipment in transit and perhaps to off-site work.
Either in the same policy, or by a separate insurance, the 'all risks' may be
extended to include an indemnity against legal liability for injury to third
parties and damage to their property for a specific limit of indemnity.

2.13.2 Contractor's insurance

The extent to which a contractor is responsible for loss or damage to the
works and material for incorporation therein will be specified in the condi-
tions of contract.
In addition a contractor will normally be responsible (sometimes with-
out recourse to the owner even where negligent) for loss of or damage to
constructional plant and equipment and temporary accommodation. 1
 Bibliography I
The contractor is required to undertake by law certain insurances such
as employer's liability in relation to his employees and insurance of motor
vehicles on the public highway. Other insurance arranged will depend on
the contractual obligations and otherwise be based on the philosophy of the
contractor's management.

2.13.3 Claims and reporting

It is normal for the contract conditions to require a contractor to report all
loss or damage immediately to the owner, there being thereafter a laid
down procedure for the reporting of claims and the adjustment of losses
depending on which party has arranged the insurance.

BIBLIOGRAPHY

Association of Project Managers (1994) Body of Knowledge, Association

of Project Managers.
Hackney, J.W. (1995) Control and Management of Capital Projects,
McGraw-Hill.
Harrison EL. (1985) Advanced Project Management, Gower.
Karger, D.W. (1991) Strategic Planning and Management, Dekker.
Kimmons, R.L. (1991) Project Management Basics, Dekker.
Ethylene Cracking unit
Grangemouth, Scotland.

Plant Owner
B. F? Chemicals Ltd.
11 Estimating
3.1 INTRODUCTION

The ability to forecast cost accurately is important in all industries, but

essential where substantial sums are to be committed to a project whose
final cost may not be known for a decade or more. A poor estimate can in
such circumstances encourage investment in uneconomic or marginal pro-
jects while leaving other projects starved of cash, and may cause the failure
of a company. Alternatively, opportunities may be missed with the possible
risk of a competitor investing in a similar project.
In the engineering industries an owner will seek to estimate demand
and therefore the value of a product, balance this against the cost of pro-
duction, and it is hoped identify an acceptable return on the capital
invested. The cost of production will itself comprise estimates of raw
materials, the capital and financing costs, and the operational costs
involved in processing the raw materials into the product, including sub-
sequent distribution and sale.
This chapter deals with the estimation of the capital cost of production
facilities up to the preparation of the most detailed estimate, typically
called the definitive estimate. Estimates required for the continuing control
of change are covered elsewhere in this book.

3.2 INITIAL ACTIONS

On receipt of a request for an estimate, the estimator must make urgent

contact with all the key personnel associated with the project to determine:
the programme for completing the estimate which should cover provi-
sion of drawings, specifications and the like;
nature of the plant;
the quality of available information;
the range of design solutions available;
an acceptable base case;
the date for provision of additional information;
the accuracy and timing of the required estimate(s).
The estimator will need to obtain information regarding:
the nature of the local environment;
availability of local services and facilities;
the position of the plant relative to other constructions and whether
such other constructions are 'live' plants;
relationship of the plant to associated installations;
whether associated installations provide services to the new plant or
are dependent on it.
The estimator will therefore not only consider work within the designated
area of the plant, but also the manner in which the facility relates to other
installations that may be providing the power, water, fire fighting systems,
etc. needed to service the facility. Such systems are, in a petroche'knical
environment, commonly referred to as utilities. Similarly, consideration is
I Estimating accuracy

given to the pipelines or other means of delivery, storage or removal of the

raw materials and product (commonly referred to as offsites).
Once an understanding is reached as to the nature of the project, consid-
eration is given to the information readily to hand, which can be used
directly or in an adjusted form in the estimate. This information may be in
house or published, but it will be of little use and positively dangerous if
details are not available that place the various costs into context, e.g. loca-
tion, date of construction, capacity, feedstock, nature of the ground and
provision of utilities.
Items frequently undervalued or forgotten from an estimate include:
utility supply(s);
extent of access platforms;
temporary laydown areas for outfitting work prior to erection;
foundations for heavy lift cranes;
spares and commissioning spares;
initial charges or catalysts for the equipment;
logistical requirements in getting large numbers of men and large
items of hardware on to a site.
Other factors could include:
required skills not locally available;
local accommodation not adequate to house the workforce;
bridges not sufficiently strong to carry the transport loads;
power lines too low or bends in roads too acute to take long transporters.
None of the above can be anticipated from a plant layout, and it is therefore
vital that the estimator should inspect the site, the local environment, the
main access routes and consider the construction methods to be used to
take full account of any such ancillary cost.
Onshore and offshore estimating checklists are available from the
Association of Cost Engineers.

3.3 ESTIMATING ACCURACY

An estimate is basically dependent on four factors, each of which will have

a significant impact on the accuracy of the figures produced:
availability of design;
availability of relevant cost data;
the skill and experience of the estimator;
time available to produce the estimate.
When all four of the above are readily available, an accurate estimate
should be possible, but in the very early stages of a project, design will not
be available and reliance will be placed on historical cost data and experi-
ence in the use of such data. Unique projects will require additional cost
research to interpolate the available historical data, which further empha-
sizes the importance of an experienced estimator's ability to interpret the
most rudimentary concept into a useful estimate.
I Estimating

It will be necessary at the earliest stages to qualify the estimate regard-

ing any assumptions made which will have a significant impact on the
estimate.
As a project develops, the level of detail within the estimate, and there-
fore the accuracy of the estimate, increases. Not only does the technical
definition increase during the duration of the project, but also the number
of potential design solutions decreases, thereby reducing the level of
design uncertainty and variability.
Although a high degree of accuracy is always to be preferred, there is no
merit in attempting to achieve a level of accuracy inappropriate to the
information available and inappropriate to the decision that is dependent
on the estimate. An estimate produced from minimum information cannot
be appreciably improved by attempting to add isolated items of detail, and
moreover may give it a perceived credibility that it does not deserve.
The estimator will be required to produce a statement regarding the
accuracy of the estimate inclusive of a contingency allowance as discussed
later in this chapter. This statement is normally expressed as plus or minus
a stated range, sometimes referred to as tolerance limits, which will vary
dependent on the type or class of estimate. The limits of the range are the
minimum and maximum values of the estimate and are expressed as a per-
centage of the expected cost. Since there is a limit on lowest possible cost,
i.e. zero, but no equivalent upper limit, this 'confidence factor' will often
have a positive figure higher than the negative.
The accuracy statement can only be arbitrary, and each estimate should
be assessed on its own merits. However, since the judgement of estimating
accuracy is primarily based on the quality of information available, includ-
ing scope, cost data and productivity, an experienced estimator should be
able to identify the risk and contingency requirements and forecast a realis-
tic accuracy level.

3.4 STAGES IN ESTIMATE PREPARATION

A project advances by taking measured steps through a minefield of checks

(and cheques!) and balances, involving proposals, estimates, approvals,
reviews, changes and further approvals. Each approval will be judged
against earlier approvals and the owner will look for the reason for any
change, especially if such is detrimental to the viability of the project.
Estimates will be required on a project from the date on which it appears
as a bright spark in the firmament of an owner's imagination, to the date on
which the project is completed and handed over. The number and types of
estimates to be undertaken in the duration of the project will depend on its
complexity and nature.
The production of an estimate is itself a not inconsiderable expense, and
pressure may be brought to reduce the number of estimates or to limit their
extent. In such circumstances, there will be a need to balance the cost of
preparing an estimate against the risk in not preparing the estimate.
I Estimate types 11 57 1
The first stage of a project (the feasibility stage), will begin with the
need for a facility being identified. The definition provided to an estimator
at this time will be limited to a description of what the facility has to
achieve to meet the owner's requirements. The resulting estimate will be at
its most approximate, but since early estimates are used solely to decide to
commit to a relatively modest additional investment in carrying out further
design, the level of accuracy required will only be relative to the invest-
ment decision being taken, e.g. whether the project is likely to be viable
and hence the design worth developing.
Following completion of the feasibility stage and acceptance of the esti-
mate, a limited amount of design work will be undertaken to develop what
may still be sketchy proposals. This is usually referred to as the conceptual
design stage and will cover the activities identified in Table 3.1.
Conceptual design may be undertaken by the owner or the owner's chosen
designer but will always be undertaken by an organization's most experi-
enced personnel. This will be the first attempt to describe and commit to
paper the scope of a plant capable of meeting the stipulated requirements,
the characteristics and output of the plant and will identify the required
processes and major equipment items together with a possible layout.
The cost of detailed design is substantial and can involve large design
teams. Time spent in the essential aspects of suggesting and discounting
various design alternatives within a particular concept can be costly in both
time and hours. It is therefore frequently the case that a further stage is
introduced between the conceptual and detailed design stages. This further
stage may be used to add further definition to the conceptual design and is
commonly termed preliminary design. Alternatively, it may be used to val-
idate some aspects of a well-developed conceptual design or as a first stage
of detailed design, termed front end design.
The decision to undertake either preliminary design or front end design
will be dependent not only on the status and confidence in the conceptual
design but also on the normal procedures of the particular company or pro-
ject manager.

3.5 ESTIMATE TYPES

As previously stated, the types of estimate are many, they have varying
depths of quality and are suited to quite different and distinct purposes.
Each estimate is intended to predict the final cost of the design and execu-
tion of a project, and each is capable of a degree of sophistication and
accuracy appropriate to the stage of the project.
It has been suggested that the early estimates are not carried out by the
quantification of components but rather by the application of historical, all-
inclusive rates to product criteria.
Estimate content and proportions will of course vary between differing
types of project, and will change during the life of a project, reflecting not
only the degree of detail available but also the purpose of the estimate. An
Table 3.1 Estimating accuracy
Technical definition Project Estimate Estimate
stage type accuracy (%)
Generalized scope definition
Required capacity of plant
Plant location
Preliminary project schedule
Preliminary process diagram
Main statutory requirements
Equipment list
Outline engineering specifications
Preliminary 'block' plot plan
Offsites and utilities by system and
capacity
List of major equipment
Preliminary equipment data sheets
Preliminary process and instrument
diagrams
Quotations for unfamiliar items
Detailed scope definition
Finalized heat and mass balance calculations
P & I Dsa for process and offsites
Detailed plot plan
Detailed engineering specifications
Operator's requirements
Local authority requirements
Project master schedules
Information on site conditions
Local availability of labour and material
Detailed equipment list
Completed and approved plant layout
Electrical single line diagrams
Detailed equipment specificationsldata sheets
Detailed material take-offs
Firm quotations from potential vendors
Quotations from potential contractors
Commissioning and operating information
Installation and fabrication specifications
Amended design and specifications as a
result of safety reviews
Construction subcontract enquiries
Production design phase continues
Process and instrumentation diagrams
Key to design stages: Feasibility

Key to estimate types: Order of magnitude

Appropriation
Budget
Definitive
 Estimate types
Irn
estimate prepared in a formalized manner, with an eye to its continuing use
as a source of information and control during the project and as a receiver of
information that adds to the in-house knowledge base, will have a number of
manifestations. Each manifestation should ideally be a development of that
which went before and should accommodate that which is to come.
The exception to the above may be the order of magnitude estimate,
which is frequently on a basis different from subsequent estimates. It may
be based on the typical cost of a plant capable of processing a stated
amount of product per day, which as a set of criteria is incompatible with
subsequent estimates, relying as they do on the identification of the labour
and materials required to design and construct the plant, rather than the
capacity of the plant.
Nevertheless, all subsequent estimates have a hierarchical relationship,
each estimate containing a greater degree of detail within a static set of
accounts that can be related to the tender enquiry documents and extended
into project execution to provide a basis for cost control. Good cost control
will keep the last estimate live, with old information being replaced by
new for later analysis to provide the high-level data for future order of
magnitude estimates. In this way a basis for comparison exists throughout
the project life and data are provided for use in following projects.
There are four basic types of estimate that are generally required during
the various stages of the project, each of which may be supported by
numerous supplementary estimates to assess intermediate change and
value options:
the first estimate during the feasibility stage, variously referred to as a
conceptual definition, class IV or order of magnitude estimate;
the second estimate prior to commitment to the further expense of
conceptual design, variously referred to as a outline definition, class
111, study or appropriation estimate;
the third estimate required during the front end design stage prior to
commitment to the significant cost of detailed design, variously
referred to as a design, class 11, preliminary or budget estimate;
the fourth estimate before commencement of capital expenditure, var-
iously referred to as an execution, class I or definitive estimate.
Estimate titles will depend not only on the industry but also on whether the
estimate is produced by an owner or contractor. Each company will have a
preferred title, class definition and indicative accuracy ranges, but estimate
types are referred to herein as:
order of magnitude estimate;
appropriation estimate;
budget estimate;
definitive estimate.
In addition, there may be additional intermediate stages, or conversely, a
merging into fewer estimate types to suit the individual needs of specific
companies. It is therefore advisable to state the probable accuracy,
together with the estimate description, whenever such estimates are
offered or requested outside the organization.
IEstimating
Table 3.1 demonstrates the phases of the project design during which the
technical definition is produced and the degree of accuracy normally
expected of the four basic estimate types.
The estimator will concentrate on the critical cost areas, bearing in mind
the further effects that such critical items may have on other elements. A
typical piping account within a budget estimate for a petrochemical project
would be considered critical, since it may equate to 20-25% of total mater-
ial costs, 4 0 4 5 % of total labour costs and furthermore will have an impact
on pipe supports, foundations, painting, insulation, engineering and project
management costs. Piping accounts on an engineering project also have the
greatest variability and are the most difficult to estimate.
By contrast, the structural steelwork element of a typical offshore module
would be considered important but not critical since although it may consti-
tute a similar proportion of the material and man-hour cost as the previous
example, it does not have the same impact on other trades as it is designed
early, in a traditional manner, and does not usually change dramatically.

3.5.1 Order of magnitude estimate

Sometimes known as a 'ballpark' or 'seat of the pants' estimate, an order of
magnitude estimate is produced for the rapid evaluation of commercial
possibilities and economic viability of a project. It is frequently based on
gross engineering parameters.
Regardless of title, this type of estimate will be used to gain initial sanction
for development knds to continue into the next stage of the project and will
contain (relatively) little detail. It will be dependent on historical data and will
use broadly based all-inclusive rates. An order of magnitude estimate will typ-
ically be considered to have to an accuracy of -25 to +50%.
Since little detailed knowledge of a plant will exist at such an early
stage, the estimate will depend on pro-rating information from previous
projects that contain similar processes, items, buildings, systems and ele-
ments previously designed, built and costed. Adjustments will be made for
time, location, changes in market conditions, current design requirements
and relative capacity before their use in the estimate.
Cost does not vary in direct proportion to size, and major changes in
scope or relative capacity between the current project and the project being
used as an estimating base, can be adjusted using a factor sometimes
referred to as the 'six tenths' rule, this being a rudimentary ratio by which
cost increases relative to size. This rule of thumb states that the amount by
which the estimated cost of a desired item should be adjusted relative to a
change in size or capacity, can be calculated as the pro-rata change multi-
plied by six-tenths. On this basis the estimated cost of an item of plant that
doubles in size will increase by 60%.
The revised composite rates obtained by such adjustment, or condition-
ing, provide not only a reasonably accurate and speedy estimate but will
also be used to provide a basis for cost control as the design progresses.
Clearly, the level of accuracy achieved from such a 'factored' estimate
will depend on the availability of historical data from similar projects in
 Estimate types
Irn
terms of purpose, location and scale, feedstock, market conditions, etc.
Data obtained from previous estimates may have originated either from
tenders received, or from final costs incurred, and in each case may have to
be adjusted further, either because a tendered figure will invariably be less
than the final cost, or alternatively, a final cost may include the cost of
overcoming problems that may not recur.
If historical data from a previous project which is not a near duplicate of
the proposed project are to be used, further research and development will
be required to achieve the level of accuracy required, before commitment
of development funds.
In the absence of information from a near duplicate plant, the estimator
will rely on published or historical information from a number of existing
projects to trace the variance in cost of the principal component parts aris-
ing from differing duties, capacities, relationships to existing equipment,
or the nature of the feedstock.
Historical information is of little use without a knowledge of any quali-
fication that made such data unique in whole or part, i.e. nature of ground
conditions, power generation being provided by existing installation, gen-
erous or congested plot, e t ~ .

3.5.2 Appropriation estimate

The appropriation estimate is sometimes known as a class 111 estimate,
because it uses technical information developed to a level of definition
described as class 111.
Although there is still a lack of design detail necessary to achieve even a
preliminary quantification of the elements comprising the project, the
designers will now have identified the major equipment items and deter-
mined their required outputs. This information should be sufficient to allow
a more accurate estimate to be made of the cost of the major items of
equipment, and will provide an opportunity to make enquiries of potential
suppliers regarding key components including budget price. Such key
components can comprise a significant proportion of the total capital cost,
and the capture of these important costs with a degree of certainty will give
added confidence to the estimate.
The remaining elements will still not be defined to a sufficient degree
of detail to allow vendors to provide budget prices, or to allow a quan-
tification sufficient to undertake any other than a factorized approach,
and in the absence of such better information, the cost of installation of
equipment can be estimated by a Lang factor. The Lang factor is named
after H.J. Lang, who found that various types of plant had a reasonably
consistent relationship between equipment cost and installation cost.
An appropriation estimate will therefore be based substantially on the
list of major equipment. Costs will be estimated using in-house data or pre-
liminary budget prices, obtained from vendors for its manufacture and
installation, but with most of the remaining construction elements included
as a percentage of the value of each item of equipment. Given a good data-
I Estimating I
base, such methods can produce a very acceptable result, so long as the
nature and basis of the data are fully understood.
An appropriation estimate will commonly be considered to have an
accuracy of -15% to +25%.
Vendors will frequently suggest alternative options and consideration
should be given to such additional information to optimize costs.

3.5.3 Budget estimate

Sometimes called a class I1 estimate, the budget estimate will be produced
once the conceptual design stage has been completed. It will be used in the
final decision to commit to detail design and to provide a basis for the con-
tinuing cost control of the project. The budget estimate will typically be
considered to have an accuracy of -10% to +15%.
In the early stages of a project, design hours for engineering, procure-
ment, project management and project services will be included in the
order of magnitude and appraisal estimates, either by inclusion in a cumu-
lative rate or applied as a percentage. In the later stages of budget and
definitive estimates, these same hours will normally be separately esti-
mated by the individual user departments. This will usually be done by the
engineer, who will anticipate the number of drawings or requisitions
(deliverables) required, or in the case of management, by consideration of
the organization required to undertake the work, and the duration of each
of the positions identified on the organization chart.
Information available at this stage will allow for approximate quantities to
be established and guide prices obtained from potential vendors and contrac-
tors. Such quantities, although preliminary, will frequently be available from
material take-offs produced from drawings, either manually or electronically.
The cost of construction labour for inclusion in a budget or definitive
estimate will usually be calculated by applying man-hour norms to the
quantified schedules and attaching all-inclusive labour rates to the resulting
totals. The labour rates to be used will include the cost of 'normal' construc-
tion plant, supervision, site accommodation, etc. but will exclude major
method related construction plant, such as heavy lift cranes and the like.
The material and equipment elements within a budget or definitive esti-
mate will be calculated or refined by the issue of preliminary enquiries for
budget prices, once the necessary information is available. In the case of
the major equipment items, such enquiries may not be preliminary but
rather the request for confirmation of previous estimates, since the vendors
will have been asked to provide preliminary information relating to perfor-
mance, capacity, various aspects of design and estimated price early in the
conceptual phase.

3.5.4 Definitive estimate

The final estimate produced immediately following commitment to the
major capital expenditure, is the definitive or class I estimate and will typi-
 Composite rates
/El
cally be considered to be to an accuracy of -5% to +lo%, therefore giving
little margin for error.
This estimate will typically contain the level of detail used in the execu-
tion of projects and the preparation of bids. It will be used in the
maintenance of close control over the cost of the work, or for allocation of
resources into work packs, job cards and similar project control tools.
The definitive estimate will use a significant amount of the information
obtained during the budget estimating phase, but will have the benefit of
more detailed design particulars, detailed labour and material breakdowns
together with more accurate prices from commitments made, or enquiries
issued to vendors and potential contractors.
While the definitive estimate is more accurate regarding quantity, speci-
fication and price, since the estimate is being produced at a higher level
using specific detail, it is more susceptible to error by omission than is, for
instance, an order of magnitude estimate. The order of magnitude estimate
will probably have been based on an analysis of the actual final cost of a
previous project, a 'top down' estimate. By its very nature, therefore, an
order of magnitude estimate includes all costs incurred on the previous
project. In contrast, a definitive estimate is a 'bottom up' estimate, built up
from information specific to the project and which cannot rely on the ulti-
mate safety net of an all-inclusive rate, to account for all the sundry items
that need to be considered when compiling a major definitive estimate.
Such sundry items, if not separately addressed, may be included as a per-
centage add on to the estimate, or alternatively, included within the rates
and prices used.
Various on- and offshore checklists are published to assist the estimator
and help avoid omissions from the estimate.

3.6 HIERARCHICAL COMPOSITE RATES

A11 estimates are the result of a quantity being multiplied by a rate, and all
rates other than the most fundamental costs are composed of a number of
cost elements in various ratios to form a composite rate. Composite rates
may reflect detail at various hierarchical levels; the highest level of detail
may be the basic costs of labour, plant, materials, etc., while the lowest
level could be a single all-inclusive composite rate per unit of production
of a completed plant.
Although the use of low level composite rates in an estimate can be both
cost-effective and accurate (if properly produced and documented), the use
of such rates without an understanding of their original content is danger-
ous. A full set of composite rates at various levels, without any idea of
what the rate represents, when the rate was current, and where they were
used, is of little benefit to any company and it is therefore advisable to
maintain a record of the basic components of composite rates, including
design criteria, date and location, so that rates can be adapted for use in dif-
ferent circumstances.
1 Estimating

Unlike the building and civil engineering industries that tend to estimate
using composite rates that are inclusive of labour, construction plant and
materials, the process engineering industries estimate each of these ele-
ments separately.
The building and civil engineering component of an industrial engineer-
ing project may initially be produced using methods appropriate to those
industries. However, it is not unusual for the estimator to analyse the
resulting estimate into its constituent parts for the sake of consistent pre-
sentation and to predict more accurately overall labour levels required on
site and to anticipate the need to rationalize the labour loading within what
is considered to be a manageable total workforce.
The rate for labour used by an estimator will be a form of composite rate
usually referred to as an 'all-up' all inclusive rate. An 'all-up rate' can be
interpreted as including some or all the costs of employment, provision of
accommodation, management costs, construction plant, material costs and
the like. It may have been produced from the examination of the total pay-
roll alone, the payroll for a particular discipline, or obtained by dividing
the final outturn costs of a project by the total on-site hours expended. An
estimator should therefore always qualify his request for information, or
his response to a similar request, by stating its inclusions in general terms.
This continuing problem of definition can be further complicated when a
rate is stated in terms of direct man-hours, as the estimator must be alert to
the further problem of definition, as discussed below.
The message throughout this, and other, chapters is that any rate that
is not defined is unusable, and an experienced estimator when offered a
rate will always respond with the question 'what does that mean or
include?'

3.7 MAN-HOUR NORMS

In the engineering industries, in contrast to the building and civil engineer-

ing industries, there is a tendency to estimate labour and material
separately. Engineering plants are frequently constructed in remote areas or
countries and labour productivity and efficiency is therefore a matter for
specific consideration.
Most companies have a set of 'base' man-hour norms; such norms may
have been originated by them, or alternatively the company may use as a
base a set of published norms. Published norms will usually be at the high-
est level at which work can be measured, i.e. per metre of a specified pipe
or per butt weld, and the estimator may need to compile data on composite
norms in the same way as has been discussed for composite rates.
Whatever their origin, norms will reflect a stated set of circumstances
and will require adjustment to accord with the levels of efficiency expected
of the new plant by the application of an efficiency factor. The efficiency
factor to be applied to such basic norms will take account not only of the
estimator's experience of his company's recent performance agaihst the
 Man-hour norms I
established norms, but also the nature and location of the work for which
the estimate is being produced.
Efficiency varies from country to country, in regions within a country
and towns within regions. It can be influenced by the relative experience
of the labour force, site management including planning, trade union
influences, staffing traditions and governmental decrees on hours of
work, safety and the like. Without any specific experience of his own, an
estimator may have to make numerous enquiries to relate the basic norms
in his possession, whether in-house norms or published norms, to the par-
ticular labour environment, to account for the relative efficiencies of the
available labour. In any such enquiries however, care should be exercised
so that a full understanding is obtained regarding the information offered.
Productivity and performance should not be confused. Productivity is a
measure of the effort required to produce a specified result, whereas per-
formance is the speed by which the result can be achieved. Increased
productivity can improve performance, but performance can also be
improved by increased labour levels, which in turn may have the effect of
reducing productivity and increasing costs.
It should be noted that a productivity factor stated as being more than 1
represents a reduction in productivity while a factor less than 1 is an
increase.
Productivity factors should not be applied to any locally obtained
budget prices since these would already reflect the local conditions.
Comparison of such budget prices with the company standard may, how-
ever, provide further means of validating a productivity factor.
Frequently, only 'direct' man-hours are calculated with 'indirect' man-
hours being included as part of the 'gang rate' applied to the number of direct
man-hours. Direct man-hours are, however, sometimes interpreted as a con-
tractor's own labour as compared to subcontracted labour. Alternatively,
indirect man-hours may be understood as all labour other than tradesmen and
it is therefore again necessary to define the information offered.
It is useful to use a definition that has an ongoing use throughout the life
of the project, by planning and cost control groups. All projects should be
consistent to provide a reliable database.
The following definitions of direct and indirect man-hours are sug-
gested:

Direct labour: crafts or trades that are directly involved with the pre-
fabrication, fabrication, construction, machining, preparation,
assembling, erecting, finishing and testing of the work. Direct labour
shall include all crafts and trades that directly contribute to the con-
struction of a facility or who are of direct support and without whom
the activity could not be achieved.
Indirect labour: labour of a more general nature that provides support
to the direct labour and which is necessary for the orderly comple-
tion of the work, but which cannot be assigned to discrete activities
and does not directly contribute to the construction of a facility.
1 66 1 I Estimating
Indirect labour may include foremen and supervision, quality con-
trol, scaffolding, cleaning, warehouse and transport services, crane
drivers, material control, fire guards, safety, dimensional control and
construction camp operations.

3.8 ESCALATION, EXCHANGE RATES AND FINANCING

CHARGES

On a major project, escalation and provision for fluctuation in exchange

rates can be a very significant component of the estimate and it should be
made clear in the estimate whether costs include or exclude allowances for
escalation.

3.8.1 Escalation
Again, it is advisable to retain within the estimate details of the manner in
which escalation was calculated, so that any variances occurring later in
the project can be identified and reported.
The estimate should include details of the base date of the estimate, the
applicable rates used and escalation allowance and the project programme.
The main contract items should be clearly identifiable in a phased escala-
tion programme and anticipated expenditure profiles produced for the most
significant activities.
In some cases, owners may predetermine the level of escalation to be
assumed, on the basis that the escalation anticipated within their calcula-
tions as to the value of the product, will be loosely comparable with
escalation in the capital budget.

3.8.2 Currency fluctuations

The need to allow for currency fluctuations depends on the nature of the
plant, the location of the plant, the duration of construction and the nature
of the owner's business. Some effects of currency fluctuations can be
allowed for by the estimator, while others are outwith the requirements of
the capital cost estimate.
An example of the latter would be the use of a feedstock priced in a cur-
rency that is different from that of the product. This can affect the project in a
way that is totally outwith the control of the estimator and the project team.
The effects of currency fluctuation on the capital cost of the plant can,
however, be allowed for in a number of different ways:

Certainty can be purchased by buying forward currencies, in which

case the anticipated premium charge of such a purchase should be
included in the estimate.
The owner may be willing to accept the risk of currency fluctuation,
in which case the project will agree with the owner a 'project
 Contingency allowance
IEI
exchange rate' to be used throughout the life of the project, with the
owner taking the risk of currencies varying from this agreed base.
Owners that are multinational companies with substantial foreign cur-
rency holdings may not be concerned with currency fluctuations since
they may elect to pay foreign currency accounts out of their foreign
currency holdings.

3.8.3 Financing charges

Charges for the financing of a major project throughout the many years of
design and construction can be equally important. The estimator will create
his cash flow forecast by effectively pricing the project schedule by spread-
ing the expenditure against the periods over which that expenditure is
being incurred in line with an appropriate expenditure profile.

3.9 CONTINGENCY ALLOWANCE

A contingency allowance is a sum provided within an estimate for unfore-

seen items, which experience shows are likely to be required to cover
design development, construction change and estimating adjustments
within the project scope. Known requirements should be included in the
base estimate and not as a component of the contingency allowance.
The contingency allowance should not include forforce majeure, or for
the possibility of specific scope changes. For example, the possibility of
requiring piled foundations should be included within the body of the esti-
mate, while the cost of excessively long piles should be accommodated by
a specific allowance within the contingency sum. The possibility of the
requirement for additional piles in the event of the plant capacity being
increased should be excluded.
Similarly, since it is almost certainly the case that general inflation will
cause costs to rise, this should be provided for within the estimate under a
specific heading; an allowance for unexpectedly high increases would,
however, be accommodated within the contingency allowance.
The contingency allowance is not added to the base estimate to reflect
the highest possible cost but rather the most probable cost. It will therefore
not relate to the extreme range of the accuracy statement referred to in sec-
tion 3.3 on estimating accuracy.
The amount of contingency to be included in an estimate, although
clearly dependent on the information available, is also materially affected
by the knowledge of the type of plant being contemplated. An order of
magnitude estimate, which is based on the analysis of a recently con-
structed similar plant, may have an accuracy similar to a budget or
definitive estimate, and care should be taken to ensure that any estimate
that is based on actual recorded cost is not penalized by the addition of an
unnecessarily high contingency allowance.
I Estimating
As stated previously, the contingency allowance can be a very significant
account within an estimate and as such deserves to be handled in a manner
appropriate to a major cost element. On a major project and where an indi-
vidual's experience allows, it may be necessary to introduce a probability
analysis, or full risk analysis, of the various maximum and minimum con-
tingency figures established, to provide a realistic total allowance.
It is to be anticipated that estimating accuracy will increase in line
with improvements in experience, estimating techniques and estimating
data. It should always be remembered that improvements that reduce esti-
mating errors or omissions or more accurately predict cost or quantity,
should also allow a reduced contingency to be included. Failure to adjust
the contingency allowance may result in a high estimate and jeopardize a
project.
Management of contingencies is covered in Chapter 5, Part 1 on cost
control.

3.10 RISK ANALYSIS AND EVALUATION

Chapter 2 stated that a contingency allowance is a sum provided within an

estimate for unforeseen items, but not for items such as force majeure or
other extreme happenings that are totally outwith the control of any man-
agement. It also identified that on a major project it may be necessary to
undertake a full risk analysis and thereafter manage the risk through all the
stages of the project. The analysis, identification and management of pro-
ject risk is discussed in Chapter 2.

3.1 1 ESTIMATE CONTENT

An estimate prepared for the design and construction of a capital project

will contain many sections, usually called accounts, which may be sumrna-
rized under headings. On a process engineering project these would be
typically as follows:

1. Design, procurement, project services

of which
engineering design
procurement
project services
2. Construction labour/supervision
of which
civil
piping
electrical/instrumentation
paintlinsulation
other
 Interfaces
Irn
%
3. Equipment 20.0
of which
vessels/exchangers
rotating equipment
other
4. Materials
of which
civil
piping
electrical/instrumentation
paintlinsulation
other
5. Site/construction overheads
6. Escalation
7. Contingencies
Total

3.12 INTERFACES

While producing an estimate the estimator will constantly seek to question

the information provided to ensure that he has an understanding of the full
scope of the work and to satisfy himself that the information provided by
others also reflects the full scope as he understands it. Examples of queries
raised at this interface will include the following.

3.12.1 Process
Review equipment list with the process engineers to ensure that equipment
not related to the actual process is included, i.e. service cranes within a
compressor building, etc.

3.12.2 Procurement
Establish with the procurement department that enquiries for check prices
include all anticipated elements of cost, i.e.:
delivery and documentation costs;
construction and commissioning spares;
full painting specification;
suppliers' site engineers;
special tests.

Establish confidence level of material take-offs produced by piping

engineers and agree any adjustment necessary. Check with the piping
PII Estimating
engineers an inclusion for cutting and waste, which is an allowance for
materials that have to be purchased in excess of the installed quanti-
ties, including allowances for short lengths of pipe not used, damaged,
lost, etc.

3.12.4 Construction
Construction possibly carries the highest degree of risk to an estimator
and care and diligence must be used when estimating construction costs.
The opinion of the construction department should be sought for the fol-
lowing:
selection of appropriate construction norms;
productivity in relation to site location, degree of pre-assembly, estab-
lishment location, construction time, e.g. predominantly winter or
summer, working elevations, proximity to other major construction
projects, working within the confines of live plants, requirement for
working permits, etc.;
labour availability;
site working agreement including normal working week, requirement
for shift working and productivity payments, radius allowance reflect-
ing local labour market, etc.

3.13 MONITORING CHANGE

Once the conceptual design is completed and work on the budget estimate
begins, it will be necessary to ensure that changes or potential changes to
the estimate are identified. Clearly with information at a preliminary stage,
and with a number of assumptions and approximations being made, it is
sometimes difficult to keep up with the possible changes that can occur
from any given or assumed base.
It is therefore necessary to identify the key documents on which all
other aspects of design rely and to establish a specified revision as the base
and to monitor change against that base. I
There are five documents that are fundamental to an engineering dksign,
control of which will identify all significant change:
the basis of design or design specification; I
~
the process/utility flow sheets and heat and mass balance calcula-
tions;
the piping and instrument diagrams;
the equipment layouts/plot plans;
the electrical single line diagrams.
Any change identified to these documents should be investigated by the
estimator and the cost ramifications assessed by using his own knowledge
or that of the design engineers, following which the necessary reports
should be raised or adjustments made to the estimate.
 Coding and control
1m
3.14 CONTROL BY ESTIMATE

Costs require control at all times but control becomes progressively more
important as the rate of expenditure increases. Expenditure will start to
accelerate once the conceptual design is completed and cost information
must be made available to set targets, record progress and expenditure,
anticipate corrective action and forecast final cost.
Cost that is b'eing progressively expended over a significant period
cannot be controlled against a single high value entry. Although the defini-
tive estimate may contain the required detail it will not be available at an
early stage and if, for example, the budget estimate contains a single figure
for the bulk purchase of carbon steel pipework, this will not allow effective
control of the individual purchase orders to begin.
The detail contained in a budget estimate may therefore require expand-
ing or refining before it can be used as an effective working tool. If
information is not available to produce an accurate breakdown the estima-
tor must make his best assessment since even an arbitrary figure provides a
basis for comparison and control.

3.15 CONTINUED USE OF ESTIMATE

An estimate should not be put aside once the total has been approved. The
estimate should instead be part of a dynamic ongoing basis of control of all
actual expenditure or anticipated expenditure in order to best anticipate
and control the final costs. This control is to be exercised by cost sampling
and cost control techniques covered elsewhere in this book.

3.16 CODING AND CONTROL

In order to establish a system of control during the life of a project, means

of comparison between projects, a formalized approach to the production
of historical data, and a good workable coding system should be estab-
lished which recognizes the various estimating and cost control
requirements.
Codes of accounts are further discussed elsewhere in Chapter 5 on pro-
ject controls, but their relevance to estimating is that they formalize reports
into a structure that will facilitate future estimates. Regrettably, each user
body tends to have its own code of accounts and unless contractors run par-
allel systerhs, data captured on one project are not as easily translated into
a new project, and computer usage is therefore restricted and less efficient.
A good coding system will provide the three or four top levels of detail
and make allowances for the further detail that would be required by, for
example, an enquiry based on unit rates. It should also reflect a job execu-
tion approach since this provides means for ongoing monitoring and
control.
I Estimating
3.17 ESTIMATE PRESENTATION

The detail provided with an estimate will depend on the requirements of

the recipient, but whether or not the detail is to be submitted, the estimate
should be fully documented to provide a basis for estimate revisions and
reallocations and to provide a basis for feedback analysis. Estimates pro-
duced in a consistent manner will assist in the establishment of a basis for
comparative analysis and in-house estimating.
It is, therefore, preferable to use standardized forms, each dated, and
containing clearly and concisely, all calculations, assumptions and estimate
basis. Of course, the use of a computer in storing and analysing such data is
of immense benefit.

BIBLIOGRAPHY

Association of Cost Engineers (1991) Estimating Checklist for Capital

Projects, E & F N Spon.
Association of Cost Engineers (1981) Offshore Checklist, E & F N Spon.
Bentley, J.I.W. (1988) Construction Tendering and Estimating, E & F N
Spon.
Collier, K. (1988) Fundamentals of Construction Estimating and Cost
Accounting, Prentice-Hall.
Holland, D.M. (1985) Measuring Profitability and Capital Costs,
Lexington.
Institute of Chemical Engineers and Association of Cost Estimators (1989)
Guide to Capital Cost Estimating, Institute of Chemical Engineers.
Kharbanda, O.P. and Stallworthy, E. (1991) Capital Cost Estimatingfor the
Process Industry, Butterworths.
Smith, N.J. (1 995) Project Cost Estimating, Thomas Telford.
Spain (1991) Budget Estimating Handbook, E & F N Spon.
Taylor, T. (1987) Electronics Industry Cost Estimating Data, Wiley.
Value
Management

Sheildhall sewage works,

Glasgow, Scotland for
Strathclyde Regional
Council.
I Value management
4.1 INTRODUCTION

Value management (VM), value engineering (VE) and value analysis (VA),
are terms that are being used more and more frequently; but what do they
mean? Most design organizations have a concern for value and have
processes and design reviews to address owner requirements and the cost
of any proposed scheme. Capital cost is certainly one element of value but
general experience indicates that the cheapest is not always the best and a
broader understanding of value is needed.
It is increasingly recognized that not only do design organizations need
to provide assets that meet the owner's specification and are built to time
and within budget but that the potential project maximizes the benefit to
the owner's business. At the earliest stages of project thinking the owner
specification is an expression of a number of perceived andlor actual
'needs'. As design proceeds and the cost of meeting those needs emerges it
is often necessary to recycle the design to provide a scheme that is more
acceptable to the owner. In the same way, as design proceeds, additional
opportunities can be generated that could bring additional benefits to the
owner's business.
It is a key role of the design organization to enter this debate of value
and need at the earliest stages of design. Experience shows that 'loose dis-
cussion' and 'asking the owner what is wanted' is unlikely to be enough,
and design organizations need to be able to get close to the owner, under-
stand the needs and provide solutions which not only give good capital
value but also enhance the business.
It is this presentation of need and cost in a different form that VM tech-
niques address. VM and associated techniques should not be seen as
displacing normal design reviews but as providing a different perspective
to the owner which is not apparent from the normal engineering specifica-
tion and cost estimate.

4.2 DEFINITION OF VALUE

Value can be described as the relationship between satisfaction of need and

the cost of resources required to achieve that satisfaction. This can be
expressed as:

value = satisfaction of need

cost of resources
From this relationship it is clear that value can be enhanced by improving
the level of satisfaction as well as reducing the resources needed. In some
cases the level of satisfaction might be improved to such a degree that an
increase in resources is justified. In most cases capital cost is an important
resource but operating and lifecycle costs and availability of skills could
figure in the equation.
It is worth recognizing that different interests in a project have difkerent
needs; for instance a factory manager could be looking for ease of mainte-
 VM definitions I
nance while the sales manager might value a quicker order lead time. VM
techniques seek to provide mechanisms by which these differing interests
and needs can be brought together.

4.3 VM DEFINITIONS

Although the terms value management, value analysis and value engineer-
ing are widely used, there is not total agreement on definitions. The
European Union is working on an overall approach to the understanding,
practice and training for value management within the EU and clarification
of terms is expected.
However, it is generally accepted that VM covers a range of value
improving practices, particularly those used for early conceptual thinking
and the 'softer' front end issues of a project, while VA and VE are more
usually used to cover studies of the traditional 'harder' issues at the later
stages of design. Commonly, the term VE is used for studies at the project
cost level with VA used to describe more detailed component analysis.
However, some organizations transpose these terms.
It is possible to consider four broad levels of review as shown in Figure
4.1.
The cost of change at the later stages of design is also greater as design
proceeds. Although obvious, this point is often forgotten and expectations
can be created that VENA studies at the later stages of design will deliver
substantial cost-benefit opportunities. This is unlikely as major changes

Business and
strategy strategy technology analysis
4
Business and
operating scope
,
i
I

$ + - - - + ?Project scope Conceptual analysis

Scheme design I
I
7
Engineering definition Project cost analysis

4
Detail design I
I
+ Detail design Component /item
analysis

Figure 4.1 Levels of review

I Value management
cannot usually be tolerated because the delay and cost of making changes
is unacceptable. This often results in only minor changes of a cost cutting
nature being made, which should have been identified by normal
designlcost reviews. Thus the distinctive contribution that VM can make is
not realized, and at worst the VM process is devalued.
The reviews can be described as below:
A technology/business review confirms the business strategy and
establishes a broad understanding of the technology and overall oper-
ating and other requirements.
A conceptual review establishes or confirms the overall project scope
and, if orders of cost are available, confirms that the broad design and
requirements are considered 'good value'.
A project cost review is a more detailed examination of a proposed
scheme carried out when the specific engineering elements have been
specified and can be looked at to confirm that the design is optimal in
meeting the requirements defined at the concept stage.
A plant item or component review considers the design of specific
items.

4.4 TIMING OF STUDIES

The opportunity to make savings or other changes diminishes as the project

approaches detail design and financial authorization is given for purchase
of equipment and other engineering works - see Figure 4.2.

4.5 VALUE MANAGEMENT METHODOLOGY AND JOB PLAN

In general VM embraces three elements which together provide the

uniqueness of the approach. These are:
1. team based working;
2. a structured 'job plan';
3. use of the principle of 'functionality' or 'need'.
The first two are not unique and are characteristics of many problem solv-
ing techniques. The latter is the distinguishing feature of most forms of
VMIVENA techniques. 'Functionality' is used to describe what the com-
ponent, system, plant or project is trying to achieve. For example, the
'function' of a door might be to provide privacy, provide security, create
the right image or a combination of all three. This distinction provided by
using 'functional' descriptions is not apparent from the engineering
description 'door'. Describing components in this way enables costs of
items fulfilling the same function to be added together, thus allowing the
owner to understand the overall cost of that function. Taking the previous
example, it might be that if an element of the door is primarily for image
then other elements that are there for the same reasons can also be included
 VM methodology and job plan
Irn
I Opportunity for change
,and cost savings
Cost of change
I

Strategy Concept Detail design

Figure 4.2 Opportunity/cost of change relationship within project timetable

within the functional description. A better understanding of the overall

costs and options for providing the image function can be assessed -
including that for the managing director's office! 'Functional' descriptions
also differ from conventional engineering descriptions in that many items
of equipment fulfil more than one function without this distinction being
apparent from the cost estimate.
The principle of functionality can also be used to help develop the scope
of a proposed project. A successful chemical plant project will not just
have the main process function of 'react feedstocks' but will probably have
other process functions such as 'recover materials', 'remove impurities',
'achieve product form', etc. There will also be functions such as 'ensure
operability', 'make safe', 'protect the environment', 'provide for the
future', 'improve customer service', etc. These are all typical functions for
a process plant, the costs of which are not apparent from a normal engi-
neering specification and cost estimate. It is these other functions that
determine whether an asset will be 'world class' or ahead of the competi-
tion and not just a copy of that being used by others. It is critical, therefore,
that these functions are properly defined and explored.
It is normal to present functional descriptions in the form of a FAST -
functional analysis system technique - diagram. A feature of this type of
diagram is that the hierarchy of needslfunctions enables costs and opportu-
nities to be understood at different levels. An example of a FAST diagram
I Value management
Provide tanker
off-load
Receive materials
Transfer to
storage
- Maintain raw
material supply r Provide capacity

Maintain
Store materials temperature
and humidity

L Transfer to plant

Remove water

Filter

Provide new
Provide reaction reactor
- React -
capacity
Uprate existing
reactor

Uprate existing
plant
t Assure product
quality
Meet Remove -Provide
specification - solids belt filter

Ensure routine - Duplicate

operation reaction stream
Provide flexibility
Provide for - Layout for extra
the future reaction stream

Treat routine
effluents
Protect
environment Cater for
abnormal events

Uprate services

Improve site
L Provide access
infrastructure
Provide new
L amenities
Figure 4.3 Typical FAST diagram

for a chemical plant is shown in Figure 4.3. From this it can be seen that
'assure product quality' could be considered at different levels, i.e. change
the product specification, change the process technology to give a more
effective process, change the equipment type or change the detail design of
the selected equipment. All of these present opportunities with different
levels of ease of implementation and trade off. This form of presentation
 VM methodology and job plan
IEI
gives an enhanced view of the project that is not apparent from a normal
engineering estimate.
A feature of the FAST diagram is that it is developed from the left-hand
side by asking 'how?' and from the right-hand side by asking 'why?' It is
this questioning that enables the fundamental purpose to be established.
For instance, asking 'why a distillation column?' could give a variety of
answers including: 'remove impurities', 'recover material' or 'concentrate
the product'. These different descriptions give a quite different perspective
of the need for a distillation column and the possible options, e.g. different
process, equipment, operating (get someone else to do it) or commercial. A
further feature of the FAST diagram which leads to greater clarity is the
use of 'verb-noun' descriptions of functions. For instance 'increase product
quality', might probably require a quite different solution from 'maintain
product quality'.

4.5.1 The job plan

The job plan helps to work in an ordered and systematic way. The main
phases of the job plan that are commonly used during design development
are as follows.

Information phase
The information phase involves defining the project, gathering the available
information, establishing constraints and carrying out a function analysis to
describe 'What is it we want the project to do?' rather than 'What are the
physical components of the project?' It is at the start of this phase that the
level of study and potential team members should be defined.

Creative phase
During the creative phase the team uses the functional descriptions, nor-
mally presented in the form of a 'function' or 'FAST diagram' to explore
alternative ways for accomplishing the desired functions. 'Brainstorming'
is usually used to generate ideas.

Evaluation and analytical phase

The ideas generated during the previous phase are screened and evaluated
by the team during the evaluation and analytical phase. Normally, some
form of decision evaluation technique would be used to help during this
phase.

Development and recommendation phase

During the development and recommendation phase the team reviews the
selected ideas and agrees on the proposals to be adopted or requiring fur-
ther investigation.
I Value management
Presentation phase

The presentation phase involves the presentation of the agreed design pro-
posal including any outstanding developments.

Implementation phase
It is important to see that the recommendations are developed and pro-
gressed during the implementation phase. Often, a lot of energy is put into
the first five phases over a fairly short period but as implementation is over
a longer period and involves people not involved in the initial review,
momentum can be lost.
The job plan is not meant to be prescriptive but is there to help a team to
work systematically through the design phase. Judgement is needed to
structure the job plan to suit the level of study and complexity of the project.

4.5.2 The study team and resources

There is a view that studies interrupt the design process. The opposite is
the case. Properly set up studies enable the interested parties to come
together and conduct a comprehensive and orderly review of the project,
particularly at the early stages of design. In many cases the study can take
the place of normal design reviews and team meetings. Reviews present
the opportunity for people not normally engaged in the design process to
be involved. It is only the owner and interested parties that represent the
owner's various interests that can change the scope of the project, the engi-
neering team can make recommendations, and then only if they understand
the wider aspects of the project.
As for most team based activities, the size of the study is important. Too
many or too few participants results in the study being unmanageable or
there not being sufficient interaction of ideas. A team of five to eight people
is ideal and selecting the team often gives a good insight into who is really
important in the project decision process.
The formal team based stages of a study, i.e. construction of the function
diagram, speculation and evaluation, can normally be carried out over a
half to two days for each phase with breaks to summarize and generate
more data. Thus, over a period of one to two weeks, most small to medium-
sized projects can be reviewed. In some cases a very detailed analysis of a
large scheme down to the component level will take longer, but note needs
to be made of previous comments on the opportunity to make significant
changes.

4.6 CONCLUSION

Although the value management techniques that have been described are
based on well-established and proven techniques there is the need to recog-
nize that the experience and track record of the 'study leader' is critical to
 1El
~onc~usion

success. For any individual to become proficient and suitably experienced

it is recommended that study leaders should be carrying out approximately
one study a month. There is the temptation to believe that engineers and
designers who have attended a VM training course are able to lead VM
reviews. The experience needed to underwrite a sound theoretical under-
standing of the techniques can only - as in any activity - be gained through
practice and the personal learning that takes place. The techniques need to
be used flexibly and with imagination: a too mechanistic application can
sometimes miss the issue and the study leader needs to be aware when to
adapt the technique to draw out the real issues. This requires the study
leader to be able to draw on other techniques and methodologies to support
development of solutions to the issues raised by the formal 'function'
analysis.
Project
Services
1 Project services
5.1 INTRODUCTION

Being in control implies a knowledge not only of the current position and
ultimate target, but also of the route to be taken to achieve that target. The
target will be to complete the work within time and budget, while the cur-
rent position will be described in terms of progress achieved and cost or
time expended. By monitoring past performance on a project it is possible
to forecast future results. From these forecasts it may be evident that the
achievement of the target is not possible without making changes in the
project strategy. It should be noted that these changes may have an effect
on both time and cost; due consideration needs to be taken of both. It is
also necessary when reviewing past performance to understand the factors
that influenced that performance; a judgement has to be taken when fore-
casting future results as to whether these factors will still apply or indeed
whether new factors may come into play and influence the future outcome.
Control is an ongoing process which seeks to:
monitor performance;
understand those factors which influence performance;
suggest corrective action where performance is adversely affected;
forecast future results;
suggest changes in strategy where the forecast result does not meet
project objectives;
provide a basis for continuing performance improvements.

5.1.1 Project services

The various factors which influence a project affect both time and cost and it
is therefore necessary to ensure that records of progress and cost are compat-
ible in order to assist in the identification of future trends. Many companies
recognize this strong link between cost and time by placing responsibility for
both with a single group frequently called project services.
Since the receipt and issue of documentation and free issue materials is
governed by the programme the group may also include both document
control and material control. Project services usually covers all those mat-
ters which relate to the direct or indirect control of cost, time, materials and
documentation, throughout the life of a project.

5.1.2 Project controls

Project controls comprise a suite of procedures and reporting structures pro-
viding appropriate information, at the right time and in as much detail as
will allow the project team to make informed decisions. Project controls are
not an end in themselves but are effective tools for use by the project team.
Procedures and controls must be seen by all users and contributors as
assisting with the management of a project and not as obstacles to be
avoided or overcome. If the reporting structure and suite of procedures is
relatively easy to understand and efficient in use it will be acceptable and
complied with by all contributors. Conversely, if the level 04 detail
 Objectives
Irn
requested and the time needed to provide it is so excessive that it is viewed
as a drain on time and effort, it will meet with resistance, leading to poor
quality data and unreliable/meaningless results.

Part 1 Cost control

5.2 OBJECTIVES

The Association of Cost Engineers defines cost control as 'The process of

controlling all cost factors connected with a job so that production facili-
ties for a defined duty are achieved at an economical cost within the
amount of money appropriated'. In order to achieve this, cost control activ-
ities on any project should encompass the following objectives:
identify potential cost trouble spots in time for corrective or cost-
minimizing action to be taken, i.e. detect potential budget overruns
before they become a reality;
ensure that those who are spending the project funds are aware of the
budget for their area of responsibility and how their expenditure per-
formance compares to that budget;
create a cost-conscious environment so that all within the project
team are cost conscious and aware of how their activities impact on
the project cost;
minimize project costs by looking at all activities from a cost reduc-
tion point of view.
To meet these objectives it is necessary to:
have a realistic financial yardstick (the control estimate);
break down the control estimate into controllable packages of work
utilizing code of accounts and/or work breakdown structures as
appropriate;
generate accurate and timely cost forecasts for these packages of
work;
compare these forecasts with the yardstick to identify potential prob-
lems;
take positive action to minimize these potential problems.
The essence of any type of control is the establishment of an agreed defined
base, the monitoring of results against that base, the identification of
adverse trends, the proposing and implementing of corrective measures and
the monitoring of such measures to ensure that they have the desired effect.
Clearly the identification of adverse trends must be in sufficient time to
allow corrective actions to be taken, and therefore cost control is an on-
going continuous activity rather than an occasional event.
It should be noted that cost control cannot be viewed in isolation. As
stated in the introduction to this chapter, cost and time are interrelated
where an overrun on time often results in an overrun on costs. It is neces-
r BB 1 I ~roiectservices 1
sary therefore to consider progress, value of work done, productivity fac-
tors, etc. when deriving a cost forecast. This is explained in greater detail
later in this chapter.
Cost control does not necessarily mean that a job is done in the cheapest
possible way, but it should ensure that the project will be completed at an
economic cost within the agreed estimate. It should also ensure that there is
no overdesign or uneconomic design.

