PROJECT MANAGEMENT

MANUAL

Ignacio Manzanera, CCC, MBA, ME, FMP

2014
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Table of Contents

Subject Page

PART 1 - Project Life Cycle, Planning & 3

Scheduling, Constructability and Procurement

PART 2 – Purchasing, PM Metrics, Safety, Health 94

and Environment

PART 3 – Contractual Claims, Cost and Schedule 239

Control System Criteria (EVM)

PART 4 – Skills for Success 320

PART 5 - Contracts Knowledge 416

PART 6 – Contracting Skills 559

PART 7 – Risk Management & Communications 652

PART 8 – Cost Estimating, Budgeting and Control 747

PART 9 – Scope and Quality Management 799

PART 10 – Human Resources Management and 877

Project Governance

Attachment I – Special Scheduling Tools & 933

Techniques

Attachment II – Linear Programming 956

Attachment III – EPC Contracts and others 986

Attachment IV – Useful Internet Links 1016

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PROJECT MANAGEMENT
MANUAL
PART 1

PROJECT LIFE CYCLE,

PLANNING & SCHEDULING,
CONSTRUCTABILITY,
PROCUREMENT
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Table of Contents Part 1

Subject Page

Projects Planning, Project life cycle 5

Detail Planning and Scheduling 14

Design Guidelines (Constructability) 42

Contracting 55

Procurement 83
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PROJECTS PLANNING
One of the most exciting things in life is to change our ideas into tangible
achievements using whatever means are available to us. Every time ideas are
transformed into facts an elementary process called project execution has taken
place.

Projects may be developmental as in the case of a new idea or well-known

when all the parameters involved in its execution have been experienced
before.

Projects are omnipresent in human activity. They may be simple things such as
:

 Studying for an examination;

 Saving for buying a favourite thing;
 Making travelling arrangements;
 Transforming a bathroom;
 Repairing an electric appliance at home; and
 Assembling your own personal computer.

They can be medium size propositions as:

 Designing a new house;

 Building a house;
 Investing in a new idea;
 Developing a new consumer product;
 Writing a book; and
 Introducing further education courses.

They may be large and super large sized ideas such as:

 Building a multi-storey facility;

 Developing a new airplane;
 Designing a new petrochemical complex;
 Building an oil refinery;
 Designing and building a dam; and
 Designing and building a nuclear plant.
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Regardless of their nature, projects invariably follow a common disciplined

approach comprising the following stages:

1.-Getting well informed about the subject

2.-Establishing a plan of action
3.-Cost estimating the plan of action
4.-Finding out the time required to develop the project
5.-Instituting the means of accounting for all expenses
6.-Generating a system to measure progress and revise plans
accordingly
7.-Organizing a system to store all data concerning the project
8.-Executing the plan of action

For small projects the above-mentioned procedure may be developed without

the help of sophisticated management science procedures.

For medium and large projects the situation changes dramatically due to the
fact that it is almost impossible to keep in mind the amount of information that
may be accumulated by the number of activities included in these kinds of
undertakings.

Management and computer science provide the means to handle projects:

For getting well informed about the project:

Historical information, databases, economic indexes, brain storms, statistical

information, market research, learning curves.

Establishing a plan of action:

Work breakdown structure, organization breakdown structure, planning and

scheduling procedures

Cost estimating the plan of action:

 Index estimating;
 Cost factors estimating;
 Cost capacity estimating;
 Unitized cost estimating;
 Parametric cost estimating; and
 Range cost estimating.
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Finding out the time required to develop a project:

Critical path methods, Project evaluation and review techniques

Instituting the means of accounting for all expenses:

Code of accounts facilitates gathering of all expenses incurred in an organized

manner.

Generating a system to measure progress and revise plans accordingly:

Clearly specifying how progress and productivity measurements will be

certified periodically as a percentage of the total project and procedures to be
followed when the project:

 Has to be accelerated;
 Falls behind schedule;
 Has to include changes; and
 Productivity is lower than expected.

Organizing a system to store all data concerning the project:

Specifying computer and management science applications to be used to store,

organize, and report all relevant information to the project. After recognizing
all the above elements, a definition for project management may be drawn as
an organized effort dedicated to the attainment of a goal.

The goal usually is the successful completion of a product or service when it

is required in time, within a previously approved budget and in compliance
with performance specifications. Project management may be seen as planning,
organizing, directing and controlling an engineering effort to achieve an
objective.

The essential function of every human endeavour is planning and it consist of

deciding what to do, setting goals, determining strategy and selecting
alternative courses of action.

Planning involves:

 Determining short- and long-term objectives;

 Formulating programs, policies and procedures; and
 Reviewing information from periodic reporting systems and adjusting plans
accordingly.
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Once things are planned they need and organization breaking down the work
required and structuring it to facilitate its achievement. Organizational
principles give projects the capability to:

 Divide the work to allow better productivity and control;

 Group related jobs;
 Delegate authority; and
 Develop coordination mechanisms to reduce complications.

Plans and organizations need motivation and guidance that is brought to project
management by directing. Directing means understanding human behaviour at
work, communicating properly, motivating and using leadership to achieve
planned productivity levels. Directing is a management compromise among
autocratic, democratic and free-rein leadership styles to influence others to
behave as required by project requirements.

Finally, measuring performance against planned objectives gives project

management the controlling function that feeds facts back into the system to
make it react and adjust.

Controlling basic functions are:

 Establishing of planning standards;

 Scheduling of work;
 Budget reviewing and adjusting;
 Supervisory action;
 Productivity measurement; and
 Corrective action activity.
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PROJECT MANAGEMENT STRUCTURE

Projects are typically organized by task or vertical structure instead of by

function or horizontal structure. Project management uses a vertical structure in
which control and performance associated with autonomous management are
maintained for a given project. (see Figure No.1)

PROJECT MANAGER

FIELD CONSTRUCTION SENIOR PROJECT BUSINESS ADMINISTRATOR

MANAGER ENGINEER

CONSTRUCTION PROJECT QA/QC ENGINEERING

ENGINEERS ENGINEERS

COST/SCHEDULE ENGINEERS
START UP PROCESS
ENGINEER ENGINEERS
CONTRACT SUPERVISOR

SURVEYORS PROCESS
SPECIALISTS JOB ACCOUNTANT

PROCUREMENT
SPECIALISTS COST ENGINEERS

Figure No. 1

Essential to the project management concept is a clear delineation of authority

and responsibility. The project manager knows that his basic responsibilities
consist of delivering a product:

 As designed;
 Within budget; and
 Within the time scheduled specified by his customer.

Project managers delegate by tasks giving subordinate managers the same three
basic responsibilities for subprojects. Successful project management depends
on the ability of the manager to perceive fine variations of performance, budget
and time schedule and to resolve continuous conflicts among them.

The project management first line of supervisors is by hierarchy the ones who
play the key roles in guiding the daily progress of a project.
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Such supervisors bear a wide range of burdens such as:

 Manpower control;
 Contractors control;
 Design and specifications control;
 Schedule compliance;
 Cost compliance;
 Resolution of contract/design interpretation disputes;
 Reporting;
 Invoicing and payments;
 Material procurement; and
 Change-order administration.

Typical first line supervisors are:

 Cost engineers;
 Project engineers;
 Planning and scheduling engineers;
 Estimating engineers; and
 Design engineers.

PROJECT LIFE CYCLE

Most capital projects are generated by either one of the following reasons or a
combination of them:

 New product development;

 Market pressure;
 Natural resources exploitation;
 Business expansion;
 Business ventures; and
 Personal initiative for business opportunities.

Whatever the reason, they all follow what may be called a project life cycle.

The project life cycle may be defined as the organized number of activities
needed to develop a project from its proposition or inception to its full
implementation or completion.
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Figure No.2 shows a typical summary schedule network depicting the main
activities involved in such a development.

CEP= CONCEPTUAL ESTIMATE PAPER

DBP= DESIGN BASIS PAPER
PP= PROJECT PROPOSAL
PEP= PROJECT EXECUTION PLAN
DD= DEFINITIVE DESIGN
CEP DBP P.P. EFA LLIP= LONG LEAD ITEMS PROCURE
EFA= EXECUTION FUNDING ASSURED

D.D. 40-60% D.D. 100%

PEP
MC
LLIP CONSTRUCTION COMMISSIONING

COST
ESTIMATE
PROCUREMENT

Figure No.2

When a project is proposed a very elementary procedure based on personal

experience, historical data, project analogy, incipient design or a combination
of them is set on the table in the form of a package usually called Conceptual
estimate paper.(CEP)

The conceptual estimate paper is a description of the project in question. It is

required as part of the initiation review package before a budget item is
incorporated into the company's business plan.

The CEP usually contains the following kind of information:

 Purpose of the proposed project;

 Description of the project;
 Milestone schedule for the project main activities(duration estimate); and
 Order of magnitude cost estimate.

It gives management a first rough idea about the size of the project, its
financial commitment and timing for the execution. This document is
developed in-house by the interested party and its usually inexpensive but at
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the same time its accuracy is very limited. It really serves as a basis to proceed
to further development when circumstances justify it.

Once the CEP is approved, additional activity is generated by starting an

Engineering study which in time will be the base line to develop a project
proposal for expenditure approval. This engineering study along with other
related information outlines is called the design basis paper (DBP).

The DBP clearly defines the project scope and supports the technical
development of the project proposal later on in the project life cycle. It
encourages completion of a planning study before a project team is given the
responsibility for the item.

The DBP makes emphasis on what has to be done rather than how it will be
done.

The design basis paper should incorporate:

 The purpose of the proposed project;

 The relationship of the project to existing plans;
 The description of the proposed project;
 A review of the alternatives studied;
 An order of magnitude estimate (-40, +40 % accuracy); and
 The scheduled dates for major milestones.

If the DBP is approved the cycle continues with a selection of a contractor to

proceed with a more elaborated design that will support a better cost and time
estimate and seeking of funds for project construction. This more elaborated
design is usually called the project proposal and it usually provides the final
design basis and scope of work for the proposed project.

The Project Proposal usually contains:

 The project location and layout;

 The process design basis;
 The on-plot and off-plot facilities;
 Major mechanical and electrical needs;
 Instrumentation needs;
 Needed modification to existing facilities;
 Operating variables;
 Corrosion control parameters;
 Project impact on related facilities;
 Environmental impact assessment;
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 Fire protection and safety requirements;

 Equipment and material needs;
 Project milestone schedule; and
 Engineering studies if applicable.

Along with the production of the Project proposal the following documents
should be developed before asking for project funding:

 Project execution plan;

 Updated cost estimate (-15, +10 % accuracy); and
 Financial feasibility studies.

If project funding is granted a definitive design contractor has to be selected,

long lead time procurement has to be started and a slate of construction
contractors updated.
When definitive design has been completed enough, according with the type of
project, the construction contract is awarded and the last phase of the project
will be on its way.

REFERENCES

Manzanera I., “PLANNING AND SCHEDULING REFERENCES”, Aramco

Saudi Arabia, 1991

Lasser's, J.K.,"BUSINESS MANAGEMENT HANDBOOK", McGraw Hill

Book Company, 1998

Joseph J. Moder, Cecil R. Phillips, Edward W. Davis, “PROJECT

MANAGEMENT WITH CPM, PERT AND PRECEDENCE
DIAGRAMMING”, Van Nostrand Reinhold Company, 1995

Duncan W.R., A Guide to the Project Management Body of Knowledge,

Project Management Institute, 1996
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Detailed Planning and Scheduling

The lack of adequate tools, techniques, and system design knowledge has been
primarily responsible for the historical difficulties with project management.
Most of the traditional scheduling techniques are based on the Gantt or
barchart, a tool which has been in common use for over 50 years. Although it is
still a valuable tool, its use is limited in the scheduling of large scale
operations.

In particular, the bar chart fails to delineate the complex interactions and
precedence relationships existing among the project activities. In addition, it
does not lend itself to mechanization through the use of a high-speed electronic
computer and thus cannot utilize many of the scientific management
techniques that computers make feasible.

The process of detailed planning is simply an application of the thought

process that must be developed before the actual scheduling or event-timing
can begin. Planning is determining what has to be done, when and by who in
order to accomplish an objective. The preliminary process of planning should
include answers to the following questions:

Material procurement:

 Are materials needed for the project been researched for local availability?
 Have vendors established there procuring conditions according to the
project conditions?

Time for construction:

 Is the time allowed to complete the project adequate for the location and
the seasons, or will it require increased crew sizes or premium time?

Special construction equipment:

 Will special equipment be required for construction? If so, is it off-road

equipment that will require special haul routes?
 What are the load limits and bridge clearances for roads in the area?

Interdependence of the tasks:

 Are some of the tasks in this project dependent upon the completion
of another contractor or utility owner before they can be started?
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Work and storage areas:

 Have provisions been made for contractor's work and storage areas?

Manpower availability:

 Have studies been made about local availability for different labor trades?
and if so, how will the results impact the manloading of the project?
Temporary utilities:

 Will temporary utilities lines be required during the construction period?

Local by-laws:

 Have local by-laws been researched and understood? If so, what

regulations have to be followed and what permits required?

Once these questions and the additional ones drawn from the natural business
process, have been answered and satisfied the task of planning can begin.

There are three kinds of planning:

Strategic Planning

Planning effort considering activities to be implemented looking at a long-term

horizon. Usually, more than five years ahead.

Tactic Planning

Planning effort regarding activities to be performed in the medium-term future.

Usually, between 1 and 5 years ahead.

Operation Planning

Planning effort regarding activities to be performed in the immediate future.

Usually, between 1 and 12 months ahead.

Planning Elements
A structured planning procedure should include the following elements:

Objective: goals/target/quota to be accomplished

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Program: strategy to be follow

Budget: Resources and expenditures organized logically
Forecast: Projections of what is going to happen
Policy: guidance for decision making
Procedures: detailed methods for carrying out a policy

Standard: Define accepted performance level

Planning Tools
Engineering management science has always helped to provide the needed
tools for good planning practices. Some of the tools are enumerated here:

 Historical Information;
 Engineering capital projects checklists;
 Local time and cost estimating data;
 Project Management Software;
 Estimating methods;
 Network scheduling;
 Statistical analysis;
 Optimization techniques;
 Learning curves;
 Responsibility matrix;
 Safety regulations;
 Security regulations;
 Contracting administration;
 Resource allocation techniques;
 Accountability check lists; and
 Computerized simulation techniques.

Planning Primary Objectives

Planning engineers primary objectives are concerned with getting things done
within the shortest available period of time, minimizing cost and risk, and
complying with the required technical specifications.

To achieve these primary objectives, resources utilization, communications,

and project controls must be optimized and team spirit fostered at all times.
Misunderstanding of corporate goals, lack of discipline, poor financial
estimates, plans based on insufficient data, schedules neglected are only a few
of the parameters that can go wrong.
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Scheduling Engineering
Scheduling engineering is a management tool providing time and other
resources allocation to a plan, time-cost trade-offs for all activities involved,
and expenditures control.

As may be seen from the above definitions scheduling is the heart of good cost
control. Unfortunately, it is usually neglected by management due to the level
of complexity that is normally achieved and the consequent lack of
understanding.

Scheduling is one of the simplest and less sophisticated tools available for cost
control, yet it only requires a good team effort at the beginning of the task and
good management support to have a powerful tool working for all.

When scholars talk about different methods of scheduling they mention:

 Barcharts scheduling;
 Velocity curves(S curves) scheduling; and
 Network scheduling.

True scheduling engineering is only concerned with network analysis practices

such as critical path method (CPM), program evaluation and review technique
(PERT) and similar developments.

Barcharts and velocity curves (S curves), are good tools when used along with
network analysis, but they should not be considered as stand-alone means to
control capital expenditures.

Critical Path Method (CPM)

CPM is a network analysis technique providing management with:

 Estimates of time and resources required to accomplish plans;

 A sequence of events and responsible personnel;
 Time-cost trade-offs for all activities involved;
 Resource allocation for all phases of the plan;
 Activity completion and cost compliance control;
 An organized, clear, concise way of documenting plans, programs start
and completion dates and cost performance;
 Easy training and indoctrination of new management personnel; and
 A comprehensive, psychological communication resource to foster team
unity and delineation of responsibilities.
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Critical Path Method Development

To properly understand the CPM procedure, the reader should introduce
himself to the scheduling engineering jargon shown in Attachment 1 at the end
of this chapter.

Once you have familiarized yourself with the scheduling terms it will be easy
for you to follow the next discussion.

Basic Rules for Drawing Networks

Rule 1. A complete network should have only one point of entry (a start event)
and
only one point of exit (a finish event).

Start Finish

Rule 2. Every activity must have a preceding or tail event and a succeeding or
head
event. Many activities may share a tail or a head event but not the same
tail
and head event.

Rule 3. No activity can start until its tail event has been reached.

Rule 4. An event is not complete until all the activities leading into it are
complete.

Rule 5. A series of activities leading back to the same event are not allowed.
(Looping)
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Convention for Drawing Networks

Convention 1. Networks proceed from left to right.

Convention 2. Networks are not drawn to scale. (convenient but not

mandatory)

Convention 3. Events or nodes should be progressively numbered.(convenient

but not mandatory)

There are several ways of identifying activities on a network and they are:

 Shortened description of the job;

 Alphabetic or numeric code; and
 Identification by the head and tail events.

There are two widely used methods of diagramming networks:

 Arrow diagram method (ADM); and

 Precedence diagram method (PDM).

ADM represent activities as follows:

Activity name

Resources needed

PDM represent activities as follows:

Activity name Activity name

Resources needed Resources needed
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Preliminary Steps for Processing a Network

Step 1

Establish what activities are involved in the project at hand and make a list of
them disregarding timing and logic. For example:

Survey, fabricate forms and rebar, excavate, grade, pour concrete, install forms
and rebar

Step 2.

Establish the logical relationship among all the activities listed in step 1.
(What has to go first?)

A Survey
B Grade
C Excavate
D Fabricate forms and rebar
E Install Forms and rebar
F Pour concrete

Step 3.

Make a diagram showing activities as arrows and depicting the logic

established in step 2.

Install Pour
Grade Excavate F&R Concrete

3 4 5 6

Survey

1 2

Fabricate
Forms & Rebar

3
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Step 4.

Estimate the time needed for the completion of each activity and depict them
for each activity on the diagram drawn in step 3.

Install Pour
Grade Excavate F&R Concrete

3 4 5 6
2 5 2 1

Survey

1 2
1
Fabricate
Forms & Rebar

3
4

Earliest Start Time Calculations (FORWARD PASS)

The earliest start of a head event is calculated by adding the earliest start of the
tail event to the duration of the linking activity. Where more than two or more
routes arrive at the same event, the longest route time must be taken as the
earliest starting time. (highest number)

The earliest starting time for the finish event is the project duration and it is the
shortest time in which the project can be completed. The figure next page
shows the forward pass calculations for the example at hand.

Activity names have been changed by initials and node numbers eliminated to
avoid congestion.
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3 8 10 11

B C E F

2 5 2 1

0 1

1
5
D
4

Latest Start Time Calculations (BACKWARD PASS)

Starting at the last event for which the earliest start time and the latest start
time is the same, work backward through the network deducting each activity
duration from the previously calculated latest start time. When the tails of
activities join the same event, the lowest calculated late start time is taken for
the event.

The figure below shows the backward pass calculations.

3 3 8 8 10 10 11 11

B C E F

2 5 2 1

0 0 1 1

1 5 8
D

4
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Once early start and late start for each event within the network has been
established, it is easy to proceed calculating the early start, early finish, late
start, and late finish for each activity as follows.

For each activity the calculated numbers of its tail event represent its early
start, late start. Similarly, calculated numbers of its head event represents its
early finish, late finish. The following graphic illustrates it:

ES LS EF LF

(tail) (head)

Where,

ES = Early Start LS = Late Start

EF = Early Finish LF = Late Finish

The critical path is established by following the activities where early start
and late start are the same and early finish and late finish are the same. There
may be several critical paths although this situation is not desirable.

Total Activity Float (slack)

Total activity float or slack is equal to the difference between the earliest and
latest allowable start or finish times for the activity in question. The total float
calculation shows the amount of time that an activity has before it becomes
critical.

Project team members are always interested in this calculation during planning
and scheduling updates for the duration of the project since they do not want
surprises from critical path deviations or more than one critical path.

There is another kind of float that is called free float and it is defined as the
difference between the earliest start of the activity's successor activity minus
the earliest finish time of the activity in question.

This concept of free float is not widely used today perhaps because it does not
provide immediate management information and is often misunderstood.
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Network Analysis of Engineering Projects

Schedule analysis should start with careful and detailed planning of each
activity and this mean that every resource needed to accomplish the activity
must be clearly consolidated and supervised.

Let us considered the activity "Install Pumps" shown in the figure below. It is
imperative to know more about resources other than time needed to perform
this activity.

INSTALL PUMPS

4 DAYS

For instance, we should know:

 Who is supposed to provide the pump?

 How the pump is going to be install?
 What kind of crew is needed to install the pump?
 Where the pump is going to be install?
 How much does the pump cost?
 How heavy the pump is?
 How much equipment if any is needed to install the pump?
 Does the equipment need a certified specialist?
 What tools are needed to install the pump?
 What kind of inspection should be carried out before and after pump
installation?
 How many tests are necessary to commission the pump?
 What kind of working permits are needed to install the pump?
 Do we need additional electrical installations to provide power to the
pump?
 How many instrumentation connections are needed?

As it may be noticed, the job is not as easy as just scheduling the activity by
determining the time it will take to accomplish it. It does require a great deal of
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additional planning and scheduling if we are to attain the desired objective. The
figure next page shows how resources should be loaded to an activity in the
master schedule.

INSTALL PUMPS

4 DAYS
1 MECHANIC
1 ELECTRICIAN
2 HELPERS
1 MASON
3 PUMPS
3 BREAKERS
5 MTRS OF CABLE DOUBLE O
1 CRANE
1 SET OF SMALL TOOLS

FIGURE No.2

Therefore, the question know is to decide how much information should be

enough input for the schedule and how it should be handle to avoid confusion
while at the same time certifying that the schedule may go as planned by
communicating all requirements to all interested parties within the project
team.

The answer to the first question is an easy one, all information related to the
activity must be made available to the schedule. As for the second question,
however, it would be very confusing to present everyone within the project
team with information other than that concerning their responsibilities. The
best solution is to produce additional schedules out of the master one to
communicate with the corresponding trades and trigger action from them when
required.

The Original Schedule Analysis

Once all activities in the original approved schedule have been loaded with
resources and responsibilities as explained before, the original schedule
analysis can start.

This task is mostly performed by charting resources against time during the
project duration as shown in the figure next page.
.
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These charts will help the planners/schedulers in their job to create resource
pools with enough anticipation to avoid production bottlenecks and low
productivity areas.

JAN FEB MAR APR MAY JUN JUL AUG SEP

10

MECHANICS

JAN FEB MAR APR MAY JUN JUL AUG SEP

10

ELECTRICIANS

JAN FEB MAR APR MAY JUN JUL AUG SEP

10

HELPERS
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Cash flow analysis for the project is one of the immediate results of this
analysis. Regardless of the procedure used for time distribution of the activity
cost the planners/schedulers can calculate the amount of cash needed for each
project period just by adding the expenditures of the activities following in that
period as shown in the figure below.

Planning a company's cash flow is an important part of good financial

management and its purpose is to identify cash shortages or surpluses and to
deal with them in the most efficient manner.

Project management must supply the company with all required information
about the projects needs with enough anticipation to allow company's cash
flow planning accordingly.

JAN FEB MAR APR MAY JUN JUL AUG SEP

100,000

50,000

DOLLARS

The concept of cash flow is not an obscure one. Either the company has a
certain amount of cash or it has not. And a lack of cash is critical. A company
can sustain losses for a time without suffering permanent damage, but a
company that has no cash flow is insolvent and in imminent danger of
bankruptcy, no matter what profit picture
the future may be showing.

Projects may be significantly affected if cash flow planning is not given the
necessary attention.
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From the project management point of view there are three major concerns
when dealing with cash flow planning:

1.- Project cost must be scheduled according with company's cash flow
capabilities.

The project financial representative must establish his cash flow needs
according to the Projects consolidated budget and schedule. The company's
finance department will come back with the financial constraints ruled by the
company's cash flow.

Company's priorities will play an important role in deciding what project must
be developed first.

2.- Approved projects' cash flow variances may affect the company's overall
cash flow by the lack of return in cash not expended or by the cost of meeting
unplanned cash requirements.

3.- Projects’ cash flow analysis is the foundation for capital investment
appraisal and management decision-making.

The standard method of evaluating potential investments is the cash flow

analysis, which provides the timing and the amount of all projected capital and
operating expenditures and related revenue. Annual net cash flow equals
revenues minus expenditures calculated for each year of the economic life of
the project.

The reliability of the projects evaluation depends on the accuracy and

completeness of the cash flow analysis, so it is important to include all related
costs, including direct support costs. Economic evaluations of investments
involve comparison of some alternatives including taking no action.

The figure in the page before is a summary of the cash needed for each period
of time during the project duration. If there are several projects needing control
by the same planners/schedulers, they will be able to establish the cash flow
needs for the group of projects by just adding the individual cash flow need for
each project. The figure next page shows and instance of this.

The lack of adequate tools, techniques, and system design knowledge has been
primarily responsible for the historical difficulties with project management.
 P a g e | 29

Most of the traditional scheduling techniques are based on the Gantt or

barchart, a tool which has been in common use for over 50 years. Although it is
still a valuable tool, its use is limited in the scheduling of large scale
operations.

In particular, the bar chart fails to delineate the complex interactions and
precedence relationships existing among the project activities. In addition, it
does not lend itself to mechanization through the use of a high-speed electronic
computer and thus cannot utilize many of the scientific management
techniques that computers make feasible.

JAN FEB MAR APR MAY JUN JUL AUG SEP

100,000

50,000

DOLLARS PROJECT A

JAN FEB MAR APR MAY JUN JUL AUG SEP

100,000

50,000

DOLLARS PROJECT B

JAN FEB MAR APR MAY JUN JUL AUG SEP

200,000

100,000

DOLLARS TOTAL A+B

 P a g e | 30

The Network-Based Approach

In recent years, the problems of project management have received

concentrated attention. The work of several independent investigators led to a
family of techniques that represents a major breakthrough in project planning
and scheduling techniques. The complexity of the systems required for military
projects has given great impetus to this development.

The Polaris missile program led to the development of PERT, Program

Evaluation and Review Technique by Lockheed Aircraft Corporation along
with the US navy special projects office and a consulting firm called Booz,
Allen and Hamilton. PERT is a probabilistic approach specifically designed for
new projects or projects involving a high degree of uncertainty.

However, the normal activities of industry also involve work which fits into the
project concept quite naturally. DuPont and Remington Rand Univac interest in
optimization of such projects as routine plant overhaul, maintenance, and
construction work led to the design of CPM, the Critical Path Method in the
late 50’s.

CPM is a deterministic approach requiring not only a high level of professional

discipline but a complete commitment of top management to become a useful
management tool.

Known by these and hundreds of other acronyms, these techniques share a

large number of common elements. Chief among these is the use of a network
flow diagram as a model of the project's precedence relationships.

The network represents all the activity paths or sequences that must be
accomplished before the project's objective can be achieved. The longest of
these sequences is the "critical path," the identification of which permits
management to focus its attention on the progress-pacing activities of the
project.

Much of the early success of PERT/CPM was based on the explicitness of the
project plan, this explicitness being essential to the construction of a network.

Being explicit about what was to take place at some much later time was a new
experience for many.

