Volume1-Project Management Series

PPC
ASME Professional
Practice
Curriculum
Project Management
Series
Volume 1
2
PPC
ASME Professional Practice Curriculum
The ASME Professional Practice Curriculum:
The ASME PPC is a program of study for engineering students and early career
engineers that will supplement the formal college/university engineering curriculum
in helping you be better prepared for entry into and early advancement in the
engineering profession.
It is a major aim of ASME to help colleges of engineering guide the development of

students and teach the principles of engineering practice and professionalism
without overburdening an already full undergraduate curriculum. The PPC is meant
to supplement the formal college/university engineering curriculum and aid
engineering faculty in better preparing graduates for entry into and early
advancement in the engineering profession.
The ASME PPC is a joint project of the Board on Student and Early Career
Development and the Board on Education and is funded by the ASME Foundation.
Its existence is made possible through the valuable expertise and support of
individual contributors.
© 2003 - 2011 ASME International. All Rights Reserved.

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Volume 1 The Project Management Series

Volume 2 The Product Management Series
Volume 3 Writing Winning Proposals
Volume 4 The Engineering Design Series
Volume 5 Sustainability Series
Volume 6 Business & Legal Series
Volume 7 Entrepreneurial Series
Volume 8 Career Transition Series
Volume 9 Sales and Marketing for Engineers
Volume 10 Communications Series
Volume 11 Management & Leadership Skills Series
Volume 12 Industry Series

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Project Management Series

Volume 1
Project Management. . . . . . . . . . . . . . . . . . . . . . . 6
Project Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Contracting Organizations and Options . . . . . 32

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TABLE OF CONTENTS
Introduction 7
Part 1: About Projects 7
Part 2: Project Management Functions 8
Part 3: Engineering Functions 9
Part 4: Planning Cycle 10
Part 5: Planning Steps 10
Part 6: Work Breakdown Structure (WBS) 11
Part 7: Project Schedule 12
Part 8: Scheduling Tools 13
Part 9: Project Budget 14
Part 10: Project Controls 14
Part 11: Project Management Software 15
Part 12: Sample Project Schedule 16
Part 13: Conclusion 18
Glossary 19
Quiz 20
Quiz: Answer Key 22

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Introduction
As mechanical engineers, we are involved in a wide variety of industrial de-

velopment activities, from design of components, equipment, systems or Educational Goals
facilities through various phases of manufacturing, construction or operation.
In the context of business, we apply our skills to help our organizations pro- After completion of this
vide a competitive benefit or develop a solution to a unique challenge. module, you will be able to:
"Houston, Tranquility Base here, the Eagle has landed." These words of  Understand how engi-
astronaut Neil Armstrong demonstrate not only the technical achievements neers participate in
of 20th Century America, but also the successful application of a complex complex projects
project management process.  Become familiar with
common project man-
Any development activity ("project") requires that unique tasks be per- agement concepts and
formed, resources allocated, and a time frame established. In order that all terms
involved apply their talents in the best ways and at the appropriate times, it  Learn the importance of
is generally necessary to implement some form of project management. breaking engineering
projects into subtasks
All projects that contain multiple tasks and/or involve multiple resources are  Learn how to set-up
candidates for project management techniques. This module will introduce and use tools to man-
you to the basic principles, concepts, and tools for managing a project. age engineering pro-
While this module demonstrates a business application of project manage- jects
ment, the same principles apply to managing multi-task school or personal
projects. Understanding how to do a schedule IS a critical success factor in
project management. It can't be delegated to a specialist unless there is a
basic understanding of the principles and the ever-changing critical issues
on a project.
1 About Projects
Projects are risk enterprises...... Project Management helps us to achieve the end objectives in the face of all
the risks and problems encountered along the way. Success depends largely on careful planning, carrying out
the constituent tasks in a sensible sequence, and deploying resources to best advantage.
Project managers often do not develop the project concept or quality (also known as scope), but are responsi-
ble for bringing the concept to reality. Please note that in this module, scope and quality are used interchange-
ably.
The nature of a project requires focus on three basic goals: quality, cost, and time. A successfully managed
project is one that is completed at the specified level of quality, on or before the deadline, and within budget.
Each of these goals is specified in detail and constitutes the plan of the project. These specifications then form
the basis for project control.
While it is possible to strive to meet all three of these basic goals, it has been said that one can only specify
two of them. For instance, if you have a critical set of features to implement, and a fixed set of resources, it
may not be possible to fix the duration of the project.

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2 Project Management Functions
Effective project management may be summed-up with the acronym POWER. This stands for Plan, Organize,
Work, Evaluate and Revise the plan. Pictorially, it is shown below.
The dotted line, "reporting activity," is very important to keep the client/customer informed that the project is on
track.
A typical project is broken into several phases in order to develop the concept scope or quality and complete the
work. These phases are typically used by businesses to define and control project activities and allocate resources
before costs are well defined. Each project phase must be POWERed and integrated into an overall budget and
schedule. The following is an example of discrete project phases. Note that the cost accuracy improves as a de-
sign is developed.

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Anticipated Accuracy of Predicted Costs
Project Phase Cost Estimate Accuracy
1 - Completion of Planning Study ±40%

2 - Completion of Conceptual Engineering (Concept ±25%
Design) ±15%
3 - Completion of Basic Design Package
4 - Completion of Detailed Design Engineering and ±10%
Procurement or Construction Planning*
A "contingency" is often included to address uncer-

tainty in the cost estimate.
* Note that projects headed toward quantity manufacture and projects culmi-
nating in construction of a unique artifact, while very similar, have some signif-
icant differences. Mechanical engineers work on both sorts of projects
The planning accomplished during the early phases of a project, particularly the work done before Conceptual En-
gineering (Concept Design) is completed, determines how smoothly a project will progress through further phases
of engineering, procurement, construction or introduction to manufacture, operational planning, commissioning and
startup, or product launch.
3 Engineering Functions
Project organizations consist of many different functions, such as marketing,

finance, engineering, etc. A project manager may be chosen from any of these
functions.
The engineering activity is the first step (Planning Study) of project or product
development. As discussed in the last section, other engineering phases often
follow. The goal is to achieve sufficient detail to obtain an "investment grade"
estimate. Some businesses perform their engineering function, while others
seek outside assistance. Many businesses-for example a company whose
strength is in manufacturing and marketing-purchase these services from an-
other company ("outsourcing"). Whichever path is chosen, effective project
management is essential. As a minimum, this means all costs must be included in the project budget and control of
scope changes is essential.
If a project has a relatively complete scope definition, based on past experience, for example, outsourced services
are generally purchased via a fixed price (lump sum) contract. This is because changes to the scope are not antici-
pated and resulting cost or time impacts are minimal. For a project without past experience (new product develop-
ment, for example), costs or durations can be expected to change because of the uncertainty of the reference
scope basis. These services are usually done on a reimbursable (cost plus) basis, whether outsourced or in-house.
Familiarity with these types of contracts - fixed price and reimbursable - is essential in preparing the project plan
and procuring further services for manufacture or construction.

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4 Planning Cycle
Planning is critical in project man-

agement. Planning means listing, in
detail, what is required to successful-
ly complete the project and meet the
three critical goals of quality, time
and cost. The five basic elements of
project planning are shown pictorially
below. These five elements are pic-
torially represented in the "Project
Triangle" shown on the right.
5 Planning Steps
Establishing clear project objectives and goals is critical at the outset. A project justification (why is it required or
what are the benefits?) and a project scope (what is applicable?) are examples of project objectives. The project
justification specifies the reason for pursuing the project and is expressed in quantitative, or measurable terms,
often sales volume or dollars. The project justification should relate to a Business Plan, and is typically developed
not by Engineering but by Marketing or Product Management.
Completion of the first phase of the Business Plan lets engineers move ahead with planning the project develop-
ment/design. Typical steps are to:
Choose a basic strategy for achieving the objective.
1. Break the project down into sub-units or steps ("Work Breakdown Structure" or "WBS").
2. Break the project down into sub-units or steps ("Work Breakdown Structure" or "WBS").
3. Determine the performance standards for each sub-unit (deliverables).
4. Determine how much time is required to complete each sub-unit (resources and schedule).
5. Determine the proper sequence for completing the sub-units and aggregate the information into a schedule for
the total project (critical path chart).
6. Identify codes and standards which apply. (Some of these should be in the Business Plan).

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Project Management
7. Develop the cost of each sub-unit and aggregate costs into the project budget.
8. Design the necessary staff organization, including the number and kind of positions, and the duties and respon
sibilities of each, within the project team.
9. Determine what training, if any, is required for project team members.
10. Develop the necessary policies and procedures.
A good project plan is understandable to all users to facilitate inputs on scope (quality), schedule (time) and budget
(cost).
6 Work Breakdown Structure (WBS)
The WBS is a project management tool for defining the project deliverables to be provided and the tasks to be ac-
complished. The purpose of this step is to establish the project outputs that will meet the project goals, to facilitate
latest assignment of project responsibilities, and to facilitate progress measurements and updating project plan-
ning.
The basic idea of the work breakdown struc-

ture is to divide the total work of the project into
major groups, then to subdivide these groups
into tasks, and then if necessary divide these
tasks into sub-tasks, to a level where a specific
organization, sub-team or individual can be
identified to be responsible for completing the
particular activity. The lowest level of subdivid-
ed work should be small enough to permit ade-
quate control and visibility without creating an
unwieldy administrative burden. The figure
here shows a simple example of a WBS for a
construction project.

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Criteria for developing a WBS:

 The WBS and work description should be easy to understand.
 No attempt should be made to sub-divide work arbitrarily to the lowest possible level. Go only far enough to
identify assignable tasks.
 The WBS should result in a list of discrete, measurable, and tangible deliverables, which can form the basis for
schedule milestones that everyone will recognize when they are achieved.
 Tasks should have clearly defined start and end dates; it should be possible to construct a schedule for a WBS
task.
 No effort should be made to extend the WBS to the same number of levels for all parts of a project.
After completion of the WBS, resources (supervision, labor and materials) and timing/sequencing of each task are
evaluated to develop the costs and schedules. You can take the WBS and cost and schedule summary and use
them with project software to create project schedules in various formats. The Microsoft® Project Building Remod-
eling Schedule shows the results of the WBS and duration/sequencing information from the example. Please note
that resources have not been included, therefore, there is insufficient information to develop the cost of each task.
Other items to note are:

 Where numbered predecessors are shown, a FS (Finish/Start) relationship exists. That is, an activity cannot
start until its predecessor is complete.
 FF (Finish/Finish) denotes an activity will finish the same time as the predecessor activity.
 SS (Start/Start) denotes an activity will start the same time as the predecessor.
 Underground work is shown "leading" completion of the foundation by one day. This means work can start pri-
or to completion of excavation.
 Utilities are shown "lagging start" of interior partitions by 5 days This means work can start as partitions are
being erected.
 Ceiling finishes has multiple predecessors.
 Concrete Foundation is a summary task and its duration consists of the sum of the sub-tasks. See task 6 in the
sample schedule.
Note: the product mentioned on this page is for illustrative purposes only. No A.S.M.E endorsement is intended or implied.
7 Project Schedule
Any project without a schedule understood by all is doomed to failure. Thinking in terms of sequential phases en-
sures that all decisions are made and all resources are allocated for efficiently moving into each succeeding phase.
The previous example was for a Construction Phase schedule. The objectives of scheduling are to:
 Identify calendar completion dates and constraints.

 Identify relationships among various parts of the project.
 Determine resource requirements as a function of time.
 Identify key points (milestones) where approvals will be needed.
 Communicate all of this to all participants and stakeholders.
 Maintain good project control.
Scheduling is an iterative process, with a fixed overall duration and adjustments applied to resources and sequenc-
ing of tasks to achieve project goals. It is important to note that developing a project schedule often requires input
from others. Therefore, the schedule should be a team document with which all participants agree to comply. Sim-
ple schedules (with under 25 activities and simple logic as shown in the previous example) can be created without
the use of software.

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Network diagrams can be used where the logic relationships are not obvious, as in the previous example.
Because networks and schedules are inter-twined, network diagrams (tasks and deliverables shown linked togeth-
er in the order in which they must be completed) show how the elements of the WBS relate to one another.
Superimposing a network on a calendar becomes the basis for creating a detailed project schedule.
Here are some key steps to creating a schedule:
 Identify all major events and dates.