5.2.1 Cost control terminology

It is necessary to understand some of the terminology frequently used in
cost control and by cost engineers. Confusion often exists as to the differ-
ence between commitment, accrual and expenditure, detailed records of
which are maintained by cost engineers for comparison with a control esti-
mate. These terms do tend to vary in minor ways across the industry, but a
common definition is as outlined below.

Commitments
Commitments against a budget within the control estimate will normally
comprise the following:
value of orders placed;
faxes or letters of intent issued;
estimated values of orders with no fixed value;
allowance for escalation (which will include cost of freight, carriage,
duty and taxes).

Accrual
The accrual is the difference between the invoiced value and the actual
value of work performed, be it design engineering or construction installa-
tion work, at a given point in time. While to some extent an approximation,
the invoiced value plus the accrual is normally a reasonable assessment of
the value of work done. It is therefore the major tool used for forecasting as
commitments are recorded in advance of work actually being accom-
plished and expenditure lags behind.

Expenditure

Expenditure is a record of 'cash out the door'. Due to the time lag between
the work being accomplished and the invoice for that work actually being
paid it is of little use to the cost engineer as a forecasting tool. However, it
is of obvious importance to the owner's accountants who require to know
the magnitude of project funds which will be required on a monthly basis
to meet invoice payments. As part of his responsibilities the cost engineer
is often required to supply cash flow forecasts on a regular basis during the
life of the project.
 Control estimate 1
5.3 THE CONTROL ESTIMATE

The basis for controlling costs is the control estimate. The control estimate
is developed by taking the best estimate available at project commence-
ment, in most cases the definitive estimate (see Chapter 3), and sorting it
into related categories which reflect the way in which the project is to be
executed. The whole of the cost control philosophy relies on the control
estimate in that all forecast costs derived on the project are compared with
the appropriate estimate allowances contained within this document.
In order to ensure that these comparisons are on a like for like basis the
control estimate should be broken down in a manner which will be compat-
ible with the way later information will be available. The control estimate
should be suitably qualified to indicate to users the level of accuracy which
can be expected and access must be available to the full record of informa-
tion used and assumptions made in its preparation.
Prior to the control estimate being in place it is of course still necessary
to control costs accruing against the project. These costs will primarily
consist of feasibility and front end engineering activities and must be taken
into account when compiling the control estimate. Once the control esti-
mate is agreed, all matters which may have an impact on final cost will be
under constant review including changes, predictions of cost, time,
resources and contingency allowances required to complete the project.
Further details on estimating are given in Chapter 3.

5.3.1 Changes to the control estimate

Perhaps the most important aspect of cost control in the engineering office
or on the construction site is the control of change. The prompt identifica-
tion of changes to the scope of work and the speedy conversion of these
changes into time and monetary terms, where applicable, is of vital impor-
tance in the control of a project. Without these, control and cost forecasting
systems cannot reflect the true scope of work.
As scope changes are identified, estimated and authorized they must be
added to the project control estimate ensuring that the current control esti-
mate always reflects the agreed current scope of the project. The original
control estimate was completed at a specific point in time and reflected the
project scope as it stood at that point in time. By the addition of scope
changes the estimate is kept alive and up to date, always reflecting the cur-
rent project scope.
Changes to design are often unavoidable due to the nature of plant
design. It is, however, essential both to a successful design operation and
to effective cost control that design changes are controlled and reduced
during the detailed design phase, resisted during the production design
phase and accepted only in exceptional circumstances during the construc-
tion phase.
Changes must therefore be identified early and brought to the attention
of the project manager and owner speedily in order not to disrupt the
design effort.
I Project services
All design documents emanate from a few key documents which formed
the basis of the estimate for the project. It is not possible to significantly
change the design without changing all or one of these key documents.
Thus, if changes to key documents are controlled, changes to the design
can be controlled.
It is necessary when considering changes to differentiate between
agreed changes and non-agreed changes when reporting. An agreed change
is one which is accepted by both owner and contractor as being necessary
to the project and for the contractor to have an entitlement under the con-
tract. Such changes would be added to the original control estimate and
incorporated into the current control estimate and project schedule.
Therefore, assuming efficiency is currently loo%, forecast final cost would
be current expenditure divided by the progress to date.
Non-agreed changes may include costs for which the contractor has no
right to reimbursement under the contract and 'contractual' changes for
which agreement is awaited. The original control estimate should not be
amended for such changes and they should not be incorporated into the
current control estimate or project schedule. Cost and time has or will be
expended on the 'change' and this must be considered when assessing the
forecast final cost.
The differentiation is important when reports are viewed by the owner
and the contractor. These non-agreed changes, while in many cases being
rejected by the owner as justification for additional reimbursement, do
highlight factors which may have adversely affected the contractor's per-
formance. These factors therefore may well form the basis of future claims
to be lodged by the contractor against the owner.
It is usual to incorporate only agreed changes into the current control
estimate and project schedule. In order to ensure that cost and planning are
always on the same basis it is important that cooperation between contractor
and owner is such so as to provide a rapid response against change requests.

5.4 COST SEGREGATION

The essence of any cost control system is to break down the project into
packages of work that can be controlled and managed.
A project cannot be controlled by simply keeping track of the total
expenditure accruing on it. After all, using this method, the project team
would only realize they had a problem when the total project funds ran out.
If the cost engineer is to identify potential problem areas and adverse
trends it is necessary for a project to be broken down into a series of bud-
gets which can be individually reported against. These budgets should
reflect both the cost elements of the project, i.e. material and equipment
purchases, contractor costs, design costs, etc., and the way in which the
project is to be executed, thereby making it possible to allocate budget
responsibility to the appropriate members of the project team.
These two differing requirements are satisfied by the adoption of two
interrelated reporting structures commonly referred to as the work break-
 Cost segregation
Im
down structure (WBS) and the code of accounts. The interaction of these
structures allows the reporting and control of costs by discipline or by area
or by discipline within an area, e.g. total cost of labour, total cost of all
requirements in an area and total cost of labour in an area.
When both types of structure are used with a complementary coding
system the result is a flexible reporting matrix capable of producing sub-
stantial detail if required, while summarizing at various levels and in
various formats to suit the requirements of the recipient.

5.4.1 Work breakdown structure

A project requires that time and cost are controlled and hence a hierarchi-
cal structure is required which is relatable to these two essential bases of
control. As previously stated, control not only involves monitoring actual
costs but also the comparison of such costs against a fixed base and the
timely identification of adverse trends and recommended corrective
actions.
The selected structure is commonly referred to as a work breakdown
structure (WBS) and covers the total project with each layer of the hierar-
chy having successively greater degrees of detail (see Figuie 5.1). It will
run through owner, contractor and subcontractor activities and will link
defined packages of work, their estimated and actual cost and their esti-
mated and actual schedule.
Such packages of work at whatever level in the WBS may be referred to
as work packages, sometimes as CTR packages (cost time resource) or
ACP (activity control packages) or other titles; but they are fundamentally
similar in concept.
On most projects the person who most influences design progress and
cost is the design engineer at 'the work face' or his immediate superior,
who may be supervising a number of engineers designing a particular sec-
tion of the work. On a construction site the supervisors may have the
greatest influence on progress and cost.
The person who could have the biggest effect on a portion of the work
should also have responsibility for that portion of the budget in terms of
both time and cost. Most problems start at the detail level and most solu-
tions can be found there and the control structure should therefore not only
reach this level of detail but should produce information, such as progress
to date, cost to date, etc., which will assist the responsible persons in suc-
cessfully meeting their responsibilities.
A typical work package will contain the following information which
serves to define the budget against which control is to be exercised:
scope of the work package;
name of the responsible engineer;
planning network references and timing data;
resource man-hours and cost summaries;
estimated cost of bulk materials;
estimated cost of plant and equipment.
I Cost segregation ( 1 ,93 1
Work packages should not be so large as to make the identification of prob-
lems unduly difficult, nor should they be so small that difficulty is
experienced in administering a large number of packages with their various
interfaces. Also bearing in mind that the most accurate measure of progress
is when an activity is 100% complete and as adverse trends need to be
identified early, work packages should not be of an excessive duration.
Consideration should be given to the level at which control is to be exer-
cised. It may for instance be considered necessary to monitor progress on
individual drawings only to monitor man-hour expenditure against
progress on a group of drawings.
In deciding what level of control is most appropriate the following crite-
ria should be considered:
accuracy of base information at the lowest level of detail;
amount of time required to maintain a highly detailed system;
potential for error increases in proportion to detail.
It is not normally recommended that man-hours expended per document is
recorded. Such records produce not only excessive detail but also widely
varying results due to the comparison of precise actuals with an estimate at
its least precise level.
For a WBS to be effective it must be structured in a manner which will
allow information to be 'rolled up' to each successive level of the hier-
archy; the top levels will therefore be owner 'owned' and the lower levels
contractor or subcontractor 'owned'. The owner will have to define his
requirements to the contractor, thereby allowing the aggregation of results
at the interface. The contractor will have to ensure a similar arrangement
with his subcontractors.

5.4.2 Code of accounts

The code of accounts is sometimes referred to as a cost breakdown struc-
ture, because it reflects cost categories, and is sometimes referred to as an
organizational breakdown structure (OBS), because it reflects to an extent
a company's organizational structure.
Figure 5.2 is based on the standard code of accounts published by the
Association of Cost Engineers which defines a code of accounts as 'A logi-
cal labelling system utilizing a series of numbers and letters to permit the
costs of like or related items to be collected together'. This labelling
system provides the basis for reports on expenditure, commitments and
predictions of costs to the completion of the project. The primary reasons
for imposing a code of account system can be summarized as follows:
to aggregate data logically;
to impose a consistent approach to data collection;
to assist in the control of costs;
to provide cost data for future projects.
Coding systems vary across the construction industry but normally consist
of a hierarchical system making reporting at various levels of detail pos-
sible. Thus they ensure that detailed information can be extracted from the
 Approval of funds I
system to assist with future project estimates while supplying high level
cost information for cost control purposes.
While providing detailed information on project costs it is also impor-
tant that the coding system should be as brief as possible and yet easy to
use and understand. The cost code may use a series of four alpha numerics
to identify categories of cost. Using Figure 5.2 and cost code 7421 as an
example, cost code 7*** may designate engineering and project manage-
ment, 74** piping, 742" piping design with the fourth digit designating
deliverables, e.g. drawings, specifications, etc.
It is essential to produce an efficient coding system early in the project
which reflects the levels of detail required since once the project is running
it will become increasingly difficult to produce detailed cost data below
that allowed by the original coding system.
The code of account should allow its use on many different projects.
This will not only facilitate accuracy in cost allocation and reporting but
will over a period of time assist the estimators by providing compatible
estimating data.

5.5 APPROVAL OF FUNDS

Prior to incurring expenditure on a project it is necessary to obtain author-

ity from the owner to spend money. It is normal with large projects for this
authority, often termed sanction, to be able to be granted only by the
owner's board of directors.
Procedures to be followed when applying for sanction of funds vary
between companies; however, it is normal for a justification document for
the project to be prepared as a basis for the evaluation to proceed or aban-
don. It is likely that a specific project will be competing against numerous
other projects for limited available resources, particularly finances, and for
each project to be assessed on its merits by the board of directors, or other
high level of authority, in an effort to ensure that the company's resources
are invested in the projects which will give it maximum future benefit.
The justification document will contain all the key information on the
project to aid this decision making process. Key information to be included
will normally comprise the following:

1. project description;
2. project objectives;
3. technicalfactors:
technology to be used;
project location;
size of the facility;
raw material requirements;
product output;
4. commercial factors:
market trends;
anticipated benefits (e.g. product sales);
I Project services

anticipated actions of competitors;

5. financial evaluation (capital outlay versus anticipated return on
investment):
estimate of project cost;
project schedule;
project execution strategy;
assessment of risks.

As covered in Chapter 3 on estimating, projects move through a series of

phases from feasibility studies through to commissioning and handover. It
is normal for the sanctioning of project funds also to be phased in a similar
fashion. This ensures limited funds are made available during the feasibil-
ity and front end development phases of the project and that significant
funds are only sanctioned when sufficient information has been developed
on which to base an informed decision to proceed.

5.6 COST CONTROL TECHNIQUES

A wide range of techniques are used by the cost engineer to identify poten-
tial cost problems on a project. These techniques vary depending on the
type of project expenditure, and while this publication does not attempt to
detail all of these various methods of control it is useful to appreciate some
of the more commonly used methods of approach.

5.6.1 Control of design costs

Design costs, encompassing design, procurement and project supervisory
activities, can be monitored and forecast by collecting information on
progress achieved and man-hours expended and converted to cost by
applying recorded man-hour rates.
Information available to the cost engineer on which to base cost predic-
tions will normally comprise the following:

planned man-hour expenditure by discipline;

planned progress by discipline;
actual man-hour expenditure by discipline;
actual progress by discipline;
the discipline heads' assessment of man-hours to complete.

Based on this information the cost engineer can derive the man-hours and
therefore the cost to complete the design activities, by using the most
appropriate of the following three methods:

1. the man-hours required to complete assuming productivity of 100%

based on the remaining planned man-hour expenditure;
2. as method 1 but with the result adjusted by the productivity factor
achieved to date;
3. using the discipline heads' assessment of man-hours to complete.
 Cost control techniques
Irn
- Planned man-hours to date
Productivity factor
Actual man-hours to date

Total planned man-hours

.'. Total forecast man-hours =
Productivity factor achieved to date

Figure 5.3 Use of productivity factors in forecasting

The productivity factor in method 2 is achieved by dividing the man-hours

anticipated to be used in achieving an amount of work divided by the
actual man-hours expended in achieving the same amount of work as
shown in Figure 5.3.
Care should be taken when calculating the productivity factor to ensure
that an apparent fall in productivity is not caused by changes not yet raised
or agreed which have therefore not been incorporated into the current con-
trol estimate. When using this derived productivity factor to forecast
man-hours to complete, consideration must be given to factors which may
have influenced productivity to date (for example man-hours expended on
familiarization) and whether or not they will influence future performance.
Based on this assessment it may be necessary to adjust the factor accord-
ingly to obtain a more realistic forecast.
The cost engineer's adjudged forecast of total hours should be based on
the principles that during the early stages of a project the forecast will be
the man-hour variance to date added to the revised control estimate.
Between this stage and latter stages of design the forecast will be the
revised control estimate divided by the productivity factor described
above. During the latter stages of design the engineer's forecast of hours
to complete will be added to the man-hours expended as the forecast of
total hours.
By undertaking this assessment for each design engineering discipline
on a regular basis it is possible to forecast the final man-hour expenditure
and therefore cost of the total design effort for a project as well as to iden-
tify problem areas and potential overruns to budget.

5.6.2 Control of equipment costs

It is normal for the control estimate to be based on a reasonably accurate
equipment listing produced during the early design phase of the project. It
is also normal for the estimator to have obtained budget quotations from
suppliers on which to base his assessment of equipment costs included
within the estimate.
It is necessary for the cost engineer to check the validity of these esti-
mates as tenders are received for the purchase of these various equipment
items. Cost overruns to the estimate provision should be immediately iden-
tified and reported, in order that corrective action can be considered and
implemented. Reasons for overrun to budget may include but are not lim-
ited to the following:
11 Project services
more exotic materials specified than anticipated in the budget;
increased capacity or size - occasionally as a consequence of over-
design;
unnecessary requirements written into the specification;
poor selection of bidders;
foreign currency fluctuations.

This list gives some indication as to where to start looking for the reasons
for the overrun and it is evident that corrective action can be taken in cer-
tain cases. It is important to note that when investigating overruns the
possibility of a low estimate should not be excluded; but this should be
considered only after all avenues of corrective action have been exhausted.
It is a psychological fact that once it has been admitted that the budget is
low all efforts towards corrective action will cease.

5.6.3 Control of bulk material costs

Assessments will have been made on the quantities of bulk materials
required to construct a project. The costs of these bulk materials will have
been derived by the estimator using either data from previous projects,
with appropriate escalation added, or budget quotes. It is necessary to mon-
itor and refine these assessments throughout the project design phase.
In order to achieve this the cost engineer normally undertakes reviews
of quantities of the various materials required to construct the project,
based on the drawings and material take-offs produced by the design
team, as the design progresses. Close attention has also to be paid to the
unit cost of materials as purchasing commences on the project. The find-
ings of such reviews are compared progressively with the relevant
allowances in the control estimate. Adverse trends are thereby identified
sufficiently early for the project manager to arrange for possible corrective
action to be taken.
It is important to note that any adverse trends identified with regard to
the quantity of materials required for a project will have a corresponding
'knock on' effect with the cost of installation of those materials.

5.6.4 Control of construction/installation contractor costs

When reviewing the activities of a cost engineer during the construction
phase of a project it is necessary to distinguish between the owner's cost
engineer and the contractor's cost engineer. The activities on the owner's
side will be dictated by the contract strategy adopted on the project, while
the activities of the contractor's personnel will depend on the nature of the
work for which they are contracted.
The level of control necessary by the owner's cost engineer will largely
depend on the basis of the construction contracts let on the project. The
basis of these contracts may vary from totally reimbursable to lump sum
without variations. Obviously if a contract is let on a lump sum basis with-
out variations there is little requirement for the owner's cost engineer to
 Cost control techniques
IEI
attempt to analyse performance of the contract, the final cost of that con-
tract being known from the outset. At the other end of the spectrum, with a
totally reimbursable contract the owner's cost engineer will be required to
put in place the necessary control mechanisms in order that he can predict
the likely final cost of the contract.
It is fair to say that whatever strategy is adopted the owner's cost engineer
has to take a broader view of the project cost overall, whereas the contrac-
tor's cost engineer is only concerned with costs pertinent to that specific
contract. One of the responsibilities of the owner's cost engineer is therefore
to obtain cost data from the contractor's cost engineer, verify that these are
realistic and build them into his overall cost status report for the project. The
owner's cost engineer will therefore be required to liaise closely with the
contractor's cost engineer obtaining the required information in a format that
is compatible with his cost reporting structure and methods.
An important duty of the owner's cost engineer is to ensure that the con-
tractor's cost forecasts and programme predictions are consistent. In all
construction activities cost and time are closely linked. In many cases these
two functions are handled by separate sections within the contractor's
organization and often there is little correlation between the two sets of
data. The owner's cost engineer is ideally placed to undertake these funda-
mental checks.
A further key activity of an owner's cost engineer when assessing con-
struction contractor costs is the recognition of potential claim situations
occurring during the construction phase. These assessments are largely
based on dialogue with other members of the project team to ascertain
what problems are being experienced by a particular contractor on site. If
these problems are the owner's responsibility (i.e. late design or late issue
of free issue materials), and the contractor's costs are affected as a result, it
is likely that a claim for additional costs will be made. The owner's cost
engineer must be aware of these potential problems and make adequate
allowance for them in the forecast cost to complete.
The contractor's cost engineer will normally have access to more
detailed contractor cost and productivity information than the owner's
cost engineer and hence will use these data to try and maximize the con-
tractor's performance during the execution of the contract. Many
construction organizations are schedule driven and fail to appreciate the
productivity costs that go hand in hand with overtime or the cost of
equipment retained on site in case it is needed to avert a future schedule
delay. The contractor's cost engineer therefore attempts to ensure that
labour and construction equipment are used prudently in order to maxi-
mize a contractor's profit as well as completing the contract within
programme.
The contractor's cost engineer is primarily concerned with the following
key elements of the contractor's costs:

1. direct labour costs;

2. contractor's material costs;
3. subcontract costs;
1 Project services

4. field labour overheads, including:

temporary construction costs;
consumables;
supervision costs;
construction tools and equipment.

The contractor's cost engineer employs a number of techniques to control

expenditure on the above items. Perhaps the most important technique used
by the contractor's cost engineer to derive cost forecasts is the assessment
of construction progress on which to base forecasts.
Construction progress is normally summarized and reported as percent-
age complete. To derive the overall percentage complete it is necessary for
the cost engineer to break down the labour elements of construction work
into major activities, for example earthworks, concrete work, structural
steel, piping installation, etc. The contribution of each of these activities
towards the total percentage complete is proportionate to the estimated
man-hours necessary to complete that activity as a percentage of the over-
all estimated man-hours. For example, if the estimated man-hours for
placing concrete represented 15% of the overall estimated man-hours and
this activity was assessed to be 50% complete the contribution to the over-
all percentage complete would equal 50% of 15%, i.e. 7.5%.
The assessment of percentage complete by activity is undertaken by the
physical checking of construction work accomplished. By comparing the
value of work done in estimated man-hour terms with actual man-hours
expended on these activities, it is possible to assess productivity achieved
to date and therefore forecasts to complete, in much the same way as with
design engineering. This technique, widely used in the industry, supplies
vital feedback to the project planners for progress updates as well as identi-
fying scope increases and/or productivity problem areas to the project
management team.
The paragraphs above are only indicative of the various cost control
activities undertaken by a cost engineer on a typical project. These tech-
niques have a variety of names including 'trend analysis', 'sampling', 'unit
cost analysis', etc. and vary from one organization to another depending on
the sophistication of control systems in place. They all, however, to some
extent rely on logical mathematical processes, but above all else communi-
cation with and feedback from others within the project team, in order that
realistic cost predictions can be made based on all the relevant information
available.

5.7 CONTINGENCY MANAGEMENT

The purpose of any estimate is to forecast the final anticipated cost, and
since unknown or unspecified costs are always incurred a provision has to
be included within an estimate for such unknowns.
A contingency allowance is therefore to cater for unknowns alongside
the known scope of the project. It is not an allowance to cover scope
changes arising during the course of the project which were not known or
 Escalation IE l
envisaged at the project definition stage. The reasons for requiring a con-
tingency allowance and its assessment are covered in Chapter 3 on
estimating.
Ownership of contingency is an issue which should be clarified at the
commencement of any project. In some cases the owner will prefer to be the
holder of this provision and will control its allocation during the execution
of the project; in other cases the project team is given the responsibility.
Whatever form of approval is adopted it is important that all parties under-
stand how contingency is to be handled and what procedures are required to
be followed to ensure that it is managed in a controlled manner.
The contingency allowance can be a large sum, with some demands on
its cushion being made early, and others much later. Additional information
will become available or modifications envisaged throughout the period of
the project, and judgements will have to be made as to whether such items
are covered by the contingency allowance or whether the items constitute
an addition to the estimated final cost. This judgement can only be made if
the contingency sum has been broken down into various defined categories
and the calculation of the contingency undertaken in a structured manner
by allocating different percentages to each main component according to
the quality of the data available at the time the estimate is compiled.
It is only by so doing that control can be maintained, and a judgement
made to avoid the running down of the remaining contingency below a
level required to accommodate future design development.
By monitoring the various demands on the contingency allowance and
using good techniques of cost control a realistic final estimate can be main-
tained and a contingency allowance retained for the later activities.

5.8 ESCALATION

Due to the excessive time scale of many projects cost escalation is a large
element of the budget. Control requires that an understanding exists of the
current financial position which provides a platform for the projection of
future costs. Differing parts of a project will be designed, purchases made
and construction executed at widely varying times, and if escalation is
simply a large figure to be used to draw money as required the early prob-
lems will be disguised and later items left with an inadequate budget.
The calculation of escalation is dealt with in detail in Chapter 3 on esti-
mating. It is normally held as a separate budget within the estimate, to be
allocated in an appropriately controlled manner as the project progresses.
The problem is in obtaining an accurate figure for actual escalation
included within a particular cost element of a project and therefore being
able to transfer a realistic sum from this separate budget. The cost engineer
relies on a number of techniques to make this assessment, one of them
being the use of cost indices published by, among others, the Association
of Cost Engineers.
It is not intended that this book should address these various techniques;
suffice to say it is a budget, as with contingency, that has to be managed
and that it will obviously diminish as the project progresses.
1 Project senices

5.8.1 Currency exchange rate variations

When involved in construction projects overseas or making purchases of

materials, equipment or services from outside of the host country, the pro-
ject concerned will be exposed to currency exchange rate variations. This
exposure, which can be either detrimental or beneficial to the final project
cost, is handled differently by companies across the industry.
One method of reporting these variations is to set predetermined
exchange rates at the commencement of the project; these are normally
derived at the estimating stage. Any variations to these predetermined rates
experienced during the execution of the project are then reported sepa-
rately within the cost report. A benefit of using this method of reporting is
that true comparisons of actual cost against the relevant allowance within
the control estimate can be made.
As a method of removing the uncertainty of exchange rate variations
some owners within the industry choose to buy forward foreign currencies.
This involves a contract to buy a specified amount of foreign currency at a
specified rate at a specified date in the future. This is a highly specialized
area and should only be dealt with by experts in this field.

5.9 THE COST CONTROL REPORT

A cost control report should be issued regularly, normally on a monthly

basis during the life of a project. The purpose of the report is to present the
up-to-date status of actual costs incurred, commitments entered into and
forecasts to complete the project scope.
The report compares the above with the current control estimate (the
control estimate plus agreed changes) and highlights differences between
the anticipated final cost (AFC) and the estimate provision.
The cost control report together with the updated project programmes
are the main means for effective project control in that they gather together
information, analyse it and report on the current project status with sug-
gested corrective actions.
The content of the cost report and amount of detail within varies
depending on the size of the project and the recipients of the report.
Typically a cost report would contain the following, which are further
described below:
summary narrative;
cost summary tabulation;
summary of changes to the work;
various charts and graphs depicting cash flow, cost trends, etc.

5.9.1 Summary narrative

The summary narrative highlights and explains major changes to the cost
forecast in the period as well as identifying potential problems and sug-
 The cost control report I
Project no. Status at:
Project title: COST REPORT SUMMARY Reporting currency: f000s
Code Description Original Approved Current Value Commit- Estimate Anticipated Over1
control scope control of work ment to to final (under)
estimate changes estimate done date complete cost budget

1
I

1100 Major equipment 184.2 7.0 191.2 170.3 180.3 15.0 185.3 (5.9)

1200 Piping 291 .O 3.6 294.6 275.6 302.8 44.6 320.2 25.6

1300 Civil work, building and steelwork 324.0 13.8 337.8 373.7 372.7 0.0 373.7 35.9

1400

1500

1600
Electrical

Instrumentation

Insulation
135.0

210.0

40.0
1.3

6.7

0.0
136.3

216.7

40.0
35.6

100.2

10.0
54.5

106.2

25.0
100.7

116.5'

15.0
136.3

216.7

25.0
O.O

0.0

(15.0)
I
1700 Painting 15.0 0.0 15.0 3.5 12.5 9.0 12.5 (2.5)

I 1800 Temporary construction facilities 25.0 0.0 25.0 15.8 22.4 9.2. 25.0 0.0
I
12000 Fire protection 100.0 0.0 100.0 36.3 76.5 43.7 80.0 (20.0) 1
3100

3300
Engineering

Professional fees

Subtotal
220.0

58.0

1607.2
14.6

0.0

48.0
234.6

58.0

1655.2
214.2

33.0

1268.2
214.2

34.3

1401.4
39.8

11.3

410.8
254.0

44.3

1679.0
(13.7)

23.8
I
5000 Contingency 181 .O 1.5 182.5 0.0 0.0 158.7 158.7 (23.8)

I Total project costs 1788.2 49.5 1837.7 1268.2 1401.4 569.5 1837.7 0.0

Figure 5.4 Example cost report summary

gested corrective actions necessary to avoid them. It is normal that separate

narratives are included for the main elements of the project, which are:
design;
materials and equipment;
fabricationlconstruction;
(other) subcontracts.

5.9.2 Cost summary tabulation

The key document in any report is the cost summary tabulation. The format
and level of detail of such a summary varies across the industry and is
often adapted to meet the circumstances of the particular project. An
example of how this may be presented is shown in Figure 5.4.
1
0
4I ~roiectservices
The cost summary tabulation typically displays the following information
at levels of detail to suit the users of the report and may be supplemented by
a scope change summary, various reports, charts and graphs:

original control estimate;

approved scope changes;
current control estimate;
value of work done;
commitment (to reporting date);
estimated costs to complete;
anticipated final cost;
variances between the current control estimate and the anticipated
final cost;
expenditure to date.

By using the applicable coding structure, the cost summary tabulation can
be presented in accordance with the cost breakdown or work breakdown.

5.9.3 Scope changes summary

The scope changes summary is a list of both scope changes approved
together with their impact on the original control estimate and pending
scope changes currently under consideration.

5.9.4 Charts and graphs

Charts and graphs may include the following:
design progress reports and trend analysis;
progress curves;
productivity profiles;
manpower histograms;
short- and long-term cash flow (expenditure) forecasts (see Figure 5.5).
Computers allow for a vast quantity of detailed information to be stored
and manipulated, making it a simple task to produce a large imposing-
looking report containing information on both work packages and cost
codes to a very detailed level, but hiding problem areas in a jumble of fig-
ures that nobody in authority has the time to read. It is recommended that
the cost control report is kept as brief as possible, with reports being sum-
marized to suit the needs of the recipient. Higher level reports should be
prepared for those who must make the higher level decisions, while more
detailed information should be made available to those who need to deal
with the detail.

5.10 OTHER REPORTS

Other reports which the cost engineer may be required to issue at regular
intervals comprise the following. I
 Other reports I1 (

Planned commitment -
Actual commitment --------
Planned expenditure ...........
Actual expenditure ---------

Oct Nov Dec Jan Feb Mar Apr May Jun Jut Aug Sep Oct Nov Dec Jan Feb Mar

Figure 5.5 Expenditure and commitment curves

5.10.1 Exception reports

As a means of rapidly identifying problem areas where progress is not sat-

isfactory, or man-hour expenditure excessive, exception reports will be
produced on a frequent regular basis throughout the life of the project.
The exception reports will list those activities, or individual documents,
where predicted completion dates are later than the activity early finish
date or where an excessive man-hourlcost variance exists.

5.10.2 Cash flow forecasts

A cash flow forecast will frequently be requested by the project which will
be produced by effectively pricing the project schedule. This is achieved by
spreading the expenditure against the periods over which that expenditure is
being incurred in line with an appropriate expenditure profile, in order to
produce an anticipated cash flow monthly expenditure for the remainder of
the project.
There is often a requirement for both long- and short-term forecasts,
usually covering the subsequent three months. The short-term forecast
would be used by the financing group to draw money down from the
owner or co-venturers in readiness for the payment of monthly
invoices.
1 1 Project services
Part 2 Planning and progress control

5.11 INTRODUCTION

One of the fundamental elements of project control is the planning activity.

Control requires an understanding of the current status, the ultimate goal
and of the actions necessary to achieve that goal. This is as true in the con-
text of the overall project as it is in the day-to-day activities of each person
working on a project.
Planning itself comprises all activities involved in setting up the strat-
egy for a project; it influences the method of execution, the resourcing, the
procurement policy and the contracting strategy. The planning function
continues throughout a project, monitoring progress, forecasting future
trends, measuring results, and reporting status.

5.12 THE IMPORTANCE OF PLANNING

The importance of project planning can best be illustrated through previ-

ous project experience. Many projects fail due to misconceptions,
underestimations of time and the like in the initial planning stages and due
to the failure of management to ensure that the plan is adhered to. It
should be understood that planning engineers plan the project and project
managers manage the project. It is therefore the duty of the planning engi-
neer to establish the project activities and events, their logical
relationships and interrelationships and the sequence in which they are to
be accomplished, which is the route map by which the project manager
will direct the project. The failure by the planning engineer to produce the
correct chart or the project manager to follow its requirements will have
dire consequences.
The rectification of problems may be comparatively painless if identi-
fied at an early stage; but as a project progresses the cost of rectifying error
or incorporating change increases dramatically. The completion date is also
increasingly at risk and the consequential lack of time in the later stages of
a project can result in restrictions, or modifications to the preferred strate-
gies, uneconomical working and additional cost.
If work cannot be anticipated it cannot be planned, if work cannot be
planned it cannot be controlled and will be undertaken in an ad hoc manner
with costs being monitored and not controlled. This comment applies
equally when the word 'time' is substituted for 'cost'.
The provision of a properly considered plan is vital to the commercial
success of a project and must be produced by those who have experience of
a similar type of project, and who appreciate the full range of dependencies
and relationships between the various activities which have to be under-
taken in order to complete the project. ,
 Levels of planning I 1 107 1
5.1 3 ORGANIZATION

To undertake a complex project successfully, it will be necessary to estab-

lish a dedicated, responsible, planning team providing a comprehensive
planning, monitoring and control service that gathers and distributes infor-
mation by the receipt and issue of appropriate reports through the whole
project, from the owner to the project team and through the design and
construction contractors to the various subcontractors and suppliers. The
degree of transparency and control that can be exercised at any level will
depend on the contractual relationships. It will be of paramount importance
to the project that the planning engineer ensures that a condition of 'no sur-
prise' exists throughout the life of the project.
While the planning activity embraces the time span from the moment
a project is born through to its completion, the start point of a particular
planning exercise will depend on whether the planner is working for an
owner, contractor or subcontractor. A planner working on behalf of an
owner will start with a blank sheet of paper and will be restrained only
by the degree of urgency expressed by his management. Planners work-
ing for contractors or subcontractors, on the other hand, will work
within increasing constraints the lower they are on the contracting
pyramid.
The control of a complex project may require the owner's project team
to insist that all participating contractors use planning systems that are
compatible with the higher level requirement, both in terms of technique
and system software. The same team may require information to be pro-
vided on progress achieved, anticipated completion dates for the work or
parts thereof, and perhaps manning levels to ensure the smooth progression
of work from one contractor to another. In addition the team may require
planning and progress systems to be compatible with work packages and
other work breakdown structures to provide integration of reporting. Such
requirements can, of course, have a profound effect on contract strategies
and relationships.

5.14 LEVELS OF PLANNING

The degree of detail required by the various personnel or organizations

working on a project depends on their position within the project. What
may be considered as mere detail to the owner may be the full scope of
work to a subcontractor.
As with other areas of project services, planning systems and reporting
requirements are arranged in a hierarchy, each level of the hierarchy con-
taining detail appropriate to the work being controlled and level of
management involved. The level of detail necessary to control the day-to-
day activities is not required by a project manager reviewing the general
status of the project, while corporate management may only be interested
in a high-level 'executive summary'.
1 1 Project services

Various levels of planning and reporting are therefore necessary to

reflect the requirements of the users of the information, with each level
being capable of interrogation at a greater level of detail through the hier-
archical structure.
The planning function commences by the setting up of a plan for the
overall project in the form of a Gantt or bar chart. The project programme
is then prepared which sets the plan in a time-scale and takes account of
key activity dates and milestones. Detailed control programmes are then
produced in bar chart format derived from logic networks. Logic networks
identify activity durations, the logical links between activities and take
account of the salient aspects of the required and available resources.
Finally, individual task level schedules are prepared, based on the control
programme, for the day-to-day control of the physical work.
Ownership of the plan is not confined to the planning engineer and it
cannot be emphasized too strongly that the advice and participation of the
parties that will be working the plan, e.g. engineers, buyers, construction
managers, etc. should be solicited. All members of the project team should
participate in the formulation of the plan from its inception and fully 'buy
in' to the schedule in its final form.
Physical work will be expressed in terms of physical progress achieved.
Progess related to design and similar activities will frequently be expressed
in terms of deliverables. A deliverable is the physical result of the comple-
tion of a discrete package of work and usually relates, but is not limited, to
drawings, specifications, procedures, reports and other documents.
Described below are the four typical levels of planning, there may be
additional levels depending on the nature of the project. Levels 1 and 2 will
be produced by the owner's project team and levels 3 and 4 by the contrac-
tor, who may also have his own version of levels 1 and 2.

5.14.1 Level 1 bar chart

The level 1 bar chart is the most basic graphical demonstration of work
plotted against time. It will show the overall programme for completion of
the project in the form of a time based bar chart (sometimes called a Gantt
chart) of perhaps 30 activities and in single sheet format.
Such a chart, a simplified version of which is shown in Figure 5.k, pro-
vides a very clear overall view of a project's requirements with completed
work perhaps represented as a solid line and outstanding work as a broken
line compared to a 'time now' line to show activities ahead or behind pro-
gramme. A bar chart cannot indicate the complex interrelationships and
dependencies between the many activities in a project and is not a document
against which detailed control can be exercised since it does not contain the
information necessary to monitor progress in controllable portions.
The level 1 programme will typically be used as a summary by senior
management and may also contain summary progress information and key
dates as shown in Figure 5.6.
Key dates, sometimes referred to as milestones, will typically have a
single deliverable for their achievement, for example: .
 % complete at status date
Plan Actual

Engineering 99.6 96.4

Procurement 72.4 79.5
Long lead
equipment
Equipment
Bulk materials
Subcontracts 96.1 94.0
Major
Minor
Construction 13.8 14.1
Site preparation
Piping and
civil works
Pipework and
structural fabrication
Mechanical, piping
and structural
Electrics and instruments (in-
cluding underground cables)
Hydrotesting, loop
checks and finishes
Off-sites1tie-ins
Commissioning

Oct N w Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar
Year 1 Year 2 Year 3 Year 4

Overallearlyplan 0.0 0.8 2.0 3.9 6.0 7.9 10.1 12.1 14.0 16.1 17.9 22.2 26.4 29.9 31.9 34.0 40.1 46.4 52.4 63.9 72.2 78.0 84.8 87.9 91.1 94.0 97.2 99.6 99.8 100.0
Overall actual progress 1.3 2.0 3.1 4.1 6.1 8.9 10.0 13.2 20.0 23.7 26.8 29.2 30.4

Figure 5.6 Level 1 bar chart with key dates (milestones) and progress curve
1 110 1 I Project services
placement of purchase orders for particular items of equipment;
mobilization of a key contractor;
completion of detail design;
delivery to site of certain specified items of equipment;
completion of heavy lifts;
power on;
mechanical completion.

The key dates will result from the more detailed considerations in the level
2 programme.

5.14.2 Level 2 programme

The level 2 programme is the highest working level of the planning struc-
ture it is the level at which the relationships between the various activities
are identified and will be the project manager's working tool. Since it will
identify all key activities and key dates it will typically be the project man-
ager's 'master schedule' and can be used to track predetermined project
milestones and the related approvals required from the owner.
This programme will be in the form of a time based linked bar chart of
perhaps 100 key activities and stages of completion similar to that shown
in Figure 5.7. All dates shown on this programme having been derived
from the analysed level 3 network.
The level 2 programme will show the overall project status and will be
updated and reissued at regular intervals showing, relative to a vertical
dateline, the progress planned and achieved for each activity.

5.14.3 Level 3 network

The level 3 programme is usually viewed in the form of a bar chart derived
from a logically linked network.
A network identifies all activities necessary to the completion of a pro-
ject, the time required for each activity and the logical dependency of
activities on each other. For each network there will be a chain of logically
linked activities from the start of the network through to the finish of the
project that defines a duration through the project as a whole whichcannot
be reduced. This is called the critical path because any overrun on any of
the activities on this critical path will cause an overrun of the project (see
critical path and float section 5.16).
A first pass at the level 3 programme, in the form of a trial network, will
probably be undertaken by the owner's project team, but the 'definitive'
level 3 programme is usually produced by the contractor as his detailed
control programme. This programme covers the entire scope of the con-
tractor's work in the form of a logically linked network, identifying the key
dates, deliverables, interfaces, material procurement and (sub-) contracting
activities.
In producing the 'definitive' level 3 programme, the contractor's plan-
ning engineer will take full account of all 'softer' links such as resource
Engineering design
Process design (P & IDS,line
llsts and spec~f~cations)
Process des~gn(AFC issues, oper-
atlng manuals and HAZOP, etc.)
Fabncated and mechan~cal
equlpment
Metallurgy
P~pingdesign
Civil des~gn
Structural design
Safety and env~mnmental
Electrical design
Instrumentation des~gn
Procurement
Enquire and order long
lead equlpment
Manufacture and deliver
long lead equlpment
Enqulre and order
fabncated equipment
Manufacture and deliver
fabncated equipment
Place subcontracts
S~te
preparation (earthworks)
P~ling
Main civil works
Construction
Demolit~onlearthworks
Piling
Prefabrication underground
C.S. plplng
Main civil works
Substation electrical and
instrumentation works
Steel prefabrication and
flreproof~ng(off s~te)
Steel erection
Fireproofing on slte
Equipment erection
Heavy lifting programme
Pipework prefabncat~on
Pipework erectton
Hydrostatic testlng
Undergmund cabling (power, elec-
trical, instrument and earthing)
Electrical instrumentation
lnstallat~on

Figure 5.7 Level 2 bar chart programme

I Project services
and manpower constraints, which are under management control, as com-
pared to logical links which are not. Thus, for example, the stripping of
shutters is absolutely dependent on the curing of concrete, but it may also
be dependent on the availability of carpenters. The first link cannot be
altered, whereas the second can.
The programme will allow for the requirements of any significant key
dates in the 'project calendar' and when the analysis is performed (see sec-
tion 5.16), it calculates the start and completion dates, taking account of
non-working days and 'total float' for each activity. Float is the amount of
overrun on an activity that can be accommodated without it affecting the
project completion date. Activity durations are usually shown in days.
When the detailed plan has been developed and the analysis run and
agreed, activities are loaded with man-hours and preliminary manpower
histograms produced. These are reviewed with the discipline lead engi-
neers, construction managers, etc. and activities are moved within their
float limitations to obtain the optimum 'smoothed' histogram, i.e. a labour
profile without excessive peaks and troughs. At this point the programme is
frozen, often referred to as being 'base lined' and the level 2 programme
and level 1 bar chart are then produced.
The level 3 programme is the basis against which those undertaking the
work report progress and likely completion dates for each activity, using
summated information obtained from level 4. The level 3 programme will
usually be updated fortnightly during design increasing to weekly during
the construction phase. The update will be based on information received
from engineers, construction managers, etc. indicating achieved progress
and current forecast against the plan for each activity.
The contractor should be allowed the freedom to plan and manage his
own work and unless the owner is carrying out some of the work himself,
level 3 will be the lowest level at which the owner's project team will oper-
ate on a day-to-day basis. The owner will require such detail as will allow
him to manage the various interfaces, but should resist the temptation to
plan at too low a level and in too much detail.

5.14.4 Level 4 schedules

The level 4 schedules convert the theory of the network into the practical
considerations for executing the work. Level 4 information generally com-
prises registers containing all the relevant details of deliverables or site
work pertaining to the work elements within each level 3 activity and are
the basis for the subsequent day-to-day planning, monitoring and control of
workscope and physical progress. The level 4 schedules are produced by or
on behalf of the contractor or whoever is chosen to execute the work.
Every level 4 design deliverable or element of site work, identified by
the design disciplines or construction managers, will be assigned a code
number which will link the documents or work to activities at level 3.
It is usual for the activities at level 4 to be coded and organized so as to
be capable of being summated in a number of different ways. For example,
 Levels of planning I1(
- - - - -

JOBCARDNO DISCIPLINE PAGE NO

CONTRACT NO ISSUE DATE

REVISION NO REV DATE
PLANNED START PLANNED FINISH DURATION HOURS
COST CODE

JOBDESCRIPTION RESOURCE TYPE RESOURCE QUANTITY RESOURCE DURATION

e.g. fabricate and weld 'can A'
jacket leg A1

DRAWINGS REQUIRED

SERVICES REQUIRED WELDING DOC REF NOS

e.g. SCAFFOLDING, RIGGING TOOLS, NDT

PERMITS REQUIRED
HOT WORK VESSEL ENTRY ELECTRICAL

CONTRACTORS' SIGNATURES

INSPECTOR SUPERVISOR
DATE DATE

SITE MANAGEMENT SIGNATURES

INSPECTOR SUPERVISOR
DATE DATE

Figure 5.8 Job card example

although initially the reporting and planning of level 4 activities may be on

an area basis, at a later stage it may be necessary to produce information
sorted on a system basis so as to provide a detailed report on the activities
and man-hours required to complete each of the process systems regardless
of area.

5.14.5 Shutdown planning

When a process plant is closed down for repair, maintenance or upgrading
(see Chapter 11 on operational maintenance), construction activities are
planned and controlled vigorously due to the extent of the work to be
undertaken over a very short contract period, which frequently requires 24-
hour shift working.
1 Project services
In these situations job cards similar to that shown in Figure 5.8 may be
used. The job card will contain, for example, the degree of detail necessary
for a field supervisor to organize his workforce, since it will designate the
timing and resources allocated for the completion of each activity. It will
also carry details of all drawings applicable to the work.

5.15 NETWORK TECHNIQUES

The network is at the heart of the planning function in that it contains the
logic on which the various planning schedules are based.
A network consists of a sequence of events logically linked together and
contains information regarding the nature of events, the order in which
events can be achieved and the duration of any activity necessary to their
achievement. The duration of a path through a network is therefore depen-
dent on the duration of the constituent activities, whereas progress is
plotted against events.
There are two conventions of representing networks. The first advo-
cates activities as arrows, the event being the node at which the arrows
meet. The second is termed a precedence network which represents the
activities as the nodes of the diagram which are connected into a chain
of logic by arrows called constraints The former is sometimes referred to
as 'activity on arrow', the second 'activity on node' which is current
practice.

5.16 CRITICAL PATH AND FLOAT

In order to calculate the earliest time of an event, it is necessary to consider

the durations of activities that precede it. This is called a forward pass.
In order to calculate the latest time that an event can occur while not
affecting the overall completion date, it is necessary to consider the dura-
tions of activities between the event and the end of the project. This is
called a backward pass.
The forward and backward passes through the network produce for each
event a range of times at which the event can take place without jeopardiz-
ing the project completion. The limits of this range are the earliest possible
event time, produced by the forward pass and latest possible event time,
produced by the backward pass. Where the earliest and latest dates coin-
cide these activities are known as critical activities and the critical path is
that which links these critical activities.
When the forward and backward passes have been completed an end
date for the project becomes evident. By fixing this end date any future
analysis extending critical activities will be indicated as negative float,
which highlights the offending activities to the planning engineer. To retain
the original contract completion dates it will be necessary to review the
(now) supercritical activities and perhaps increase manning levels to
reduce the duration of the activity, or manage the problem by highlighting
the difficulty and giving it regular specific attention.
 Progress measurement
I
Activities may be on the critical path at a particular time in the project,
but may thereafter cease to be critical, due to a particular happening, or
lack of happening; similarly, activities that were not on the critical path
may become critical.
Events away from the critical path have a range of available times cal-
culated by the forward and backward pass, the difference between the
earliest and latest times for an event is known as float. The critical path will
be the path with the least float, normally zero.
For a definition of the terms used in project networks reference should
be made to British Standard (BS 4335) entitled Glossary of Terms used in
Project Network Techniques.

5.17 PROGRESS MEASUREMENT

In order for the project team to forecast the final completion date and cost,
a basis for comparison needs to be established between the anticipated and
actual progress and anticipated cost and cost to date.
The level 4 schedule forms the basis of the contractor's progress control
system. It is at this level that the contractor will record progress, identify-
ing what has been achieved and when it was achieved. The actual hours
used in its achievement will be recorded against time sheets which are nor-
mally the equivalent of level 3 information.
This information will be used to forecast man-hours required to com-
plete the work taking into account progress and productivity achieved to
date, by area, discipline or system.
Progress is not measured by comparing time expended against total time
allowed, nor is it measured by comparing man-hours expended and total
man-hours anticipated, or by comparing amount paid and total value of the
contract. Progress is a comparison between work anticipated and a mea-
surement of actual physical work achieved. Progress will only be measured
against 'direct' or 'progressable' activities, i.e. activities that directly con-
tribute to the production of the unit. Management and support trades, for
example, are not measured as progress.
Measurement is carried out periodically at agreed cut-off dates, the
method of physical measurement of progress varying between disciplines.
Clearly the method of measurement of design, procurement and similar
activities will differ from that used in connection with construction works
where physical progress is directly measurable.
In order that progress on design and similar activities does not remain a
matter of opinion it is necessary to agree, prior to commencement, the
stages through which deliverables, e.g. layout drawings, general arrange-
ment drawings, enquiry documents, etc. will proceed in order to establish a
framework against which progress can be evaluated. This is usually
referred to as benchmarking. The agreed stages should contain a descrip-
tion of the 'quality' of the deliverable required, as progress on a deliverable
containing various 'holds' or blanks is questionable.
Original design effort and progress are based on the designer's estimate
as to the types and quantities of documents to be produced and man-hours
1 1 Project services
established for the different stages through which the document has to be
processed. Progress is assessed by the engineers at the lowest level of
detail, e.g. drawing, specification, study, etc. The physical status of the
document is reviewed using the benchmarks laid down for the stages, per
document and the engineer's own judgement.
Procurement can be planned and monitored by setting a procurement
cycle which includes such activities as enquiry issue, order placement, etc.
and allocating man-hours accordingly. Time allocated to each stage of the
cycle takes account of vendor (supplier) documentation requirements, prepa-
ration of design deliverables, etc. Procurement progress is measured against
the procurement cycle per requisition for the total procurement effort.
Design programmes will usually be construction driven, in that the needs
of the large construction workforce will take priority over the inconve-
nience of the designers. The delivery dates for procured items will be linked
to the construction requirements; equipment and materials will therefore be
'reverse engineered' to take account of when it is required to suit site activi-
ties. Certain equipment will be critical with regard to vendor (supplier) data
rather than delivery, in which case the enquiries will be programmed early
in the project so as to be in receipt of data to suit design requirements.

Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb

Figure 5.9 Typical level 2 progress cuwe

 Continuing control I (1171
Information obtained from the physical progress measurement will be used
in conjunction with the 'S' curves and planning breakdown to show actual
physical progress against planned progress on a given date (see Figure 5.9).
Measurement undertaken for the purposes of reporting progress is not
necessarily suitable for other purposes, i.e. agreeing accounts, although it
is frequently used as a basis for the agreement of interim payments by the
reported progress being applied to the current value of an element.

5.17.1 Histograms and progress 'S' curves

Histograms indicate the manner in which labour levels periodically
increase and decrease over the life of a project or part thereof. They fall
into two categories, progressable and non-progressable as follows:
1. non-progressable:
management and support services;
2. progressable:
engineering design;
procurement;
supervision;
staff;
labour by trade.
There may also be a summary histogram indicating overall labour.
The contractor is usually required to submit manpower histograms for
the work together with curves ('S' curves) showing graphically the antici-
pated progress versus actual progress throughout the contract period (see
Figure 5.9).
The 'S' curves will show the planned and actual percentage completion
for each reporting period and will be generated from the level 4 pro-
gramme. The initial planned curves usually remain unchanged for the
duration of the contract unless there is a major change that would other-
wise make comparisons irrelevant.
Histograms can be determined by applying resources to each network
activity and aggregating the results per period in order to obtain required
labour totals weekly, monthly, or to whatever other period may be chosen.
Computerized network programmes not only carry out the aggregation but
also plot the resulting histograms. Histograms may disclose erratic labour
levels that may indicate that the network logic requires attention.

5.18 CONTINUING CONTROL

Once the project is under way the planning engineer will regularly review
and report on the status of the work and will update the planning database.
The planning engineer will coordinate his activities with the cost and con-
tract engineers to ensure that all project controls can be used in conjunction
each with the other. This is particularly important with regard to the incor-
poration of agreed changes into the scope of work.
1 Project services
Information will be collected on man-hour expenditure and progress
achieved for comparison with that planned. The planning engineer will,
together with the material controller, monitor deliveries of material and
equipment against planned and actual requirements together with the
issue of design information and the release of any 'holds' on design
drawings.

5.18.1 Progress reports

Each contractor actively involved in the project will produce progress
reports at regular stipulated intervals, in accordance with the requirements
of the project team. The project team's planning engineer will then produce
a consolidated progress report for the whole project.
A typical monthly progress report required of a contractor will comprise
the following.

Summary
A summary of the current status of engineering design, procurement,
contract placement, equipment and material deliveries and construction
progress. Specific reference should be made to any current problems, bot-
tlenecks, delivery lapses, etc., the effect on programme andlor costs, and
an indication of the steps being taken to overcome them.

Achievement
A description of progress and summary of the labour force by trade or dis-
cipline for both the contractor and his subcontractors.

Objectives
This comprises a description of activities to be carried out in the next
period.