Improved communications among those concerned with a given project was

the result most frequently cited by the individuals involved in the early
attempts at networking the project plan.
 P a g e | 31

The Role of Networks in the Engineering Management System

The project management system requires the existence of means for the
description and evaluation of alternative project plans. The network models
described here are means of depicting a particular project plan in such a
manner that evaluation is not only possible but is in fact a logical extension of
the model.

A given model of this basic type will describe one alternative. Other models
will be required if other alternatives are to be examined.

The modeling process will be described on the assumption that the project
management consultant is preparing the network based on information he
extracts from the project manager and others selected as sources of
information.

It will further be assumed that the project management consultant knows little
of the technical details of the project and the project managers know little of
the network concept being used.

Network Construction

The network concept involves the graphic representation of activities and their
precedence requirements. Activities are elements of the project representing
logical subdivisions of the work to be done. If you considered preparing
breakfast as a project, pouring a cup of coffee could be an activity.

The level of detail used depends upon the degree of control desired.

Precedence requirements indicate which activities must be completed before a

given activity can proceed.

The project network may be formed in several ways. One of these is to start at
the realization of the end product or objective and work backwards in time in a
step-by-step fashion, determining what work must be completed in order to
start a given activity. Another approach is to list randomly all the jobs having a
bearing on the project and to determine their technological relationships as the
diagram is developed.

We want to be able to identify each activity by a work item number for use in a
computer analysis of the network. Activities may be numbered in any fashion,
as long as a number is not repeated, without creating any logic or identification
problems.
 P a g e | 32

Computer processing of networks depends upon such numbering, but most

computer programs have the capability to take any activity numbering and
renumber with predecessor less than successor for internal usage, reverting to
original numbers in the output.

The belated discovery of activities is an inherent property of the network

design of a project plan. The fact that such activities may cause substantial
redesign of the network not only slows down the networking, but also tends to
inhibit the project planners in their search for activities overlooked previously.
An important psychological factor in the planning stage is inertia.

The networking system should be capable of maintaining an up-to-the minute

graphical representation of the project plan as it is being formulated. PDM
precedence diagramming system is quite effective in this respect when
compared to the ADM arrow diagramming approach. Planners sitting around
waiting for the networker to incorporate their latest disclosure into the ADM
network tend to lose the enthusiasm with which they may have started.

LAG Factors

There are situations in which establishment of the proper precedence

relationship gives an erroneous representation of the project. Consider the
following portion of a project:

PAINT ROOM INSTALL CARPET

While it is true that carpeting should follow painting, it is not true that all
painting must be completed before carpeting starts. The proper representation
could be obtained by representing the activities as follows:

PAINT ROOM

INSTALL CARPET

Indicating that carpet installation can start 2 days after painting of the room has
started.
 P a g e | 33

Networks Level of Detail

A general guideline for determining the level of detail is that it must be keyed
to the level of management using the network. Hierarchies of networks will be
employed in more complex, large scale projects. A major aircraft design
project, for example, might have three levels of networks.

The top-level network might summarize the ten major subdivisions of the
project into 300 activities. The next level might involve describing each of the
ten major project subdivisions with a network of 1,000 activities for a total of
approximately 10,000 activities used in this intermediate level.

Each intermediate network could break down into ten l,000-activity networks
employed at the actual operating level, resulting in a total of 100,000 activities
being used at this most detailed level.

At any given level of management, there is always the question of how much
detail is appropriate. Some organizations attempt to control level of detail by
specifying that the network shall consist of a total number of activities ranging
between X and Y.

This approach applied to projects of varying complexity can produce networks

with widely varying levels of detail. A more sound approach to obtaining a
consistent level of detail involves specifying that no more than X percent of the
activities shall have a duration of more than Y or less then Z time periods.

Some more specific approaches to making level-of-detail decisions are:

1. For the resource entities being controlled by this management level, one
activity should end and another start at the point where a different resource
comes into use on a given work item. This might be the basis for deciding to
use the three activities, Layout Site, Clear Site, and Grade Site rather than the
single activity, Prepare Site.

2. If some other activity is dependent on the first portion of the activity in

question but is not dependent on its full completion and the overlap amounts to
as much as one of the time periods used in duration assignments, the activity in
question should be divided into two activities at the point of dependence.

3. If there is considerable doubt left as to whether or not an activity should be

broken down into more detail, one should remember that the network analyst
can later combine activities without the project manager's assistance, but will
require assistance to further subdivide activities.
 P a g e | 34

Combining Sub-networks
No matter how involved and complex the project, the rules for combining
activities and precedence information into a network still hold. Often with very
large projects, whole subprojects are performed independently but
simultaneously as a part of the overall project. It is then possible to network the
subprojects to reduce the complexity and then combine these sub-networks.
Contractors or managers in charge of the subprojects may then have their
responsibilities scheduled separately.

Overall management's total network can correspond precisely to the sub-

networks without requiring an overall network to be constructed separately.
Under these circumstances, responsibilities are split out before the network is
constructed instead of after, and the complexity of the network generation is
reduced rather than increased.

Any interface activities are identified with unique symbols to mark the points
where the networks rejoin. These activities on the overall network contain the
corresponding activity numbers from all sub-networks.

CPM Implementation Recommendations

The project management consultant must acquaint himself with the project
objective before starting the construction of the network model. He may do this
in any or all of the following ways:

1. Reading the specifications

2. Revising drawings
3. Looking at artists' concepts of finished product
4. Discussing the function of the end product
5. Seeing a similar end product in use.

Then, he determines the management objectives, discussing with the project

manager the question of which of the following objectives should govern the
project management system operation:

 To meet a deadline for project completion

 To minimize project length
 To minimize the sum of direct and indirect costs
 To minimize the variation in resource requirements
 To limit the maximum resource requirements of one or more resource
types
 P a g e | 35

 To communicate project information to various levels of individuals

concerned
 To co-ordinate the project with interface groups

The consultant is now ready to undertake the networking of one of the

alternative approaches to the project. Subdividing the project as discussed
earlier is the first step which should be attempted.

After either arriving at subdivisions or determining that no reasonable basis for

subdivision exists, the planner should obtain a summary narrative from the
project manager describing the approach to this portion of the work. This
narrative should be in the order of 5-15 minute discussion of the intended
project plan.

The consultant is now ready to start networking. It is possible to proceed by

eliciting responses from the project manager to the question, "What other
activity must take place?", and putting the response on paper as an activity
node. In general, one should put activity descriptions, abbreviated if necessary,
in the nodes rather than code letters or numbers referring to some separate list.
The network should be a document that can be read directly. Reference to a
coded list destroys the flow of logic that one should perceive when examining
a network.

Precedence can be ignored at this time and the result will be a sprinkling of
unconnected activities over the worksheet. Some activities are obviously near
the start of the project and will likely be placed to the left of the sheet, just as
activities likely to have few successors will be placed toward the right. It is not
necessary, however, that any location rules be followed. Worksheets
containing pre-printed or predrawn nodes will speed up the network building
process.

There is reluctance on the part of many individuals to commit to even the most
preliminary network. It must be emphasized that this first network will be re-
drawn and eventually change forms and that the original network will be
discarded. Even then, however, some project managers respond more readily if
their tentative descriptions are placed in a list first, then put into the network
format.

The network planner may well invest some time in listing activities purely for
the purpose of getting the modeling process underway. The network planner
should never attempt to indicate predecessors on the list, however. Precedence
information is much more easily obtained by directly incorporating each bit of
information into the network as it drawn.
 P a g e | 36

When the process of discovering activities begins to lag, it is desirable to turn

to precedence identification, rather than try to identify 100% of the activities
on the first pass. Precedence may be determined by asking this question with
reference to the predecessor: "What activities cannot start until this activity is
completed?" In the process of establishing precedence connections, additional
activities will be discovered and redefinition of existing activities will become
necessary.

This process should be continued until the project manager is unable to readily
find additional precedence relationships. There will usually be some
precedence relationships that are not found in this first phase, but these
remaining ones can best be discovered during the duration/resource assignment
phase.

Network planning differs from bar charting in that no time/resource concerns

restrict the construction of a network. This time-free model tends to encourage
the consideration of more alternatives than does the bar chart. When the
planners begin to have difficulty in thinking of additional activities to place on
the network, however, it is then time to consider activity durations and
resource requirements.

As the activities are reviewed for time/resource requirements, additional

activities and precedence relationships will be discovered and some existing
ones changed.

At this point it will be helpful to have a draftsman or clerical assistant redraw

the network, attempting to have predecessors to the left of successors and
attempting to minimize the crossing of arrows.

It is impossible to avoid having some arrows crossing others, but a sense of

flow of the work is best attained when these are minimized. The revised
network is then ready for use in estimating time and resource requirements of
each activity.

For some individuals and groups, the process of obtaining this basic network
model will give new understanding of the nature of the project. In fact, an
organization may find it desirable to go no further on its first attempt at
network project management.

Such an approach might involve posting the network where the project
manager can refer to it during meetings and shading in each arrow as the
activity is completed.
 P a g e | 37

ATTACHMENT I

Scheduling Expressions
Activity: Work item represented by an arrow when using arrow diagramming
or by a box when utilizing precedence diagramming.

Actual completion date: The date an activity is actually completed.

Activity duration: Time allocated to complete an activity. OD stands for

original duration and RD stands for remaining duration.

Arrow diagram: A logical plan to accomplish a job where all the activities
required to complete the job are represented by arrows organized and
interconnecting in sequential order of execution.

As of date: The calendar date equivalent of time-now for statusing purposes.

Barchart: Graphic representation of items of work displaying duration of item

as a bar whose length is proportional to the time allocated to perform the item.

Calendar days: Scheduling time units for measuring activity durations which
includes weekends and holidays.

Concurrent Activities: Activities which can be performed at the same time

Constraint: Any factor which exerts a time or sequence effect upon the plan
activities.

Critical Path: The shortest time in which a plan can be performed.

Cut-off date: The assigned date on which accumulation of data for a reporting
period must be completed.

Data base: A collection of records for the project which allows management's
information requirements to be drawn from it.

Direct cost: The portion of total cost which takes into account only material,
labor and equipment assigned to a project or activity.

Dummy arrow: A dotted arrow used as a constraint in a network to display

where a relation exists between tasks but no activity arrow connects them.
 P a g e | 38

Early finish (EF): Computed value for the earliest possible time at which an
activity can be completed.

Early start (ES): Computed value for the earliest possible time at which an
activity can begin.

Event: The starting or ending point of the activities.

Float: The difference between the computed time available in which an

activity may be completed and the estimated duration time previously assigned
to the task.

Fragnet: Any area of a network that has been expanded into more detail and
definition for analysis.

Forward pass: Procedure to calculate early event times for all activities in a
network.

Gantt chart: Synonym of barchart

Hammock activity: Summary of a entire subset of activities utilized to reduce

the number of project elements to track or for analysis of a portion of the plan.

I-node: The number assigned to the beginning event of an activity arrow.

J-node: The number assigned to the ending event of an activity arrow.

Lag factor: A ratio or quantity used in precedence diagramming (PDM) which

numerically indicates when a dependent activity can start relative to the
duration of the predecessor.

Lag time: A time delay required by a sequential connection in a network.

Late finish (LF): Computed value for the latest possible time an activity
should be completed according to CPM calculations.

Late start (LS): Computed value for the latest possible time an activity should
begin according to CPM calculations.
 P a g e | 39

Lead time:

a) Time between the ES and schedule start for an activity.

b) Time period acting as a constraint for the beginning of an activity.
c) Time in overlapping related activities between the start of one and the
start of the second.

Loop: A networking drafting error situation in which activities are so arranged

as to cause a sequence of work to return to the originating point.

Leeway: Synonym for float

Logic diagram: The network plan without quantification time data.

Milestone: Planned date to start or to finish a special event.

Merge: To combine or relate two or more networks at any level to form a

single network.

Node: A circle graphically depicting the beginning or the ending event of an

activity.

Normal cost: Direct cost estimate for an activity based on the normal time to
perform it.

Normal time: The estimated duration time allocated to an activity according to

established standards.

Operational planning: That aspect of planning that relates to how things will
be accomplished.

Original schedule: The user approved schedule at the time, or immediately

following project award.

Output: Material coming out of the computer which results from processing
input data

Precedence diagramming: A network diagramming technique for showing

the relationships of activities in a project with rectangular boxes symbolizing
the activities.

Print out: A document usually produced from a computer that translates data
into usable, readable form.
 P a g e | 40

Proposed schedule: A preliminary schedule used for a study and/or proposal.

Remaining Duration: Time required to finished an activity once it has been

started.

Revised schedule: Original adjusted schedule after actual data and /or new
change decisions has been introduced.

Resource leveling: The process of scheduling activities within their available

float so as to control fluctuations of resource requirements.

Status: Activity completion level at a given point in time.

Sorting: The selective arranging of data to provide a needed pattern of

information.

Strategic planning: That aspect of planning which evaluates what must be

done within a reasonable period of time.(usually 5 years or more)

Target: A copy of the original plan saved to compare it against performance in

the field.

Time compression: A scheduling technique by which project duration is

shortened by resource allocation speculation.

Updating: Revising the monitoring plans and documents to reflect current

performance, needed changes on logic, durations, and physical resource
allocations as of a given date.

Work Breakdown Structure: Breakdown of a project in activities and sub-

activities to allow better planning and control.

Working days: Scheduling time units for measuring activity durations which
excludes weekends and holidays.
 P a g e | 41

REFERENCES

Manzanera I., “PLANNING AND SCHEDULING REFERENCES”, Aramco

Saudi Arabia, 1991

Lasser's, J.K.,"BUSINESS MANAGEMENT HANDBOOK", McGraw Hill

Book Company, 1998

Joseph J. Moder, Cecil R. Phillips, Edward W. Davis, “PROJECT

MANAGEMENT WITH CPM, PERT AND PRECEDENCE
DIAGRAMMING”, Van Nostrand Reinhold Company, 1995
 P a g e | 42

Design Guidelines (Constructability)

The objective of this procedure is to make optimum use of construction

knowledge and experience in planning, design, procurement, and field
operations to achieve overall project objectives.

A common view of design guidelines involves only:

 Determining more efficient methods of construction after mobilization of

field forces;
 Allowing construction personnel to review engineering documents
periodically during the design phase;
 Assigning construction personnel to the engineering office during design;
and
 A modularization of pre-assembly program.

In fact, each of these represents merely a part of the optimization process. Yet
only through effective and timely integration of construction input into
planning, design, and field operations will the potential benefits of
optimization be achieved.
The planning/execution phases for a typical major industrial project involve
conceptual engineering, detailed engineering, procurement, construction, and
start up. Construction optimization analysis should begin during the conceptual
stage, at the same time as operability, reliability and maintainability
considerations surface.
It can then continue through the remaining phases. Planners must recognize
that the payoff for optimization analysis is greatest in the earliest phases of a
project, growing progressively less, but never ceasing, until the end of the
project.

In modern engineering jargon this process of design optimization

is called constructability.
 P a g e | 43

Constructability
Constructability analysis is a form of both Value Engineering (VE) and Value
Analysis (VA) that focuses mainly on the construction phase.

Constructability decisions are oriented toward:

 Reducing total construction time by creating conditions that maximize
the potential for more concurrent (rather than sequential) construction,
and minimize rework and wasted time;
 Reducing work-hour requirements by creating conditions that promote
better productivity or creating designs that demand less labor;
 Reducing cost of construction (and tools) by reducing requirements for
such equipment, creating conditions that promote more efficient use of
the equipment, and minimizing the need for high-cost, special purpose
equipment;
 Reducing materials costs through more efficient design, use of less
costly materials, and creation of conditions that minimize waste;
 Creating the safest work place possible, since safety and work
efficiency go hand in hand; and
 Promoting total quality management (TQM).

Essential Elements Of Constructability

Three elements must be present if a constructability program is to realize its

full potential.

First
Constructability must be viewed as a program that requires proactive attention.
The mistaken idea that constructability is a review of designs by someone
familiar with construction is totally wrong. By the time designs are ready for
review, it may be too late to change anything, and, if such changes are made,
they will be costly.

Instead, individuals with a knowledge of construction must jointly participate

with the other interested parties—owner, engineer, operator, and maintainer- to
brainstorm concepts and approaches before they are committed to a drawing.
In other words, constructability is a component of planning that must be
included in all phases.
 P a g e | 44

Second
Constructability is a team effort. Only if the interests of all parties are jointly
represented in all decisions will the optimum solution be realized. Reducing
construction costs is certainly an important objective, but doing so must not
compromise other needs.

Third
Constructability must have management commitment and support. The time
and resources needed for such a program must be made available if the
program is to be a success.

A Constructability Program

While no single program will fit every program, the consensus is that most
successful constructability programs have the following elements:
 Clear communication of senior management’s commitment to the
program;
 Single-point executive sponsorship of the program;
 An established ministerial policy and program, as well as tailored
implementing programs for each project;
 A ministry database compiling “lessons learned and examples;
 Orientation and training as needed; and
 Active appraisal and feedback.

Constructability Culture

Constructability works best when it is an accepted part of the way an

organization operates. If the subject is given enough emphasis and attention
over time, it becomes ingrained within the organization reaching what it can be
called a constructability culture. Every staff person must feel part of the
system, since their input is frequently sought in constructability brainstorming
session and their ideas are welcome additions to the database.
 P a g e | 45

Constructability Concepts

The Management Approach

Recognize that startup and construction drive engineering and procurement
scheduling.

Develop a network schedule as early as possible; and

Include engineering and procurement packages in the control schedule.

Use contracting and management approaches that promote construction

efficiency.

 On engineering-procurement-construction projects executed on a fast-

track basis(overlapping phases), use single management of the total
effort from the outset of conceptual engineering;
 Use construction contract packages of a quality that will allow fixed-
price bidding as a means of reducing or eliminating the problems
associated with changes;
 Do not start on a work package until the availability of all required
resources is assured (personnel, materials and support equipment.);
 Work with the owner to use any existing facilities or services rather
than creating duplicate ones for the construction period;
 When packaging designs for specialty subcontracting, consider normal
jurisdictional lines so that packages logically fit the specialty
contractors involved an do not require sub-tier subcontracting;Plan the
release of contracts to take advantage of favorable construction
weather;
 Provide adequate planning time for contractors and subcontractors in
the bidding-award process;
 Keep the control schedule at a summary level;
 Ensure that project milestones are reasonably attainable considering
both construction and procurement time;
 Do not impose unnecessary hold points for quality checks;
 Keep requirements for owner involvement in the project(such as
reviews and approval) to a minimum;
 Issue instrumentation, piping and insulation packages as early as
possible, since these require the most field time to execute;
 Use a contract form that incorporates incentives designed to reduce
construction costs. For example, include Value engineering (value
analysis) clauses that provide for sharing in savings engendered by
adopting cost improvement suggestions made by the contractor;
 P a g e | 46

Ensure that project requirements and conditions are understood.

 Make certain that field conditions are accurately reflected on design

documents;
 Identify all access routes and any limitations on their use;
 Be sure that all parties understand their roles and responsibilities with
regard to providing equipment, the use of project areas and facilities,
security and gate control, administrative policies, etc;
 Identify disposal areas for excavations, vegetation, non-hazardous
waste and hazardous waste; and
 If working in or adjacent to an operating facility, identify all constraints
that the situation presents.

Design Phase

Emphasize standardization and repetition.

 Standardization and repetition maximize application of the learning

curve to the work force, permit volume buying of materials, and
simplify purchasing and warehousing.
 Standardize structural members, foundations, bolt sizes, and other
components as much as possible;
 Dimension concrete components to take advantage of readily available
commercial form sizes;
 Repeat designs throughout the facility. This will reduce design costs
while promoting the learning curve effect during construction;

Take maximum advantage of readily available, off-the-shelf materials and

components.

 Maintain access to commercial catalogs of equipment and materials;

 Make maximum use of vendor representatives to assist in item
selection;
 Survey the area to determine which materials are most readily available
locally;
 Require procurement specialists to publish bulletin on a regular basis,
identifying materials and items in short supply on the world market and
approximating order-ship-deliver lead times of all equipment and
materials regularly used in the contractor’s work; and
 Consider using pre-engineered structures in lieu of specially designed
structures.
 P a g e | 47

Choose configurations that facilitate or simplify handling and erection.

 Require design engineers to develop recommended construction

methods and include them with the design. This will force them to think
constructability;
 When designing steel members and connection, remember that erection
is much easier if a member to be connected to another can be
temporarily positioned on top of the in-place member or on a pre-
installed seat on that member before bolting or welding;
 Take advantage of modularization. Vendor-assembled modules are
produce under more favorable conditions than those in the field. This
ensure better quality while reducing field erection time;
 Use designs that employ pre-cast concrete components which can be
cast in a controlled environment, delivered to the project when needed
without intermediate handling, and directly installed;
 Avoid components that require special care and handling in the field;
 Create designs that require special care and handling in the field;
 Include special foundations in the design o structures for mounting
climbing cranes and elevators if such equipment will be used during
construction;
 Locate heavy and/or bulky items within structures so that as many as
possible can be hoisted from a single location of the lifting equipment;
 Maximize the use of straight runs and perpendicular tie; avoid
curves(particularly complex curves) and angles;
 Consider limitations of standard transport and lifting equipment when
designing components. If necessary, design over-size items so they can
be fabricated, transported and erected in parts;
 Use designs that minimize the need for temporary structures such as
forming, shoring, bracing, and tie-downs;
 For multiple electrical and piping systems, consider using common
utility tunnels or conduits through which multiple system can be
installed (and easily removed or expanded later if necessary) rather than
using direct embedment or multiple conduits;
 For multiple foundations in the same are, establish the same bottom
elevation for all foundation so that excavation can be handled on a mass
basis rather that individually;
 Design engineered items so that they can be dressed out on the ground
for installation. In other words, design any components that cross
several items(such as ladders or raceways) so portions of them can be
pre-assembled with the engineered item to create a module;
 P a g e | 48

 Design electrical/instrumentation connections with plug-in

configurations rather than a labor-intensive connection;
 For complex wiring networks, specify the use of wiring harnesses that
are factory assembled and coded;
 In lieu of cast-in-place reinforced walls, consider using the lift-slab
technique;
 On multi-storied buildings with reinforced concrete floors, consider
casting the floors one at a time on the lower deck and lifting them into
position. This will eliminate many bracing and scaffolding
requirements;
 In lieu of specifying concrete block wall using conventional masonry
techniques(mortar between blocks), specify simple stacking of blocks
followed by plastering of both sides with fiber-reinforced mortar. The
result is a better-looking, stronger wall that can be constructed more
quickly by less skilled personnel;
 When designing connections for hydraulic or other systems, create
unique designs for each category of connection to avoid any potential
for connection mixups in the field;
 When designing or specifying large components (such as vessels or
rotating equipment), include lifting hooks or other handling
devices/features in the design so field erectors will not have to
improvise the rigging and handling;
 Provide designs for special measuring devices, templates, or other
erection aids that may be useful for aligning or achieving tolerances;

Design Phase.......

Create designs that promote accessibility and provide adequate space for
construction personnel, material, and equipment.

 Consider interstitial designs for buildings. This means providing space

above all operating floors that is zoned for various operating systems.
The vertical clearance in this space should be enough to allow for easy
movement of workers. This design greatly simplifies construction, and
facilitates future maintenance and upgrading;
 Locate electrical pull boxes with adequate space around them to
simplify cable pulling;
 Size pipe racks to allow easy addition of new lines;
 Incorporate access openings in both exterior and interior walls;
 Provide for reasonable working space around all installed components;
 P a g e | 49

Adapt designs and strategies to project location and time.

 In an area with a very short construction season or limited labor

availability, make maximum use of factory-assembled modules and
components that have been designed for rapid assembly;
 Consider local labor and specialty contracting capabilities;
 Select designs that best use these capabilities, since they will be less
costly than imported capabilities;
 If the local population lacks needed skills, maximize the use of remote,
off-site fabrication;
 In a union environment, consider jurisdictional rules and wage scales
when selecting a design approach;
 Avoid designs whose construction is particularly weather sensitive;
 Avoid the use of materials expected to be in short supply or subject to
unusual price inflation during the duration of the project;

Use realistic specifications.

 Do not require unnecessarily tight tolerances. For example, the

imposition of ASTM or nuclear-quality specifications on ordinary
construction can be overkill;
 Do not specify an expensive, hard-to-install material when another is
far more economical. for example, PVC conduit is lighter, more
flexible, and easier to work with than rigid conduit;
 Designers must learn to challenge each specification. Is it the best for
the project at hand?;
 Maximize the use of performance rather than proprietary or descriptive
specifications to five grater feasibility to the field;
 Minimize the number of specifications applying to the same type of
work, such as concrete, bolt sizes, etc.;
 Consider field installation costs in the economic evaluation of material
or equipment choices;
 Include in the specification file information on where and why a given
specification is applicable. This will assist engineers in selecting the
best specification for the job at hand;
 Maintain and continually update a file of “lessons learned” from
previous projects. Make these the subject of training sessions;
 When possible, allow for alternates in case the primary method or item
is not achievable;
 Include requirements for packing and shipping critical items that assure
undamaged delivery of them;
 P a g e | 50

 Specify testing methods and procedures that are reasonable for the
field;

Assure quality and completeness of design deliverables (such as drawing and

specifications).

 Be willing to hire outside expertise when the in-house staff does not
have the talent or time needed to prepare quality deliverables;
 Establish a complete system of reviews and checks to ensure accuracy
of dimensions, compatibility of drawings and specifications, and
consistency of flow diagrams, piping and instrumentation diagrams,
etc.;
 Use physical or computer models to be sure there are no interference
among systems;

Incorporate safety in designs.

 Specify locations where beams and columns should be drilled to

accommodate safety cables; and
 Design components to facilitate pre-assembly on the ground and lifting
into final position in modular form.

Construction Phase

Plan and develop the site to promote worker efficiency.

 Use cardboard cutouts that have been cut to scale to represent
temporary construction facilities on an overall map of the site drawn to
the same scale; brainstorm the best layout of the site to support
construction;
 Provide for dust control on roads;
 Develop and stabilize all heavily used foot traffic areas around the
construction site;
 Design the construction road network to isolate administrative traffic
from traffic that directly supports construction activity;
 If space permits, develop a perimeter road around the site. This will
help prevent traffic congestion and interference;
 Design laydown areas as a series of alternating roads and narrow
laydown pads that allow any item in the laydown area to be handled
using lifting equipment on the adjacent road;
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 Shape all laydown areas for drainage, and construct a supporting

drainage network. Stabilize surfaces where material will be placed and
spray them with weed killer or cover them with plastic sheeting to
prevent grass and weed growth. Make cribbing available for off-ground
placement of materials;
 Do not allow long-term storage of any materials adjacent to a facility
under construction. Leave clear space around its perimeter that is
available for construction equipment and pre-positioning of materials
needed for current work activity;
 Locate smoke- and dust-producing activities downwind from the center
of construction activity;
 Locate/relocate portable facilities to minimize travel distances from
worker concentrations;
 Regularly clean up an remove construction debris and garbage from
work areas;
 Schedule work shifts to minimize interference with local traffic patterns
and to avoid excessively hot portions of the day;
 Establish grids for construction electrical, gas, water and compressed
air service with distribution points in convenient locations. Design
connection trees that are modular and can be moved from distribution
point to distribution point as needed;
 Have portable lighting sets available to illuminate work areas where
natural illumination is poor;

Perform work when and where it is most efficiently accomplished.