 Decide in detail and in what sequence WBS tasks need to be done, and develop a network or interrelationship
of tasks.
 Estimate the duration of each separate activity.
 Activities should be relatable to the WBS.
 Use the activity duration estimates to calculate the estimated project duration.
 Identify the time constraints and relate the significance of each activity to the timetable and major events.
Identify resource constraints.
8 Scheduling Tools
PERT and CPM are plan-

ning and control tools for
defining the parts of a pro-
ject and putting them to-
gether in a network form so
that the person responsible
for each element of work
knows what is supposed to
happen and when in relation
to other project activities.
The basic difference in
PERT and CPM methods is
the reliability of the estimate
of the duration of each ac-
tivity. PERT is used when
durations are based on sto-
chiastic (probabilistic) data.
CPM, on the other hand, is
utilized when durations are
known or can be reasonable
estimated. In most applica-
tions, CPM is utilized, although PERT is often used in government-sponsored projects.
The CPM schedule example shows the dependencies of one task on another in a Gantt (bar) chart format. Another
type of presentation is a network (flow chart) diagram. Because the latter becomes increasingly difficult to under-
stand as the number of tasks increases, Gantt charts are more commonly utilized.
A Gantt Chart is a horizontal bar type chart developed as a production control tool by Henry Gantt. A Gantt Chart,
today, provides a graphical illustration of time related logic and scope.

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9 Project Budget
Every project needs a budget against which to

measure costs that are expended. The overall pro-
ject budget requires buy-in from management and
from the owners of the Business Plan. Breaking this
overall budget into WBS-related parts permits the
project manager and each task leader to control
their own performance.
Some inaccuracies in the budget are inevitable, but

they should not be the consequence of insufficient
work on the original plan. Costs and resources
should be identified for all tasks on the project
schedule, including management. The objective is
to be as realistic as possible and provide an allow-
ance for uncertainty or inaccuracy (see discussion
of accuracy in section 2, Project Management Func-
tions).
You cannot estimate the cost of a project until you know how long it will take (labor inflation, etc.). Therefore, the
work breakdown structure and project schedule are the key supporting documents for developing a project budget.
The following is an example of a summary level budget (that which contains many components associated with
each line item) developed at the completion of a Planning Study. This information is the basis for the next phase of
development and of financial analysis to determine if the costs support the economic benefit forecast and contin-
ued development is warranted. Please note the correlation between accuracy and contingency.
10 Project Controls
Just having a schedule and budget is not sufficient. As the project work proceeds, it is necessary to constantly
manage performance to the schedule and budget. Performance will not always be perfect-work will slip and costs
may increase. But by constant monitoring and applying corrections whenever possible, it is usually possible to
stay very close to both the schedule and the budget. This is often called "Variance Control."
Should the time come when it is no longer possible to control the variance in either the schedule or the budget, it
may be necessary to re-negotiate either or both. All stakeholders-especially the owners of the Business Plan-
must be part of this negotiation. But do not do this lightly; it is a matter of importance for the engineering team to
achieve the schedule and budget to which they originally committed, if at all possible.
Schedule variances are identified when completion progress is regularly incorporated into the baseline schedule.
Negative variances (increases in project duration) require re-sequencing or additional resources to minimize the
variance from the baseline. Completion progress must be related to "physical progress" (i.e., quantities actually
installed) and not the percent of resources expended.
During engineering as well as construction phases, physical progress must be measured against start and end
dates of individual tasks in the WBS. For example, during the engineering phase, engineering man-hours can be
gauged to the number of expected engineering deliverables (Drawings and Specifications) to determine physical
progress. The application of physical progress measurement utilizing the WBS is also an important part of cost
control for labor related activities.

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Cost variances are identified as costs are committed (intent to purchase or com-
mit resources). By comparison with the corresponding cost in the baseline budg-
et, variances can be identified. Negative variances (increases above budgeted
amount) can only be mitigated by cost savings from another item or utilization of
an allowance for uncertainty (contingency).
Referring to the project triangle, the impact of variances can be visualized. Usu-
ally, by providing sufficient budget and schedule allowances, one or two of the
three project goals can be maintained.
After variances are identified and recovery efforts have not been successful,
timely forecasting of the change in project goals (cost or time) is important. It is
essential to keep management and the owner informed.
11 Project Management Software
The Work Breakdown Structure (WBS) can be incorporated into software packages to provide ease of manipula-
tion and analysis. Features include:
 Task-level Work Breakdown Structure.

 Resource assignments for each project task.
 Task dependencies (What things need be to done first?) which help determine the sequence of project work.
 Use of a Critical Path Method (CPM) algorithm to determine project duration. (Based upon the sequence of
tasks which must be completed as planned in order for the entire schedule to be maintained.).
 Identification of key milestones (significant events).
 Measurement of progress by tracking progress at several levels (eg. Actuals by task, Actuals by resource).
Software facilitates development of baseline schedules and analysis of delays that may be encountered. When
a project is delayed, a recovery plan is needed. Because Schedule tasks may be concurrent, shortening of the
critical path may require different approaches. See the recovery figure below, depicting both sequential and
concurrent approaches.

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12 Sample Project Schedule
In the development of a CPM Schedule, either the overall project duration is known, requiring task durations and
sequencing to complete on time, or the task durations and sequencing are fixed and the overall duration is devel-
oped manually or by the algorithm in the software.
In order to shorten the overall duration of a project, critical path activities must be evaluated. Since task durations
depend on resources, resources must be increased or some tasks must be started before all work of other tasks is
completed.
While each project may be broken into phases, each phase must be analyzed to identify tasks and the required
resources to complete each task. By so doing, an estimate of the time for completion may be obtained.
The example WBS and schedule shown in section 6 are for a project for which detailed design (engineering) was
complete and construction was ready to be awarded. Even at this stage, however, engineering details or correc-
tions are part of a project and usually preceded applicable tasks. As an example, the HVAC, Electrical, and Plumb-
ing tasks will require, at least, purchase and manufacturing of components prior to installation. A more complete
WBS and schedule would include these activities.
The following exercise will allow you to develop a schedule manually. Table 1 is an example of a WBS with an esti-
mate of resources, duration, and sequence for each task, for the design of a new product.
Using this table, develop a Gantt chart, identify the critical path and estimate the completion date of the work. In
order to prepare a schedule, a calendar is needed to convert the duration into calendar days. Utilizing Table 1 and
and the calendar Table 2 is developed. The results are shown in the Product Design Baseline Schedule.

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TABLE 2
TASK ID START FINISH

1 January 6 January 6
4 January 31 February 7
5 February 10 February 11
8 February 28 March 13
11 March 14 March 27
12 March 27 March 27

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Product Design Baseline Schedule
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 18 19 20 21 22 23 24 25 27 28 30 31 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 18 19 20 21 22 23 24 25 27 28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 18 19 20 21 22 23 24 25 27 28 30 31
1 Critical Path:
Tasks 2,3,4,5,6,7,8,9,11
2 Completion Date:
March 27, 2003
3 (81 Days Duration)
4
5
6
7
8
9
10
11
12
13
14
13 Conclusion
This module has introduced the subject of project management. The integration of scope, schedule and budget
into a project plan is not an easy task. Engineering education has prepared you with the requisite skills to develop
the technical part (scope) of the plan. The other elements, scheduling and budgeting, and contracting methods for
services, will require additional information and experience. In addition to the "mechanics" of project management,
there is a human dimension, that of team "players" and leaders. A successful project benefits all participants.
Some people view project management as a tool for forcing people into meeting schedules and keeping to budg-
ets. It is easy to envision this scenario: "Our data shows that you are late! Get back on schedule!" If the contract
allows, a far more effective scenario is for the project manager to approach an owner who appears to be at risk of
missing a scheduled commitment, and asking "is there any help you could use that would enable you to meet this
upcoming commitment?"
Often, success is not possible without a leader (as differentiated from a manager). When it seems impossible to
achieve the goals, a leader's determination and vision can change things. George Bernard Shaw best summarized
a leader when he said: "You see things; and you say, 'Why?' But I dream of things that never were; and I say, 'Why
not?'"

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Glossary
Because projects vary in scope, how resources are applied, and how significant the considerations of timely com-
pletion and funding sources are, there are many engineering/business words/terms that are used. The following
are incorporated in this Guide.
Baseline - The initial budget and schedule developed to achieve the goals.
Basic Design Package - Further development of Conceptual Engineering to be able to solicit independent confir-
mation of the project costs and timing (when construction or manufacture is involved).
Conceptual Engineering - Further development of the concept from the Planning Study to arrive at a decision to
invest (apply additional resources).
Critical Path - The critical path is, by definition, the subset of activities that must be completed on schedule in or-
der to complete the overall project on time.
Deliverables - A performance standard for each sub-unit or task. Examples are drawings or specifications, or fin-
ished products.
Milestones - When depicting a Project Schedule, it sometimes becomes necessary to introduce a milestone in
order to preserve the accuracy of the representation. A milestone is a fictitious activity of null duration. It has a cost
of zero. However, it does have a reality in that it may not commence before any of its precedents are completed
and none of its successors may begin until it has been completed. It is usually reserved to demonstrate a signifi-
cant event. Examples are "Ready for Testing" or Manufacture.
Network - The interdependencies of the component tasks.
Physical Progress - A measurement of actual items not related to the cost. For example, the number of drawings
issued that can be related to the total expected.
Planning Study - The initial technical and financial evaluation of a concept to determine if additional investment in
resources is warranted.
Predecessor - An activity that must precede another. Quality - An attribute that describes an acceptable element
of scope or design detail.
Resources - Capital or Human resources. Scope - The project scope defines technical requirements (systems,
equipment, facility requirements) for the product or facility. Successor - An activity that must follow another. Work
Breakdown Structure - Project activities broken down into sub-units or steps that are of a reasonable duration.

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Quiz
1. The types of organizations that employ engineers and how they are utilized in a project team is the subject of a
future module. However, the engineering involvement in the development of a project was presented. Consider the
following:
An energy company utilized its in-house resources to estimate the cost of a new facility, when it would be operable,
and the economic benefit. The basis of these estimates was a Planning Study done by its staff.
Because the project looks attractive, further development is warranted. However, the accuracy of the work pre-
sents an unacceptable risk of cost overrun and, therefore, significantly more engineering resources are needed to
complete additional development of the design, and construction and commissioning planning, to reduce the risk.
If the difference in time and costs to complete a Conceptual Engineering “package” verses a Basic Design Pack-
age is not significant in terms of the project economic benefit, but the funding risk is critical (you can’t overrun the
budget by a specified amount), which level of development (completion of project phase) would you seek? Why?
1.a. Conceptual Engineering Package.

All you have to do is add 25% to the budget to cover the accuracy. If you missed some detail, it is not important. We
can bet on the precision of 25% accuracy based on statistics.
1.b. Basic Design Package.

The anticipated cost accuracy discussed for various phases implies that completion of a Basic Design Package would
provide an accuracy of +/- 15%. This means that more of the project details (auxiliary systems, local construction and
operating labor costs, etc.) are addressed. Thus, the high accuracy means a more complete scope definition as well
as less risk of overrun.
1.c. Detailed Design.

Because of the higher accuracy, 10%, the project should wait until completion of this higher level of detail. Always
take as long as is needed.
1.d. Any of the above.
2. What were the three goals in President Kennedy’s vision of landing a man on the moon and safely returning him to Earth
before the decade was out?
2.a. Only one – beat all nations to the moon at any cost. Others were secondary.
2.b. Reliable design completed by the end of the decade at any cost.
2.c. Reliable design, completed by the end of the decade with non-military budget
that could be supported by the taxpayers – to be developed.
2.d. Reliable design completed by the end of the decade for $1 billion.