Areas of concern
Highlights any problem areas that may cause delay to a key date or to the
completion of the work.

Pending or approved change orders

A summary of pending or approved change orders obtained from the cost
engineer or contract engineer.

Accidents and losses

A summary of accidents and losses as produced by the safety officer.
~1
I Introduction ( ( 119 (

Planning matters

A summary of progress indicating any departures from the agreed pro-

gramme and their likely effect on overall completion of the work.
Bar charts or other graphical presentation to show planned and actual
progress for:
engineering design;
procurement;
material deliveries to site;
construction.
The graphical presentation is frequently in the form of a histogram based
on original control man-hours and the original project programme and
shows current manpower requirements, overall and by discipline. The
basis of the histogram will be updated periodically based on revised man-
hours and agreed revised programme.
The cost engineer will use information relating to progress achievement
when forecasting final cost and developing other statistics; it is important that
cost and planning controls are maintained on a directly comparable basis.

5.18.2 Intermediate reports

On major projects or during critical stages of a project it may be necessary
for a contractor to be required to produce weekly or even daily reports.
Such reports may be restricted to the following subjects:
details of the actual compared with the planned physical progress of
the work achieved during that period;
manning levels by major activities;
materials and equipment status, indicating any areas of special con-
cern;
any matters which could jeopardize timely completion of the work;
activities to be carried out during the following period;
weather report;
all downtime;
accidents.

Part 3 Document control

5.19 INTRODUCTION

The number of drawings, specifications, data sheets and certificates gener-

ated on a major project by the owner, designer, construction contractors,
subcontractors, suppliers and the like can run into many thousands, each of
which may ga through a series of revisions.
11 Project services I
Engineering projects are complex and involve large design and con-
struction workforces working in parallel or consecutively on many
different disciplines. Each discipline depends on information provided by
others and each in turn provides information to others. Such information
may relate to space requirements or to the functional or structural depen-
dence of one system on another.
This high level of interdependence, together with the usual tight sched-
ules and large workforces means that failure to produce a document on
time, or failure to comment on a document produced by others in accor-
dance with the agreed time scales can cause serious delay andlor costly
change to the design and the construction work.
The progress of documents, whether produced by the owner, designer,
contractor, or supplier and at whatever location, needs to be tracked
through the various stages of design review, comment and issue.

5.20 MAIN ACTIVITIES

Efficient coordination between all the design disciplines and suppliers is

vital. Strict control needs to be exercised over the progress of the key deliv-
erable~and their availability, in order to ensure that all persons requiring the
use of the information have access to the latest revisions at all times.
On major projects it is often necessary to establish a document control
team to provide the project with a document management service covering
all document control requirements and related functions from contract
award to project handover, possibly extending into the provision of manu-
als necessary to the subsequent operation and maintenance of the plant.
The main activities of the document control team will be to provide an
information service to discipline engineers, construction contractors and
suppliers, in various locations covering registration, monitoring, printing,
distribution, expediting and status reporting on all documents produced by
the project.
Although exceptions may be made in the case of.documentation of a
confidential nature, document control will be the focal point for the regis-
tration, monitoring and distribution of project documents.
The team will therefore:
establish a system of document referencing;
establish a document tracking system to control and report on the gen-
eration, issue, receipt, review and return by each discipline;
provide a system of document storage and retrieval.

5.21 CONTROL METHODS

Document control will operate at the level at which individual documents

can be identified and tracked, which is usually the equivalent of level 4 of
I Controlmethods 1 1 121 1
the planning system. The document control team will be responsible for
establishing and maintaining the document database at this level.
Information flows into the project from subcontractors and suppliers,
etc. as well as flowing out from the design team. In order to ensure that the
required information is received, in the required format, in the required
number and at the required time a document schedule will be issued with
each purchase order or subcontract, under which there is a design respon-
sibility, as-built drawing responsibility or the like. Document control will
liaise with the originator of the information with regard to format while
the expediters will ensure receipt of the required documents at the appro-
priate time.

5.21.1 Registration of documents

All documents generated within or for the project, will be identified by a
unique number to facilitate registration, reference and retrieval.
Registration of each deliverable will record as a minimum:
document number;
subjectttitle;
date of original and current issue;
revision/status/date;
purpose of issue (e.g. for review; for design; for enquiry; for con-
struction);
file reference.

5.21.2 Transmission of documents

Documents will usually be issued under cover of a hard copy letter, elec-
tronic message or other pro forma means of recording its issue.
It is important to consider the wording of the transmittal which should
clearly state the date of issue and the reason for which it is issued. If, as in
the case of drawings, specifications, etc. being issued to a design or con-
struction contractor, it should be made clear whether the issue is or is not
an instruction to proceed with the work shown thereon.
It is also important that the document controller knows not only that
drawings were issued but also that they were received through some means
of formal acknowledgement. To rely on the contractor spotting a gap in a
sequence of transmittal slip numbers is not a viable option when time is of
the essence.

5.21.3 Review of design deliverables

Deliverables received from subcontractors and suppliers requiring review
by others will normally be distributed to the reviewing departments under
cover of an internal transmittal that records issue date and the date by
which comments are required, Approval cycles will be tracked and
I Project services
recorded and the document control team will expedite comments not
received by the required date in order to maintain the programme.

5.21.4 Distribution
As previously stated, it is important that members of the project work
from the latest information. This is especially true in the case of the design
team.
Clearly not everybody on a project requires copies of each of the thou-
sands of documents that a major project will produce, and therefore a
document distribution matrix will be established at an early stage and con-
tinually maintained to meet the requirements of the project, thereby
minimizing unnecessary distribution.
The matrix will identify all the documents which it is anticipated will be
produced on that specific stage of the work. The document control team
will invite each member of the project to identify on the matrix which of
the documents they wish to receive as part of the standard distribution. In
addition an updated document list will be available at all times, either in
hard copy form or on a computer database, against which an engineer can
check on the availability of documents that he had not originally identified
as being required to receive on the standard distribution list and also to
check that he is now using the latest information.
The document control team can ensure that engineers always have
access to the most up-to-date information but it is up to the individual engi-
neer to ensure that he is using that which is available.

5.22 AS-BUILT DRAWINGS

The activities necessary for the preparation of as-built drawings may vary
dependent upon whether or not computer aided design (CAD) is being
used. The contractor will be required to mark up copies of the drawings
issued to him for construction purposes, to show any changes made at site
in order to ensure that on completion the owner has a complete and accu-
rate record of the work. If CAD is used the information contained on the
marked up drawings will usually be transferred into the computer database.

5.23 REPORTING

The status of design deliverables must be known if project progress is to be

monitored. Status reviews and reports will therefore usually be generated
at the equivalent of planning level 4 using a database.
Prior to the commencement of engineering design, each discipline will
review the list of drawings and other deliverables required to satisfy the
complete project scope. This listing will be used by the document control
team to establish the initial database against which control will be exer-
I Introduction ]W
cised. Planned and forecast dates will be set by the planning engineers and
as each deliverable is received by document control, actual dates will be
held within a 'live' operating environment, enabling the current status of
deliverables to be known and reported. The database will be updated as
further information becomes available.
The document control team will need to maintain complete records of
documents linked to a reporting system, which will typically allow for:
tracking of all types of deliverable documents with full revision his-
tory - designer and supplier drawings and specifications, requisitions,
purchase orders, etc.;
tracing successions and cancellations;
logging equipment to documents;
carrying multiple document numbers for owner, contractor and sup-
plier with variable numbering structures to suit all needs.

5.24 RETENTION OF DOCUMENTS

The amount of paperwork generated on a major project is immense. Some

of it is destroyed but many documents need to be retained over significant
periods of time.
Different clients and different countries will each have particular
requirements regarding ongoing liabilities which must be established prior
to the commencement of the project in order that the relevant documents
are retained for the requisite period.

Part 4 Material control

5.25 INTRODUCTION

The cost of equipment or materials on an engineering project is one of the

most significant cost components in the estimate and the consequential cost
of materials failing to arrive at the required time or at the wrong location
causes delay and disruption to the construction activities often out of all
proportion to the value of the missing item.
Whether the material controller is part of the project management team
and dealing with 'free issue' material only, or whether part of a contractor's
team supplying all material, the overall requirements of material control
remain the same.
The material controller is responsible for ensuring that materials are
received:
I 124 1 I Project services
at the required time;
at the required location;
in the required quantities;
to the required specification.

The material controller will develop and operate a system that monitors
status against these requirements, inspects and approves storage conditions
and procedures and records any maintenance undertaken during the con-
struction period, in order to ensure that material and equipment is in good
condition when installed and that any guarantee is not invalidated.

5.26 TRACEABILITY

Due to the hazardous nature of process plants, in addition to the commer-

cial considerations stated above, there will frequently be external
requirements to satisfy the certifying authorities, insurance companies and
statutory authorities with regard to material quality and traceability. Such
requirements are in order to ensure that the quality and integrity of the
completed plant are to the appropriate standard, that the plant can be oper-
ated safely, with a minimal risk of failure and that identification and
traceability of supply is facilitated in the event of equipment or material
failure.
Traceability is usually required for primary items such as equipment,
piping, fittings, structural steelwork, etc., and records are therefore nor-
mally maintained through a coding structure that identifies the supplier,
batch number and location within the finished project so that if necessary
the location of all other similar components from the same batch can be
established and the items inspected or replaced.
The means of providing traceability will depend on the nature of the
material. For example, electrical cables should have all the required infor-
mation printed on the cable at regular intervals, while each piece of
pipework or structural steelwork must have a heat and cast number
stamped on it. Many owners and design engineers now require that such
numbers are also on the delivery notes. When a piece of pipe or plate is cut
from the original marked item of material, the heat and cast numbers must
be transferred on to the piece that is left unnumbered, otherwise that mate-
rial will not be allowed to be incorporated into the finished unit and will be
worth scrap value only.

5.27 COORDINATION

During the procurement phase the material controller will act as coordina-
tor between the construction contractor and the design office, by informing
the design engineers of the coding systems to be used for material control
purposes and providing expediters with the required on-site dates. The
material controller will also seek the efficient use of material by agreeing
allowances for contingency and waste with all parties.
 Spares I El
Coordination often includes 'nesting'. Nesting is a term used for arrang-
ing the various shapes and sizes of steel plate required by the design in
order to reduce wastage when they are cut from the standard rectangular
plate delivered from the steel supplier. Nesting will usually be undertaken
by the fabrication contractor and verified by the design engineers. Once
'nested' the material controller should record nesting through material allo-
cation sheets.

5.28 SITE STORAGE

Materials and equipment that have been correctly delivered, will be moved
from the receiving area into site storage. Such storage varies from a lay-
down area typically for pipe, steel, etc., to a warehouse for electrical or
instrumentation equipment. Note should be taken of any special require-
ments for security of the materials, especially on a multi-contractor or
multi-project site, and for the preservation and protection of the materials
such as heated storage. The issue of materials for fabrication and installa-
tion will vary between projects but it is usual to requisition materials from
the stores as they are required to be incorporated into the work.
Once in the storage area the materials will be under the immediate con-
trol of a stores organization who either report to the material controller or
work to procedures agreed with the material controller. The stores organi-
zation will be equipped with the necessary lifting and transport plant and
other items necessary for the safe handling and protection of the materials
and equipment.
The material controller is responsible for ensuring that the equipment
and material are kept in good condition. This will involve regular inspec-
tion of stores and ensuring that equipment is subject to a system of
preventive maintenance that may involve regular inspection, lubrication or
turning of motors, pumps, etc.
Accurate material control will be achieved by the keeping of records of
receipts, stocks and issues and the cross-referencing of quantities on order
and delivery forecasts. In this way, material shortage reports can be gener-
ated so that prompt action can be taken to obtain additional material, i.e. by
expediting effort or the placement of new orders.
Particularly heavy items of equipment will be required to be delivered
on a predetermined date and off-loaded directly on to prepared foundations
to avoid double handling.

5.29 SPARES

Material controllers will often coordinate the interface between the con-
struction contractors and the plant operations by recording and handing
over surplus materials and spares to the plant operations together with all
associated certification, etc.
Breakdowns on a manufacturing plant are an insurable risk and the
longer a plant is idle the higher the cost to the insurance company.
@( Project services

Consequently insurance companies frequently require that certain key

spares are kept in store in order to avoid delay caused by having to order,
manufacture and deliver replacement parts. Such spares are often referred
to as insurance spares and a material controller must ensure that such
spares are handed over to the operations group in good condition and with
the necessary documentation.

5.30 CLOSE OUT

A dossier of test certificates will be produced by the material controller for

handing over to the owner together with a set of as-built drawings and iso-
metrics which contain reference to the heat and cast numbers, etc.
On project completion, the material control records will be used to carry
out a material reconciliation in order that all materials are accounted for
and costed. Surplus material may then be:
sold back to the suppliers (via 'buy back' clauses in original orders);
auctioned to interested companies;
sold for scrap value.

Part 5 Coordination of procedures

5.3 1 INTRODUCTION

The professional institutions associated with the UK building and civil

engineering industries have developed standard documents and training
requirements which allow any person working on any project to have a rea-
sonable idea of what his opposite member on another project will be doing.
By comparison the engineering industries have developed from a
number of different industries and geographical areas. Although the funda-
mentals of administration may be similar in the various divisions of the
industry the manner in which it is practised and by whom can be substan-
tially different.
Most owners, contractors and subcontractors are now subject to a quality
system which requires the company to maintain procedures covering its
activities, however such procedures may not be fully compatible with those
of the owner/contractor. In order to ensure efficient working it is necessary
to set down those common activities necessary to align existing procedures
and to establish new procedures at the administrative interfaces.
The lack of any standardization in documentation and working practices
means that there is a risk of inconsistency in the procedures. For example
payment requirements may in some instances be stated in the conditions of
 Management procedures
]
contract, while in others they are included in the compensation section of
the contract, alternatively they may be incorporated in a set of coordination
procedures bound into the contract or agreed subsequent to the award of
the contract.
Procedures can be divided into management, design and site procedures
but the complexity and detail of the documentation will depend on the
nature of the project and more importantly the requirements of the condi-
tions of contract.

1 5.32 MANAGEMENT PROCEDURES

Throughout the whole of this chapter, comments have been made regarding
a hierarchy of control and reporting being available at various levels to suit
the requirements of the many members of the project team and their corpo-
rate masters. Emphasis has been placed throughout on the complex nature
of engineering projects both in terms of design and management.
The establishment of a single set of procedures which covers the overall
administration philosophy is essential for complex multidiscipline projects
to work efficiently.
The following subjects will normally need to be coordinated to ensure
compatibility between procedures produced by various organizations:

communications including addresses for correspondence, filing sys-

tems, verbal communications and electronic mail;
engineering matters including requirements for document distribution,
registers, drawing and specification format, drawing review and
approval, as-built drawings, certification records and operating manuals;
procurement, material control and subcontracting, including require-
ments for purchase orders, approval of all tenderers/contractors,
layout drawings of warehouses and storage areas, material receipt
and control, certificates and traceability and disposal of surplus
material;
personnel control;
QAIQC requirements including quality plans and procedures, inspec-
tion records and dimensional control;
safety plan and safety manual;
progress reporting including requirements for reporting, daily,
weekly, monthly, and the provision of progress photographs;
planning and progress control requirements including programmes at
various levels of detail, progress control and measurement systems,
histograms and progress 'S' curves;
cost control and reporting requirements including work breakdown
structures, code of accounts, monitoring and controlling costs, report-
ing and forecasting costs and cash flow schedules;
invoicing and payment including applications, submission, disputed
invoices, payment;
I Project services

contract instructions/amendments/variations including notification

and evaluation;
insurance claims reporting and evaluation;
project completion including final accounts, acceptance certificates
and final documentation.

5.33 DESIGN PROCEDURES

The design procedures are probably one of the most complex set of proce-
dures on any project. Not only are the design procedures within a single
design team complex, the approval cycles and coordination with other
parts of the design process, e.g. equipment manufacturers and owners,
make it essential that all parties are working to compatible procedures.
Design procedures cover the management of the design and should
include the control both of written information in the form of specifications
and reports, etc. and of drawn information.
In the initial phases of a project it is essential to put in place the
structure of the design procedures that will be suitable for all the phases
of the project. However it is not necessary to have a full set of proce-
dures at the start of a project to cover the later elements of the design
process, for example the procedures to cover the review and approval
of suppliers' drawings, such procedures can be issued at a more appro-
priate time. It is essential that the procedures are structured to enable
them to be incorporated at a later date and developed to meet the needs
of the project.
Procedures are normally based on the owner's requirements and devel-
oped to meet the requirements of the project. An owner who regularly
procures projects will often have detailed corporate standards which must
be complied with. These can cover the provision of drawn information in
an electronic form suitable for the owner's own system, and at the other
extreme down to the thickness of lines on drawings.
As a project develops so will the design procedures and the owner's ini-
tial requirements will be expanded by the designer's, contractor's,
subcontractors' and suppliers' design procedures. It is essential that these
procedures are aligned in order to avoid clashes and to reduce the risk of
complicating systems and formats.
One of the key procedures is that covering the status of design informa-
tion as it is important that the issue of all information is controlled in order
that the receiver of the information understands the status of the informa-
tion and what they can and cannot do with it.

5.34 SITE PROCEDURES

Site procedures are a set of procedures used to control the work carried out
on site. Procedures cover a number of subjects, some of which are legally
 Production of site procedures I
essential to the lawful operation of a site, particularly in the area of health
and safety, while others are essential to the efficient working of the site and
administration of the contracts.
Site procedures control various activities covering:
access to the work;
working hours;
contractual matters;
security/confidentiality;
health and safety;
public relations;
meeting and reporting requirements;
management structures;
quality assurance;
environmental constraints (noise, dust, etc.);
testing and commissioning.
The procedures vary from project to project and within a project from con-
tract to contract.
Site procedures are normally based on the owner's requirements,
which will define a series of restrictions and administrative requirements
for the project. These are developed by the design team and may be such
that they have to be included in the tender documentation to the extent
that they affect the tender price. Contractors may later develop and
enlarge on these procedures as may be appropriate for their own control
purposes.

5.35 PRODUCTION OF SITE PROCEDURES

Site procedures need to be in place before the commencement of any site

work or associated off-site work. The procedures should be clear and well
coordinated in order to support the efficient running of a contract. If they
are, for example, poorly structured and drafted using different styles they
tend to lead to confusion and frustration.
In their drafting it is important to coordinate elements, for example
the working hours on site might be restricted by various requirements,
such as the owner supervises all work during set hours, noise restric-
tions at certain times of day laid down in an earlier planning approval,
availability of the owner's site security personnel to permit access to
the site, etc.
It is not uncommon for a contractor to issue site procedures to the pro-
ject manager for comment or approval. This should help to ensure that the
site will be properly controlled and that any restrictions, etc. are clearly
notified to the site team.
The relevant site procedures should be issued under QA procedures as a
controlled document to the owner, project manager and contractors and
through the contractors to their subcontractors, etc.
Project services

5.36 TYPICAL SITE PROCEDURES

The following is a limited list of issues that site procedures cover.

5.36.1 Health and safety

Health and safety is an important element in site procedures and can typi-
cally include permits to work, site evacuation etc.

5.36.2 Instructions
The issue of giving instructions is a common contractual matter. Site
administration procedures should look to standardize the contractual posi-
tion and cover matters which are not specifically covered by the contract.
Typically contracts require that all instructions shall be in writing. But
what happens if the contractor receives a verbal instruction? Should he act
on it? It is common in this instance for the contractor to confirm the verbal
instruction in writing and ask for a formal instruction in writing. It must
be clear either within the contract or in site procedures whether the origi-
nal verbal instruction must be acted upon or not before any written
confirmation is received and whether failure to reject the verbal instruc-
tion means that the instruction is confirmed. Similar issues arise over the
status of site meeting minutes and correspondence to the contractor from
the owner, etc.
In addition to the issuing of instructions most contractual requirements
state that only named persons may authorize an instruction.
Site procedures must be in place in order to actively control the above.

5.36.3 Drawings and specifications

Drawings and specifications are obviously essential for construction to be
carried out. This information must be accurate and current; hence good site
administration procedures are essential in order to ensure that this is
achieved.
It is usual for site administration to have registers of drawings and spec-
ifications including lists of superseded information. The control of this
information can be very complex when both the owner and the contractor
have elements of design responsibility. The owner's design may change
and this change needs controlling and communicating. Contractor's design
often requires the owner's approval, which is normally required within a
specified time period. Any failure by the owner to comment upon or
approve the document, may in certain circumstances be taken as approval
and any belated comments construed as variations. The situation becomes
more complex when the owner's changes affect the contractor's design and
in turn suppliers' and subcontractors' design. All this must be controlled
and recorded in order that the work is accurately and efficiently carried out
while ensuring any performance criteria, required by the owner for the
works, are met.
 Typical site procedures 1W
5.36.4 Site records

Site records are numerous and are commonly kept by the contractor with
copies being sent to the contract administration team. These may cover:

weather conditions- temperature minimum, maximum, wind, rain, etc.;

resources on site - list of management personnel and operatives
including discipline and name;
plant on site -type, dutylsize;
health and safety records - hours worked, incidents, etc.

Each of the above may be recorded at different times varying from hourly
to monthly. Some records may be available for inspection by the owner,
some copied to the owner and others agreed with the owner.
It is important that the site records requirements are clearly identified
and in place as it is common to refer to them at times of contractual or
quality disputes.

5.36.5 Payments
As money is the life blood of all companies it is essential to lay down the
procedure by which payments are agreed and made. The procedures should
be based on the requirements of the contract and should cover:
timing - monthly, towards the end of the month or event based;
level of support detail required to be submitted with the payment
application;
person and address to whom the payment application is to be sub-
mitted, and any requirement to obtain a receipt on submitting it;
monitoring the progress of the payment including applications for
interest on late payment.
As cash flow is the life line of a contractor's business this is often viewed
as a key procedure for all parties to a contract.

5.36.6 Insurances
Although the checking for provision of insurances by contractorslsubcon-
tractors may be the subject of a management procedure, site procedures
are usually restricted to the manner in which insurance claims should be
handled.
Provision of insurances may include obtaining insurance in joint names,
vetting of the policies by the owner, displaying insurance certificates,
annual renewal of policies, complying with the policy requirements to pro-
vide information to the insurers.
Claims cover serving notice of a claim, keeping records, agreeing and
progressing any remedial work, obtaining payment, etc.
The subject is a specialist area and it is not uncommon to have the
owner's and contractor's experts put this site procedure in place.
W I Project services
5.36.7 Security procedures

Security procedures are often based on the owner's existing requirements

which the contractor may develop to suit his needs. Subjects such as the
issue of passes, vetting of personnel and the powers to search are common.

5.37 PEOPLE AND PROCEDURES

All good procedures should clearly define what people are required to do
under the procedure. They often cover the following:
giving of authority to a named person or persons;
giving authority to a person fulfilling a particular job title;
defining the disciplinesltrades of those who can carry out the pro-
cedure;
defining the various duties of those mentioned in the procedure.
Structures are normally prepared which show the reporting lines and duties
for a particular procedure. The structure should cover job title, name of
persons who carry out the job, telephone number and location. Often they
include the names of alternative people who are authorized to carry out the
tasks. In certain circumstances these structures might cover more that one
procedure when they cover a similar topic.
It is not uncommon to have the same individual carry out various jobs
within different structures, but care must be taken to ensure that there is no
conflict of interest between the person's roles. For example, the person
who is responsible for achieving progress of the work should not be
responsible for health and safety.
Having the right structure in place which is not overcomplicated and
which includes appropriately experienced and trained people will support
the smooth running of a project.
Due to the relatively short-term nature of projects and the changing
activities carried out in the duration of a project it is common for the struc-
tures to need regular updates.

5.38 CHANGES TO PROCEDURES

It is not uncommon for procedures to have to be changed during a project.

The changes vary from minor ones which can be predetermined (e.g. a
change in the contractor's site construction team due to the planned retire-
ment of an individual) to major and unforeseeable changes (e.g. the local
authority suddenly imposing both weight restrictions on vehicles using cer-
tain local access roads and the hours that heavy good vehicles can use the
roads). These changes should be managed correctly in accordance with the
established QA procedures.
When a change is being considered it must be notified firstly as apoten-
tial change and its financial and time implications considered and
controlled.
 Bibliography I1
5.39 COMPLIANCE

It is a fact that non-compliance of procedures does happen even on the best

run projects. On the discovery of the non-compliance it will often be nec-
essary to notify any defect and reinforce the procedure including providing
additional training, etc.
The results of non-compliance can include:
dismissal of staff (for smoking);
suspension of the work (on health and safety grounds);
the contractor being removed from future tender lists (failure to cor-
rectly implement site procedures);
reduced payments (due to not serving notices to the correct time
scale).

5.40 CONCLUSION

Procedures are essential for numerous reason but they must be clear and
relevant in order that they support the project and do not restrict it with
bureaucracy.

BIBLIOGRAPHY

Association of Cost Engineers (1994) Standard Code of Accounts, The

Association of Cost Engineers, Sandbach, Cheshire.
Clark, F.D. and Lorenzoni, A.B. (1978) Applied Cost Engineering, Dekker,
New York.
Gray, C.F. (198 1)Essentials of Project Management, Petrocelli.
Hewerdine, S. (1994) Plant Integrity Assessment, Institution of Chemical
Engineers.
Institution of Chemical Engineers and The Association of Cost Engineers
(1988) A Guide to Capital Cost Estimating 3rd edn, The Institution of
Chemical Engineers, Rugby.
Jackson, M. J. (1986)Computers in Construction Planning and Control,
Allen & Unwin.
Karger, D.W. (199 1 )Strategic Planning and Management, Dekker.
Kharbanda, O.P. and Stallworthy, E.A. (1985) Effective Project Cost
Control, The Institution of Chemical Engineers, Rugby.
Smith, N.J. (ed) (1995) Engineering Project Management, Blackwell
Science, Oxford.
Stukhart, G. (1995) Construction Materials Management, Dekker.
Quality
Assurance
1 136 1 I Quality assurance I
6.1 INTRODUCTION

In the current business world, it has become increasingly necessary to

obtain a recognized and accepted standard of measured quality before major
customers will consider doing business with a company. This fairly recent
quality revolution has gained pace and credibility from the early days of the
BSI Kitemark, through BS 5750 to today's IS0 9000 series and is now the
subject of internationally agreed standards covering goods and services.
The need for a quality system standard was recognized and developed
during the Second World War and subsequently in the US space pro-
gramme. It was apparent that products and systems purchased from
contractors would not be available on time or be compatible and work to
specification unless each operated according to a strongly defined and doc-
umented quality system.
In Europe the requirements of a suitable system applicable to defence
contractors were standardized through NATO as Allied Quality Assurance
Publications (AQAPs), and were initially published in the UK by the
Ministry of Defence as defence standards (DEF Stans.). These standards
were subsequently used by the British Standards Institute as a basis for the
introduction in 1979 of the BS 5750 quality system standards.
This process of development culminated in the publication of I S 0 9000
standards by the International Standards Organization, ISO, in 1987. On
their publication the original British standards were withdrawn and
replaced by the BS 5750: 1987 series as the UK version of the I S 0 9000
documents.
Quality management applies to all products and services - fields as
diverse as production engineering, food, textiles, building and construc-
tion, energy, health and social services, transport, pharmaceuticals, local
government, accountancy and law. Those responsible for quality in all
these fields, apply scientific and technical skills and specialized manage-
ment techniques to achieve the standard of product or service required by
the customer at the right price and the right time.
All professionals, whether accountants, architects, engineers, surveyors
or solicitors, now have the opportunity to demonstrate their efficiency and
consistency through the application of a proven quality management
system within their own businesses.

6.2 QUALITY ASSURANCE

There are many 'definitions' of these two words, which being subjective
often lead to confusion at first encounter. However, as the reader gains more
confidence in the subject, a pattern of similar interpretations will emerge.
The most quoted definition is that given in BS 4778:

All those planned and systematic actions necessary to provide adequate

confidence that a product or service will satisfy given requirements for
quality.
 The standards IW
As each contract for service or product may vary from the previous one,
the perception of quality can readily be seen to rest with the customer. If
each customer is satisfied, then quality has been achieved.
So that customer satisfaction is not a 'one-off' or random event, it fol-
lows that a systematic approach is required. The rapid growth of a
particular system, such as BS 5750 (now renamed I S 0 9000) is due to the
fact that it offers a framework of activities that assess and measure the
installed quality system, and provides for it to be recorded and remeasured
for consistency and checks on corrective actions and (it is to be hoped)
improvements.
It is quality records, particularly in the form of audit reports, that permit
management to review the effectiveness of their business practices, and
which give management and their customers the knowledge that their
products or services are 'quality assured'.

6.3 TOTAL QUALITY MANAGEMENT

Total quality management is something the majority of companies are pur-

suing today in one form or another. A caution is, as Professor Steven
Wearne (UMIST) said, 'Quality can lose purpose, become a paper exer-
cise, oppressive and bureaucratic'. Every opportunity to prevent such a
happening and to build a quality culture is needed.
A new UK standard, BS 7850, which takes more account of total quality
management is now available. The objective of a total quality management
system is to identify all those matters necessary to ensure the achievement
of the written objectives.

6.4 THE STANDARDS

The model for a system of quality management is I S 0 9000 that can be

adopted by companies and independently evaluated. It effectively com-
bines the disciplines and procedures that make the achievement of
consistent quality possible. The standard also focuses attention on the qual-
ity system, gives more effective documentation and, when properly
understood and applied, makes quality improvement inevitable. This
makes the implemented system more effective in reducing errors, hence
saving money and improving customer satisfaction.

6.4.1 I S 0 9000 and I S 0 9004

I S 0 9000-1 provides guidelines for the selection and use of the standards
and explains the structure of the standards. It defines the quality concepts
and clarifies the distinctions and interrelationships between them.
Guidelines are also provided for the selection and use of the quality system
standard that can be used for internal quality management or external qual-
ity assurance purposes. The importance of this section of the standard is
1 Quality assurance
that it explains when and how to use I S 0 9001,9002 or 9003 when there is
a contract between a purchaser and a supplier. I S 0 9004-1 is a Guide to
Quality Management and Quality System Elements which is designed as an
aid to the introduction of internal quality management systems.

IS0 9001 is the Specification for Design/Development, Production,

Installation and Servicing. It applies to those companies and organizations that
are involved in the original design, development, production and subsequent
operation of a product or service as specified by the purchaser. Suppliers cov-
ered by IS0 9001 include design groups and computer installers.

I S 0 9002 is the Specification for Production and Installation. It applies to

companies or organizations providing an established product or service to
an agreed specification. The supplier is here assumed to have no significant
part in new design or in the servicing, which in many cases are under the
control of the purchaser. This leads to more limited responsibilities for
management, internal auditing and training. Suppliers covered include
manufacturers and suppliers of pressure vessels and valves.

I S 0 9003 is the Model for Quality Assurance in Final Inspection and Test.
It applies to companies where conformance of the product to specified
requirements is required to be confidently demonstrated by inspection and
tests on the finished product.

6.5 THE SYSTEMS

The introduction of I S 0 9000 quality systems alone does not guarantee

product or service quality. This has to be accomplished through a combina-
tion of good systems and technical competence. I S 0 9000 sets a
framework for the journey of continuous improvement towards total busi-
ness excellence.

6.5.1 Quality plans

Quality planning is an essential part of any quality system and the quality
plan describes how and when the quality requirements will be implemented.

6.5.2 Typical contents list of a quality standards system

Most quality systems address the following 20 topics. Some ark self-
explanatory, all are to be found in I S 0 9000 and in most general tdxts on
the subject of quality: 1
 The systems I
management responsibility and organization;
quality system or programme;
contract review;
design control;
document control;
purchasing;
purchaser supplied items;
product identification and traceability;
process control;
inspection (testing and surveillance);
inspection (measuring and test equipment);
inspection (test and operating status);
control of non-conforming products;
corrective action;
handling, storage, packing and delivery;
quality records;
quality audits;
training;
servicing;
statistical techniques.

I S 0 9000 provides the blueprint for quality systems. It is expressed in

terms that can be applied to all types of large, medium and small enter-
prises, in designing and constructing the product or providing the service
to the requirements of the purchaser.
The current international (ISO) standard is the IS0 9000 series, and the
well-known British quality standard, BS 5750, was renamed as BS EN IS0
9000 in 1994, to align with the numbering for easy international recognition.
The text was and is identical, and future revisions will be similarly in step.

6.5.3 Quality manual

The highest level of the corporate quality plan is the quality manual that
formally states the company's policy on quality, and gives a summary of
the governing principles in the main areas of the company's business. A
typical quality plan will identify a listing of company procedures with a
summary description of content to indicate linkages and relationships
between the various procedures. This may be shown as a flow chart.
The manual will apply to all operations of the company, and any activi-
ties performed outwith the requirements of the quality manual will require
prior written approval from those so authorized.

6.5.4 Quality plans

Separate quality plans will be produced and issued for each of the main
areas of the company's operations and on major projects the components of
the quality plan may be included in the project execution plan. The quality
plans will acknowledge the principles laid out in the quality manual and
will comprise the procedures agreed and approved by the corporate body
11 Quality assurance
relating to specific quality practices, resources and activities relevant to a
particular operation. Any departures from the requirements of these proce-
dures must have prior written authorization.

6.6 PROCEDURES

Modem management thinking is that work processes need to be understood

and specifically engineered to aid the achievement of objectives.
Records on how decisions are reached are thought by some people to be
a problem. Trying to find out what has been considered and what has not,
and the reasons for a particular selection, can prove difficult; but an under-
standing of the principles followed in reaching a decision is essential to
validating a quality design and later to operational decision making.
The quality assurance team's objective should be to determine the opti-
mum number of procedures. Procedures have a tendency to go much
further than is strictly compulsory on the basis that such further detail aids
efficiency. In many cases such prescription is counter to efficiency, is
oppressive and limits initiative and improvement.
Procedures should be simple, include only essential material and should
only be compulsory for those matters which, if a certain methodology were
not followed, would pose a real risk of failing to meet purchasers' require-
ments, be a risk to safe working, cause financial loss or breach legal
requirements. It should be made clear in the procedure what is compulsory
and what is merely guidance and therefore not compulsory.
According to the principle of 'ownership', draft procedures should be
reviewed before final approval and issue by the persons who will be
responsible for implementing them.
Below the level of formal procedures there will be job instructions or
method statements that define the details of how the procedures are to be
implemented. Such documents should be produced by the person responsi-
ble for the function, who must also approve any significant departures from
their requirements.

6.7 TEAM QUALITY

Although the various managers on a project are responsible for the imple-
mentation and maintenance of quality systems within their areas of
responsibility the responsibility for quality rests with everyone on a project.
It is common to appoint a QA engineer to act as a focal point and cata-
lyst for QA matters who will normally be responsible for the following:

providing a service and advice on quality matters;

ensuring the implementation of necessary quality systems through-
out the project and any matters not specifically assigned in this
section;
 Quality improvement 1
arranging and where appropriate, conducting quality audits through-
out the project;
coordinating and standardizing all supplier surveillance activities.

Contractors have in many cases instigated quality councils and training to

involve everyone.
The quality assurance team should aim to 'engineer' the work or deci-
sion processes used, rather than evolve 'a sticky plaster approach' to
putting problems right as they occur.

6.8 SUBCONTRACTOR AND SUPPLIER QUALITY

It is now common to rely on the quality assurance of the subcontractor or

supplier rather than on the traditional approach of the purchaser inspecting
the work. In certain cases (a common example being British Steel), the
importance of the material is such that independent inspection is still
required. In other cases though it should be satisfactory to validate that the
supplier has adequate inspection and rely on that.
Suppliers should be registered to IS0 9001 or I S 0 9002, or have equiv-
alent procedures in place.
A team comprising senior managers will often visit all important sub-
contractors and suppliers prior to or shortly after award of a contract. This
is to impress on the subcontractor or supplier the importance of their work
to the project, the need for quality and timely completion.
Quality assurance programmes will be developed for all procured items
as part of preliminary engineering.
A performance test will be performed wherever practicable on all sup-
pliers' equipment.
Suppliers will generally be required to maintain material and test
records for inspection throughout the operating life of the project.

6.9 QUALITY IMPROVEMENT

There are always two bases for quality improvement: one is the reactive
basis, where problems discovered during audits or other surveillance meth-
ods are recorded, and preventive measures taken to ensure no recurrence.
The second is the proactive, which is more difficult as improvement
implies knowing the starting point. There is, therefore, a need always to
consult data collected with the intent of analysis for quality improvement,
or data that are available that can be used for quality improvement analy-
sis, the proactive being less well defined.
The main tool for recognizing, in a proactive way, the need for quality
improvement, is the production, where possible, of flow diagrams for each
working procedure. The logical sequence can be seen and, therefore, the
expected outcome can be assessed.
1 1 Quality assurance
6.10 THE WAY FORWARD

The future success of all our businesses is in our hands, to win work, to
complete it to the customer's satisfaction, to encourage further orders and
to ensure continuing improvement in business methods. In this search for
improvement the three 'soft' management issues of quality, safety and
environment will rank equally in importance to the traditional 'hard' issues
of cost and schedule.
It is self-evident that a quality job will be a safe job, and noting that BS
7750 for environmental systems is based on the old BS 5750, we have the
basis for considerable synergy by combining the three subjects into one
structure. Purchasers cannot abdicate their legal responsibilities to the con-
tractor; the law now makes the 'employer' responsible. Future work must
be won by competing in all the above areas, and it will be the most efficient
team that wins the business.

BIBLIOGRAPHY

A quick check on the status of quality systems in place in most formally

assessed companies can be found in the Department of Trade and Industry
Register.

Ashford, J.L. (1989) The Management of Quality in Construction, E & F N

Spon.
Department of Trade and Industry Guide to Registered Firms.
Lock, D. (1995) Handbook of Quality Management, Gower.
Owen, F. (1993) Quality Assurance: Guide to Application of IS0 9000,
Institution of Chemical Engineers.
Parker, G.W. (1995) Achieving Cost Effective Quality, Gower.
Sayle, A.J. (1995) Management Audits, McGraw-Hill.
IsomerisationUnit at
Elf / Murco / Gulf Refinery,
Milford Haven, Wales,
showing the
deisohexanizer.
1 146 1 1 The contract I
7.1 INTRODUCTION

A contract may comprise a number of documents usually bound together,

by reference, in a form of agreement signed by the contracting parties. A
construction contract will therefore typically be comprised of the following
in one form or another:
form of agreement;
conditions of contract;
supplementary or special conditions;
scope of work;
compensation or terms of payment;
coordination procedure;
technical information including drawings, specifications;
programme requirements, etc.
The form of agreement will not only list the above, or similar sections
making up the contract, but may also state the order of precedence in the
event of a contradiction between the documents. Other aspects which may
require consideration according to the circumstances of the project are
listed in section 7.18 of this chapter under supplementary and special con-
ditions.
The form of agreement is often part of a set of conditions of contract,
which sets out the responsibilities of the various parties and contains the
more standard procedures under which the contract is to be administered.
Procedural information, in addition to any contained in the conditions, is
discussed in Part 5 of Chapter 5.
The form of agreement and conditions of contract are frequently
referred to as the form of contract and may be based on, or take the form
of, a standard printed document. A standard form of contract, which has
been formulated and authorized by one of the professional institutions, is
advantageous where it can be directly related to the type of work con-
cerned. In many cases the wording of the clauses contained in the standard
form of contract will have been tried and tested over a period of time and
may even have been tested in courts of law.
In practice many engineering contracts are based on non-standard
forms of contract; in such circumstances it would be advisable to compare
their various provisions with those advocated in standard forms in order to
anticipate their effect. Many of the larger companies, such as chemical
and oil companies, have their own 'standard' form of contract developed
over the years, as it would be difficult for them to use published standard
forms for work such as offshore construction, without extensive amend-
ment.
No two projects are ever the same and, where the conditions are based
on a standard form, clauses may be amended and additional clauses intro-
duced to suit particular circumstances. These must be read carefully in
order to ascertain their full effect, particularly as they relate to the obliga-
tions and responsibilities of the parties. I
I Forms of contract I
It is most important that a contractor fully recognizes the responsibili-
ties he is expected to accept when tendering. These responsibilities must be
set out unambiguously in the contract. Most standard forms attempt to
establish an equitable relationship between the parties but some owners
may choose to transfer the onus of certain obligations on to the contractor.
The increase in the risks to be undertaken may affect the financial provi-
sion required by the contractor and included in the tender price.

7.2 TYPES OF CONTRACT

The choice of the type of contract will inevitably vary according to the
owner's requirements and the nature of the project. The more usual types
of contract tend to fall into the following categories which are further
described in Chapter 9 on contractor and subcontractor selection:
turnkey based on lump sum;
lump sum: design and manage;
remeasurement based on schedule of rates lapproximate quantities;
performance contract: design and construct;
cost reimbursable (which can be subject to a target cost).
The above list can only be indicative of the many types of contract in gen-
eral use. Many contracts use a combination of contract types: lump sums
for elements of work for which the scope can be ascertained, while approx-
imate quantities may be appropriate for other elements the scope of which
cannot readily be determined at the time of tender.
Types of contract will vary considerably, depending on the respon-
sibilities to be borne by the parties and the extent to which the scope and
definition of the work can be established prior to tenders being invited for
the work, or the tender accepted. The type of contract may also vary
between the owner and the contractor and the contractor and the various
subcontractors. The selection of the type of contract is discussed in
Chapter 9.
Arrangements between the parties will recognize the risks involved,
which may lead to different contracting methods and the means whereby
these risks can be shared. Such arrangements include joint venture con-
tracts, where two or more contractors agree to collaborate in submitting a
tender, and alliancing, where various contractors and an owner agree to
work together in a cooperative agreement and share risk and savings.

7.3 FORMS OF CONTRACT

The following is an indicative list of the more usual standard forms of con-
tract used in the industrial engineering industry, which can be regarded as
having been standardized and accepted by the industry:
I The contract
the Institution of Chemical Engineers: Model Form of Contract for
Process Plants: Lump Sum Contracts ('Red Book');
the Institution of Chemical Engineers: Model Form of Conditions of
Contract for Process Plant: Reimbursable Contracts ('Green Book');
the Institution of Chemical Engineers: Model Form of Conditions of
Contract for Process Plant: Subcontracts ('Yellow Book');
the Institution of Civil Engineers (ICE): Conditions of Contract;
the Institution of Civil Engineers (ICE): Design and Construct
Conditions of Contract;
Federation Internationale des Ingenieurs-Conseils (FIDIC):
Conditions of Contract for Works of Civil Engineering Construction;
FCderation Internationale des Ingknieurs-Conseils (FIDIC): Conditions
of Contract International for Electrical and Mechanical Works;
the Institution of Electrical Engineers: Model Forms of General
Conditions of Contract: Engineering Contracts (MFII).

One form of contract which has been well publicized but which has still to be
fully tested is the New Engineering Contract: the engineering and construc-
tion contract issued under the auspices of the Institution of Civil Engineers.

7.4 TERMS AND CONDITIONS

The terms and conditions set out in the form of contract, whether they form
part of a standard form or have been drawn up specifically for a particular
project, are often required to cover a wide range of circumstances. Some
will be peculiar to a specific industry or to a particular type of project.
The principal aspects which need close examination as to the adequacy,
implications and onus of the respective parties and are common to most
contracts are set out in this chapter and comprise:
definitions and interpretations;
scope of work;
responsibilities;
law and statute;
damage, injury and insurance;
subcontracting;
time;
variations (changes);
payment;
testing, take-over and liability for defects;
default and remedies;
suspension and termination;
resolution of disputes.

7.5 DEFINITIONS AND INTERPRETATIONS

Terms vary from one contract to another and between standard forms. It is
therefore important to ensure that all the contract documents comprising
 Responsibilities 1
the contract use the same terms and definitions throughout. The terms in
the conditions of contract should be defined clearly to avoid any ambiguity
in their interpretation and adopted and used throughout the contract docu-
mentation and subcontract documents.
The clarity of these definitions will assist in eliminating possible misin-
terpretation of the contract arrangements and procedures, thus contributing
to the smooth running of the project.

7.6 SCOPE OF WORK

One of the most important definitions required in a contract is that of the

scope of the work. This must be carefully drafted in order to define clearly
what is expected of the contractor in the performance of the contract and
therefore included in the quoted tender amount.
It must be remembered that the scope of work is one of the fundamen-
tals of the contract. If the contract does not cover all aspects of the work,
either specifically or by implication, that aspect may be deemed to be
excluded from the contract. A comprehensive, all-embracing description
should therefore be considered for the scope of work clause which should
be supplemented by specific detailed requirements. If reliance is placed
solely on a very detailed scope description an item may be missed from
this detailed description and be the subject of later contention.
Where items of equipment are to be fabricated or manufactured off site
by others, it is advisable that the contract sets out the corresponding oblig-
ations and liabilities of the respective parties, particularly if these are to
form an integral or key part of the completed works.

7.7 RESPONSIBILITIES

The responsibilities of the contrasting parties and their representatives

should be clearly defined in a manner which will leave no doubt as to the
obligations that each is accepting. This will also allow the procedures nec-
essary to enable the contract to progress satisfactorily from inception to
completion to be established at the outset of the work.
The person given ultimate responsibility on a project may be entitled
project manager, owner's representative, engineer or supervising officer (in
this chapter this list of titles is abbreviated to 'the engineer'). The engineer
will be identified and named in the contract and, as an agent of the owner,
will represent him by interpreting his requirements and will issue appropri-
ate instructions on the owner's behalf to the contractor. Any limitations to
the powers of this person when acting for the owner will need to be clearly
stated.
Where the engineer delegates any part of his responsibilities, the extent
of such delegation must be defined. In this way, the engineer's representa-
tive, cost engineer or quantity surveyor, etc. will each have their respective
authority, duties and obligations defined for the purpose of the contract.
I The contract
The contract as a whole will also define the responsibilities for the
design, production and programming of the design information, the
requirements for design approval, the supply of any free issue materials,
the issuing of instructions and the form which these instructions are to
take, the programming of the works, the method of measuring and evalu-
ating the work, the circumstances which will constitute a variation to the
scope of works and the duties of the parties during construction and
installation.

7.8 LAW AND STATUTE

The contract should specify the law under which it is to be interpreted as

this may not be the law of the country in which the work is to be executed.
Differences in the law between countries need to be carefully consid-
ered. Local laws may be in place which affect health and safety,
employment matters, the manner in which the work is carried out, how dis-
putes are resolved, the ownership of plant, materials and equipment prior
to their delivery to site, patent rights, copyright, royalties and their equiva-
lent, etc.

7.9 DAMAGE, INJURY AND INSURANCE

Generally, standard forms of contract deal separately with the responsibil-

ity for loss or damage to the works and for injury to persons and loss or
damage to other property.
Under most standard forms of contract used in the construction of engi-
neering projects, the contractor will be made responsible for the care of the
works and their restoration if loss or damage occurs before they are certi-
fied as completed. Separate clauses deal with the insurance requirements to
cover this liability. Exceptions to this responsibility will be found, for such
risks as war,force majeure, etc.
The obligations to insure the works, as distinct from the employer's lia-
bility and third party insurance, may well depend upon the size of the
contract and its form. The contractor may be required to insure the works
under an engineering contract, but the owner may insure for the benefit of
all the contractors and himself where the contract is of large scale, or where
disproportionate risks exist such as an offshore platform, or where a
number of contractors are to be engaged on a construction site when it
would be difficult to ascertain cause and liability for an incident.
Most contract forms will seek, for the benefit of the owner, an indem-
nity from the contractor for injury to third parties and for loss or damage
to property, other than the works, which arise out of or as a result of the
construction work. That indemnity may well include the acts of parties for
whom the contractor is responsible as well as those of his employees. The
owner will also require the contractor to insure to cover this indemnity.
 Time (W
In fulfilling his insurance obligation the contractor will be required, nor-
mally at the commencement of the contract, to substantiate the fact that
insurance has been arranged.
Reference to responsibility for injury, loss or damage and the require-
ments to insure is provided in Chapter 8.

7.10 SUBCONTRACTING

Most contractors have found it uneconomic to retain the full range of spe-
cialist expertise necessary to undertake all aspects of a multidiscipline
project. The contractor may therefore need to subcontract some of the work
to other contractors because of the specialist nature of parts of the work,
equipment, engineering or plant to be incorporated.
The owner may require to be involved in the selection and appointment
of these subcontractors and may require particular subcontractor responsi-
bilities or design parameters to be incorporated in appropriate
documentation. These arrangements may involve nomination, designation,
restriction as to selection or other requirements which may involve close
cooperation between the owner and the contractor either prior to or during
the contract period.
In many cases, documentation drawn up by the contractor for the appro-
priate subcontract will reflect the provisions of the main contract between
the owner and the contractor.

7.11 TIME

Delay and disruption to the work is the most frequent cause of claims being
raised by contractors against owners, while delay in completion due to fail-
ure by a contractor is the most frequent cause of action being taken by
owners against contractors.
A failure in performance of a responsibility for design by either party,
may lead to delay in providing the information necessary to enable the
works to proceed. Alternatively the contractor may fail to meet his pro-
gramme requirements by poor progress, possibly caused by delay in the
provision of labour and material or due to his subcontractors or suppliers.
Failure to provide design information, free issue material, plant or special-
ist equipment promptly and correctly is one of the most common causes for
delay, with accompanying financial penalties under the contract. This may
be compounded by errors or omissions in the drawings or other design
information.
Circumstances outside the control of either party such as inclement
weather, national strikes, hostilities, unforeseen ground conditions, may
also prevent the programme from progressing as initially envisaged.
The proper control of these events is necessary if the contract is not to
be frustrated and unnecessary claims submitted. Agreed start and comple-
115211 1 The contract

tion dates are essential and, depending on the size and complexity of the
project, an agreed contract programme may also be either essential or
desirable.
The conditions of contract will contain clauses which recognize the var-
ious circumstances which can adversely affect or vary the work and the
programme. Failure to recognize a change in circumstances and deal with
it equitably and expeditiously can lead to friction between the parties and
possible litigation and arbitration.
Some contracts, where the contractor is responsible for the whole of the
project, will stipulate only the date on which the contractor is required to
commence the work and the date by which the work is required to be com-
pleted and ready for handover by the contractor to the owner. The details of
how the work is to be organized are then left to the contractor to establish
and monitor, although he may be required to submit his detailed pro-
gramme in advance for approval.
In other contracts a detailed programme, rather than just the start and
finish dates, will be regarded as a contract document and may require the
owner's agreement to any alteration. This is often the case where a number
of 'main' contractors for civil, mechanical, electrical, instrumentation and
insulation, are involved and key dates have to be established to ensure site
and work availability for each.
In either case a programme will be required to show the contractor's
proposed method and sequence for the execution of the works. The pro-
gramme may also indicate the proposed sequence and dates for receipt of
key documents and information to be provided by the owner together with
similar details of any plant or specialist equipment for which the owner is
responsible for procurement.
Where materials and equipment are to be provided on a free issue basis,
dates for delivery should be established by the owner and the contractor
advised accordingly. Failure by the owner to meet these dates may cause
delay and incur financial penalty.
In support of the programme the contractor may be required to pro-
vide detailed schedules for individual sections of the work and progress
charts and manning levels for approval by the owner and may subse-
quently be required to update progress charts during the progress of the
contract.
In most cases it is the engineer who is conversant with the development
and progress of the work and who will best be able to communicate in writ-
ing to the contractor those decisions which will determine the smooth
running or otherwise of the contract.