 Complicated process equipment is often best assembled in modules at a

factory, requiring only positioning and connecting at the project site.
This takes advantage of the factory environment, which generally has
more skilled workers, better productivity, and better working
conditions. Pay scales also may be more favorable. Module assembly
can be accomplished in parallel with other construction work, which
permits field construction schedules to be shortened;
 On-site prefabrication yards for forms, steel cages, and piping spools
allow such work to be accomplished under the best conditions and, look
for the yards to be weather-protected to allow work to continue during
inclement weather;
 Work on the ground can be accomplished more efficiently and safely
than in the air. For example, insulated components can be at least
partially insulated while on the ground, with only the finish work left
for the air;
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 During construction of multi-level structures, pre-position installed

equipment and other materials on the various levels as decks are
completed to avoid later problems of access;
 In a congested area where multiple piping and electrical systems are
competing for space, install the heavier, bulky components firsts,
leaving the lighter, more flexible items for last;
 When building construction roads, include non-drainage culverts and
ducts where future utility lines are expected to be located so that roads
will not be cut up later to accommodate laying these lines;
 Fabricate like components, such as rebar cages, on an assembly line
basis;
 Allow materials to be delivered to the site only during off-shift hours;

Minimize unscheduled and unproductive activity.

 Use detailed work package planning and adopt a philosophy of never

starting on a work package until personnel, materials, and equipment
availability is assured;
 Use separate crews for materials pickup and spotting at the point of use
to keep the supervisor with the crew;
 Obtain old trailers to use in picking up and positioning materials to be
used by crews. Materials can be moved directly from the trailers to the
point of placement, thus eliminating multiple handling;
 To avoid the inevitable productivity degradation associated with rework
due to changes, use a special crew within each craft to handle rework,
thereby allowing the primary crew to move on to other first-time work;
 If special equipment, such as heavy cranes, must be rented to support
certain phases of a project, concentrate the scheduling of work
requiring this equipment into as short a time span as possible;
 Use bar codes or other codes to identify materials in storage. This will
speed up identification time;
 For critical layouts, use two separate survey crews, each starting from
the primary benchmark, to lay out construction. This will minimize the
potential for layout errors;
 When storing materials in a laydown area, store them in order of
retrieval. This will minimize damage and loss associated with handling
and re-handling;
 Paint distinguishing marks (such as a North arrow or “Top”) on
components to facilitate their final positioning. This will eliminate lost
time due to misplacement;
 Assign laydown areas by discipline;
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 Place tool boxes, tool rooms, parts lockers, etc. on wheels or skids to
permit their relocation as work moves. Install lifting hooks on them so
they can be handled with cranes;
 Use bar coding and computerized inventory control to speed tool
issuance. This is even more effective if employee ID badges have a bar
code so that the employees accessing the tools can be quickly
identified;
 Consider using “just-in-time” materials deliveries from suppliers to
eliminate the cost and effort of intermediate storage and handling;

Employ work-saving tools/equipment and modern construction techniques.

 It is impossible to keep up with the market, since new and better

technology is always introduced. Ask vendors to demonstrate their
equipment. They are usually receptive to providing training as well;
 Use automatic welding machines, nail guns, cordless tools, laser
levelers, craftsman stilts, etc.;
 Use commercially available material items designed to speed the
construction process. for example, commercial forms are available for
concrete work, and a complete family of high chairs, clips and other
gadgets can speed the placement and tying of resteel. Comparable items
are available for carpentry, electrical, and other work;
 Have a representative of the organization attend trade shows to learn
what is on the market. Bring back literature and make it available to
those with a need to know. Consider making a video tape using scenes
from a trade fair or pictures from brochures with appropriate narrative,
and distribute this video among the staff;
 Subscribe to trade publications, which contain many advertisements
describing innovative products. Prepare a scrapbook of those with the
most potential and make it available to the staff;
 Cut out articles from trade and other publications that describe innovate
techniques used by competitors. Compile them in a scrapbook that is
available to the staff;

Sequence work for optimum efficiency.

 When the facility to be built includes repeated designs, try to schedule

work on repeated elements in series to take advantage of the learning
curve;
 Pre-position and temporarily lash heavy and/or bulky components
within a structure when access is most favorable;
 P a g e | 54

 On large concrete slabs, pour sections in checkerboard fashion to

reduce the need for forms;
 Hold stairs and platforms early so they can be used in lieu of
scaffolding and elevators;
 Schedule construction activity around the weather. For example, some
building may be erected early to provide protected work space for later
construction;
 With owner concurrence, construct selected permanent facilities early
and use them for construction support;

Employ construction practices that emphasize safety.

 Erect stair towers early so they may be used for access during
construction;
 Use remotely-activated release devices on rigging equipment so
workers will no have to be hoisted to release them manually from
equipment lifted into place;
 Have safety equipment vendors demonstrate available state-of-art
safety equipment and provide any training needed;
 Install safety lines and other safety devices on structural members
before they are lifted into position;

Employ Value Engineering principles to solve field problems.

 Describe the goal in terms of a verb and a noum (Example: move

materials);
 Identify all options possible;
 Evaluate all options, eliminate those not practical, and make a short list
of options with most potential;
 Evaluate the remaining options in detail;
 Select the best option;
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Contracting
It is essential that the administration and management of contracts results in
reducing risks, maximizing cost savings, minimizing claims, and improving
economic return. These results can only be achieved through effectively
managing contract risks: developing tough but fair contract documents,
engaging in aggressive negotiating practices, and employing outstanding
communication skills.

The process of reaching a contract requires a specific sequence of steps. In

taking these steps, the Project Manager must make a series of choices between
priorities for project objectives, degrees of risk to be assumed by the
contracting parties, control over project activities, and the cost of achieving
selected goals.

This process must first be fully understood by the Project Manager, then be
tempered by experience, and finally be expanded into the ability to reach a
contract through the exercise of negotiating and communicating skills.

What is a Contract?
A contract is a mutual business agreement recognized by law under which one
party undertakes to do work (or provide a service) for another party for a
previously agreed sum of money.

Owner contracting arrangements should cover:

 Contract Conditions;
 Commercial Terms & Pricing Arrangements;
 Scope of Work (Technical); and
 Project Execution Plan.

Why have a Contract?

A written contract provides the document by which the risks, obligations, and
relationships of all parties are clearly established, and ensures the performance
of these elements in a disciplined manner. In the Owner situation, the contract
is the means by which the Contractor can be controlled and ensures that the
work and end product satisfy the Owner’s requirements.
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Parties to the Contract

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

 The Owner, who establishes the Form of Contract and the General
Conditions;

 The Engineer, who can have the following three roles:

 Designer - carrying out the detailed engineering work, and purchasing

equipment and material on the Owner’s behalf

 Arbitrator - acting as the Owner’s agent in administering the contract and

deciding, impartially, on certain rights of the parties under the contract

 Project Manager - handling design, procurement, and construction or

construction management/services; and

 The Contractor, who executes the work.

The normal contractual relationship among these three parties on a single

project is for the Owner to have one contract with the Engineer for design,
procurement, and other services, and a separate contract with the Contractor for
the construction work. No contractual relationship exists between the Engineer
and the Contractor.

This is usually referred to as a “divided or split responsibility” arrangement. In

an alternative arrangement, called “single responsibility”, a General Contractor
is awarded total responsibility for the engineering, procurement, and
construction.

The Project Manager must carefully decide on a specific contracting

arrangement.
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Contract Responsibility
The Project Manager is essentially responsible for the contract strategy, which
is developed as part of the project strategy. However, the proposed division of
work, contracting arrangements, forms of contract, and bidders’ lists should be
developed in conjunction with the company’s Contracts Department.

This combined responsibility of the Project Manager and the Contracts

Department in the contracting process can lead to inefficiencies, delays, and
disagreements and can negatively impact the project cost and schedule when
there are organizational conflicts.

Close coordination and effective communications must exist between all

groups to ensure complete agreement and commitment to the proposed
contracting program. This is particularly important in all submissions to
Contract Committees and/or senior management.

The Project Manager must obtain agreement from the company’s Contracting
Department and Insurance Department before committing to contractual
language regarding liability, indemnity, or insurance.

Contract Strategy
The following would be major considerations when developing a contract
strategy for the project:

 When and how will the work be divided up?

 How will the division of work affect Client/Project Team/Main contractor/

Vendor/Subcontract or interfaces? (This division enables the Project
Coordination Procedures to be properly prepared.)

 What type of contract should be used? Segment the project into discrete
work packages to facilitate management, and subject the work packages to
available resources. Consider the contract philosophy, the type of contract best
suited to the project, contract interfaces, bid evaluation techniques, and bid
documentation. This enables the contract strategy to be produced in liaison
with the Contracts Department.

 What roles are licensors and consultants expected to play? This allows
arrangements to be made for prequalifying suitable contractors, issuing
invitations to bid, evaluating bids, and making award recommendations.
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 Are there potential conflicts of interest with other Owner projects in

contractors’ offices, in vendors’ workshops, or within fabrication yards? Such
conflicts can have an impact on the bidder’s list.

 What is the availability of skilled labor? What is the industrial relations

climate local to fabrication yards and local to the construction site? Lack of
labor can delete a contractor from the bidder’s list.

 What is the quality and availability of personnel to develop, evaluate, and

administer the required type of contract/contract conditions?

Generalities about Contracting

Contracting differs from others disciplines in the degree of uncertainty. The
contractor must deal with difficult variables, such as adverse environment,
weather, terrain, interference, personnel qualifications and tempers, different
types of jobs, different specifications and widely fluctuating costs in addition
to an unknown future market for his services. Generally speaking, contractors
are men of integrity for those who are not eventually do not survive.

Profit is the contractor's incentive and no one should expect a contractor to

perform at cost. The point is that a healthy contractor is a solid performer and
a good businessman, knows its costs and what he can or cannot do, and realizes
that his reputation is built upon his past performance.

Success breeds success. A contractor may overbid or underbid any given

project, but on the whole, at year end, he should show up reasonably in the
black. This is the motivation and makes his efforts worthwhile.

While an established contractor tries to provide steady year-round employment

for a fixed group of people he has found reliable, he must deal with multiple
factors affecting his potential. Some of these factors are:

 Level of economical activity in his area of business;

 Specialized personnel available to perform;
 Ever-growing competition;
 Difficult-to-deal-with customers;
 Internal organization problems; and
 Adverse weather conditions.
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Successful Contracting
Successful contractors outside of attributing their good fortune to esoteric
business skills, suggest the following general precepts as particularly important
in operating a profitable contracting firm:

 Well-trained, experienced personnel;

 Sound job selection;
 Effective cost-control and reporting procedures;
 Careful analysis and cost/time estimating;
 Good labor and public relations;
 Alertness to improvements; and
 Sound financial policies.

Well Trained, Experienced Organization

The secret of success in any endeavor has been defined as organization. This is
certainly true in the case of a contractor. His success and reputation depend on
the effectiveness of the organization he directs.

The contractor, his management, and his staff must be well qualified for their
positions by reason of education, experience, and demonstrated ability, with
capability in organizing and directing men to accomplish jobs in minimum
time with quality workmanship, not an easy task by any means.

Contractor failures are by and large due to managerial inability, lack of

experience, and incompetence. These, of course, are linked to organizational
incapability, which results in ineffectiveness in other areas as well.

Sound Job Selection

A contractor usually has an opportunity to bid many jobs each year; many
more than he has capacity to perform. From these solicitations he must be
astute enough to select only those he can perform and which offer him a
reasonable opportunity for profit.

He cannot afford to be indiscriminate, since bidding is a costly process. If he

were not selective, he might find himself overextended with disastrous results.
Of course, he would prefer a cost-plus or a negotiated contract, which
minimizes this risk and assures a profit.
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Effective Cost Control And Reporting Procedures

The importance of this item should be quite obvious. It is necessary to report
and record costs effectively so that the contractor can keep on top of his job.
these guide him in the control of the job, provide the data on which he can base
future estimates, and bring to light opportunities for savings on jobs he
performs.

Careful Analysis and Estimating

This is vital to the successful contractor. Knowing and understanding
thoroughly all facets of the job being bid and providing for possible unknowns
he must now be able to estimate accurately his costs for performing the job
including a reasonable profit.

An estimator actually plans how the work is to done taking into account all
pertinent factors. This is true on firm or cost-plus contracts. All plant engineers
and other top management people have a need for accurate estimates; these are
the basis for approval or disapproval of proposed projects.

A pet peeve of most plant managers and plant engineers is the inaccuracy of an
estimate as compared with the final cost of the project.

Good Labor and Public Relations

The contractor is a businessman in a community and he needs to attain and
reinforce a positive favorable image in that community. By this image he
becomes known, and his reputation becomes enhanced. Certainly this is more
desirable than the alternative. Perhaps of greater importance is his ability to
deal with the people he has on his jobs. His success or failure depends on the
accomplishment of his jobs at a profit through the people he employs.

The management skill of his organization is tested almost constantly in

coordinating and motivating various crafts involved in a job. Certainly each
supervisor should have a working knowledge of the limits of craft
responsibility, as well as an understanding of the working class environment,
union or otherwise, and should be able to control and guide a project
effectively and wisely to a successful conclusion.

This proficiency, on the part of the contractor, is very important to a plant

engineer; it assumes an even greater importance when plant craftmen are
involved since disputes resulting in costly delays can readily develop between
plant craftmen and outside craftmen.
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Alertness to Improvements
Every businessman, including contractors, must be aware of developments and
methods improvement, which may make it easier and less costly to perform his
tasks. He needs to be flexible, willing to change and not married to the old way
of job performance. Many new types of material and labor-saving devices are
being developed in the present competitive environment. The contractor must
keep abreast of an utilize these advance if he is to remain alive.

Sound Financial Policies

Most contractors who have failed seem to have met their doom because of
ineptness in financial management. It is important at all times to have sufficient
cash reserves and working capital. Excessive innvestments in fixed assets may
result in insufficient working capital, burdensome fixed charges and a high
break even point. Inventories should be held to a minimum, since having cash
tied up in inventory may result in insufficient cash available to cover current
liabilities.

Working capital should be adequate to avoid becoming overextended

financially. Many different financial ratios, compiled by various associations
from balance sheets and profit-and-loss statements, are available. Some of the
more menaningful ratios which may apply to a contractor's business are:

 Working capital to sales 10-15%

 Cash to current liabilities 25-30%
 Net profit to net sales 5-10%
 Current assets to current liabilities 1.5-2.5 times

Contracting Clauses
Contracting is basically an agreement between two parties, one called the
contracting party or owner and the other the contracted party or the contractor,
to perform a previously determined scope of work for a previously determined
amount of money.
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It is the contractor's duty to perform the scope of work for which he (she) was
contracted according with the clauses stipulated in the contract related to:

 Job specifications;
 Level of quality;
 Safety requirements;
 Cost control services;
 Reporting requirements; and
 Labor laws.

Contracting usually follows a cycle as the one depicted in the figure below.
This plan shows all the usual pre-contracting activities, the bidding process and
after bidding contract development. The discussion that follows will speculate
on each area with more detail.

Type of Contract

Approve Technical Specs Internal Review Bid Package

Approve Bidding Draw ings

PHASE I

Invitations to bid Job ex meeting Bid Closure

PHASE II

Post-Qualification Technical Package Commercial Package Aw ard

PHASE III
Pre-contracting Activities
The owner contracting representatives usually rank the contractors in the area
with special qualification requirements well either in anticipation of starting
any specific contracting activity (pre-qualification) or asked for credentials
along with the bid offer (Post-qualification).
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Whatever system is chosen contractor’s qualification is usually carried out

taking into consideration a number of parameters as:

 Financial capabilities;
 Supervisory staff;
 Manpower availability;
 Equipment;
 Previous experience; and
 Workload.

Supervisory staff should be qualified by name and resume. A team of ten is

essential:
 General superintendent;
 Superintendent assistant;
 Chief engineer;
 Civil engineer;
 Mechanical Engineer;
 Electrical engineer;
 Accountant;
 Quality assurance supervisor; and
 Security & safety supervisor.

Equipment should be measured by maintenance state and reported success

based on historical data. So when a project comes by the contracting people
have clearly established in anticipation the slate of contractors available to
perform the job.

Once the job is ready for contracting, a bid package has to be put together. This
bid package usually contains the following:

 Instruction to bidders on how to handle their proposals;

 Contracting general conditions;
 Contracting special conditions;
 Technical specifications; and
 Drawings and schedules.
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Instruction to Bidders
The instruction to bidders should contain:

 Project description, parties involved and schedules;

 Type of contract to be followed;
 Deadline for proposal submissions;
 Number of copies for offer;
 Sealed proposals and a one-time opening after due date;
 Payment routine;
 Procurement needs;
 General safety requirements;
 Inspection regulations; and
 Bond requirements.

General Conditions
Contract general conditions will depend on specifics about every project in
particular but it usually includes:

 Definition and interpretation;

 Contract documents;
 Responsibilities;
 Duties;
 Performance bonds;
 Site inspection procedures;
 Project cost and schedule controls;
 Safety regulations;
 Security regulations;
 Compliance with company bylaws;
 Patent rights and royalties;
 Cleanliness requirements;
 Hold owner harmless clauses;
 Labor relation matters;
 Quantity assurance and quantity control clauses;
 Project modification and changes procedures;
 Unit rates;
 Owner rights; and
 Contractor default clauses.
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Special Conditions
Special conditions usually refers to those related to the kind of contract at hand
which sometimes makes the job specifically different from run-of-the mill
contracts.

They usually include:

 Special work hours;

 Extensive insurance coverage;
 In-depth definitions of responsibilities;
 Extra safety precautions;
 Highly confidential issues; and
 National security involvement.

Technical Specifications
Technical specifications are the heart of the job definition and as a minimum
they should contain the following:

 Written description of what is to be built;

 Interfaces with drawings to show details and with procurement
schedules to establish real needs;
 Work breakdown structure; and
 Organization breakdown structure.

Drawings and Schedules

Drawings and schedules are the complement of the technical specification and
they depict the total scope of the job and material quantities required to be
installed.

They are usually marked "For quotation only" (FQO) as opposed to drawings
and schedules later issue marked "Authorized for construction" (AFC).

Once the bid packages are distributed to bidders, a job explanation meeting is
prepared to allow prospective contractors to consult the owner design team
representatives. A physical visit to the construction site will follow and bidders
are usually asked to present certification of attendance to this procedures along
with their proposals.
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During the period between bid distribution and bid closing a great deal of
consultation activity takes place between bidders and owner representatives to
clear:

 Bid errors;
 Bid omissions;
 Additons; and
 Deletions.

At bid closing time, contractors are requested to deposit commercial and

technical proposals in different envelopes in specially locked boxes belonging
to the owner. Owners usually have an internally developed proposal to be able
to compare bids against it. The technical proposals go to the owner's technical
team where their compliance with bid technical requirements is established and
returned to owner contracting representatives. The owner's contracting
representatives along with the owner's auditors open and analyze commercial
proposals and establish the best offers with matching technical acceptance.

A management executive committee then decides where the award goes based
on the previous analysis by other groups mentioned above. Once the award is
communicated to the successful contractor, a meeting is set up to ultimate
details and analyzed the contract document to be signed.

The contract should establish clearly the owner and contractor representatives
and their respective duties through out the contract. After contract signature,
the contract performance starts by securing approval of the contractors
planning and scheduling of the activities involved and mobilization of
contractor's equipment and personnel.

Performance measurement procedures are set up and followed and

accountability reports based on the project breakdown structure and the
previously establish code of accounts are started. During the first construction
site meeting, daily, weekly and monthly report needs are organized and
enforced.

Inspection and safety from the owner's office will keep close attention to field
developments and highlights of inappropriate work produced. Close analysis of
the data collected by the above mentioned reports and schedule updates will
generate decision-making activities within the project management team to
keep the contract running under budget and on schedule.
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Planning and Scheduling

As mentioned above Planning and scheduling starts at contract signature with
the approval of the contractor's schedule. The contract should have specific
provisions to deal with:

 Lack of progress;
 Project design changes;
 Manpower allocation;
 Original schedule updates and revisions;
 Reporting needs and frequency;
 Material procurement interface; and
 Tools and equipment allocation.

Contracting Arrangements
Engineering and construction contracts can be drawn in a great variety of
forms, depending on the contract strategy and the financial resources of the
Contractor. The most successful contracts have at least one element in
common: thoughtful and thorough preparation before the contract is let.

Contractual arrangements in construction are becoming increasingly more

involved, which leads to the potential for significant added costs. Project
complexity and the changing and increasingly costly legal and insurance
environments, are major reasons for considering whether better contractual
arrangements are possible.

Contracts, of course, must be made early in the life of a project. To do this

while simultaneously providing for the risks of uncertainties and gaining
improved performance and innovation presents major challenges for Owners
and Contractors alike.

Forms of Contract
There are three principle types of contracts: reimbursable, measured (unit
price), and lump sum. The following forms of contract are typical of these
types:

 Cost Reimbursable (Time & Material);

 Cost Reimbursable with Percentage Fee;
 Cost Reimbursable with Fixed Fee;
 Cost Reimbursable Plus Cost/Schedule Bonus – Penalties;
 P a g e | 68

 Measured Unit Price (Mostly Construction);

 Guaranteed Maximum Price; and
 Lump Sum/Fixed Price.

The objectives of cost, time, quality, risks, and liabilities must be analyzed and
prioritized, since trade-offs will probably be necessary in deciding the type of
contract to be used.

Reimbursable Cost Contracts

These require little design definition, but need to be constructed in a way that
allows expenditures to be properly controlled. The major advantage of a
reimbursable cost contract is time, since a contract can be established during
the early stages of a project.

This type of contract does present a disadvantage to an Owner, however, since

poor Contractor performance can result in increased costs, and the final costs
are the Owner’s responsibility. Additionally, the final/total investment level is
not known until the work is well advanced.

Reimbursable cost contracts can contain lump sum elements. e.g. the
Contractor’s overhead charges and profit, which is usually preferable to a
percentage basis for calculating these costs. Reimbursements may be applied to
salaries, wages insurance and pension contributions, office rentals,
communication cost, etc.

Alternatively, reimbursement can be applied to all-inclusive hourly or daily

rates for time spent by engineers on the basis that all office support costs are
built into these rates.

This form of contract is generally known as a fixed fee/reimbursable cost

contract and can be used for both engineering and other office services as well
as for construction work.

Such arrangements give the Owner greater control over the Contractor’s
engineering work, but the effect of reducing the lump sum content of the
Contractor’s remuneration is to reduce its financial incentive to complete the
work economically and speedily. It also reduces the ability to compare/evaluate
competitive bids, since the comparison that can be made between Contractor
bids involves only a small percentage of the project cost. It is possible that the
“best” Contractor may not quote the lowest prices.
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Requirements

 A competent and trustworthy contractor;

 Close quality supervision and direction by the Owner; and
 Detailed definition of work and payment terms covered by lump sums
and by “all-inclusive” rates.

Advantages

1. Flexibility in dealing with changes (which is very important when the

job is not well defined), particularly if new technology development is
proceeding concurrently with the design.
2. An early start can be made.
3. Useful where site problems such as Internal Review (IR) delays and
disruptions may be encountered.
4. Owner can exercise control on all aspects of the work.

Disadvantages

1. Final cost is unknown.

2. Difficulties in evaluating proposals--strict comparison of the amount
tendered may not result in selection of the “best” Contractor or in the
lowest cost of the project.
3. Contractor has little incentive for early completion or cost economy.
4. Contractor can assign its “second division” personnel to the job and
may make excessive use of agency personnel and/or use the job as a
training vehicle for new personnel.
5. Owner carries most of the risks and faces the difficult decisions.

Target Contracts
(Cost and Schedule)

Target contracts are intended to provide a strong financial incentive for the
Contractor to complete the work at minimum cost and time. In the usual
arrangement, the Contractor starts work on a reimbursable cost basis.

When sufficient design is complete, the Contractor produces a definitive

estimate and project schedule for Owner review, mutual negotiation, and
agreement. After agreement is reached, these become targets.
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At the end of the job, the Contractor’s reimbursable costs are compared with
the target and any savings or overrun is shared between the Owner and the
Contractor on a pre-arranged basis.

Similarly, the Contractor qualifies for additional payment if it completes the

work ahead of the agreed-upon schedule. The main appeal this form of contract
has to the Contractor is that it does not involve competitive bidding for the
target cost and schedule provisions.

Requirements

 A competent and trustworthy contractor; and

 Quality supervision by Owner (both technical and financial).

Advantages

1. Flexibility in controlling the work.

2. Almost immediate start on the work, even without a scope definition.
3. Encourages economic and speedy completion (up to a point).

Disadvantages

1. Final cost initially unknown.

2. No opportunity for competitive bidding for the “targets”.
3. Difficulty in agreeing on an effective target.
4. Variations are difficult and costly once the target has been
established--Contractors tend to inflate the cost of all variations so as
to increase profit potential with “easy” targets.
5. If the Contractor fails to achieve the targets, it may attempt to prove
that this was due to interference by the Owner, or to factors outside
the Contractor’s control; hence, effective control and reporting is
essential.

Measured Contracts
(Unit Price)

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

unit/quantities for the work. Contractors then bid fixed prices for each unit of
work. The advantage is that the time and cost risk is shared: the Owner will be
responsible for the total quantities, and the Contractors will have the risk of the
fixed unit price. A quantity increase greater than 10% can lead to increases in
the unit prices.
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Requirements

 An adequate breakdown and definition of the measured units of work;

 A good quantity surveying/reporting system;
 Adequate drawings and/or substantial experience for developing the
Bill of Quantities;
 Financial/payment terms that are properly tied to the measured work
and partial completion of the work;
 Owner-supplied drawings and materials must arrive on time; and
 Quantity-sensitivity analysis of unit prices to evaluate total bid price for
potential quantity variations.

Advantages

1. Good design definition is not essential-“typical” drawings can be used

for the bidding process.
2. Very suitable for competitive bidding and relatively easy Contractor
selection, subject to sensitivity evaluation.
3. Bidding is speedy and inexpensive and an early start is possible.
4. Flexibility - depending on the contract conditions, the scope and quantity
of work can be varied.

Disadvantages

1. Final cost is not known at the outset since the Bills of Quantities have
been estimated on incomplete engineering.
2. Additional site staff is needed to measure, control, and report on the
cost and status of the work.

Lump Sum/Fixed Price Contracts

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

methods and resources it chooses in order to complete the work. The
Contractor carries total responsibility for proper performance of the work
although approval of design, drawings, and the placement of purchase orders
and subcontracts can be monitored by the Owner to ensure compliance with the
specification.

The work to be performed must be closely defined. Since the contractor will
not carry out any work not contained in the specification without requiring
additional payment, a fully developed specification is vitally important.
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The work has to be performed within a specified period of time, and

status/progress can be monitored by the Owner to ensure that completion meets
the contractual requirements.

The lump sum/fixed price contract presents a low financial risk to the Owner,
and the required investment level can be established at an early date. This type
of contract allows a higher return to the Contractor for superior performance.

A good design definition is essential, although this may be time-consuming.

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

Requirements

 Good definition and stable project conditions are essential;

 Effective competition is essential;
 Several months are needed for bidding and appraisal; and
 Minimal scope changes.

Advantages

1. Low financial risk to Owner; maximum financial risk is on the

Contractor.
2. Cost (and project viability) is known before commitment is made.
3. Minimum Owner supervision - mostly quality assurance and schedule
monitoring.
4. Contractor will usually assign its best personnel to the work.
5. Maximum financial motivation of Contractor - maximum incentive for
the contractor to achieve early completion at superior performance
levels.
6. Contractor has to solve its own problems - and quickly.
7. Contractor selection (by competitive bidding) is fairly easy, apart from
deliberate low price.