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3. If engineers from one organization are responsible for completing a design for a customer, what risk is incurred
by the customer in obtaining a fixed price contract for manufacture or construction before scope definition is ap-
proved by the user?
3.a. The prestige of the engineering organization might surpass that of the
customer.
3.b. There is no risk. Engineers only need to take direction from their customer.
If obvious changes are needed, they will always be reimbursed.
3.c. No risk because the end user is not usually significant.
3.d. If the scope of work is not well defined, an increase in cost and/or time
required for completion should be contemplated.
4. Why is it important to maintain a Baseline Schedule for comparison?
4.a. Need to keep a record so no changes are made.
4.b. Need to use as a defensive weapon for disputes if the project goals are
not met.
4.c. A Baseline assists in identifying negative trends in the updated schedule so

that recovery efforts toward achieving the original completion date may be
instituted, or potential time related cost increases identified.
4.d. All of the above.
5. Why is it necessary to track total invoiced costs and % physical completion?
5.a. Companies didn’t invoice for more than that which is completed. Measuring
actual, physical, work provide good records to review after project
completion.
5.b. Measuring physical completion is necessary for comparison with invoiced

costs only before final payment.
5.c. It is important to evaluate the cash flow only.
5.d. It is essential that the funds that have been paid and those that are to be paid
shortly do not exceed that which is actually completed. Budget trends can
then be identified and productivity evaluated.

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Quiz: Answer Key
1.b.
2.c
3.d
4.c
5.d.

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Project Controls
TABLE OF CONTENTS
Introduction 24
Part 1: Control Tools 25
Part 2: Identification of Performance 26
Part 3: Analysis of Goals 31
Part 4: Attenuation of Problems 31
Part 5: Critical Tasks vs. Delays 33
Part 6: Oversight 33
Quiz:: 35
Quiz: Answer Key 37

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Project Controls
Introduction
As we know, the best-laid plans for any project won't succeed unless the work is
systematically managed and monitored as it progresses. That is the Project Con- Educational Goals
trol function. This process gives all participants the information to make correc-
tions as needed, to bring the project to completion, on time and on budget. Maybe, After completion of this
ideally, even ahead of schedule, if delays are averted and the allotted "float time" module, you will learn:
is not used.
 The importance of the
To begin, it is useful to review previous topics in the Professional Practice Curricu- tools used to identify,
lum. In the Project Management Module, the interrelationships of scope, schedule analyze and attenuate
and budgets were discussed. The importance of budget and schedule controls negative changes to
were recognized. These issues are analyzed on a typical project by various con- the original project
ceptual tools. Typical tools provide the information for both cost and schedule vari- plan.
ances, as well as trend analysis.  The importance of ap-
plication of project con-
In the Contracting Organizations and Options Module, the various contract issues trol tools early and sys-
were discussed. The contracts between the various project entities such as the tematically throughout
owner, the designer and the contractor, contain the definition of scope, the project the project
cost and timing, and a protocol for prompt response should these "performance"
issues deteriorate.
Baseline budgets and schedules contain the essential reference points for analysis. The project baseline budget is
a breakdown of the contractually agreed to cost, while the project baseline schedule is a breakdown of the contrac-
tually agreed to timing. The breakdowns for these documents should contain similar information (tasks or cost
grouping). Inconsistencies will cause delays while they are resolved.
A budget breakdown should list elements of costs that could be monitored as the project progresses. For example,
if equipment (material) items will be "packaged" into the scope of a purchase order and the installation (labor) of
this equipment will be contracted from a different service provider, each would be separately listed as budget
items.
The Work Breakdown Structure (WBS) identified on the project schedule would contain the timing of the work sub-
divisions for key equipment (drawing/specification approval, purchase, fabricate and ship) and installation (setting,
alignment, grouting) and the logical relationships between each element that comprises the entire scope of work.
The WBS should be organized to incorporate different budget elements.
Since the project scope typically includes regulatory issues at the beginning (permits), during (inspection/QC), and
the end (Certificate of Occupancy, Testing Certifications, etc.), these elements should be part of a baseline sched-
ule.
Since projects are typically broken into phases, separate budgets and schedules are essential for each of the pro-
ject phases. A design, procurement, and construction schedule, applied during the construction or installation
phase, must often be supplemented by a separate system testing and commissioning schedule (including warran-
ties, as-built drawings, etc.) and phased turnover/training and acceptance. However, the overall budget must con-
tain sufficient detail for all phases of the project - from the beginning (baseline).

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Project Controls
1 Control Tools
Project controls are necessary to manage both variances (actual changes in

planned items) and trends (anticipated changes or risk) for elements of scope, cost
and timing. (For purposes of this Module, scope is defined as the equipment, materi-
als, and labor required in the design basis, for a designer, or the design documents,
for a contractor, and the means and methods required to complete the work.) Be-
cause variance and risk management require the elements of identification, analysis,
and attenuation (the minimizing of potential problems), the focus of project manage-
ment must be on communication (and, therefore, understanding) by each party of
the issues and risks involved. Tools must be in place to evaluate completion pro-
gress against the initial, or "baseline," plan to the satisfaction of each party.
Identification and analysis of cost and schedule issues (which often are the result of
scope changes) begin with an evaluation of variances from the baseline plan, at the smallest definable task. For
example, tasks such as the work of an engineer include the labor means and methods to develop a drawing, speci-
fication, etc. These tasks can cause problems in timely completion, due to changes in the scope of work or to the
planned design sequence.
Attenuation requires an understanding of contractual requirements to rapidly respond to project scope or other
changes, as well as frequent/periodic monitoring of cost and schedule variances and trends, implementation of
effective safety and quality assurance plans, and also flexibility in the application of resources. Flexibility must be
built into a project budget (additional contingency to recover lost time) and schedule (ability to re-sequence work to
recover lost time without increasing costs). With early application of a "semi-continuous" process to address posi-
tive and negative impacts to budget procurement activities, the progress of critical tasks, and potential or pending
scope changes, these variances and risks can be managed. It should be noted that positive variances are also im-
portant because it may be possible to exceed the goals or provide offsetting allowances as the project progresses.
The focus of controls is not only on issues, but also on the timeliness of the decision-making process. To avert
costly delays, issues must be resolved as soon as possible within a phase, and certainly prior to moving to the suc-
ceeding phase. This is shown via the dotted line "loop" shown in Figure 1.

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2 Identification of Performance
Overview
The identification of performance begins with an understanding of the business plan (in the private sector) or pro-
gram plan (for the public sector); especially the elements of scope, cost, and schedule. At each phase of a pro-
ject, negative variances in budgets and schedules are the most common areas to be identified and investigated.
Time-tested project control tools (such as scheduling software, cost-forecasting reports, and documentation pro-
cedures) must be integrated at each phase of the project. A risk management process (beyond the scope of this
presentation) can be used to supplement typical trend analysis tools.
Identification consists of observing a deviation from a "baseline". These deviations either have obvious conse-
quences (they clearly will increase cost or duration), or they may not be able to be quantified without further anal-
ysis. Not only is the nature of the variance important, but also the contractual responsibility. For example, site
conditions (nature of the soil, unknown buried components, etc.) that differ from the defined basis should be con-
tractually addressed in terms of who will pay for any impact, should mitigation fail.

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Since identification is the starting point in the process, and essential for notification and communication with the
project participants, the importance of complete documentation must be emphasized. Without a clear definition and
presentation of predicted and evolving variances and risks, resolution will not be possible. The key areas include:
Scope Definition, Project Cost/Budget, and Project Schedule.
Scope Definition
While contract and delivery method risks were previously addressed in the Contract-
ing Organizations and Options Module, the primary focus of uncertainty lies in ade-
quate scope definition in the contract attachments. Because a typical project plan
development consists of discrete phases, uncertainty can be related to complete-
ness of scope definition at the end of each phase.
At the inception of a project, the end user or owner may not be 100% certain of the
scope of a project designed to fulfill his needs. The desired "program of needs" may
also continue to evolve during the design and construction phases. Similarly, envi-
ronmental issues (i.e., asbestos abatement, lead abatement, etc.) may not be fully
defined. The variability in design requirements, operational needs of the owner's
business, and unknown conditions, therefore, play an important role in identification
of impacts to the project goals.
While disputed scope definition and schedule delays affect project costs, change orders due to owner-initiated
scope changes or unanticipated field conditions are typically the most frequent contribution to cost overruns for an
owner. Cost overruns and schedule delays apply equally to fixed cost and reimbursable cost contracts. Of course,
the timely resolution of all changes is essential to address the cost increase, especially where the change order
work impacts other ongoing work or also has a time impact. All change orders (whether between owner and con-
tractor or contractor and subcontractor) should be tracked to identify how long a change order is in the process of
approval. This "aging" information is useful for determining the need for management intervention.
Change order costs that are associated with significant redeployment of resources or delays can be evaluated if
the project schedule is cost- or resource- loaded. The project schedule is a useful tool to assess the cost/time trade
-offs for such changes.
Finally, for relatively larger change orders, an owner could obtain an independent estimate from a specialist esti-
mating entity to validate the contract change proposal. This will facilitate a decision on both the method and
amount of payment. If cost or time impacts cannot be agreed to, a "force account," or time and materials tracking
system, are typically implemented to allow the work to proceed while discussions are ongoing. Alternately, a con-
tract provision for an independent dispute mediator can expedite critical change order negotiations.
Project Cost/Budget
As shown in the Project Management Module, during the course of a project from the planning phase through con-
struction bid preparation, more accurate estimates are developed to reduce uncertainty. Typically, information from
informal quotations, or historical information, engineering judgment, and experience factors are used by owners or
designers in assembling cost data during early project phases. As more scope definition is developed, cost data
are obtained from suppliers, manufacturers, and contractors.
It's important to note that since 100% design completion is rarely attained when going out for bids, final completion
costs above the bid cost should be expected - even for a lump sum bid. Therefore, an owner's project budget must
include an adequate contingency to account for both the accuracy of an estimate and an allowance for unforeseen
conditions and changes.

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Figure 2 depicts the components of a budget. The dotted boxes shown are the ones that are unknown prior to bid.
All should be self-explanatory, except General Conditions. While the definition of General Conditions varies, these
are costs related to performing the work in the field that do not include a permanent feature of the final asset. The-
se include trailer rental, small tools, supervision costs, telephone, etc.
After the detailed design is com-

pleted and the contract docu-
ments are finalized, the project
owner is ready to go to the mar-
ketplace and find the true cost
of constructing the project.
While the designer has been
estimating the costs throughout
the design phase, they are all
theoretical. Until a contractor
submits a price for the work,
which may be backed up by a contract and a performance bond (see Contracting Organizations and Options Mod-
ule), the owner can't be sure of the price of construction. As stated before, the contractor's risk requirements can-
not be estimated and will only be evident at the time of bid. Because of this, the more the design is complete and
clearly presented, the better the opportunity to obtain competitive bids. A well-coordinated set of design documents
for the different construction trades is essential for competitive bidding, and will provide the information for pro-
gress measurement during construction. At this point, the cost estimate box in Figure 2 becomes the "project budg-
et".
Once a budget has been established, each element of expenditure must be compared with the budget and some
means applied to reduce or eliminate cost increases (value engineering, splitting or combining bid packages, etc.).
Cost variance analysis is an essential part of a project controls process. Cost variances are identified as the actual
costs committed, via purchase awards and payments. Earned costs are developed from a budget task grouping
(e.g., installation of piping in an area) where each element of work is quantified (i.e., feet of various types and sizes
of pipe to be installed) and the unit cost of each is identified. As a quantity of work is complete, the value, or earned
value, of the work can be computed. This, then, allows a comparison with the actual costs incurred, which will per-
mit productivity or other variance evaluations. Utilizing the individual variances, a forecast for the entire task group
may be made. By applying this to all tasks in the Work Breakdown Structure, weighted on a total budget costs ba-
sis, an overall percent complete and resulting forecast to compete can be developed.
Without a change in scope, resulting from value engineering or some other technique, negative trends (increase
above the budgeted amount) can only be relatively mitigated by cost savings from another budgeted item, or utili-
zation of a contingency (which is an allowance for uncertainty). Figure 3 is a contractor Cost Tracking/Forecast
Summary for the construction and commissioning phases of a project. This summary shows variances compared
to the budget and includes a physical completion evaluation so that productivity may be factored into the forecast-
ing methodology. This is a simplified format. Typically, a summary would also include columns that show changes
from the prior period; this information is vital to timely identification of variances.