7.12 VARIATIONS

A variation is a change or an alteration to the work which involves an addi-

tion, omission or substitution to the work described and established at
contract award, or a change to the circumstances, including programme
 Variations I
requirements, under which the work was to be undertaken and may be var-
iously referred to as engineer's instructions, variation orders, change
orders or other such term.
Variations should be in writing. If the variation is in the form of drawn
information it should be issued in writing, while an oral instruction given
in meetings or at site should be confirmed in writing.
The most suitable vehicle for the evaluation of variations is that pro-
vided by a schedule of rates or bills of quantities prepared in accordance
with a set of measurement principles such as the Standard Method of
Measurement for Industrial Engineering Construction.
In certain cases, because the full extent of the work cannot be predeter-
mined, the only means of valuing the work will be by recording actual time
expended on a daywork basis. The record of labour, plant and materials
used will need to be signed by an authorized representative on site at the
time the work is carried out. Rates and percentage additions established at
tender stage may then be applied for overhead, profit, etc., to enable the
variation to be evaluated.
The evaluation of a variation may be carried out by the engineer, his
representative, or by the contractor. The evaluation may involve a simple
calculation of revised quantities against original tendered rates, or possibly
an evaluation on a daywork time and cost basis. Where applicable the eval-
uation of the cost of disruption to the programme caused by the variation
or the cost of extending the contract period must be added.
On certain types of contract, the whole of the work will be remeasured
on completion, in which case the contractor may be responsible for prepar-
ing and submitting priced detailed measurements of the completed work.
Alternatively the engineer may be responsible for these duties or appoint a
third party to carry them out. The remeasurement may have to be submitted
on completion of the contract or on a continuous basis in support of interim
applications for payment throughout the course of the works. In such cir-
cumstances individual variations would not be remeasured in detail, but
would have an estimate attached at time of issue for purposes of cost con-
trol. Either way the procedures for authorization and evaluation should be
established at award.
Major variations, or variations introduced late in the programme, may
cause a disruptive effect sufficient to delay the programme or require spe-
cial arrangements to be introduced to offset the effect. In many cases it is
the combination of a series of variations which accumulates into a signifi-
cant problem. A delay affecting the work of one of the earlier trades may set
off a chain reaction which affects each of the subsequent trades or contracts.
Where an element of the work has not been defined at tender stage, to a
sufficient degree to allow the tenderer to include the work in his tender, a
specific contingency may be included at the time of the enquiry by the
owner in the form of a provisional sum.
Where provisional sums are included in the contract price, these must be
replaced at final account stage with a properly quantified and priced set of
items or agreed lump sums substantiated in an appropriate manner.
1 The contract
7.13 PAYMENT

The contract should include terms of payment detailing the procedures for
interim payment, and retention and should state how the final account is to
be calculated and final payment made.
It is usual for the contractor to submit an application at monthly inter-
vals to the engineer indicating the value of the work completed and any
other amount such as establishment charges to which he considers he is
entitled under the contract. In the case of construction contracts this may
include the value of unfixed materials and plant both on and off site.
Supporting documentation may be required in certain instances, the details
of which will depend on the nature of the work.
The contract normally requires the engineer or his representative to cer-
tify the value to which the contractor is entitled. Interim certificates will be
issued by the engineer authorizing payment from the owner within what-
ever period is stipulated within the contract. Delay in receipt of payment to
the contractor may entitle him to interest charges. Alternatively the con-
tract may specify predetermined stage payments rather than monthly
interim payments.
Where there is an amount to be retained against satisfactory completion
of the work, the percentages to be applied for such retention and the condi-
tions and time of release should be clearly stated in the contract.
The maximum period within which agreement is required between the
parties as to the precise value of a final account or the final contract price
may be stated.

7.14 TESTING, TAKE-OVER AND LIABILITY FOR DEFECTS

Various liabilities commence or are released when certain stages have been
reached in the work. Such stages are usually acknowledged by the issue of
a certificate, which may include certificates of handover and take-over, par-
tial or final completion, maintenance period.
Industrial engineering projects, by their very nature, will require tests to
be conducted both during and on completion of individual installations and
in many cases in relation to a number of separate installations which oper-
ate in conjunction with each other to meet the design parameters of the
project as a whole.
Testing therefore may relate to individual material components, factory
testing of completed items of equipment off site, pressure testing of indi-
vidual sections of pipework, testing of welds or pipe joints, a vast array of
electrical and process control tests and tests of environmental conditions or
quality of finished product after processing. Testing may also be required
for insurance purposes.
Testing needs to be interpreted separately from pre-commissioning or
commissioning, as does performance testing where the whole or part of an
installation requires certain preset specified design parameters to be met. A
more comprehensive description of pre-commissioning and commission-
 Suspension and termination IW
ing is given under initial operations in Chapter 2 on the management of
engineering projects. The owner may arrange for commissioning of com-
pleted installations or groups of installations to be carried out
independently or jointly with the contractor(s).
While the specification will set out the procedures and parameters for
testing and commissioning, the contract will set out the obligations as to
how these parameters are to be met and the consequences of failure to meet
them. The responsibility for the provision of fuel for testing and testing
equipment also needs to be stipulated.
Performance testing is usually applicable where the design is the
responsibility of the contractor and can include the running of the com-
pleted plant and the checking of product quality and quantity, feedstock
consumed, use of energy, waste and by-products, environmental conditions
and other aspects such as may be required. In such instances time limits for
the rectification of performance defects must be stated together with penal-
ties for failure.
The documentation required in the form of test certificates, warranties
and guarantees, to enable proper records to be maintained should be stipu-
lated, as will the effect in relation to the guarantee or warranty period and
the extent to which it will apply.
In many cases the awarding of a handover certificate following testing
will establish the date of take-over of the installation or, where applicable,
that part ready for commissioning.
Liability for defects should be defined in the contract together with the
period of time for which such liability is to apply and the length of time
within which defects are to be remedied.

7.15 DEFAULT AND REMEDIES

Where the contractor has failed to comply with the terms of the contract,
the owner may have the right to take appropriate action to remedy the
default including, where applicable, having the work completed by another
contractor at the expense of the original contractor.
The manner of serving notice of default and the financial consequences
of the default should be stated.
Where either party to the contract has defaulted to the extent that finan-
cial redress or litigation is invoked, contemporary records will be required
by way of substantiation. Proper record taking procedures should already
have been established but, as soon as potential default situations become
evident, these procedures may need to be reviewed and additional records
kept.

7.16 SUSPENSION AND TERMINATION

Circumstances may arise where it is necessary for the work to be sus-

pended and the reasons for which such action will be allowed should be
I The contract
stated together with the financial consequences. The consequences will
vary according to whether the reason is due to default on the part of the
contractor, default on the part of the owner or unexpected happenings such
as weather conditions or force majeure. The periods of notice should be
given for each situation together with the rights and remedies open to each
party according to the circumstances.
Termination of the contract rather than suspension may be the only
appropriate remedy in the case of insolvency, default, force majeure and
the like and periods of notice required. Again, periods of notice required
and the manner of serving such notice should be stated.
The rights and obligations of each party in the event of termination must
be stated, including the right of the owner:
to engage another contractor to complete the works;
to use constructional equipment belonging to the original contractor,
where the contractor is the party in default;
to take over possession of all materials and plant, both on and off site;
to regain ownership of property temporarily in the custody of the con-
tractor.

7.17 RESOLUTION OF DISPUTES

Most standard and bespoke forms of contract will incorporate a condition

relating to the way in which disputes are to be resolved. Where the owner
and the contractor fail to agree upon any matter covered by the provisions
of the contract, the contract may provide that either party may take the
matter in dispute to arbitration.
Arbitration provisions may include the periods of notice required to be
given by either side, the nomination of an independent body to appoint an
arbitrator if the parties fail to agree on such an appointment, the time and
venue of any arbitration and the provision of the appropriate legal statutes
which would govern the conduct of the arbitration.
The appointment of a third party with a proper knowledge and experi-
ence of the construction process and who has the confidence of both parties
can often establish a settlement of a particular dispute within a relatively
short period of time. In most cases such procedures can be run in parallel
with the construction programme without disrupting the work to the benefit
of both parties.
Alternative processes for the mediation of disputes rather than arbitra-
tion may also be stated in the contract conditions. Alternative dispute
resolution (ADR) is a mechanism for resolving disputes which is intended
to avoid litigation or arbitration, limit the time and the cost of the action
and achieve early agreement.
Sir Michael Latham, in his report entitled Constructing the Team recom-
mends that a form of adjudication be incorporated in construction contracts
in order to provide an immediate resolution of disputes so that the actual
construction may proceed without hold up and limiting the right of appeal,
e.g. by way of arbitration, until the works have been completed.
 Supplementary and special conditions I
The government in Part I1 (Construction Contracts) of the Housing
Grants, Construction and Regeneration Act has specified that within a
'construction contract' (which term embraces agreements with professional
advisers) the parties to the contract shall have a right to refer a dispute for
adjudication under a procedure which complies with the Act. Where there
is no such adjudication clause in the contract or one which is not in compli-
ance with the adjudication provisions of the Act, then the scheme for
construction contracts shall apply. At this time the draft of the scheme is
still to be issued by the government.
The requirements under the Act are likely to be very onerous, for
example the Act initially requires the adjudicator to reach a decision within
28 days of the referral of the dispute.
As the Act has only just been placed on the statute books it is impossible
at this time to provide any advice based on practical experience.

7.18 SUPPLEMENTARY AND SPECIAL CONDITIONS

The previous sections relate to the main areas which are common to most
contracts. Individual contracts will inevitably contain clauses required by a
particular owner or a particular project, which may be called supplemen-
tary or special conditions. This title can be important since in law special
conditions take precedence to general conditions, unless otherwise particu-
larly stated to the contrary.
A checklist of the most common clauses is included below. Some, not
all, will inevitably be required:

1. services to be provided by the owner;

2. hours of work;
3. labour agreements;
4. special requirements;
5. security;
6. safety, health and welfare;
7. confidentiality;
8. advertising/publicity/photographs;
9. site conditions/hazardous areas;
10. explosives and fires;
11. testing or materials samples;
12. direct contractors;
13. fluctuations;
14. currency changes;
15. nominated or designated subcontractors;
16. liquidated damages;
17. daywork;
18. design;
19. audit requirements;
20. value added tax.
Indemnities
and Insurances

Lifting a reactor vessel at

Hydrofiner plant
Grangemouth, Scotland.

Plant Owner B.P. Oil Ltd.

1 160 1 I Indemnities and insurances I
8.1 INTRODUCTION

Due simply to the sheer size of the subject it would be inappropriate in this
chapter to attempt to provide a detailed and comprehensive recital of the
law of contract in relation to indemnities, or advice and guidance on all
forms of insurance needing to be considered by an owner and a contractor
undertaking construction projects.
This chapter is intended therefore to provide information that will be
sufficient to secure a basic understanding and thereafter form the frame-
work for both asking the appropriate questions and making suitable
enquiries.
It is also the intention to confine legal comment to the common law of
England, although recognizing that work undertaken in Scotland and in
other parts of the world may lead to differing legal interpretations.

8.2 GENERAL

It is very common to observe within construction contracts clauses that

seek indemnities normally in a format that requires the indemnifying party
to provide compensation in circumstances that would not otherwise exist in
law. Such clauses are again normally supported by an obligation on the
indemnifying party to arrange certain types of insurance to support the
indemnity being granted.
Insurance is, however, not confined to supporting an indemnity but
extends to operate with other obligations such as the contractor's duty to
carry out and complete the construction contract.
The wording or indeed interpretation of such clauses can become com-
plicated when the contractor carries some form of design liability or
undertakes a 'turnkey' contract, especially in deciding the extent of the
indemnity in relation to the design responsibility and the insurance protec-
tion the contractor is required to provide.
The insurance market is very cautious about granting either material
loss or liability insurance due to defects in design because of bad experi-
ences in the past. In consequence a full understanding of the extent of that
design liability is very important and great care is needed in securing the
appropriate cover.

8.3 DEFINITIONS

A study of the indemnity and insurance clauses contained in the various

conditions of contract relating to industrial engineering will quickly
demonstrate a considerable variation in their wordings.
Many construction projects may include a high value for mechanical
and electrical work but yet may still be based on a JCT (Joint Contracts
Tribunal) form of contract for building work, an example being the con-
struction of a new trust hospital. ICE (Institution of Civil Engineers) forms
 Need for indemnities and insurance ]1
of contract utilized mainly for civil engineering projects can again be the
base contract for engineering works. Both JCT and ICE forms adopt the
terms 'employer' and 'contractor' although representation is by the 'archi-
tect' and 'engineer' respectively.
In form MFIl, recommended by the Institutions of Mechanical and
Electrical Engineers and the Association of Consulting Engineers and in
I.Chem.E., recommended by the Institute of Chemical Engineers we find
the 'employer' described as the 'purchaser'.
To avoid confusion in this chapter reference will be confined in the main
to calling the 'employer' or 'purchaser' the 'owner', the representative the
'engineer', the construction or engineering work as the 'construction pro-
ject or contract or work(s)' unless there is a need to identify more
specifically.
The words 'peril' or 'perils' are utilized by the insurance market as alter-
natives to 'risk' and in this chapter are intended to convey a type of risk.
Examples of specified perils are the risks of fire, explosion, storm and
flood.
The term indemnity has a dual role but the reference to 'indemnity
clauses' will relate specifically to the indemnity granted in a construction
contract although the term 'indemnity' or its derivatives will also be uti-
lized in relation to compensation paid by insurers. An indemnity clause,
dealt with in more detail later in this chapter, is an undertaking by one
party to compensate another party for wrong done or trouble or expense or
loss incurred. Utilized in connection with insurance policy the term simply
means the undertaking of an insurer to compensate the insured for a loss
suffered or a liability incurred which arises out of the event or events for
which the insured has taken out insurance.
Insurance to support an indemnity clause is mainly confined to claims
for bodily injury or physical loss or damage, although cover can be
widened to embrace other forms of liability such as obstruction or trespass.
However, it is important to remember that all policies are subject to terms,
e.g. conditions and exceptions.

8.4 NEED FOR INDEMNITIES AND INSURANCE

Over the years owners have sought the protection of indemnity clauses that
not infrequently widen the liability that a contractor would otherwise incur,
and have also imposed obligations to insure mainly as an assurance that
there will be sufficient funds to ensure that repairs or reinstatement will be
carried out and without delay.
Indemnity clauses, normally requiring a contractor to indemnify an
owner in defined circumstances, e.g. due to negligence, omission or default
of or even breach of statutory duty by that contractor and indeed others for
whom the contractor is responsible, need to be studied carefully by a con-
tractor at tender stage. The study necessitates the contractor having
sufficient 'internal expertise' or otherwise to seek such expertise, to estab-
lish that such clauses have been reasonably drafted and embrace only
1 162 1 1 Indemnities and insurances

liability in scope and quantum that the contractor feels can be accepted
without jeopardizing the contractor's trading ability. It is important to rec-
ognize that an indemnity clause can be drafted to be so wide in scope that it
may not be possible to secure insurance that will provide a full protection.
Again, as is explained in section 8.5, there is a need to ensure the insuring
obligations are fully understood and are so drafted that they neither introduce
ambiguity nor are so wide that compliance is impossible.

8.5 PROVISION OF INSURANCE

Insuring clauses will require the contractor to obtain insurance that nor-
mally must be evidenced at the commencement of the contract by the
production of certificates or policies of insurance. However, in drafting a
construction contract the owner may decide he will undertake the responsi-
bility for arranging certain insurances and likewise will undoubtedly be
required to produce evidence of that insurance in the same way. Whichever
party does arrange the material loss and liability insurances it is normal for
them to be for the benefit of both parties to the contract.
The extent of the insurance can vary but it is general for at least one
clause to relate to the insurance of the work being undertaken, including
material and goods for incorporation into the work and possible construc-
tional plant. Yet another may specify the scope of the liability insurance
required, very often drafted in general terms that are to the effect that the
contractor will arrange insurance that compensates the contractor for the
legal indemnities the contractor has granted to the owner.
Where such loose descriptions are utilized the contractor may wkll find
that it is difficult or indeed impossible to secure insurance that is fully in
line with the scope of the indemnity being granted. This position has
existed for many years and appears to have been accepted by owners by
default or otherwise possibly in the knowledge that the indemnity clause(s)
are paramount.
An example would be ICE (6th edition) where although clause 23 (third
party insurance in respect of injury or damage) sets out to be specific, the
obligation to insure against 'injury to any person' tends in the more stan-
dard form of public liability policy to refer to 'bodily injury' rather than the
wider term 'personal injury', there being a considerable difference in law
in that personal injury can embrace forms of liability which do not necessi-
tate actual injury to the body.
Where design forms part of the construction contract the indemnity
clause may be sufficiently wide as to seek an indemnity for injury loss or
damage resulting from design failure, including failure to meet the plant
performance requirements as well as defects in materials or workmanship.
Nor is there always a specific reference in the corresponding insurance
clause in the contract to provide 'professional indemnity insurance', and
the public liability policy relied upon may well be limited as to the extent
of cover provided in relation to design responsibilities. That limitation is
generally in the form of an exclusion whereby an indemnity will not be
granted if the injury, loss or damage arises out of a breach of a professional
duty, e.g. the responsibility to design without defect.
It is not unreasonable to state that the arranging of insurances for con-
struction projects (in particular large process engineering projects which
embrace responsibility for testing and possible commissioning) can be a
veritable minefield and that any contractor so undertaking should be satis-
fied that the necessary 'internal expertise' exists, or otherwise seek the
assistance of an insurance broker skilled in the construction industry and
its insurance requirements.
Often too little attention is paid at the time of tendering and award to the
obligations to insure, let alone to a detailed analysis of the scope of the
cover being undertaken. Inevitably this will be to the detriment of the
insured parties if later a major claim or loss occurs.

8.6 SPECIALIST ADVICE

In the context of the total income received by the UK insurance market, the
construction industry is but a small part and as a result it is unlikely that
the majority of staff of intermediaries (e.g. insurance brokers) and insur-
ance companies will have the knowledge required to adequately advise
owners and contractors undertaking industrial engineering projects.
It would be sound advice to ensure, if an intermediary is utilized, that
the company has considerable experience in the field of construction insur-
ance and a full understanding of the forms of contract utilized in the
industry. It is likely that the majority of insurance companies undertaking
this type of insurance will have specialist staff capable of assisting the
owner, contractor or the intermediary.

8.7 STANDARD CONDITIONS OF CONTRACT

The standard conditions of contract printed in the UK are numerous in

themselves and as a number of companies prepare their own conditions of
contract reference to all forms of contract in any detail would be quite
impossible.

In the underlying relationship of contractor and subcontractor it is essential

for a contractor to recognize that the contract conditions sought from sub-
contractors must be complementary to the terms of the main contract or,
for example, indemnities given by the contractor to the owner may not bal-
ance with indemnities received by the contractor from the subcontractor.
Insurances arranged by the contractor and sought from a subcontractor
may also either duplicate or leave areas of responsibility unprotected if
great care is not taken.
1 164 1 1 Indemnities and insurances
It is certainly not unusual to find at the time of an event that a subcon-
tract has not been signed and that the subcontractor's tender was stated to
be subject to the subcontractor's own terms and conditions.
It is as well to remember in law a contract needs an offer and an unqual-
ified acceptance. If this 'rule' is not followed great difficulty can arise as to
which terms apply and hence which indemnities operate and which insur-
ance should have been provided.

8.9 INDEMNITIES

From the very fact that the undertaking of a construction contract involves
an exposure to risk of the contracting parties, there is a tendency in the
drafting of construction contract forms to embrace what are commonly
known as 'indemnity clauses'.
Clauses of this nature are normally drafted within the main contract for
3 the benefit of the owner and similarly for the benefit of the contractor in
subcontract conditions of contract into which the main contractor may
enter as permitted or authorized by the owner. It should be mentioned that
most standard forms of main contract embrace a clause or clauses dealing
with both 'assignment' and 'subcontracting', neither normally being
allowed without the express consent of the owner. In addition, such clauses
may specify part of the terms that must be embraced within any subcon-
tract conditions.
An indemnity clause is one in which one of the parties to the contract
agrees to compensate the other party against certain specified losses in the
event of defined happenings occurring. It should be added that in certain
standard contracts the clause is so drafted that each party seeks an indem-
nity from the other in defined circumstances.
The type of indemnity clause included in construction contracts gener-
ally relates to loss or damage to property both real and personal, to the
death or injury of a person and seeks to secure an indemnity for one party
by another which is not simply confined to claims but embraces all actions,
demands, costs, charges and expenses.

8.10 DRAFTING OF CLAUSES

Before entering into a contract a study of the precise wording of such

indemnity clauses is paramount.
One of the major aspects in the study is to establish, for example, if the
owner is seeking an indemnity in circumstances where the owner can be
seen to have been negligent. Previous cases heard before the 'courts' have
demonstrated the reluctance of the 'courts' to embrace within such indem-
nities the negligence of the party being indemnified. Because of the
dislike of judges to see the transfer of such liability, there appears to be an
attempt to recognize such a clause as being 'wholesome' without the
importation of that negligence. In other words, unless the wording is so
 Problem areas 1
clearly drafted as to be beyond doubt, past case law appears to demon-
strate that the judgement will be in favour of the party granting the
indemnity, i.e. negligence will not be 'imported'. If the negligence of the
owner is to be embraced within the indemnity clause the clause must state
so in clear terms.
If the clause is shown to be beyond what would otherwise be the indem-
nifying party's legal obligation then the consequences can be very serious,
e.g. picking up the negligence of the owner.
The common law of England (i.e. the ancient unwritten law of the
kingdom) is based on judicial decisions and it is very important in draft-
ing clauses for a legal document for the drafter to be aware of how
'words' are currently interpreted by the courts. Statute law, on the other
hand, equates with an Act of Parliament or regulation made thereunder
and can be so drafted that it can override or otherwise the common law of
the country.

8.10.1 Unfair Contract Terms Act, 1977

The passing of the Unfair Contract Terms Act 1977 and its subsequent
enactment, was important in denying a person the right to exclude or
restrict his or her liability by the use of contract clauses for death or per-
sonal injury resulting from negligence. The strongest protection is given by
the Act to persons who deal as 'consumers', though those dealing other-
wise than as consumers, e.g. where goods are brought for use in a business,
are covered.
The Act also relates to loss or damage allowing the right to contest the
terms of a clause, which is felt to be unfair or unreasonable. However, care
has to be taken to ensure the Act can be applied to the particular contract.
The Act also deals with 'written standard terms'. Success in practice in
contesting a contract term may well depend on a legal argument demon-
strating the power of one party to impose what are deemed to be unfair and
unreasonable terms on the other party as a result, for example, of having a
monopoly position.
It is interesting to note that in an attempt to treat the ICE conditions in
this way the court held that the general conditions were not a partisan doc-
ument. However, it would be unwise of any contractor undertaking a
construction project to enter into a contract embracing extremely onerous
indemnity clauses on the basis of relying on the Unfair Contract Terms Act.

8.11 PROBLEM AREAS

Past case law has shown that difficulty can arise in the interpretation of a
contract where, for example, the indemnity clause relating to property is
not specific in its definition of the property to which it is intended to relate.
The contract may well have a specific clause relating to the contractor's
obligations to carry out and complete the works; this clause does not limit
that responsibility, unlike the indemnity clause, to the negligence of the
1 Indemnities and insurances

contractor. It is in consequence very important to ensure when studying the

clauses of the contract that a possible conflict of this nature is avoided.
Another point that can often arise in an indemnity clause is that its
wording may not allow for the situation of contributory negligence, i.e. the
negligent acts of other parties. For example, a clause wording may refer to
'unless due to any act or neglect of the contractor' and so call for the right
to an indemnity where otherwise there may be a right to contribution.
Whereas if those words read 'and to the extent the same is due to any act or
neglect' the right to contribution would exist.

8.12 CURRENT PRACTICES

To a large extent the indemnity clauses contained within the standard forms
of contract issued in the UK have been amended from time to time to elim-
inate ambiguities that previously existed and to recognize that one party
may not be solely responsible for the event that has resulted in the indem-
nity being sought.
Nevertheless, it is common where the owner calls upon the contractor to
provide an indemnity not to confine that indemnity to the negligence of the
contractor but to embrace persons for whom the contractor is responsible,
e.g. employees and subcontractors.
Without qualification it is likely that such terminology would confine
the widening of the indemnity to the acts of persons for whom the contrac-
tor is responsible under the law of tort. So to counter such limitation it may
be found the clause is worded to ensure there is a full description of such
persons as, for example, in the JCT standard form of building contract
1980, clause 20.2.

8.12.1 The right to an indemnity

In general it should also be recognized that the obligation to indemnify
does not normally arise until the loss against which the indemnity is
claimed has actually been established. For example, the indemnifying
party has been found responsible in law and damages (i.e. the amount of
compensation) have been assessed and awarded. The timing of the claim
being made could also raise the question of whether the seeking of the
indemnity is made within the time limit allowed by law. For example,
the law may require a summons to be issued and delivered to the defen-
dant within a specific period for the claim to be allowed to be heard by
the court.

8.12.2 Guilty until proved innocent

It is not uncommon within indemnity clauses to observe a wording that
introduces 'a reversal of proof', i.e. the contractor is required to indemnify
unless the contractor can show the injury loss or damage is the result of an
act of the indemnified party. The argument for such a reversal of proof is
 Non-standard conditions (
that the contractor has custody of the site of the work and the owner, apart
from acting through his engineer, has little presence.
Such reversal of proof does not form part of the law of tort but is
imposed solely by contract. If called upon to accept only in relation to
death or personal injury the position is not so serious for the reason
explained above. However, a contractor should be very wary when such a
clause extends to loss or damage to property and does not confine the
indemnity to negligence.
An example of the exposure that could follow relates to the legal duty of
one person to support the land of his neighbour. The duty is not confined to
negligence, being more in the nature of a legal nuisance and under such a
wide indemnity clause the contractor may well be required, where for
instance there is subsidence on an adjoining property, to grant an indem-
nity to the owner in circumstances which would not but for the wideness of
the clause call on the contractor to do so.
This is but one example which demonstrates the need for sound legal
advice when entering into construction contracts for in this particular
example it is not sufficient for the defendant to state that he took all reason-
able care not to cause collapse of his neighbour's land, and in consequence
the very wide indemnity granted by the contractor may be called upon.

8.13 AMENDED DOCUMENTS

It has already been mentioned that companies can prepare their own partic-
ular conditions of contract. In many instances the skeleton of the contract
conditions can be traced back to one or more of the standard forms.
Nevertheless it is advisable to be extremely cautious when being pre-
sented with a 'typed' as opposed to a 'printed' wording on which to tender
where that wording appears on face value to be identical to a standard form.
It is most sensible to query why the owner has taken the trouble to so 'type'.
Such an approach can well mean that minor but significant alterations have
been made to what would otherwise be standard clauses. An example from
the past is the omission from clause 20 of ICE conditions of contract 6th
edition, of clause 20(2)(b), i.e. the excepted risk relating to design.
It has not been the intention, in referring to death or injury to persons,
to specifically differentiate between employees and other persons. The
indemnity clauses in a number of standard contracts will not do so
although an example of separate clauses being introduced is shown in
MFIl clauses 43.4, 5 and 6.
Where indemnity clauses do not define a financial limit it means the
indemnity is unlimited in amount.

8.14 NON-STANDARD CONDITIONS OF CONTRACT

In some standard forms reference is made to the limitation of liability,

clause 44 of form MFI1 again being an example. Equally it may be found
1 Indemnities and insurances
in tailor-made contracts for work offshore, such as offshore platforms, that
the liability of the contractor to the owner has a financial limitation partly
because there are few contractors capable of financing the size of damages
that could be contemplated or the consequential loss that an owner could
suffer or attempt to redress by way of liquidated damages. It is essential for
the contractor to ensure that it is the contractor's liability which is limited
and not just the amount for which the contractor is required to insure.

8.15 SOUND LEGAL ADVICE

It is not possible in this brief guidance to indemnity clauses to set out the
entire legal position but if any party has any doubt as to the extent of the expo-
sure, clearly such indemnity clauses should be referred to for legal advice.
It should be mentioned that indemnity clauses normally are unlimited in
financial terms, unlike insurance policies where limits always apply.
It is hoped this introduction to indemnity clauses will at least have
stressed the need to read carefully and to seek advice when necessary.
It is equally important that a contractor identifies insuring clauses
whether they relate to the work being undertaken or to accidents that can
occur during the construction period. Such clauses must be related to the
indemnities being granted and again a need to ensure there is adequate
internal or external specialist advice to ensure performance.

8.16 INSURING CLAUSES

Insuring clauses, as mentioned earlier, normally form part of construction

contracts, but it would be very misleading to state that such clauses are
drafted in a manner whereby the owner and the contractor can assume all
incidents involving injury, loss or damage will be financed by the compen-
sation granted by the insurer. For example the insured may have to bear a
substantial part of any loss (e.g. 'excess' or 'deductible') or the terms of the
policy may exclude certain types of losses.
Insurance clauses tend to relate to two forms of cover:
1. to indemnify the parties to the contract for the cost of repairing or
reinstating work carried out, temporary works, materials and goods
for incorporation therein and occasionally extended to constructional
plant, equipment and site accommodation;
2. to ensure the contractor has liability insurance sufficient in scope and
amount to support the indemnity the owner seeks from the contractor.
Because surety guarantees such as performance and retention bonds are
issued by insurance companies as well as banks it is possible that such
guarantees can be confused with the owner's insurance requirements.
Bonds of this nature, however, are not insurance contracts.
The owner may seek from the contractor evidence that he has inburance
to indemnify the contractor against defective design or defective designing
 Insuring clauses I
depending upon the extent of the contractor's design liability. Both defec-
tive design and defective designing have been mentioned previously, the
former extending to design failure that may be a breach of duty not nor-
mally placed on the contractor, e.g. unforeseen within the normal design
duty of skill and care. As with indemnity clauses great care must be taken
to understand clearly the obligations under insuring clauses and to identify
if those obligations can be fulfilled.
An example of a 'failure to fulfil', i.e. to provide cover which is identi-
cal to the indemnity to be granted, would be where the indemnity clause is
sufficiently wide as to embrace events that cause environmental pollution
and where there is a corresponding insuring clause to arrange insurance to
cover the indemnity. Clauses 22 (1) and (2) of ICE conditions of contract
(6th edition) are an example. As it is now common for insurers to exclude
from their public liability policies, injury, loss or damage due to gradual
pollution it may not be possible to comply with the insuring clause and
therefore as insurance cannot be provided it can be argued that the contrac-
tor is in breach of contract.
In the USA liability for pollution, such as the cost of clearing polluted
sites, is a major problem. The influence of such problems has spread to
Europe and as UK insurers are unable to secure adequate reinsurance, cover
is now confined to what is termed 'sudden and accidental pollution', e.g. to
secure an indemnity the discharge, dispersal, release, seepage or escape
must arise from an identifiable single, sudden, unintended and unexpected
event. Indeed at the time of preparing this chapter there was talk of exclud-
ing the risk of pollution completely from public liability policies.
An owner in purchasing a site for development would be well advised to
embrace within his enquiries the possibility of pollution, and equally any
contractor tendering must recognize the possible exposure especially if
such a risk comes within the indemnity clause.
It is not uncommon to see the well-known non-insurable risks as exclu-
sions in a policy of insurance, examples being war, sonic bangs and
ionizing radiation from nuclear establishments or weapons. This position
may be recognized in a construction contract by being risks retained by the
owner or commonly known as excepted risks. The excepted risks specified
in the contract should apply both to the indemnity and insuring clauses.
It must be appreciated that all insurance policies embrace terms of con-
tract, which means for example there can be exclusions to the cover
provided, conditions which are precedent to liability or indeed warranties.
Details of conditions and warranties will be referred to later in this chapter.
It would be quite impossible to embrace within an insuring clause exten-
sive detail of the cover required and which is known to be available.
Therefore in general and as described in section 8.5 above there tends to be
an acceptance by an owner that the cover granted adequately supports the
indemnity clause(s).
Insurance cover is provided in the UK by a market made up of many
hundreds of companies, mutuals and also Lloyd's.
Since the demise of the Fire Offices Committee there has been little
standardization and therefore a description of a 'standard policy' is almost
1 Indemnities and insurances
impossible, each insurance company or Lloyd's underwriter issuing word-
ings that suit the company or underwriting syndicate. Most insurance
companies and underwriters will also be prepared to issue wordings tailor
made for a particular insured or contract.

8.17 CONDITIONS AND WARRANTIES

It is important both to recognize and understand a clause in an insurance

policy that is prefaced by such words as 'It is hereby warranted' and to dis-
tinguish from a 'Condition that is precedent to liability'. The difference is
normally explained by saying that a 'condition' requires an insurer to
demonstrate the breach influenced the loss, whereas in the case of a 'war-
ranty' it is sufficient for the insurer to demonstrate the breach existed at the
time of the loss whether or not influencing the event, i.e. the incident that
has caused the claim.
An example would be a policy covering all risks of loss or damage to
property but containing a 'warranty' that when the premises are unoccu-
pied a burglar alarm must be in operation. If during unoccupancy the
premises catch fire and it was discovered the insured had failed to set the
alarm insurers would have no obligation to indemnify despite the alarm
having no relevance to the fire.
The point about conditions and warranties is most important in indus-
trial engineering work as often there are bound to be hot workings taking
place. A vivid example was where the contractor sought a corresponding
indemnity to the one he had given in the main contract but failed to check
that the subcontractor's public liability policy embraced a 'heat treat war-
ranty'. That warranty called for specific precautions to be taken but after a
serious fire had occurred damaging the existing plant the subcontractor was
found to be in breach and his insurer refused to grant an indemnity. This
left the contractor in the unfortunate position of having to fulfil the indem-
nity the contractor had given to the owner which indemnity embraced the
acts of subcontractors. It need hardly be stated that the subcontractor with-
out recourse to insurance was not able to compensate the contractor for the
very large sum involved.
The obligation to insure the work being undertaken and possibly the
existing plant that is being worked upon can be either that of the contractor
or of the owner or indeed divided. It is to be hoped that the insurance being
arranged protects at least both the main parties to the contract. The scope of
that insurance may be clearly defined by specifying the perils against
which insurance is required. Problems can arise when reference is made to
all risks insurance and there is no clear definition in the contract of any
exceptions to the cover that will be acceptable.
An interesting point at law arises when in a subcontract the contractor
extends the benefit of the insurance he has arranged under the main con-
tract to the subcontractor, which at the time of an occurrence is discovered
to be a unilateral decision in that the owner has not so approved the exten-
sion of the cover within the main contract. Hence the need to ensure the
main and subcontracts are complementary.
 Conditions and warranties (
Very often either within an insuring clause or by way of an appendix to
the form of tender the owner specifies the limit of indemnity to be granted
under the public liability policy. It is not uncommon to find a totally
unfounded belief that the nomination of such an amount equates with a
limitation of liability. Where the sum specified by the owner is low then the
contractor must ensure adequate protection and hence the contractor
should deem the figure a minimum and select a limit of liability that is
nearer the exposure faced.
Occasionally an owner will provide the public liability insurance and
extend the benefit of the insurance to the contractor. This is likely to occur
with a very large project and such insurance may be combined with mater-
ial loss cover. Again, where the contractor has to place reliance on such
insurance, where normally the liability for the work and indemnity would
remain with the contractor, then great care should be taken to ensure at
tender stage that the cover being provided is adequate.

8.17.1 Subrogation
Subrogation, which is a common law provision, can be defined as the right
which one person has of standing in the place of another and of availing him-
self of the rights and remedies of that other person. The reason for mentioning
this doctrine is that as most insurance policies contain a 'subrogation' clause
there is a tendency to introduce the doctrine into construction contracts.
However, before developing this point it should be mentioned that in
common law an insurer cannot compel the insured to allow him to exercise
subrogation rights against a third party until the insurer has first paid the
claim, unless the policy provides otherwise.
The introduction of a subrogation clause and its specific wording does
prevent the insurer's claim against the third party being prejudiced by
delay. The subrogated claim is incidentally taken in the name of the
insured, it being part of the insured's duty to assist the insurer in the con-
duct of the claim.

8.17.2 Rights of recourse

Clearly the right to subrogation cannot apply against an insured for if an
insurer undertakes to indemnify the insured then the insurer cannot there-
after set out to recover the compensation on the grounds, for example, that
the insured had been negligent. In other words, an insurer having paid a
claim cannot take legal action against its insured to recover the money the
insurer has paid out.

8.17.3 Introduction into contract forms

The JCT, because of past case law, amended the definition of 'joint names
policy' in clauses 1.3 and 22 of the standard form to read:
Joint Names Policy: a policy of insurance which includes the Employer
and the contractor as the insured and under which insurers have no
11 Indemnities and insurances
right of recourse against any person named as an insured, or pursuant
to clause 22.3 recognized as an insured thereunder.

The words in italics (written as such in this chapter solely to highlight a

point) are unnecessary and are really introduced for the comfort of parties
not understanding the law of subrogation which has been explained above.
It should be mentioned that the words 'which includes' are deliberate in
that there may be other insured parties.

8.17.4 Other uses

Again referring to the JCT standard form the reference to subrogation is
utilized in clause 22, as providing an option to grant to subcontractors cer-
tain benefits of the insurances arranged under clause 22, whereby the
insurers can either add the subcontractors as insured parties or 'waive their
rights of subrogation'.

8.17.5 Principal's clause

In a similar vein to the waiving of subrogation rights reference may be
introduced into the insuring clauses of construction contracts and in partic-
ular to clauses dealing with liability cover to the effect that the policy
should embrace a 'principal's clause'. This really equates with adding the
name of any principal, e.g. the owner, with whom the insured is in contract
and granting to that principal an indemnity,
It is important to understand that this does not necessarily provide the
principal with the full rights of a 'joint insured'. However, the policy can
be drafted to so provide.
Again it is possible to turn to the JCT standard form to indicate the limi-
tation for under clause 21.1.1.2. the words read:
shall indemnify the Employer [i.e. the principal] in like manner to the
contractor but only to the extent that the contractor may be liable to
indemnify the Employer under this Contract.

8.18 TYPES OF INSURANCE

8.18.1 Employers' liability (EL)

In simple terms this form of insurance sets out to indemnify an owner (i.e.
employer) against a claim by an employee for death, injury or illness that
arises out of and in the course of that person's employment.
A typical example of a requirement for the contractor to provide EL
insurance can be found in MFI1 clause 47.5, but ICE (6th edition) is rather
more interesting. The main feature of an EL policy is that the indemnity
relates to the words 'arising out of and in the course of'. ICE attempts to
distinguish between third party insurance and the indemnity in relation to
 Types of insurance I
employees. Unfortunately in the 6th edition the words in clause 23 read
'(other than any operative or other person in the employment of the con-
tractor)' so excluding from the obligation to insure 'arising out of or in the
course of' circumstances which form part of the public liability cover.
Mention should be made of the difference in the way wording is drafted
under an EL and a PL policy. In an EL policy the injury or illness must be
'caused' during the period of insurance and in the case of a PL policy the
injury or damage must 'occur' during the period of insurance. In this way
the EL policy provides cover even if the illness, e.g. an industrial disease,
does not manifest itself immediately.
ICE conditions limit the reference to employees in clause 24 to an
indemnity and do not require insurance. Doubtless this is due to the fact
that such insurance in the UK is compulsory.
Since regulations were passed under the Employers' Liability
(Compulsory Insurance) Act 1969 (which itself may be amended),
owners, i.e. employers (with certain exceptions), have been required to
insure their legal liability for injury to employees which arise out of and
in the course of their employment. Hence the possible absence, as has
been mentioned, of a construction contract containing an obligation to
insure.
This demonstrates how varied are the insuring conditions in construc-
tion contracts. Complications may arise in that the definition of 'employee'
in any EL policy can now extend beyond a person under a contract of
apprenticeship or service, which means ensuring there is no gap between
the cover granted under the EL policy and the public liability policy.
Examples would be:
a person hired or borrowed from another employer;
a labour master or a person supplied by him or any person supplied by
a labour only subcontractor;
a self-employed person;
a person supplied by a local authority, e.g. under a work experience
training programme or a youth training scheme.

8.18.2 Value of the cover to be provided

An EL policy has had for very many years an unlimited indemnity,
whereas a public liability policy will have a limit selected by the contractor
or otherwise increased to conform with the limit stated in the construction
contract. From the beginning of 1995 the insurance market reduced the
limit of indemnity under the EL policy to a figure of £10000000, in
respect of any one occurrence (and possibly for a series of claims against
the insured arising out of any one occurrence). 'Occurrence' may in some
policies be amended to read 'cause' or 'event'.
The decision is partly due to the Piper Alpha experience, which high-
lighted the catastrophic exposure of some risks, and the subsequent lack of
ability by insurance companies either to buy at all or purchase reinsurance
at a reasonable price.
I Indemnities and insurances
The Employers' (Compulsory Insurance) Act 1969 will be of no assis-
tance, for the limit specified within that Act is £2000 000 and despite
considerable representation the government (at the time of going to print)
has not disclosed any intention of increasing that value, the value having
been proposed over 20 years ago.
In fact where, say, a public limited company purchased EL insurance
under one policy but embracing the parent and all subsidiaries as the
insured, the limit to £10000000 any one occurrence could have been a
breach of the Act in that all employers are required to insure for a mini-
mum of £2000 000.
However, by the Employers' Liability (Compulsory Insurance) General
(Amendment) Regulation 1994 the government has avoided this breach, in
that a 'group' policy with a limit of not less than £2000 000 complies with
the Act.
Where the contractor is required by the terms of contract to procure
insurance against injury to persons in general, and such terms nominate a
limit of indemnity exceeding £10 000 000, it is possible either through the
primary insurer or through an insurance market known as 'an excess of
loss' market to purchase the balance of the cover required, i.e. the differ-
ence in the limit of indemnity required and the £10 000 000 granted under
the primary EL policy.
It is important to point out that, again due to the Piper Alpha disaster,
the EL limit of indemnity in relation to offshore work has been for some-
time limited possibly to as little as £2000 000, with difficulty in securing
'excess of loss' cover. Otherwise with the use of the excess of loss market
limits up to £100 000 000 for any one occurrence are available if such an
amount is stipulated by contract or otherwise felt a necessary by the con-
tractor.

8.18.3 Public liability (PL)

Briefly this form of insurance provides an indemnity against claims for the
accidental death of or bodily injury to persons or the accidental loss of or
damage to property occurring during the period of insurance and arising out
of the contractor's business (as defined). The indemnity in many cases is now
extended to take into account other forms of possible legal liability such as
interference with traffic, obstruction, loss of amenities, trespass or nuisance.
In clause 18.1.1 (third paragraph) the variation in the wording of the
'operative clause', i.e. the clause embracing the description of the indem-
nity to be granted under EL and PL policies was explained. It should be
added that in addition to the loss under a PL policy having to 'occur'
during the period of insurance the injury or damage must be of an 'acciden-
tal' nature. In other words insurers do not intend to indemnify an insured
who intentionally causes injury or damage.
Again there is no standard industry form of PL policy and although for
manufacturing companies public and products liability may be dealt with
separately, in the case of a contractor where the supply of materials and
goods is simply for incorporation in the work it is preferable to contain the
 Types of insurance I
two forms of cover in one common wording. For the purpose of this chap-
ter PL will be deemed to embrace products liability.
Examples of contract clauses specifying public liability or third party
insurance (the two terms being synonymous) are MF11 clause 47.4, ICE
(6th edition) clause 23 and the Institution of Chemical Engineers Red Book
clause 32. A study of those clauses will give the reader some idea of the
different way in which such clauses are drafted.
Normally the term 'an indemnity against legal liability' in a policy of
insurance will cover both liabilities in tort and statutory exposures. When
in referring to indemnity clauses it has been made clear that a contractor
can incur contractual liability, it is important that the PL policy is ade-
quately worded to address these additional liabilities.
Although the construction contract requires the contractor to obtain
insurance in respect of the indemnity he is required to give to the owner, in
making his insurance arrangements the instruction by the contractor to his
brokerlinsurer will not be so limited.
Apart from the indemnity there is a duty owed beyond the owner to
other parties and the contractor should insure his liability for injury to
other parties or loss or damage to their property.
In section 8.5 it was explained that an owner may choose to arrange
insurance to protect both the owner and contractor. In such circumstances
it will generally be found the cover provided will not be confined to any
indemnity granted but, as mentioned above, will include protection
against the contractor's legal liability to other parties. It would necessitate
a chapter in itself and of a very extensive nature in order to provide guid-
ance on suitable wording.
The wording, however, should take into account that:
the 'operative' clause is carefilly drafted;
the cover includes products liability;
contractual liability is not excluded;
if there is any reference in the exclusions to design or to the cost of
rectifying defective materials or workmanship such exclusions must
be fully understood;
any exclusion relating to property in the contractor's custody or con-
trol is qualified by reference to property being worked upon and also
that occupied for the purpose of the work;
where by contract the owner seeks protection under the PL policy this
is appropriately arranged by way of a joint insured or a 'principal's'
clause, e.g. by adding the name of the owner as an insured party or by
introducing a clause granting an indemnity to the contractor's princi-
pals, one being in this case the owner; and
as required by, e.g. ICE (6th edition) clause 23(2) a suitable 'cross lia-
bility' clause is embraced.
This is only a short reference to some of the aspects of a PL policy and
must not be taken as a comprehensive guide but simply be utilized to rec-
ognize the need for advice from a specialist who understands liability
insurance very thoroughly.
11 Indemnities and insurances
Reference to PL policies cannot be completed without contemplating
that the construction contract may include design of the plant. The terms of
the contract may require the contractor to provide plant fit for its purpose
or limit the design liability to that of a professional acting under a separate
contract where the liability is intended to be restricted to 'reasonable skill
and care'. It is most unlikely that the PL policy will provide adequate pro-
tection in either case and professional indemnity insurance will be needed.

8.18.4 Professional indemnity (PI)

If the contract seeks insurance to cover the design liability it is most
unlikely that the PL policy together with the policy covering material loss
will fulfil the requirement and there will be a need to provide 'professional
indemnity' (PI) cover.
The form of policy (as will be explained later) differs from that of the
'pure' professional, e.g. consulting engineer and is generally known as a
'design and construct' PI policy.
Again it is not possible in this guide to refer to all the salient points to be
considered when buying this form of cover short of saying that it is a very
small and specialized market and a limited number of insurance brokers
have the specialist knowledge required to arrange this cover.
To give one example a professional would expect to be indemnified
against a claim that arises out of a negligent act, error or omission on his
part. In the case of a failure occurring in the contractor's design before
handover (i.e. before the construction work has been completed) there is no
claim to be made by the owner and the contractor will simply be required
to fulfil his contractual obligations as opposed to the owner needing to
prove the failure is due to a negligent act, error or omission. In such cir-
cumstances the standard PI wording granting cover against legal liability
arising out of negligent acts, errors or omissions would not so accommo-
date a requirement simply to fulfil the contract and the wording of the
policy must be widened.
Equally the contractor may well subcontract part of the design so he
must make sure the reference in the policy of insurance to 'a negligent act,
error or omission' is not limited to those of the contractor but ensure the
policy provides the contractor with an indemnity arising out of such fail-
ures of the designer to whom the contractor subcontracted the design.
Having explained that an EL policy is on a 'causation' basis and a PL
policy on an 'occurrence' basis , variation is again seen in a PI policy in
that it is underwritten on a 'claims made' basis, i.e. the claim against the
insured must be made during the period of insurance.
PL and PI policies have numerous exclusions, far too many to refer to in
detail and hence the need for specialist advice.
Most PL policies have an exclusion relating to 'penalties and liquidated
damages': these forms of liability will be referred to later in this chapter.
In Chapter 7 reference is made to the Housing Grants, Construction and
Regeneration Act 1996 and in particular Part I1 Construction Contracts.
The Act is so newly on the statute books that there is no practical experi-
 Types of insurance 11
ence of its operation but certainly PI underwriters are very concerned that
if an adjudicator's decision made within 28 days of the dispute being
referred is considered final (unless brought to arbitration but only at the
end of the contract) they may be required to indemnify their insured imme-
diately. PI premiums at the moment certainly take into account the lengthy
period during which the majority of such premiums will be invested before
any court action is finally resolved.

8.18.5 Subcontractors' insurance

Before discussing insurance of the work undertaken, completion of the ref-
erence to EL and PL insurance must culminate in the mention of
subcontractors' insurances.
There is no standard format in construction contracts and it may be
argued by an owner that there need be no reference to subcontractors'
insurance in that the indemnity given by the contractor embraces the acts
of subcontractors and the contractor is required to insure against such lia-
bilities.
Other forms may well recite in a similar manner but equally embrace
such words as 'the Contractor's obligation to insure shall be satisfied if the
subcontractor shall have insured against the liability in respect of ...'
Many subcontractors will have in existence, possibly on an annual basis,
both EL and PL policies and will doubtless have costed such insurance in
producing a subcontract tender price. For the contractor to extend his poli-
cies to provide all subcontractors with cover will undoubtedly be a
duplication and one for which the owner is likely to pay.
Nevertheless, it is very important that the insurance arranged by the
contractor covers liability for the acts of all the subcontractors whether
labour only or otherwise. In law the contractor, in certain circumstances,
can incur liability for the acts of his subcontractors, an example being work
of a dangerous nature.
However, where reference is made to subcontractors in the main con-
tract it is incumbent on the contractor to ensure the subcontract conditions
adopted are quite explicit in the insurance the subcontractor is required to
provide and to ensure that cover is effected.
To protect the contractor's own claims experience and minimize future
premiums it is important to check that a subcontractor is adequately
insured. If there is a failure and the owner requires the contractor to pro-
vide compensation by way of the indemnity clause forming part of the
main contract, then such an award if reimbursed by insurers will prejudice
the contractor's claims experience.
An interesting situation is when the main contract may specify a very
large PL limit of indemnity, e.g. £25 000 000, and one that the contractor is
required to ensure subcontractors also provide. Many subcontractors would
find it hard to procure such a limit and in so doing it may be found that the
aggregate of the prices such subcontractors are charged for cover in excess
of their normal limit will prove prohibitive. It may be preferable financially
for the contractor to arrange insurance covering all subcontractors in
11 Indemnities and insurances
excess of a lower limit that is specified in subcontracts. Such insurance
would need internal specialist skill or the assistance of an insurance broker
dealing in this form of cover.
Reference to a contractor's liability for the subcontract works and to
insure them against loss or damage will be dealt with later in this chapter.
A subcontractor's design liability for the permanent works is a subject
that causes great concern. Normally a contractor has no desire to embrace
within a construction only contract that is limited to workmanship and
materials, design by reason that a specialist subcontractor has designed an
element of the works. If such a situation arises the contractor must view
whether he can impose upon the specialist subcontractor a liability greater
than the normal one of 'skill and care' and seek one of fitness for purpose.
Fitness for purpose can be very difficult to impose when a specialist con-
tractor designs only part of the whole. Equally the contractor will need to
decide if the design liability must be supported by what is commonly
known as a 'professional indemnity' (PI) policy.
PI cover in relation to the contractor has already been discussed and in
passing down the responsibility to a subcontractor similar considerations
arise. Where the contractor is not designing the works it may be possible to
attempt to ensure the specialist subcontractor's design responsibilities are
specified in a separate contract directly with the owner.