Disadvantages

1. Variations are difficult and costly - the Contractor, having quoted

keenly when bidding, will try to make as much as possible on extras.
2. An early start is not possible because of the time taken for bidding and
for developing a good design basis.
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3. The Contractor will tend to choose the cheapest and quickest solutions,
making technical monitoring and strict quality control by the Owner
essential; schedule monitoring is also advisable.
4. The Contractor has a short-term interest in completing the job and may
cause long-term damage to local Internal Review (IR) relationships,
e.g. by setting poor precedents/union agreements.
5. Bidding is expensive for the Contractor, so the bid invitation list will be
short; technical appraisal of bids by the Owner may require
considerable effort.
6. Contractors will usually include allowances for contingencies in the bid
price and they might be high.
7. Bidding time can be twice that required for other types of contracts.

Typical Forms of Contract Used in the United Kingdom and the United
States.

United Kingdom

 Institute of Civil Engineers - ICE - mainly for civil and construction-

only contracts;
 Federation Intemationale des Ingenieurs-Conseils . FIDIC - primarily for
offshore and overseas work; and
 Institute of Mechanical Engineers - IMech E - primarily for design and
erection of mechanical plants

United States

 American Institute of Architects - AlA -mainly for engineering work

and project/construction management; the A/E usually functions as the
Owner’s “agent” on a fee/reimbursable basis;
 The Associated General Contractors of America - AGC - mainly for
construction work and construction management; the Contractor
usually functions as an “independent contractor” on a lump sum/fixed
price basis; and
 The Engineers Joint Council (EJCDC) forms of contract documents
(issued jointly by the NSPE, ACEC, ASCE. and CSI and approved by
the AGC), are often used by many engineering firms.
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Summary
It is possible to devise a Form of Contract with appropriate terms and
conditions to suit many different circumstances. Some basic considerations
leading to the best choice are:

1. Clear definition of each party’s contractual responsibilities. Shared

responsibilities are unsatisfactory, although they are unavoidable in
some circumstances.
2. The Lump Sum Form of Contract provides the best financial risk for
the Owner, gives the Contractor the maximum incentive for early
completion, and produces the greatest benefit of competitive bidding.
Conversely, Reimbursable Contracts provide no such incentives. It is
dangerous, however, to attempt to use a Lump Sum Contract if the
essential conditions are not satisfied - notably, a clear and complete
definition of the scope of work.
3. The Owner must have the contractual right to exercise adequate control
to ensure the success of the project, but the temptation to assume
excessive control should be resisted.
4. Control and responsibility go together - the greater the Owner’s control,
the less the responsibility carried up by the Contractor.

Recommendation for Additional Contracting Clauses

The following is a contract supplement covering the minimum requirements

for project schedules to be prepared and maintained by the contractor.

Scope

The contractor representative shall attend planning, scheduling and

coordination meetings to interface with the COMPANY and other contractors
to identify and resolve critical scheduling issues.

Proposed revisions to previously agreed schedules shall be submitted to the

COMPANY at least 48 hours prior to the meeting where they are suppose to be
discussed.

These revisions shall be accompanied by complete documentation related to

the proposed variations. The meeting shall be held at the work site or as
designated by the COMPANY representative.
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Types of schedules

Project milestone schedule

The contractor shall submit to the COMPANY, within 60 days of contract

award, for its review and approval, a proposed project milestone schedule
showing definitive plans for execution of the contract.

This approved schedule shall be the contractor project milestone schedule and
shall be used to plan, organize and execute the work, record and report actual
performance and progress, and show how the contractor plans to complete all
remaining work as of the end of each progress report period.

The schedule shall be in the form of an activity oriented time scaled network
diagram ( critical path method) and the principles and definition of the terms
used herein shall be as set forth in THE INTERNATIONAL COST
ENGINEERING COUNCIL (ICEL). Subcontracted activities shall be
identified by the name of the subcontractor.

The project milestone schedule shall identify critical milestones mentioned in

other part of this contract. The project milestone schedule shall be updated and
reissued on monthly basis.

The project schedule shall reflect working within operating plants and the
construction sequencing, tie-ins and the shutdown as generally described in the
job specifications.

Summary schedule

The contractor shall develop an Engineering, procurement and construction

(EPC) summary schedule within 60 days of contract award. These schedules
will establish the control points reflected in the project milestone schedule
referred to in a paragraph above. The format for the EPC summary schedule
shall be that of a time-scaled network containing 75-100 lines and 200-500
activities. Major restraints and interdependencies shall be shown.
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As a minimum the following should be identified:

1. Start and completion dates for each engineering discipline and release
of critical drawings for procurement and construction.
2. All long lead critical material, major equipment and bulk materials,
showing the procurement of these items and how they support the
construction schedule.
3. The contractor site mobilization and start and completion dates for all
major construction activities.
4. All activities to be performed by subcontractors including the contract
award dates.
5. Man-hour weightings against each line item and man-hour weightings
for engineering, procurement and construction works
.
The EPC summary schedule shall be updated monthly.
EP schedules

Engineering/Procurement schedules by major facilities shall be prepared to

expand activity detail represented in the project milestone schedule and other
schedules.

Construction mobilization schedule.

The construction mobilization schedule shall be prepared 60 days prior to

arriving at jobsites. The plan shall consist of a full layout of all temporary
facilities and the utilities required. Manpower and equipment required to
complete mobilization shall be identified. In addition organizational charts are
required for key personnel along with appropriate experience CVs.

Construction summary schedule

A construction summary schedule shall be submitted at least 60 days prior to

arrival at jobsite to cover the overall duration of the construction segment of
work and show the interface with engineering, procurement and fabrication via
issue of drawings and delivery of equipment. The construction summary
schedule shall be time-scaled and shall be developed within the parameters of
the milestone schedule and the engineering, procurement, fabrication and
construction schedules.
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90-day construction schedule

The construction 90-day schedule shall be prepared from the criteria

established by the construction summary schedule. It shall be prepared as a
time-scaled barchart format with major restraints shown. It shall be inclusive of
work planned in a geographical area during the time span designated. The 90-
day schedule indicates all resources required to meet the plan, including
manpower allocation by craft, heavy equipment, materials, equipment
deliveries, and engineering drawing interfaces.

Construction weekly work plans

The weekly work plan (WWP) shall be prepared in detail for all the resources
required and quantities of work to be completed to achieve interim milestone
dates. The activities on the weekly work plan shall be consistent with those on
the 90-day schedule. The forecast work for the week is broken down by day,
showing the total weekly quantity and total manpower required.

Each week a construction meeting shall be convened to discuss the upcoming

week’s work and review progress of previous week. The weekly work plan
shall form the basis for all discussions and therefore shall be presented in a bi-
weekly format.

Construction equipment schedule

The contractor shall prepare a construction equipment schedule identifying

each type of major equipment and the quantity by month over the life of the
contract. The submission shall be correlated to each activity of the construction
summary schedules. The construction equipment schedule will be updated
monthly by the contractor and include equipment actually used as of the report
period and the equipment required to complete the remaining work.

Equipment shall adhere to jobsite safety requirements and any required

certificates shall be recorded with each piece of equipment.
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Tie-in schedule, Hot-Tap schedule and shutdown schedule

The contractor shall prepare detailed schedules showing how these activities
will be accomplished. These schedules shall be submitted for COMPANY
review four weeks prior to commencement of work activities.

Progress Reporting Curves

Each progress report should include a minimum of the following:

1. Highlights of significant accomplishments during the report period,
expressed in relation to the total of work to be done in each category.
2. Current status of the work, Project progress information shall be
provided in the form of a monthly project update report as instructed by the
COMPANY representative and graphs showing actual versus scheduled
progress for:
 Detailed engineering;
 Requisitions issued;
 Materials commitment;
 Materials received at site; and
 Field construction
3. Explanation of deviations from the target schedules, their consequences
and corrective actions to be initiated shall be given.
4. Problems, along with actions taken to solve them.
5. Highlights of significant work items anticipated to be completed in the
succeeding month.
6. Execution of action items as identified for the reporting period.
7. Status of subcontracts
8. Photographs of the site to indicate construction progress.
9. Status of claims
10. Input for manpower reports.
11. Areas of concern
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Management review report

The management review presentation should cover the up-to-date status of the
project scope, schedule, project interface, detail engineering, procurement,
construction, pre-commissioning and start up. The presentation should be
depicted graphically and shall include a minimum of the following:

1.- Major milestones and major milestones schedule

These two charts highlight the overall schedule. The major milestones chart is
a listing of the project milestone with a tabulation of the scheduled, actual and
forecast dates for each. The major milestones schedule chart lists the key
engineering, procurement and construction activities and duration required to
support the milestone.
2.- Engineering percent complete
This chart represents the engineering progress by month. It is a series of ‘S’
curves denoting scheduled, actual and/or forecast progress.
3.- Status of major engineering office functions.
This is a barchart presenting the status of the following items:
 Drawings production;
 Material requisitions issued for bid; and
 Purchase order placed.
4.- Procurement status
This chart represents, in percentage, the status of material requisitions issued
for bid and purchase orders placed. it is a series of ‘S’ curves denoting
schedule, actual and/or forecast progress. Progress should reflect design,
manufacturing, and transportation activities or stages of material procurement.
5.-Fabrication and construction status
This is a barchart representing the key fabrication and construction activities
and duration. The activities included are major disciplines e.g., civil, structural,
piping, electrical and subcontracts.
6.-Overall plan/progress/forecast for engineering, fabrication and
construction.
This chart represents the total project plan. It relates engineering to
construction progress and indicates the major milestones. It is a series of ‘S’
curves denoting schedule, actual and/or forecast progress.
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7.-Contractor concerns.
This chart is a listing of contractor concerns regarding the contractual
responsibilities such as: scope variations, man-hour/manpower control,
productivity, schedule variations/delays/recovery, etc.
Manpower requirement forecast
The contractor shall prepare a construction manpower requirements forecast in
the form of a series of graphics displays depicting manpower by the following
categories and in accordance with the construction summary schedule:
 Non-manual;
 Manual;
 Manual and non-manual summary; and
 Manual by craft.

The graphs shall display the number of men by month, over the life of the
contract. This submission shall be correlated with the manpower assigned to
each activity of the construction summary schedule.
A computerized analysis is required unless the contractor can demonstrate to
the COMPANY representative’s satisfaction that a manual system will give
acceptable control. The manpower requirements forecast will be updated
monthly by the contractor and include manpower actually used by trade as of
the report period and the manpower required to complete all remaining work.

Schedule variation approval

A.-Revisions to the project milestone schedule shall only be made to reflect the
impact of variation orders and addenda. All proposed revisions to the project
schedule shall be clearly identified and highlighted, and the reasons for each
revision proposed shall be detailed by the contractor.
All such proposed revisions shall be subject to approval by the COMPANY
representative. The COMPANY representative shall review and approve or
disapprove any request for such a revision within ten (10) days after
submission of a documented request by the contractor.
B.-When variation orders or addenda impact the project milestone schedule, or
delays are experienced by the contractor, the contractor shall submit to the
COMPANY representative a schedule analysis depicting the influence of each
such variation order, addendum or occurrence of delay on the critical milestone
date(s) and the schedule completion date.
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Each analysis shall include a network demonstrating how the contractor

proposes to incorporate the variation order or addendum into the project
milestone schedule and how delays no directly attributable to a variation order
or addendum is proposed to be overcome by the contractor.
The analysis shall demonstrate the time impact based on the:
 Date the variation order is issued, the addendum agreed or delay
encountered;
 Status of the work at that point in time; and
 Event/time computation of all affected activities.
This shall agree with the latest update copy of the contractor’s detailed
progress report. Networks of proposed revisions which result from variation
orders and addenda and which are approved by the COMPANY representative
shall be incorporated into the project schedule during the first revision after
agreement is reached.
C.- If a variation order does not set forth the agreed time impact of a variation
because this impact is “to be negotiated”, the contractor shall use its best
efforts to estimate the time impact in its proposed revision to the project
schedule and, subject to COMPANY’s representative concurrence, the
contractor’s estimate shall be used on a provisional basis for project scheduling
purposes.
However, such use shall not constitute agreement as to the definitive time
impact of the variation, and shall in no way prejudice the right of either the
COMPANY representative or the contractor to negotiate the agreed time
impact for that variation thereafter.

Schedule control
A monthly analysis of the project milestone schedule shall be made by the
contractor and submitted to the COMPANY representative with particular
emphasis on the critical and sub-critical paths. The conclusions of this analysis
shall be covered in the monthly progress report to be prepared by the contractor
and this report shall, as a minimum include:
 Narrative highlights of any variations over the status of the previous
month;
 Special actions recommended or being implemented to maintain or
improve schedule; and
 Outlook for activities to be started or finished.
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Reporting
In addition with the reports outlined above, the contractor shall maintain
progress curves (planned versus actual performance) for each engineering
discipline (project, process, instrument, electrical, piping, civil, etc.) and for
each field craft (millwrights, pipefitters, welders, etc.) by major area of work.
Progress shall be measured by physical measurements of work completed. The
progress curves shall be available for review by the COMPANY’s
representative on request.
Schedule submission non-compliance
If the contractor fails to submit the project schedules or manpower
requirements forecasts, or revisions thereof within the required time, the
COMPANY shall be entitled to withhold payments otherwise due until the
contractor submits the required information.
Schedule coordination
The contractor shall coordinate work under this contract with other contractors
working in the same general area. prior to developing the schedule and
continuing throughout the time frame of the work, the contractor shall plan and
coordinate all work activities directly with all other contractors and determine
concurrent activities which may impact the work.
The contractor shall throughout the performance of the work make every effort
to coordinate activities so as to minimize interference and delays.
The schedule and all revisions thereto shall clearly indicate such areas of
interference and/or delays which have not been resolved between the respective
contractors.

The contractor shall submit with the schedule an analysis of alternatives, cost
estimates of each interference and/or delay situation, and complete
documentation demonstrating impact on present schedules, future work events
and on other contractors as well as sequence sketches illustrating the problem
areas.

These documents shall include minutes as approved by the COMPANY’s

representative of all meetings between contractors whereby the situations and
their alternatives were discussed.
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PROCUREMENT
Procurement management may be defined as the combined functions of
purchasing planning, vendors qualification, purchasing, inventory control,
traffic control, quality control, and salvage operations.

Procurement management is a concept originally introduce by governments

whereby the purchasing function is expanded from merely exchanging money
for goods to one of total responsibility for acquiring goods.

From the project management point of view, procurement functions vary

according to the job progress within the project life cycle. Since material
supply for projects is usually one of the main components of the total
construction effort, special attention should be given to the functional
organization that will be handling the procurement operation.

Procurement during conceptual estimate paper and design basis paper, is

limited to consulting services from the engineering department about:

 Vendor availability;
 Market conditions;
 Order of magnitude estimates; and
 Delivery time estimates.

This consulting service is a simple but vital function considering that project
procurement cost is usually found to be 40 to 60 percent of the total cost of the
project.

During Project Proposal (PP) development the main function of the

procurement organization should be the creation of an acquisition schedule for
long lead time materials according to the project milestone schedule
implemented within the project execution plan.

The acquisition schedule is usually called the Long Lead Time Material
(LLTM) and equipment schedule and it is always a commanding element for
the total project duration.

Additionally, during the project proposal phase preliminary materials take-off

(TO) is carried out and a program for procurement of items other than LLTM
is established.
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Materials 'take-off' (TO) is an engineering function that consist of reading

design drawings and producing material and equipment schedules required for
supporting construction of the project. Once the material/equipment TO's are
completed, purchase requisitions are generated.

Purchase requisitions (PR) usually contain the following:

 Engineering drawings;
 Engineering specifications;
 Inspection requirements;
 Contracting terms and conditions;
 Shipping requirements; and
 Required ex-plant date.

Once the project is funded, definitive design generates more detail information
and purchasing functions become more involved in the project development.
The already started vendor consultation and qualification will be
complemented with new information resulting from the design team and
purchase requisitions will be consolidated.

Long lead time material and equipment purchasing orders will be generated
immediately after funding if prior provisions for this issue have not been made.
This phase of procurement development requires a great deal of bidding and
contracting before the total project requirements are committed.

When all purchase orders have been placed and the contract awarded, the
procurement organization has some of the most important tasks within the
project life cycle, they are:

 Expediting;
 Quality assurance;
 Quality control;
 Shipping; and
 Delivering to site.

Expediting:

Vendors and sub-vendors have to be closely supervised to avoid unnecessary

delays and ascertain delivery according to technical specifications.

Expediting requires:
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 Original vendor production schedule;

 Original buyer milestone schedule;
 Establishing a progress measurement system;
 Reporting progress according to the above; and
 Analysis of performance to date and recommending action if necessary.

Quality assurance & Quality control:

Quality assurance and quality control are procurement activities dealing with
the accomplishment of design specifications. A quality assurance program is
run by the vendor and control by the buyer at production time. Planning and
scheduling for testing and checking are established at purchase order issuance.

A quality control program is run by the project owner to ascertain that received
and installed equipment and material comply with designed specifications and
quantities.

CONTRACTORS QUALITY CONTROL

REGULATE PRODUCTION PROCEDURES

TEST MATERIALS AND EQUIPMENT

INSPECT WORKMANSHIP

OWNER QUALITY ASSURANCE

VERIFY THAT CONTRACTOR'S QUALITY CONTROL

FUNCTION IS PROPERLY PERFORMED

ENSURE THE RESULTS OF ANY OF THE COMPLETE

FUNCTIONS ACCORDING TO SPECIFICATIONS
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Shipping & delivering to site:

Materials and equipment transportation is an extremely delicate task and

requires extensive planning. Adequate planning includes consideration of:

 Insurance coverage;
 Proper packing;
 Local and foreign custom requirements;
 Lead times;
 Cost analysis;
 Local transportation to site capabilities;
 Local traffic restrictions;
 Project schedule required delivery dates;
 Financial implications; and
 Temporary storage arrangements.

Project Procurement Financial Implications

The cost of project material and equipment represent an important part of the
total budget, big enough to cause serious financial damage if good cost control
is not exercised. Decision-making for procurement organizations essential role
in project management is based on:

 Purchase records;
 Specifications files;
 Vendors' performance records;
 Price historical information; and
 Exhaustive research.

With today's computer aids these tasks have become less of a load for the
purchasing organizations and quick management information related to
purchasing requirements data may be retrieved from data files if they are kept
adequately updated. Projects cash flow are very much concern with timely
acquiring materials and equipment and avoiding unnecessary expenses tied to
transportation expediting or temporary storage. The procurement organization
purchasing plan must follow the construction approved schedule and its
periodic revisions.
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Material procurement has to be concerned with:

 Market studies;
 Trend analysis;
 Make-or-buy studies;
 Price-cost analysis;
 Supply sources investigation;
 Value analysis;
 Value engineering analysis;
 Latest purchasing innovations; and
 Computer advances.

Only then, it will be able to provide management support in its financial

decision-making activities.

Procurement Engineering Value Analysis

Procurement engineering value analysis is a disciplined examination of the

project procurement requirements to eliminate unnecessary costs brought up
by:

 Over design;
 Lack of original ideas;
 Insufficient information;
 Temporary business pressures and the like.

Value is defined as the relationship between price and worth of the function of
a particular element.

Value = price / worth

The primary concern of any design is the function. Too frequently, the subject
of cost is pushed into the background and then forgotten. A value engineering
program will not let the team forget about cost and it will generate a healthy
relationship between function and cost.

Value engineering may be applied to the procurement functions as follows:

1.-Set up a plan.

Before starting any procurement activity, ascertain that the procurement team
has a plan of action.
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Follow the value engineering plan approach by breaking down the plan in
phases as follows:

 Feasibility;
 Information;
 Creativity;
 Evaluation;
 Proposal; and
 Implementation.

2.- Get all the facts.

Become familiar with the procurement elements by factually reviewing them.

Find answers to the following questions:

 What is the lead time required for fabrication?

 How many units will be needed?
 When are the units needed?
 How many suppliers are there?
 How much does it cost?

3.-Know about costs.

To make a complete analysis of any procurement element, it is essential to

know not only the total cost, but the breakdown of the total cost. This
breakdown should include logistics, trade trends and the like.

4.- Set a currency value on each main idea.

Rank your cost reduction ideas and start working on those offering a better
return.

5.- Update your information continuously.

Keep good information about vendors’ activity and materials market

developments. Participate in procurement related professional associations for
they are continuously updating information and presenting new approaches and
ideologies.
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Procurement and IT

Purchasing and materials management is one of the project areas that have
benefited most from the introduction of sophisticated yet easy to master
computer applications.

Computers applications have brought along:

 Reduction of paper work;

 Ready access to collected data;
 Communications improvement;
 Fast response to changes in purchasing variables;
 Automated data analysis;
 Virtual elimination of filing; and
 A host of other intangible benefits.

Some specific project procurement tasks improved due to computer activity

are:

At project proposal phase:

Creating and maintaining vendors' data, creating and maintaining quotations'

data, evaluating suppliers, reviewing quotations, processing planned items
requirements, generating cash requirement reports, maintaining a master data
base, and generating materials take-offs.

At preconstruction phase:

Computers technological advances are helping at generating requisition and

purchase orders, reviewing and approving requisitions, updating cash flow
requirements, monitoring and controlling suppliers, and monitoring project
management interface.

At construction phase:

Altering purchasing orders, answering order inquiries, estimating time of

arrival, closing purchase orders, updating historical data bases, consolidating
cash flow requirements, and providing instant information and communication

Additionally, computers provide real time processing capabilities. The new

available data is entered on line into the computer and information systems are
updated forthwith. Computers hardware configuration may be designed
according to the customer needs and expanded as business expand without
losing flexibility, quality or money.
 P a g e | 90

Software is found galore for all kind of business activities or may be designed
in-house following friendly, easy-to-learn, powerful, computer languages.
Computers have changed the face of materials management and procurement
activities as much as they have done with any other business.

Vital functions as statistical information for the formulation of purchasing

policy, can be updated as new data is entered and reported as:

 Historical purchasing activity;

 Prices variance;
 Purchasing order analysis and evaluation;
 Purchasing evaluation by vendor;
 Vendors’ delivery records;
 Purchasing economic indicators;
 Purchasing backlog;
 Rejections by vendor; and
 Cash flow updates.

All of the above mentioned are always available and revised to the latest trends
thanks to computers. Computers let you sort your information, summarize it,
break it down into components, present it in alternate formats, and highlight
business most relevant areas at incredible speeds.

Procurement Measurement

Normally for a major project, the procurement of long lead technical

equipment and materials is a function of the engineering effort and it is
included in the engineering budget as a separate item.

The procurement effort consists of three major functions:

 Material Take-offs;
 Purchase Requisitions; and
 Purchase Orders

To measure physical progress of the procurement effort, each of the three

major procurement functions should be weighted as a percentage of the total
procurement effort. This weight factor should be based on the budgeted
manhours for each function relative to the budgeted manhours for the total
procurement effort as shown in the table below.
 P a g e | 91

FUNCTIONS ESTIMATED ESTIMATED FUNCTION %

QUANTITIES MANHOURS WEIGHTED VALUE

MAT. TAKE-OFF 150 400 26.6

PR’s 200 700 46.7
PO’s 100 400 26.7

PROCUREMENT 100

Material Take-offs

Physical progress measurement for material take-offs is based on the estimated

number of drawings requiring material take-offs versus the number of
drawings for which take-offs have been completed.

For example:

The estimated drawings requiring take-offs = 150

Drawings with take-offs complete = 75
Physical progress would be: (75/150)(100) = 50%

Purchase Requisitions

Physical progress measurement for purchase requisitions is based on the

estimated total number of purchase requisitions versus the number of
requisitions approved for purchase. For example:

The total estimate of Purchase Requisitions = 200

Purchase Requisition approved for purchase = 50
Physical progress would be: (50/200)(100) = 25%
 P a g e | 92

Purchase Orders

Progress should be based on both the quantity of purchase orders placed and
the cumulative dollar value of materials shipped from the manufacturer's plant
(explanted). The quantity of purchase orders placed will contribute 50 percent
progress and the dollar amount of total material value explanted will contribute
the remaining 50 percent.

For instance, the purchase order quantity is 100 with 28 purchase orders
placed. The total cost of purchase materials is estimated at 50 million dollars
and from this amount approximately 1 million dollars of materials has been
explanted. Progress would be calculated as follows:

28 PO's placed out of 100 = 0.28( 0.5 )100 = 14%

$ 1 MM of materials explanted out of $50MM= 0.02 x 0.5 (100) = 1%

Progress to date for purchase orders:

14+1=15%

Total Procurement Progress

By evaluating the physical progress of each major procurement function, the
total procurement progress can be determined as shown in the table below.

FUNCTIONS PERCENT WEIGHT PROCURE

COMPLETE VALUE CONTRIBUTE

TAKE-OFFS 50 26.6 13.3

PR’s 25 46.7 11.7
PO’s 15 26.7 4.0

Progress 29.0
 P a g e | 93

REFERENCES

Hodges, H.G.,"PROCUREMENT HANDBOOK", Harper & Brothers

publications, 1991

Duran, J.M.,"QUALITY CONTROL HANDBOOK", McGraw Hill Book

company, 1944

Dobler, D.W.,"PURCHASING AND MATERIALS MANAGEMENT", 1997

Lasser's, J.K.,"BUSINESS MANAGEMENT HANDBOOK", McGraw Hill

Book Company, 1998
 P a g e | 94

PROJECT MANAGEMENT
MANUAL
PART 2

PURCHASING, PM METRICS,
SAFETY, HEALTH &
ENVIRONMENT
2014
 P a g e | 95

Table of Contents Part 2

Subject Page

Purchasing 96

Projects Management Metrics 114

Total Quality Control 125

Design Control 135

Change Orders Administration 143

International Principles of Measurement for 162

Construction Work

Contracting General Safety, Health, and 204

Environmental Regulations
 P a g e | 96

PURCHASING OBJECTIVES
Purchasing objectives should be well-understood and clearly established to
provide solid basis for purchasing measurement and evaluation.

The following checklist or general purchasing objectives are typical to many

organizations:

 Continuous supply of needed materials, supplies and services;

 Identification of long-lead time materials;
 Minimum inventory investments consistent with cost/schedule/safety;
 Maintenance of adequate quality;
 Lowest total material costs;
 Supplier development;
 Maintaining the organization's competitive position;
 Good interdepartmental and supplier relationships;
 Lowest possible administrative costs consistent with purchasing
objectives (productivity);
 Development of purchasing personnel; and
 Meeting legal and social responsibility requirements.

In more detail purchasing objectives may be translated to the following:

1. Develop and apply sound purchasing principles, practices and

techniques to the supply function.
2. Develop and maintain a competent purchasing staff and manage
company wide procurement activities to achieve the lowest cost to
adequately carry out the function.
3. Contribute to improved management decision making through
development and maintenance of information services in the areas of:

 New items and services;

 Market demands;
 New sources;
 Price fluctuations and trends;
 Equipment design changes;
 New materials and methods;
 Promote a positive company image among vendors and the
general public;
 Establish and maintain equitable and mutually profitable
relationships with suppliers;
 P a g e | 97

 Cooperate with other company management to promote the best

interests of the corporation;
 Develop and implement contractual safeguards which clearly
establish responsibility for the warranting of design, materials,
workmanship, performance, and patents for all purchase
materials, goods and services;
 Optimize investment in purchased material inventories through
cooperative and supportive activity with operating departments;
 Minimize total delivered costs through management and control
of inbound transportation according to requirement schedules;
 Use internal sources of supply when this is to the advantage of the
company;
 Maximize investment recovery through smart scrap and surplus
disposal; and
 Contribute to the orderly development and implementation of a
materials management concept in the company.