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COST TRACKING/FORECAST SUMMARY
Period Beginning: 8/1/2000
Period Ending: 8/31/2000
Budget vs.
Budgeted Actual Percent Earned Cost to Forecast at Completion
Description Cost (1) Cost(2) Complete Value(2) Complete Completion Variance (2)
GCs $6,188,831 $5,534,207 69.6% $4,305,274 $1,883,557 $7,417,764 -$1,228,933
Pipeline Materials $9,387,526 $7,393,749 100.0% $9,387,526 $0 $7,393,749 $1,993,777
Pipeline Valves $479,000 $471,375 100.0% $479,000 $0 $471,375 $7,625
Process Equipment $9,215,134 $6,450,588 99.6% $9,181,038 $34,096 $6,484,684 $2,730,450
Sitework $2,091,004 $2,314,505 88.5% $1,849,514 $241,490 $2,555,995 -$464,991
Sanitary & Temporary Water $283,824 $333,746 94.6% $268,541 $15,283 $349,029 -$65,205
Structures $4,603,424 $4,451,060 100.0% $4,603,424 $0 $4,451,060 $152,364
Plant Mechanical $3,638,212 $4,046,277 98.8% $3,593,826 $44,386 $4,090,663 -$452,451
Admin Building $2,374,973 $1,646,427 64.8% $1,538,983 $835,990 $2,482,417 -$107,444
Aux. Building $2,785,286 $2,553,601 86.4% $2,405,466 $379,820 $2,933,421 -$148,135
High Voltage Electrical $2,492,100 $2,484,100 100.0% $2,492,100 $0 $2,484,100 $8,000
Elec Substation Foundation $207,500 $154,838 100.0% $207,500 $0 $154,838 $52,662
Medium/Low Voltage Electrical $6,031,112 $5,129,526 86.2% $5,201,834 $829,278 $5,958,804 $72,308
Instrumentation $585,000 $235,297 77.8% $455,130 $129,870 $365,167 $219,833
Storage Tank $2,217,000 $2,445,685 100.0% $2,217,000 $0 $2,445,685 -$228,685
Route A $4,104,118 $2,979,062 88.4% $3,630,059 $474,059 $3,453,121 $650,997
Route B $2,663,236 $2,720,352 100.0% $2,663,236 $0 $2,720,352 -$57,116
Paving, Curb, Gutter $1,338,181 $736,000 55.0% $736,000 $602,181 $1,338,181 $0
Cathodic Protection $482,500 $392,810 95.4% $460,165 $22,335 $415,145 $67,355
Crossing & Tunneling $1,015,125 $534,409 100.0% $1,015,125 $0 $534,409 $480,716
QA/QC $542,615 $476,732 93.3% $506,441 $36,174 $512,906 $29,709
Permitting Activities $275,000 $12,375 4.5% $12,375 $262,625 $275,000 $0
Commissioning $2,269,819 $213,808 9.4% $213,808 $2,056,011 $2,269,819 $0
Subtotal: $65,270,520 $53,710,529 88.0% $57,423,365 $7,847,155 $61,557,684 $3,712,836
Contingency $3,206,012 $0 (3) 0.0% $0 $3,206,012 $3,206,012 $0
TOTALS: $68,476,532 $53,710,529 N/A $57,423,365 $11,053,167 $64,763,696 $3,712,836

1. Includes approved Change Orders
2. Costs for this period and associated variance omitted for presentation purposes
3. Subtotal variance is positive (no contingency utilized)
The amount of contingency remaining and variances are critical indicators. Forecasting not only includes evalua-
tion of the variances discussed above, but also identification of trends. Trends are an early warning that a reasona-
bly expected cost increase or decrease will occur at a later point. Depending on the magnitude or how long it takes
to quantify, it may be added with the related line items (as a committed cost) in the variance analysis or else incor-
porated as a trend via an adjustment to the Contingency.
Project Schedule
Thinking in terms of sequential phases ensures that all decisions are made and all resources are allocated for effi-
cient movement into each succeeding phase. The initial owner-approved schedule represents a fully integrated (all
phases) project with additional definition for the current project phase. It is the planned, or baseline schedule, for
future reference until changes are authorized. As discussed in the Project Management Module, the objectives of
scheduling multiple tasks (from a work breakdown structure, WBS) include:
 Providing for owner input via milestones, approvals or other activities

 Identifying calendar completion dates and constraints
 Determining cash or cash flow requirements
 Determining resource requirements
 Refining estimating criteria (validating the budget)
 Obtaining improved project control capability via what-if analyses capability
 Providing effective communication for buy-in by all participants (including subcontractors)
 Providing a basis for easy revision and comparison to the baseline schedule
All participants must contribute to, or "own", the schedule and all revisions as the project progresses. Otherwise,
coordination breaks down.

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In order to own a schedule, the baseline or updated information must be provided in a user-friendly manner. The
demands and the varying requirements for timely information by different participants often results in the need for
different formats, or different levels of detail extracted from the schedule database, for owners, subcontractors, etc.
This is done to enhance communication so all parties can review issues and that time-related impacts can be iden-
tified and quantified.
Of particular importance to all participants is the focus on the project's critical path (or longest path of related
tasks). Incorporation of cost and resources associated with activities, especially near or on the critical path, allows
discussion and decisions regarding correction of negative schedule impacts. Whether from scope changes, man-
power, or material issues, these impacts could introduce a time-related cost to the contractor or owner, or both.
In order for the project schedule to be a useful tool to identify, analyze, and prioritize the related impacts (and asso-
ciated costs), certain factors must be incorporated:
1. This Critical Path Method (CPM) schedule should clearly demonstrate how the work is to be completed. The
work sequence and time durations should be the actual intended ones, not simply approximations to satisfy the
contract requirements and use up all the available time in the schedule.
2. Total float should be available, with flexibility built into sequencing to "recover" lost time. Total float is the sched-
ule equivalent of budget contingency, and is equally important.
3. The schedule should be sufficiently detailed (using the WBS) to clearly show the use of major equipment (e.g.,
crane for steel erection), sequence of activities by task and location, etc., as well as regulatory milestones.
4. Schedule activities should be cost- and/or resource-loaded, to adequately evaluate options to sequencing and
durations planned.
5. The actual progress of the job should be tracked and recorded in accordance with the original (baseline) sched-
ule or authorized changes. 6. Near term (two-week), look-ahead bar charts (by trade) are used to supplement the
CPM.
Tracking progress should be related to a "physical progress" measuring system, and not be merely an echo of the
percent of resources expended from the budget, or the construction duration expended from the schedule. The
application of physical progress measurement is an important part of cost and schedule control for all design and
construction activities. Within reason, the greater the detail, the greater the accuracy.
In order to identify variances in a timely way, the schedule should be updated periodically throughout the life of the
project. Usually this is a once-a-month occurrence, with distribution of the results to all involved parties. After each
update, all parties should ask themselves the following three questions:
(1) Where are we now?

(2) Why are we here?
(3) What should we do about it?
As a project nears completion, the focus of scheduling changes from construction completion by area, to comple-
tion by systems or phased operational needs. Pre-commissioning and construction completion must be treated as
concurrent activities. As such, the CPM, while essential for completion tracking from start to finish, must be supple-
mented with a pre-commissioning or operational transfer schedule. Without this, time impacts cannot adequately
be identified nor analyzed.
In summary, schedule variances can be identified when completion progress is regularly compared with the ap-
proved baseline schedule, and supplemental schedules. Negative trends (increase in project duration) may require

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re-sequencing or additional resources to minimize the variance from the baseline. They must be evaluated and
acted upon promptly.
3 Analysis of Goals
Similar to identification via use of project control tools, analysis involves quantifica-
tion of the impact on the project goals. If the impact is first identified in qualitative
terms, it must be further developed into quantitative terms. Only quantitative values
can be related to the business plan performance goals of project cost and schedule
duration. The numbers are what "count."
The qualitative rating, or prioritization, however, is often used to help focus further
analysis and attenuation activities. Figure 4 shows a qualitative ranking of risks to
various goals. In this example, action plans are required for any risk with a value
higher than 2.
FIGURE 4 RISK RANKING - PROJECT X

(Low = 1, High = 4)
4 Attenuation of Problems
Once the variances from project goals are quantified and their responsibilities assigned, informed team decisions
may be made and the necessary management support provided to mitigate the impact. Time is of the essence in
engineering and construction, and, therefore, for the decision-making process. The importance of quick and early
action should be obvious. Changes to scope made at the start of a project phase can generally be accommodat-
ed with the least cost and time impact.
As discussed in the Project Management Module for the three project goals of scope, cost, and schedule, a
change in one will impact at least one of the others. Therefore, it is important to prioritize the goals at the start of
a project. Effective control of scope changes, adequate budget contingency, and baseline schedule "total
float" (time allowed for a task to slip behind without impacting the completion date) are essential in reducing the

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variances of the three goals. Project scope and cost attenuation methods were discussed in the previous section.
The means and methods are the remaining issues that impact schedules.
Maintaining the Schedule
Early and continuous planning and scheduling of a project allows for prompt detection of schedule impacts with
sufficient time to explore a range of options to maintain the schedule. Scheduling the project from beginning to end
provides the benefits of expending resources early to stay on or ahead of schedule. This avoids expending even
greater staffing resources at the end of the project, trying to catch up.
As an example of resource options, Figure 5 shows a sequential or finish-to- start (i.e., finish the entire preceding
task before starting the next) schedule that satisfies the contract duration. However, you should realize that this is
not the typical way the project is to be built. It is essential that the work is broken into tasks of reasonable work-day
duration. 15-day tasks, in this example, are difficult to manage unless subdivided into smaller tasks. A sequential
plan often does not provide adequate flexibility to respond to delays. By subdividing the activities into concurrent
(those that may occur simultaneously) tasks, the work can be completed in a shorter time with the same total re-
sources. Figure 6, shows a possible approach, given manpower availability. The critical activities are connected by
logical constraints and durations. A delay in one activity will delay the project completion date. The critical (longest)
path is determined by summing up the longest activities for each sequence below. In essence, because of the
shorter overall duration, Figure 6 builds in "total float" (the schedule equivalent of budget contingency) to the con-
tract completion date, thereby providing for potential disruptions. This shows that projects can also be accelerated
by re-sequencing, as well as the obvious method of providing additional resources to reduce critical path durations.
Figure 5:
Contract Completion
60 WORKDAY S
TRENCH BEDDING LAY PIPE PPG TES T BACKFILL
10 Days 15 Days 15 Days 10 Days 10 Days
Figure 6: Cumulative Days
2 5 8 11 14 17 21 24 27 31
TRENCH 1 TRENCH 2 TRENCH 3 TRENCH 4 TRENCH 5
BEDDING 1 BEDDING 2 B EDDING 3 BEDDING 4 BEDDING 5 31 w orkdays

LA Y P IP E 1 LA Y P IP E 2 LA Y P IP E 3 LA Y P IP E 4 LA Y PIPE 5
Contract Completion
60 w orkdays
PPG PPG PPG
TEST 1 TEST 2-4 TEST 5
3 Days 4 Days 3 Days
B A CKFILL
BACKFILL 1 BACKFILL 5
2-4
3 Days 4 Days
3 Days
29 days
Total Float

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5 Critical Tasks vs. Delays
The engineer cannot afford to spend a great deal of management time and re-
sources on activities that are not "critical" to project completion. On many projects, a
small percentage of the schedule activities are critical. Because some of the "near
critical" activities (those that are closest to critical path activities), could subsequent-
ly prove to be the bottlenecks that ruin any chance of on-time project completion,
near critical activities should also be closely monitored.
Early knowledge of a delay will allow exploration of options such as:
 Identifying those critical activities which could be shortened by the application of

additional resources (i.e., increased staffing or selected overtime);
 Identifying those activity sequences which constrain the completion date and
then considering re-sequencing to eliminate or reduce the constraint
 Accepting the reality of a delayed completion date and planning alternatives to the entire project being done
on time. (phased completion)
In determining the responsibility for recovery of a delay of project completion, consider that there can be two
basic types of delays on a project: excusable and non excusable. These terms apply to the contractor's perfor-
mance requirement. Unusually severe weather and delayed access to the site are two examples of excusable
delays to a contractor.
Excusable delays are often compensable by the owner and the contract time is extended, so that liquidated dam-
ages or other owner contractual delay remedies do not apply to the extended contract duration.
Inadequate staffing of the project and rework by the contractor results in non-excusable delays. Non-excusable
delays are not compensable and could expose the contractor to owner's delay-related remedies.
If an excusable and a non-excusable delay occur during the same time period, they are said to be concurrent
delays. (Do not confuse concurrent tasks with concurrent delay responsibilities.) Typically, an extension of con-
tract time is granted for concurrent delays (owner-delay remedies do not apply) but no compensation is granted
to the contractor. These are excusable but not compensable.
The contract should identify which delays are excusable, as well as which are compensable. As an example,
some contracts contain a No Damages for Delay clause, which is intended to deny compensation to a contractor
for owner-caused delays by granting only a contract time extension. In this example the contractor also bears full
responsibility for concurrent delays; thus, the delay is neither excusable nor compensable. Because there are
limits to application of this clause, documentation and concise presentation of unusual impacts related to the
schedule is important.
6 Oversight
In addition to establishing a good project implementation plan, oversight, or independent periodic review, should be
considered an element of the project controls process. On-site project personnel can become overwhelmed in the
details of construction and, thus, delay control activities. Often this results in inaccurate reporting and a loss of ca-
pability for timely response. The independent reviews help keep events on track.
Oversight is not an audit. Audits are post-mortem examinations and deal with performance in the past. They carry