8.18.6 Material loss

Two fundamental questions arise, namely which party carries the risk of
loss or damage to the works and which party is required to insure against
material loss or damage. The risk of workmanship and materials is almost
certain to rest with the contractor and also design responsibility where so
required by the form of contract. Exceptions are likely to be embraced and
retained by the owner - examples being war, riot and civil commotion.
Whichever party is required to insure it must be remembered that nor-
mally the cover will set out to protect both the owner's and contractor's
interest in the works. Whether subcontractors are also protected varies
greatly and depends on the form of contract utilized.
The wording of insuring clauses varies greatly betweeen the forms of
construction contracts; some clauses require very wide forms of cover
while others are more restricted. Equally, some clauses are clear and
others ambiguous. However, it should be borne in mind that the obliga-
tions placed on a contractor to perform in many cases will extend beyond
the forms of loss, damage or liability insurance which are required to be
arranged under the contract. On the other hand the wording of the insur-
ing clause may be so loose as to be ambiguous. For example form MFI1
in clause 13.1 refers to: 'with due care and diligence, design, manufac-
ture, deliver on Site, erect and test the Plant, execute the Works and carry
out the Tests on Completion'. This example embraces very onerous lia-
bilities and although there may be excepted risks (i.e. risks retained by
the owner) it is necessary to compare the responsibility with the obliga-
tions to insure. I
 Types of insurance /
In form MF/I clause 47.1 states 'The Contractor shall in the joint names
of the contractor and the Purchaser insure the Works and contractor's equip-
ment ... for their full replacement value against all loss or damage from
whatever cause arising, other than the Purchaser's Risks'.
Clause 45.1 refers to the 'Purchaser's Risks' which in precis form relate
to the purchaser's or his engineer's design, use and occupation of the site by
the works, etc., rights of way and light and so on, damage which is
inevitable excluding the contractor's method of construction, use of the
works by the purchaser, acts of the engineer or the purchaser, etc., and force
majeure except to the extent insured by reason of clause 47.
It is not difficult to identify an element of ambiguity by the qualification
to force majeure for whether some of the risks specified in clause 45.1 are
insurable will depend upon the insurer so selected.
Equally the reference in clause 47.1 to 'whatever cause arising' does
seem to embrace all loss or damage due to design for which the contractor
is responsible, such a broad definition of cover being unlikely to be
achieved within a material loss policy.
The example provided is not intended to be a criticism of a specific form
of contract wording but to demonstrate the need to fully understand insur-
ing clauses, to identify any ambiguities and if necessary secure clarification.
Equally, where the contractor's responsibility is wider than the insurance
required under the contract, it is necessary to ensure, if possible, the cover
is also widened.
It would be impossible in this chapter to provide a detailed recitation of
material loss insurance. However, all risks cover provided for industrial
engineering works as opposed to building and civil engineering works is
normally known as engineering all risks (EAR). For building and civil engi-
neering works the term utilized is contractors' all risks (CAR). A reader is
bound to question the position when the project embraces both forms of
work. The unofficial and general guide in the Insurance market is to identify
the percentage of work that is industrial engineering and if this exceeds
50% of the total value treat as EAR but otherwise as CAR.
Each form of policy sets out to provide an indemnity against 'damage' to
specified property and in some cases 'damage' will be defined as 'loss or
damage' and in others 'physical loss, destruction or damage'.
Underwriters are prepared to embrace within the cover a selection of
property according to the insured's wishes, examples being the permanent
works, temporary works, constructional plant and equipment either owned
or hired, site huts or other structures such as caravans, tools and personal
effects of employees. That property as well as being covered on site can be
extended, in certain circumstances, to off-site storage, while at other
premises and while in transit.
The breadth of cover afforded also varies in relation to the insurance pro-
vided during the period known as 'the defects liability period' or
'maintenance period'. The aim of such cover is to indemnify the contractor
against damage occurring during such period but resulting from a happen-
ing prior to 'handover' and also to damage caused while undertaking work
during that same period. The wording of such an extension in relation to
11 Indemnities and insurances
industrial engineering projects can vary being in some cases restricted to a
defect occurring during the construction period but sometimes even when
the defect arose during manufacturing.
One further warning relates to a construction contract that may call upon
the contractor to continue full CAR or EAR cover for a period after 'han-
dover'. An example is in MF/1 clause 47.1 seeking that extension for a
period of 14 days. Certainly it is to be preferred that the owner arranges
insurance of the works after they are handed over.
Although accommodating, insurers underwriting all risks insurance for
construction risks are certainly not happy to entertain the risk after handover
when there is permanent use of part or whole of the project, especially as
the rating structure is not designed for such an exposure, e.g. the rate is cal-
culated as applying to a building or plant in course of construction and not,
for instance, as a plant processing highly flammable liquids or a building in
which highly combustible materials are being stored.
It is important for a contractor to recognize the excess or 'deductible'
imposed by an insurer when granting all risks cover. The sum may well be
reasonable for the general type of loss such as a fire, possibly higher for
storm or flood damage but in the case of loss due to defects in design,
material or workmanship it can be a very substantial sum especially if the
'design' cover granted is wide. A figure of £50 000 or even a £100 000 can
be contemplated.
To attempt to deal in detail in this chapter with 'offshore' works would
be quite impossible, but where such work embraces ocean tows very great
care has to be taken to ensure the marine cover and the construction cover,
if written in separate policies, do not duplicate or leave gaps.
Insurers are normally willing to cover the interest of a number of parties
(i.e. include various names as the insured under one policy) including the
owner, contractor and subcontractors. It is often difficult to add the name of
the engineer and other professionals appointed by the owner or that of
manufacturers of plant for installation. The reason is that insurers seek to
retain rights of subrogation against them.
No insurer will simply issue a policy covering all risks of loss or
damage of whatsoever nature to the insured property and hence with such a
wide type of wording the policy will bear exclusions to the cover provided.
To ensure the scope of the cover is fully understood the contractor will
need to utilize appropriate internal skills or engage the services of a spe-
cialist insurance broker.
The exclusions and qualification to 'all risks' forms of cover are very
extensive and as there is no standard wording alternative wordings exist in
the Insurance market. Various extensions to the normal type of cover are
also available.
Some of the more common extensions are:

professional fees;
debris removal;
escalation of value;
automatic reinstatement after loss;
 Types of insurance I
expediting expenses;
local authorities' requirements;
immobilization without physical damage of, e.g. constructional plant;
water borne craft;
defective design;
inventory losses;
inevitable damage;
cessation of work;
breakdown during testing and commissioning.

Testing and commissioning cover in relation to industrial engineering pro-

jects is a very important aspect of the insurance and it will normally be
found the periods for testing are limited and cover for commissioning
depends upon whether the contractor is called upon to commission with
feedstocks utilized or simply required to assist. Insurers' great concern is
the provision of breakdown cover if the plant is not new, or even more
importantly is of a prototype or experimental nature or indeed of unproven
design. There is no standard wording relating to loss or damage due to
design, the extent of the cover granted being reflected in the premium paid.

8.18.7 Terrorism
Where the form of contract seeks 'all risks' cover then those words embrace
the risk of 'terrorism'. There is an agreed definition of the term terrorism
such as an act of terrorism having to result in fire or explosion damage.
For insurers to provide cover for large sums insured they normally rein-
sure with the Pool Reinsurance Company with the government
underwriting as 'reinsurer of last resort'. The terms of the reinsurance
granted by the Pool Re. forbid an insurance company subscribing to the
reinsurance to grant terrorism cover for a period exceeding 12 months.
Under a construction contract the requirement to insure the works is nor-
mally for the full construction period. Hence where a construction contract
exceeds a 12-month period there is clearly a breach if the contractor does
not provide the full material loss insurance for the whole period of the con-
tract which will not be possible as the cover against terrorism will be for a
period less than the full construction period.
Certainly the JCT have made provision for this problem by amendment
of their standard forms of contract; but it is necessary to be alerted to this
problem if utilizing other forms of contract.
The Pool Re. announced on the 13 June 1996 that the review of pre-
mium rates undertaken following the ceasefire by the IRA and others was
to be discontinued now that it had been established that the estimated
losses following the South Quay explosion on the 9 February 1996 would
exceed £75 million, being the 'cut off' point at which an insured would be
called upon to pay the 40% deferred premium. The bombing in the Centre
of Manchester immediately after this statement was made by the Pool Re.
makes it clear that the losses the Pool Re. will now be called upon to pay
will greatly exceed the 'cut off' point of £75 million.
1 182 1 I Indemnities and insurances 1
Therefore the concession granted by the Pool Re. applying to EAR and
CAR policies, namely that where only 60% of the premium has been paid
for a policy of short duration and that policy has expired by the time the
Pool Re. recognized losses have actually exceeded the 'cut off' figure then
the insured under such a policy would not be required to pay the balance of
the premium, i.e. the 40% will no longer apply to new policies.

8.18.8 Variations to standard forms

Variations to the standard practice of requiring the contractor to insure the
industrial works can also be experienced. For instance, the project may be
of such dimensions that the owner will decide to provide the material loss
insurance. The need then is for the contractor to establish the true extent of
cover at the time of submitting a tender for undoubtedly the contractor will
not be relieved of his responsibility for the works and in any case may be
called upon to meet claims falling within the excess (i.e. the first amount of
any claim) under the policy.
Equally a form of contract known as project or construction manage-
ment may be utilized, with separate sections of work being undertaken
by various main (i.e. trade) contractors. In such a case the project man-
agerlowner may arrange the material loss insurance or seek insurance in
accordance with each individual trade contract. Where the project man-
agerlowner provides the insurance on the works it may well continue
until final completion of the project; but a 'trade' contractor should be
alerted to the fact the benefit of the cover afforded under the individual
'trade' contract may well cease at the completion of that individual con-
tract. If damage occurs after the trade work has been handed over the
trade contractor cannot rely on the project insurance for an indemnity,
save for any extension providing cover during any defects liability
period.
Project or construction management contracts are common in the oil
and gas industries. The contractor is most likely to be made responsible
for the work being undertaken irrespective of which party insures.
However, in relation to constructional plant and equipment utilized by the
contractor for carrying out the works, there may be an obligation to accept
full responsibility for any loss or damage even without any right to seek
recourse from the owner if the owner is found to be responsible for such
loss or damage. The form of contract utilized will state any requirement for
such constructional plant and equipment to be insured.
In considering material loss insurance consideration must be given to
existing property and its contents when the project is to be carried out in or
on existing plant, i.e. who is responsible for it and who insures it. It is
essential that the main contract is read with this particular exposure in mind
not only in relation to the material loss but (as the insurance market as
opposed to English law describes it) the consequential loss that can flow
from such material damage. It is particularly important to compare any
clause requiring insurance with the corresponding indemnity clause. If there
is ambiguity argument may pursue, the case for the contractor being the
 Other forms of insurance 1
belief that any undertaking by the owner to insure embraced not only mate-
rial loss of the existing plant and structures but also any consequential loss
that arose. The argument by the owner would be to the contrary.
Working in some of the major UK chemical plants or oil refineries can
introduce an exposure of such magnitude that it is beyond the reasonable
financial ability of even some of the largest contractors and hence waivers
of liability or financial limit to that liability, joint names insurance on such
plant or installation and concessions in relation to consequential loss must
be viewed at the time of tendering.

8.19 OTHER FORMS OF INSURANCE

8.19.1 Performance bonds

Both MFI1 and ICE forms of contract make provision for the employer, i.e.
owner, to seek a performance bond from the contractor.
Although it has already been stated, performance bonds are not insur-
ance policies and it is important for a contractor to ensure the terms of the
bond or guarantee are fully understood especially that the wording does not
equate with an 'on demand' bond. An on demand bond would normally
allow the beneficiary (i.e. the owner) to call upon the surety to pay the
amount of the bond or other appropriate sum with or without evidence of
the contractor's failure to perform.
The courts have recently been critical of the forms of wording adopted
partly because of their lack of clarity, and changes can well be envisaged.
For example, someone may well ask why the contractor has to be jointly
bound under the bond.
It is also interesting to study the attitude of the banks and insurance
companies towards bonds. The banks tend to require 'financial certainty'
so that once the call on the bond is shown to be in accordance with the
wording the demand can be honoured. Insurance companies, on the other
hand, wish to secure the full benefits of a 'surety' to the extent of under-
taking performance if necessary. This distinction in approach mainly
results from banks not wishing to undertake the full responsibilities and
duties of a surety, arguing that such responsibilities and duties are not
part of the skills they wish to possess or perform. Insurers, on the other
hand, not normally being in a position immediately 'to debit an account'
with the amount of any financial guarantee paid, prefer to have the right
to undertake the full duties of a surety and if necessary complete the per-
formance of the work rather than simply meeting a financial claim under
the bond.
Care must equally be taken in studying the 'counter indemnity' required
by the 'bondsman' either from the contractor or, if the contractor is a sub-
sidiary company, possibly from the contractor's parent company.
Performance bonds, although the primary form of bond, are not the sole
form and, for example, bonds can be granted in return for the release of what
would otherwise have been retention moneys and also for advance payments.
1 Indemnities and insurances

8.19.2 Parent company guarantees

Mention has been made that performance bonds are not policies of insur-
ance, but as it has been seen suitable to refer to such instruments and
indeed to counter indemnities, mention shall also therefore be made of
'parent company guarantees'. Where a contractor has no parent company
then such guarantees are inappropriate. Equally, parent companies are ret-
icent about guaranteeing the performance of a subsidiary, partly because
this is a financial exposure to the group of companies that is not wel-
comed.
Nevertheless there are circumstances where in order to secure the award
of a contract a guarantee of this nature is given. That guarantee may or may
not be in addition to a bond issued by a surety.
There is a tendency to utilize the term 'guarantee' loosely but in law a
guarantee is given on behalf of another party, it not being possible for a
contractor 'to guarantee itself'. A parent company guarantee can also be
known as a group company guarantee.

8.19.3 Business interruption

Some insurers are willing to extend EAR or CAR policies to cover the con-
sequential loss flowing directly from material damage for which an
indemnity is granted. This could relate to additional payments the owner is
required to make to the contractor or additional costs the contractor must
bear without recompense from the owner.
Such consequential loss can relate to 'idle or standing time' which is not
recoverable under the contract or to the additional cost of completing work
which has not been started or having been started is delayed as a result of
the insured damage.
Many contractors would not insure against business interruption but it is
as well to know that if the individual or annual EAR or CAR policy does
not provide this cover there is within the Insurance market a specialist sec-
tion underwriting what is know as 'business interruption forms of
insurance'. This specialist section will also accommodate the owner's
interest by providing cover for loss of turnover or profit.

8.19.4 Credit insurance

It is not the intention in this chapter to deal with export credit guarantees,
but it is possible for a contractor to secure insurance which is aimed at
indemnifying in the event of the insolvency of the owner.
Credit insurance can be arranged in many forms; in relation to a
specific construction contract there is a tendency to seek such cover if
the contractor has doubts about the financial standing of the owner; but
in such circumstances it will be found that the underwriter of such
cover is reticent to grant insurance equally recognizing that financial
instability.
 Other forms of insurance I
8.19.5 Engineering services

The services supplied by the specialist engineering insurance companies to

comply, for example, with statutory regulations in relation to the inspection
and testing of pressure systems, lifting plant and tackle is not insurance and
does not form part of this chapter. However, it is important to make refer-
ence to such services which can be coupled with insurance. Equally, these
companies will undertake the inspection and testing of large vessels or
other plant to be utilized in engineering projects during both design and
manufacture and also to provide cover during that manufacture and transit.
The services afforded are very extensive, including such services as
destructive and non-destructive testing.

8.19.6 Annual covers

Although in the main this chapter has aimed at dealing with insurances
required in relation to specific construction contracts, clearly a number of
the covers mentioned are arranged by a contractor on an annual basis, for it
would be uneconomic in time alone to attempt to place individual covers
for a multitude of small and medium engineering contracts and subcon-
tracts that could be secured in any period of 12 months.
These annual types of insurance will also deal with the property at per-
manent establishments, motor vehicles, computer equipmenttnet works and
the 'hacking' thereof, dishonesty by staff, directors' and officers' indernni-
ties, political risks and employee benefits, to quote but a few examples.

8.19.7 Ascertained or liquidated damages

English law, and in particular the law of tort, requires a claimant who has
suffered a loss due to breach of duty owed by another party to prove his
financial loss and as such that sum is likely to be awarded as damages.
However, in contract it is acceptable for both parties to the contract to
accept in the event of certain circumstances occurring, that a sum which
was agreed at the time of entering into the contract will be the compensa-
tion paid by one party to the other.
In the majority of contracts for building or civil engineering works the
sum known either as ascertained or liquidated damages is payable when
the contractor does not complete the work being undertaken in the time
prescribed. The figure agreed can be a weekly or a monthly sum with or
without a maximum limit.
It would be inappropriate to seek payment in all circumstances causing
delay and the contract will specify certain circumstances where an exten-
sion of time is granted instead of the liquidated sum being paid (or
deducted from moneys owing to the contractor). Examples would beforce
majeure or a major peril such as fire or explosion.
It is known for industrial engineering contracts to extend liquidated
damages to cover lack of performance of the plant, inadequate product or
I Indemnities and insurances

output, excess use of raw materials or the consumption of power, stack

emissions or possibly excess waste product or quality of that waste.
Both building and engineering contracts require the contractor to per-
form in accordance with the contract, but in relation to liquidated damages
it could be argued that an engineering contract is more severe in that the
specification may require very keen limits on product quality and quantity
and at an expected production cost.
In general the law in relation to such agreed damages is complicated
for even if the contractor has agreed a sum this does not remove the con-
tractor's right to apply to the courts to have the sum recognized as a
'penalty' and thereby for payment to be overruled, although this would
not deny the defendant then the right to seek unascertained damages (i.e.
actual costs).

8.20 RISK MANAGEMENT

With the severity of loss made by the insurance market in the early part of
the 1990s the need for a contractor to demonstrate the capability of its
directors and staff to manage 'risk' has become more and more of a key
factor not only as a sensible way of running a company but also in being
able to secure reasonable insurance premiums. The board of any construc-
tion company should be well aware of this subject and indeed ensure risk
management is fully practised.
It can be argued that risks have always been managed but this concept,
now known as risk management, concentrates a board's attention on ensur-
ing risks to which the company is exposed are identified, their elimination
or reduction designed and controlled thereafter.
In particular, attention should be drawn to the Joint Code of Practice on
the Protection from Fire of Construction Sites and Buildings Undergoing
Renovations; insurers are likely to import the operation of this code into all
risks construction policies and not necessarily confine it to buildings but also
extend it to other forms of work. The code is normally only enforced where
the original contract price exceeds a figure selected by the particular insurer
as the minimum valued contract to which the underwriter will apply the
code. Insurers tend not to apply the code to the smaller valued contract but
there is no 'market' agreement to the minimum value which will be applied.
This code in conjunction with the CDM regulations will certainly impose
upon both designers and contractors very strict duties and obligations.
The CDM Regulations (The Construction [Design and Management]
Regulations 1994) came into force on the 3 1 March 1995 and are possibly
the most far reaching Health and Safety regulations influencing the con-
struction industry that have ever been promulgated by Parliament.
 Bibliography
1 1187 1
8.21 CONSTRUCTING THE TEAM

It would be quite inappropriate to conclude this chapter without making

reference to Sir Michael Latham's final report issued in July 1994 entitled
Joint Review of Procurement and Contractual Arrangements in the United
Kingdom Construction Industly for it lays great emphasis, among other
things, on the value of standard forms of contract and the need for some
organizations issuing standard forms to amalgamate. Indeed, a recornmen-
dation is made that the new engineering contract, with its core clauses,
would be an appropriate form of contract for the construction industry to
utilize. It should be made clear no attempt has been made in this chapter to
refer in detail to this form of contract, which as indicated by a footnote in
the report has been very little used to date.
However, a brief study of clause 8, 'Risk and insurance' in the second
edition will not go amiss, for the wording is certainly likely to introduce
legal argument and for insurers some difficulty in producing policies which
comply. The basic concept of each party not only carrying risk but in the
case of the contractor and subcontractors insuring that risk under separate
policies (and the owner also doing so at his option) surely will result in
greater complication than the forms of contract which seek to insure in
joint names against specified risks and so avoid the need to identify where
liability would otherwise rest.
Equally, core clause 6, 'Compensation events', which divides the
owner's and contractor's risks, could again produce complication, espe-
cially when there is a serious fire and an allegation that the cause could rest
with the contractor.

1 BIBLIOGRAPHY

Advanced Study Group 208A, Construction and Erection Insurance, The

Insurance Institute of London, Aldermanbury, EC2B 7HY.
Anderson, Bickford Smith, Palmer, Redmond-Cooper, Emsdenb
Construction Law, Butterworth, looseleaf with continuous updating.
Bunni, Nigel G. (1 986) Construction Insurance, Elsevier Science.
Duncan Wallace, I.N. (1995) Hudson Building and Engineering Contracts,
11th edn, Sweet and Maxwell.
Hickson, R.J. (1987) Construction Insurance: Management and Claims, E
& F N Spon.
Levine, M. and Wood, J. (1991) Construction Insurance and UK
Construction Contracts, Lloyd's of London Press.
Report of Study Teams on Auditors/Construction Industry/Insurance/
Liability/Professionals/Surveyors(1989), Professional Liability, HMSO.
Wright, J.D. (1991) Construction Insurance, Witherby.
Contractor.
Subcontractor
Selection
11 Contractor/subcontractorselection
9.1 INTRODUCTION

The effective selection of appropriate contracting and subcontracting orga-

nizations to undertake the implementation phase of a project is vital to its
success. This chapter seeks to explore the process for ensuring that the
choice of best contractor is made in all the circumstances; however, since
all projects are unique, the following should be regarded as a checklist and
not a prescription for the selection of a contractor.
There are many factors to be considered in arriving at the decision
which may be summarized as:
capability;
credibility;
enthusiasm.
In addition to basic commercial and contractual considerations there are
an increasing number of constraints to be observed in the selection
process.
Private individuals and many privately owned organizations may oper-
ate with little outside interference, while many larger organizations,
especially those with, or aspiring to, quality assurance accreditation will
have corporate procurement procedures. It is recommended, however,
that such procedures are based on the principles contained in the recog-
nized codes of tendering practice, or the codes used directly, in order to
give tenderers confidence in the fairness of the tendering process. Such
codes include the NJCC Codes of Procedure for single stage selective
tendering, two stage selective tendering and selective tendering for
design and build.
Governmental organizations and utilities are subject to EC procurement
directives which are intended to ensure fair and equitable tendering proce-
dures, value for money and auditability. These directives are sufficiently
influential to warrant the detailed summary which appears later in this
chapter.

9.2 SELECTION STRATEGY

The main activities to be derived from a selection strategy are

establishing selection criteria;
pre-qualification;
shortlisting;
tender evaluation;
negotiation/clarification;
selection.
There can be no doubt that a selection process, based on an understanding
of project objectives, carried out using a structured, analytical, objective
approach and tempered using risk management techniques, can greatly
assist in the choice of the most appropriate contractor.
 ere-qualification I
9.3 ESTABLISHING SELECTION CRITERIA

Selection criteria should be established following an analysis of the princi-

pal aims of the project. These may include:

safety;
functionality;
programme;
customer satisfaction;
cost;
third party issues.

The above factors cannot all be of equal importance and establishing their
relative merits and agreeing upon a hierarchy creates a framework for deci-
sion making throughout the project. The first set of decisions may well
involve converting the aims into objectives, by setting units and means of
measurement, parameters and time scales. These, in turn, are the founda-
tion for value engineering and risk management.
Armed with objectives and alerted to probable risks and sensitivities,
the team undertaking the evaluation can establish selection criteria against
which to assess the suitability of potential contractors and subcontractors
which may include:
relevant experience;
availability of resources;
in-house capability;
safety record;
quality assurance accreditation and systems;
current and projected workload;
financial stability.

9.4 PRE-QUALIFICATION

Pre-qualification is a selection process in which an extensive list of poten-

tial contractors1subcontractors is evaluated against certain criteria in order
to establish a short list of those to be invited to submit a tender. Some orga-
nizations refer to this process as simply 'qualification', but the distinction
is notional.
The purpose of the pre-qualification process is to select the contractorslsub-
contractors to be invited to tender. For certain works, e.g. work of a specialist
nature, the need for pre-qualification may not arise as the number of compa-
nies capable of undertaking the work may be limited, in which case the market
will determine the final tender list. However, this is not normally the case and
pre-qualification, of some description, will have to take place.
The initial list may be drawn from:

expressions of interest submitted in response to published procure-

ment notices including those required by the EC;
1 1 Contractorlsubcontractor selection
registers of contractors1subcontractors held by the owner or another
member of the procurement team. Although not universal within the
industry the register concept provides an initial starting point at which
to seek potential contractorslsubcontractors. The details on any regis-
ter will vary, but they will give some insight into a company and
allow a quick initial appraisal. It may be that the register will be used
as an 'initial selection' device or alternatively be used as a mailing list
for obtaining expressions of interest;
lists of organizations provided by trade organizations;
direct or indirect knowledge of the organizations whether from other
projects, word of mouth, articles in the trade press or advertisement.
Even though the team may know a reasonable number of companies,
it should consider searching for new companies which, perhaps due to
the project locality, may be equally suitable.

The importance of pre-qualification as part of the process of selecting the

contractor1subcontractorcannot be overemphasized. It is as a result of the
pre-qualification process that the final tender list is drawn up and it is from
this list that the successful contractor will be selected. It is therefore imper-
ative that the final tender list should contain only those
contractorslsubcontractors that are experienced, capable and interested in
tendering for the work.
The type of pre-qualification undertaken and its extent will depend on
the project itself. It is unrealistic to expect the same amount of time and
energy to be spent on pre-qualification for a £50 000 project compared with
a £100 million project; however, the reason for pre-qualification remains
the same.
The pre-qualification process for each contract takes into account the
size, nature of the work, complexity, programme of work, location, likely
form of contract, the owner, any statutory requirements, etc., and it should
be carried out impartially and with the best interests of the project in mind.
It is the responsibility of the project team to ensure that the final tender list
and subsequently the successful contractorlsubcontractor is not only tech-
nically, administratively and financially capable of undertaking the project
but is also willing and enthusiastic.

9.4.1 Pre-qualification content 1

The pre-qualification will request general company information, name,
address, contact persons, ultimate holding companies, etc., and will seek
responses in order to satisfy the following typical pre-qualification criteria,
derived from the general selection criteria covered above.

Compliance: does the contractor comply with stated technical and

professional requirements, e.g. inclusion on an approved list, mem-
bership of professionalltrade organizations, etc.?
Financial stability: is the contractor operating profitably? Are the
financial burdens of a major project due to payment terms, retentions,
I Evaluation criteria 1
bonds, etc., likely to cause financial difficulties, under-resourcing of
the work or even insolvency?
Experience: what is the type of work normally undertaken? Does the
contractor have experience of similar projects, particularly if the pro-
posed project has specific challenges and requirements? Has the
contractor worked for similar owners? What is the contractor's track
record in the kind of works under consideration? Does the contractor
have experience of similar prevailing climatic, geographical and cul-
tural conditions? Does the contractor employ suitably experienced
key personnel?
Capacity/resources: what capacity is available considering current pro-
jects and outstanding tenders? What is the general availability of
labour, plant and key personnel? Quality systems: can the contractor
demonstrate a corporate commitment to the achievement of quality
products?
Healthtsafety: does the contractor have an acceptable health and
safety policy and procedures including Construction (Design and
Management) Regulations 1994, and an acceptable safety record?
Industrial relations: does the contractor have an acceptable policy and
record?
Project specific: does the contractor have experience of matters which
are peculiar to the work, e.g. special construction techniques or
design knowledge?

The relative importance attached to each of the various factors will depend
on the nature of the project. In certain cases, some of the above may not
apply at all.
In preparing the pre-qualification document care should be taken to
ensure that the questionnaire is clearly worded, contains appropriate ques-
tions and that the information requested is capable of being positively
assessed.
Having prepared a pre-qualification questionnaire contractors on the
long list are invited to respond within a set time scale. Much of the
requested information is standard and 7 to 14 days should normally be ade-
quate. In cases where comprehensive information is required, perhaps
involving joint venture or complex subcontract agreements, then a longer
period of up to 28 days may be necessary.
Replies should be logged, acknowledged and checked for compliance.
Those organizations not providing all of the requested information or not
responding by the due date should not be surprised if they are not selected
to appear on the resulting short list.

9.5 EVALUATION CRITERIA

Evaluation criteria should be established which suit the particular needs of

the project. The following may be regarded as typical evaluation criteria
for the assessment of pre-qualification submissions.
 1 Contractorlsubcontractor selection
9.5.1 Technical and professional competence

The contractor should be able to demonstrate that it has the technical capabil-
ities required for the work including, where appropriate, design capability
and that it complies with the stated qualifying requirements (e.g. inclusion on
an approved list, members of professionalltrade organizations, etc.)
Inclusion on an approved list means that the company has given details
previously which have been considered satisfactory for inclusion on that
list. In some cases the procurement rules of statutory bodies will require
inclusion on approved lists which will automatically override the neces-
sity to provide certain basic details; the EC has such a requirement in its
rules which allows contractors to gain details and express an interest in a
project.
Membership of professional or trade organizations means that a com-
pany is affiliated to that organization and operates under its guidance.

~ 9.5.2 Financial stability

The financial strength of an organization provides a guide as to whether it
will be able to complete contracts once commenced. The extent of finan-
cial/commercial vetting of a company will depend upon the value of work
for which it is being considered. The value of the work will also, of neces-
sity, limit the time spent on evaluation.
Financial and commercial data of a company should be requested,
including annual reports and accounts. An analysis of what may be con-
tained in these reports and accounts follows. Alternatively, information and
data concerning a company can be obtained from business information
suppliers such as ICC and Dunn & Bradstreet, who analyse and assess
company accounts and report and comment upon the company's finan-
ciallcommercial credibility.
In addition to these sources of information, data specific to the project
can be requested.

9.5.3 Experience
Experience of similar projects

Experience of similar projects means the company has gone through the
learning curve and tackled some of the problems that are likely to occur.
However, caution must be exercised to ensure that companies which have
the necessary skills, experience and adaptability, but which do not have
experience of work precisely like that of the proposed project are not
immediately rejected.
This broader outlook cannot be taken to extremes, and where there are
particular specialities which are critical to the success of the project then
the firms invited must obviously be limited to those who have the requisite
skills. It should, however, be remembered that an alternative approach may
 Evaluation criteria 1
be to allow subcontracting of some specialist activities if the prospective
main contractor stands out as being exceptionally experienced, or has a
good track record, or is highly qualified in other areas.
The extent and nature of each firm's involvement in these areas of expe-
rience is important. For example:
If the firm was involved in a joint venture, was it as a principal or as a
subsidiary?
Did the firm have primary responsibility, or a supporting role for a
particular aspect?
Was the experience quoted that of the firm, or of an individual gained
before joining the firm?
Was the project successful/unsuccessful and why?
Auditing and checking of experience on similar projects should be under-
taken to establish its validity together with the success, or otherwise, of the
project and general project history.

Projects for similar owners

It is useful for firms to be aware of the normal requirements of owners in a
particular field, or with a particular background, but it must always be
remembered that no two projects are identical and that a modicum of
research and consultation will often give the same end result. As with
experience of similar projects, this consideration must not be allowed to
dominate to the extent that suitable candidates are excluded when they are
qualified in other ways.

Track record in the type of services under consideration

In specialist areas such as petrochemicals, pharmaceuticals, nuclear engi-
neering and the like, the kind of service under consideration is often unique
and not all contractors/subcontractorswill have knowledge and experience
of providing that service. Care must again be exercised not to exclude
firms who may prove in the long run to be the best by too closely defining
the 'type of service'.

Key personnel
Curricula vitae of key personnel may be requested, together with an organ-
igram of a typical management team in order to judge a contractor's
management philosophy.

The company should be able to manage the manpower and plant require-
ments for the project. If they have already committed their resources and
experienced supervision to other projects it would be unwise to consider
1 C~ntract~r/~~bc~ntractor
selection

them further. Even if they were able to carry out the work by using
resources other than those directly owned by them, such as by subcon-
tracting, it may be that their management, planning and coordination
resources would be stretched to an unacceptable level and the project
suffer.
Company management structures should be studied to ensure adequate
reporting relationships between senior supervisory personnel and other
levels of management. The availability and depth of experience of perma-
nently employed key supervisory personnel could be crucial to the success
of the project. The stability of the company's supervision and workforce
should also be taken into consideration.
The company's current and future workload should be investigated to
establish that the necessary resources will be available for the project.
Overcommitment can cause problems.
The company should be requested to identify those elements of the work
that it traditionally subcontracts to other companies.

9.5.5 Quality assurance

The company should be able to demonstrate a commitment to quality man-
agement. QA accreditation is one way in which this can be evidenced.

9.5.6 Health and safety

The company should be able to demonstrate a good safety record and have
practices and procedure for all employees, i.e. a health and safety policy.

9.5.7 Industrial relations ( I R )

Depending on the area and country in which the project is to be executed
the company's industrial relations policy could be of significant impor-
tance. The company should be able to demonstrate adequate IR practices
and procedures and a good track record of successful working relationships
with local trades unions.

9.5.8 Project specific

The 'learning curve' required by a contractor who is faced with unusual
site conditions or project requirements is very steep and can have a signifi-
cant effect on performance. There may be a number of such project specific
factors which may include:

unusual construction techniques or processes, e.g. refinery shut-

downs;
unusual contractual relationships, e.g. alliance or partnering arrange-
ments;
the requirement to work in hazardous areas, e.g. in a live plant;
unusual geographical areas.
 Shortlisting I El

Figure 9.1 Pre-qualification matrix

Climatic, geographical and cultural experience in some parts of the world

where working practices differ from those in the UK can have a significant
impact on project success. The significance of cultural differences can be
reduced depending upon the degree of contact and cooperation with local
nationals. Failure to take account of cultural differences can have serious
consequences. A company with a local subsidiary or partners in a country
together with local plant, yard facilities, etc. would be a distinct advantage.
A company offering key personnel with previous experience of working in
the area of the project, with knowledge of the language and local culture
would also have an advantage.

9.6 SHORTLISTING

Evaluation of pre-qualification submissions is usually undertaken by a

team, each member being invited to complete an evaluation matrix. Each
of the selection criteria is weighted according to its perceived importance
and each submission 'scored' against each criterion. The products of the
scores and weighting factors are sumrnated to give each submission a total
score. A typical evaluation matrix may be found in Figure 9.1.
1 Contractorlsubcontractor selection
The code of practice for competitive tendering makes suggestions about
the number of organizations that should be included on a short list and
invited to tender. In general fewer than four tenders is insufficient to ensure
adequate competition, while more than seven is unfair to tenderers and
assessors alike. The choice between four and seven depends upon a number
of factors including:

anticipated project value;

the cost of tendering - on complex major tenders and large lump sum
design and construct contracts the cost of tendering is very significant
and it is unreasonable to propose a long tender list. In such circum-
stances more information should be requested during the
pre-qualification period in order to shorten the tender list;
the degree of complexity and opportunities for submitting alternative
proposals;
the scores from the pre-qualification assessment.

Thus, the highest four, five, six or seven organizations from the selection
matrix are advised that their pre-qualification submission was well
received and asked to reconfirm their interest in tendering.

9.7 EXAMINATION OF COMPANY REPORTS AND ACCOUNTS

The subtleties of accounting practice make the examination of company

accounts a specialist task and what follows can only be regarded as a gen-
eral overview of this 'art'. The main contents of the report and accounts are
described here but do not forget to read the notes to the accounts, which
can contain useful snippets of information. It should be noted when assess-
ing company reports and accounts that these are historical documents and
are normally one year out of date. It is also worth noting that when com-
paring data from different years changes in accountancy practice could
have had a significant effect.

9.7.1 Directors' report

The 1985 Companies Act requires companies to include in the directors'
report, inter alia,the following:

principal activities of the company;

a 'fair review' of the development of the business during the year with
an indication of likely future developments and research and develop-
ment activities;
names of the directors and their interests;
changes in fixed assets;
details of the company's acquisition of its own shares;
important events affecting the company since the end of the financial
year.
 Examination of reports and accounts I
9.7.2 Chairman's statement

This is not a legal requirement and where supplied will usually contain
information relating to:

the general economic climate and future outlook;

performance of the company in general terms and its future prospects;
strategy and plans for the future.

9.7.3 Auditor's report

A company is required by law to have its accounts audited and the audi-
tor's statement can provide useful indicators of possible irregularities or
company weaknesses. There are some commonly used phrases which are
used to indicate specific situations without openly disclosing particular
concerns; for example, if there is a reference to the accounts being pre-
pared on a 'going concern' basis this could mean that continuing financial
support has not yet been guaranteed.
In any case, if the auditor's report is qualified in any way then further
examination is required.

9.7.4 Profit and loss account

From this statement some useful data can be gleaned such as:
gross and net profit margins;
unusual increases in expenditure in specific areas (such as administra-
tion);
interest payable on loans and overdrafts;
directors' and employees' emoluments;
dividends paid;
earnings per share.

9.7.5 Balance sheet

This is a snapshot of the company's assets at the end of the financial year
and will include details of:
fixed and current assets;
creditors falling due within one year (current liabilities);
working capital (current assets less current liabilities);
capital employed;
creditors falling due after one year;
provisions for liabilities;
capital and reserves;
retained profits.
In addition to noting the factual data contained in the annual report and
accounts the information can be used to establish ratios which, in turn,
1 200 1 1 selection
C~ntract~r/subc~ntractor

allow comparison of the company's performance with that of other compa-

nies. It is also useful to calculate the ratios for the previous year to
establish trends. There are three key areas which give indications of the
strength and stability of a company and for which standard ratios can be
established; these are profitability, liquidity and solvency.

9.7.6 Profitability
The basic indicator of profitability is the 'return on capital employed',
I
which is calculated by dividing trading profit by capital employed and
expressing it as a percentage.
Other indicators which show strength or weakness in this area are 'profit
margin', which is trading profit divided by turnover as a percentage and
'asset turnover', which is the ratio of turnover to capital employed.
A final indicator concerned with profitability is 'trading profit per
employee' which is calculated by dividing the trading profit by the number
of employees.

9.7.7 Liquidity
The key ratios here are collection period; stock turnover rate; working cap-
ital and sales; current ratio; and acid test ratio.
'Collection period' is an expression of the speed with which accounts are
paid and is equal to the value of trade debtors divided by turnover times 365
days. 'Stock turnover rate' is a measure of the level of stock needed for a
given turnover and is calculated by dividing the cost of goods sold by clos-
ing stocks. A high stock turnover rate is desirable as this indicates that stock
levels, and therefore currently dead capital investment, can be kept low.
'Working capital to sales ratio' gives an indication of the probable addi-
tional cash which must be obtained if turnover is increased. This ratio is
equal to working capital divided by turnover. If the ratio year on year is
falling this indicates that the company may be overstretching itself in its
expansion plans. The result can be failure to pay short-term creditors in
order to free cash for expansion. This is a quick route to financial disaster
and is to be avoided at all costs.
'Current ratio' is the ratio of current assets to current liabilities. A ratio
of more than unity indicates a surplus of assets over liabilities. A corbpany
with a current ratio of 1.5 is generally considered to be a good credit risk
and therefore fairly secure.
'Acid test ratio' is similar to the current ratio except that it disregards assets
which cannot be readily converted into cash such as stocks. The acid test
shows what the result would be if the company had to settle with creditors and
debtors immediately. If the ratio is less than unity this would not be possible, a
low and declining ratio often indicates a rising overdraft; the question to be
asked then is whether the company's bankers are likely to be happy.
There is no 'normal' level for either 'current ratio' or 'acid test ratio' due
to the number of variables involved. The best use of these ratios is to estab-
 Examination of reports and accounts I
lish a normal level for the company and look for a recent drop below this
norm which would suggest decreasing stability.

9.7.8 Solvency
Solvency relates to the ability of a company to meet its longer term com-
mitments as opposed to liquidity which relates to short-term commitments.
In trying to establish the level of solvency of a company two ratios are nor-
mally calculated, namely 'gearing' and 'interest cover'.
'Gearing' is a measure of the borrowing levels of the company and can
be expressed as the ratio of long- and short-term loans to the total capital
employed in percentage terms. Borrowings of up to 50% of capital
employed are normally acceptable in the engineering industry.
If gearing is high it means that the company is at the very least close to
its total borrowing limits and that it may even be overcommitted.
'Interest cover' is a measure of trading profit against interest charges. If
the ratio is less than unity this means that interest charges exceed profits
and therefore if the charges were to be met then further capital would need
to be raised, for example, by sale of assets or by a rights issue. In practice,
this situation would suggest that the profitability of the company is so low
that it is really pointless to continue trading unless the award of further
guaranteed profit-making contracts is imminent.

9.7.9 Financial/commercial capacity

In addition to general published company information specific data relating
to the project should also be obtained.

Financial limits
The company should be able to undertake the financial investment required
for the project. Financial resources should not be stretched to the limit
either by the size of a particular project or by other projects that the con-
tractor is already committed to.

Banking details
Reference from the company's bank should be sought to establish the cur-
rent up-to-date financial situation and lending facilities available.

Insurances
The company should give details of its insurance cover in connection with
employers' liability, public liability and professional indemnity to establish
and confirm its suitability and capacity to undertake the work or to see if
alterations to the levels of cover are required.
I 202 1 ( Contractorlsubcontractor selection

9.8 PRE-QUALIFICATION INTERVIEWS

Depending on the proposed number of tenderers to be included on the final

tender list a selection of the most capable, enthusiastic and experienced
contractors/subcontractors, as determined by the pre-selection process,
may be invited for interview.
The purposes of the interview are to clarify the information that has
been provided, confirm the contractor7s/subcontractors'continued enthusi-
asm and ability to undertake the project and to meet the personnel who are
likely to work on the project.
On some projects a pre-qualification interview may not be required or
desirable due to size, time or cost restraints and any interview will be held
over until after tender.

9.9 CONTRACTING STRATEGY

Contracting strategy involves two main decisions, how to break up the

overall project into appropriate, separately tendered, packages of work and
the type of contract to be used.
The choice of pricing strategy involves a number of factors including:
What date will the various parts of the work have to be awarded in
order to maintain the programme?
What design information will be available at tender enquiry, at award
and during construction - will this preclude a lump sum contract or
will design hold up construction?
What is the likelihood of change?
What is the potential for disruption?
What degree of control is required over the manner of execution by
the owner or his management contractor?
What risk is the owner prepared to accept?
Although the contract strategy will be established early in the project and
incorporated into a contract plan as described in section 2.6.9 on manage-
ment of engineering projects, it is nevertheless dynamic and should be kept
under review and amended to accommodate the changing circumstances in
the project.

9.9.1 Tendering risk and control

Many of the above factors relate to design status and the likelihood of
change or disruption to the work. A turnkey contract offers the lowest
financial risk to the owner in that the final cost can be guaranteed but it
requires that definitive information is available with the enquiry and it does
not provide the owner, or his project team, with the ability to control or
have continuing input to the work. By comparison the final cost of a reim-
bursable contract cannot be guaranteed but the owner can control the work
and make changes without major contractual risks.
 Contracting strategy 1 1 203 1
Owner Contract type Contractor

Minimum risk1 Turnkey Maximum risk/

minimum control maximum control
Lump sum

Lump sum
(with schedule of rates)

Firm bills of quantities

RemeasuremenVapproximate
bills of quantities

Target cost
7
Management contracting

Fixed fee prime cost

Maximum risk/ Minimum risk/
maximum control Reimbursable minimum control

Figure 9.2 Relative risks amd controls

In order of minimum to maximum owner risMowner control the types of

contract commonly used and the relative risks and controls are shown in
Figure 9.2.

9.9.2 Types of contract

The type of contract to be used depends on a number of factors, including:
availability of design information at enquiry and award:
potential for change;
potential for disruption or delay;
A project could include several main contracts each let on a different
basis as may be appropriate. Sometimes it is advantageous to let different
portions of one project on a different basis, perhaps obtaining fixed prices
for designed elements and other appropriate methods of payment for ele-
ments yet to be designed.
The type of contract to be used can also have the potential to affect the
programme due to the way in which design can overlap the construction
phase. An example of this is given in Figure 9.3.
The types of contract and the circumstances under which they may be
used include the following.
(a) development of conception
(b) full detailed design/
full BlQs.spec~f~cation/

Approach 2: BIQ contract

subject to remeasure
(a) development of concept

(d) construct~on/

Approach 4: Turnkey
(a) concept design/
performance specification1
contract documentation
(b) tender period1

Figure 9.3 Programme effects of differing tender approaches

 Contracting strategy I
Turnkey

A broad scope of work plus all process and performance requirements is

required with the enquiry and a fixed lump sum tendered for the design,
purchasing, construction and supervision of the work, etc., through to com-
missioning and performance tests.

Lump sum
All relevant design information is totally completed prior to it being
handed over to the contractor who quotes a 'lump sum' for carrying out the
works. A schedule of rates may be included in the enquiry to evaluate
unavoidable change or extra work.

Lump sum (with schedule of rates)

As above but although the relevant design information will be substantially
complete a schedule of rates or approximate bills of quantities may be pro-
vided to cover items for which design is incomplete for later evaluation.

Firm bill of quantities

Design fully or substantially complete at enquiry stage. The contractor is
required to tender against a detailed, itemized pre-measurement of the
work issued with the enquiry. Work is not remeasured unless changed.

Remeasurement/approximate bills of quantities

Design incomplete at enquiry stage and completed as the work progresses.
A schedule of rates or approximate bills of quantities is issued to the con-
tractor to obtain rates to be applied to a remeasurement of the works
undertaken as the work progresses.

Target cost
Design incomplete at enquiry stage and completed as the work progresses.
The work is commenced against a 'not to exceed' budget with incentives
for working within or below budget and perhaps for early completion.

Management contracting
All preliminary or conceptual design information and criteria relating to
performance requirements is handed over to the management contractor
who manages the project from start to finish. The management contractor,
who may be employed on a lump sum or reimbursable basis, arranges dis-
cipline tender packages and supervises work to completion. Contracts for
supply of equipment, materials or construction work may be placed by the
management contractor for and on behalf of the owner, or alternatively,
11 Contractor/subcontractor selection
may be directly subcontracted by the management contractor. In this latter
case the construction costs would usually be reimbursed to the manage-
ment contractor.

Fixed fee prime cost

Design incomplete at enquiry stage and completed as the work progresses. A
form of part reimbursable contract with for example the contractor's main
office, overheads, profit, etc., contained in a 'fixed fee' and the remainder, i.e.
labour, supervision, site establishment, materials, etc. being reimbursed at cost.

Reimbursable
Design incomplete at enquiry stage and completed as the work progresses.
Costs are fully reimbursable with the contractors having a mark-up or lump
sum(s) for profit and overhead, etc.

9.10 TENDERING PROCESS

9.10.1 Objectives

The objectives of the tendering process are to ensure that:

the owner receives the most favourable priceltender;
bona fide competitive tenders are received;
tenderers have the necessary information to properly price the work
and are given an equal commercial opportunity;
truly competitive tenders are obtained in a uniform and directly com-
parable basis;
confidentiality is maintained;
tender evaluation is fair and efficient;
all concerned are aware of the procedures and programme leading to
contract placement.

9.10.2 Tender documentation I

The tender document, issued to those on the tender list, must be thd same
for each tenderer and should contain all the information necessary for the
tenderer to appreciate the full extent and content of the work. The tenderer
must be given sufficient time to analyse, complete and return the tender by
the stated time with all the information requested.
Tender documents vary in their content according to the scope of work,
type of contract, form of agreement and selection criteria. The following may
be regarded as typical of the documents prepared by the procurement team:

1. covering letter;
2. introduction;
 Tendering process I
3. instructions to tenderers;
4. form of tender;
5. general conditions of contract and form of agreement;
6. special conditions of contract;
7. specification:
scope of work;
general;
technical including drawing package;
site conditions and regulations;
safety and fire regulations;
8. project master schedule;
9. contract sum analysislschedule of rateslbills of quantities;
10. forms for bondslparent company guarantees, etc.

The following are typical of the documents to be prepared by the tenderer

as appendices to the tender:

method statement;
programme, cash flow, labour histogram;
management structure;
curricula vitae for key personnel;
track record information;
safety plan;
quality plan;
proposed subcontractors or joint venturers;
any design information required;
update of new contracts awarded or bid since pre-qualification.

If the tender list has been produced following a pre-qualification exercise it

would be reasonable to suggest that tenderers should not be required to
resubmit information previously submitted as part of the pre-qualification
submission. In such circumstances tenderers may be requested to confirm
that their previous submission was still valid or otherwise to provide fur-
ther information in the event that the previous submission did not fully
address the current requirements or the contractor's circumstances have
changed. This last point is particularly valid in connection with current and
anticipated workload, etc.

9.10.3 Tender period

It is important that tenderers are given sufficient time to formulate their
bids. Insufficient time will either make the tenderers decline to bid, or to
include larger risk costs. In deciding the tender period consideration should
be given to the amount of design, if any, that the tenderer may have to
undertake in order to complete his tender and to the fact the tenderer may
have to issue and receive tenders from his subcontractors prior to finalizing
his quotation.
1208 Contractor/subcontractor selection I
9.1 1 TYPES OF TENDER

9.11.1 Open tenders

Open tenders are utilized when obtaining prices for small elements of
work, materials and equipment where there is no necessity for confiden-
tiality. Tenders are requested with a 'guide' date for their return. It is
normal to include address labels, but purely for the convenience of return-
ing the tenders to the interested party.
There is no official opening as tenders may be received before, on or
after the 'guide' date. Tenders, however, should be logged in and a brief
analysislcomparison completed on receipt of all the tenders. This analysis
should be placed on file for audit purposes.

9.11.2 Sealed tenders

This is the 'formal' method of obtaining tenders. The date and time for
receipt of tenders is fixed. Thus any tender received after the prescribed date
and time may be disqualified. Envelopes with labels in place are usually
included with the tender package for return of tenders to aid the identifica-
tion of its importance and confidentiality. Some owners require the financial
section of the proposal to be returned in a separate sealed envelope.
All questions raised by the tenderers during the tender period should be
channelled through one person, usually the contract engineerlquantity sur-
veyorlbuyer who will pass them on to the relevant parties. Once the
answers are formulated the questions and answers should be distributed to
all the tenderers by the contract engineerlquantity surveyorlbuyer to ensure
information is common and hence like for like tenders received. Care
should be exercised to avoid passing on any innovative design information
to other tenderers.
Tenders, once received, are logged in by recording the date and time of
receipt.
At the date and time for receipt of tender, all tenders are opened and
each page containing prices andlor rates should be signed or initialled by
all the members of the tender opening committee which usually comprises
as a minimum two people, the manager responsible for the work and the
contract engineerlquantity surveyorlbuyer. A record is made of the open-
ing, those present, tenders received, and their respective amounts.

9.12 EC DIRECTIVES

The European Union (EU) may be regarded as a political body that uses the
European Commission (EC) as an executive body. Thus the EC issues
directives on behalf of the EU. The EC directives aim to open up trade
across Europe for suppliers and allow purchasers to realize potential sav-
ings by the introduction of fair competition.
 EC directives I
The directives and their embodiment into UK law (as at October 1995)
are as follows ( values are originally in ECUs therefore sterling values are
approximate):

the Utilities Directive 90153 lIEEC, SI 9213279 covering supplies and

works contracts for operators in the energy, water, transport and
telecommunications sectors. Threshold for supplies and services is
£300 000 (except for telecoms sector £450 000) and for works £3.7
million;
the Supplies Directive 93/36/EEC; SI 951201 for the purchase of
goods with a value of £150 000 or more;
the Works Directive 93137lEEC; SI 9112680 for construction and
engineering contract with a value of £3.75 million or more;
the Services Directive 92150lEEC; SI 9313228 for various services
including consultancy with a value of £1 50 000 or more;
the Compliance Directive 891665lEEC sets out procedures for objec-
tion and the various measures and penalties available for
enforcement.

Note: There is no separate Statutory Instrument for the Compliance

Directive as its provisions are built into the other Statutory Instruments.
Failure to comply with these rules can result in a challenge by an unsuc-
cessful tenderer who can refer the matter to the High Court (the Court of
Session in Scotland). The High Court cannot set aside a contract which has
already been awarded, but it can award damages. Complainants do not
have to prove that they would have won the contract if the correct proce-
dures had been followed, they only have to show that a contracting entity
did not comply with the rules.
Infringements of the rules may be broken down into two categories -
procedural infringements and discrimination. Procedural infringements
include administration errors such as failure to comply with the laid down
time limits, incorrect notices, etc. Discrimination covers technical specifi-
cation, operating requirements, financial specifications or other actions
which discriminate in favour of local or national suppliers.
The court determines the level of damages to be paid. These are not
restricted to the costs incurred in preparing the tender submission, but can
cover lost profits, opportunity, costs, etc.
To comply with the EC directive all requirements for contracts, includ-
ing services, valued at above £150 000 (£3.7 million for works), must be
publicized in advance throughout the member states by means of a Pre-
Information Notice (PIN) placed in the Official Journal of the European
Community (OJEC). The OJEC, which contains advertisements from all
member states, is published daily and is available within the UK from Her
Majesty's Stationery Office (HMSO). The rules ban prior parallel advertis-
ing within newspapers and trade publications.
All suppliers within the EC must be given an equal opportunity to
tender for the business.
I Contractor/subcontractor selection
Tenders must be invited in accordance with one of the prescribed proce-
dures: open, restricted, negotiated, accelerated or urgent. Special rules
apply for concessions and design contests. The open or restricted proce-
dures are the usual ones as there are very tight restrictions on the use of the
others. Each procedure imposes minimum time scales covering every
tenderlprocurement activity. These time scales must be met to ensure that
the owner is not subject to legal action under the Compliance Directive.
Contracting entities must also comply with regulations covering stan-
dards. They must use European standards if available and after that, a
hierarchy of alternatives. The essential requirement is that the specification
selected may not discriminate against suppliers from other member states.

9.12.1 Contract award criteria

The choices of selection criteria offered by the EC are either:
the lowest price or
the most economically advantageous.
While lowest price may be adequate for relatively low technology, proprietary
items or low risk purchases, it is almost certain, that for major purchases,
owners will use most economically advantageous (MEA) as the basic contract
award criteria. Factors such as the following may be appropriate:
delivery or completion date;
running costs or overall cost effectiveness;
quality and reliability; aesthetics and functionality;
technicalldesign capability and levels of technical assistance offered;
after sales service and commitment to spare parts;
strategic security of supplies;
price.