Purchasing Performance Measurement and Evaluation

Purchasing performance measurement and evaluation are the foundations of
purchasing cost and schedule control. Twelve categories of purchasing
performance measures are identified here:

 Price effectiveness;
 Cost saving;
 Workload;
 Administration and control;
 Efficiency;
 Vendor quality and delivery;
 Material flow control;
 Procurement planning and research;
 Competition;
 Inventory; and
 Transportation.
 P a g e | 98

Price effectiveness measures

Typical measures to determine how effectively purchasing money is being

spent are:

 Actual purchase price versus planned purchase price comparisons;

 Actual purchase price compared with a market index;
 Comparisons of actual to actual purchase prices for individual and
aggregated items between operating plants, project teams or divisions
within an organization;
 Actual price compared with plan;
 Planned purchase prices can be based either on historical cost, historical
cost plus a budgeted increase or decrease, or a target price forecast
(generally used for new items); and
 Favorable or unfavorable variances from plan can be calculated and
used as a measure of purchasing effectiveness. Purchase plan normally
are developed, at least for higher-priced purchased items.

Purchasing Price Measurements

1. Purchase price variance: actual price - planned price

2. Purchase price variance percentage: actual price / planned price

3. Total purchase price variance:

actual price x purchase quantity or

actual price x estimated annual volume

Units of Measure

 Money; and
 Percent.

Reported by:

 Purchase item;
 Commodity or family group;
 Product;
 Project;
 Location;
 P a g e | 99

 Buyer;
 Management group; and
 Vendor.

Developing a Purchase Plan

Purchasing plans have to be designed according to the kind of business one is

dealing with. A purchasing for a project development will look like this:

Drawings
Take-off

PR’s PO’s Approval Site Delivery

Specs
Development

A purchasing plan for a factory will look like this:

Production / Maintenance JIT suppliers adjustments Factory

functional review Deliveries

The measurement of absolute, percentage, and extended-quantity variances

from plan is relatively mechanical. Development of the purchase plan is the
most critical aspect of measuring purchasing price effectiveness.

Plans are usually based on:

 Historical price (current or last price paid) modified by documented

price changes which have been agreed to and which will take effect
before the end of the next planning period;
 Historical price plus forecast price changes; and
 Price forecasts for new purchased items.

In developing and operating plan, price forecasts can be made within the
purchasing department by buyers and reviewed by purchasing management 3
to 6 months prior to the planning horizon which was the next budget period.
Industrial engineers can also be used to develop independent forecasts of
purchase prices by item number.
 P a g e | 100

Other personnel generally involved in the planning process include financial,

manufacturing, product and top management. Whereas buying and staff
purchasing personnel develop and review plans at the detail level, financial,
manufacturing, product and top management efforts are concentrated at the
commodity, product and material budget levels.

Approved material budgets become part of the operating plan and are then
incorporated into the overall plan. To determine favorable or unfavorable
variances, actual prices paid are compared with operating plan prices. These
variances are then related to such categories as product being sold, buyers,
vendors, and commodity groups.

Actual Prices-to-Market Index

Purchase price versus market index comparisons are often used to provide
information about the relationship of actual prices to published market prices.
An index representing the actual cost of items purchased can be compared with
the producer’s price index or against an index that included only items in the
producer’s price index (PPI) which the company purchased.

The following calculations illustrate how an index reflecting the actual

purchases of the organization can be calculated. Invoiced prices paid are used
in these calculations.

Index base (100): Price paid Nov. 1999 - $42

Price paid Dec. 1999: $ 45

Index for this item in Dec. 99: (45/42)x100 = 107

Comparisons of indexes provide information about how the firm is performing

compared with the market and indications about the direction and extent of
future price changes. By looking at the index based on selected PPI items, the
organization could anticipate pressure for more significant price increases than
it could expect if only the overall PPI were reviewed.

Additional information is available by using more detailed breakdowns of

product which make up the PPI, which are available from governments Bureau
of Labor Statistics.
 P a g e | 101

Price Comparisons between Operations

Actual purchase price comparisons between operating projects and/or divisions

buying similar items can also be made. This type of measurements provides
opportunity to identify purchase price difference requiring justification.

Reporting Price Effectiveness

Various reporting formats are used to report price effectiveness. The figure
below illustrates approaches typically used to report purchase price
effectiveness. After approval of the purchase operating plan, progress toward
achievement can be monitored monthly, with reports going to various levels
within the purchasing department and to selected non-purchasing managers.

Item No.: Description:

Suppliers:

Original Price:
Last year’s Price:
Current Price:

Amount Required (per year):

Ordering Inventory Level:
Actual Index:
Percentage of PPI: Lead Time Required:

Four reporting levels are depicted when disclosing purchasing price variances
from plan. Level 1 reporting is at the overall purchase material-budget level.
The material budget is established and actual-to-planned expenditures are
monitored.

Level 2 reporting is for major purchases by group or family. Actual-to-planned

performance is monitored and reported throughout purchasing.

Level 3 control is organized so that actual-to-planned purchase-price

performance can be monitored for products sold.
 P a g e | 102

Level 4 reporting requires that purchase price plans be established at the part or
item number level, which can then be aggregated into major purchase product
groups or families. Actual-to-planned purchase price performance can be
monitored by buyer, group or section, and vendor. Actual-to-planned
performance is usually rolled up into levels 1, 2 and 3.

Cost Savings Measures

Cost savings measures may be classified into two basic categories:

 Cost reduction; and

 Cost avoidance.

Cost reduction requires that purchase price be reduced from the last price paid.

Cost avoidance is the difference between price paid and a higher price that
might have been paid had purchasing not obtained the lower price.

The difference between cost reduction and cost avoidance is that cost reduction
is a decrease from prior purchase price or practice whereas cost avoidance
refers to the difference between what might have been and what is.

Measure Examples

Cost reduction:

Unit cost reduction in currency = old unit price - new unit price

Annual or quantity currency cost reduction:

(old unit price-new unit price) x annual or purchase quantity

Cost reduction variance from budget or target:

actual cost reduction - budgeted cost reduction

(unit or annual) (unit or annual)
 P a g e | 103

Cost avoidance:

unit cost avoidance in currency = vendor requested unit cost-actual unit cost

Annual or quantity cost avoidance in currency:

(vendor requested unit cost - actual unit cost)*cost avoidance

Cost avoidance variance from budget or target:

actual cost avoidance (unit or annual) - budgeted cost avoidance

Vendor requested unit cost = average of quoted prices; highest quoted prices;
add-on costs not incurred, e.g., free samples, tools

A saving in the cost of purchased materials or services is achieved through

planned and deliberate action by the purchasing group. Savings reflects a better
way, lower price, less labor, less power consumption alternate materials, etc.,
have been achieved through constructive and creative effort that would not
have occurred had no such action been taken.

It does not include cost reductions that may occur without such planned and
deliberate action.

Reported savings should comply with the following criteria:

 Identifiable and measurable;

 Improvement from the cost that would have been incurred if no
planned, deliberate action had been taken by the purchasing personnel;
 Saving must be actual, not potential; and
 A cost avoidance saving must reduce or eliminate a new cost which
would have otherwise occurred.
 The following cost reductions do not qualify as purchasing savings:
 Windfall saving which occurs without planned and deliberate action;
 The routine choice of the lower of two or more bids that results from
routine request for quotations;
 Saving in overhead or allocated cost between units of company x when
the total company x cost will not be directly reduced by the change;
 Cost saving resulting from lower requirements that may be caused by
reduced sales, withdrawal from a business, etc.; and
 Correction of a previously recognized error or improper procedure.
 P a g e | 104

Measuring and Reporting Cost Reductions and

Cost Avoidances
Normally, a cost reduction or cost avoidance is developed by the buyer, who
reports it on a cost-saving form. This form usually contains data pertaining to
part number, description, purchase order number, supplier, quantity, old and
new unit prices, amount claimed as cost reduction or cost avoidance and
supporting justification for the saving.

Item No.: Description:

Suppliers:

Original Price:
Last year’s Price:
Current Price:

Amount claimed as cost reduction:

Supporting justification of reported saving:

Workload Measures

Purchasing department workload can be measured in the following categories:

Workload in: a measure of the new work coming into the purchasing
Organization;
Workload current: a measure of the current backlog of work; and
Workload-completed: a measure of the work accomplished by purchasing.
 P a g e | 105

Workload in

Workload in, measures are primarily used to determine purchasing workload

levels and to provide information for staff scheduling, balancing or
justification. Measures in this classification are simple counts of work
received.

 Purchase requisitions;
 Urgent purchase requisitions;
 Pricing requisitions; and
 Change notices.

Counts are usually reported on a monthly or cumulative year-to-date basis.

Measuring workload in is utilized by management to predict and explain
changes in other departmental measures.

Workload current

Measures in this category are usually counts of the backlog of work within the
purchasing department. They include:

 Open purchase requisitions;

 Line items to be purchased; and
 Open purchase orders.

These are usually reported on a monthly basis and usually compared with the
previous year's experience

Workload-complete

Measures in this classification include:

 Purchase orders placed;

 Line items purchased;
 Currency of purchases placed;
 Contracts written; and
 Pricing proposal written.
 P a g e | 106

Utilizing Workload Measures

Administration and control measures are used to help plan the annual budget
for purchasing and to help control administrative expenses during the budget
period. The administrative budget typically includes salaries, travel and living
expenses, telephone expenses, office supplies, and miscellaneous. Salaries are
by far the largest item.

The major question is:

 How large the purchasing budget should be?

 Since salaries are the major item in the budget, the crux of the
question is:
 What should our head count be?

The following methods for planning and controlling the administrative budget
of purchasing are proposed:

Current budget plus adjustment

The most common method used for establishing a new budget is to start with
the current budget and adjust it up or down, depending on the business forecast
for the next planning period. The adjustment reflects management's views
about projected purchasing workload and projected profit margins.

Control ratio
The workload measure typically is planned currency expenditure for direct
material. The budget calculation is:

Purchasing administrative budget = ratio x direct material

input budget
The ratio is based on historical levels and on negotiations between the
purchasing manager and higher management. In good times the ratio might be
above the historical average and in bad times below.

The material input budget is based on a projection of material input needed to

support final product deliveries for the next year. The implicit assumption is
that the purchasing workload is proportional to direct material input currency.

Once the ratio and budget are set for the year, the ratio then becomes a control
figure for actual expenses.
 P a g e | 107

The ratio

Monthly ratio = Mr

Mr = actual monthly purchasing administrative expense / monthly direct material input

currency

It is calculated and reported on a monthly basis. If this monthly ratio is

consistently above or below the negotiated ratio, steps are taken to modify
expenditures.

Control of the administrative budget at departmental level is accomplished in

part by controlling the ratio not the money spent. This approach provides a
flexible budget that expands or contracts with workload.

A problem with this kind of control is that much of the actual work of
purchasing is completed before the direct material is received and paid for by
the organization. If significant variations in actual purchasing workload and
direct material input occur over time, it will lead to cycles of over- and under-
funding of the purchasing department.

Models for Buyers

The essence of this approach is to establish a standard workload per buyer,

based on historical performance and/or time studies.

The projected workload is then divided by the standard to calculate the total
number of buyers required. The projected number of buyers is multiplied by
another ratio to get the number of secretarial-clerical workers needed. Finally,
a fixed number of managers and other staff is added to get a head count for the
department.

Model 1 Buyer

Buys: New subcontracted systems, new forgings, new castings

Assumptions: They have 5 of 7 years experience, are working on systems or

parts with 30 weeks lead time, and are buying for three programs

Workload: they can handle 25 active part numbers and 3 new requisitions per
week
 P a g e | 108

Model 2 Buyer

Buys: State-of-the-art products with special testing and data requirements.

Assumptions: They have 3 to 5 years purchasing experience, are working on

parts with 24 to 30 weeks lead time and are buying for five programs

Workload: They can handle 76 active part numbers and 5 new requisitions per
week

Model 3 Buyer

Buys: Special parts made to customer specification without special testing.

Assumptions: They have 2 or more years experience, are working on parts with
8 weeks lead time, and are buying for 10 programs

Workload: They can handle 340 active part numbers and 30 new requisitions
per week.

Model 4 buyer

Buys: Standard parts

Assumptions: They have 1 or more years experience, are working on parts with
3 weeks lead time, and are buying for 15 programs

Workload: They can handle 450 active part numbers and 100 new requisitions
per week.

Labor and Expense Budget Reporting

Most organizations need to measure and report actual administrative expenses
against budget. Items usually reported and control may be enumerated as
follows:

 Labor;
 Benefits;
 Clerical;
 Purchase indirect labor;
 Space rental;
 Duplication;
 Education and training expenses;
 P a g e | 109

 Purchased services;
 Office supplies;
 Travel expenses;
 Mail services;
 Telephone and telegraph;
 Computer supplies;
 Other services; and
 Other supplies.

Expenses are generally reported for control purposes on a monthly and year-to-
date(YTD) basis as:

 Actual monthly expense;

 Monthly budget;
 YTD actual expenses; and
 YTD budget.

Current month expense variance= Actual monthly expense- monthly budget / monthly
budget

YTD expense variance = actual YTD expenses - YTD budget / YTD

budget

Purchasing Efficiency Measures

Efficiency measures are utilized to relate purchasing output, such as line items
orders placed, to purchasing input, such as buyers.

The measures are calculated by dividing a count of some output of the

purchasing department by a count of a resource input. A wide variety of inputs
and outputs are counted by the purchasing organization, some of them are:

Outputs

 Purchase orders placed;

 Line items placed;
 Contracts written;
 Money committed;
 Cost-saving money;
 Number of releases; and
 Change orders complete.
 P a g e | 110

Inputs

 Administrative money;
 Number of personnel; and
 Actual hours.

The usual measure ratios are:

 Purchase orders per buyer, per clerk or per total staff;

 Line items per buyer, per clerk or per total staff;
 Dollars committed per buyer, per clerk or per total staff;
 Contracts written per buyer, per clerk or per total staff;
 Work-hours per purchase order;
 Work-hours per line item;
 Work-hours per purchase requisition;
 Administrative money per purchase order; and
 Administrative money per contract.

Purchasing Administrative Lead Time

Purchasing administrative lead time (PALT) is an efficiency measure defined

as the time elapsed from the arrival of the purchase requisition in the
purchasing department until the purchasing order is placed with a vendor.

Several approaches may be taken for reporting and controlling PALT.

Organizations usually establish time limits in which most requisitions should
have been placed. Buyers then receive reports listing all open requisitions;
those over the time limit are flagged to indicate that they are delinquent.

This type of report reminds buyers of the age of the requisitions and serves as a
basis for an exception report to management, allowing managers to focus on
problem requisition and/or buyers and to gauge how the department as a whole
is doing in the timely placement of requisitons.

Material Flow Control

Measures concerning the flow of material from vendors to the organization can
be classified into four functions as follows:

 Open purchase orders and their due dates;

 Past due open purchase orders;
 Material or orders that are needed immediately (hot list); and
 Buyers and vendors ratings (meeting due dates).
 P a g e | 111

Vendor Performance Measures

Vendor performance measures used by organizations include:

 Vendor quality;
 Vendor delivery;
 Total money purchases from each vendor; and
 Total money purchases from geographical areas and divisions within
the organization.

They are regarded important for vendor selection, to identify problems needing
corrective action, to help improve vendor performance, and for justification for
dropping suppliers who do not accomplish the job adequately.

Environmental and Regulatory Measures

This measure category provides information about purchase department's

achievement of regulated public policy objectives and environmental
objectives considered important by organizations.

The measures include:

 Purchases place with small business and a ratio of purchase with small
business to total purchases;
 Purchases placed with minority business and a ratio of purchases with
minority vendors to total purchases;
 Purchases and percent of purchases placed in labor surplus areas, that
is, areas of high unemployment; and
 Number and percentage of minority employees in purchasing activities.

Procurement Planning and Research

The most common indicators providing data regarding how much of certain
types of planning and research activities are executed or how accurate those
activities are, include:

 Number of procurement plans established per year, including

availability and price forecasts and trends;
 Price forecasting accuracy based on unit price or percentage
differences;
 P a g e | 112

 Delivery-lead-time forecasting accuracy based on unit time or

percentage variance; and
 Number of make-or-buy studies completed.

Competition Measures

The following measures relate to information needed to establish how

purchasing is using its economic power to further competition and possibly
improve prices and terms of purchase.

 Amount and percentage of actual purchases on national or area

contracts;
 Amount and percentage of purchases on annual contracts;
 Amount and percent of annual purchases placed with sole source
suppliers;
 Comparative awards percentage; and
 Formal advertised awards percentage.

Inventory Measures

Where purchasing has direct inventory responsibility for purchased parts and
commodities, the following measures are utilized:

 Currency value of inventory on hand;

 Currency value of inventory issued;
 Number of items on hand;
 Number of line items issued;
 Number of line items ordered;
 Percent active items;
 Currency value versus number of items;
 Number of orders versus number of active items;
 Service level;
 Number of items versus currency value of gross fixed investment;
 Currency value of inventory versus currency value of gross fixed
investment;
 Annual inventory value write-off;
 Annual stores functional cost versus number of items in stores; and
 Annual stores functional cost versus inventories value
 P a g e | 113

Purchasing Personnel Evaluation

Functional reviews are the primary means to evaluate the overall department
and key personnel.

Policy and procedure audits and various short-term performance measurements

are used to evaluate subsection managers and buyers on a quantitative basis.

In addition to the use of the quantitative measurements, qualitative measures

must be added as follows:

 Problem analysis capabilities;

 Decision making;
 Planning and organizing capabilities;
 Communications skills;
 Flexibility;
 Initiative and innovation skills;
 Interpersonal effectiveness; and
 Grow capacity

To be objective in evaluating purchasing personnel, appropriate standards of

performance should be established to measure good, average and poor
performance for key measurement areas.

References
Emory C.W. : "BUSINESS RESEARCH METHODS" , R.D. Irwin Inc., 1995

Pfaffenberger R.C. and D.A. Walker,: " MATHEMATICAL

PROGRAMMING FOR ECONOMICS AND BUSINESS", The Iowa U.
Press, 1976

Hackney J.W.,: "MANAGEMENT OF CAPITAL PROJECTS", John Wiley &

Son, 1995

Buffa E.S. : "MODERN PRODUCTION MANAGEMENT", John Wiley &

Son 1965

Specthrie S.W. : "INDUSTRIAL ACCOUNTING" , Prentice-Hall, Inc., 1959

 P a g e | 114

Project Management Metrics

One of the most important functions of project controls is to accurately
evaluate the physical progress of engineering, procurement and construction
activities. Physical progress is the primary factor in:

 Determining progress payments due to the contractor;

 Evaluating the impact of changes, interferences and delays;
 Measuring the contractor's performance to his plan; and
 Projecting final costs and facility turnover dates.

The following guidelines offer an objective method of determining physical

progress for each phase of a project from start of design to project completion.

Engineering

Physical progress for the engineering phase of a project consists of three levels
of indenture as follows:

 Progress by drawing;
 Progress by discipline; and
 Total engineering progress.

Estimate

Prior to implementing a system for progress evaluation an estimate must be

developed for both manhours and quantities of drawings for each engineering
discipline. For these guidelines we will assume the estimate shown in Table 1
below.

Progress Evaluation

Actual physical progress is measured against the drawings only. The progress
measurement for each engineering discipline and for the total engineering
effort is a function of the progress against each individual drawing.
 P a g e | 115

DISCIPLINE ESTIMATE BUDGETED DISCIPLINE

DRAWINGS MANHOURS WEIGHTED
(%)

CIVIL 20 1,250 8.3

ARCHITECTURAL 35 2,500 16.7
STRUCTURAL 20 1,250 8.3
MECHANICAL 20 1,500 10.0
PIPING 50 4,000 26.7
ELECTRICAL 40 3,000 20.0
INSTRUMENTS 15 1,500 10.0

TOTAL ENGINEERING 200 15,000 100

Table 1

To objectively determine the physical progress against each drawing a series of

milestones are established to give credit for incremental work accomplished.
The following is an example of typical drawing milestones and their related
values to the completed drawing:

Drawing Milestones
Start draft (20%) Layout and design completed and actual line work visible.
Rough draft of specification is completed ready for draft typing.

Draft complete (65%) Drawing has been completed by drafting, checked by

chief draftsman, and issued to engineering for checking. Specification is ready
for checking.

Office check (80%) Engineering has reviewed the drawing and pertinent
corrections have been incorporated by draftsmen and engineers.

Owner review (85%) Drawing and specification have been reviewed by the
owner and returned with comments.

Final draft (90%) All engineering and owner comments have been
incorporated and drawing and specification have been issued to owner for
approval.

Approval with holds (95%) Drawing and specification have been approved by
owner and are ready to be issued for construction with the exception that some
portion(s) of the drawing has "holds", waiting for final resolution.
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Final owner Approval (100%) Drawing and specification have been approved
by the owner and they are ready to be issued as approved for construction with
no "holds".

In order to control the drawing process and effectively monitor the

accomplishment of the above-mentioned milestones, a drawing control log
should be maintained to record the accomplishment of each milestone and
identify the location of each in-process drawing.

Progress by Discipline

Now that the estimated number of drawings for each engineering discipline has
been established and the drawing milestones have been defined and assigned a
weighted value, the physical progress for each discipline can be evaluated.

For example, assume the work status shown in Table 2 (next page) for the 50
piping drawings referenced in Table 1.

MILESTONE DRAWS.IN PIPE MILESTONE DISCIPLINE

MILESTONE DRAWINGS VALUE %
COMPLETE

Start Draft 10 50 20 4.0

Draft compl. 5 50 65 6.5
Office Check 5 50 80 8.0
Owner Review 5 50 85 8.5
Final Draft 5 50 90 9.0
APPR.W/H 5 50 95 9.5
Final Approval 10 50 100 20.0

Piping Progr. 65.5

TABLE 2

The progress for each of the other engineering disciplines could be calculated
in the same manner.

Total Engineering Progress

As each drawing milestone represents a portion of the total drawing, so does
each engineering discipline represent a portion of the total engineering effort.

Because certain disciplines may require more manhours per drawing than
others, depending on the nature and complexity of the project, the weighted
 P a g e | 117

value of each discipline is determined by the engineering manhours budgeted

to the project

To calculate total engineering physical progress, the percentage of drawing

completion for each discipline, would be multiplied by that discipline's
weighted value. The product of this calculation would be the discipline's
contribution to total engineering progress. For example:

The piping discipline was calculated to be 65.5% completed. Let us assume the
percentages of completion for the remaining disciplines and the total
engineering physical progress would be calculated as shown on Table 3.

DISCIPLINE PERCENT WEIGHTED PROJECT

COMPLETE VALUE CONTRIBUTION

CIVIL 90 8.3 7.5

ARCHITECTURAL 70 16.7 11.7
STRUCTURAL 80 8.3 6.6
MECHANICAL 75 10.0 7.5
PIPING 65.5 26.7 17.4
ELECTRICAL 60 20.0 12.0
INSTRUMENTS 50 10.0 5.0
ENGINEERING PROGRESS 67.7
TABLE 3

PROCUREMENT MEASUREMENT

Normally for a major project, the procurement of long lead technical

equipment and materials is a function of the engineering effort and it is
included in the Engineering budget as a separated item.

The procurement effort consists of three major functions as follows:

 Material take-offs;
 Purchase requisitions; and
 Purchase orders.

To measure physical progress of the procurement effort, each of the three

functions should be weighted as a percentage of the total procurement effort.
This weight factor should be based on the budgeted manhours for each
function relative to the budgeted manhours for the total procurement effort.
(see Table 4)
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FUNCTIONS ESTIMATED ESTIMATED FUNCTION %

QUANTITIES MANHOURS WEIGHTED VALUE

MAT. TAKE-OFF 150 400 26.6

PR’s 200 700 46.7
PO’s 100 400 26.7

PROCUREMENT 100
TABLE 4

Material Take-offs

Physical progress measurement for material takeoffs is based on the estimated

number of drawings requiring material takeoffs versus the number of drawings
for which takeoffs have been completed.

For example:

The estimated drawings requiring takeoffs = 150

Drawings with takeoffs complete = 75

Physical progress would be: (75/150) (100) = 50%

Purchase Requisitions

Physical progress measurement for purchase requisitions is based on the

estimated total number of purchase requisitions versus the number of
requisitions approved for purchase.

For example:

The total estimate of Purchase Requisitions = 200

Purchase Requisition approved for purchase = 50
Physical progress would be: (50/200)(100) = 25%

Purchase Orders

Progress should be based on both the quantity of purchase orders placed and
the cumulative dollar value of materials shipped from the manufacturer's plant
(explanted). The quantity of purchase orders placed will contribute 50 percent
progress and the dollar amount of total material value explanted will contribute
the remaining 50 percent.
 P a g e | 119

For instance, the purchase order quantity is 100 with 28 purchase orders
placed. The total cost of purchase materials is estimated at 50 million dollars
and from this amount approximately 1 million dollars of materials has been
explanted. Progress would be calculated as follows:

28 PO's placed out of 100 = 0.28( 0.5 )100 = 14%

$ 1 MM of materials explanted out of $50MM = 0.02 x 0.5 (100) = 1%
Progress to date for purchase orders: 14 + 1 = 15%

Total Procurement Progress

By evaluating the physical progress of each major procurement function, the

total procurement progress can be determined (see Table 5).

FUNCTIONS PERCENT WEIGHTED PROCUREMENT

COMPLETE VALUE CONTRIBUTION

TAKE-OFFS 50 26.6 13.3

PURCHASE REQUISITIONS 25 46.7 11.7
PURCHASE ORDERS 15 26.7 4.0

PROCUREMENT 29.0
PROGRESS
TABLE 5

Design and Engineering Overall progress

To evaluate the Design/Engineering overall progress, the value of the

engineering effort must be combined with the value of the procurement one.
(see Table 6)

BUDGETED WEIGHT % PROJECT

MANHOURS VALUE COMPETE CONTRIBUTION

ENGINEERING 15000 90.9 67.7 60.6

PROCUREMENT 1500 9.1 29.0 2.6

TOTAL 16500 100 63.2

PROGRESS

TABLE 6
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CONSTRUCTION

There are two basic methods of determining physical progress for the
construction phase of a project, they are:

 Intermediate Milestone; and

 Percentage Complete.

The approach to performing the construction phase of a project can vary

considerably from one project to another and from one contractor to another.
Because of this fact, it is very important that the activities and/or milestones
selected as progress measurement criteria reflect the contractor's approved
work plan and schedule.

It is equally important that the estimated manhours to perform these activities

be as accurate as possible.

Intermediate Milestone Method

The intermediate milestone method gives credit for progress only when a
milestone has been completed. This method would apply to small, short term
projects (from 3 to 6 months) where cash flow to the contractor would not
present a problem. The method is effective to the project team because it
requires less surveillance and documentation is totally objective and requires
little interpretation.

To calculate progress using the intermediate milestone method, several

progress milestones should be identified starting with "mobilization" and
ending with "commissioning". Each milestone would be weighted based on the
estimated construction manhours required to complete the milestone versus the
total construction manhours required to complete the project.

This means that even if the contractor has already started piping and electrical
construction, he receives no credit for physical progress until the corresponding
milestones are completed.

Percentage Complete Method

The percentage complete method is probably the most commonly used form of
progress measurement. In this method the activities on the project schedule are
weighted by the estimated construction manhours required for each activity
versus the total construction manhours required to complete the project.
 P a g e | 121

In the percentage complete method, credit is allowed for incremental work

accomplished against each activity based on the activity's estimated percentage
of completion. The estimated percentage of completion for an activity can be
determined by several methods, as follows:

Credit by units installed: Using this method of credit, the percentage of

completion for each activity is based on the units of work installed (e.g.: cubic
yards, tons, linear feet) for the activity versus the total estimated units required
for completion. The number of units actually installed is normally determined
or verified by a quantity surveyor, who physically quantifies the units installed,
however, cognizant personnel such as the scheduling engineer, project engineer
or construction manager could perform this task.