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an undertone of criticism and punitive connotation. By contrast, oversight teams use

past performance to learn from, and to encourage future excellence while discourag-
ing poor performance. What is going right and why, is just as important as what is
going wrong and why. Through observations of past performance and projections for
future performance, Project Oversight may result in recommendations and a com-
prehensive action plan to implement improvement opportunities. The goal is to as-
sist in meeting (or exceeding) all project and organizational goals.
In addition to these processes, operating companies often conduct formal reviews

prior to construction funding approval. This "design review" focuses on the elements
of risk identified previously (contract type, delivery method, completeness of scope,
definition, budget, cost contingency, schedule, schedule contingency, and planned
resources). This effort is intended to support that of the project teams and confirm
that the project goals are consistent with organizational goals.
7 Conclusion
In any project, variance from the project plan is to be expected. But all successful
projects have procedures in place, from the beginning, to deal with anticipated vari-
ances. The most successful projects minimize variances by anticipating or evaluat-
ing potential risks and addressing them as early as possible.
In short, effective "continuous variance seeking" management is the first step in ef-
fective control. The timely analysis of negative variances and trends will allow quan-
tification and evaluation of the best available opportunities (not just a single oppor-
tunity) for attenuation, and therefore, success. For this, intricate coordination and
communication are the project manager's best friend.

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Quiz
1. “WBS” stands for:

a. Workers Best Systems
b. Worldwide Basic Structures
c. Work Breakdown Structure
d. Waste and Breakage Standards
2. Project budgets can be:

a. Designed as a whole after supplier’s bids arrive.
b. Parceled out to suppliers by the week.
c. Integrated into initial overall planning.
d. Phased in as work progresses.
3. Variations in plan:
a. Are always negative.
b. If positive, enable goal to be exceeded.
c. Only affect the budget.
d. Only affect the schedule.
4. Deviations from baseline plans:

a. Always suggest immediate solutions.
b. May need further analysis
c. Have nothing to do with getting permits
d. Can’t be solved by the engineers.
5. The final goals of a project:

a. Are always clearly defined at the start.
b. May evolve as work progresses.
c. Cannot be changed once work begins.
d. Are not affected by budget considerations.
6. The most common cause of cost overruns is:

a. Changes in government regulations.
b. Schedule delays due to bad weather.
c. Owner-initiated changes in plan.
d. Accounting project mistakes.
7. The design is finalized before going to work:

a. Always
b. Never
c. Seldom
d. Usually
8. A contingency:
a. Can be adequately predicted.
b. Is an allowance for uncertainly in the plan.
c. Is an excuse for delays.
d. Should not be factored into the schedule or budget.

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9. Scheduling multiple tasks does not include:

a. Using identical formats for all parties involved.
b. Cash-flow requirements.
c. Completion dates.
d. List of possible “what-if” problems
10. The project schedule:

a. Needs to list if cranes are needed for construction.
b. Contains two-week schedule predictions.
c. Lists ways to recover lost time, with a total float calculation.
d. All of the above.
11. Progress schedules should usually be updated how often:

a. Daily
b. Weekly
c. Monthly
d. As needed, to report to owners.
12. The Critical Path Method of tracking:

a. Is a self-sufficient method.
b. Is the only way to manage a project.
c. Must be supplemented by other methods.
d. None of the above.
13. All delays:

a. Are of equal importance to completion.
b. Have equal impact on the budget
c. Can sometimes be excusable.
d. Can be blamed on bad weather.
14. Independent project oversight:

a. Is needed because on-site personnel are immersed in daily details.
b. Is the same as an audit.
c. Is intended to assign blame for mistakes and delays.
d. Has nothing to do with staying on target.
15. Successful project management depends on:

a. Sufficient budget to pay for overruns.
b. Complex coordination of work phases, from the start.
c. Owner’s staying at a distance during work.
d. Elimination of all risks and possibility of error

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Project Controls
Quiz: Answer Key
1–c
2–c
3–b
4–b
5–b
6–c
7–c
8–b
9–a
10- d
11- c
12- c
13- c
14- a
15- b

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Contracting Organizations and Options
TABLE OF CONTENTS
Introduction 39
Part 1: Parties to Contract 39
Part 2: Delivery Options 41
Part 3: Definition of Scope 42
Part 4: Contracting and Delivery Methods 42
Part 5: Contract Elements 44
Glossary: 49
Quiz: 56
Quiz: Answer Key 57

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Introduction
Many engineers are involved in the construction of facilities. Even if you do not
work in the construction industry, you may be called upon to work on a construc- Educational Goals
tion project in some capacity. For example, you may work at a research lab and
need to oversee the design and construction of a facility, or work for a utility or After completion of this
manufacturing company that is expanding, upgrading, or mothballing facilities, all module, you will learn:
of which may include extensive design and construction. At a personal level, you
may build your own house, or, as an engineer, be called upon by your neighbor-  Types of entities enter-
hood association or other organization in which you are involved to provide assis- ing into engineering or
tance or input into local construction projects. construction contracts
 Types of delivery meth-
The nature of all projects requires focus on three basic goals: quality, cost, and ods
time. A successfully managed project is one that is completed safely at the speci-  Types of contract
fied level of quality, on or before the desired deadline, and within the available  Criteria for selection of
budget. Each of these goals is specified in detail and constitutes the plan of the delivery methods and
project. These specifications then form the basis for project control, or manage- contracts
ment; the PPC module "Project Management" provides an introduction to this pro-
cess.
An element of project management is the establishment of contracts defining and

governing the project. Many types of contracts exist for the design and construction of projects, describing the
scope, or quality, of the project (the detail of which may vary widely), the relationships of the parties involved, the
compensation for work, the distribution of risk among the parties, and other legal aspects of the project. In select-
ing and defining the contract to use for a construction project, a thorough understanding of your situation and care-
ful consideration of the pro and cons of the various options are crucial to the success of a project. This module will
introduce you to the parties and the types of contracts involved in construction projects, their advantages and dis-
advantages, and considerations involved.
There are generally three parties involved with the design and construction of a project: the owner, the engineer
and the contractor (also known as the constructor). In many cases, these functions may be combined or further
divided. For example, a project owner may also be the engineer or hire one organization to perform both the engi-
neering and/or construction, or the owner may decide to hire multiple engineers and contractors to provide the en-
gineering and construction services. Contracting options must reflect the risks of all parties to a contract.
1 Parties to Contract
You may find yourself involved in a project in a variety of capacities. It's important that you thoroughly understand
you role as well as that of all the other players. In this section, we'll introduce you to the typical parties that enter
into construction projects.
The Customer
While not necessarily a party to the contract itself, customers are key players in any construction project. Each en-
tity, or party involved in a project, may have a different customer. The owner, for example, may need to respond to
the requirements of its Board of Directors, or it may be building a facility to lease to another entity, who would then
be its customer. For the engineers and contractors involved, the owner is the customer. For subcontractors, the
entity with whom they contract is the customer. Ultimately, the owner or the owner's customer are customers of all
the parties involved in a project, and, wherever possible, involvement of all parties in understanding the needs of

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the owner's customer is an essential first step in establishing the project basis or scope.
Each party considers the requirements of their customer before investing financially or entering in binding contacts.
If, for example, the owner of a restaurant intends to lease the facility to another party, then the owner must have a
clear understanding of the customer's requirements and may need participation of the customer in the engineering
and construction activities which further develop the needs. During engineering and construction, it is not uncom-
mon for requirements to change, and the customer(s) may need to be involved at various times throughout the pro-
ject.
The Project Owner
The project owner is an individual or organization that has a need to have a facility designed and constructed in
order to carry out its goals or obligations. This might be as simple as an individual wanting a new restaurant built in
a period of six to nine months, or as complex as the Federal Government wanting to build a nuclear waste pro-
cessing facility, with expansion phased over a period of twenty years. As such, the owner identifies the scope of
the project, in performance terms, and the financial and timing restraints. The owner must have a clear understand-
ing of its customer's requirements and may need participation of the customer in any engineering and construction
activities which further develop the needs.
In some instances, the owner may have the resources for complete engineering design. For larger projects, how-
ever, the project owner usually needs to procure the services of other organizations to design as well as build the
project. The project owner wants the project scope completed safely, on schedule, within budget, and of the re-
quired quality.
Thus, a key assumption in contract execution is that the owner understands, or will develop, the project require-
ments to convey complete and unambiguous direction to the engineer or constructor, and that the owner can pro-
vide unrestricted access to the work area in a timely manner.
The Engineer
The engineer, alternately referred to as the designer or architect/engineer (A/E), is an individual or organization
that is able to assist the project owner to meet its needs by designing (developing and specifying in detail the
scope, cost and timing of) the project. In addition to the actual design services (preparation of plans and specifica-
tions), the engineer might also assist the owner in determining its full needs, by activities such as procuring spe-
cialty items, providing construction bid documents and post-design completion services, and assisting the owner in
starting up and operating the facility. Because the engineer may perform work that has either a well-defined basis
or that requires investigation and analysis in order to improve the definition of scope, cost and timing more accu-
rately before proceeding to construction, these services may be provided on either a fixed cost or reimbursable
cost basis. (To be discussed later.)
The Contractor (Constructor)
Contractors can vary in capability, depending on the complexity of the project. The contractor may be as small as a
one-man carpentry service performing work in a local community or as large as an international organization em-
ploying tens of thousands of workers across the globe. The contractor will construct the facility as defined by the
engineer, for an agreed upon price and duration, utilizing its own means and methods. Prior to contract award, it is
essential that the design be comprehensive and that access to the construction site(s) be provided in a timely man-
ner.
Here are some of the basic types of contractor organizations

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General Contractor - This is an individual or organization that typically contracts with the project owner to construct
the facility. The general contractor typically does not perform the design of the project. The general contractor gen-
erally performs the work with a combination of direct hiring of individual craft workers and the use of subcontrac-
tors. Often, the work is bid as a fixed price, and the general contractor is responsible for safely "delivering" the en-
gineered scope at the specified price, within the time allotted. This is referred to as being "at risk," because the
contractor assumes any financial burdens that might result from project delays or cost overruns In some instances,
a reimbursable contracting method is used when the engineered scope is not sufficiently detailed.
Subcontractor - This is an individual or organization that typically contracts with a general contractor to perform a
specified part of the work as shown below, the subcontractor may directly hire craft personnel to perform the work
or use a sub/subcontractor.
Specialty Contractor - This is an individual or organization that provides specialized construction services, usually
involving a regulatory license or technical specialty (i.e., removal of contaminated soils, lead or asbestos abate-
ment, x-ray inspection, electrical, plumbing, mechanical - or heating, ventilation and air conditioning, HVAC, etc.).
They may be contracted directly to the project owner (in which case they are referred to as a "prime" contractor) or
as a subcontractor to a general contractor.
2 Delivery Options
The successful completion of a project is referred to as its "delivery." The "delivery method" describes the structure
of the working relationships among the owner, engineer, and contractor(s), in other words, their roles and responsi-
bilities as well as the overall project risk sharing. It is essential that all parties involved combine in a form (delivery
method) that allows each to manage the risks for individual and project success.
In addition to the general contractor and prime contractors, other participants can include:
Construction Management
When a project owner uses a number of separate, or "prime" contractors to construct a facility rather than hire a
general contractor, and does not have sufficient resources to manage the work, the project owner may hire a con-
struction manager to assist in obtaining bids, manage the construction, and interface with the A/E. This is referred
to as the design/bid/build delivery option.
Design/Build
This is an individual or organization that has the capability to both design and construct the facility that the project
owner requires, and turn over a facility ready to be operated. A Design/Build Contractor can be referred to as a
"Turnkey" contractor or an Engineer/Procure/Construct (EPC) contractor. Often this type of approach is sought in
order to accelerate completion of an ambiguous project.
Both reimbursable and "at risk" (fixed price) services are utilized, depending upon the
adequacy of scope definition. As scope becomes defined, a reimbursable contract may
be converted from reimbursable to fixed price (convertible contract) or guaranteed
maximum price. In the design/build method, scope is often presented in terms of facility
performance standards, such that further design detail is necessary. A variation of the
above is a Design/Build/Operate contract where the contractor also operates the facility
for the owner.