9.13 RECEIPT AND ANALYSIS OF TENDERS

9.13.1 Analysis of tenders

Although variable for each procurement exercise, the technical submission

and the commercial submission are normally evaluated separately and
without consultation with the assessors of the other submission. Some
owners require that only those technical submissions achieving a particular
threshold have their accompanying commercial submissions opened, all
others being returned unopened to the tenderers.
Many of the criteria chosen for selection of a contractor and questions
asked of a tenderer may be subjective, resulting in difficulty in agreeing the
'scoring' of the tender submission. In order to assist in the evaluation of
subjective criteria, the evaluation team may find it beneficial not only to
define and agree the marking criteria prior to receipt of tenders, but also to
state the objective behind asking the question and to stipulate the informa-
tion required.
 Receipt and analysis of tenders
I
For example, objectivelrequirement on workload may be:
objective: to provide to the owner such information as will demon-
strate that the tenderer will have available such facilities, plant and
equipment and experienced personnel as are necessary to undertake
the work during the contract period identified on the project master
schedule;
requirement: the tenderer shall provide details of his future commit-
ments, both for himself and any proposed joint venture partners and
subcontractors.

9.13.2 Technical appraisal

It is normal when evaluating competitive tenders to draw up comparison
schedules (technical and commercial), where the particulars from all tenders
being reviewed can be presented in a tabular form. Any outstanding variation
from the normal or expected should be examined and commented on.
During the detailed examination, some gaps in information provided or
anomalies within the tender may be discovered which, time permitting,
will have to be clarified with the tenderer.
If unit prices are tendered a comparison of the prices of items should be
made and any omissions or anomalies noted. While the apparent technical
details may not reveal any technical shortcoming, a wide price difference
may indicate that the tenderer is not meeting the expected technical stan-
dard, has not understood the work content or has simply made an error.
In some situations a points system may be used for marking and ranking
tenders in order of technical merit.
The points system is useful where no prices are available to the techni-
cal evaluation team, or in the case where technical ability is the overriding
criterion.

9.13.3 Commercial and financial appraisal

An arithmetical check should be made of all tenders and a detailed analysis
of each tender carried out.
A price comparison table should be drawn up using the information pre-
sented in the tenders (i.e. schedule of rates, bills of quantities, etc.). If the
enquiry is in the form of a schedule of rates then estimated quantities
should be set against each item and an estimated final sum calculated.
It is at this stage that early signals of variations to the client's prelimi-
nary budget may be identified and projected. It may be necessary to
consider actions to reduce costs through design or specification changes or
to highlight the need to exercise particular cost control to avoid or reduce
projected cost increases.
A major concern of the tender appraisal is to ascertain whether the ten-
derer has understood and priced all the work described in the tender
documents and whether inconsistently high or low rates may have a dispro-
portionate effect on the final sum to be paid to the contractor.
11 Contractor/subcontractor selection
A cost model of the project can be extremely valuable to the tender
analysis team. Such a model can be set up on a spreadsheet and risk assess-
ments can be made by adjusting key cost values to simulate potential
claims, scope changes, daywork allowances, etc.
The cost model can also allow the analysis of anomalies or omissions in
the tender and to estimate the cost of the omitted elements.
Decisions on the basis of bid price can also be enhanced by a time based
view as cash flow can affect the viability of the project or, for example, an
early finish can improve the financial success of a project despite a higher
initial capital cost.
In the event of a tenderer making an error in a fixed price tender it is
good practice to invite the tenderer either to stand by his original tender or
to withdraw the tender but not to invite a correction to be made.

9.13.4 Alignment of tenders

On large projects where the information provided with the tender enquiry
does not precisely define the work in all respects, it is inevitable that differ-
ences will arise in detail design, supply and services proposed by the
tenderers.
In order to make a direct comparison of tenders an adjustment to some
tenders will be necessary to align them with a norm for evaluation pur-
poses. This norm need not be the final contractual scope but it avoids later
adjustments if it is.
The alignment process can be camed out by the evaluation team them-
selves making estimates or by reference to the tenderers requesting
additional information. If the situation is simple and the estimated cost
effect is low, it is quicker for the evaluation team to make the assessment
themselves. Where the situation is complex and large costs involved, the
tenderers should be consulted. If this situation can be foreseen prior to
inviting tenders then a two stage form of tendering may be written into the
tendering procedure to cover this contingency.
Tenderers may seek to qualify their tender and the evaluation team
should consider each statement made by the tenderer, anticipate why it was
made and either seek withdrawal of the qualification or evaluate its impact
on the work.
If it proves necessary to approach the tenderers for alignment purposes,
all questions from all team members should be compiled into one docu-
ment for each tenderer. The questions should be unambiguous and
preferably in a form that can be answered by 'Yes' or 'No' or by a quantita-
tive statement.
The evaluation team should indicate the additions or deductions for
alignment purposes which they deduced from the information submitted by
the tenderer andlor by their own assessment.

9.13.5 Key personnel

Curricula vitae (CVs) of all the proposed key personnel should be acquired
along with an organigram of the proposed team. Key personnel should, of
 Receipt and analysis of tenders IW
course, be the personnel who are actually going to undertake the project
and not be marketing executives, front men, etc. who have good CVs but
will not be part of the team. Assessments are often made by a combination
of desk top studies, the taking up of references and interviews.

9.13.6 Capacity in terms of manpower

The company should be able to handle the manpower investment required
for the project. If such matters have not been reviewed during pre-qualifi-
cation they should be considered at this time (see section 9.5.5).

9.13.7 Current and future workload

The company's current and future workload should be investigated to
establish that the necessary resources will be available for the project.
Overcommitment can cause problems. Also the company's current projects
should be investigated to ensure that any delays in completion will not
impinge on the subject programme.

9.13.8 Proposed subcontractors and suppliers

The subcontractors and suppliers proposed for the project by the company
should be checked to ensure that there is no conflict with the owner's pre-
ferred list.

9.13.9 Project execution

The company should be able to demonstrate an understanding of the scope,
content and any logistical and technical difficulties associated with the
work by submitting with the proposal a description of the sequence and
method of construction, together with details of the proposed organization.
The company may also be requested to provide a labour histogram and
details of proposed project controls.

9.13.10 Programme
In many contracts the completion date is an obligation but the programme
to achieve it is not. A proposed programme is usually required to be sub-
mitted with the tender establishing key dates, phases, durations, etc. for the
proposed works. This is the key to establishing project controls as well as
demonstrating the tenderer's understanding of the project. The assessor
would need to check this outline programme to see that it generally meets
with project requirements, delivery dates of material and equipment and
the work of others.

9.13.11 Post-tender interview

Once the preferred tender has been established (which may not necessarily
be the lowest priced tender), discussions will be held with that tenderer to
4
1
21 Contractor/subcontractor selection
resolve any outstanding anomalies, commercial and technical, that may
remain. This post-tender interview is designed to clarify any points on the
contractorYs/subcontractor's submitted tender, confirm acceptance and
enthusiasm to undertake the project and meet the proposed project team
who should be the team who are actually going to undertake the project.
Minutes of the above discussions should be taken which may be included
in the contract documentation.
If important anomalies cannot be resolved satisfactorily, then discussion
may commence with the next favoured tenderer. The resolving of the out-
standing anomalies allows the contract or purchase order to be awarded.

9.13.12 Tender evaluation report

The tender evaluation team should always present a tender evaluation
report to the project manager that clearly states the recommended contrac-
tor and the reasons for the recommendation. Whether the review criteria
appear in either the pre-qualification (if there is one) or in the tender
assessment depends on many factors. Some will obviously only relate to
the tender assessment but others may be relevant to one or to both.

9.14 FINALIZATION OF CONTRACT DOCUMENTS

Once approval has been obtained to the award of a contract from the vari-
ous project and corporate managers, co-venturers, etc., the contract
documents will be assembled and listed.
Depending on the number of modifications and amendments made to the
original tender enquiry, the contract may comprise the priced tender docu-
ment, together with reference to, or copies of, all documents recording
such modification/amendments. However, a heavily amended contract can
be difficult to interpret and use and it is frequently preferred that a 'clean'
copy of contract is produced, in which the modifications/amendments are
incorporated into the body of the document.

9.15 CONCLUSION

It can be seen from the above that detailed evaluation of potential tenderers
is a complex process of great value if tackled properly. It depends to a great
extent upon the experience of those performing the task, not only in the
evaluation itself but in deciding what factors to consider and allocating rel-
ative importance to each.
It is probably true to say that if two teams of people were to evaluate a
set of companies they would produce two different lists, if not in respect of
the names included then certainly in the order of preference. Advance
preparation is essential if a correct assessment is to be made and adequate
auditable records of the decision making process produced and maintained.
The use of a compliancy matrix and evaluation matrix is highly desirable
 Conclusion I
and the items listed should be given a relative weighting if possible, but at
the least should be classified as 'essential' or 'desirable'.
The stability of any structure, whether it be physical or organizational,
depends on a firm foundation. In terms of project management the founda-
tion of a successful implementation phase is the selection of the correct
contractor. To achieve this, it is essential to carry out a thorough evaluation
within a structured selection process.
Procurement
of Materials
and Equipment

Downshaft pumps in
water ring main,London,
England.

Owner Tharnes Water Plc.

11 Procurement of materials and equipment
10.1 INTRODUCTION

This chapter addresses the procurement of materials and equipment.

Procurement of construction contractors and subcontractors are covered in
Chapter 9.

10.2 SCOPE OF PROCUREMENT ACTIVITIES

Throughout all industries there are five guiding principles that govern the
procurement function: they are known as the 'Five Rs':
1. right quantity;
2. right quality;
3. right supplier;
4. right price;
5 right time.
To ensure compliance with these principles, the procurement function nor-
mally comprises the activities relating to purchasing, expediting,
inspection and shipping. In addition to these activities is material control,
which is considered in Chapter 5 , Part 4 on material control. The procure-
ment function is responsible for ensuring that all equipment and materials,
together with associated drawings, documents and data are delivered in
such time as will enable the engineering, construction and commissioning
programme to be met and subsequent plant operations carried out. ,

10.3 REQUISITIONS

A requisition is a statement of requirement prepared by a user department

(usually the engineering or construction department) which is used as the
basis against which materials and equipment on a project are purchased.
Requisitions will contain information regarding scope of supply, quantity,
specification and final location within the work, together with details of
any special requirements. Required delivery dates to meet the construction
schedule will be attached by the planning department.

10.4 THE PROCUREMENT CYCLE

The term 'procurement cycle' is frequently used to describe the time taken
from the identification of a material or equipment requirement to the place-
ment of a purchase order. The cycle is established at the planning stage of a
project and delivery periods estimated, so that the programme of requisi-
tion production can be formulated to meet site delivery requirements.
Drawings and data from a supplier may be critical to the design; deliv-
ery dates of the hardware may not therefore be the only controlling factor.
Activities within the procurement cycle are normally as follows:
 The ~rocurementteam I %1
receipt of enquiry requisition (by procurement);
pre-qualification of bidders;
issue of enquiry;
receipt of tenders;
shortlisting of tenderers;
commercial and technical analysis of tenders;
preparation of bid summary;
receipt of purchase requisition (by procurement);
placement of purchase order.

Time taken for each of the above activities depends on the complexity of
the equipment and materials to be purchased, however, standard times are
agreed for planning purposes.
Standard times will run from completion of the previous activity and
may be based on a typical enquiry for a packaged equipment item. For
bulk materials, times will be reduced considerably, and for major or
complex equipment items, times will increase, especially when the sup-
plier is required to carry out design work to comply with tender
requirements.
The procurement role on a project starts at the commencement of the
detailed planning stage. The procurement cycle and individual delivery
periods will be incorporated into the planning schedule, to ensure that
design information and the materials or equipment items are available to
meet design and construction requirements. This exercise not only
checks the validity of the overall programme (design and construction),
but also enables planning of required procurement manpower to take
place.

10.5 THE PROCUREMENT TEAM

For major projects it is common to have a dedicated procurement team.

The manager of the team will report directly to the project manager.
Besides his procurement responsibilities the procurement manager will be
part of the project management team. All procurement matters on a project
will be dealt with by the procurement manager and he will liaise directly
with the owner's project manager or procurement coordinator (depending
on size of project) on all subjects concerning the purchase of materials and
equipment.
The general responsibilities of the procurement team are as follows:

purchasing: identification and evaluation of potential suppliers,

enquiry issue, tender receipt and analysis, order placement/adminis-
trationlclose-out of the order;
expediting: ensuring the timely receipt of design data and
materialslequipment to meet design/construction requirements;
inspection: ensuring that materialslequipment ordered are to the cor-
rect specification and meet the required quality;
11 Procurement of materials and equipment
shipping: ensuring that materialslequipment released by inspection
are shipped in a timely and cost effective manner to the correct site;
also responsible for maintaining import records and liaison with cus-
toms authorities.

10.6 EU REGULATIONS

The EU directives that cover purchasing in the oil, gas and certain other
industries are enshrined in UK legislation through the Utilities Supply and
Works Contracts Regulations 1992. This legislation covers the method of
establishing a supplier qualification system and how the purchasing
process is governed to ensure full and fair opportunity for companies from
all EU countries. The rules cover the advertising of requirements, selection
methods for tenderers, method of enquiry, evaluation criteria, award notifi-
cation and required records. Reference should be made to Chapter 9 on
contractorlsubcontractorselection where the major aspects of this legisla-
tion are outlined.
Procurement work has increased due to the implementation of this legis-
lation. The legislation is both complex and vague, which has resulted in a
variety of approaches being adopted by different companies. However, it is
important to note that the legislation only covers utilities (oil, gas and
water companies) and not contractors purchasing in their own names.

10.7 COMMUNICATION

The entire relationship forged by a purchase order between purchaser and

supplier is built on good communication. Where communication links
break down, errors occur and strains in this relationship take place.
Communication is obviously a two-way process and efficiency will be
enhanced where goodwill and trust are generated. The objective of good
communication is to avoid problems, but if problems do occur, good com-
munication should ensure that they are identified early and have less
impact on the work. All parties to an order should be seeking to create a
successful long-term relationship and good communication is vital to the
achievement of this aim.

10.8 TERMS AND CONDITIONS

10.8.1 Purchase order versus contract

Purchase orders are of course legally binding contracts; many companies,

however, refer to the relatively simple documentation required to buy
material as a purchase order and the larger, more complex documentation
required to place, control and evaluate work of design or construction as a
 Terms and conditions ]W
contract. Because of the difference in content and method of administration
they are frequently handled by separate sections.
Different companies have different interpretations of what comprises a
purchase order and what comprises a contract. The clearest demarcation
between the two is that where work is required at a construction site this
should be the subject of a contract, with a purchase order being applicable
where the arrangement is for supply and delivery only. However, where
there is a large design element to the work a contract is frequently used in
place of a purchase order, to give added protection to the purchaser. Most
companies will have their own policy on this subject, but it should be
noted that the decision between purchase order and contract is rarely one
of value alone.

10.8.2 Obligations of purchaser and supplier

The purchaser's principal obligations under a purchase order are to define
precisely what is required and to pay the price agreed when items are cor-
rectly delivered according to those requirements. However, this as stated is
a very simplistic approach and the purchaser does have other obligations.
Once an order is placed, there may be design documentation for the pur-
chaser to approve according to approval schedules agreed in advance with
the supplier, so that delays do not affect delivery dates. For complex or
high value orders, progress payments may be agreed so that when specific
milestones are reached (either time or event based or both), payments
become due. The purchaser also commits to take delivery at specified dates
either on an ex-works basis (purchaser arranges collection) or at a con-
struction site.
For the supplier, his obligations can be summarized in three words -
quality, quantity, time. By accepting an order, the supplier agrees to pro-
vide the specified item(s) to the correct specification and quality, in the
correct quantity, and to produce the goods in the agreed time scale. Other
obligations such as provision of design data, progress reports, invoices
and maintenance of records also exist but are subsidiary to the main three.
Where delivery is made to a construction site, then the stores organiza-
tion or construction/contractor will take delivery of the items. They will be
responsible for off loading and safe storage of items, until required for con-
struction. In order that payments can be made to suppliers, they will ensure
that items delivered are correct in number and that no shortages or damage
have occurred in transit.

10.8.3 Basis of order

Purchase orders will specifl what is needed, to what specification, the
quantity required, the price and delivery date and location. The purchase
order is confirmation of all that has passed between the purchaser and sup-
plier from a simple telephone call at one end of the spectrum, to several
months of detailed negotiations at the other end. A variety of documents
may be either referenced in, or attached to, the order and these expand the
11 Procurement of materials and equipment
order's content. Such documents will range from guides to reporting
requirements, specifications, etc., to the agreed terms and conditions under
which the order is placed. The order from a purchaser represents accep-
tance of a supplier's offer and without agreed conditions, an enforceable
contract may not exist. Such conditions are important to both parties
because they ensure that responsibilities are known.

10.8.4 General terms and conditions

Most companies have their own purchase order terms and conditions and all
would prefer to trade using their own terms rather than those of another
company. However, it is rare in the engineering industry to accept a sup-
plier's terms and conditions even where near monopoly situations occur.
Therefore, an important part of the procurement process is the agreement of
terms and conditions before order placement. Where the contractor is acting
in the owner's name or on a 'for and on behalf o f basis then it is usual for
owner's terms and conditions to be used. However a contractor undertaking
procurement on its own behalf will frequently use 'in-house' conditions
with amendments to reflect any special terms of the main contract.
From a supplier's viewpoint, the important terms of any order relate to
warranties, liabilities, penalties and terms of payment. It is usual in the oil
and gas industry for extended warranties to be sought, due to the time it
takes for projects to be completed, with a warranty period of three years
not being unusual. Regarding terms of payment, the standard is frequently
a single payment, but milestone payments may be linked to completion of
drawings or submission of data where such is required to progress the main
design work. Suppliers will often request progress payments where deliv-
ery schedules are lengthy or material costs high.

10.8.5 Call-off orders

Call-off orders or supply agreements are used to cover bulk material
requirements where final quantities are not known at the date of original
order placement. They are used to avoid the necessity of placing several
orders for the same material with often the same suppliers. By using such a
mechanism, a source of supply can be established early in the project pro-
gramme, design data obtained, a single standard specification established
and administrative costs reduced. Such orders can be placed on a per project
basis or for a specific time, covering an owner's requirements on several
projects.
When issuing enquiries on this basis, it is important to have a reasonably
accurate estimate of total quantities and items required, so that best price and
discounts can be obtained. From a supplier's viewpoint,'such orders are ben-
eficial as they assist production planning and secure a long-term
commitment. Call-off orders are used for piping materials, structural steel,
valves, cable, etc. For orders that extend over one year, and where prices are
increasing, an escalation formula can be agreed to share the risks between
the parties.
 Terms and conditions I (a
Terms and conditions for such orders would not vary to any great degree
over those for a one-off requirement, but would address items unique to
call-off situations, i.e. no guarantee of final quantities, price escalation for-
mulae, buy-back arrangements, etc.

10.8.6 Bonds and guarantees

A variety of commercial tools are available to a purchaser when drafting
terms and conditions, which are used both to provide comfort to the buyer
against potential problems and to limit risks to the buyer. Those most com-
monly used are as follows:
Parent (or group) company guarantee issued by the ultimate parent
of a supplier guaranteeing that its subsidiary company will per-
form the work in accordance with the order and that if their
subsidiary company should default, that the parent company will
complete or pay for a third party to complete the work. This type
of parent company guarantee is readily provided by suppliers as it
does not cost them anything (excluding minor administration
costs).
Bank guarantees, issued by the supplier's bank to cover advance or
progress payments and/or early release of retention moneys held.
Such guarantees impose a financial liability on the supplier that nor-
mally reduces the limit of any credit available to the supplier.
Retention, withheld from invoices paid (usually 10%). Release of
retention is usually on delivery (50%) with the balance paid at the end
of the warranty period.
A performance bond is issued by a bank or insurance company for a
certain percentage of the order value (usually 10%) which is called in
the event of non-performance by the supplier.
In deciding which of the above tools (if any) to use, the buyer must assess
the potential risks of the supplier's failure to perform, against the addi-
tional costs incurred by their use. The provision of any of the above is not
in a supplier's interest as they cost money to obtain, delay part of his pay-
ment or reduce his ability to obtain credit.
The other most common method of reducing the buyer's exposure to
risk is the introduction of liquidated damages. Liquidated damages are
normally written into purchase orders to provide protection against late
delivery; they are normally applied on an escalating basis, typically at a
rate of 1% of total order value per week, up to a maximum of 10%.
Although widely used in purchase orders, liquidated damages are
seldom invoked, and more often than not, the potential threat of imposi-
tion ensures that suppliers perform. In today's climate of improved
supplier relations, partnering, etc., such threats are seen as part of the
historical adversarial approach to suppliers and their use is much
reduced.
Insurance matters, including guarantees and bonds, are krther consid-
ered in Chapter 6.
1 224 1 I Procurement of materials and equipment I
10.8.7 Warranties

Most if not all work will be subject to a warranty ( sometimes called a

guarantee ) against defective workmanship or materials. The period of the
warranty will be stipulated in the various contracts and purchase orders and
will depend on the wishes of the owner.
Warranty periods usually run for a period of 12 months from the date on
which the whole installation is handed over. Since the construction of a
plant can take many years it follows that warranty periods for construction
work completed or equipment supplied during the early stages must have
long warranty periods.
In the event that a main contractor purchases equipment, etc. in his
own name then, subject to the particular contract conditions, any war-
ranty provided by that main contractor will include any materials,
equipment, subcontract work, etc., procured under that contract. If, how-
ever, an item of equipment, not purchased in the owner's name, is
required to have a warranty in excess of that applying to the main con-
tract, unless the main contract makes provision for this additional
warranty requirement, it will be necessary to ensure for a clear route to
be established through which the benefit of the warranty can be passed
from the purchaser to the owner either by assignment of the warranty or
by way of a collateral warranty.

10.9 CERTIFICATION AND CERTIFYING AUTHORITIES

To ensure that the correct materials and equipment are delivered, it is

normal practice to require suppliers to provide copies of material certifi-
cates, type test certificates, etc., to cover the items ordered. Certain
documentation may be required so that the final completed plant can
obtain the necessary approvals to start production. For UK offshore pro-
jects, this involves the employment of a certifying authority. The
certifying authority is an independent company that ensures that the
design, materials and equipment have been produced to the required levels
so that the plant obtains the certificate of fitness from the Department of
Trade and Industry.

10.10 MATERIAL TRACEABILITY

Material certificates, type test certificates and the like will be of limited
value if the material or equipment to which they apply cannot be identified
in the construction site store or in the completed project. Allied to the need
for certification from suppliers is the need to be able to maintain material
traceability. With bulk materials such as steel plate or pipe, reference num-
bers equating to those marked on the relevant certification can be 'hard
stamped' on the items. Such markings are known as heat numbers and are
repeated when the material is cut into smaller pieces. For equipment items,
tag numbers will be affixed either on nameplates or to metal tags. Both
 Spares and special tools
I
methods allow ease of traceability once installed so that if there is failure or
other problems, the original supplier can be identified and the source of
material traced.

10.11 SPARES AND SPECIAL TOOLS

10.11.1 Spares

There are three major types of spares: commissioning, insurance and oper-
ating spares.
Commissioning spares are usually purchased either at the same time as
the main equipment or separately during the manufacturing phase, but
often on the same order. Typically these spares are items that may need
immediate replacement during commissioning, i.e. gaskets, bulbs, filters,
bolts, etc., which are of low value. Depending on installation requirements,
these spares are delivered either with the main equipment, or immediately
before commissioning takes place.
Insurance spares are, as their name suggests, purchased to provide insur-
ance against a major problem with a piece of equipment. They are typically
purchased where the cost of a major breakdown would lead to an intenup-
tion in output, thereby causing serious financial loss. Types of spares in this
category are spare rotors for main oil line pumps, spare jibs for platform
cranes and spare turbines for either compressor or power generation pack-
ages. Typically, such items have lengthy lead times and are often of high
value. As with commissioning spares, such items are either purchased at
the same time as the main equipment (but with a later delivery date) or on a
separate purchase order.
Operating spares are initially for either one or two years' operation;
these are traditionally purchased separately from the main equipment and
quite often are purchased by the owner direct, rather than by the project
procurement team. Orders may be placed later than the main equipment,
with deliveries taking place immediately before plant startup. Initial oper-
ating spares are only purchased direct from the equipment supplier for the
initial requirement, for further ongoing needs items are bought direct from
the manufacturers.
The cost of all types of spares should be taken into consideration when
making the original supplier selection, as high operating costs can out-
weigh any initial advantage on initial capital cost. Due to the high cost of
spares, both in capital investment and storage expenses, suppliers are now
being persuaded to store spares at their cost, rather than expect the owner
to purchase and store.

10.11.2 Special tools

Some items of equipment require the use of special tools for the purposes of
installation, commissioning or maintenance. The requirement for special
tools will be identified within the requisition and incorporated in the
enquiry.
11 Procurement of materials and equipment
10.12 SUPPLIER DATA

Equipment supply packages may have a considerable design content, and

the timely receipt of data (drawings, specifications, procedures, certifica-
tion, etc.) for ongoing design purposes is critical. In some cases, the receipt
of such data can be more critical to the overall project programme than the
receipt of the equipment itself. When issuing an enquiry, the buyer will
specify the data required and the time scale for its receipt. Dates for sub-
mission will be agreed with the supplier before order placement, and the
supplier will be expedited against these dates. Once data are received, the
engineers will be expedited to ensure comments or approvals are made
within the agreed periods (typically 10115 days) and any resubmissions
required from the supplier will also be expedited.
Receipt of supplier data must be constantly monitored throughout the
project programme to maintain design progress and individual supplier
programmes. Final payments should not be made until all data and records
are received and approved.

10.13 QUALITY ASSURANCE

All orders placed are subject to a QA audit if so required. Increasingly,

more suppliers are qualified to BS 5750 or I S 0 9000 and are therefore
independently audited against this standard. Quality assurance audits take
on average one to two days. They cover the supplier's full procurement
cycle from receipt of an order to completion of all liabilities including
provision of spares. Any problem areas discovered are followed up later.

10.14 PRE-QUALIFICATION OF SUPPLIERS

One of the first actions to be taken at the commencement of a project is the

production of a supplier's list. The supplier's list may be produced from
existing company lists including owner nominations and preferences, or
from a project specific list. Where a company list exists, it is frequently the
case that some form of selection process will be necessary to reduce the
number of potential bidders by a pre-qualification questionnaire. The pre-
qualification questionnaire is a simple method of producing bid lists and
will in most cases be the sole method used.
The pre-qualification questionnaire can either be of a general nature cov-
ering total project requirements, or be product specific; it is issued with the
objective of producing a bid list(s) of companies sufficient to ensure ade-
quate competition, and including those companies most capable of providing
the goods at the most economical cost, while maintaining quality and sched-
ule requirements. For high value or complex items, it may be necessary to
supplement the pre-qualification process with interviews andfor visits to
prospective suppliers.
Reference should be made to Chapter 9 covering contractorlsubcontrac-
tor selection for the necessary requirements in formulating the tender list,
 Enquiries I
evaluation, audit requirements, etc. where these become mandatory under
the EU directives.

10.14.1 Evaluation
The pre-qualification questionnaire addresses general company details,
finance, experience, references, capabilities, resources, QA, safety, etc.,
and each question can be scored or weighted as required. For evaluation of
responses, either an objective or subjective method can be used. With an
objective method each question is scored (normally out of 10) and a
weighting given to reflect relative importance. Of the three principal areas
to be assessed, points to be covered are as follows:
1. financial: last three years' accounts, bankers, parent company details;
2. technical: product range, previous projects, design and testing facilities;
3. resources: manufacturing details, location, types of personnel, equip-
ment, etc.

10.15 TENDER LIST

As a result of the evaluation of the pre-qualification questionnaire, an

agreed tender list will be derived. The number of tenderers required
depends on complexity of items required and enquiry value. For most
items, the tender list will vary between three and six companies.

10.16 ENQUIRIES

Enquiry content will vary depending on overall project requirements and

the type and value of materials or equipment to be purchased. However, for
a typical large size project, an enquiry will usually consist of the following
documentation.

10.16.1 Technical

Requisition: items and quantities required;

data requirements: data required, submission periods, quantities, pre-
sentation method, etc.;
specifications;
packing requirements;
QA requirements;
inspection levels.

10.16.2 Commercial

Covering letter: return date, delivery required, etc.;

I Procurement of materials and equipment
instructions to tenderers: submission method, copies required, details
to be covered;
form of tender: pricing details;
terms and conditions.

Once issued, any queries from tenderers relating to the enquiry will be
routed to the applicable buyer, who is responsible for their prompt answer.
Any answers to queries that affect all tenderers will be issued as an enquiry
bulletin and issued to all tenderers. Requests for extension to tender return
dates will only be granted if programmes remain unaffected and where sev-
eral tenderers are making similar requests.
Where enquiries have been issued on a 'sealed tender' basis then all
such tenders will be opened at the same time and an initial record of prices
made. The level of sealed tenders varies between companies but most ten-
ders with a value more than £50 000 will be subject to this procedure. For
low value enquiries, tenders can sometimes be accepted by fax to speed
order placement.
Once opened, copies of tenders are distributed by the buyer to the vari-
ous specialists for their technical analysis that continues in parallel with
the commercial evaluation.
Where several companies have submitted tenders, it is usual to shortlist
one or two companies at an early stage, to speed up the selection process.
Once this has been accomplished by way of an initial analysis and agree-
ment with the tender assessment team, the buyer will concentrate his
analysis on the shortlisted tenders.

10.16.3 Analysis
On completion of the short list, the buyer and engineer will produce sepa-
rate detailed analyses of the tenders. Any queries with relation to the
tenders will be addressed to the tendering companies and replies will be
included in the necessary analysis. Although the commercial and technical
analyses are produced separately, a joint recommendation is made on com-
pletion, i.e. the best commercial offer that is technically acceptable. Apart
from reviewing the initial capital cost the commercial analysis will also
address the following items:
price validity;
delivery period;
spares;
capacity;
financial stability;
ancillary costs.
In addition to the above, any qualifications to terms and conditions, war-
ranty period, terms of payment and the like will be considered and the
effect on the purchase order evaluated.
Where necessary, meeting(s) will be held with tenderers to clarify both
commercial and technical aspects of bids, so that a comprehensive recom-
 Expediting and inspection I
mendation to award can be made. The buyer will arrange and chair such
meetings and will ensure that minutes of meetings are produced and agreed
with the tenderers. Normally tenderers will be required to delete any of
their standard supply conditions which may have been included in tenders.

10.16.4 Award
Once the analysis has been approved, the buyer will prepare a tender report
and purchase order for approval and signature. The order will reflect the
costings contained in the analysis and any technical agreements reached
subsequent to enquiry issue. Orders are signed and issued once the neces-
sary purchase requisition has been received from the engineer. If a
pre-award meeting is necessary, this will again be arranged by the buyer
and agreements reached reflected in the actual purchase order. Two copies
of the order will be sent to the supplier, with one copy acting as the official
order acknowledgement to be signed and returned to the buyer.
Any change of a commercial or technical nature to equipment or materi-
als after an order has been placed, will be covered by the issue of an
official amendment to order. The buyer will normally retain responsibility
for the administration of the order through to order close-out.

10.17 EXPEDITING AND INSPECTION

10.17.1 Expediting

If suppliers and purchasers carried out all of their agreed obligations on

time, there would be no need for the expediting function. However, this is
often not the case and expediting is used to progress suppliers and keeps a
project aware of potential delivery problems.
Expediting is undertaken to suit the programme requirements of a project
and is concerned with not only physical delivery of equipment and materials,
but also the flow of design data. For projects with extensive design require-
ments, the need for drawings and data fiom suppliers is of paramount
importance to maintain overall project schedules. Therefore, before award of
an order, the buyer will agree document submission dates with the supplier
and these dates will form the basis of any required expediting effort.
The type of expediting to be used will vary from visits to the supplier's
premises to regular contact by telephone or fax, or a combination of both.
For visits, the expediter will produce a detailed report showing documenta-
tion status and order progress. Problem areas will be highlighted, remedial
actions proposed (if necessary) and a forecast of delivery made. Document
status will also be updated with latest promised dates for submission.
Expediting forecasts are fed back into the project programme so that
problem areas can be immediately identified. Not all slippages in delivery
dates cause problems, and areas that affect programmes are concentrated
on. As a supplement to direct expediting, suppliers are often requested to
submit regular (normally monthly) progress reports.
11 Procurement of materials and equipment
Frequency of expediting visits and order progress is reviewed on a regular
basis so that its need and effectiveness can be measured and priorities
reviewed. Where necessary, normal expediting visits can be supplemented
by either management meetings or visits, to reinforce the expediting process.
The expediting function is also responsible for ensuring that equipment
and materials are delivered in the correct quantity and to the right location.
The expediter acts as the liaison point between the supplier and the deliv-
ery site, and forewarns sites what materials and equipment items are being
delivered and when. Nothing moves from a supplier's works without the
expediter's prior knowledge and permission.

10.17.2 Inspection
Inspection can be regarded as an industry assurance service in that its func-
tion is to ensure that what has been ordered is in fact what is supplied and
delivered. In a perfect world such a service would not be required and
items delivered would be to the correct specifications and quality; unfortu-
nately this is not the case and inspection is required to 'police' the
manufacture of purchased materials and equipment.
Inspectors will typically have a manufacturing or engineering back-
ground and particular practical and technical skills and qualifications. It
may be necessary to employ third party inspectorates to undertake
inspection on behalf of a purchaser when the item to be inspected is of a
specialist nature, or due to the geographical location of the manufacturer.
Inspection establishes acceptability of materials and equipment through
compliance with design, destructive and non-destructive testing and pres-
sure, proof, load, burst, performance, functional and operational testing
practices supported by relevant certifying statements.
Inspection is required not only to satisfy the requirements of the purchase
order but also to ensure compliance with statutory regulations. The level of
inspection to be applied depends on the nature of the requirement and on the
complexity of the equipment and the criticality of the item to the project.
Therefore, bulk materials are usually subject only to a final inspection,
while a compressor package will be inspected at various stages throughout
the manufacturing and testing process. To achieve this a manufacturing
quality control plan is produced by the supplier for approval, which alerts
the supplier to the level of inspection required during the life of the order
and which contains witness, hold and surveillance points at which inspec-
tion is required before continuing with manufacture or delivery.
Inspection by the purchaser should not be allowed to erode the supplier's
responsibility to ensure that what is manufactured is to the required quality
and specification. Reports are produced after each inspection visit to high-
light problem areas and to serve as a progress check on the order. On
completion of manufacture, the equipment will be inspected against final
approved documentation and if acceptable, an inspection release note will be
issued allowing preparation for shipment. If problems exist, a 'punch-list' of
items requiring rectification or completion will be produced by the inspector,
and the supplier will be required to clear this list before reinspection.
 Shippingitransport insurance 1 1 231 1
As part of his activities, the inspector will check all appropriate certifi-
cation and documentation and ensure that completed data dossiers comply
with project requirements.

10.18.1 Shipping and transport

On most projects, suppliers are responsible for the delivery of equipment

and materials to site. Once an inspection release note has been issued, the
expediter will obtain details from the supplier of weights, sizes and quanti-
ties and will issue precise shipping instructions. Details will be advised to
site to forewarn the site management of impending deliveries. While in
transit, the supplier remains responsible for the equipment and arranges
necessary insurances.
For large offshore projects or overseas projects, the services of a freight
forwarding company are often used to control and execute the movement
of equipment and materials. The use of a forwarder increases the control a
project has on site deliveries, reduces the cost as a consequence of bulk
shipments and allows priorities for movements to be set, so that urgent site
needs can be rapidly addressed. At every stage in the delivery process, the
project is aware of status and actual location of the equipment and materi-
als. Advanced planning of abnormal loads takes place so that routes are
identified and necessary permits obtained. It is usual for the forwarder to
provide an in-house coordinator to carry out this work and liaise with the
project team. Freight savings are identified by comparing the forwarder's
price with that of the supplier's for deliveries.
Whichever method of delivery is used, the purchase order will clearly
state delivery terms based on the internationally recognized Incoterms
nomenclature. For deliveries by way of freight forwarder, orders will be
placed on the basis of 'ex-works loaded onto purchaser's transport'.

10.18.2 Packing
Any special packing, packaging and labelling requirements will be covered
in the purchase order and will take account of site conditions, storage, etc.
For offshore projects, export packing is often specified so the equipment
can be stored safely for several months. Unless packing requirements are
specified by the purchaser the supplier's standard is usually accepted.

10.18.3 Customs and Excise

All imports into the UK from the EU are subject to VAT, while import
duties may apply to goods from outside the EU. Where equipment or mate-
rials are designated for offshore projects, the purchaser can reclaim VAT
paid and is exempt from import duties through inward processing relief
(IPR). Because of the 'single market' within the EU, details of EU imports
I Procurement of materials and equipment I
now have to be provided by the purchaser on a monthly basis to the cus-
toms authorities. Where a freight forwarder is employed, it is usual to
include all customs records and liaison in their scope.

10.18.4 Despatch of goods

Once materials and equipment are released for despatch, the expediter will
advise either the site direct or through a material controller, that items are
available for delivery and he will obtain details of weight, size, etc. plus
estimated time of arrival. On receipt at site, items will be checked and
inspected to ensure that all items have been received, that they are in accor-
dance with the stated requirements and that no damage has occurred in
transit. Apart from checking the actual goods, paperwork will also be
checked to ensure that the necessary certification, documentation and
inspection release notes have been received.
If the items are acceptable, a report will be issued confirming that the
material has been received (sometimes called a material received report
(MRR) or goods received note (GRN)), which will allow any necessary
payments to be made. If the items are incorrect or damaged, or if there
are missing items, etc. then a report (sometimes called a damage discrep-
ancy report or DDR) will be issued by the material controller to the buyer
for action. The buyer will discuss any necessary action with the supplier
and payments will be delayed or reduced until the matter has been
cleared.
It is important in the case of damage being sustained, or goods being
lost, that the applicable insurance procedures are immediately activated.

10.19 PROGRESS MEASUREMENT AND REPORTING

Measurement of procurement effort or progress is not an exact science and

is accomplished in a variety of ways, none of which is totally satisfactory.
The following methods are currently in use:
weighting items in the procurement cycle such as enquiry issue; order
placement, etc., and then allocating total agreed man-hours accord-
ingly. Progress is then measured against these milestones for the total
procurement effort;
setting overall milestones for discreet activities such as dates for all
enquiries issued, all major equipment delivered, etc. Although this
provides defined targets for procurement effort, it makes no
allowance for actual practicalities of achievement;
monthly targets for achievement of activities such as order issue;
assessing man-hours used on a monthly basis against agreed man-
hour total.
For reports, the procurement team generates individual order reports (expe-
diting plus inspection), overall status reports on orders placed plus
pre-order stage and a project order register. Reports can be tailored to suit
 Bibliography I
individual project requirements so that the complete procurement activity
is managed.

BIBLIOGRAPHY

Baily, P.J.H. (1991) Purchasing Systems and Records, Gower.

Operational
Maintenance

Replacing the fluid

catalitic cracker at
Pembroke Refinery,
Pembroke, Wales.

Plant Owner Pembr

Cracking Company.
1 236 1 I Operational maintenance
11.1 INTRODUCTION

11.1.1 Capital and revenue expenditure

When a plant is built, the costs for the design and construction are usually
made available from a capital budget for investment in new assets. One
feature of the design phase is the consideration that must be given to future
running and maintenance aspects. The owner's loss in production, and
therefore earnings, during a shutdown can be enormous, and maximization
of reliability and reduction of maintenance effort must be incorporated into
the plant design. This is a subject in itself and is not covered here.
The plant will be built by a construction team, usually through a con-
tractor, who will then hand over the plant to the commissioning team.
Commissioning means starting the plant up and running it under normal
operating conditions to check that the construction and the process con-
form to the specification and design. Commissioning work is very
specialized and complex and will not be dealt with in this document. The
costs of the commissioning phase form part of the capital budget.
Once the plant is producing and meeting the process specification in
quantity and quality, the plant is handed over to the organization which will
operate and maintain it on a day-to-day basis. This organization is nor-
mally the owner, but may be a separate company which operates the plant
without owning it. From this point onwards the costs are not capital costs,
but are 'operating' or 'revenue' costs.
A budget is normally set aside each year to cover the running costs of
the plant, part of which is the operating cost, i.e. salaries for the operators,
electricity, oil, gas and water to keep the plant running, and the feedstock
which is the raw materials from which the product is made. The other part
of the operating budget, and the part with which this chapter is mostly con-
cerned, is the maintenance budget. This is the money required for repairs
to, and servicing of, the plant.
Maintenance can be further split into two subsections; the first is
where the repairs and servicing can be carried out while the plant is still
running and producing; the second section is where the plant must be
stopped and made safe before the repairs and servicing can be performed.
There are many names for each type of maintenance but we will distin-
guish them here by calling the first 'routine maintenance' and the second
'shutdownsy.
In the past, the generally accepted principle for maintenance, either rou-
tine or shutdowns, was to carry out preventive maintenance, the theory
being that if equipment was kept in the best working order then the inci-
dence of breakdown would be reduced. The current thinking, which is
reported to have started in the USA, is that some aspects of preventive
maintenance make it a very expensive and unreliable method of risk pre-
vention, and that it is more cost effective to repair equipment only when a
breakdown occurs. ('If it ain't broke, don't fix it,' is the US catch phrase
for this concept.)
 Introduction 1 1 237 1
11.1.2 Routine maintenance

This is sometimes referred to as 'running maintenance', 'on the run main-

tenance' and 'day-to-day maintenance' among many other names. Routine
maintenance covers all aspects of work required to ensure that the plant
runs smoothly and efficiently and ranges from grass cutting of landscaped
areas to window cleaning, from light bulb changing to major electrical
works and from vehicle maintenance to complex compressor/turbine align-
ment. There are various reasons why maintenance needs to be carried out,
and these will be covered in greater detail later in this chapter, but in
essence may include the following:
items may cease to work;
items may work inefficiently;
items may work unsafely;
items may work unreliably;
items may be costing too much to operate due to a fault in design or
performance; and
items may be creating unacceptable environmental conditions such as
odour, smoke, greenhouse gases, pollutant exhaust gases, etc.
The decision as to whether maintenance work can be camed out while the
plant is running would normally have taken place when the plant was first
designed and would depend upon such factors as the cost of duplication, the
criticality of the item and the type of process, e.g. continuous running or
batch processing. Examples of continuous running would be refineries or
coal-fired power stations where starting and stopping are very expensive.
Batch processing is frequently found within the food industry (e.g.
bread baking), in the pharmaceutical industry or iron foundries. With batch
processing, maintenance can generally be performed between batches.
Normal maintenance must still be carried out, however, to ensure that the
equipment is functional when required.
In the case of continuous processes, there is no opportunity to carry out
maintenance between batches and therefore the design of the plant must
consider all practical options to reduce the risk of one item disrupting the
entire production.
In a refinery, for example, it may be cost-effective to construct a section
with two pumps where only one is actually needed and one is spare. These
pumps are usually referred to as 'duty' and 'standby' respectively. This
option allows one pump to be maintained while the other one works.
Although this may be practical with certain smaller items, it would be pro-
hibitively expensive to design a plant with a spare high pressure, medium
pressure and low pressure turbine/compressor configuration on the off
chance that one might break down during operation. Hence, risk and cost are
major factors in design criteria with regard to maintenance considerations.
Standardization of equipment is another essential, enabling an owner to
keep only one replacement for each type of unit rather than one for each
item of plant, effecting savings in revenue and storage costs.
1 Operational maintenance
11.1.3 Shutdowns

Again there are several alternative names given for shutdowns. Common
names include shutdown, outage, overhaul, turnaround, stop or other epi-
thets. In this case we will consider all to mean the same, although some
organizations and indeed individuals have different meanings for each.
Some consider a shutdown to be only when the plant is stopped finally
ready for dismantling, while others consider a shutdown to be when the
plant stops unexpectedly. It again depends very much upon the individual.
Planned shutdowns are necessary where maintenance work cannot be
done as routine maintenance while the plant is running. Examples of this
are furnaces or boilers in power stations and distillation or fractionation
towers in refineries. In many cases shutdowns are not required by the
owner or even as a requirement of the process, but are actually to conform
with statute. There are different laws governing various sectors of industry,
but generally these laws have evolved to ensure that the operators and/or
the public are safeguarded from failure of any equipment and subsequent
leakages or explosions. One of the main operations carried out during shut-
downs is therefore mandatory inspection to comply with these laws.
Many processes cause fouling of equipment and this must be cleaned
regardless of legal requirements. Another common reason for shutdowns is
to incorporate improvements in process or debottlenecking of plant. As the
strength of a chain is dependent on its weakest link, so the throughput of a
plant is governed by the most constrained item of equipment. This is
known as the bottleneck. Debottlenecking is the removal or reduction of
these constraints (this cannot be repeated ad injnitum as the plant is only
designed to a certain capacity and continual upgrading becomes less cost-
effective).
The timing of a shutdown is normally governed by statute and market
forces. The law may possibly be stretched by formally applying for a delay,
but market forces may not. It is usual to plan well in advance when the next
shutdown will take place. All jobs which cannot be completed with the
plant running will then be listed as possible jobs for inclusion in the shut-
down works. Work on the shutdown will be limited as far as possible, to
minimize loss of production and profit. The shortest shutdown period is the
optimum target.

11.2 PLANNING

11.2.1 Scheduled routine maintenance

Scheduled routine maintenance can be related to the regular servicing of a

car. It is the same concept in any process plant; the components may be dif-
ferent, but the principle remains the same. Pumps may require new seals,
valves require new packing or seats, or other consumable items may need
replacing. This work can often be carried out either while the plant is run-
 Planning I
ning, or during a plant shutdown. In each case, it is vital that the mainte-
nance is properly planned.
In order to carry out certain maintenance while the plant is running,
there may have to be a pre-installed back-up component, for example, a
secondary standby pump which can be run while the main pump is disman-
tled. This work must be carefully planned to ensure that maintenance is
carried out before the components reach such a state that the equipment is
damaged or fails completely. The planners must devise a schedule, calcu-
lating the optimum running time of each component which requires to be
serviced, and distributing the tasks to avoid peaks and troughs in workload.
The means of planning is normally to ascertain the amount of work in
man-hours to help determine the minimum number of personnel required
to keep the plant functional. It is no use producing a schedule which
requires 140 men every third week of the year and only 15 men in the inter-
vening weeks. This would be an exceptionally expensive way to employ
labour, whether it is in house or supplied via a contractor.
In the event of a scheduled shutdown, even more emphasis is required in
planning. Many plants either feed, or are fed by, other plants, and these
other plants must be considered when deciding the date and duration of a
shutdown. To give an example, oil installations in the North Sea are contin-
uously producing oil and gas. The oil may be constantly required for
refining and is the sole feedstock for a refinery. The gas produced at the
same time may be separated and piped to an ethylene plant which extracts
the ethylene and sends it to a polyethylene plant which makes polythene
beads, which are in turn shipped to manufacturers to make gas and water
pipes or even polythene bags for supermarkets. If it is decided to shut
down the ethylene plant, it must be decided what happens to the vast quan-
tities of gas still being produced from the North Sea, how to feed the
polyethylene plant and how to maintain production of pipes. An obvious
answer would be to have large storage facilities for each stage, but this is
an uneconomic solution given the low prices, the competition for each
product, and the immense storage areas which would be required.
Planners must therefore liaise very closely with the 'business' units of
each plant. These units look after the owner's commercial interests, such as
deciding from where the feedstock and back-up supplies may be bought,
and what their marketing commitments are for their own products. The
whole chain must be consulted before a date can be arranged. Usually the
business units dictate to the planners when each unit can be shut down.
The next consideration is the duration of the shutdown. Again, this is
frequently set by the business units. They may be able to buy feedstock at
low prices for a certain period from alternative sources, or they may be
given a period of dispensation during which their customers will find alter-
native suppliers. Contract commitments and market forces are usually
firmly set regarding these periods. It is therefore vital that all work on a
shutdown, or the portion of work which can only be carried out during a
shutdown, is planned to be carried out within the given time.
The work required, such as to vessel internals, can usually be assessed
based on historical information, but some rearrangements to the pro-
11 Operational maintenance
gramme may be necessary should the extent of work found, on opening up,
to be more or less than anticipated.
To keep the shutdown period to a minimum each task must be reviewed
and consideration given to methods of working which will maximize the pre-
liminary work, prefabrication and the like which can be undertaken before
the plant is shut down. Using alternative methods of work which reduce the
workload in the shutdown period may increase the total cost, and this must
be balanced against the reduced time that the plant is non-productive.
The planners, therefore, have to look at every task to be carried out and
calculate, using man-hour norms, how long each task will take. They must
assess how many men can work simultaneously on each task, thereby
working out the duration of those tasks. Many plants are very complex and
congested and it is not always possible to use the theoretical optimum man-
ning levels for reasons of safe working and accessibility. There are only so
many men that can be used efficiently on each task.
The planners must look at all the tasks, the number of men who can work
on each, the duration of each, and how many tasks can run simultaneously.
Certain tasks depend on the previous one being started or completed before
work can start. The optimum will eventually be fixed by using various plan-
ning methods which it is not appropriate to describe here; suffice it to say
that planning is a science on its own. There will be one sequence of tasks
which cannot be reduced in duration and is dependent on other tasks finish-
ing. This is called the critical path. The critical path cannot be shortened or
reduced and this determines the length of the actual shutdown. The duration
given by the business group may be sufficient to carry out the work under
normal shift working or may even require seven day working, 24 hours per
day. Where the critical path cannot be fitted into the time scale, then negoti-
ations are required to realistically extend the time allowed.
With good planning and critical path analysis combined with the time
allowed by the business unit, the planners in conjunction with specialist
engineers can work out the total number of men required on the site and the
shift pattern they are required to work. This information is fundamental to
contractors for resourcing the task, and to the cost control personnel for
fixing budgets.

11.2.2 Scheduled particular maintenance

Scheduled particular maintenance can be described as a major element of
work which was not envisaged in the long-term running of a plant. The
work is essential and can be scheduled to be carried out alongside the rou-
tine maintenance while the plant is still running. Particular maintenance
always puts a strain on resources, and effective scheduling of the work to
fit in with other maintenance is critical. An example of particular mainte-
nance would be where moisture has penetrated 'between insulation
materials and pipework. Due to capillary action, this water will spread over
many hundreds of metres, causing corrosion to the pipework, which will be
imperceptible to the naked eye as the outer insulation will be unaffected
and the point of ingress may be concealed (underlagging corrosion). ,
 Planning I
The maintenance involved here will be the stripping of all insulation,
determining whether the pipework can be blasted and repainted or has to
be replaced, and the reinsulation of the piping (possibly to a higher specifi-
cation) to prevent recurrence. The stripping and reinsulation could be
performed while the plant is still running, provided the insulation is not
critical to the process.
The planning of this particular maintenance must take into account the
insulation contractors' available resources, the contractors' expected work-
load, whether a discrete contract should be awarded and work by other
contractors in the same area. Should an underestimation be made regarding
other insulation work being concurrently undertaken by the contractor,
then overruns of costs and time, and even loss of production, may occur.

11.2.3 Exceptional maintenance

It is often difficult to distinguish between exceptional maintenance and
particular maintenance and many owners use only one expression to cover
both categories. The overlap often makes the distinction impossible even
when both descriptions are used. Exceptional maintenance may be
described as maintenance which was not anticipated in the long-term run-
ning of the plant (the same as particular maintenance), but is not scheduled
and cannot be carried out over a long period. Exceptional maintenance may
be carried out solely to prevent breakdowns. A description of breakdown
maintenance is given in the following section.
An example of exceptional maintenance would be where the feedstock
of a plant changes, causing a pump to become clogged with sludge as the
new conditions are outside the pump's design criteria. The pump would
become very inefficient and may affect the output of the plant.
Planning the cleaning or replacement of this pump must not affect the
routine maintenance of the rest of the plant. Again, the availability and
skills of the contractor's resources must be considered, and also the con-
current maintenance requirements must be predicted.

11.2.4 Breakdown maintenance

As the name suggests, this is the maintenance required when an item of
equipment fails. If the equipment has a standby, then production will not be
affected and the repair time is not so critical; but if there is no standby the
plant will cease production. The planning of this work not only involves
the repair and the possible restart of the plant, but also the prioritizing and
rescheduling of all other work which is deferred due to the critical nature
of the breakdown.