Credit by earned manhours: This method is applied to activities for which a

specific unit of measure, other than manhours earned, would be misleading or
difficult to identify. This method also compensates for varying degrees of
difficulty in installing similar units, ie.: a squared foundation requiring 25
cubic yards of concrete would require much less effort than a 5 cubic-yard
specially shaped foundation yet, by the "units installed" method, the one
squared foundation would receive the same credit as the 5 shaped foundations.

Credit by earned manhours is essentially an estimate of the manhours

remaining to complete an activity versus the original activity manhours
estimate. This estimate determines "earned manhours".

For instance:

An activity is estimated to require 2000 manhours. To date, 1500 manhours

have been expended performing the activity. Project personnel estimate that it
will require 1000 manhours to complete the remainder of the activity.
Therefore, the percentage of completion for this activity would be:

2000 M/H original estimate - 1000 M/H estimated remaining = 1000 M/H earned

1000 M/H earned / 2000 M/H original = 50% complete.

Manhours spent are never included in the calculation of earned progress.

Start/Finish Approach

This method is applicable to tasks that lack readily definable intermediate

milestones or those for which the effort/time required is very difficult to
estimate. To illustrate, millwright alignment work usually falls into this
category. Aligning a major fan and motor may take a few hours or a few days,
depending on the situation. Workers know when this work starts and when it
 P a g e | 122

ends, but they never know the percentage completion in between. Other
examples include planning activities, flushing and cleaning, testing, and major
rigging operations. In this approach, a percent complete is arbitrarily assigned
to the activity when it starts, and 100% is recorded when the task is finished.

Supervisor Opinion

In this method, the supervisor simply makes a judgment of percent complete.

The major problem with it, is that some supervisors are optimists and some are
pessimists, thus there could be major differences of opinion as the progress
reported for the same or similar tasks. This is a subjective approach and should
be used only for relatively minor tasks and only where developing a more
discrete status is not feasible. Dewatering, temporary construction,
architectural trimming, and landscaping are candidates for application of this
approach.

Cost Ratio

This approach is applicable to tasks involving a long period of time or

continuous tasks during the life of the project which are estimated and
budgeted on bulk allocations of dollars and workhours rather than n the basis
of production. Project Management, quality assurance, contract administration,
and project controls are areas where the cost ratio method may be applied.

With this method, percent complete is calculated as follows:

Percent complete = Actual cost or workhours to date / Forecast at Completion

Equivalent Units

When an activity being controlled involves a long period of time and is

composed of two or more overlapping subactivities, each with a different unit
of work measurement, this method should be applied.

Structural steel is normally estimated and controlled by using tons as the unit
of measure. However, the subactivities involved in steel erection each have a
different unit of measure. To handle this, each activity is weighted according to
the estimated level of effort (usually workhours) that will be dedicated to that
subactivity. These weights are called “rules of credit”. As quantities of work
are completed for each subactivity, the quantities are converted into equivalent
tons as illustrated in table 7, the total weight of structural steel in this account
is 700 tons (Summary Quantity).
 P a g e | 123

Earned tons = (allowed credit ) * (Summary Quantity) * (quantity to date/ total

quantity)

Earned tons = (allowed credit ) * (Summary Quantity) * (quantity to date/ total quantity)

Allowed Task Unit of Total Quantity Earned

Credit Measure Quantity To date Tonnes
0.05 Bolts Each 300 120 14
0.40 Columns Each 110 56 143
0.30 Beams Each 600 123 43
0.10 Girts/rods Bay 70 24 24
0.10 Align % 100 10 7
0.05 Punch List % 100 5 2

1.00 STRUCTURE 233

TOTAL
Table 7

A complete project measuring system may look as the one shown in Table 8.

MILESTONE ESTIMATED WEIGHT

HOURS %

MOBILIZATION & GRADE 2000 5

FOUNDATION COMPLETE 4800 12
STRUCTURAL STEEL 3600 9
COMPLETE
EQUIPMENT ERECTION 5600 14
COMPLETE
PIPING COMPLETE 10000 25
ELECTRICAL COMPLETE 6800 17
MECHANICAL 5200 13
COMPLETION
COMMISSIONING 2000 5

TOTAL PROJECT VALUE 40000 100

TABLE 8

Table 9 next page represents a sample of the percentage complete progress

measurement method based on the weighted activities listed in Table 8.
 P a g e | 124

MILESTONE WEIGHTED PERCENT PROJECT

PERCENT COMPLETE CONTRIBUTION

MOBILIZATION & GRADING 5 100 5

FOUNDATIONS 12 80 9.6
STRUCTURAL STEEL 9 30 2.7
EQUIPMENT ERECTION 14 10 1.4

TOTAL PHYSICAL PROGRESS 18.7

TABLE 9

REFERENCES

American Association of Cost Engineers, “SKILLS AND KNOWLEDGE OF COST

ENGINEERING”, 1996

Project Management Institute, “A GUIDE TO PROJECT MANAGEMENT BODY

OF KNOWLEDGE”, 1998

Bruce M. Jervis, Paul Levin, “CONSTRUCTION LAW PRINCIPLES AND

PRACTICE”, McGraw-Hill, 1988

Kerzner H., “PROJECT MANAGEMENT FOR EXECUTIVES”, Van Nostrand

Reinhold Co., 1991

Hodges, H.G.,"PROCUREMENT HANDBOOK", Harper & Brothers publications,

1981

Duran, J.M.,"QUALITY CONTROL HANDBOOK", McGraw Hill Book company,

1984

Dobler, D.W.,"PURCHASING AND MATERIALS MANAGEMENT", 1987

Manzanera I., “PLANNING AND SCHEDULING REFERENCES”, Aramco Saudi

Arabia, 1991

Lasser's, J.K.,"BUSINESS MANAGEMENT HANDBOOK", McGraw Hill Book

Company, 1998

Joseph J. Moder, Cecil R. Phillips, Edward W. Davis, “PROJECT MANAGEMENT

WITH CPM, PERT AND PRECEDENCE DIAGRAMMING”, Van Nostrand
Reinhold Company, 1995
 P a g e | 125

Total Quality Control (TQC)

Total quality control must be implemented systematically across the whole
project in conjunction with personnel management, cost control, profit control,
and control of production volume and delivery schedules. To achieve this, all
employees must have a good understanding of the quality topics, while top
management must consider their company’s history and present circumstances,
set out clear policy guidelines, and exercise their wisdom and ingenuity to put
TQC into effect.

The TQC Organization

Comparable to real technical progress and industrial rationalization, TQC is

impossible without organizational rationalization. Since TQC is an all-
embracing activity requiring the participation of every department and every
employee of a company, the following steps are essential:

Introduction to Quality Control

1. Owners and top management must clearly state policy.

2. The organization must be rationalized and authority and responsibility
clarified.
3. The scope of delegation of authority and methods of controlling must
be researched with particular thoroughness.
4. A system of cooperation must be established by reminding ourselves
that an organization does not exist for the benefit of individuals but for
the smooth running of the company.
5. The organizational setup should be clarified for cross-functional
management as well as for intra-divisional management.
6. Clear distinctions must be drawn between project personnel and staff
personnel. Unreasonable behavior by project and staff personnel must
be restrained. The staff’s next process (i.e., its customer) is the project.
7. Management must try to adopt a scientific approach, freely appointing
technical personnel to administrative departments, and vice versa, as
needed.

Good contact between the producer and the customer lies at the root of quality
control. This means, personnel rotation among project, materials, and cost
control departments, together with the appointment of talented engineers to
these departments, will be indispensable for companies in the future.
 P a g e | 126

To implement quality control properly, it is ultimately necessary to establish a

TQC promotion office, quality control department, or quality assurance
department that can devote solely to QC activities. However, it may be better
to start by assigning the responsibility for QC to a staff department close to top
management (e.g., the planning, technical, inspection, survey, or works
department) in addition to its normal work.

As QC steadily disseminates through the company and a conducive atmosphere

is established, a TQC promotion office should be set up and its authority
gradually increased.

Any department can be made responsible for promoting QC at first, but it

should be made known to everybody in the company.

The duties of TQC and the quality control department

The department at the center of TQC promotion has various duties including
the following:

1. TQC promotion and administration

 Policy management staff work;

 Planning and execution of QC education and training;
 Planning, execution, and promotion work as top management QC audit
secretariat;
 Promotion of QC circle activities;
 Surveying and assisting with intradepartmental TQC promotion;
 Promoting group wide TQC (subcontractors, dealing organizations, and
affiliated companies); and
 Liaison and cooperation with outside QC activities.

(B) Quality assurance

 Acting as a quality assurance center;

 Acting as a complaints processing center;
 Acting as a center for quality assurance in new-product development,
possibly including new procedures development, cost control and
progress control;
 Performing quality audits;
 Performing incoming, intermediate, pre-delivery, and other inspections;
and
 P a g e | 127

 Occasionally exercising authority to stop shipments of existing and new

products.

(C) QC staff work

 Acting as general staff, giving assistance and advice on quality

problems to the company president, head-office department managers,
project managers, business managers, etc.;
 Providing a quality assurance service to all departments; and
 Assisting with QC promotion for organizations such as subcontractors,
distribution organizations, and affiliated companies, and promoting
group wide quality assurance.

All of the above duties may be assigned to a single TQC promotion office or,
in very large organizations the work may be shared out among three different
groups, e.g., a TQC promotion office, a quality assurance department, and an
inspection department, or two organizations if the inspection department is part
of the quality assurance department.

If this is done, the duties listed in (A) should be carried out mainly by the TQC
promotion office, while those listed in (B) and (C) (except for inspection)
should be done by the quality assurance department.

The work of the TQC promotion office and quality assurance department
consists mainly of general staff and service staff duties.

Who should be put in charge of TQC promotion?

People who know a lot about statistical methods are usually put in charge of
quality control, but this is a mistake. From now on, all employees will have to
learn about statistical methods as a basic qualification for remaining employed.
It is wrong, and may even be harmful, to put people in charge of TQC or QC
promotion simply because they know about these methods or have started
investigating them a little sooner than anyone else.

Learning to use statistical tools is no more than acquiring a basic item of

knowledge that happens to have been missing in the past.

The people in charge of promoting TQC are those responsible for

implementing it in their particular post, e.g., workplace foremen and
supervisors, section managers, department managers, business managers,
project managers, the company president, etc.
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(2) Staffing the TQC promotion department

In companies on the point of introducing TQC, the TQC promotion staff is

responsible for disseminating the concepts and methods of TQC and QC and
educating people in these, as well as for promoting their implementation. Since
they will be at the heart of TQC promotion and implementation, it is important
to select people with as many of the following qualifications as possible:

 Experience: Staff should have at least three years’ work experience in a line
department such as the factory floor or a branch office and should have
extensive technical work knowledge. If possible, they should have experience
of the construction and management of projects, offices, etc. A knowledge of
statistical techniques is helpful but not essential, since these can be learned
later;

 Personality: Staff should be well accepted within the project and should be
cooperative and diplomatic in the best sense. They should not be easily carried
away by idealistic speculation and groundless hypotheses, but should base their
conclusions on an undistorted appreciation of the facts. They must be tireless
and hardworking and neither overemotional nor intolerant; and

 Physical and emotional makeup: They should be both physically and men-
tally tough.

The company may have nobody who meets these conditions perfectly, but top
management should select those who come closest to staff the TQC promotion
office. People with a range of experience should be appointed, and the TQC
promotion staff should work together to complement each other’s strengths and
weaknesses and satisfy the above requirements as a whole.

The selection of the person who will head the TQC promotion department, play
the leading role in the TQC promotion office, chair the TQC study group, or
hold some other position of authority during the introduction of TQC is
particularly important. If the wrong person is selected, or he or she goes about
things in the wrong way, the full implementation of TQC will be greatly
delayed. Of course, this is true in every situation; only the very best people
should be put in charge of important new departments.

The TQC promotion office staff should also include one or two people who
have a superior knowledge of statistical techniques. Old-style inspection staff
 P a g e | 129

is often unsuitable as the staff of TQC promotion offices or quality assurance

departments.

TQC or QC committees

The TQC or QC committee plays the central role in implementing and

promoting quality control in the project when QC is first introduced, and great
care should be taken over its organization and management. Whether to form a
TQC committee or a QC committee is a question that will decide itself
naturally when the company or its top management decides on the kind of
standpoint from which they intend to promote TQC. The following types of
organization are possible:

Company committee:
 Chair: General Manager, Project Manager (the project’s No. 1 or No.
2);
 Members: directors or department managers in charge of technology,
purchasing, accounting, personnel, and quality control, together with
project managers; and
 Secretary: quality control department or section manager.

Project office committee:

 Chair: Site Superintendent;
 Members: department managers, or section managers; and
 Secretary: quality control department or section manager.

In projects with very large departments and sections, each department should
establish a departmental committee and subcommittees along the lines of the
above examples. These committees should start by regarding themselves as
educational groups, and should meet regularly (at least once a month) to
discuss the items listed below:

 Finalization of TQC or QC promotion programs, including education

and standardization programs;
 Matters relating to policy management;
 New-products, quality levels, fabrication, etc.;
 Important quality problems, quality standards, and targets;
 Quality items for analysis as a matter of priority;
 Trouble in individual areas and handling of complaints and claims;
 Reports on elimination of abnormalities from processes;
 P a g e | 130

 Other important matters relating to quality control, e.g., setting up

cross-functional management committees or suspending work in
process; and
 QC circle activities and QC team activities.

In addition, quality control promotion groups and secretariats, cross-functional

management committees, QC teams, the manager-in-charge system, etc., may
be adopted as necessary.

TQC PROMOTION PROGRAMS

Long-term TQC programs

In promoting TQC, a long-term program (for example a five-year plan) must

be set up as a matter of management policy. It is also important to make the
program an integral part of the company’s long-term business plan.

Most companies have had for a long time long-term profit and production
plans but have notably failed to include long-term quality programs in these. If
quality programs are not unified with other business plans, TQC and
management will be regarded as separate entities and people will easily fall
under the delusion that TQC is something apart from their normal daily work.

TQC must be made an inseparable part of everybody’s routine duties. The

following items should be included in a long-term TQC program:

 Policy management (Note: policy management is included when TQC

is being implemented in its wide sense);
 Plans for new-procedures development and the discontinuance of
obsolete procedures;
 Quality improvement programs;
 Quality assurance programs (in the wide sense);
 QC education and training programs, organization and personnel plans;
 Standardization promotion plans (materials and regulations);
 Subcontracting, purchasing, and raw materials plans;
 Services and maintenance plans; and
 QC circle activity promotion plans.
 P a g e | 131

Education and training programs

The education and enlightenment of all employees is a vital part of promoting

quality control. Without it, quality control would simply become a pastime for
a select group of people. The education of the workforce should have the
following aims to:

 make quality everyone’s concern;

 ensure that everyone understands the new philosophy of quality control;
 have everyone understand the statistical approach; and
 enable everyone to grasp the philosophy and methods of QC circle
activities.

However, since people at different levels of the project need to know different
things, education should be tailored to the different grades, as shown below
(the word “philosophy” below refers to the four philosophies of quality,
control, statistical methods, and QC circle activities):

 Top management needs mainly to understand philosophy;

 Middle management must understand philosophy, the use of control
charts, and some statistical techniques;
 Project Managers should understand philosophy, plus introductory
statistical techniques, including control charts;
 Project engineers, like general engineers, need to understand
philosophy and statistical techniques, but their knowledge of the latter
should be at a slightly higher level;
 Administrators should understand at least as much as middle managers,
with some people going as far as the level of project engineers;
 Workplace supervisors should understand philosophy and the seven QC
tools, if possible as much as project engineers;
 Workers should initially understand philosophy and some of the seven
QC tools; eventually they should understand all seven; and
 Statisticians should be well versed in advanced statistical techniques,
design of experiments, operations research, marketing research, etc.

Education may be more effective if outside experts are invited to conduct

training programs or people are sent to outside seminars, but in the end, much
depends on the efforts of the people in charge of quality control within the
company. The way in which it is introduced is particularly important, as is
adequate follow-up.
 P a g e | 132

Three-year or five-year education programs for all of the above levels should
be prepared and scheduled in advance. If possible, all employees should have
completed their education by the final year. Also, since the workforce is
constantly changing, these education programs must be continued for as long
as a company exists.

Education and personnel appointment programs should be linked, and each

person’s educational history should be included in his or her personal record.
This educational history should be taken into account when considering the
organization and its staffing. QC circle activities are extremely effective for
doing this.

Standardization programs

The following concerns must be addressed in the organization of

standardization programs:

 How should the different standards be classified and what

standardization system should be established?
 What is the deadline for completing each standard? and
 Control regulations for standards must be prepared and forms and filing
methods specified.

Names for standards may be freely selected according to company custom.

Some examples might be “regulations,” “specifications,” “procedures,” or
“orders.” The basic standards of a company are its articles of incorporation;
other standards are formulated around these. Standards concerned particularly
closely with quality include the types described below. There are almost an
infinite number of different types of standards and ways of classifying them,
but in principle it is best to start by preparing the minimum number of
effective, practicable standards and to add to these as necessary.

Procedures quality standards, i.e., standards regulating the quality of

individual processes: standards for final and intermediate works. Standards for
sampling, measurement, and testing may either be included in these or kept
separate.

Raw material quality standards, i.e., standards regulating the quality of all
types of purchased materials, supplementary materials, parts etc. These may
include regulations for ordering, delivery dates, and handling of materials.
 P a g e | 133

Test method standards, measurement method standards, measurement

control standards, sampling method standards, inspection standards, and
standard inspection plans.

Inspection standards such as inspection implementation regulations, test

methods, measurement methods, and sampling methods may be written
separately (in which case, the individual product standards will indicate which
inspection standard is to be used), or they may be included in the individual
product standards.

Inspection implementation regulations are a kind of work standard for

inspection and should specify the combination of inspection methods to be
used. They should include inspection criteria, handling of defectives,
disposition of non-conforming lots, and a description of responsibility and
authority for matters such as as-is acceptance.

Technical standards (including standard operating ratio, standard amount for

a product unit, standard yield, etc.), design standards, design technology
standards, and new-procedures development regulations.

Work standards, work instructions, work guidelines, and control

standards.

In the broad sense, work standards specify what every employee should do. As
well as dealing with the routine work performed on the site, they should
therefore also include inspection work standards (inspection implementation
regulations); sampling, measurement, and test analysis work standards;
preparation of contract documents; measurement control; complaints handling;
change orders management; stock control; market surveys; quality information;
standards for controlling processes using control charts; equipment, plant and
machine control; control of jigs and tools; safety and hygiene management;
education, training and skills management; transportation volume control;
manpower control; budget control; cost control; personnel management;
administration; standard forms for all kinds of reports, vouchers, etc., and work
standards for organizing and filing these.

Organizational standards and committee regulations (for quality control

committees and new product committees). Organizational standards specify
the duties and standard work of upper-level employees (e.g., from staff level up
to director) and administrative personnel. These standards are sometimes called
“job descriptions” or “management guidelines.” Their particular purpose is to
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delegate authority and clarify the relationships among different levels of the
organizational hierarchy.

Standards for policy management and information transmission, control item

standards, and reporting system standards.

Standards control regulations.

To make effective use of the above types of standards, it is necessary to specify

the method of controlling each standard. Standards that do this are called
standards control regulations.

They should specify the following:

 Who should formulate the standards, by when, and in what way, and whose
approval must be obtained; who is to prepare draft education programs, when
this is to be done, and whose approval must be sought for revisions; and
 How the standards are to be filed, organized, disseminated, revised and
checked.

Standards should be prepared in accordance with management policy with the

aim of achieving specific objectives. Preparing them is the duty of engineers
and administrative specialists. In principle, standardization only really starts to
make progress after management policy and objectives have been decided.
Superfluous standardization with unclear objectives can easily turn into
standardization for its own sake.

Organizational rationalization programs and cross-functional

management programs

As we proceed with standardization and quality control, we eventually come

up against the problem of organizational rationalization. It is therefore best to
decide in advance when to start tackling this. Given the present state of many
companies, it may be difficult to create the ideal organization in a short time
span, particularly in the areas of production, technology, inspection, and
control. It is probably better to prepare a program which proceeds gradually.

Although individual departments may be quite well organized, companies

traditionally exhibit a strong sectionalistic tendency with extremely weak
cross-functional links. It is therefore a good idea, simultaneously with the
introduction of QC, to establish cross-functional management committees (e.g.,
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for quality assurance, new-procedures development, profit, cost, production

volume, personnel, subcontracting, and affiliated companies) to devise and
expedite a program for building a cross-functional management system.

Since sectionalism tends to appear in all areas of human society, the following
are some hints that may help with breaking it down:

 The responsibility for crushing sectionalism lies with top management;

 Fundamentally, establishing horizontal contacts is the duty of middle
managers, section heads, and department managers;
 All employees should understand and act in accordance with the idea
that “the next process is your customer;”
 Cross-functional committees should be set up to clarify the duties and
responsibilities of each function and to establish cross-functional links;
 Authority should be extensively delegated to QC teams and full use
should be made of QC team activities;
 Joint QC circles should be formed and one must ensure that they
remain active; and
 One may form small management units such as divisions.

DESIGN CONTROL

Planning, design, and evaluation are not the exclusive province of the design
department. They should be carried out in groups or teams that include other
related personnel. Design means bringing to fruition project plans decided on a
companywide basis.

Design work must start from the customer’s standpoint. Drawings should only
be prepared after conditions of use have been carefully checked, product
research has been performed and production methods and process capabilities
have been investigated.

The preparation of drawings is inevitably accompanied by mistakes and an

increase in the variety of parts required. To obviate this, we should promote
design standardization and parts standardization as well as eliminating drawing
errors, tightening up the system for checking drawings, eradicating drawing
and design changes, and preparing drawings that enable projects to be
produced without adjustment.
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The use of QC tools such as Pareto analysis and check sheets will help with
this, and statistical methods are also useful for determining tolerances and
safety factors.

RAW MATERIAL CONTROL, SUBCONTRACTOR

CONTROL, AND TQC FOR SMALL AND MEDIUM-SIZED
ENTERPRISES

Subcontractor control

An average of 70% (from 50% to 85%) of the costs of projects execution is

spent on raw materials, parts, and processing. There is no way to produce good
projects if materials, parts, or processing are poor, and this is why large
companies have joined forces with subcontracting businesses and other small
and medium-sized enterprises to promote TQC from the late 1990s onward.

This has enabled the project management industry to produce high-quality

projects at reasonable prices, reduce parts stocks, and beat world competition.
Cooperative associations and other groups have also been formed, and buyers
and sellers have become allies.

Company policy for fostering and developing subcontractors should be:

 We do not purchase from companies that do not also supply other

manufacturers. In future, limit the proportion of products supplied to us
to a maximum of 50% of your total production;
 We do not purchase from companies that do not offer us their opinions
and suggestions;
 Since we are adopting a guaranteed purchasing system (a zero-
inspection purchasing system), subject your supplies to proper quality
assurance and
 Total quality control means thinking of subcontractor quality, quantity,
delivery date and cost control on a long-term basis. It takes time to
develop good subcontractors.

Ten quality control principles for buyers and sellers

To rationalize the relationship between buyers and sellers and to improve

quality assurance, the following ten quality control principles (entitled “Ten
Principles for Vendee-Vendor Relations from the Standpoint of Quality
Control”) were formulated in 1960; some have been revised in 1996:
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Preface: Both purchaser and supplier should sincerely practice the following
ten principles, while fostering a spirit of mutual trust, cooperation and
tolerance and a sense of social responsibility:

1. Purchaser and supplier are responsible for understanding each other’s

quality control systems and working together to implement quality
control;
2. Purchaser and supplier should preserve their individual autonomy while
respecting each other’s independence;
3. The purchaser is responsible for presenting his requirements to the
supplier in such a way that the supplier clearly understands what he
should manufacture;
4. Before starting any business transactions, purchaser and supplier should
draw up and sign proper contracts covering matters such as quality,
quantity, price, delivery deadlines, and payment conditions.
5. The supplier is responsible for guaranteeing that the materials supplied
are of a quality that will satisfy the purchaser during use. He is also
responsible for providing the objective data needed to confirm this, as
required;
6. When the purchasing contract is drawn up, purchaser and supplier
should decide on evaluation methods satisfactory to both parties;
7. When preparing the contract, purchaser and supplier should decide on
methods and procedures for the amicable settlement of disputes;
8. Purchaser and supplier should give due consideration to each other’s
standpoints and exchange the information needed by each party for
quality control;
9. To ensure a trouble-free relationship, both purchaser and supplier should
at all times properly manage business activities such as ordering,
production, inventory planning, administration, and organization; and
10. In their business transactions, both supplier and purchaser should always
take full account of the final consumer’s interest.

Ten items for your VA checklist

Value analysis (VA) is useful for controlling raw materials. The following is a
checklist used by General Electric:

 Does the use of the raw material add value?

 Is the raw material worth its cost for that particular application?
 Is there any waste inherent in the form of the material?
 Is anything more appropriate available?
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 Is there any way of doing it cheaper?

 Can a standard item be used?
 Can the material be used with a setup appropriate to the production
volume?
 Is the cost appropriate when compared with the total of materials costs,
labor costs, indirect costs, and profit?
 Are there any more reliable or cheaper suppliers? and
 Is anyone else buying the same material cheaper?

Criteria for selecting suppliers from the QC standpoint *

The following items relate to outsourcing and purchasing:

 Has a basic policy been established? Do you aim to function as a

specialist manufacturer or as an industrial group? Are existing suppliers
to be selected or are new ones to be developed?
 See the “Ten Principles for Vendee-Vendor Relations”
 The following criteria are considered in ranking suppliers: organization
and degree of development of quality control and quality assurance;
abilities and personal qualities of top management; level of business
management; independence; financial status; technical level; state of
equipment; number of years of previous dealings; degree of
dependability; use of subcontractors; labor-management relations;
degree of cooperation (in meeting delivery deadlines); price.
 Is purchasing to be done through QC audit or through inspection?
 Categorize parts (e.g., A, B, C, D) and vary the ordering system ap-
propriately.
 Some companies have had an international purchasing strategy since
the late 1980s, and most companies have now started to purchase and
subcontract outside their own countries. Does the company under
consideration have the capacity to do this, and have they developed
people with the requisite ability?

The selection of suppliers should be reviewed regularly. The following should

be considered in the review:

 Supplier education: group education (on own initiative); committees;

cooperative groups; joint QC teams; QC circles; QC study groups
and mutual visits; individual advice; suggestion systems; inspection
adjustment; bonus and penalty systems; rationalization of contracts;
termination of contracts with unsuitable suppliers; planned price
reductions;
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 Ordering and delivery systems: fixed-time delivery; fixed-day

delivery; bulk delivery; fixed-quantity ordering; fixed-period
ordering; planned ordering; spot buying;
 Stock control systems;
 Purchasing systems: estimate system; open-tender system; private
tender system; individual negotiation;
 Is joint testing needed?
 Who decides whether to make parts in-house or to purchase from
outside, and when and how is this done?
 Outsourcing of finished products: whether to manufacture in-house,
order from an outside supplier, act as OEM, manufacture abroad, etc.