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3 Definition of Scope
At the inception of a project, the end user (the owner or its customer) may not be
100% certain of the scope of a project to fulfill their needs. The end-user's desired
"program of needs" may also continue to evolve during the design and construction
phases. Similarly, environmental issues (i.e., asbestos abatement, lead abatement,
etc.) may not be fully defined. The variability in design requirements, operational
needs of the owner's business, and unknown conditions, therefore, play an im-
portant role in contract options.
An example of a well-defined project would be a "duplicate" of one that was previ-

ously designed and constructed, such that this "duplicate" project benefited from
changes incorporated in the design phase of the first one. An example of a project
with evolving definition would be a first-of-a kind process or manufacturing facility.
4 Contracting and Delivery Methods
Important decisions in the project execution strategy include which delivery method to utilize and which type of
contract will best support the method selected. For example, should there be multiple contracts for design and con-
struction (design/bid/build) or just one (design/build), and should the contracts be reimbursable (cost plus) or fixed
price (lump sum)? The elements of that decision may determine the priority goals (cost or schedule) and how they
are to be managed. While there is much attention paid to design/build, or EPC, today, please note that one ap-
proach cannot be used for all projects, and no contract isolates participants from risk.
The owner has a number of choices in delivery approach and contract types. Key elements affecting the choices
include:
1. A focus on a particular business need relative to cost, schedule, quality and safety. For example, does the need
for a short duration ("fast track" schedule) justify potentially increased costs?
2. How the risks of design cost and/or schedule increase relative to completeness of scope definition, and how to
manage them. This is sometimes dictated by "perceived" risk avoidance (design/build).
3. The turnover or commissioning requirements. How extensive will training be, or will build/operate requirements
apply?
4. The view of the contracting method from the owner's, engineer's, and contractor's points of view. How can we
maximize the probability of a win-win outcome?
5. Where "management responsibility" will lie, and how interfaces among engineering, construction, and owner will
function.
6. The construction industry climate and potential contractor interest.
7. The project funding source. Since this is the life-blood of the project, all participants should understand how a
project is funded and the restraints and timing of approval for potential changes.
As mentioned earlier, there are two basic contract types: Fixed Cost (or Lump Sum) and Reimbursable Cost (or
Cost Plus), with many variations (Guaranteed Maximum Price, Unit Prices, etc.) and combinations of these two

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basic types. The most common include:
Cost Plus - This type of contract works best when the scope of the required work
cannot be established at the time the parties enter into the contract. The project
owner agrees to pay the designer or constructor their costs plus a fee. The fee could
be a fixed amount or a percent of the actual costs.
Lump Sum - This type of contract works best when the scope of work (quantity of
work and duration of project) are clearly stated in the contract documents and not
subject to major change. This type of contract would be used for a building project
when the design is complete and the project drawings and specifications can be in-
cluded as part of the contract. It must be noted that a fixed price contract is not a
zero risk (for the owner) option. Any contract is dependent on the completeness of
the scope documents and possible unknown field conditions.
Unit Price - This type of contract works best when the type of work is known, but the quantities cannot be deter-
mined prior to the work being performed. This contract form might be used for the installation of a sewer line when
it has been determined (from soil borings) that there will be some rock and some earth in the area where the sewer
is to be installed. However, the quantities of rock and earth cannot be determined, with certainty, until the work is
actually performed. With a unit price contract the bid documents usually contain the engineer's estimate of the ex-
pected quantities of each bid item. Many contracts have a clause that allows for an adjustment of the unit price in
the event the quantities vary by a stated amount from those estimated quantities shown on the bid documents.
Schedule considerations should be included by incorporation of a schedule of planned durations.
Guaranteed Maximum Price (GMP) - This type of contract works best when the design is based on conventional
means and methods, but insufficient information is available for construction bidding at the time of award. Typically,
the "Guarantee" (fixed Price) contains a reimbursable contingency to cover the Contractor's uncertainty. There may
also be an agreement for the owner to share in the savings or overruns against the GMP. In either case the con-
tract must clearly spell out what costs are to be reimbursed and what costs are fixed.
Convertible Contracts, unlike GMP contracts, usually remain reimbursable until the scope is fully defined. At that
point a fixed price arrangement is usually implemented. This allows the owner to reduce the contingency available
to the contractor.
As discussed, the owner's experience and available resources are essential in determining the contract type & de-
livery method. Your thorough understanding of the available options will allow you to be more useful in providing
guidance to the owner, or to your customer. Understanding how the different choices affect your roles, responsibili-
ties, and the risks you are assuming will also help you make the best decisions for you. Attachment 1 shows the
many variations of the above, along with typical advantages and disadvantages and scenarios for which they may
be appropriate. You'll need to consider the unique requirements of every project.
Other considerations include:
1. The engineer's or contractor's experience with similar projects and the project location, and the experience of
personnel assigned.
2. Effective and equitable use of monetary incentives (bonuses) or remedies (liquidated damages, etc.).
3. Owner approval and quality control. Will there be access restrictions, quality checkpoints, inspections, etc., to
incorporate in the schedule?
Decisions on contracting and delivery methods are often made on a qualitative basis. Table 1, is an excerpt from

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Business Roundtable's Report A-7, Contractual Ar-

rangement, Construction Industry Cost Effectiveness
Report which summarizes the risk of typical variables
in various contract types to owners. It is based on
projects for which the owner is reasonably certain of
the scope required to satisfy his/her needs and for
which the design is complete. The "Cost Impact to
Owner" is a qualitative assessment of the "risk" to the
owner. While this assessment is not universally
agreed to, it is presented to show an example of con-
tract qualitative risk analysis.
5 Contract Elements
Key Contract Provisions

Control of risks and claim prevention begins with a thorough understanding of, and
compliance with, key contract provisions and procedures that address them. There-
fore, whether you are involved as project manager, lead engineer, or in another way,
you must be familiar with all contracts and subcontracts. For example, before chang-
es to a contract cost or duration can be authorized, agreement on procedure for
quantification is necessary. Since subcontractors are often bound by these provi-
sions, a copy of the prime contract should be provided to major subcontractors. Typ-
ical key provisions include (see glossary for definitions of specialized terms):
1. Substantial/Final Completion
Project completion should be well defined. In some instances substantial completion and beneficial use are inter-
changed. However, if a project is being beneficially utilized, the project may be partially substantially complete.
Thus a clear definition of punch list-type activities that can be done after substantial completion should be included.
Reduction of retainage after substantial completion should be addressed. A time period should be defined for the
work and providing the documentation required for final completion.
2. Liquidated/Other Damages
Contracts contain provisions for liquidated damages or provisions for consequential damages when a contractor is
late in achieving substantial completion (usually). Some contractors include provisions for no (owner) damages for
delay. Because delay damages may be significant, and are a major cause of claims, the importance of continually
evaluating schedule risks and timely notification cannot be overstated.
3. Notification Of Extra Work
Contracts have a variety of clauses requiring the designer or contractor to notify the owner and/or the designer of
any work that is believed to be extra or outside the scope of the contract drawing and specifications. The time
frames for notification range from 24 hours to 30 days. It is essential that this be complied with so that the owner
may mitigate the impact, if possible, and the contractor document its position. Extra work disputes are also a major
cause of claims.
4. Notification Of Delay (Request For Time Extension)

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Most contracts require notification of any delay to the overall project completion date or milestone dates. Time
frames for notification range from 24 hours to 30 days. It is essential that this also be complied with as above.
5. Differing Site Conditions, Changed Conditions Or Concealed Conditions
Many construction contracts have some form of provision to cover the unexpected which is experienced when
excavating a site or opening an existing structure. Because these are different from extra work that typically im-
proves the project, unit prices for potential activities should be included. For example, if soil borings indicate a
certain rock hardness, provisions should be made for the possibility of discovering harder or more extensive rock.
All entities benefit by having these clauses in the contract, as they provide a fair solution for what otherwise might
be a difficult problem. Be alert to the notification requirements and documentation of suitable test results for this
type of change. Along with delays and extra work disputes, this is also a major cause of claims.
6. Authority Of Parties
The contract should clearly spell out the authority of the parties to approve change orders and provide for as
much authority at the project level as possible. In addition to publishing an organizational chart with names and
titles stating responsibilities, it should be clear what change order amount can be approved by each owner's rep-
resentative and how long the authorization process should take. This is essential for prompt payment for earned
work. If this is not in the contract, a Responsibility Matrix must be created at the start of a project.
7. Variation In Quantities
The standard clause in many unit price contracts simply states that if there's a variation in quantities, plus or mi-
nus a certain percentage, both parties will agree to negotiate a new price. This does not provide for a resolution
of the problem. Equitable contracts specify a pricing structure for changes for various ranges of the quantity of
work required.
8. Requirements For Progress Schedules
When the owner requires the designer or contractor to provide a progress schedule, it must be the type of sched-
ule needed for the project that the people using the schedule understand. One way for an owner to get the pro-
gress schedule that is needed, on time, is to establish a dollar value in the contract for submission of that sched-
ule. Lack of an adequate schedule submission will result in this dollar value being deducted from requisition. This
is not a penalty. As discussed, all participants need timely updates of the schedule to resolve issues.
9. Payment Terms
One of the most important clauses to establish in a contract is the payment terms and the procedures required to
obtain that payment. This should include the definition of stored material, retention payments, etc.
10. Rates And Markup For Time & Material (T&M) Work
There is always a possibility that a change in the scope will require work to be performed on a T&M, or cost-plus
basis (sometimes called a force account when a dispute is involved.) Therefore, it is important that the contract
include not only a clear statement of the rates to be used for labor and equipment, but also the markup for over-
head and profit to be applied to labor, equipment, material and subcontract work.
11. Time Limit To Correct (Cure) A Breach
When a party to the contract has breached a "material" requirement (lack of progress or repeated deficiency that

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jeopardizes performance), there should be a time frame stated (i.e., three days, seven days, etc.) in which the cor-
rective steps are to be started or completed, or default may be declared. Default could result in the contractor be-
ing removed from the site with work being completed by others.
12. Resolution of Dispute
If a dispute cannot be negotiated, the two traditional possibilities for resolution are arbitration and litigation (court).
Either may be preceded by mediation. There are pros and cons to arbitration vs. litigation. However, if arbitration is
specified with one party on the project, the same provision is needed with all other parties on the project (multi-
prime projects). All too often disputes involve a number of parties on the same project while a common issue
needs to be resolved in a single forum. Alternate forms of dispute resolution include third party "neutral" mediation
and dispute review boards. Contract provisions and identification of a third party neutral mediator or review boards
need to be incorporated prior to signing.
13. Time Limitations For Claim Submission
Most construction contracts clearly state a limitation on the time frame within which the contractor must submit a
claim. It may be within "X" number of days from when a change order was rejected, or number of days of complet-
ing the work (which can be vague), or prior to acceptance of final payment. This must be clearly understood and
strictly complied with.
14. Exculpatory Clauses
Contract exculpatory clauses are used in an attempt to shift the financial risks for a specified problem from one
party, usually the owner, to another party. The presence of exculpatory language can create an adversarial rela-
tionship at the start of a job. An example might be "Contractor is responsible for the risk of all subsoil conditions"
for which the owner has not provided information. These clauses, which seem to be easy solutions to difficult prob-
lems, often create more problems than they resolve.
15. Ambiguous Contract Language
It is probably impossible to prepare a contract with absolutely no ambiguity. Words like: reasonable, timely, prompt,
workmanlike, etc. need to be looked at carefully to see if they can be replaced with more precise language less
open to interpretation by both parties. For example, a phrase like "the engineer will promptly review shop drawings"
could be more clearly stated as "the engineer will review and return shop drawings within fifteen work days of their
receipt."
Forms of Agreement
For common projects, it is often cost effective to use standard forms of agreement. In the U. S., both the Engineers
Joint Contract Documents Committee (of the American Consulting Engineers Council, The American Society of
Civil Engineers, and The National Society of Professional Engineers) and the Design-Build Institute Of America
offer standard contracts for use.
Using standard document language to define the respective responsibilities of the parties to a project offers sub-
stantial advantage based on "test of time" experience of interpreting such language. But as noted on the cover
sheet of each document, they have important legal consequences and should be reviewed by an attorney before
their employment. Moreover, it is important to remember that the attachments to the contract provide the unique
information upon which the project requirements are defined. This is as important as the basic contract language.
Outside the United States, the United Nations Commission on International Trade Law (UNCITRAL) has published