11.2.5 Constraints
Process plants are generally very congested with pipework, cabling and
equipment. The efficiency with which work can be carried out is very
much reduced in comparison with the construction of a new plant. In addi-
1 242 1 I Operational maintenance I
tion, on some plants, the nature of the chemicals and gases contained in the
process are extremely hazardous to health, and exposure to them is only
permitted for a limited period even with protective clothing and breathing
apparatus.
The nature of work on live plants, such as working within vessels and
towers which are very cramped, and the requirement to have another
person standing by outside for safety reasons, and for working in protective
suits with breathing apparatus, are all components of very inefficient work-
ing. Other constraints include evacuation of the area prior to radiography
of welds, restrictions on flame cutting of pipework or steel, the use of non-
sparking tools and welding only in appointed safe areas, all of which must
be evaluated when planning the work.
The above situations, to varying degrees, are all present in process
plants and it is the planner's job to calculate how each situation affects the
man-hour norm and productivity. Each plant or part of a plant will have a
different factor to apply to norms to develop an accurate overall plan. An
accurate estimate of price is extremely difficult.

11.2.6 Coordination
As with a new project, a programme must be developed for all the known
maintenance work. Should a breakdown occur, or exceptional maintenance
be required, this programme may have to be temporarily abandoned for the
more critical work to be performed. This often requires the involvement of
more than one contractor. For one mechanical job to be executed there is
frequently a requirement for scaffolders, insulators, electrical contractors,
inspectors, painters and non-destructive testers. The operation of these
contractors must be strictly coordinated to minimize the time taken by each
and the interference with others. Even when a job is critical, the time taken
by the planner to produce a programme is more than saved by the increased
efficiency of the coordinated working.
The provision of materials, spares and components all must be planned,
pre-ordered and expedited to ensure the work is not delayed.
All contracts for maintenance work should address the amount of coor-
dination required between contractors and with the owner and should make
allowance for unforeseen incidents which necessitate flexible working.

11.3 ESTIMATING AND BUDGETING

Estimating generally is covered elsewhere, and this chapter aims only to

refer to estimating and budgeting particular to maintenance.

11.3.1 Estimate
The estimate is a prediction of the final cost of work. In its preparation it
requires a blend of experience, historical data and a forecast of commercial
conditions applied to a technical understanding of the work.
 Estimating and budgeting I pi
The accuracy of the estimate will depend upon the level of technical
definition, the quality of the estimating data and the assessment of the risks
inherent in the maintenance work including realistic allowances for
unknowns.

11.3.2 Sources of cost information

Historical data

Records of past maintenance work and purchases usually contain extensive

and useful cost information. If such information is systematically analysed,
recorded and filed together within a suitable retrieval system, this forms a
good basis for costing future work.
When utilizing historical data as a basis of an estimate, it is important to
consider the following points, both in relation to the current project and to
the project from which the historical data were extracted:
procurement strategy;
reliability of information;
productivity factor;
similarity of the planned work (local conditions and time scale);
local conditions;
time scale;
condition of the plant.

Unit costs/norms databases

Estimating data for operational maintenance has generally been difficult,

with each owner employing differing methods of measurement, forms of
contract and specifications. Unlike the building industry there is little
published information available with regard to pricing. However, pub-
lished labour norms exist for the majority of disciplines in the
construction of process plants, and these may be adapted for use for
maintenance work.
The major publications are produced by:
Page and Nation;
Oil and Chemical Plant Constructors Association (OCPCA).
When using such information it is important to consider all items included
under 'historical data' and the following:
the costs/norms should be for maintenance work and not new con-
struction;
the amount of work, e.g. a small quantity of work will be more
'costly' per unit than a large quantity of work.
The above norms are generally factorized in accordance with the working
environment and labour productivity.
1 11 Operational maintenance

11.3.3 Management costs

On new projects the management is frequently dedicated to the work and

thus all costs are charged to the project. With maintenance there may not be
any staff dedicated to one particular area or cost centre. When estimating
the overall costs of maintenance it is necessary to include the costs of man-
agement in the correct cost centres, or their actual costs may cause cost
overruns when finally allocated.
Owners do not always apportion their own managerslstaff costs to main-
tenance, as these are recognized as an overhead cost to the business. In the
case where owner's staff are dedicated to the shutdown, other personnel
are often contracted in to fill their normal roles. The costs of these con-
tracted personnel must be included in the overall shutdown estimate
although they do not appear to be a direct cost. Similarly, and more obvi-
ously, if a managing contractor is appointed, the costs must be allocated to
the job being managed.

11.3.4 Numbers of contractors

The number of contractors employed on routine maintenance, or a shut-
down, has a direct effect on the costs thereof. For each contractor there is a
level of management within the costs. If several contracts can be added
together as one large contract, there is only a single management compo-
nent to be included, albeit larger than each individual one, but smaller than
the sum. Conversely, if the contract becomes too large, the required con-
tractor's management resources may necessitate the use of a large
multi-functional contractor with the attendant large overheads and this
could be inappropriate for the types and amount of work required.
The use of many contractors involves greater coordination by the owner
to prevent disruption.
These considerations must be taken into account when preparing main-
tenance estimates, budgets and contract philosophy.

11.3.5 Reliability of costs

Due to the various factors and working conditions affecting maintenance,
any historical costs or norms must be carefully evaluated to ensure that
they are appropriate. Simply taking a norm for replacing seals in a pump
would be incorrect if the man-hour norm was for a pump in lubricating oil
service and the same man-hours were being applied to work on a pump in
unfiltered crude oil service. Furthermore, all prices must be checked to
determine the build-up of that cost.
Management costs may have been excluded from individual equipment
costs on previous jobs but are to be included per item of equipment in the
estimate. It is also important to ensure that the prices and costs in any his-
torical data are actual costs expended and not only forecast costs which
were actually overrun. Prices of spares and replacements should be
checked with the manufacturer to ensure that large price changes have not
 - -- -
- - - - --

Contracting strategies ( 1 245 1

taken place since the previous expenditure. The existence of spares price
agreements with manufacturers should also be investigated.

11.3.6 Category o f maintenance

For various reasons, many owners wish to know in what category of main-
tenance costs are being expended. Estimates will have to be divided into
each of these categories per item of work. This categorization is in addition
to the cost centres.
Several of the more common categories include:
reliability: maintenance is required because the item of equipment is
unreliable in operation;
statutory: equipment must be opened up and inspected in accordance
with statutory requirements, e.g. pressure vessels;
improvement: the equipment requires modification to improve the
product or process;
inspection: inspection department have requested that the equipment
is opened to check corrosion, erosion, etc., usually as a result of prob-
lems encountered in a similar environment elsewhere;
safety: the equipment requires inspection or modification if there is a
possibility of fracture, leakage, etc;
performance: the equipment requires repair or modification to
improve its performance or output;
environment: the equipment requires some work to reduce pollutants
being introduced to the environment.
Some of the above will make the plant more efficient and will pay for
themselves in time, while others will have no financial benefit and must be
written off as a direct loss but will have indirect benefits, e.g. safety, envi-
ronmental, etc.

11.4 CONTRACTING STRATEGIES

11.4.1 Introduction

One of the stages in engaging a contractor to undertake maintenance work is

the preparation of the tender documents. It is at this stage that the apparently
straightforward matter of choosing the type of contract can influence the eco-
nomic success of the project. A contract strategy must be developed which
will reflect the type and amount of work, the complexity and reliability of the
plant and the time available for procurement and performance of the work.

11.4.2 Facilities management

Facilities management is a method of maintenance where all the responsibil-
ity for the required availability of the plant is outsourced to a contractor.
Before tendering the contractor is given the specification of the plant, any
6
4
2
11 Operational maintenance

available historical data of the previous maintenance and the operating

requirements. The contractor then submits a price for maintaining the plant
to a certain standard for a certain period. Payment terms may be lump sum or
resource based. This type of contract is rarely used on larger process plants,
but is becoming more common on manufacturing and production-line plants.

10.4.3 Routine maintenance

By its very nature, routine maintenance work will cover planned and
unplanned activities, work which is both quantifiable and unquantifiable
and work which may have to be undertaken outside normal working hours.
In all cases the principal requirements of any contract should be 'flexibil-
ity'. Due to the unpredictability of breakdowns, even with the best
planning, peaks and troughs in workloads are certain to occur and any con-
tracting strategy should address and allow for these variations.

11.4.4 Shutdowns
To prevent unnecessary loss of production it is essential that shutdown
time is kept to a minimum with as much preparatory work as possible
being performed before the plant stoppage. Any shutdown contract should
be flexible and require the contractor to supply additional resources for any
extra work arising as vessels are opened and inspected. The contractor
would still be required to finish the work without an extension of time.

Shutdowns are either those planned for maintenance or the unplanned stop-
page of plant resulting from breakdown.
Shutdowns resulting from planned activities can be accommodated into
a form of contract where control can be applied through a schedule of rates
andlor reimbursable costs. Lump sum contracts are rarely successful due to
the probability of emergent work on opening equipment. Unplanned shut-
downs may require a totally flexible approach where a reimbursable
contract may be the only option.

Term contractors
Existing term contractors can be used for work on shutdowns. However,
there may be a danger of duplication of resources, i.e. payment by man-
hours on one contract while the same is being paid on a schedule of rates
elsewhere. In addition, term contractors may not have the resources or
skills to carry out shutdown work.

Partnering
Reference should be made to partnering as described elsewhere in this
book. This approach is not recommended for shutdowns due to their rela-
 Control of costs 1
tive short-term nature and the long-term requirements of partnering, unless
the shutdown forms part of a larger maintenance contract.

In-house
An in-house maintenance department will rarely have the capacity to
handle the whole shutdown in the time required or it will be executed at the
expense of other maintenance. It is more usual that in-house maintenance
handles discrete areas of the shutdown where specialist knowledge is
required, e.g. instrumentation, turbines/compressors.

Management contractor
The services of a management contractor are often incorporated into the
management of the shutdown. The appointment should be as early as pos-
sible to enable proper planning and coordination of the work. The
management contractor provides the main management team and can also
be the executing contractor in some cases.

11.4.5 Methods of payment

Generally the payment for maintenance or shutdown contracts falls within
one of the following three main categories:
reimbursable (basic cost plus management fee);
lump sum;
schedule of rates.
There are many derivatives of these payment methods, and contracts can
contain more than one category. Reference should be made to Chapter 7 on
contract conditions for more detail of these contract types.

I 11.4.6 Disaster recovery

This is the approach and the activities required to bring a shutdown or
maintenance work, either back on programme or within budget or both.
The principal requirements will be to identify the problem(s), prioritize
the schedule, allocate resources, put in place a definitive reporting and mon-
itoring system and continually review progress against critical activities.
Every contract placed for shutdowns or routine maintenance should
contain provisions to allow for this corrective action without determining
the contract.

I 11.5 CONTROL OF COSTS

11.5.1 Introduction

The fundamentals of cost control on maintenance projects are:

1 Operational maintenance
cost monitoring: a procedure capable of providing reliable informa-
tion in due time;
cost control: the decision making in response to the information pro-
vided by the cost monitoring procedure.

Cost information is required for a maintenance project on a continuous

basis:
daily and/or
weekly and/or
monthly.
Without this information, management has lost a major tool.
The main components of cost control are:
good estimating procedure;
effective cost code or cost centre system;
workable variation system;
efficient 'actual cost' reporting system;
practical and effective procedure for predicting trends and final costs.
It is the last component that reveals where things are going wrong. Without
this component the system merely monitors. To get to this fifth stage one
must progress through the first four stages and then apply judgements.
Where necessary, decisions and changes are made to correct any problems
to bring the job back on to time and budget.

11.5.2 Work orders

On term maintenance contracts and occasionally on shutdown contracts there
is no definitive scope of work contained within the contract documents. The
contractor is required to perform work as and when instructed by the engineer.
To control costs on these types of contract, there has to be a written
instruction to the contractor which clearly describes the work, gives the
starting date and time, identifies the method of reimbursement and to
where the costs must be allocated. This information is necessary for bud-
getary control on particular items of equipment, processes or geographical
areas of the plant, depending on the cost reporting requirements. For his-
torical purposes it is also essential that the exact workscope, costs and
details are recorded, so that future estimates will be accurate.
The most efficient method of instructing the contractor is by a work
order system. There are several names used for a work order, such as site
instruction, contractor's instruction, authority to perform work, etc.
The responsibility for the raising and issuing of work orders is that of
the engineer/supe~isorresponsible for the work.

11.5.3 Variations
The control estimate should contain a contingency sum which will include
for some emergent work which is likely to be identified on opening and
 Control of costs I
inspecting the equipment. In the maintenance sector, however, unforeseen
items of work and emergency repairs frequently occur. As this work is not
within the predicted scope there may be no provision for it in the budget.
The project manager must decide if the cost of these scope changes can
be contained in the contingency sum. If so, funds must be transferred out
of the contingency to the relevant cost centre.
If the contingency sum is insufficient to accommodate the scope
changes, the project manager must either apply for a supplementary sanc-
tion or show a cost overrun. It is essential for a change procedure to be
implemented in order to list and record any variations which may occur. To
control the maintenance costs, all changes are recorded and their effects
properly evaluated.
The programme and budget can then be updated as the changes are
authorized. Contractors naturally base great importance on recognizing
changes which will affect cost and programme, and will cause interface
problems with other disciplines.
Variations can often result in disruption of the contractor's work with
consequent potential for claims for additional costs and delays.

11.5.4 Measurement
Measurement is necessary to determine the true work scope against which
costs are expended on all types of contract except lump sum. There is a
school of thought, however, which advocates measurement of resources
used and work performed on lump sum work to determine value for money
and to assist in the accuracy of future estimates. But contractors are reluc-
tant to expend effort in preparing these figures. Where these figures are
required, it should be stated as an obligation of the contractor in the tender
documents.
Measurement of maintenance work generally must be done as soon as
possible as, unlike new construction projects, the work is rarely shown on
drawings and many of the materials are reused rather than new. It thus
becomes difficult to identify work in retrospect. Similarly, if work is being
carried out on a reimbursable basis, it is necessary to monitor and report
resources per item, and this cannot always be done in retrospect if records
are incomplete. Some of the mechanical or specialized work may be per-
formed inside vessels or towers, and it is usually beneficial to close up this
equipment as soon as the work is complete, which makes subsequent mea-
surement impossible.
Unless measurement is accurately performed and recorded the reliabil-
ity of cost information is impaired. This in turn reduces the accuracy of the
cost reports and future estimates.

11.5.5 Approval of work

Payment of any item of work is based on the work being accepted by the
owner. During maintenance work, acceptance can sometimes become a
grey area. If a contractor bids a lump sum for opening a vessel and clean-
1 Operational maintenance

ing for inspection, the degree of cleanliness must be specified or a dis-

agreement could arise. The contractor will wish additional payment if he is
asked to clean further, while inspection personnel will feel that the cleanli-
ness they require is covered within the original lump sum.
On reimbursable contracts, attention must be paid to rework in instances
where the original work is rejected. If a contractor fits bolts of the wrong
material and then has to refit the correct bolts, the time for removing and
refitting should not be payable, unless due to the owner's error.

11.5.6 Star rates versus dayworks

Contractors may tender very competitive rates in the schedule of rates in
order to win work on a long-term maintenance contract. To minimize his
risk, the contractor may then request the use of reimbursable rates on vari-
ations rather than the unit rates. Conversely the owner may have failed to
define adequately some elements of the work, but will nevertheless
endeavour to apply the unit rates in order to minimize his own risk.
Where an estimate is based on prevailing unit rates, cost control could
suffer greatly should most of the work be paid on a reimbursable basis. For
this reason it is essential that a lot of effort is expended in the composition
of the schedule of rates to ensure that the items are comprehensive and
accurately describe the type of work to be performed.

11.5.7 Disruption of contractor's work and potential for claims

Due to the changeable character of maintenance, uninterrupted work is not
always possible if other breakdowns occur, either in the vicinity of the
work, or requiring the use of the contractor's resources elsewhere.
Disruption on a live plant could be caused by the presence of hazardous
substances, toxic gases or other safety restraints. All these interruptions
mean extra costs to the contractor which he will pass on to the owner,
either in the form of extra work or as a claim for extra costs and delays.
Where the delays exceed the expectations included in the estimate, there
could be a requirement for contract variations to be raised, although no
extra work or changes to scope may have occurred. One of the difficulties
in accurately forecasting final costs is assessing the likelihood of contrac-
tors submitting claims for such delays and disruptions at the end of the job,
and the settlement value of these claims. Owner's representatives should
carefully monitor all delays and disruptions to help assess and agree any
such subsequent claims for additional costs.

11.5.8 Self-policing by contractor

Where practicable, some responsibility should be placed on the contractor
for assisting in the cost control of the maintenance. Obligations and incen-
tives should be included in the contract document to this effect. The greatest
incentive for this control is the gain sharing approach where both contractor
and owner benefit from more efficient working by the contractor.
I Contracts/financialaudits I
11.5.9 Predicting trends and final costs

Predicting trends and final costs is a very important activity, as control

depends upon the prediction of final costs for each item in the control esti-
mate. Every judgement and forecast should be carefully considered by the
cost engineer in consultation with the project planner.

11.6 CONTRACTSIFINANCIAL AUDITS

On completion of a maintenance job which is liable to be repeated some-

time in the future, there is benefit in preparing a post contract review which
should cover the successes and failures of the project.

11.6.1 Contract documents

A complete review of the suitability of all parts of these documents should
be undertaken. The final work scope should be compared with that
included in the documents and a true assessment should be made as to what
was omitted from the original which should have been anticipated. For his-
torical purposes there cannot be too much detail in the final work scope.
Any contractual problem which arose during the life of the contract
should be noted and preventive measures included in future contracts. If a
new contract is not needed for some time, then notes should be attached to
the finished contract for reference. Description of priced items should be
amended where disputes arose between contractor and owner.

11.6.2 Invoices and payment

The timely submission of invoices and their payment should be audited to
ensure that sufficient back-up information was supplied and that enough
time was allowed for payment. The apparent late payment of invoices can
be the cause of the greatest discord between owner and contractor,
although some blame can generally be placed on each party. The owner
will normally reject invoices if the following problems are experienced:
the invoice does not match the certified valuation;
the invoice does not contain the correct contractual information, e.g.
contract title, contract number, etc., or
the amount is not correctly allocated to cost centres.

11.6.3 Price of non-conformance

In all aspects of maintenance, the price of non-conformance is consider-
able to the contractor and to the owner both in direct and indirect costs.
Non-conformance in quality during maintenance has a direct cost to the
contractor in rectification costs and usually some consequential costs to
the owner in delays, reinspection, etc. Non-conformance commercially,
1 252 1 I Operational maintenance I
e.g. incorrect invoices, late payment of invoices, overdue final accounts
and the like, create cash flow problems for the contractor and subcontrac-
tors leading to finance charges and loss of accrued interest.
Some of the other items on non-conformance include:
late design information;
design errors;
emergencies (gas alarms, fires, etc.);
late access to items of equipment;
late delivery of materials;
equipment in worse condition than anticipated;
drawings of existing plant not up to date;
inspection personnel not available when required.
All of these can cause serious delays which may result in disruption to the
contractor's and the owner's programmes and necessitate disaster recovery
action.
In an effort to reduce non-conformance to a minimum, techniques such
as total quality management are utilized by owners and contractors to high-
light, record and rectify areas requiring rework and modification.
Where non-conformance has been identified on a job, the cost, where
possible, should be separated. Future contracts should address the problem
if the cause lay with the contractor, and should include financial dis-
incentives. The owner's organization should review its procedures if the
problem arose in house.
The actual requirements should also be assessed as conformance may
not be realistically achievable.

11.6.4 Definition of work performed

As stated earlier within this chapter, the detailed definition of work carried out
is the single most important feature required for historical data. Many differ-
ent jobs may be carried out on a single item of equipment and unless the exact
details of each job and the number of jobs is recorded, incorrect assumptions
as to similarity of future work compared with previous work will be made.
The accuracy of estimates will be directly affected by these assumptions.

11.6.5 Final accounts

Final accounts represent the financial detail to be associated with the work-
scope details described above. Precise costs must be attributed to job
details to ensure cost reporting and future estimate accuracy.
The final account should, where possible, be structured in such a way as
to enable an analysis for statistical purposes.

11.6.6 Historical data

In many cases, cost information gets buried with the maintenance records,
discouraging any search for cost data on a particular piece of equipment. It
is therefore important to store all cost data and maintain a comprehensive
 Contractslfinancial audits I
database of historic costs, with the exact details of work performed, spares
fitted, etc.
In maintenance contracts in particular, the working environment can
change considerably due to the following:
permit conditions;
access;
live plant conditions;
nature of product;
materials used;
location.
For the above reasons historical information must be recorded, analysed,
archived and utilized, giving due cognizance to all factors affecting the
cost and more importantly the man-hour duration of each event.
Provided there is a standard format used for the archiving of job details,
each job recorded will add to the overall accuracy of the data. The archiving
format must be usable and data easily extracted for manipulation/factorization.

11.6.7 Update unit costs/norms database

Unit costs/norms for measured work are usually built up and maintained by
each owner to cover all work over many years. It is essential that the col-
lected data are constantly reviewed and updated in line with changes in
working practices, use of plant, inflation, productivity, safety regulations
and the like. Unit costs can be updated primarily as follows:
use of published indices, e.g. the Association of Cost Engineers;
review of rates from tenders received;
review of final accounts.
The updating of man-hour norms is more difficult, and only by recording
the durations of each construction task can these norms be revised.
Updating of statistical norms such as overall man-hourslmetre of
pipework, man-hours per tonne of steelwork and the like can be carried out
fairly easily by analysing the final account for every contract awarded.
Nowadays, many owners are submitting information to organizations
which compare costs, on a confidential basis, with their competitors and
publish statistical charts and analyses.

11.6.8 Value for money

With the ever increasing drive to reduce costs, owners have been striving
to get better value for money. Design and materials specifications are con-
stantly being reviewed to ensure that costs match, but do not necessarily
greatly exceed, engineering requirements.
Value management has now become a recognized activity, with more
and more owners utilizing the services of value engineers, who assess the
standards required and the work methods used. The attitude of 'We've
always done it that way', is being questioned more now than ever.
Preventive maintenance may become a thing of the past.
Health and
Safety and the
Environment
I Health, safety and the environment
12.1 INTRODUCTION

There are currently between 50 and 60 Acts of Parliament and about 400
sets of regulations that are relevant to health and safety at work.
This chapter provides guidelines as to what safety and environmental
legislation is applicable to the construction industry and gives guidance on
what the responsibilities and entitlements are for all parties of a project.
The meeting of both safety and environmental legislation inevitably
adds to the administration and construction costs of a project. These addi-
tional costs should be assessed and included in the project estimate.

12.2 HISTORICAL SUMMARY OF LEGISLATION

Legislation comprises Acts of Parliament and legislation made by subordi-

nate bodies which have been given authority by Act of Parliament.
For more than a century health and safety legislation for persons work-
ing in the UK had developed a piece at a time in response to disasters and
the high fatality rate in the construction industry, each one often covering a
particular class of person and not in a consistent manner. Separate legisla-
tion with variations in details and in methods of enforcement would apply
to a specific requirement when undertaken in a factory, as opposed to an
office, a mine or a quarry.
Between 1875 and 1937 there were attempts to unify the increasing but
fragmented legislation, culminating in the Factories Act 1937. However,
regulations made under previous legislation continued in force causing
confusion and misunderstanding.
The Factories Act 1961 repealed the shortcomings of its 1937 predeces-
sor which was recognized as having a tendency to look to the protection of
plant and equipment as a way of preventing injuries to workers. The Act of
1961 put more emphasis on the safety of visitors, contractors, neighbours
and other third parties.
By 1970 many organizations were questioning whether the existing leg-
islation was either sufficient or effective in providing proper protection for
people at work. The pressure on government as a consequence resulted in
the setting up of a review committee under the chairmanship of Lord
Robens. After studying the problem in depth the committee reported in
1972, making many wide-ranging recommendations.
The essence of the Robens Report recommendations was to:

replace the mass of existing safety legislation with one Act applying
generally to all persons at work;
replace the mass of detail with a few simple and easily assimilated
precepts of general application;
change methods of enforcement so that prosecution was not always
the first resort;
ensure that occupational safety should also protect visitors and the
public;
 Health and Safety at Work Act I
place more emphasis on safe systems of work rather than technical
standards;
actively involve workers in the procedures for accident prevention at
their place of work.

The main recommendations of the Robens Committee were accepted by

Parliament and were incorporated in the Health and Safety at Work Act
1974, and it is this Act which is the principal piece of legislation governing
health and safety at work and maintenance of safety records today.

12.3 THE HEALTH AND SAFETY AT WORK ACT 1974

Most of the Health and Safety at Work Act 1974 came into force on 1 April
1975. It created a new approach to safety law by saying what should be done
in the best interests of safety for people at work, setting goals to be met
rather than being prescriptive, as previous legislation. The Act took up the
theme of the Robens Report with a view to 'making safety everybody's busi-
ness' and extended the responsibilities to visitors to the workplace, including
contractors, subcontractors and any other person who might have cause to be
in or near the workplace, including the safety of the general public.
Many people still think about the effects of accidents in terms of insur-
ance and how much compensation might become due. The Health and
Safety at Work Act is mainly concerned with those who create the risk con-
trolling the risks. Those who do not are liable under the Act for
prosecution, the penalties for not complying ranging from heavy fines to
prison sentences.
The Act created a body - The Health and Safety Commission (HSC) -
to become responsible for the development of health and safety legislation
and its application at policy level. It also created the Health and Safety
Executive (HSE) to be responsible for the implementation and administra-
tion of most matters concerning safety and the law.

12.3.1 Scope o f the Act

The Health and Safety at Work Act is of overriding importance in almost all
work situations today and its provisions should be considered before going
on to the specific requirements of any other Acts and Regulations which
may be applicable. The Act provides such wide protection that it not only
requires employers to have regard to the health and safety of their own
workforce but also requires protection for members of the general public
who may be endangered in some way by the activities of the employer.

12.3.2 Duties
The Health and Safety at Work Act creates duties and responsibilities for
everyone at work to set up and maintain a safe working environment. It
specifies the responsibilities of employers and employees.
11 Health, safety and the environment I
The Act also requires employers and self-employed persons to set up
and maintain a safe environment in respect of other people, such as con-
tractors, subcontractors, visitors to premises and the general public.
Compliance with the law and the creation of a safe working environ-
ment must begin with the development, by the employer, of systems of
work that ensure safety for everybody and not just those they employ.
Managers and supervisors must understand and accept their roles and
responsibilities for health and safety at work. Some are mentioned specifi-
cally in the Act and others in the duties that they have to carry out.
Every employee has a responsibility to cooperate with the employer in
the maintenance of a safe working environment.

The duty of every employer

'It shall be the duty of every employer to ensure, so far as is reasonably
practicable, the health, safety and welfare at work of all of his employees.'
This is a quote from section 2 of the Health and Safety at Work Act. It does
not make any technical requirements. It does not set any minimum stan-
dards of behaviour that can be measured. The setting of technical
requirements and measurable standards of behaviour has to rely on what has
happened in the past - what others have or have not done - and what can be
done.
The minimum standard required is to do what is reasonably practicable
to create and maintain a working environment that is safe in the light of
what has happened in the past, what is happening now - and what someone
at work is likely to do in the future.
To measure what is 'reasonably practicable' it is necessary to compare
the degree of risks against the sacrifice (whether in terms of money, time or
effort) to avert that risk. For example if the risk was insignificant in com-
parison to the 'sacrifice', then the duty holder will have proved that
compliance was not reasonably practicable.

The responsibilities of the employer

An employer must so far as is reasonably practicable:

provide and maintain plant and systems of work that are safe and
without risks to health;
have arrangements for ensuring safety and absence of risk to health in
connection with the use, handling, storage and transport of articles
and substances;
provide such information, instruction, training, and supervision as is
necessary to ensure the health and safety at work of employees;
maintain any place of work under the employer's control in a condi-
tion that is safe and without risks to health and the provision and
maintenance of means of access to and egress from it that are safe and
without such risks;
 Health and Safety at Work Act I1 1
259
provide and maintain a working environment for employees that is
safe, without risks to health and adequate as regards facilities and
arrangements for their welfare at work;
maintain records as required by health and safety legislation.

The duty of every employee

It is the duty of every employee:

to take reasonable care for the health and safety of him or herself or
others who may be affected by his or her acts or omissions at work;
to cooperate with their employer in all matters relating to health and
safety law and any duty or requirement that the employer may be
required to make under that law.
It is also an offence for any employee to intentionally or recklessly inter-
fere with or misuse anything provided in the interests of health, safety and
welfare that the law may require.

12.3.3 Enforcement
The enforcement of the Health and Safety at Work Act, together with all
other health and safety law, is carried out under the provisions of this main
Act. This means that methods of enforcement are the same all over the
country for all health and safety at work legislation.
The Health and Safety Executive are responsible for maintaining an
inspectorate, and across the country there is a force of health and safety
inspectors which consists of factory inspectors, agricultural inspectors,
mines inspectors, nuclear inspectors and quarries inspectors.

The health and safety inspector S powers and duties

The health and safety inspector:

may enter any premises at any reasonable time - or at any time (night
or day) if they suspect a dangerous situation;
can examine and investigate as necessary;
can measure, take photographs, take samples or take possession of
anything, if required for evidence;
can inspect books and other documents that are relevant;
can cause dangerous equipment to be rendered safe;
can question people and require them to make a signed declaration of
the truth of answers given;
can call upon police to assist to enter premises if necessary;
if there appears to be a contravention of safety law, may serve an
Improvement Notice requiring certain work to be completed within a
specified time. If it appears to be too dangerous to allow work to con-
I Health, safety and the environment

tinue may serve a Prohibition Notice stopping the operation until

remedial work is satisfactorily completed.

12.4 CONSTRUCTION (DESIGN AND MANAGEMENT)

REGULATIONS 1994 (CDM)

It was recognized that the UK accident rate in construction was very high,
resulting in more deaths than in any other industrial sector. As a conse-
quence the Construction Industry Advisory Committee (CONIAC) worked
together with the Health and Safety Executive (HSE) to develop proposals
for new Regulations in the late 1980s.
The European Union reviewed the situation regarding construction
safety across the member states and found it to be similar throughout. The
results of this research was the Temporary and Mobile Construction Sites
Directive adopted by the EC in June 1992. The Construction (Design and
Management) Regulations were introduced by the HSE to implement this
directive, the regulations coming into force on 3 1 March 1995.
The regulations supplement and update current UK legislation contained
in the Health and Safety at Work Act 1974 and various regulations made
under it. They apply to construction projects including demolition and
everyone associated with them: owners, designers, contractors and subcon-
tractors. The Regulations are about management of health and safety and
while they do not apply to every construction project or everyone all of the
time, most construction projects and the people working on such projects
will be affected.

12.4.1 Scope and purpose

The main thrust of existing legislation prior to these regulations was to
make individual employers responsible for the health and safety of their
employees at work. These regulations, on the other hand, proceed on the
basis that health and safety responsibilities in construction should be coor-
dinated and be shared among all the parties involved, be they owner,
designer, contractor or subcontractor.
The CDM regulations apply to construction work which is notifiable,
i.e. lasts for more than 30 days or will involve more than 500 person days
of work. CDM also applies to non-notifiable work which involves five
people or more on site at any one time.
However, CDM applies to any design work no matter how long the
work lasts and how many workers are involved on site. If the work
includes demolition, CDM applies, regardless of the length of time or
number of workers.

12.4.2 Duties
Five key parties (firms or individuals) have specific duties under the
Regulations:
 CDM I
1. the owner;
2. the planning supervisor;
3. the designer;
4. the principal contractor;
5. contractors and subcontractors.

Duties of the owner

The owner's key duties are, as far as is reasonably practicable, to:

select and appoint a competent planning supervisor, and principal
contractor;
be satisfied that the planning supervisor and principal contractor are
competent and have the ability to allocate adequate resources for
health and safety;
be satisfied that designers and contractors are also competent, and
will allocate adequate resources when making arrangements for them
to work on the project;
provide the planning supervisor with information relevant to health
and safety on the project;
ensure construction work does not start until the principal contractor
has prepared a satisfactory health and safety plan;
ensure the health and safety file is available for inspection after the
project is completed.

Duties of the planning supervisor

The planning supervisor has to coordinate the health and safety aspects of
project design and the initial planning to ensure that:
designers comply with their duties, in particular, the avoidance and
reduction of risk;
designers cooperate with each other for the purposes of health and
safety;
a health and safety plan is prepared before arrangements are made for
a principal contractor to be appointed;
advice is given to the owner, as required, on the competence of pro-
posed designers and contractors in health and safety matters, and as to
whether the resources allocated by each of them to the project are
adequate for health and safety purposes;
the project is notified to the Health and Safety Executive;
the health and safety file is prepared and delivered to the owner at the
end of the project.

Duties of the designer

The designer's key duties are, as far as is reasonably practicable, to:
11 Health, safety and the environment
1
x
alert owners to their duties;
consider during the development of designs the hazards and risks
which may arise to those constructing, operating and maintaining the
structure;
design to avoid risks to health and safety so far as is reasonably prac-
ticable;
reduce risks at source if avoidance is not possible;
consider measures which will protect all workers if neither avoidance
nor reduction to a safe level is possible;
ensure that the design includes adequate information on health and
safety;
pass this information on to the planning supervisor so that it can be
included in the health and safety plan and ensure that it is given on
drawings or in specifications, etc.;
cooperate with the planning supervisor and, where necessary, other
designers involved in the project.

Duties of the principal contractor

The principal contractor's key duties are to:

develop and implement the health and safety plan;
arrange for competent and adequately resourced contractors to carry
out the work where it is subcontracted;
ensure the coordination and cooperation of contractors and subcon-
tractors;
obtain from contractors the main findings of their risk assessments
and details of how they intend to carry out high risk operations;
ensure that contractors have information about risks on site;
ensure that workers on site have been given adequate training;
ensure that contractors and workers comply with any site rules which
may have been set out in the health and safety plan;
monitor health and safety performance;
ensure that all workers are properly informed and consulted;
display the notification of the project to the HSE;
pass information to the planning supervisor for the health and safety
file.

Duties of contractors and subcontractors

Contractors and subcontractors, including the self-employed actidg as
I
~
such, have duties to play their part in the successful management of health
and safety during construction work. The key duties are to:

provide information for the health and safety plan about risks to
health and safety arising from their work and the steps they will take
to control and manage the risks; I
 CDM 112631
manage their work so that they comply with rules in the health and
safety plan and directions from the principal contractor;
provide information for the health and safety file, and about injuries,
dangerous occurrences and ill health;
provide information to their employees.

The self-employed also have these duties when they act as subcontractors.

12.4.3 Health and safety documentation required under the

Regulations
Under the Regulations a health and safety plan is required which should
consist of the following.

Pre-tender health and safety plan

This document should be prepared in time so that it is available for con-
tractors tendering to cany out or manage the construction work. It is the
responsibility of the planning supervisor to ensure that the pre-tender plan
is prepared and that it includes the following information:
a general description of the work;
details of timings within the project;
details of risks to workers known or envisaged at that stage;
information required by the potential principal contractor to demon-
strate competence or adequacy of resources;
information for preparing a health and safety plan for the construction
phase and information for welfare provision.

Health and safetyplan for the construction phase

This plan developed by the principal contractor is the foundation on which
health and safety management of the construction work is based. It should
include:
arrangements for ensuring the health and safety of all who may be
affected by the construction work;
arrangements for the management of health and safety of construction
work and monitoring of compliance with health and safety law;
information about welfare arrangements.

Health and safetyJile

This is a record of information for the ownerlend user, which tells those
who might be responsible for the structure in future of the risks that have to
be managed during maintenance, repair or renovation.
The planning supervisor has to ensure that it is prepared as the project
progresses and it is given to the owner when the project is complete. The
11 Health. safety and the environment
4
6
2
owner has to make it available to those who will work on any future
design, building, maintenance, or demolition of the structure.

12.4.4 Enforcement
The primary responsibility for enforcing compliance lies with the Health
and Safety Executive. It has powers to issue improvement and prohibition
notices and in serious cases to bring criminal prosecutions. Currently
breaches by the owner, planning supervisor, designer, principal contractor
and subcontractors are punishable by a fine of up to £5000 in the magis-
trates' court or by an unlimited fine in the crown court.
Failure by the owner to ensure work does not start on site until the
health and safety plan is prepared, or secondly failure by the principal con-
tractor to keep unauthorized persons off the site, may result in a civil claim
for damages.

12.5 REFERENCES

In order to be aware of current legislation it is advisable to consult the reg-

ular issue of the Monthly Advisory Service on Codes of Practice and the
Changing Legal and Technical Requirements of Health and Safety at Work
entitled Health & Safety Monitor published by Monitor Press. This refer-
ence publication provides up-to-date information on all health and safety
issues, current legislation and reports of incidents and prosecutions.
The major Acts and Regulations pertinent to the construction industry
are listed in Appendix B.

12.6 MAINTENANCE OF SAFETY RECORDS ON SITE

Statutory records which have to be kept on construction sites are numerous

and varied and are required to meet a wide number of statutory instruments
including many of those detailed in Appendix B. The records, which
should be readily available for examination in site offices, can be split into
two main types, i.e. those relating to plant and equipment and those relat-
ing to people.
The main record keeping requirements together with cross-references
are detailed in Appendix C and although this list is not exhaustive it is
indicative of the degree of record keeping necessary.

12.7 STATUTORY APPROVALS FOR CAPITAL PROJECTS

12.7.1 Scope and purpose

In the planning, design, construction and commissioning of any new plant

a number of approvals must be obtained and certain notifications made
 Statutory approvals I
under various Acts and statutory instruments. Many of these approvals and
notifications are also necessary for modifications to or demolition of exist-
ing plants. These statutory requirements are administered by local
authorities, statutory bodies and government departments.
The purpose of this chapter is to outline the proper procedures to be
used by a project team in conjunction with the owner for obtaining the
statutory approvals associated with new projects in England, Wales and
Scotland. Changes in the legislation are frequently made and therefore the
contents of this chapter should be used as a guide only, it being the respon-
sibility of the project team to ensure that all the requirements of current
legislation are met.
In most cases projects relate to sites where the owner is the landlord.
Generally where one operating company is present on a site in the capacity
of a tenant of another business or company and when projects encroach on
land owned by third parties there will be additional consultation with the
appropriate land owner.
A full understanding of statutory approval requirements is necessary to
ensure:
,the business meets its legal obligations;
an appropriate allowance is made in the financial budget for meeting
statutory requirements;
planning aspects of projects are completed quickly and cost effec-
tively;
good relations with the statutory authorities are developed and main-
tained;
confidentiality of information disclosed to local authorities is pre-
served.

Exclusions

This chapter excludes the statutes and regulations that apply to:
projects in foreign countries and Northern Ireland;
statutory requirements which have to be met during plant operation
(except where these must be taken into account during design);
approvals in connection with specific mines and quarries legislation,
railways and road vehicles.

12.7.2 Responsibilities
The owner project team must ensure that the project meets obligations with
respect to the statutory requirements. Progress towards fulfilling these
requirements should be reviewed regularly. The project team is responsible
for ensuring that all statutory approvals are obtained for the project and
that local deviations are complied with.
1 Health, safe!y and the environment
12.7.3 References

Appendix D: example approvals and notifications to be considered for

all projects form;
Appendix D: example project record of actions form;
Appendix E: the Local Government (Access to Information) Act
1985;
Appendix F: environmental impact assessment (EIA).

12.7.4 Procedure
Preliminary action

In order to minimize costs of new projects, those undertaking negotiations

with the statutory authorities should not propose or accept conditions more
restrictive than are necessary to obtain the various approvals.Even if plan-
ning permission is not required the need for other statutory approvals shall
be assessed.
Infringements of statutory provisions frequently arise over post-applica-
tion additions or alterations to a new plant, or over modifications to an
existing plant or building. It should not be assumed that the original statu-
tory approval covers additions or modifications.
It is suggested that appropriate external advice on statutory require-
ments is sought for projects abroad, in connection with mines and quarries,
or railways or road vehicles or relating to housing or agricultural property.
For international projects it is often necessary to obtain specialist expert
advice.

Contacts with statutory authorities

During all contacts with local authorities, the provisions of the Local
Government (Access to Information) Act 1985 should be borne in mind, as
given in Appendix E.
At an appropriate stage in the life of a project the owner's project man-
ager, or equivalent, should ensure that a meeting is convened to define the
strategy for ensuring that all the approvals are obtained. Legal, safety and
environmental departments should be consulted for advice on timing, etc.,
of initial contacts.
Discussions should take place with all the relevant statutory authorities
in order to obtain their comments, advice and agreement in principle to the
project. This ensures that when the planning application is submitted,
delays are minimal when the planning authority sends out the application
to these same statutory bodies for their approval.
The relevant statutory authorities should be informally kept aware of
progress on the project up to the stage where their formal approval is
needed.
 Conclusion I 1 267 1
Applications for planning permission should be approved and signed by
the appropriate owner's nominee and should be supported by an environ-
mental impact outline information brief as outlined in Appendix F. Certain
types of projects also require an environmental impact assessment.
When considering major or potentially controversial planning applica-
tions, local authority planning departments commonly take the advice of
external consultants. When approached by such consultants, care should be
taken to ensure that:
the role of the consultant is clearly understood by all parties;
only such information as is relevant is released;
the status of any information given to or discussed with the consultant
in confidence is fully defined using Appendix E, The Local
Government (Access to Information) Act 1985.

Other interested parties

Local action committees may employ consultants to plead their case with
the local authority. Although it may be necessary to provide information
for these non-official bodies in order to expedite the application, the great-
est care should be exercised over its release and all of the project team
should be aware of and involved in this exercise.

Monitoring progress
The project manager should maintain records of all the statutory consents,
approvals and notifications that are applicable to the project and record dis-
cussions with the appropriate consultants and progress of the approvals
being sought. An example of how these records can be maintained is
shown in Appendix D.
The time scale involved in obtaining all the necessary statutory
approvals will vary considerably from project to project. If a project
involves operations outside the site boundary, such as cross-country
pipelines or diversion of rights of way, years rather than months may have
to be allowed.

12.8 CONCLUSION

As can be seen from the foregoing, health, safety and environmental issues
are complex and a lack of understanding can lead to serious consequences
for both the project and more importantly the people involved in the pro-
ject. It is therefore imperative that the project team identify all the
requirements of current legislation, make allowances both in the project
programme and financial budget for them and ensure that they are fully
implemented.
 Appendix A
Glossary of terms

A book of this size and complexity requires a chapter which enables the terms used
to be detailed and defined for easy recognition. This glossary of terms is presented
in alphabetical form for ease of use. It attempts to cover the majority of the terms
referred to in the document but reference is made to the following two publications
which cover a wider sphere of terminology and which have been used as a guide in
the preparation of this glossary of terms:
The Association of Cost Engineers Cost Engineering Terminology
British Standards Institute's Documentation on Projects, Planning and
Contracts
Account Primary grouping of costs established for administra-
tive and accounting purposes
Accountability Defined level or point of budget authority and control
responsibility
Account code Code used to identify an individual cost account, the code
may be alpha or numeric or a combination of the two
Accounts payable Value of goods and services received for which pay-
ment has not yet been made
Accounts receivable Value of goods and services executed for which pay-
ment has not yet been received
Accrual Costs incurred but not yet invoiced and recorded in the
accounts
Accrual basis System of accounting records based on cost incurred
and income earned
Accrued cost Total recorded cost plus accruals
Accrued income Total recorded income plus accruals
Accuracy factor Factor used in estimating to indicate the likely range of
accuracy of an estimate
Activity An operation or process consuming time
Activity-on-arrow A network in which the arrows symbolize the network
network diagram activities
Activity-on-node Network in which the nodes symbolize the network
network precedence activities
diagram
Advanced funding Provision of funds, to cover future payments for goods
or services purchased for and on behalf of an owner
AFC (1) Approved for construction; (2) anticipated final cost
AFD Approved for design
I Glossary of terms
AFE Authorization for expenditure
Ageing rate Predetermined assessment of depreciation expense or
capital cost relative to a period of time
Ancillaries Necessary auxiliary components, usually unspecified,
particularly of plant and equipment
Appropriation Authorized allocation of funds for specified future work
Appropriation Early cost estimate, usually by owner, prepared from
estimate preliminary but largely fixed design data to an accuracy
of -15% to +25%, for early budget purposes to establish
viability of proposed project and to secure necessary
funding approvals, also known as class 111, evaluation,
outline definition, sanction, study or scope estimate
Appropriation request Documented application for future project funding
requirements, prepared for management approval
Arrow A directed connecting line between two nodes in a net-
work
Assets Current value of property, investments, stock and cash

Backcharge Claim made against supplier, contractor or subcontrac-

tor for remedial work, loss or damage effected in
respect of goods or services
Ballpark estimate See Order of magnitude estimate
Bar chart A chart on which activities and their durations are rep-
resented by lines drawn to a time scale
Bar chart schedule Graphical representation of project activities or
resources drawn as horizontal lines against a common
time scale
Base cost A cost established as a basis for calculating escalation,
changes, provisions or other related variance
Base date A date established as a basis for calculating price varia-
tions, forward escalation, currency differentials or other
time-based cost data
Base estimate An estimate prepared against a defined scope of work
and established as a basis for evaluating subsequent
adjustments, modifications or changes
Base exchange rate A currency exchange rate used in preparation of a cost
estimate or budget and established as a basis for calcu-
lating subsequent actual currency differentials or
variances
Basic price Standard rate or value adjustable by discount, escala-
tion or variation to suit specific circumstances
Battery limits Line of demarcation defining the extent of project
scope, on-site facilities or contractual responsibility
Bid analysis Activity of analysing suppliers' quotations or contrac-
tors' tenders
Bid bond Sum provided by bidder as guarantee that bid will be
submitted, or that if accepted, bidder will proceed into
the contract
 Glossary of terms IW
Bill of materials List of material quantities estimated or measured from
drawings for estimating or procurement purposes
Bill of quantities List of construction quantities estimated or measured
from drawings for tender pricing and contract payment
purposes
Bill of quantities Contract awarded against a bill of quantities for which
contract payment is contract made in accordance with the unit
prices contained in the bill of quantities
Bond Sum of money, securities or a guarantee of a third party
to guarantee completion of the work and/or recover
sums payable or owed by the contractor under the terms
of contract
Bonus Incentive payment over and above agreed wage or con-
tractual reimbursement, usually relating to achievement
targets
Bonus incentivelbonus System agreed to increase output from work scheme
scheme force by promised payments in respect of identified and
tabulated targets for achievement
Bonuslpenalty clause Contractual incentive placed on supplier or contractor
to achieve certain completion targets for which a bonus
payment is earned or a financial penalty incurred
Bonuslpenalty contract Contract containing a bonuslpenalty clause
Book value Asset value as recorded in the books of a business
Budget (1) Authorized target for project achievement, or part
thereof, usually expressed in terms of quantities, man-
hours or costs; (2) a financial and/or quantitative
statement, prepared and approved prior to a defined
period of time, of the policy to be pursued during that
period for the purpose of attaining a given objective
Budget change Authorized change to previously established budget
Budget cost Authorized target costs for completion of the work
Budget estimate Semi-detailed estimate prepared for budget purposes
from preliminary but largely fixed design data to an
accuracy of -10% to +15%. Also known as class 11, pre-
liminary, sanction, scope or semidetailed estimate
Budgetary control The establishment of, and the continuous comparison of
actual with budgeted results, either to secure the objec-
tive of that policy individual or to provide a basis for its
revision
Building services Mechanical, electrical or other specialized service facil-
ities existing or to be installed within a building
Bulk factors Multipliers used to raise manufactured equipment costs
to erected plant or total installation costs, inclusive or
associated bulk materials and ancillaries
Bulk materials General term for any material commonly purchased in
bulk
Burden Overhead expenses distributed as an add-on cost to
direct cost
11 Glossary of terms
Cancellation charges Charges submitted by supplier or contractor in respect
of cancellation of purchase order or termination of con-
tract by owner or others
Capacity factor Term used in estimating in respect of the capacity ratio
between two similar plants
Capital Money invested or available for investment against
which earnings and dividends are assessed
Capital cost estimate Any cost estimate for a future fixed asset, including
design, supply and installation costs, but excluding any
finance or operating costs
Capital expenditure Expenditure attributable to the creation of a permanent
or fixed asset
Capital recovery Recovery of capital invested in a project over the life of
that project, including allowed depreciation
Cascade chart A bar chart on which the vertical order of activities is
such that each activity is dependent only on activities
higher on the list
Cash Moneys in hand or available for immediate use
Cash basis Method of recording cost and income data based on
actual cash payments and receipts
Cash call Projection and request for future cash requirements at
specific points in time
Cash flow Projected cash balance over a stated time period based
on the net flow of actual or anticipated cash payments
Change estimate Estimate prepared for evaluation- of a potential change
to the project
Change impact Effect of change on project cost and schedule
Change order Document authorizing execution of a defined project
change
Change of scope Any deviation from a previously established scope of
supply or scope of work
CIF Camage, insurance and freight
Claim Demand made for compensation or additional remuner-
ation to which one of the parties to the contract
considers he has a contractual right I
Class I estimate See Definitive estimate 1
Class I1 estimate See Budget estimate
Class 111estimate See Appropriation estimate
Class IV estimate See Order of magnitude estimate
Close-out report Final end-of-project or end-of-assignment report
Code of accounts Complete set of account codes developed for the pur-
pose of cost identification, cost allocation and cost
reporting, as necessary for cost control or future esti-
mating purposes
Commitment Total value of all orders placed to date, including letters
and telexes of intent, and including allowances for all
additional costs anticipated in respect of such orders
Committed cost Costs or liability that are debited to the project budget
 Glossary of terms I
Conditions of contract Terms agreed between the parties for the execution of a
contract
Construction indirects Term commonly used to describe all indirect field
expenses, such as non-productive labour, field staff,
field office staff, construction tools, etc.
Construction phase Period within the life of a project covering the site con-
struction activity
Construction philosophy Overall plan of construction work, stating intended
methods of execution, sequence and timings of key
activities, utilization of direct or subcontract labour
resources, etc.
Consumables Material consumed or construction aids permanently
incorporated into a construction project, including non-
recoverable formwork, shims and packings, welding
electrodes, industrial gases, fuel, etc.
Contingency Budgetary provision for unforeseeable occurrences
within a defined project scope
Contingent reserve Current value of contingency held or remaining
Contract Legal and binding agreement in writing between two or
more parties, defining scope of work or services to be
provided, terms and conditions and financial settlement
Contract period Time stated in contract documents for the execution of
the works
Contract price Adjustment to the contract sum, usually in respect of
adjustment (CPA) escalation and for which provision is made in the contract
Control budget Any budget used for control purposes, against which
actual performance is measured
Control estimate Any estimate used as a basis or yardstick for cost con-
trol purposes
Cost Expense, estimated or actual
Cost analysis Systematic breakdown of cost data into elements or cat-
egories for detailed examination
Cost breakdown Systematic breakdown of costs into predefined ele-
structure (CBS) ments in order to summate cost of like items
Cost centre Principal cost collection facility established for bud-
getary control
Cost code Identifying code assigned to specific cost items in
accordance with a defined, methodical and usually hier-
archical classification system
Cost control Systematic restraint on expenditure in order to secure
completion within predetermined budgets or targets
Cost engineer An engineer who by virtue of his training and experi-
ence is competent to develop and make practical use of
the principles of engineering cost management
Cost engineering That area of engineering practice devoted to the prob-
lems of project cost management, involving such
activities as estimating, cost control, investment
appraisal and risk analysis
wl 1 Gloloa~yof terms

Cost estimate Any considered prediction of future or final project

costs
Cost index Factored tabulation of recorded cost movements for a
particular category or item or unit of work over a speci-
fied period of time as measured from a defined base
date
Cost indices Series of factored tabulations as defined above for cost
index
Cost monitoring Close observation of the costs of work in progress with
reference to the estimated cost targets
Cost norm Established average or expected cost of defined item or
unit of work
Cost overrun Any cost in excess of that budgeted
Cost plus contract General term describing a form of contract in which
reimbursement is based on actual costs incurred plus a
mark-up or fee to cover overheads and profit
Cost report Formal record or register of current cost information
prepared in an agreed manner for reporting, statistical
or record purposes
Cost to date Any costs variously committed, incurred, expended,
accrued, etc. to a specifically defined current cut-off
date
Cost underrun Any cost less than budgeted
Cost variance Confirmed or forecast deviation between actual or fore-
cast cost and previously established budget or estimate
CPA (1) Contract price adjustment; (2) critical path analysis
Critical activity An activity on a critical path
Critical event An event on a critical path
Critical path A path through a network with least float
CTR Cost, time and resource - particular concept of project
control based on assigning costs, durations and
resources to individual network activities
Currency differential Cost variance due to currency exchange rate fluctuations