The Ten Commandments for small and medium-sized enterprises

1. A business that does not contribute to society will be cold-shouldered

by the public;
2. Develop and foster successors, rationalize personnel selection, and
remove ineffective people from top management;
3. Establish constructive and cooperative labor-management relations and
take responsibility for employees and their families;
4. Develop top management’s awareness of quality control and
improvement, concentrate on new-product development, and become a
specialist manufacturer;
5. Master the statistical approach, base policies and plans on statistical
data, and make use of market surveys. Know your own company’s
process and manufacturing capabilities;
6. Do not depend exclusively on orders from a single company. Retain
your independence and accept no more than 50% of your orders from
one company; if possible, reduce this figure to 20% or less;
7. Do not hold too many fixed assets or over invest in equipment; this can
lead to lack of assets or insufficient liquidity when needed;
8. For the same reasons, carefully control inventories and credit sales;
9. Do not rely on cheap labor;
10. Avoid irrational business customs such as lack of enthusiasm or
leadership on the part of top management, ignorance, indecisive
handling of problems, lack of experience, helping oneself to too much
of the profits, insufficient investment in education, lack of personnel
development, and failure to select and appoint competent individuals.
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Delivery control
The following are recommendations to be considered in addition to raw
material and subcontractor control:

 Clearly define what is meant by delivery, set specific deadlines, and

ensure that everyone enters the spirit of meeting those deadlines;
 Clearly define what is meant by a missed deadline or an incorrect
delivery. Unreasonable deadlines and delays in issuing drawings or raw
materials are frequent causes of missed delivery dates. Trouble in
supplier-purchaser relationships and too many failed lots, defectives, or
incorrect deliveries are 60% to 70% the responsibility of the purchaser
or contractor and only 30% to 40% the responsibility of the supplier or
subcontractor.
 Use Pareto analysis;
 Provide quality information feedback to suppliers;
 Check changes in quality of goods supplied, process capabilities, failed
lots, and defective products; and
 Examine the percent defective after incoming inspection and decide
whether the incoming inspection method or the supplier should be
changed.
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EQUIPMENT CONTROL, JIG AND TOOL CONTROL,

AND MEASUREMENT CONTROL

The philosophy behind all three of these types of control is basically the same.

 Historically, equipment control methods started out with a plan to

repair equipment because it had broken down; this developed into
carrying out preventive maintenance to prevent equipment from
breaking down. The next development involved ensuring that
equipment maintains and improves its process capabilities; the most
recent development has been a focus on improving equipment
reliability through total preventive maintenance (TPM);
 To perform process capability studies, one must decide who is
responsible for investigation, maintenance, and improvement.
Preventive maintenance will come to nothing without an awareness of
dynamic precision, static precision, and the statistical approach;
 Considerations involving inspection and maintenance standards for
equipment and measuring instruments are: Who is to prepare these, the
manufacturer? And is the required inspection technology available?
 If there are frequent breakdowns after inspection and maintenance, one
must question whether the test operation standards are adequate;
 Which department is responsible for equipment control? Does the
workplace use equipment unreasonably and fail to carry out regular
servicing? Grass-roots improvement is impossible if people are simply
forced to follow orders. What about stock control of spare parts?
 Priority control must be carried out;
 What are the equipment renovation standards like? The process
capabilities of old equipment can be considerably improved. Before
purchasing equipment, question whether it is really necessary. It is no
good trying to write off costs through the tax rules; technical progress
will decrease the value of equipment much faster;
 Are there proper work standards for using equipment, jigs and tools,
and measuring instruments?
 It is totally wrong to assume that control is being implemented just
because periodic servicing and calibration are being carried out.
Adjusting and repairing equipment that has gone wrong is crisis
management; it is no more than shutting the stable door after the horse
has bolted;
 What about reliability control?
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 Is equipment investment really necessary from the viewpoints of cost

control, process capability and manufacturing capability? Through
proper control, project execution capability can be increased by 50% to
100% and process variation can easily be reduced to one-half to one-
third of its original value;
 Are the results of equipment investment being checked properly?
Ensure that people are not escaping their responsibilities by simply
spending their investment budgets or using the equipment but failing to
check the results; and
 Is error control firmly established?

REFERENCES

Hope T., Hope J., “TRANSFORMING THE BOTTOM LINE”, Harvard

Business School Press, 1996

Moss Kanter, R., “WORLD CLASS”, Simon and Schuster Inc., 1995

Larry Reynolds, “BEYOND TOTAL QUALITY MANAGEMENT”, Sheldon

Press, 1994

W. Edwards Deming, “THE NEW ECONOMICS”, MIT Center for Advanced

Educational Services, 1996

Lucey T.,: "QUANTITATIVE TECHNIQUES" D.P. Publications 1993

Peters M.S. and K.D.Timmerhaus,: "PLANT DESIGN AND ECONOMIC

FOR CHEMICAL ENGINEERS" McGraw-Hill, 1996

Buffa E.S. : "MODERN PRODUCTION MANAGEMENT", John Wiley &

Son 1995

Kaoru Ishikawa, “INTRODUCTION TO QUALITY CONTROL”, Juse Press

Ltd., 1989

Ignacio Manzanera, “PROJECT MANAGEMENT REFERENCES”, Aramco

Press, 1992

Carl C. Pegels, “TOTAL QUALITY MANAGEMENT”, Boyd & Fraser

publishing company, 1995
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Change Order Administration

Change order administration is a name given to an organized effort to eliminate
unnecessary cost and time impact as a result of processing project work outside
the original scope of the contract.

To think that a project or a construction contract can be executed without

change orders is a fallacy unsupported by experience.

Change orders are just part of every day business in project management
environments. The important issue is to recognize their implications and set up
an effective management system to take care of them. An effective
administration of change orders can minimize their cost and time impact and
prevent costly legal action.

Construction change orders represent modifications to the contract between the

contractor and the owner. The construction contract may be adjusted to reflect
design changes, clarify documents, resolve unexpected conditions at the
construction site, and accommodate substitutions.

Change orders can be initiated by owner's deletion or addition of work,

designer's clarification of the contract, or any other change in the scope of the
work, contract time or compensation. Repeatedly, the work covered by a
change order cannot wait until its negotiation is over, and there may be
disagreements between the owner, contractor, and designer over responsibility
for the change, all these factors make change order administration a
complicated and difficult subject while at the same time justifying project
management teams need for a discipline approach to achieve better results.

Sources of Changes

Every kind of construction has a pattern in the development and number of

changes, but they usually arise from one of the following:

 Unanticipated site conditions; and

 Owner requested design modifications.

Simple changes, such as substitution of comparable materials, may be carried

out with little or no problem, however, more complex changes as those
involving substantial judgment to interpret apportioned costs, and assess the
impact on project schedules, are more common.

Change orders may get extremely complicated depending on the size, time of
issuance, schedule progress, criticality, and concurrence with other changes.
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Contractual Aspects

The contractual review of a change order involves a meticulous examination of

contractor, designer, and owner compliance with the contract requirements,
and the time and money negotiated as part of the change order.

Usually, legal reviews focus on satisfaction of:

 Notice requirements;
 Equity of payments versus actual costs; and
 Adjustment of project schedules.

Project management's daily attention to changes and their reasonable

compensation, may find frequent disagreements over:

 The precise scope of the change;

 Equipment rental rates;
 Acceptable profit; and
 Overhead costs.

Unless these specific items have been outlined in the contract or some other
standard agreement has been reached, these issues will probably persist
through all the negotiations. This point must be emphasized because there are
no universally adopted:

 Tables of costs;
 Definitions of change in scope; and
 Guidelines for overhead and profit reimbursement;

Besides the predictable concern over:

 Direct costs; and

 Schedule delays.

Increased legal and management attention should be given to:

 Indirect costs;
 The impact of changes on later aspects of the work;
 The indirect effect of numerous changes;
 The relationship between changes and productivity;
 The additional supervision required to handle changes; and
 Associated impacts.
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Most contract provisions addressing changes provide a detailed listing of items

compensable when a change occurs, and typically only the cost of schedule
modification directly attributable to the change is covered.

Attention should be given to the consequential effects of a change on the

project schedules, such as the effect of multiple changes on the efficiency of
the labor and supervision, the disruptive effects of changes on the efficiency of
the contractors and their morale, and other costs the contractor incurs but may
not be able to directly link to specific changes.

Strictly speaking, other costs not directly linked to the change may not be
considered compensable. However, the contractor will attempt to include the
impact of all of these items in the resultant change order agreement.

The evolution of a reasonably simple change into one that has a large impact
illustrates the basic elements of a simple change and how it can readily
mushroom into something ponderous and nearly unmanageable as the
contractor attempts to recover related but separated costs.

In most cases, the contract language is directed at the scope of the change and
compensating the contractor for associated, direct costs. But, citing a breach of
the contract, force majeure (an unanticipated major event), or other legal
concept, the contractor may be able to substantially expand not only the scope
of the change but also the compensable costs and time delays.

The most interesting development these days is the systematic use of the
project network schedules along with other contract documentation such as
progress reports, productivity analysis, daily and weekly meetings,
correspondence, survey reports and the like to prove the impact that is not
easily visualized by other means.

As-planned and actual scenarios should be compared at the time when the
change order is approved. Then the actual performance schedule should be
depicted before the introduction of the change order and compared to the actual
situation after the change was incorporated.

Change order administration involves a practical and realistic interpretation of

the contract language in light of the proposed changes in the work.

Change order administration should be an exercise of applying contract

language to a relatively discrete situation. But it may be much more than that,
because it involves:
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 The degree of control the contractor, designer, and owner have over one
another;
 How the change is being administered;
 Types of documentation that are required for its approval by both sides;
and
 The ability of the parties to establish the actual scope of the change.

Contract provisions related to changes are used to guide both parties in

reaching an agreement. However, owners and contractors can use the contract
language in their favor.

Out of self-defense, many contractors have found the best way to ensure
recovery for changes is to aggressively and promptly pursue each prospective
change in the contract. This may be achieved by giving prompt notice to the
owner along with documentation of all costs involved, schedule delays
incurred, and the precise presentation of this information with the proposed
change order.

When the contractor is well prepared and the owner is not, the contract has
been turned from a document for the mutual benefit of both parties into a
potential weapon used by one to exploit changes as means of gaining
additional compensation.

The sponsoring of projects by multiple owners as a joint venture and large

financial institutions providing money and seeking project participation may
have an impact on change order approval or processing in general.

Third parties may provide some funding, but frequently also claim control over
specification provisions and the review of change orders. In principle, since
third parties funding is involved, they wish to ensure the project scope is
maintained despite the occurrence of change orders, and to ensure change
orders are reasonable.

Similar restrictions on the contract language used and requirements on the prior
approval or right-to-review change orders may be exercised by each of the
partners in commercial joint venture projects and the funding organizations.

With projects having multiple sources of finance or control, there are several
common forms of distortion in the change order process. "Prior Approval" may
be required before the work proceeds, actual funding may be delayed until after
all participants have approved the change, and sources of finance may reserve
the right not to participate in change orders even though they are within the
original project scope.
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Insistence on prior approval of changes has a particularly adverse effect on

construction. The contractor encountering interferences in the work, changed
conditions, or other obstacles must stop further work in the area until the
change is acknowledged and approved. Otherwise, the funding for the change
may not be approved, regardless of the actual merit of the change. This
interruption of the work and restarting later invariably results in:

 Reduced labor efficiency;

 Adverse impacts on the project schedule; and
 Greater costs.

Reservation of rights to participate in the change order or to approve the

change much later can also have a severe impact. Some Project managers,
fearful of an arbitrary or restrictive review of change orders by funding
agencies, deliberately deny reasonable requests for change orders in a ploy to
either hide the costs or to appear as a rigorous enforcer of the contract.

Change Orders Elements

There are at least six key elements in the successful administration of changes
during construction; they are:

 The contract approved schedule revised on the day the change was
approved;
 The approved progress reports;
 The full scope of the change identified and understood;
 The detailed records of all related aspects;
 Information to all affected parties, and assessment of their role in the
change; and
 The evaluation of alternative strategies available for minimizing the
impact of the change.
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Change Order Strategy

Establishing the Scope of the Change

When starting the design or construction phase of a project, a great deal of

effort is invested in carefully defining the scope of work and its associated
costs. A particular effort is made to minimize and control ambiguous details
which will affect costs, quality, and schedules. Even with the most schematic
of construction drawings, the designer will prescribe basic dimension,
materials, and key characteristics of the work.

By contrast, with changes, the scope is often narrowly and poorly defined, and
estimates of the associated cost and schedule impact are considered
approximate at best. In effect, the contractor, designer, and owner may agree
that something must be done, but may not agree on its full description and its
associated costs.

In principle, when assessing whether or not a change exists we compare

characteristics of the alleged change with the contract requirements, and based
on this review agree on the existence of a change. A great deal of attention is
given to the specific contract wording and its reasonable interpretation.

It is not enough, however, to simply acknowledge that a change exists

according to the contract language; it is also essential to define its scope and
impact on the actual project. But it is difficult to assess the full impact of the
change or there is simply no time to fully understand it.

When establishing the scope for a change, look beyond the simple contract
wording and consider the potential impacts of the change on other areas of the
project construction and operation, events which may ease or worsen the
effects of the change, and any consequential cost and schedule impacts which
may be incurred.

This is not to say that we will set aside the contract or ignore its provisions, but
indirect or consequential issues associated with the change may have a large
effect on its eventual cost and schedule impact.

Even if the direct impact of a specific change can be readily established, its
indirect effects can be much harder to assess. The following checklist is a
guideline for change orders scope recognition.

 Evaluate the full scope of change;

 Evaluate the full impact of change on related work;
 Evaluate the schedule impact locally and overall;
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 Analyze daily and weekly meeting minutes;

 Evaluate progress reports;
 Establish productivity profiles;
 Visit the site;
 Take photographs; and
 Establish cost estimate.

Maintaining Detailed Records

If full credit is to be granted for the change, legal precedent and good practice
requires all related issues to be thoroughly documented, from initial notice of
the change through its final impact on the project cost and schedule.

Unfortunately, lack of time on the construction project makes the development

and maintenance of detailed records difficult. Furthermore, contractors,
engineers, and architects often resist exact record keeping on the grounds that
outsiders interpretation may be inaccurate.

Several approaches have been used to help develop good records some of
them:

 Isolating the schedule portion affected by the change, impacting it with

the change and incorporating it back to the overall schedule for further
identification of impacts;
 Maintaining a verbal commentary while filming the work with a video
camera;
 Requiring the contractor to hire a professional photographer to maintain
a detailed photo log of the work; and
 Using a professional court recorder to transcribe the minutes of all
periodic meeting among contractor, designer, and owner.

Contract administrators, contractor personnel, and legal staff from both sides
may then work with these records to establish the impact and relative
responsibility for each aspect of the changes. Records may be used to develop
background for future projects.

If there is a more serious administrative or legal dispute over a single change or

the impact of multiple changes, the maintenance of detailed, clear records will
not only substantially increase the probabilities of a fair settlement, but
decrease the associated legal and administrative costs.
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Establishing Proper Processing Time

In the simplest of cases, the representatives of the contractor and owner

negotiate and reach a direct agreement on the change immediately after it has
been identified. Agreement may be reached without having to receive
approval from other outside parties.

In practice, there is usually a point where other parties must be consulted and
their approvals received, and inordinate amount of time is often spent
documenting, explaining, and justifying the existence of the change. The key
point here is that the time required to respond to a change is often much longer
than any party might reasonably expect or want.

Because many change orders are requested by the contractor, and certainly
much of the documentation must originate with the contractor, it is often
tempting to say that delays in the change order processing are attributable to
contractor delay and inaction. Consequently, many owners and designers attach
a lower schedule and financial priority to change orders that to other aspects of
their work.

Contractors often contribute to delays in change order processing by delaying

their request for a change until all of their costs are known, or until later in the
project when the impact of changes is clearer.

In many respects, though, their delay is exacerbated by contract notice

requirements, the contractor must notify the owner of any potential change as
soon as it occurs or lose the opportunity to recover later. Therefore, the
contractor files a notice with all potential changes, when in fact most are not
realized and many are not documented until well after the initial filing.

Then, given this large time gap between initial notice and actual request for
compensation, it appears that protracted delays in change order processing is a
natural and relatively benign development. In fact, this is not the case. From
experience, the more rapidly owner and designers respond to potential and
claimed changes in the work, the lower the direct and indirect costs the owner
will incur.

Keep in mind that delaying change orders processing until the end of the
project increases the probabilities of the contractor recovering claims and net
owner administrative costs. Deferring resolution of change orders until the end
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of the project allows the contractor an opportunity to identify more costs

associated with the change and more complete records.

It is a well known fact that after-the-fact data analysis by the contractor brings
substantial increase on constructive change orders claims. Many good reasons
are given for not pursuing the prompt resolution of change orders. But it is
important to recognize that the net costs will be lower for all with more
expeditious handling of their identification and processing.

Establishing a plan of action

Change orders must be treated as small contracts within the contract. As such,
they must have their own:

 Budget;
 Working approved schedule;
 Manpower crew loading;
 Other resources allocation;
 Progress measure system; and
 Analysis and evaluation frequency.

Parallels may be drawn between the administration of a change and that of a

simple project. In either case, good management requires us to establish a goal
or objective, to organize the people involved, and then to monitor the work as
it progresses.

But no matter how small, effective administration of changes often requires

greater management skill, for here we are not only responding to a new task or
objective, but we must also deal with a whole universe of related, evolving
tasks making up the original project.

In spite of the importance of good project scheduling, few contractors and

owners develop and maintain strong schedules for the project as a whole.
Reasons vary, but most often it is because lack of time to develop and update
it, and lack of the technical background needed for more sophisticated systems.

It is seeing, however, a great deal of interest in the use of microcomputer-based

systems, where the project personnel may use simple software systems to plan
their work over the next two to three weeks. These commercial systems allow
personnel to easily enter critical activities and to better examine alternate
strategies for completing the work.

This ability to use a sophisticated, but user friendly system to evaluate alternate
sequences, equipment, and personnel for a particular task results in more
 P a g e | 152

effective planning of the work. When field personnel have control over the
schedule development system and when they may use it as a planning tool to
evaluate alternatives, they get more involved and become very effective in
planning and monitoring the impact of changes.

The use of schedule and work planning systems at the project site, operated
independently from remote main-office computers, should be encouraged.

The Construction Schedule

As with almost every other aspect of the relationship between owner and con-
tractor, scheduling must be established in the contract. If a construction
contract contains no schedule or no completion date, courts will infer that a
“reasonable time” is allowed for the contractor to complete the project.
Needless to say, few project owners are willing to trust the fate of their project
to such an amorphous standard of performance.

The Contractual Schedule

Most construction contracts contain the statement that “Time is of the essence.
To understand the purpose of this statement, it is necessary to recall the distinc-
tion between material and immaterial breach of contract discussed in previous
discussions.

By stating that time is essential, the owner is putting the contractor on notice
that a failure to meet the completion requirements will be a material breach of
contract which would justify a default termination of the contract. As a
practical matter, an owner would be on shaky ground if it kicked a contractor
off a job simply because the contractor was a few days behind the established
progress schedule.

However, if the owner could show that the contractor has no reasonable chance
of completing the project on time, a default termination would be upheld.

Establishing a completion schedule is quite simple. Sometimes the owner

simply states the date by which the work must be completed. The preferred
method, however, is to state the number of calendar days the contractor will be
allowed for performance of the work. This method is superior because it allows
for greater flexibility and specificity when it becomes necessary to make
adjustments in the completion date. These matters will be discussed later in this
chapter.
 P a g e | 153

If a contractor is allowed a certain period of time to perform the work, for

instance, 420 calendar days, it is obviously necessary to establish when the
period starts to run. Some construction contracts state that the performance
period starts to run on the date of the contract itself.

Frequently, however, the contractor is not authorized to begin work imme-

diately upon contract signing. Problems with site access or project financing
may force the contractor to wait weeks before actually beginning work.

It is common for contracts to state that the contractor will receive a “notice to
proceed” within 30 or 60 days of contract execution and the contractor must
commence work within 5 days of receipt of that notice. When a contract is
structured in this manner, it usually states that the contractor’s performance
period starts to run upon the owner’s issuance of the notice to proceed.

Construction contracts should also establish how the date of completion will be
established. Considering the financial consequences of late completion, this
should not be determined on an ad hoc basis.

The most prevalent and appropriate benchmark for a contractor’s completion

of the work is “substantial completion.” Substantial completion is achieved
when the project is sufficiently complete so that the owner can take occupancy
and put the structure to use for its intended purpose.

There may be a large number of remaining “punch list” items which the
contractor is contractually obligated to complete, but if the contractor achieves
substantial completion within the stated number of calendar days, it has met its
completion obligation.

The fact that certain finish work needs to be touched up or certain hardware is
missing should not enable the project owner to levy harsh financial penalties
against the contractor. The owner received that which it bargained for. It is
occupying and making productive use of the project within the stipulated
period of time.

Sometimes construction contracts will state that the contractor must achieve
“final completion” of the project within the stipulated number of calendar days.
This means that the punch list must be completed and the owner must formally
accept the project and release final payment.
 P a g e | 154

This arrangement is quite unfair to contractors. As will be seen in the final

chapter on project closeout, a great deal must be done between substantial
completion and final completion and acceptance of the project. Many of these
matters are beyond the control of the contractor.

Why should the contractor be held financially responsible, for instance, by way
of liquidated damages, for this period of time, particularly when the owner has
the beneficial use of the project’ For this reason, courts prefer to interpret
“completion” of the project to mean substantial completion. If a contract
explicitly requires final completion and acceptance within the stated number of
calendar days, however, this requirement will be enforced.

The Contractor’s Construction Schedule

Considering the complexity and extent of a typical construction project, it is

apparent that a great deal of planning and scheduling is required. A detailed
examination of scheduling techniques is beyond the scope of this book, but a
basic understanding is useful.

Until recent years, most construction scheduling was performed using simple,
manually prepared bar charts. Each bar represented a particular activity and
indicated when it must commence and when it must be completed.

These milestones are usually expressed as the number of elapsed calendar days
of work on the project. The timely commencement of follow-on activities
would of course be contingent upon the timely completion of the earlier ones.

Some bar charts are quite crude, breaking the activities down only according to
trade. Some are quite elaborate, however, with separate bars for virtually every
identifiable activity.

In recent years, the use of bar charts has been largely replaced by the use of
computerized “critical path method” (CPM) schedules. These schedules are
based on the same concept as a bar chart, but the activities are tracked on a
computer-generated network drawing. CPM schedules tend to break the activ-
ities down with far greater specificity than even the most elaborate bar chart,
thereby giving contractors greater ability to monitor their progress and properly
coordinate the various activities.

The term “critical path” refers to that sequence, or path, of activities which is
critical to the timely completion of the project. For some activities, the
 P a g e | 155

scheduling constraints are not severe, as little or no follow-on work is depen-

dent upon their timely completion. Other activities, such as the pouring of the
foundation, are sure to be on the critical path.

The fact that CPM schedules are computerized adds greatly to their usefulness.
It is common for contractors to generate an “as-planned” CPM schedule prior
to starting work. As work progresses, an “as-built” schedule is maintained.
This enables the contractor to carefully monitor its own progress. As will be
seen later in this chapter, it also provides a powerful tool for documenting the
extent of various delays, their effect on the critical path, and their effect on the
actual completion of the project.

Traditionally speaking, progress schedules have been prepared by contractors

strictly for their own use. The attitude of contractor and owner alike was that
the contractor was responsible for the proper scheduling and coordination of its
work.

As long as it met the completion date, this scheduling was no one else’s busi-
ness. In recent years, however, project owners have insisted on getting into the
act. It is now common for contracts to require that the contractor submit a
proposed progress schedule to the owner within so many days of contract ex-
ecution. This schedule is to be reviewed and formally approved by the owner.
Adherence to this schedule is a requirement of the contract.

Project owners feel that by reviewing and approving a contractor’s schedule,

they will gain more control over the contractor and be in a better position to
hold the contractor accountable for its progress or lack thereof. From a
managerial standpoint, this is probably true. From a legal standpoint, however,
this is a dubious proposition.

As mentioned earlier in this chapter, an owner will not be able to terminate a

contract for default simply because a contractor has fallen behind its approved
schedule. The owner must be able to prove that the contractor was so far
behind schedule that it had no reasonable chance to complete the project on
time. In the absence of that showing, the owner must give the contractor an
opportunity to pick up its pace and complete the work on schedule.

The owner’s formal approval of a contractor’s progress schedule is also a

double-edged sword which can come back to harm the owner. On any con-
struction project, the owner has certain obligations that must be met in a timely
 P a g e | 156

manner. The site must be accessible. Decisions and approvals must be made.
The work of separate contractors must be properly coordinated. If the owner
fails to carry out its responsibilities in a timely fashion, it may very well be
held liable to the contractor for delay damages.

By formally approving the contractor’s progress schedule submittal and

making it a part of the contract, the owner has gained a slightly higher degree
of leverage with the contractor. It has also made a contractual representation
that it will carry out its responsibilities in a manner which will enable the con-
tractor to meet the approved schedule. If the owner fails to do so and the con-
tractor’s performance is delayed as a result, the approved progress schedule
will be Exhibit I in the contractor’s delay claim against the owner.

Categorizing Delay

Before examining the relationship between owner and contractor regarding

delay, it is useful to discuss the three basic categories of delay. All construction
delay can be characterized as excusable, non-excusable, or compensable.

Excusable delay is delay which occurrence is due to factors beyond the control
and without the fault of either party. Bad weather is the most common exam-
ple. Generally speaking, excusable delay will entitle the contractor to an ex-
tension of the performance period, but no additional compensation.

Non-excusable delay occurs as the result of the contractor’s failure to meet its
contractual obligations. For instance, material was not procured on time or
insufficient labor was furnished.

CASE STUDY 1

The contract allowed Contractor 290 days to complete construction of a fire

station. Some of the drawings furnished by Owner proved to be defective. This
delayed the Contractor’s performance of the work.

Owner became dissatisfied with the pace of Contractor’s progress and

terminated the contract for default. Contractor contested the termination.

Contractor’s delays were beyond its control and therefore excusable. Owner
was obligated to extend the performance period to compensate for the delay. If

1
Chaney Building Co. v. City of Tucson, 716 P.2d 28 (Ariz. 1986).
 P a g e | 157

the proper extensions had been granted, Contractor’s progress would have
been satisfactory.

Therefore, the default termination was reversed.

If a non-excusable delay results in the contractor’s failure to complete the

contract within the stipulated number of days, the contractor will be held
financially responsible to the project owner for the delay.

Compensable delay is a delay caused by the owner’s failure to meet its obli-
gations. For instance, the owner failed to provide timely access to the site or
failed to review shop drawings within the contractually allowed period. Gen-
erally speaking, compensable delay entitles the contractor to an extension of
the performance period and an increase in the contract price to compensate it
for the increased costs caused by the owner’s delay.

Sometimes, two separate causes of delay occur concurrently. If an excusable or

compensable delay occurs concurrently with a non-excusable delay, the
contractor will not be entitled to a time extension or increased compensation
for the period of non-excusable delay. The rationale is that the contractor
would have been delayed anyway because of its own shortcomings.

Similarly, if an excusable delay occurs concurrently with a compensable delay,

the contractor will be entitled to a time extension, but no compensation, for the
period of excusable delay. After all, the contractor would have been unable to
work notwithstanding the owner’s shortcomings.

To understand the concept of concurrent delay, consider these illustrations:

The owner denies timely site access to the contractor. Ten days later, unusually
severe rain begins to fall. Ten days after commencement of the rain, the rain
stops and the owner provides site access. The first 10 days of delay would be
compensable. The next 10 days of concurrent delay would entitle the
contractor to an extension of time for the excusable delay but would not be
compensable.

The contractor is unable to obtain a piece of equipment necessary to perform

the excavation. The owner, however, has not provided access to the site. The
occurrence of the non-excusable delay cancels the effect of the owner’s
 P a g e | 158

compensable delay. The contractor would not be entitled to a time extension or

additional money.