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a guide for construction of industrial works. However, this is an area where there are no standard agreements, so
you must consult an attorney experienced in the specific country.
Insurance and Bonding
Insurance
Insurance and Bonding are tools used to transfer risk. Insurance requirements include General Liability, Work-
mens Compensation, Automotive, Builders All Risk, and Professional Liability (for an A/E). The owner typically
specifies the amount of coverage required of the A/E and contractors.
For example, the risk of having to rebuild completed work due to fire, storm or acts not under control of the con-
tractors or owner is typically managed via a "Builders All Risk" insurance policy. Liability limits must be sufficient
and include coverage for third parties and adjacent properties that may suffer damage from unanticipated condi-
tions during construction.
Another example is error and omissions risks, which are ostensibly managed by engineers' professional liability
insurance. Seeking this remedy, however, means that poor design has resulted in cost, time, or quality impacts.
Rarely are owners adequately compensated for their losses. A better solution is to be actively involved in the de-
sign and bid process and to alert the owner of risks and allow additional resources to be involved in quality con-
trol.
Another type of insurance an owner considers is business interruption.
Bonding
Bonds are also used to transfer the risks involved in construction. Types of Bonds typically utilized, include (see
glossary for the definitions):
 Bid Bond
 Payment Bond
 Performance Bond
The companies that provide these are called Sureties. Basically, Surety Bonds are guarantees. They are third
party agreements between the surety, owner and the contractor, under which the contractor and surety guaran-
tee the owner that the requirements will be completed. A surety bond is not an insurance policy. As stated, the
surety is a guarantor, not an insurer. Surety bond premiums are not based on actuarial or statistical probabilities
of loss. The underlying principle is that of a credit device.
Resource Allocation
Besides labor included in the cost estimates, the significance of availability and cost-effectiveness of qualified
supervision and support services should not be underestimated. First, the owner should consider its own staffing,
or that of the parties selected to represent them. The owner must select the right person(s) or entity - at the right
time to manage or oversee the job, and expedite approvals of design drawings, contractor product submittals,
etc. This is perhaps the most critical step the owner will take. Most importantly, how will requests for additional
funding be approved? Who will be granted the authority to approve changes to funding requirements. As dis-
cussed previously in "contracting and delivery methods," the execution strategy is usually related to the owner's
experience.

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An owner may be faced with a decision to contract for outside services or to manage a project with its own employ-
ees. A lack of understanding of the relationships of these two types of management interactions with the engineer
could lead to unanticipated conflicts. Even when qualified companies are involved, inexperienced people or those
with poor negotiation skills can be offered to an owner when the market for such people is tight. (Negotiation skills
are crucial! See the PPC module on Negotiation to hone yours).
As a project progresses from conceptual design through construction, the management method chosen introduces
particular risks during project phase transitions. For example, if a single project management team is responsible
for a project from concept to commissioning, it is expected that there would be less scope-related cost risks as
compared to when different project managers are assigned to each of the phases. (No single point responsibility
and more opportunity for issues to "fall in the cracks" or be misinterpreted.) While this qualitative risk is difficult to
quantify, an owner must consider this in the context of spending additional funds on a more comprehensive or
qualified team.
Finally, in certain locations, engineering and craft resources may be in short supply or union contracts may be
scheduled for renewal. In either case, these risks should be identified in sufficient detail so that alternate sources of
labor may be considered or potential cost increases factored into project decisions.
6 Conclusion
There have been many notable successes and failures in selection of the appropriate contracting method and con-
tract option. Focusing on the failures provides a basis to develop "Lessons Learned." Since a typical project con-
tains scope, time, cost (quality & safety are important also), the interrelationship between these helps determine
the preferred method. In the Project Management Module, the interrelationships are briefly addressed. Also, the
importance of applying contingency for budget and time are discussed in order to understand the risks as the pro-
ject progresses.
No contract or delivery method shields the signatories from risk. A thorough understanding of the scope of work,
timing, cost and how responsive the parties must be is a necessary starting point.

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Glossary
activity - In CPM (Critical Path Method) scheduling, a task or item of work required to complete a project.
activity duration - In CPM (Critical Path Method) scheduling, the estimated time required to complete an activity.
addendum, addenda (pl.) - Alteration or clarification of the plans or specifications provided to the bidder by the
owner or by the owner's representative prior to bid time. An addendum becomes part of the contract documents
when the contract is executed.
advertisement for bids - The published, public notice soliciting bids for construction. Usually, it is required by law
that the advertisement be published in newspapers of general circulation in the area, when public funds are to be
used for construction.
agent - A person authorized by another person to act on the first person's behalf. An architect is frequently the
owner's agent.
agreement - (1) A meeting of the minds. (2) A promise to perform, between signatories of a document. (3) In con-
struction, the specific documents setting forth the terms of the contracts between architect, owner, engineer, con-
struction manager, contractor, and others.
allowance - (1) In bidding, an amount budgeted for an item for which no exact dollar amount is available. (2) A
contingency for unforeseen costs. (3) The classification of connected parts or members according to their tightness
or looseness.
alternate bid - An amount stated in a bid which can be added or deducted by an owner if the defined changes are
made to the plans or specifications of the base bid.
arbitration - A method of settling disputes between parties of a contract by presenting information to recognized
authorities. Parties agree in advance to binding arbitration of disputes, either as a clause in the contract or at the
occurrence of a dispute. This method of avoiding litigation can save both time and money.
base bid - The amount of money stated in the bid as the sum for which bidder offers to perform the work described
in the bidding documents, prior to adjustments for alternate bids which have been submitted.
bid - A complete and properly signed proposal to do the work or designated portion thereof for the amount or
amounts stipulated therein. A bid is submitted in accordance with the bidding documents.
- bid bond A form of bid security executed by the bidder or principal and by a surety to guarantee that the bidder
will enter into a contract within a specified time and furnish any required performance bond, and labor and material
payment bond. C
- bid date The date established by the owner or the architect for receipt of bids.
- bid form - A form, furnished to the bidder, on which to submit his bid.
- bid opening - The opening and tabulation of bids submitted within the prescribed bid time and in conformity with
the prescribed procedures. Bid opening is preferable to bid letting.
bidding documents - The advertisement or invitation to bid, instructions to bidders, the bid form, other sample
bidding and contract forms, and the proposed contract documents, including any addenda issued prior to receipt of
bids.
bidding period - The calendar period beginning at the time of issuance of bidding documents and ending at the
prescribed bid time.

50
PPC
bonding company - A firm providing a surety bond for work to be performed by a contractor payable to the owner
in case of default of the contractor. The bond can be for work performance or for payment for materials and labor.
building code - The legal minimum requirements established or adopted by a governmental unit pertaining to the
design and construction of buildings.
business agent - An official of a trade union who represents the union in negotiations and disputes and checks
jobs for compliance with union regulations and union contracts.
change order - A written order to a contractor with the necessary signatures to make it a legal document and au-
thorizing a change from the original plans, specifications, or other contract documents, as well as a change in the
cost.
changes in the work - Changes to the original design, specifications, or scope of work requested by the owner. All
changes in the work should be documented on change orders.
clarification drawing - An illustration, provided by an architect or engineer, to explain in more detail some area or
item on the contract documents, or as part of a job change order or modification.
clerk of the works - A representative of the architect or owner who oversees construction, handles administrative
matters, and ensures that construction is in accordance with the contract documents.
closed list of bidders - A list of contractors that have been approved by the architect and owner as the only ones
from whom bid prices will be accepted.
closed specifications - Specifications stipulating the use of specific or proprietary products or processes without
provision for substitution.
completion date - The date certified by the architect when the work in a building, or a designated portion thereof,
is sufficiently complete, in accordance with the contract documents, so that the owner can occupy the work or des-
ignated portion thereof for the use for which it is intended.
completion list - The final list of items of work to be completed or corrected by the contractor. Sometimes called a
"punch list".
comprehensive general liability insurance - A broad form of liability insurance covering claims for bodily injury
and property damage which combines under one policy coverage for all liability exposures (except those specifical-
ly excluded) on a blanket basis and automatically covers new and unknown hazards that may develop. Compre-
hensive general liability insurance automatically includes contractual liability coverage for certain types of con-
tracts. Products liability, completed operations liability and broader contractual liability coverage are available on an
optional basis. This policy may also be written to include automobile liability.
construction documents - Drawings and specifications setting forth in detail the requirements for the construction
of a project.
contingent agreement - An agreement, generally between an owner and an architect, in which some portion of
the architect's compensation is contingent upon the owner's obtaining funds for the project (such as by successful
referendum, sale of bonds, or securing of other financing), or upon some other specially prescribed condition.
contract documents - (1) The owner-contractor agreement. (2) The conditions of the contract (general, supple-
mentary, and other conditions). (3) The drawings. (4) The specifications. (5) All addenda issued prior to, and all

51
PPC
modifications issued after, execution of the contract. (6) Any items that may be specifically stipulated as being in-
cluded in the contract documents.
damages - Usually, per diem amounts specified in a contract and payable only when incurred loss can be proved
to have resulted from a contractor's delays or breach of contract.
date of agreement - The date shown on the face of an agreement, or the date the agreement is signed. It is usual-
ly the date of the award.
date of commencement of the work - The date established in the notice to proceed or, in the absence of such
notice, the date of the agreement or such other date as may be established therein or by the parties thereto.
date of substantial completion - The date certified by the architect when the work or a designated portion thereof
is sufficiently complete, in accordance with the contract documents, so that the owner may occupy the work or des-
ignated portion thereof for the use for which it is intended.
early finish - In CPM (Critical Path Method) terms, the first day on which no work is to be done for an activity, as-
suming work began on its early start time.
early start - In CPM (Critical Path Method) terms, the first day of a project on which work on an activity can begin if
all preceding activities are completed as early as possible.
employer's liability insurance - Insurance that protects an employer from his employees' claims for damages
resulting from sickness or injury sustained during their course of work and based on negligence of common law
rather than on liability under workmen's compensation.
errors and omissions insurance - Professional liability insurance protecting architects or engineers from claims
for damages which may result from alleged professional negligence.
extended coverage insurance - Work-site insurance (included in property insurance) against loss or damage
caused by wind, hail, riot, civil commotion, aircraft, land vehicles, smoke, and explosion (except steam boiler explo-
sion).
extra work - Any work, desired or performed, but not included in the original contract.
feasibility study - A thorough study of a proposed construction project to evaluate its economic, financial, tech-
nical, functional, environmental, and cultural advisability.
final acceptance - The formal acceptance of a contractor's completed construction project by the owner, upon no-
tification from an architect that the job fulfills the contract requirements. Final acceptance is often accompanied by
a final payment agreed upon in the contract.
final completion - A term denoting that the work has been completed in accordance with the terms and conditions
of the Contract Documents.
final payment - The payment an owner awards to the contractor upon receipt of the final certificate for payment
from the architect. Final payment usually covers the whole unpaid balance agreed to in the contract sum, plus or
minus amounts altered by change orders.
force account - A term for any work ordered on a construction project without an earlier agreement on its lump
sum or unit price cost and performed with the understanding that the contractor will bill the owner according to the
cost of labor, materials, equipment, insurance, and taxes plus a certain percentage for overhead and profit.