Daywork Work paid for on an hourly, daily or weekly time basis

covering labour, material and plant charges
Definitive estimate Detailed estimate prepared for control purposes from
well defined design data to an accuracy of -5% to
+lo%. Also known as class I, execution, detailed or
final estimate
Deliverables Term used to describe documents, materials and other
physical commodities capable of being 'delivered' on a
project in accordance with a specific programme or
schedule I
Demurrage Charges payable for delay or detention of delivery
Depreciation Fall in value of a capital asset due to use andlor lapse of
time I
 Glossary of terms 1
Design and construct Contract based on a brief provided by the owner in
contract which a contractor designs and constructs a project
Design basis Formal front-end document defining project scope of
work and anticipated execution philosophy as required
for engineering design activity, and upon which esti-
mated costs of the project are based
Design cost Cost of preparing defined design, inclusive of all fees,
drawings, specifications, models, surveys, and all other
documentation or services necessary to a completed
package
Design development Nominal allowance included in an estimate or forecast
allowance to cover additional costs resulting from natural devel-
opment of preliminary design data
Detailed estimate See Estimate (class I)
Direct man-hours ( I ) Man-hours which can be directly allocated to a pro-
ductive account or cost centre, as opposed to indirect
man-hours; (2) man-hours in respect of labour directly
employed by owner or principal, as opposed to man-
hours for contract labour
Duration The estimated or actual time required for the comple-
tion of an activity
Errors and omissions A qualification clause commonly used to cover mis-
excepted (E & 0 E) takes in quotations
Earliest event time (EET) The earliest time by which an event can occur within
the logical and imposed constraints of the network
Earned man-hours Budget man-hours for work completed
Earned value Budget value for work completed
EP&C Engineering, procurement and construction - term com-
monly used in respect of contract services provided
Estimate Method of categorizing estimates within particular
levels of detail classification and expected accuracy
(e.g. class 1, class 11 and class I11 estimates)
Evaluation estimate See Appropriation estimate
Event A stage in the progress of a project after the completion
of all preceding activities but before the start of any
succeeding activity
Event time The time by which an event can be (or is to be)
achieved
Expenditure Value of all invoices and charges paid or approved for
payment
Factored estimate (1) Preliminary estimate prepared by factoring known
costs from a previous similar project; (2) preliminary or
budget estimate prepared by factoring the costs of
major items in order to establish the cost of minor or
bulk components
Final account Final agreed settlement of payment under a contract
I Glossary of terms
Final measure Final measurement from as built drawings or site con-
struction
Firm price Price fixed in all respects except perhaps escalation, for
which additional payment may be made in accordance
with a stated formula and base date
Fixed lump sum price Single price for specified scope of work not subject to
adjustment for escalation or other reasons
Fixed price Price for specified goods or services which remains
unalterable for specified duration
Float The time available for an activity or path in addition to
its duration (it may be negative)
Fluctuation clause Condition inserted into the terms of a tender or contract
stating the method of dealing with price adjustments
due to cost of living increases during the contract period
Free on board (FOB) Cost of goods plus all charges until placed on board a
vessel at a named port
Force majeure clause Clause freeing the contractor from specific obligations
in the event and as a result of an Act of God, such as
earthquake, flood, war, riot, etc. as may be specifically
detailed in the conditions of contract
Free issue material Fabrication or construction material supplied or made
available by owner or design contractor at no cost to
fabricator or construction contractor

Hammock An activity, joining two specified events, that may be

regarded as spanning two or more activities. Its dura-
tion is initially unspecified as it is only determined by
the difference between the earliest and latest times of
the events concerned
Histogram Vertical bar chart indicating estimated or actual man-
power over each period of the contract

Incentive payments Additional payments to labour for incentive purposes

Incurred costs Actual cost to date of services rendered, work per-
formed or materials supplied
Indirect costs Costs not directly allocated to a productive account
Indirect man-hours Man-hours which cannot be directly allocated to a pro-
ductive account
lndirects General term commonly used to describe all labour,
material, plant, tools, supplies, services, etc. which
cannot be directly allocated to a productive account
Indefinite schedule Unlimited schedule - a schedule produced without
resource constraint
Interface An activity or event common to two or more events

Job card Printed card or computer generated document authoriz-

ing specific elements of site work to be carried out in
accordance with stated schedule and budget data
 Glossary of terms I
Key event An event or milestone selected for its importance in the
project

Labour only contract Contract for supply of labour only

Ladder A device for representing a set of overlapping activities
where the start and finish of each succeeding activity are
linked only to the start and finish of the preceding activ-
ity by lead and lag activities which consume only time
Lag The minimum necessary lapse of time between the
finish of one activity and the finish of an overlapping
activity
Lang factors Series of factors used in estimates to convert the cost of
manufactured plant into erected or installed plant cost
and, ultimately, completed project cost
Latest event time (LET) The latest time by which an event has to occur within
the logical and imposed constraints of the network,
without affecting the total project duration
Lead The minimum necessary lapse of time between the start
of one activity and the start of an overlapping activity
Liquidated damages Predetermined daily or weekly amount recoverable
from a contractor in the event of delay in completion
Loop An error in a network which results in a later activity
imposing a logical restraint on an earlier activity
Lost time Work time lost through labour problems, equipment
failure, inclement weather or other cause
Lump sum Single total price for work, goods or services covered
by agreed specification or drawings

Managing contractor Prime contractor responsible to owner for overall man-

agement of project
Man-hour forecast Forecast of man-hours to be expended
Man-hour norm Standard duration for undertaking a task
Master network A network showing the complete project, from which
more detailed networks are derived
Material take-off (MTO) (1) Process of measuring material quantities from draw-
ings; (2) document resulting from the process of
measuring material quantities from drawings
Measured term Term contract based on a schedule of rates, with pay-
ment based on valuing work done at the rates quoted
Measured work Construction or fabrication work which is identified and
measured, either physically or from drawings, for
tender, progress or payment purposes
Mechanical completion Recognized milestone for the completion of a process
plant project, from which point commissioning can
commence
Method statement Statement in contract indicating general method of
working
1 1 Glossary of terms
Milestone Principal or critical event or occurrence within a project
programme
Mobilization Term used to describe preparatory setting-up activity
Monte Carlo simulation Particular method of computerized probabilistic deter-
mination commonly utilized in risk analysis
procedures

Network (project A representation of activities and/or events with their

network) interrelationships and dependencies
Network analysis System of resource measurement and control relative to
a planned schedule
Node A point in a network at which arrows start and/or
finish
Non-productive time Paid labour time with no productive output, such as
meal time, walk time, lost time, overtime uplift, etc.
Non-splittable activity An activity that, once started, has to be completed with-
out interruption or removal of resources for use on other
activities
Norm Standard cost or duration for specific task

OCPCA norms Standard man-hour norms for mechanical and electrical

work developed and published by Oil and Chemical
Plant Contractors Association
Offsites Term relating to areas of work outside battery limits of
the main process plant and usually comprising delivery,
product storage, administration and utilities such as
water treatment, sewage treatment, etc.
Order of magnitude Term commonly used for very preliminary cost estimate
estimate Also known as class IV, ballpark, guesstimate, horse-
back, seat of the pants, screening estimate
Overhead costs Company expenses not directly allocatable or charge-
able to a particular project
Overtime Hours worked in excess of defined normal times
Owner In this document the word owner is used as a common
term covering employer, purchaser, manufacturer, client
or operator

Path An activity or unbroken sequence of activities

Payroll burden Indirect payroll costs, such as national insurance, holi-
days, etc.
Performance bond See Surety bond
PERT Programme evaluation and review technique
P&ID Piping and instrument diagram
Precedence matrix A table of activity identification used to show the
sequence and interrelationship of activities in a network
Premium time Overtime paid at uplifted rate
Price variation formula Formula for evaluating contract prices to reflect change
in economic conditions
 / Glossary of terms I
Prime cost Basic cost of installed plant, materials, labour or ser-
vices, exclusive of indirect charges, operating costs,
maintenance costs or loan interest
Prime cost sum (PC sum) Sum included in a contract for an item or work to be
supplied or carried out by a supplier of subcontractor
and excluding the attendance and profit margin of the
general contractor
Probability Statistical concept which takes account of possible vari-
ations among a large number of occurrences or
estimates
Probability analysis Term given to systematic evaluation of probability as
used in risk analysis
Productivity Measure of efficiency of productive work relative to an
established base or norm
Progress payment Payment made to supplier or contractor in respect of
progress
Progress weighting Method of relating different activities in respect of a
common base, in order to achieve an overall progress
measurement
Project control The proactive setting and monitoring of targets, analy-
sis of performance, identification and anticipation of
inefficiencies and implementation of preventive or
remedial actions
Project life Overall project duration, from inception to completion
Project manager The individual to whom authority, responsibility and
accountability has been assigned for the overall
management of resources (including the technical,
time and cost aspects) of a project, and the motiva-
tion of all those involved (see 2.3 of BS 6046: Part
1: 1984)
Project management The mobilization and management of resources (includ-
ing the technical, time and cost aspect) for the purpose of
completing a project (see 2.3 of BS 6046: Part 1: 1984)
Project management A multi-disciplinary group of people headed by a pro
team ject manager established to fulfil the range of manager-
ial responsibilities inherent in the project management
task (see 2.3 of BS 6046: Part 1: 1984)
Project monitoring The comparison of current project status with that
planned to identify and explain any deviations
Project programme A diagram or list showing work to be done, with associ-
ated time scales
Provision Allowance in estimate or forecast for a specific item or
occurrence which cannot be fully defined
Provisional sum Specified sum allowed in contract for item of work or
supply which cannot be fully defined

Radius aliowance Allowance paid to site construction staff to cover local

transport, etc.
1 Glossary ofterms
Reimbursable contract General term used to describe any contract in which
payment is made on a cost reimbursement basis, either
against rates, at cost plus a mark-up, or at straight cost
Resource cumulation The process of accumulating the requirements for each
resource to give the total required to date at all times
throughout the project
Resource levelling The process of producing a schedule that reduces the
variation between maximum and minimum resource
requirements
Resource limited The scheduling of activities, so that predetermined
scheduling resource levels are never exceeded
Resource smoothing The scheduling of activities, within the limits of their
float, so that fluctuations in individual resource require-
ments are minimized
Retention Sum of money retained under contract for specified
period of time in respect of possible defective work or
service
Risk analysis Process of systematic evaluation of risk possibilities in
respect of uncertain project outcome
Royalty Payment for use of copyrights and patents, such as for
proprietary chemical processes

Schedule of rates List of unit prices for work to be undertaken andlor

materials to be supplied
Schedule of rates Open-ended contract with reimbursement against a
contract schedule of rates
Scope of supply Defined extent of services, commodities or facilities to
be provided under contract
Scope of work Defined extent of work to be executed under contract
'SY-cdrve Graphical control tool commonly used for monitoring
cost, progress or resource performance against time
Skeleton network A summary network obtained by reducing the number
of activities in a network without changing the logical
or timing relationships of the remaining activities
Slack The calculated float time within which an event has to
occur within the logical and imposed constraints of the
network, without affecting the total project duration.
Note 1: It may be made negative by an imposed date.
Note 2: The term slack is used as referring only to an
event
Splittable activity An activity that can be interrupted in order to allow its
resources to be transferred temporarily to another activity
Star rate Agreed additional unit rate for work not covered by the
original contractual schedule of rates
Summary network A network in which the amount of detail presented is
condensed
 Glossary of terms 1
Supplier Company supplying material or specialist equipment to
a project. Supplier's work may include supervision of
installation and commissioning
Surety bond Legal document executed by the owner with a third
party to guarantee that a contractor performs its con-
tracted liability

Tender Written formal offer stating price, completion time and

any qualifications submitted for the purpose of entering
into a contract
Term contract Contract that enables a client to order work at pre-
agreed rates during a prescribed period
Tied activities Activities that have to be performed sequentially or
within a predetermined time of each other
Time-based network A bar chart that shows the logical relationships between
linked bar chart activities
Time limited scheduling The scheduling of activities, so that the specified pro-
ject duration, or any imposed dates, are not exceeded
Total float The time by which an activity may be delayed or
extended without affecting the total project duration
Turnkey contract Contract for design, supply, construction and commis-
sioning of a plant or facility

Unit cost Cost per stated item or unit of measurement

Unlimited schedule A schedule produced without resource constraint

Valuation Assessment or calculation of completed work for pay-

ment purposes
Value The worth of activities in terms of budgeted man-hours
or costs
Value engineering Technique of ensuring completion at most economic
cost, without loss of quality
Variation Change in scope of work or supply, subject to confirma-
tion and approval
Variation order See Change order

Work breakdown The way in which a project may be divided into discrete
structure groups for programming, cost planning and control pur-
poses (see also Work package)
Work package A group of activities (normally related in some way or
ways) that are defined at a level within a work break-
down structure

Yardstick Historical data established for measurement, evaluation

and control of current work
 Appendix B
Acts and Regulations
pertinent to the
construction industry

PRINCIPAL LEGISLATION

The Public Health Act 1936 (specifically that part of the Act covering the construc-
tion of premises used for the purposes of a food business and their repair and
maintenance)
The Factories Act 1961
Town and Country Planning (Assessment of Environmental Effects) Regulations
1988
Town and Country Planning (Environmental Assessment - Scotland) Regulations
1988
The Fire Precautions Act 1971
The Health & Safety at Work Act 1974
The Control of Pollution Act 1974
The Construction (Design and Management) Regulations 1994
The Food and Environment Protection Act 1985

SUBORDINATE LEGISLATION

Petroleum (Consolidation) Act 1928

Occupiers' Liability Act 1957
The Work in Compressed Air Special Regulations 1958
Radioactive Substances Act 1960
The Construction (Lifting Operations) Regulations 1961
The Construction (General Provisions) Regulations 1961
Offices, Shops and Railway Premises Act 1963
Construction (Notice of Operations and Works) Order 1965
The Construction (Health & Welfare) Regulations 1966
The Construction (Working Places) Regulations 1966
Employers' Liability (Defective Equipment) Act 1969
Employers' Liability (Compulsory Insurance) Act 1969
Abrasive Wheels Regulations 1970
 Acts and Regulations 1 1 283 1
The Highly Flammable Liquids & Liquefied Petroleum Gases Regulations 1972
Gas Safety Regulations 1972
Employment of Children Act 1973
The Protection of the Eyes Regulations 1974
The Woodworking Machines Regulations 1974
The Health & Safety at Work Act 1974 (Application outside Great Britain) Order
1989 (specifically covering work in connection with offshore installations and
pipelines)
The Safety Representatives and Safety Committee Regulations 1977
The Control of Pollution (Special Waste) Regulations 1980
The Safety Signs Regulations 1980
Control of Lead at Work Regulations 1980
Industrial Diseases (Notification) Act 198 1
The Diving Operations at Work Regulations 1981
The Health and Safety (First Aid) Regulations 1981
Notification of Installations Handling Hazardous Substances Regulations 1982
Notification of New Substances Regulations 1982
The Asbestos (Licensing) Regulations 1983
Control of Industrial Major Accident Hazards Regulations 1984
The Reporting of Injuries, Diseases and Dangerous Occurrences Regulations 1985
The Ionizing Radiations Regulations 1985 (to be observed where NDT is required)
Control of Asbestos at Work Regulations 1987
Consumer Protection Act 1987
Petroleum Act 1987
Collection and Disposal of Waste Regulations 1988
Dangerous Substances (Notification and Marking of Sites) Regulations 1988
The Control of Substances Hazardous to Health Regulations 1988 (COSHH)
The Control of Pesticides Regulations 1986
The Asbestos at Work Regulations 1989
The Electricity at Work Regulations 1989
The Noise at Work Regulations 1989
Pressure Systems and Transportable Gas Containers Regulations 1989
Food Safety Act 1990
Environmental Protection Act 1990
Planning (Hazardous Substances) Act 1990
Lifting Plant and Equipment (Records of Test and Examination, etc.) Regulations
1992
Management of Health and Safety at Work Regulations 1992
Manual Handling Operations Regulations 1992
Notification of Cooling Towers and Evaporative Condensers Regulations 1992
Personal Protective Equipment at Work Regulations 1992
Provision and Use of Work Equipment Regulations 1992
Workplace (Health, Safety and Welfare) Regulations 1992
The Plant Protection Products Regulations 1995
 Appendix C
Safety records required
on site

PLANT AND EQUIPMENT ISSUES

Form
Scaffolding weekly inspections F91 (Part 1)
General access F91 (Part 1)
Tower scaffolds F91 (Part 1)
Suspended access equipmentF91 (Part 1)
Lifting appliances
Cranes F96
F91 (Parts 1 & 2)
F75
Hoists F91 (Part 1)
F92 (Part 2)
Excavators (used as crane) F91 (Part 1)
Other lifting appliances

Lifting gear
F80
F91 (Part 1)
F9 (Part 2)
F87
F97
~ ,

I
F91 (Part 1)
Portable electrical equipment
HSE Guidance Note PM32 (1983) Electricity at Work Regulations require
regular inspection and documentation of results.
Pressurized systems (air compressors, etc.)
Records of periodic inspections need to be maintained as required by
Pressurized Systems Regulations.
Excavations
Excavations need to be regularly examined (Form F91 Part 1 Section B).
 Site safety records I
I ASSESSMENTS

The following assessments need to have been carried out:

Control of substances hazardous to health
Manual handling
VDU operators
Risk assessment
Form C9 to be issued for identification of hazardous work

PEOPLE ISSUES; LISTS OF NOMINEES OR APPOINTEES REQUIRED

Abrasive wheels
Asbestos workers
Competent persons for inspecting scaffolds
Competent persons for inspecting lifting tackle
Competent persons for inspecting electrical gear
First aiders
Dumper/excavator/cranedrivers, etc.
Competent persons for ionizing radiations
Permit to work system where required should be in place and records held.
Competent persons for issuing
Competent persons for issuing entry permits as required under Chemical Works
Reg. 7 (1 922)
Accident book B1510 and F2508lF2508A as required for RIDDOR incidentslacci-
dents
 Appendix D
Example forms
APPROVALS AND NOTIFICATIONS TO BE CONSIDERED FOR ALL PROJECTS
Example forms I
 1 Example forms
PROJECT RECORD OF ACTIONS FORM

(a) Preparation of safety case

(b) Preparation of onsite

(c) P~~vision of information for

offsite emergency plan
(d) Unless already done by site.
information to persons liable to
 do or may require an EIA should be dlucussed wtth the local authority planning depaltment to determine the need for. and extent of.
t of envimnmental impact.

ved by (piwiectmanager)
 Appendix E
The Local Government
(Access to Information)
Act 1985

SCOPE AND PURPOSE

This Act extends to England, Wales and Scotland and provides for greater public
access to local authority meetings, reports and background documents. Its provi-
sions shall be taken into account in relation to any document containing sensitive
information which is to be passed to local authority.
Commercially sensitive information disclosed orally to a local authority officer
or councillor is not affected by the Act unless made the subject of:
a report by an Officer which is submitted to a meeting;
a background paper to a report
The Act applies to council, committee and sub-committee meetings of all local
authorities, but does not apply to parish and community councils.

INFORMATION GUIDANCE 1
The Act requires that meetings shall be open to the public except:
where 'confidential information' is likely to be disclosed (in which case there
is an obligation to exclude the public), or
where 'exempt information' is likely to be disclosed and the meeting for that
reason decides to exclude the public. (Where exempt information is con-
cerned, the meeting has a discretion whether or not to exclude the public.)
The means to safeguard 'exempt information' are likely to be unreliable and it
should be assumed therefore that any other documentpassed to any local authority
may become public. Indicate on any confidential document or part of it which it is
proposed to pass to any local authority, the following:
this document (or sectionlparalpage xyz) contains 'exempt information' for
the purposes of the Local Government (Access to Information) Act 1985 and
 1 1 2!
I shall not be disclosed to the public without authorization from the owner
Local Government Act 1985
,
(name originator);
information discussed with or passed to a technical consultant acting on
behalf of a local authority should be the subject of a secrecy agreement. The
project
. . manager shall ensure that consultant's reports do not contain 'exempt
information'.
I the business should be consulted in connection with any secrecy agreement
I and the passing of confidential and/or 'exempt information' to any local
authority.

GLOSSARY

'Confidential information' means information whose disclosure is forbidden by

statute or by order of the Court or by the terms on which it has been furnished by a
Government Department.
'Exempt information' means information which fits into one of the categories
listed in the Act. Of most interest to the Business is the category 'information relat-
ing to the financial or business affairs of any person other than the Authority'. The
words 'financial or business affairs' include contemplated as well as past, current
or now planned activities.
 Appendix F
Environmental impact
assessment (EIA)

SCOPE AND PURPOSE

The EEC directive on environmental impact assessment has been enacted in

England and Wales in the Town and Country Planning (Assessment of
Environmental Effects) Regulations 1988 and in Scotland in the Town and Country
Planning (Environmental Assessment- Scotland) Regulations 1988 both of which
came into force on 15 July 1988.
The regulations require developers to follow the procedure set out as a flow
chart in Figure 1.1. A local authority planning department cannot now accept a
planning application for any development of a type listed in Schedule 1 of the
1988 Act unless the procedure outlined in Figure 1.1 has been followed.
Although guidance is provided in the flow chart for determining whether an
environmental impact outline (EIO) and/or an environmental impact assessment
and statement (EIS) are required, judgement is usually necessary and so early
advice should be sought.

RESPONSIBILITIES

The exact wording of an EIO and an EIS should have the agreement of the project
manager and business representative and the relevant environmental and safety
specialists for the site concerned.

GUIDANCE

The EIO for Schedule 2 of the 1988 Act projects will take the form of a brief for
the planning officers. The information in the EIO will be put on public display. The
content of the EIO should be discussed with the planning officials before submis-
sion, but will typically cover the following sections.

Background
This should provide an outline of the reasons why the business is initiating the pro-
ject and its historical context.
 EIA
I1
4
Technology

The nature of the proposed technology and whether it is new or existing should be
revealed. All benefits such as improvements in the working environment, to safeAy,
etc should be stated.

Investmert
A rough indication of the size of the financial iwestntent may be w p r i a t e fb?
large projects.

Process description
An outline of the process chemistry and other detail as necessary.

Employment
Will the project bring new jobs to the local authority area?

Choice of site
The links with other units on the site should be revealed.

Chemicals handled
This should indicate the main chemical materials handled and should emphasize
the owner's experience when relevant.

Gaseous emissions
Indicate if the means for control of gaseous emissions have been agreed with
HMIP.

Aqueous effluents
These should normally be within the existing consent parameters. This should be
stated. If this is not the case indicate why.

Other wastes
If there are other wastes arising indicate how they will be disposed of.

Noise
Normally new plants should be designed so that boundary noise levels are not
measurably increased. If the development is likely to cause any problem, the state-
ment on noise will need careful consideration.
I EIA

Dust
Potential problems should be indicated.

Odour
Any special problems should be mentioned.

Traffic
The increase or decrease in road and rail traffic as a result of the proposed develop-
ment should be quantified.

Visual impact
It should be made clear whether the proposal will have significant visual impact.
 Index

Page numbers appearing in bold refer to figures and page numbers appearing in italic refer to tables.

Acceptance, of maintenance work Asset turnover 200 Certificate of fitness, Department

249-50 Association of Cost Engineers of Trade and Industry
Accidents, in UK construction 87,93, 101 224
industries 45 Change control, preliminary and
Accounts Bank guarantees 223 detail design 38
on a 'going concern' basis 199 Banks, attitude to bonds 183 Change(s)
see also Final accounts; Bar charts, in planning agreed and non-agreed 90
Payment 108, 109,110, 111 effect on time and cost 86
Accrual (cost control) 88 Batch processing, aids increasing cost of 77-8
Accuracy maintenance 237 monitoring of 70
budget estimates 62 Benchmarking 1 15-1 6 CIMAH (Control of Industrial
order of magnitude estimates 60 Breakdown insurance 181 Major Accident Hazards)
Acid test ratio 200-1 Breakdown maintenance 241 (onshore projects) 46
ACP packages see Work packages Breakdowns, and insurance spares Client see Owner
Acts and Regulations pertinent to 125-6 Close out 126
the Construction Industry British Standards Co-venture partner requirements
282 BS 4335 115 31
Adjudication clauses 157 BS 4778 136-7 Code of accounts 7 1,90,93-5
Adverse trends 93, 98 BS 5750 136, 137,226 reasons for imposing a system
identification of 87 BS 7750 142 93
Agreed damages 186 BS 7850 137 Coding systems 7 1
All risks insurance 170 BS EN I S 0 9000 see British Collection period 200
contractor's all risks (CAR) Standards, BS 5750 Commercial analysis 228
179, 184 Budget estimates 59, 62, 71 Commercial enquiries 227-8
engineering all risks (EAR) Bulk materials 7 Commissioning 41, 236
179. 184 control of costs 98 insurance cover 1 81
excess 'or 'deductible' 180 final inspection only 230 Commissioning spares 225
extensions to 180-1 requirements and call-off orders Commitments (cost control) 88
'All-up rate' 64 222-3 Communication, for good
Alliancing 22, 26 Business interruption insurance relationships 220
Allied Quality Assurance 184 Companies Act (1985) 198
Publications (AQAPs) 136 Company management structures
Alternative dispute resolution Call-off orders 222-3 196
(ADR) 49, 156 terms and conditions for 223 Company reports and accounts
Anticipated final cost (AFC), and Capacity/resources, contractors 198-20 1
estimate provision 102 193, 195-6 auditor's report 199
Appropriation estimates 59, 61-2 Capital costs, allowing for balance sheet 199-200
Approvals currency fluctuations 66-7 chairman's statement 199
obtaining of 31 Cash flow forecasts 89, 105 directors' report 198
statutory 264-7, 286 Cast number 124 financial/commercial capacity
Arbitration procedures 156 CDM Regulations see Construction 201
As-built drawings 122 (Design and Management) liquidity 200-1
I Ascertained damages 185-6 Regulations (I 994) profit and loss account 199
 Company reports and accounts Contracting strategy(ies) 202-6, law and statute 150
(contd) 245-7 non-standard 146
profitability 200 preparation, bidding and award payment 153, 154
solvency 201 of contracts 36 problem areas 165-6
Comparison schedules, technical tendering risk and control requiring full CAR or EAR
appraisal 21 1 202-3 after handover 180
Competition and tendering, EU and types of contract 203-6 responsibilities 149-50
UK regulations 36 work packages and payment for scope of work 149
Completion delays 151 35-6 for shutdown 246-7
Compliance 133 Contractinglmanagement 'standard conditions of 163
at pre-qualification 192 philosophy 26 standard forms of 147-8, 182-3
in procurement 218 Contractor negligence 165-6 subcontracting 15 1
with statutory regulations 230 Contractorlsubcontractor selection supplementary and special
Compliance Directive 209, 210 190-215 conditions 157
Composite rates 6 3 4 contracting strategy 202-6 suspension and termination
basic components of 63 pre-qualification 19 1-202 155-6
Computer-aided design (CAD) 122 selection strategylcriteria 190-1 terms and conditions 148
Conceptual design 37, 57 tendering process 206-14 testing, take-over and liability
Conditions of contract 146 Contractors for defects 154-5
non-standard 167-8 damage, injury and insurance time 151-2
Conditions and warranties 170-2 obligations 150-1 types of 147,203-6
introduction into contract forms design responsibility, contract variations 152-3
171-2 conditions for 150 Contributory negligence 1 6 M
~ principal's clause 172, 175
rights of recourse 17 1
early selection of 37
employed on maintenance
Control, an ongoing process 86
Control estimate 88-90
subrogation 171, 172, 180 244,245-6 changes to 89-90
Confidentiality 28 insurance liability 50-1 Coordination
Consequential loss 184 for acts of subcontractors 177 in document control 120
Constructability, verification of 37 for specialist subcontractors of materials 124-5
Construction 39 178 of procedures 126-33
progress as percentage complete material loss insurance 178 programme for, maintenance
100 principal, key duties under 242
Construction (Design and CDM regulations 262 Corporate requirements 31
Management) Regulations producing definitive level 3 Cost breakdown structure see Code
(1994) 45-6, 1 8 6 , 2 6 0 4 programme 1 11-12 of account
duties 260-3 recognition of responsibilities Cost control 59, 71, 87-105
enforcement 264 146-7 approval of funds 95-6
health and safety documentation self-policing on maintenance contingency management
required 263-4 250 100-1
scope and purpose 260 Contractors1subcontractors the control estimate 88-90
Construction Industry Advisory contract conditions 1 6 3 4 cost control report 102-4
Committee (CONIAC) 260 key duties under CDM cost segregation 90-5
Construction interface 70 regulations 262-3 defined 87
Construction labour cost, in budget Contracts 1 4 6 5 7 escalation 101-2
estimate 62 award criteria 210 1
maintenance projects 247 51
Construction norms 70 caution towards amended objectives 87-8
Construction/installation contractor contracts 167 techniques 96-1 00
costs, control of 98-1 00 damage, injury and insurance Cost control report 102-4
Contingency, ownership of 101 150-1 charts and graphs 104
Contingency allowance 56, 67-8, defaults and remedies 155 cost summary tabulation 103-4
100-1, 124, 153 definitions and interpretations scope changes summary 104
maintenance variations 248-9 148-9 summary narrative 102-3
Contingency management 100-1 dispute resolution 156-7 Cost control techniques 96-100
Contract conditions 49 forms of 147-8 control of bulk material costs 98
Contract documents, finalization of indemnitv clauses 160 control of constructionl
214 involving detailed programmes installation contractor costs
Contract management 22 152 98-100 I
 Index 1 12971
control of design costs 96-7 Definitive estimate 59, 62-3, 88-9 Document database 121
control of equipment costs 97-8 susceptible to error by omission Documentation
Cost engineers 63 for certification 224
contractor's, elements Delayldisruption to work fundamental to an engineering
concerned with 99-1 00 claims against owners 151 design 70
information available for cost costs to contractors working on health and safety, required
prediction 96-7 live plant 250 under CDM Regulations 263-4
owner's Delays, effects of 9 non-standard 13
broad view of overall cost 99 Department of Trade and Industry tenders 206-7
key activities 99 (DTI) 30 testing and take-over 155
level of control 98-9 Design Documents
supplying cash flow forecasts 88 consideration of hazard and risk contract, finalization of 214
Cost indices 10 1 262 distribution of 122
Cost overruns 39,249 early input preferred 28 expanding purchase order 221-2
Cost segregation 90-5 management of I28 maintenance contract 25 1
code of account 93-5 Design changes pre-qualification questionnaires
work breakdown structure 91-3 acceptance of 89 193,226,227
Costs owner's and contractor's 130 purchase orders 229
control by estimates 71 Design costs, control of 96-7 registration of 12 1
control and reduction of 11-1 2 Design data, receipt of critical 226 retention of 123
critical areas 60 Design deliverables submission dates 229
Credit insurance 184 review of 121-2 transmission of 12 1
CRINE (Cost Reduction Initiative status reviews and reports
for the New Era) Report 11, 122-3 Efficiency 64-5
49-50 Design failure, indemnity for 162 and standardization 13
Critical activities 114 Design hours, attribution in budget Efficiency factors 64
Critical path 11 1, 1 14-1 5 estimate 62 Employees, duty of 259
and length of shutdown 240 Design information, status of 128 Employers
Critical path analysis 240 Design liability 176 duties of 258
Critical path method (CPM) 114 insurance cover for 160 responsibilities of 258-9
Cross liability clause 175 subcontractor's, for the see also Owners
CTR packages see Work packages permanent works 178 Employers' Liability (Compulsory
Cultural differences, to be taken Design organization, entering into Insurance) Act (1969) 173,
into account 197 value and need discussions 174
Currency, forward buying of 76 General Amendment
66, 102 Design procedures 128 Regulation (1994) 174
Currency fluctuations 66-7, 102 Design programmes, construction Employers' liability (EL) insurance
Current ratio 200 driven 116 51, 172-3
Customs and Excise 231-2 Design team 8 value of cover to be provided
Cutting and waste allowance documents for 122 173-4
6P-70 Designers Engineering insurance companies,
key duties under CDM supplying engineering
Damage, definitions 179 regulations 261-2 services 185
Damage discrepancy report (DDR) need appreciation of end user's Engineering projects
232 requirements 28 comulexitv of 6-7
Debottlenecking, during shutdown Detail design 38 high level-of interdependence
238 cost of 57 120
Default Direct man-hours (direct labour) Engineer(s) 19, 161
by contractor 155, 156 64,65 delegation by 149
by owners 156 Disaster recovery 247 Environmental considerations
and remedies 155 Dispute resolution 156-7 9-1 0
Defective designldefective Document control 119-23 Environmental impact assessment
designing, insurance as-built drawings 122 48,267,292
against 168-9 control methods 120-2 Environmental impact outline
Defects, liability for 155 reporting 122-3 information brief 267,292
Defects liability period1 retention of documents Environmental pollution,
maintenance period, 123 indemnities and insurance
insurance during 179 Document control team 120 for 169
 1Index
Environmental protection 45 Expenditure (cost control) 88 historical summary of
Equipment Experience, of contractors and legislation 256-7
control of costs 97-8 subcontractors 193, 194-5 in project design and initial
major items, cost of in estimates planning 26 1
61 Facilities management 245-6 site procedures 130
and materials, significant cost Factories Acts (1936 and 1961) see also Safety
component 123 256 Health and Safety at Work Act
standardization of 237 Factory testing 154 (1974) 257-60
Escalation 66, 101-2 Fair competition, through EC duties and responsibilities
calculation of 101 Directives 208-9 257-8
currency exchange rate FAST (functional analysis system enforcement of 25%0
variations 102 technique) diagram 79-8 1 scope 257
Escalation formula, call-off orders development of 81 Health and Safety Executive
222 Feasibility stage 36 (HSE) 30,46,257,259,260
Estimates and estimates 57 enforcing compliance 264
accuracy of 55-6,58, 68 Final accounts Health and safety file 26 1, 262,
content 68-9 calculation for payment 154 2634
continued use of 71 maintenance 252 Health and safety inspector,
items undervalued or forgotten Financial stability, of contractors powers and duties 2 5 M O
55 192-3, 194 Health and safety plan 261, 262
for maintenance 242-3 Financing charges 67 construction phase 263
presentation of 72 Firm bill of quantities contract 205 pre-tender 263
stages in preparation 56-7, 58 Fitness for purpose liability I78 Heat numbers 124,224
types of 57, 59-63 Fixed fee for prime cost contract Histograms 117
Estimating 10, 54-72 206 Historical data, for assessing
coding and control 71 Float 112 maintenance costs 243, 244,
contingency allowance 67-8 negative 114 252-3
escalation, exchange rates and Force majeure 41,42, 179 Hot workings, consideration of
financing charges 66-7 Form of agreement 146 conditions/warranties 170
hierarchical composite rates Form of contract 146 Housing Grants, Construction and
634 Forms Regeneration Act (1 996)
initial actions 54-5 examples 286 176-7
interfaces 69-70 standardized 72 concern of PI underwriters 177
man-hour norms 64-6 see also Standard forms of referring of disputes for
monitoring change 70 contract adjudication 157
Estimators, interfacing and 'Free issue' equipment and
questioning 69-70 materials 7, 20, 34-5, 152 ICE (Institution of Civil Engineers)
EU 30 Freight forwarding 232 forms of contract 160-1,
details of EU imports by advantages of 231 162, 165, 175
purchasers 231-2 Front end design 57 employers' liability 172-3
EC Directives 20&10,260 Functionality (need) 78-9 performance bonds 183
Regulations covering FAST diagram 79-81 'If it ain't broke, don't fix it!' 236
purchasing 220 Funds, approval (sanction of) 95-6 Import duties 231
value management in 77 justification document 95-6 Inconsistency, risk of 126-7
Exception reports 105 Indemnities 161, 164
Exceptional maintenance 241 Gang rate 65 against damage 179
Exchange rates see Currency Gantt chart see Bar charts for design failure 162 1
fluctuations Gearing 201 need for 161-2
Expediting Goods, despatch of 232 right to 166
and despatch of goods 232 Goods received note (GRN) 232 Indemnity clauses 160, 161, 164,
liaison between supplier and Government influence 29-30 175
delivery site 230 current practices 166-7
in procurement 229-30 Handover certificates 155 drafting of 164-5
by procurement team 219 Health & Safety Monitor 263 if doubtful seek legal advice 168
Expediting forecasts 229 Health and safety 9,45, 129 need for careful study 16 1 ~ 2
Expenditure, during construction
39
contractor policy/procedures
193, 196
problem areas 165-6
reversal of proof 166-7 '
~
 Index 1
Indirect man-hours (indirect contractslfinancial audits 25 1-3
labour) 65-6 coordination of 242
Industrial relations policies, of cost categories 245
contractors 196 estimating and budgeting 242-5
Inflation, causing rise in costs 67 in-house 247
Information 7 JCT (Joint Contracts Tribunal) management costs of 244
control and reporting 8 form of contract 160, 166, 181 planning 238-42
for estimators 54 Joint Names Policy 17 1-2 reliability of costs 244-5
Information flows 121 subrogation 172 sources of cost information 243
Initial operations 40-1 Job cards 113-14 star-rates v. dayworks 250
commissioning 41 Job instructions 140 Maintenance budget 236
pre-commisioning and Job plan, phases of 81-2 Maintenance contracts
mechanical completion 40-1 Joint Code of Practice on the changes of working
Initial start-up 4 1 Protection from Fire of environment 253
Insolvency, indemnifying for 184 Construction Sites and long-term, rates for 250
Inspection, of materials by Buildings Undergoing Man-hour norms 64-6
procurement team 219,230-1 Renovations 186 base man-hour norms 64
Inspection release note 230,23 1 Joint names policies 171-2, 175, Man-hours-to-complete, forecast of
Inspection reports 230 183 97, 115
Institution of Chemical Engineers Justification document (approval of Management 7,26
'Red Book' 175 funds) 95-6 management style 18
Insurance 50-1 procedure coordination to
all risks 170, 179, 180-1, 184 Key dateslmilestone 109, 111 ensure compatibility 127-8
annual cover 185 Key documents, changes to 89 Management contracting 205-6
claims and reporting 51 Key personnel 195,212-13 Management contractor 22,24,25
cover provision in the UK for shutdowns 247
169-70 Labour availability 70 Management costs, in maintenance
insurance claims 131 Labour levels, progressable and 244
joint names 171-2, 183 non-progressable 1 17 Manufacturing quality control plan
need for 161-2 Lang factor 61 230
procedures for damaged goods Latham Report 48,49, 156, 187 Master schedule 111
232 compensation events 187 Material control 1 2 3 4
provision of 162-3 on risk and insurance 187 close out 126
testing required for 154 Legislation, health and safety, coordination 124-5
to cover indemnities 160 historical summary 256-7 site storage 125
types of 172-83 Liability spares 125-6
variations to standard practices limitation of 167-8 traceability 124
182-3 waivers oftfinancial limits to Material controller, materials
Insurance companies, attitude to 183 responsibilities 123-4
bonds 183 Liability insurance 168 Material loss insurance 178-8 1
Insurance markets scope of 162 projects in or on existing plant
excess of loss market 174 Liquidated damages 185-6,223 182-3
limit of indemnity under an Liquidity 200-1 terrorism 181-2
employer's liability policy Local action committees 267 Material received report (MRR)
173 Local Government (Access to 232
Insurance obligations 170 Information) Act (1985) Material reconciliation 126
Insurance spares 1 2 5 4 , 2 2 5 266.267.290 Material traceability 224-5
Insuring clauses 168-70, 171 Logically linked network 109, Measurement, of maintenance
full understanding of needed - 111-12 work 249
179 Lump sum contracts 147, 205,247 Mechanical completion 40-1
Interest cover 201 with schedule of rates 205 Method statements 140
Intermediate reports 1 19 MF/1 form of contract
Inward processing relief 231 Maintenance 236-53 161, 175, 180
I S 0 9000 quality systems 138-40 approval of work 249-50 employers' liability 172
I S 0 9000 standards 9, 136, 137-8, capital and revenue expenditure material loss insurance
226 236 examples 178-9
I S 0 9000-1 137-8 constraints on 241-2 performance bonds 183
Milestone payments 222 150, 175 Planning permission, applications
Milestonesltarget dates 34 involvement in projects 6 for 267
Mission statements 32, 33 key duties under CDM Planning and progress control
Multi-contractor construction sites regulations 261 106-1 9
6 negligence of, indemnity continuing control 1 17-1 9
multinationals, and currency clauses 164-5 critical path and float 114--15
fluctuations 67 owner's all risk insurance importance of planning 106
policy 50 levels of planning 107-14
Negligence, importation of 164-5 role at detail design stage 38 network techniques 114
Nesting, recorded by material specifying limit to indemnity organization 107
controller 125 under public liability policy progress measurement 1 15-1 7
Network techniques 114 171 Planning schedule, incorporating
NJCC Codes of Procedure 190 procurement 219
Non-compliance, results of 133 Packing 231 Planning supervisor, key duties
Non-conformance, maintenance Parent company guarantees 184 under CDM regulations 261
contractors, price of 251-2 Parent (group) company bonds 223 Pool Reinsurance Company
Non-insurable risks, as exclusions Particular maintenance, scheduled 181-2
169 240-1 Pre-commissioning 40
Partnering, not recommended for Pre-Information Notice (PIN) 209
Obligations, failure to fulfil 169 shutdowns 246-7 Pre-qualification, contractors and
Official Journal of the European Partnerships 22,26 subcontractors 191-3
Community (OJEC) 209 see also Co-venture partner content of 192-3
Offshore work, employers' liability requirements evaluation criteria 193-7
limit of indemnity 174 Passes, forward and backward 114 pre-qualification interviews 202
Offsites 55 Patents and licenses 30 purpose and importance 191-2
'On demand' bond 183 Payment Pre-qualification, suppliers 2 2 G 7
Open tenders 208 calculation of final account 154 Precedence diagram method
Operating spares 225 and invoicing, maintenance 251 (PDM) 1 14
Operatinglrevenue costs 236 for maintenance or shutdown Preliminary design 37-8, 57
Operational input 28-9 contracts 247 purpose of 38
Operational maintenance see procedure for 131 Preliminary estimate see Budget
Maintenance stage payments 154 estimate
Operations coordinator 28 terms of 222 Preventive maintenance 236
Operations groups People, and procedures 132 Price comparison table 211
preliminary design stage 37 Percentage complete by activity, Pricing strategy, choice of 202
responsibilities of 29 assessment of 100 Principal's clause 172, 175
Operator see Owner Performance 65 Probabilities and values,
Order of magnitude estimates 59, Performance bonds 168. 183,223 assessment of 43-4
60-1 Performance test(ing) 141, 154, Procedures, coordination of
Order reports 232 155 126-33
Ordering, ahead of contract 7 Perillperils see Risk changes to procedures 132
Organization charts 33 Piping interface 69-70 compliance 133
Organizational breakdown Planning engineers, importance of design procedures 128
structure see Code of 9 management procedures
account Planning, levels of 107-14 127-8
Organizations, cultures, values and level 1 barchart 108, 109, 111 production of site procedures
policies 18 level 2 programme 110, 111, 116 129
Outside influences 29-30 level 3 network 111-1 2 site procedures 128-32
Overruns 112 base lined 11 2 Process interface 69
cost overruns 39,249 level 4 schedules 112-13 Procurement 218-33
reasons for 97-8 activities, coded and certificationlcertifying
Overspecification, removal of 12 organized 112-1 3 authorities 224
Owners basis of contractor's progress enquiries 227-9
categorizing of maintenance control systems 115 EU Regulations 220
costs for 245 shut down planning 113-14, expediting and inspection
insurance for benefittprotection 23940 229-3 1
of contractors and self Planning, for maintenance 2 3 8 4 2 material traceability 224-5
 Index
11
planned and monitored 116 Project management 18-51 Projects
pre-qualification of suppliers Project management team, breaking down into budgets
226-7 selection of 26-7 90
procurement cycle 1 16,218-19 Project managers 7, 13, 18-19 breaking down into work
progress measurement and insist on adequate progress packages 90
reporting 116, 232-3 reports 39 certification and regulatory
quality assurance 226 issued with site procedures for requirements schedule 48
requisitions 218 comment/approval 129 procedures and controls 86
scope of activities 218 key management skill 27 records of actions forms
maintain all statutory records 288
267 statutory approvals for 264-7
spares and special tools 225 owner's, strategy for obtaining work outside site boundary
strategies 34 approvals 266 267
supplier data 226 responsibilities 19 Property, insured both on- and off-
tender list 227 Project organization 20-9, 107 site 179
terms and conditions 2 2 0 4 alliancing and partnering 22, Public liability insurance/policies
Procurement interface 69 26 162, 171, 174-6
Procurement manager 219 confidentiality 28 described 174
Procurement phases, role of management contractor 22, 24, limited in relation to design
material controller 124 25 responsibilities 162-3
Procurement team 219-20 operations support 28-9 Purchase orders
Productivity 65, 70 owner-based project team 20, for delivery by forwarders 23 1
Productivity factors 65, 97 21 firther documentation 221-2
use in forecasting 96 with a project services v. purchase contracts 220-1
Products liability, under public contractor 22,23 Purchase requisition, from the
liability policies 175 personal objectives 27-8 engineer 229
Professional indemnity (PI) policy roles and responsibilities 27 Purchasers, obligations of 221
162, 176-7, 178 Project planning, importance of Purchaser's Risk 179
claims made basis 176 106
design and construct policy 176 Project services 22, 8 6 1 3 3 Quality, costs of non-conformance
Profit margin 200 coordination of procedures 251
Profitability, of companies 200 126-33 Quality assurance 9,45,48,
Programme evaluation and review cost control 87-105 136-42, 196
technique (PERT) 114 document control 119-23 audits 226
Progress material control 123-6 definitions 136-7
defined 115 planning and progress control management of procedural
measurement of 1 15-1 7 106-19 change 132
and reporting, procurement Project specific factors 193, 1 9 6 7 procedures I40
232-3 Project stages 36-9 procurement 226
Progress reports 39, 11 &19,229 conceptual design 37 quality improvement 141
Progress 'S' curves 117 design deliverables 39 and site procedures 129
Project control, effective 102 detail design 38 subcont~actor/supplierquality
Project cost models 212 feasibility stage 36 141
Project execution plan 2 7 , 3 2 4 preliminary design 37-8 team quality 140-1
contracting strategies 35-6 Project team 19 Quality assurance engineer,
critical success factors 33-4 conforms to requirements of responsibilities of 140-1
development of 32-3 owner or co-venture partners Quality assurance team
free issue equipment and 31 objectives 140
materials 34-5 individual roles and quality of 140-1
mission and vision statements responsibilities 27-8 Quality control 9
32,33 owner-based 20, 21 ,22,23 Quality management 136
procurement strategies 34 owner's Quality manual 139
project objectives 33 and control of complex Quality plan see Project execution
project programme and project 107 plan
milestones 34 level 3 programme 111 Quality planning 138, 1 3 9 4 0
supplier (vendor) engineers 35 responsibility for meeting Quality standards systems 126
Project insurance 50 statutory requirements 265 typical contents list 138-9
'Reasonably practical' standards Safety records 264 Status reports 232
for working 258 required on site 284-5Ap Statutory approvals
Record keeping, for accurate Safety requirements 47 example forms 286-7Ap
material control 125 Schedule of rates payment 247 procedure 266-7
Registers 112 Scope references 266
of drawings/specifications, with developed using functionality responsibilities 265
site administration 130 principle 79 scope and purpose 264-5
project order 232 of work 149 Statutory authorities, contacts with
Reimbursable contracts 147, 202, Scope changes 117 266-7
206 added to project control Statutory provisions, infringements
maintenance 246,247, 249, 250 estimate 89 of 266
Reinsurance 181-2 in maintenance 249 Stock turnover rate 200
Remeasurement/approximate bills summary 104 Stores organization 125, 221
of quantities contract 205 Sealed tenders 208, 228 Subcontracting, for specialisms
Requisitions 218 Services Directive 209 151
Resource markets 30 Shipping Subcontractors
Responsibilities procurement team responsibility ~rotectionfor material loss 178
failures in performance of 15 1 220 and suppliers, quality assurance
to be clearly defined in and transport 23 1 141
contracts 149-50 Shortlisting Subcontractors' insurance 177-8
Retention bonds 49, 168, 223 from evaluation of pre- Subrogation 171, 172, 180
Return on capital employed 200 qualification submissions Supercritical activities 114
Reverse engineering, equipment 197-8 Supplier (vendor) engineers 35
and materials 116 for procurement 228 Suppliers 141
Rights of recourse 17 1 Shutdowns 236,238 important terms 222
Risk 16 1 flexible contracts 246-7 obligations of 22 1
avoidance of 44 maximize preliminary work 240 responsible for delivery to site
control of 44 planned 113-14, 238,239 231
evaluation techniques 42-3 planners to liaise with submitting progress reports 229
identification of 42 'business' units 239 Supplier's list 226
information for health and timing of 238 Supplies Directive 209
safety plan 262 SI 2885 (Safety Case Regulations) Surety guarantees 168
provision for 42 (offshore projects) 46 Surplus materials 126
reduction or avoidance of 262 Site procedures Suspension, of contracts 155-6
transfer of 44 drawings and specifications
Risk analysis 41-2, 68 130 Tag numbers 224
elementary risk analysis 42-3 health and safety 130 Target cost contract 205
and evaluation 68 instructions 130 Team work 49
probabilistic 44-5 insurance claims 13 1 and cooperation 13-14
probability analysis 43-4, 68 for on-site working 128-9 Technical enquiries 227
sensitivity analysis 43 payments 131 Technical/professional competence
Risk assessment 262 production of 129 194
Risk estimating 10-1 1 on receipt of goods 232 Temporary and Mobile
Risk management 44-5, 186 security procedures 132 Construction Sites Directive
Risk register 44-5 site records 13 1 260
Robens Report, on safety at work Site storage, of materials 125 Tender list, procurement 227
256-7 Site working agreement 70 Tender period 207
Routine maintenance 236,237,246 'Six tenths' rule adjustment 60 Tenderers
scheduled 23-0 Solvency 20 1 post-tender interview 213-1 4
Spares 125-6,225 potential 214
Safe working environment and replacements, costs of seeking to qualify tenders 212
requirement 258 244-5 to confirm validity of previous
Safety 9 , 4 5 7 Standard forms of contract 147-8 submissions 207
Safety case, objectives of 46-7 variations to 182-3 Tendering
Safety Case Regulations 46 Standby equipment 237,239 invitations to tender 210
Safety philosophy 47 Start/completion dates, agreement for maintenance 245
Safety plan 47 on 152 process 206-7 I
 -

I 1ndexI

risk and control 202-3 Terrorism, and insurance 181-2 definitions 77-8
types of contract 203-6 Testing methodology and job plan
Tenders 210-14 during work and on completion 78-82
alignment of 212 154 Value management studies
analysis of 210-11, 228-9 insurance cover for 181 experienceltrack record of
appendices to 207 Third party insurance 150, 181 leader critical 82-3
commercial and financial Time 151-2 study team and resources 82
appraisal 2 11-1 2 an important consideration 8-9 timing of 78,80
evaluation of 210 Tolerance limits (estimates) 56 Variations 152-3
evaluation reports 214 Total hours forecast 97 disruptive 153
key personnel 212-1 3 Total quality management (TQM) evaluation of 153
post-tender interview 213-1 4 137,252 maintenance contracts 248-9
technical appraisal 211 Traceability, of materials 124 VAT 231
types of 208 Trust accounts 49 Vessel internals, assessment of
Term maintenance contracts 246 Turnkey contracts 160, 202, 205 work required 239-40
work orders 248 Vision statements 32, 33
Termination, of contracts 156 Unfair Contract Terms Act (1977)
Terminology 12-1 3 165 Warranties 224
Terms and conditions, procurement Unit costslnorms databases 243, see also Conditions and
220-4 244 warranties
basis of order 221-2 updating of 253 Waste, elimination of 11
bonds and guarantees 223 Utilities, facilitating relationships Work breakdown structure (WBS)
call-off orders 222-3 with 54 9 0 , 91-3
general 222 Utilities Directive 209 Work orders, term maintenance
obligations of purchaser and Utilities Supply and Works contracts 248
supplier 221 Contracts Regulations (1 992) Work package numbering 112
purchase order v. purchase 220 Work packages 90, 91
contract 220-1 Value, defined 7 6 7 information in 91
warranties 224 Value analysis (VA) 76, 77 level of control 93
Terms and definitions, in contracts Value engineering (VE) 76, 77 Working capital to sales ratio 200
148-9 Value management 7 6 8 3 , 2 5 3 Works Directive 209