52
PPC
general conditions - The portion of the contract documents in which the rights, responsibilities, and relationships
of the involved parties are itemized.
general contract - In a single-contract system, the documented agreement between the owner and the general
contractor for all the construction for the entire job.
general contractor - For an inclusive construction project, the primary contractor who oversees and is responsible
for all the work performed on the site, and to whom any subcontractors on the same job are responsible.
general foreman - The general contractor's on-site representative, often referred to as the "superintendent" on
large construction projects. It is the responsibility of the general to coordinate the work of various trades and to
oversee all labor performed at the site.
guarantee - A legally enforceable assurance of quality or performance of a product or work, or of the duration of
satisfactory performance. Also called "guaranty" and/or "warranty".
guaranteed maximum cost - The maximum amount above which an owner and contractor agree that cost for
work performed (as calculated on the basis of labor, materials, overhead, and profit) will not escalate.
guaranty bond - Each of the four following bonds are types of guaranty bonds: (1) bid bond, (2) labor and material
payment bond, (3) performance bond, and (4) surety bond.
hold harmless - A clause of indemnification by which an insurance carrier agrees to assume his client's contractu-
al obligation and to assume responsibility in certain situations which otherwise might be the obligation of the other
party to the contract.
insurance - A contractual obligation by which one person or entity agrees to secure another against loss or dam-
age from specified liabilities for premiums paid.
- professional liability - Insurance coverage for the insured professional's legal liability for claims for damages
sustained by others allegedly as a result of negligent acts, errors, or omissions in the performance of professional
services.
- workers' compensation - Insurance covering the liability of an employer to employees for compensation and
other benefits required by worker's compensation laws with respect to injury, sickness, disease, or death arising
from their employment. Also still known in some jurisdictions as "workmen's compensation insurance".
invitation to bid - A portion of the bidding documents soliciting bids for a construction project.
labor and material payment bond - A contractor's bond in which a surety guarantees to the owner that the con-
tractor will pay for labor and materials used in the performance of the contract. The claimants under the bond are
defined as those having direct contracts with the contractor or any subcontractor. A labor and material payment
bond is sometimes referred to as a payment bond.
latent defect - A defect in materials or equipment that could not have been discovered under reasonably careful
observation. A latent defect is distinguished from a patent defect, which may be discovered by reasonable obser-
vation.
latest finish date - In the CPM (Critical Path Method) of scheduling, a completion deadline for a particular activity.
Work performed after this deadline will result in project delay.
latest start date - In the CPM (Critical Path Method) of scheduling, the deadline for starting a particular activity. A
late start will throw off the schedule and delay the project.

53
PPC
letter of intent - A letter signifying an intention to enter into a formal agreement, usually setting forth the general
terms of the agreement.
licensed contractor - A person or entity certified by a governmental authority, where required by law, to engage in
construction contracting.
lowest responsive bid - The lowest bid that is responsive to and complies with the requirements of the bidding
documents.
maintenance bond - A contractor's bond in which a surety guarantees to the owner that defects of workmanship
and materials will be rectified for a given period of time. A one-year bond is commonly included in the performance
bond.
maintenance period - The period after completion of a contract during which a contractor is obligated to repair
any defects in workmanship and materials that may become evident.
mechanic's lien - A lien on real property, created by statute in all states, in favor of persons supplying labor or ma-
terials for a building or structure for the value of labor or materials supplied by them. In some jurisdictions a
mechanic's lien also exists for the value of professional services. Clear title to the property cannot be obtained until
the claim for the labor, materials, or professional services is settled.
negligence - Failure to exercise due care under the circumstances. Legal liability for the consequences of an act
or omission frequently depends upon whether or not there has been negligence.
network - In CPM (Critical Path Method) terminology, a graphic representation of activities showing their interrela-
tionships.
notice to bidders - A notice contained in the bidding documents informing prospective bidders of the opportunity
to submit bids on a project and setting forth the procedures for doing so.
notice to proceed - Written communication issued by the owner to the contractor authorizing the work to proceed
and establishing the date of commencement of the work.
open bidding - A bidding procedure wherein bids or tenders are submitted by and received from all interested
contractors, rather than from a select list of bidders privately invited to compete.
partial occupancy - Occupancy by the owner of a portion of a project prior to final completion.
penal sum - The amount named on a contract or bond as the penalty to be paid by a signatory thereto in the event
that the contractual obligations are not performed.
performance bond - (1) A guarantee that a contractor will perform a job according to the terms of the contract, or
the bond will be forfeited. (2) A bond of the contractor in which a surety guarantees to the owner that the work will
be performed in accordance with the contract documents. Except where prohibited by statute, the performance
bond is frequently combined with the labor and material payment bond.
principal-in-charge - The architect or engineer in a professional practice firm charged with the responsibility for
the firm's services in connection with a given project.
professional liability insurance - Insurance coverage for the insured professional's legal liability for claims for
damages sustained by others, allegedly as a result of negligent acts, errors, or omissions, in the performance of

54
PPC
professional services.
project manager - A term frequently used to identify the individual designated by the principal-in-charge to man-
age the firm's services related to a given project. Normally, these services include administrative responsibilities as
well as technical responsibilities.
quality control - A system of procedures and standards by which a constructor, product manufacturer, material
processor, or the like, monitors the properties of the finished work.
record drawings - Construction drawings revised to show significant changes made during the construction pro-
cess, usually based on marked-up prints, drawings, and other data furnished by the contractor to the architect.
Record drawings are preferable to as-built drawings.
resident engineer - An engineer employed by the owner to represent the owner's interests at the project site dur-
ing the construction phase. The term is frequently used on projects in which a governmental agency is involved.
retention - A percentage, usually 10%, withheld from a periodic payment to a contractor, in accordance with the
owner-contractor agreement, for work completed. The retention is held until all terms of the contract have been
fulfilled.
schedule of values - A statement furnished by the contractor to the architect reflecting the portions of the contract
sum allocated to the various portions of the work and used as the basis for reviewing the contractor's applications
for payment.
schematic design phase, schematic drawing - The phase of the architect's services in which the architect con-
sults with the owner to ascertain the requirements of the project and prepares schematic design studies, consisting
of drawings and other documents illustrating the scale and relationship of the project components to the owner.
The architect also submits to the owner a statement of probable construction cost based on current area, volume,
or other unit costs.
sealed bid - A bid, based on contract documents, that is submitted sealed for opening at a designated time and
place.
shop drawings - Drawings, diagrams, schedules, and other data specially prepared for the work by the contractor
or any subcontractor, manufacturer, supplier, or distributor to illustrate some portion of the work.
special conditions - A section of the conditions of the contract, other than general conditions and supplementary
conditions, which may be prepared to describe conditions unique to a particular project.
specifications - A part of the contract documents contained in the project manual consisting of written require-
ments for materials, equipment, construction systems, standards, and workmanship. Under the Uniform Construc-
tion Index, the specifications comprise sixteen divisions.
subsurface investigation - The soil boring and sampling program, together with the associated laboratory tests,
necessary to establish subsurface profiles and the relative strengths, compressibility, and other characteristics of
the various strata encountered within depths likely to have an influence on the design of the project. Sometimes
called "geotechnical investigation". Preferable to soil survey.
superintendent - The contractor's representative at the site who is responsible for continuous field supervision,
coordination, completion of the work, and, unless another person is designated in writing by the contractor to the
owner and the architect, for the prevention of accidents.

55
PPC
surety - A person or entity who promises in writing to make good the debt or default of another.
surety bond - A legal instrument under which one party agrees to answer to another party for the debt, default, or
failure to perform of a third party.
survey - (1) To do boundary, topographic, and/or utility mapping of the site. (2) To measure an existing building.
(3) To analyze a building for the use of space. (4) To determine the owner's requirements for a project. (5) To in-
vestigate and report on required data for a project.
test pit - An excavation made to examine the subsurface conditions on a potential construction site. Also, a pit ex-
cavated to inspect the condition of existing foundations.
time - Term defined in reference to a construction contract as time limits or periods stated in the contract. A provi-
sion in a construction contract that "time is of the essence of the contract" signifies that the parties consider punctu-
al performance within the time limits or periods in the contract to be a vital part of the performance. Failure to per-
form on time is a breach for which the injured party is entitled to damages in the amount of loss sustained.
unbalanced bid - A contractor's bid based on increased unit costs for tasks to be performed early and decreased
unit costs for later tasks. The unbalanced bid is used in an attempt to get money early to finance later parts of the
job.
value engineering - A process of reviewing plans and specifications for the purpose of reducing the final cost with-
out changing the intended utility or overall appearance.
zoning (BOCA) - The reservation of certain specified areas within a community or city for buildings and structures,
or of use of land, for certain purposes with other limitations, such as height, lot coverage, and other stipulated re-
quirements.

56
PPC
Quiz
1. If an Owner has a complete set of design documents, is confident that changes to the scope will be mini-
mal, and needs to avoid an upside risk in cost (overrunning his budget), which form of contract should he
prefer?
A. Unit Price
B. GMP
C. Fixed Price
D. Reimbursable
2. In addition to the issues framed in Problem No. 1, if the Owner has limited resources to manage the con-
struction activity, which delivery option will afford the necessary support?
A. General Contractor
B. Construction Manager, Not at Risk
C. Design/Build
D. No Support is Necessary
3. A benefit of a reimbursable engineering contract is that it:
A. Provides flexibility to do engineering and construction concurrently (fast track).

B. Provides for adequate development of scope for a first-of-a-kind project prior to bidding construc-
tion work.
C. Provides the ability to supplement the engineer with specialist engineering support where specific
expertise can be done as a subconsultant.
D. All of the above.
4. A disadvantage of a reimbursable engineering contract is that:
A. The owner assumes all cost and time risks of extended design duration.
B. The loss of single point accountability.
C. It requires greater staffing by Owner.
D. All of the above.
5. Contract Provisions that transfer risk include:
A. Notification requirements
B. Authority of parties.
C. Insurance and Bond requirements.
D. Timelines and Decisions.

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PPC
Quiz: Answer Key
1. C
2. B
3. D
4. A
5. C

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PPC

The ASME Professional Practice Curriculum:

It is a major aim of ASME to help colleges of engineering guide the development of

© 2003 - 2011 ASME International. All Rights Reserved.

The ASME Professional Practice Curriculum:

© 2003 - 2011 ASME International. All Rights Reserved.

The ASME Professional Practice Curriculum:

Volume 1 The Project Management Series

© 2003 - 2011 ASME International. All Rights Reserved.

The ASME Professional Practice Curriculum:

Project Management Series

Contracting Organizations and Options . . . . . 32

© 2003 - 2011 ASME International. All Rights Reserved.

Part 1: About Projects 7

Part 2: Project Management Functions 8

Part 3: Engineering Functions 9

Part 4: Planning Cycle 10

Part 5: Planning Steps 10

Part 6: Work Breakdown Structure (WBS) 11

Part 7: Project Schedule 12

Part 8: Scheduling Tools 13

Part 9: Project Budget 14

Part 10: Project Controls 14

Part 11: Project Management Software 15

Part 12: Sample Project Schedule 16

Part 13: Conclusion 18

Quiz: Answer Key 22

© 2003 - 2011 ASME International. All Rights Reserved.

As mechanical engineers, we are involved in a wide variety of industrial de-

© 2003 - 2011 ASME International. All Rights Reserved.

2 Project Management Functions

© 2003 - 2011 ASME International. All Rights Reserved.

Anticipated Accuracy of Predicted Costs

Project Phase Cost Estimate Accuracy

1 - Completion of Planning Study ±40%

A "contingency" is often included to address uncer-

Project organizations consist of many different functions, such as marketing,

© 2003 - 2011 ASME International. All Rights Reserved.

Planning is critical in project man-

Choose a basic strategy for achieving the objective.

© 2003 - 2011 ASME International. All Rights Reserved.

6 Work Breakdown Structure (WBS)

The basic idea of the work breakdown struc-

© 2003 - 2011 ASME International. All Rights Reserved.

Criteria for developing a WBS:

Other items to note are:

 Identify calendar completion dates and constraints.

© 2003 - 2011 ASME International. All Rights Reserved.

Here are some key steps to creating a schedule:

 Identify all major events and dates.

PERT and CPM are plan-

© 2003 - 2011 ASME International. All Rights Reserved.

Every project needs a budget against which to

Some inaccuracies in the budget are inevitable, but

© 2003 - 2011 ASME International. All Rights Reserved.

11 Project Management Software

 Task-level Work Breakdown Structure.

© 2003 - 2011 ASME International. All Rights Reserved.

12 Sample Project Schedule

© 2003 - 2011 ASME International. All Rights Reserved.

TASK ID START FINISH

© 2003 - 2011 ASME International. All Rights Reserved.

© 2003 - 2011 ASME International. All Rights Reserved.

Network - The interdependencies of the component tasks.