CASE STUDY2

Contract called for construction of an air traffic control tower. Inadequate

Government specifications for fasteners resulted in problems with installing
masonry panels. Work was halted.

As soon as work stopped, serious deficiencies in the workmanship of Contrac-

tor’s masonry subcontractor were discovered. These problems were corrected
while Government resolved the problems with its specifications. Contractor
later brought a claim alleging that the entire period of delay was compensable.

The U.S. Claims Court ruled that the delay was initially compensable because
it was the fault of Government. As soon as the deficient workmanship was
discovered. however, the compensable delay became concurrent with a non-
excusable, contractor-caused delay. Contractor was not entitled to any
additional compensation for the period of concurrent delay.

The contractor fails to obtain the necessary piece of equipment, and no work
takes place for 10 days. Unusual severe rain then begins to fall and continues
for 10 days. By the time the rain stops, the contractor has obtained the
equipment and is ready to start work. The first 10 days of delay are non-
excusable, and to the extent this delay causes late completion, the contractor
will be liable to the owner.

The contractor will not be responsible for the next 10-day period of concurrent
delay, however. The excusable delay negates the effect of the contractor’s
shortcomings, as the contractor would not have been able to work anyway. The
contractor will not be entitled to an extension of time for any period when it
did not have the equipment available, however, as it would have been delayed
notwithstanding the rain.

Contractor’s Entitlement to Extension of Time

It is important to emphasize that a contractor’s entitlement to an extension of

time is dependent on the terms of the contract. If the contract does not ex-

2
Toombs & Co., Inc. v. United States, 4 C1.Ct. 535 (1994).
 P a g e | 159

pressly authorize time extensions, the owner will be in a position to argue that
the contractor is obligated to complete the project on schedule regardless of
any occurrences. The owner will not necessarily prevail in this argument, as
courts sometimes recognize that an act of God will excuse nonperformance of
a contract. But the door will be open for the owner to make the argument.

The contractor’s entitlement to an extension of time is usually dependent on

the definition of excusable delay; so the examination of this issue must begin
there.

Excusable Delay

As stated earlier in this chapter, excusable delay results from occurrences

beyond the control and without the fault of either owner or contractor. Most
construction contracts spell out occurrences entitling the contractor to an
extension of time. This is seldom labeled “excusable delay,” but the fact the
contractor is allowed additional performance time indicates that the delay was
recognized as being beyond the contractor’s control.

In the absence of a contract clause authorizing extensions of time, there will be

great confusion as to what, if any, events will justify an extension of time.
Courts would probably excuse the delay only in the face of catastrophic natural
disasters. A time extension clause is therefore crucial from a contractor’s point
of view.

Weather, of course, is the most common cause of excusable delay. It is also the
most misunderstood.

In order for adverse weather to be an excusable delay, it must be so severe or

unusual that it could not have been reasonably anticipated. When bidding and
scheduling their jobs, contractors are expected to anticipate bad weather. It
would be foolish, and certainly not beyond the control of the contractor, to
price and schedule work on the assumption that every day will be warm and
dry. Normal seasonal and geographic factors must be considered. A week of
rain in April might be “adverse,” but in most locations, spring rain should be
anticipated.

To prove entitlement to a time extension, contractors must rely on the weather

records for the locale of the project. The weather occurrences for the period in
question must be compared with the historical weather data for that time of
 P a g e | 160

year. Ultimately, it comes down to the inherently subjective judgment call as to

whether or not the weather conditions were so severe or unusual for that
location at that time of year that the contractor could not have reasonably
anticipated their occurrence.

Another misunderstood cause of excusable delay is acts of governmental

authorities. Again, the key is foreseeability. If a contractor knows it is required
to get certain permits from public authorities, it must anticipate that a certain
lead time will be required. Delay in obtaining these permits will usually not be
excusable. The delay will be excusable only if the contractor was without fault
and the nature or extent of the delay could not have been anticipated. A classic
example would be when an environmental organization files suit and obtains
an injunction shutting down the project.

Notice Requirements

Most contract clauses authorizing extensions of time for excusable delays re-
quire the contractor give the owner prompt notice of the delay. For instance,
AIA Document A201 requires the contractor to make a claim in writing within
20 days of the commencement the delay or the right to a time extension will be
waived. Many contracts require written notice within a much shorter period of
time.

The question arises, does the contractor’s failure to give the owner timely
written notice actually result in a waiver of the right to a time extension? The
answer is, it depends on whether or not the owner was prejudiced by the lack
of written notice.

If the owner was aware of the delay, it is hard to see how the lack of a written
notice would affect the owner’s options or decisions. This is frequently the
case, as an owner’s representative usually visits the site regularly and would be
aware of a work stoppage.

Even if the owner was unaware of the delay, the lack of written notice may not
prejudice the owner’s interests, particularly if the delay is caused by bad
weather. Even if the owner had been given notice, what could it have done?

In order for the failure to give written notice to operate as a waiver of the right-
to-an extension of time, the owner must be able to show that had it been given
notice, it would have taken certain actions to mitigate the problem. Then, the
 P a g e | 161

lack of notice did adversely and irrevocably affect the owner’s interests. In this
situation, courts will enforce the written notice requirement against contractors.

Effect of a Time Extension

The effect of a time extension is quite simple. The contractor is allowed to

complete the project at a later date without incurring financial liability to the
owner. As will be discussed later in this chapter, most contracts call for liqui-
dated damages to be assessed against the contractor for every day the project
remains incomplete after the stipulated completion date. A time extension en-
ables the contractor to avoid liquidated damages for that period of delay at-
tributable to excusable causes.

REFERENCES

Emory C.W. : "BUSINESS RESEARCH METHODS" , R.D. Irwin Inc., 1995

Pfaffenberger R.C. and D.A. Walker,: " MATHEMATICAL

PROGRAMMING FOR ECONOMICS AND BUSINESS", The Iowa U.
Press, 1976

Hackney J.W.,: "MANAGEMENT OF CAPITAL PROJECTS", John Wiley &

Son, 1995

Bu-Bhsait K, Manzanera I, “CLAIMS MANAGEMENT”, Project

Management Magazine, England, 1992

Buffa E.S. : "MODERN PRODUCTION MANAGEMENT", John Wiley &

Son 1985

Specthrie S.W. : "INDUSTRIAL ACCOUNTING" , Prentice-Hall, Inc., 1989

Lucey T.,: "QUANTITATIVE TECHNIQUES" D.P. Publications 1993

Peters M.S. and K.D.Timmerhaus,:"PLANT DESIGN AND ECONOMIC FOR

CHEMICAL ENGINEERS" McGraw-Hill, 1996
 P a g e | 162

INTERNATIONAL PRINCIPLES
OF MEASUREMENT
FOR CONSTRUCTION WORKS
 P a g e | 163

SECTION GP - GENERAL PRINCIPLES

SECTION A - GENERAL REQUIREMENTS

SECTION B - SITEWORK

SECTION C - CONCRETE WORK

SECTION D -MASONRY

SECTION E - METALWORK

SECTION F - WOODWORK

SECTION G - THERMAL AND MOISTURE

PROTECTION

SECTION H - DOORS AND WINDOWS

SECTION J - FINISHES

SECTION K - ACCESSORIES

SECTION L - EQUIPMENT

SECTION M - FURNISHINGS

SECTION N - SPECIAL CONSTRUCTION

SECTION P - CONVEYING SYSTEMS

SECTION Q - MECHANICAL ENGINEERING

SECTION R - ELECTRICAL ENGINEERING

 P a g e | 164

SECTION GP – GENERAL PRINCIPLES

GP1 Principles of measurement

These principles of measurement provide a uniform basis for measuring bills of

quantities for works of construction. More detail information than is required
by this document may be given to define the precise nature of work or the
circumstances under which is to be carried out.

Amendments to these principles of measurement for use in a particular locality

or adopted for work not envisaged by this document shall be stated; an
appendix is provided for such amendments to be recorded.

These principles of measurement may be applied equally to the measurement

of proposed works and of completed works.

GP2 Bills of quantities

The object of bills of quantities is:

1. To assist in the accurate preparation tenders, by providing for measurement

of quantities on a uniform basis.

2. To provide a basis for the financial control of a project, in accordance with

the condition of the contract.

Bills of quantities shall describe and present the works to be carried out; work
which cannot be measured accurately shall be described as approximate or
given in bills of approximate quantities.

Conditions of contract, drawings and specifications shall be provided with the

bills of quantities.

The section headings and classifications do not impose restrictions upon the
format and presentation of bills of quantities.

GP3 Measurement

Work shall be measured net as fixed in position and each measurement shall be
taken to the nearest 10 millimetres; this principle shall not apply to dimension
stated in descriptions.
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Unless otherwise stated, no deductions shall be made from items required to be

measured by area for voids of less than 1.00 m2.

Minimum deductions of voids shall refer only to voids within the edges of
measured areas; voids which are at the edges of measured areas shall always
be deducted, irrespective of size.

These principles of measurement may be used with other units of measurement

but the particular amendments shall be stated.

Notwithstanding these principles of measurement, a separate minor building or

structure may be enumerated.

GP4 Items to be fully inclusive

Unless otherwise stated, all items shall be fully inclusive of all that is necessary
to fulfill the liabilities and obligations arising out of the contract and shall
include:

1. Labour and all associated costs

2. Materials, goods and all associated costs
3. Provision of plant
4. Temporary works
5. Establishment charges, overheads and profits

GP5 Description of items

Items which are required to be enumerated, or for which an item is required,

shall be fully described.

Items which are to be measured by length or depth shall state the cross-
sectional size and shape, girth or ranges of girths or such other information as
may be appropriate; for items of pipe work it shall be stated whether the
diameter is internal or external.

Items to be measured by area shall state the thickness or such other information
as may be appropriate.

Items which are to be measured by weight shall state the material thickness and
unit weight if appropriate (for example, ductwork).

Notwithstanding these principles of measurement, proprietary items may be

measured in a manner appropriate to the manufacturer’s tariff or customary
practice.
 P a g e | 166

The description of items in bill of quantities may refer to other documents or

drawings and any reference to such information shall be understood to fulfill
any requirement of these principles of measurement; alternatively, reference
may be made to published information.

GP6 Work to be executed by a specialist nominated by the employer

Unless otherwise required by the conditions of contract, work required to be

executed by a specialist nominated by the employer shall be given as a sum;
such a sum shall be exclusive of contractor’s profit and in each case an item
shall be given for the addition of profit.

An item shall be given in each case for assistance by the contractor, which
shall include:

1. Use of contractor’s administrative arrangements

2. Use of constructional plant
3. Use of contractor’s facilities
4. Use of temporary works
5. Space for specialist’s offices and stores
6. Clearing away rubbish
7. Scaffolding required by the specialist, giving particulars
8. Unloading, distributing, hoisting and placing in position items of plant,
machinery or the like, giving particulars.

GP7 Goods, materials or services to be provided by a merchant

or tradesman nominated by the employer

Unless otherwise required by the condition of contract, goods, materials or

services required to be provided by a merchant or tradesman nominated by the
employer shall be given as a sum; such sum shall be exclusive of contractor’s
profit and in each case an item shall be given for the addition of profit.

Fixing goods, and materials shall be given in accordance with relevant clauses
in these principles of measurement; fixing shall be understood to include
unloading, storing, distributing and hoisting the goods and materials.
Particulars shall be given of any requirement for the contractor to arrange for
delivery or pay any cost of conveying goods or materials.
 P a g e | 167

GP8 Works to be executed by a government or public authority

Unless otherwise required by the condition of contract, work which may only
be carried out by a government or public authority shall be given as a sum;
such sum shall be exclusive of contractor’s profit and in each case an item shall
be given for the addition of profit.

An item shall be given in each case for assistance by the contractor as

described in clause GP6

GP9 Dayworks
The cost of labor in dayworks shall be given as a sum; alternatively, a schedule
of the different categories of labor may be given containing a provisional
quantity of hours for each category. The cost of labor included in a sum or
schedule shall include wages, bonuses and all allowances paid to operatives
directly engaged on dayworks (including those operating mechanical plant and
transport). This shall be done in accordance with the appropriate employment
agreement or, where no such agreement exists, the actual payments made to the
work people concerned.

The cost of materials in dayworks shall be given as a sum; alternatively, a

schedule may be given containing a provisional quantity of different materials.

The cost of materials included in a sum schedule shall be the net invoiced
price, including delivery to site.

The cost of constructional plant employed exclusively in dayworks shall be

given as a sum; alternatively, a schedule of the different categories of plant
given containing a provisional quantity of hours, ro such other period of time
as may be appropriate, for each category.

The cost of constructional plant included in a sum or schedule shall include

fuel, consumable stores, repairs, maintenance and insurance or plant.

An item shall be given for the addition of establishment charges, overheads and
profit to each of the sums or schedules of labor, materials or plant.

Establishment charges, overheads and profit shall include:

1. Cost related to the employment of labor

2. Costs related to the storage of materials, including handling and waste
in storage
3. Contractor’s administrative arrangements
 P a g e | 168

4. Constructional plant, except plant employed exclusively on dayworks

5. Contractor’s facilities
6. Temporary works
7. Sundry items

GP10 Contingencies
Unless otherwise required by the conditions of contract, contingencies shall be
given as a sum; no item shall be given for the addition of profit.
 P a g e | 169

SECTION A - GENERAL REQUIREMENTS

A1 Conditions of contracts

A schedule of the clause headings shall be set out in the bills of quantities.

Where there is an appendix to the conditions of contract requiring insertions to

be made, a schedule of the insertion shall be set out in the bills of quantities.

A2 Specification

Where the specification contain clauses related to any of the following General
Requirements, the bills of quantities shall make reference to appropriate
clauses.

A3 Restrictions

Particulars shall be given of any restrictions, which shall include:

1. Access to and possession or use of the site

2. Limitations or working space
3. Limitations of working hours
4. The maintenance of existing services on, under or over the site
5. The execution or completion of the work in any specific order, sections
or phases
6. Items of a like nature.

A4 Contractor’s administrative arrangements

An item shall be given for contractor’s administrative arrangements, which

shall include:

1. Site administration
2. Supervision
3. Security
4. Safety, Health and welfare of workpeople
5. Transport of workpeople

A5 Constructional plant

An item shall be given for constructional plant, which shall include:

1. Small plant and tools

2. Scaffolding
 P a g e | 170

3. Cranes and lifting plant

4. Site transport
5. Plant required for specific trades

A6 Employer’s facilities

Particulars shall be given of any facilities required for the employer or the
employer’s representatives, which shall include:

1. Temporary accommodation (for example, offices, laboratories, living

accommodation including heating, cooling, lighting, furnishing,
attendance or related facilities)
2. Telephones, including cost of calls; alternatively, the cost of calls may
be given as a sum
3. Vehicles
4. Attendance of staff (for example, drivers, laboratory assistants)
5. Equipment (for example, survey or laboratory equipment)
6. Special requirement for programs or progress charts
7. Any other facilities (for example, progress photographs, signboards)

A7 Contractor’s facilities

An item shall be given for facilities required by the contractor, which shall
include:

1. Accommodation and buildings, including offices, laboratories,

compounds, stores, mess rooms, and living accommodation
2. Temporary fencing, including hoardings, screens, roofs and guardrails
3. Temporary roads, including hardstanding and crossings
4. Water for the works; particulars shall be given if water will be supplied
to the contractor
5. Water for the works; particulars shall be given if current will be
supplied to the contractor
6. Temporary telephones

Particulars shall be given where the nature or extent of the facilities is not at
the discretion of the contractor.

A8 Temporary works

An item shall be given for temporary works, which shall include:

1. Traffic diversion
 P a g e | 171

2. Access roads
3. Bridges
4. Cofferdams
5. Pumping
6. De-watering
7. Compressed air for tunneling

Particulars shall be given where the nature or extent of the temporary works is
not at the discretion of the contractor.

A9 Sundry items

An item shall be given for sundry items, which shall include:

1. Testing for materials

2. Testing of the works
3. Protecting rubbish, protective casings and coverings and cleaning the
works at completion
4. Traffic regulations
5. Maintenance of public and private roads
6. Drying the works
7. Control of noise and pollution
8. All statutory obligations

Particulars shall be given where the nature or extent of the sundry items is not
at the discretion of the contractor.
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SECTION B – SITE WORK

B1 Site exploration generally

Keeping records of site observations, site tests and laboratory test shall be
given as an item.

Samples, site observations, site tests, laboratory tests and analyses shall be
given as an item.

Providing reports shall be given as an item.

B2 Trial holes

Excavating trial holes shall be measured by depth, taken along the centre line,
stating the number and the maximum depth below commencing level.

Earthwork support, not at the discretion of the contractor, shall be measured by

depth.

B3 Boreholes (including pumping test wells)

Driving boreholes shall be measured by depth, taken along the centre line,
stating the number and the maximum depth below commencing level; raking
borehole shall be so described.

Lining which is not at the discretion of the contractor shall be measured by

depth.

Cappings shall be enumerated.

B4 Site preparation

Removing isolated trees shall be enumerated.

Removing hedges shall be measured by length.

Site clearance, which shall include removing vegetation, undergrowth, bushes,

hedges, trees or the like, shall be measured by area.
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B5 Demolitions and alterations

The location of each item shall be given. Unless otherwise stated, old materials
shall be understood to become the property of the contractor and shall be
cleared away; old materials required to remain the property of the employer
shall be so described.

Removing individual fittings, fixtures, engineering installations or the like

from an existing structure shall each be given as an item.

Demolishing individual structures (or part thereof) shall each be given as an

item; alternatively, demolishing all structures on a site may be given as an
item.

Cutting openings in existing structures and alterations to existing structures

shall each be given as an item; making good all work damaged shall be
understood to be included.

Temporary screens and roofs shall be given as an item.

B6 Shoring

Shoring incidental to demolitions and alterations, together with clearing away

and making good all work damaged, shall be understood to be included.

Shoring (other than that incidental to demolitions and alterations) shall be

given as an item, stating the location; clearing away and making good all work
damaged shall be understood to be included.

Particulars shall be given where the design of the shoring is not at the
discretion of the contractor.

Shoring which is required by the specification to be left in position shall be so

described/

B7 Underpinning

Work in underpinning shall be given under an appropriate heading, stating the

location.

Unless otherwise stated, work shall be measured in accordance with the

appropriate sections of this document.
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Temporary support shall be given as an item; particulars shall be given where

the design of the temporary support is not at the discretion of the contractor.

Excavation shall be measured by volume, taken to the outside line of the

projecting foundation or to the outside line of the new foundations (whichever
is the greater), classified as follows:

 Excavation in preliminary trenches down to the base of the existing

foundations
 Excavation below the base of the existing foundations

 Cutting away projecting foundations shall be measured by length.

B8 Earthworks generally

Any information available concerning the nature of the ground and strata shall
be provided with the bills of quantities.

The quantities for excavation, dredging or tunnelling shall be understood to be

the bulk before excavation, and no allowance shall be made for any working
space or subsequent variation in bulk; existing voids shall be deducted.

Multiple handling of materials and transporting about the site shall be

understood to be included; multiple handling which is required by the
specification shall be so described in the item of disposal.

Earthwork support shall be given as an item.

Excavation in rock shall be so described; alternatively, it may be measured as

extra over excavation (that is, the volume of rock shall be measured but no
deduction shall be made from the volume of excavation in which the rock
occurs).

For the purposes of measurement, rock is defined as any material met with
which is of such size or position that, in the opinion of the employer’s
representative, it can only be removed by means of wedges, special plant or
explosives.

Unless otherwise stated, excavation shall be measured by volume as the void

which is to be occupied by the permanent construction, or vertically above any
part of the permanent construction, classified as follows:

1. Oversite excavation to remove top soil, stating the average depth

2. Excavation to reduce level
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3. Excavation in cuttings
4. Basement excavation
5. Trench excavation to receive foundations, which shall include pile caps
and ground beams
6. Pit excavation to receive foundation bases, stating the number
7. Excavation for diaphragm walls, stating the width of the permanent
construction and the type of support fluid.

Excavation of trenches for service pipes, drain pipes, cables or the like shall
each be measured by length, stating the average depth; disposal and filling
shall be understood to be included.

For excavation in tunneling see clause B24.

B10 Dredging

Dredging shall be measured by volume, stating the location and limits; unless
otherwise stated, measurement shall be understood to taken from soundings.

B11 Disposal

Disposal of material arising from excavation, dredging or tunneling shall be

measured by volume as equal to the volume of excavation, dredging or
tunneling and each shall be classified as follows:

1. Backfilled into excavation

2. Backfilled in making up levels
3. Backfilled oversite to make up levels, giving details of special
contouring, embankments or the like
4. Removed, which shall include providing a suitable tip.

B12 Filling

Filling material (other than that arising from excavation, dredging or tunneling)
shall be measured by volume equal to the void to be filled, classified as
follows:

1. Filled into excavation

2. Filled in making up levels
3. Filled oversite to make up levels, giving details of special contouring,
embankments or the like.
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B13 Piling generally

For the purposes of measurement, driven piling shall include timber, precast
concrete or metal piles.

Other piling systems (for example, performed casing with concrete filling)
shall be measured in accordance with the principles for driven piling as may be
appropriate.

Unless otherwise stated, reinforcement shall be measured in accordance with

Section C.

B14 Driven piling

Supplying piles shall be measured by length, stating the number; reinforcement

shall be given separately.

Heads and shoes shall be enumerated.

Driving piles shall be measured by length, taken from the pile point in contact
with ground when pitched to the pile point when driven, stating the number;
driving piles on rake shall be so described.

Cutting off tops of piles and connections for lengthening piles shall be
enumerated.

B15 Bored piling

Boring for piles shall be measured by length, taken from the formation level of
the ground to the bottom of the pile hole, stating the number; the measurement
shall include for blind boring when the pile is to be below the formation level
of the ground.

Boring through rock shall be measured by length as extra over boring for piles
(that is, the length of boring through rock shall be measured but no deduction
shall be made from the total length of boring).

Linings for piles shall be measured by length.

Disposal of material arising from boring shall be measured in accordance with

clause B11.

Concrete filling shall be measured by volume.

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Cutting off tops of piles and forming enlarged bases shall be enumerated.

B16 Sheet piling

The measurement for sheet piling shall be taken along the centre line.

Supplying sheet piling shall be measured by area, taken as the area when in
final position.

Corner piles or the like shall be measured by length.

Driving sheet piling shall be measured by area, taken from the formation level
of the ground to the bottom edge of the sheet piling when driven; strutting and
waling and withdrawing sheet piling when driven; strutting and waling and
withdrawing sheet piling shall be understood to be included.

Cutting sheet piling shall be measured by length.

Sheet piling required by the specification to be left in position shall be so

described.

B17 Performance designed piling

Performance designed piles shall be enumerated; reinforcement and disposal of

material arising from boring shall be understood to be included.

Details shall be given when the pile top is to be below the formation level of
the ground.

B18 Testing piling

Testing piling, which shall include trial piles and testing working piles, shall be
given as an item.

B19 Underground drainage

Drain pipes shall be measured by length, taken along the centre line over all
fittings; drain pipes within inspection chambers of the like shall be so
described and shall be understood to include fixings and supports.

Drain fittings in the length (for example, bends, junctions) shall be enumerated,
grouped together for each size of pipe and describe as ‘fittings’.
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Drain accessories (for example, gullies, traps) shall be enumerated; concrete

surrounds and additional excavation shall be understood to be included.

Concrete beds and coverings for drain pipes shall each be measured by length,
stating the diameter of the pipe; surrounds to vertical pipes shall be so
described and shall be understood to include formwork.

Inspection chambers or the like shall be enumerated; alternatively, they may be

measured in accordance with the relevant section of this document and given
under an appropriate heading.

Connection to existing drains shall be enumerated, subject to clause GP8

B20 Paving and Surfacing

Paving and surfacing shall be measured by area

Expansion joints and water stops shall be measured by length.

Channels, curbs, edgings or the like shall be measured by length; curved work
shall be so described.

B21 Fencing

Fencing, which shall include posts and supports in the length, shall be
measured by length; excavating pits, disposal and filling shall be understood to
be included.

Special posts (for example, gate posts, straining posts) shall be enumerated;
excavating pits, disposal and filling shall be understood to be included.

Gates, barriers or the like shall be enumerated.

Finishes shall be measured in accordance with Section J.

B22 Landscaping

Cultivating and fertilising ground shall be measured by area.

Soiling, seeding and turfing shall be measured by area.

Hedges shall be measured by length.

Trees and shrubs shall be enumerated.

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B23 Railway work

Track, guard rails and conductor rails shall be measured by length, taken along
the centre line over all fittings; curved work shall be so described.

Sleepers and chairs shall be enumerated.

Switches and crossing shall be enumerated, classified as follows;

1. Switches and turnouts

2. Diamond crossings
3. Single slip crossings
4. Double slip crossings
5. Other switches and crossings.

Ballast shall be measured by volume, without deduction for tract, classified as

follows:

1. Bottom ballast, placed before the track is laid

2. Top ballast, placed after the track is laid.

Concrete track foundation shall be measured by length, except that overwidth

foundations for switches and crossings shall be measured by area;
reinforcement and shuttering shall be understood to be included.

Bitumen filler to complete rail assemblies shall be measured by length.

Buffer stops, wheel stops or the like shall be enumerated.

Signalling installations shall be measured in accordance with Section L or

Section R.

B24 Tunnel excavation

Excavation shall be measured by volume as the void is to be occupied,

including the volume of permanent linings, grouped as may be appropriate to
identify different lengths and classified as follows:

1. Straight tunnels
2. Straight shafts
3. Curved tunnels
4. Curved shafts
5. Tapered tunnels
6. Tapered shafts
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7. Other cavities, which shall include transitions, breakaways and

intersections between shafts and tunnels

Forward probing shall be measured by length, stating the number of probes.

For disposal see clause B11.

B25 Tunnel linings

Poured concrete linings shall be measured by area, stating whether spay or cast
concrete, classified as follows:

1. Primary lining
2. Secondary lining

Performed segmental tunnel linings shall be enumerated.

B26 Tunnel support and stabilization

Timber supports shall be measured by volume.

Sprayed concrete supports and reinforcement shall be measured by area.

Rock bolts shall be measured by length.

Face packers shall be enumerated.

Metal arch supports shall be measured by weight.

Injection of grout materials shall be measured by weight.

 P a g e | 181

SECTION C – CONCRETE WORK

C1 Generally

Reinforced poured concrete and plain poured concrete shall each be so

described.

Poured concrete required by the specification to be placed, compacted, cured or

otherwise treated in a particular manner shall be so described.

No deduction shall be made for voids less than 1.00 m3, nor for the volume of
any reinforcement or structural metal enclosed in the concrete, except that
voids caused by boxed or tubular structural metalwork shall always be
deducted.

Unless otherwise described, horizontal surfaces of concrete shall be understood

to be tamped.

C2 Poured concrete

Unless otherwise stated, poured concrete shall be measured by volume, classified as follows:

1. Foundations, which shall include combined or isolated bases

2. Pile caps, which shall include ground beams
3. Blinding
4. Beds, which shall include roads and footpaths, stating the thickness
5. Suspended slabs, which shall include floors, landings, roofs or the like,
stating the thickness
6. Walls, which shall include attached columns, stating the thickness
7. Columns, which shall include casing to metal stancheons
8. Beams (measured below the slab), which shall include lintels and
casing to metal beams
9. Staircases, which shall include steps and strings
10. Diaphragm walls
11. Other classifications (for example, tunnel linings, bridge abutments) as
may be appropriate.

Poured concrete suspended slabs of special construction, including floors,

landings, roofs or the like, shall be measured by area; coffered and troughed
slabs shall be so described; giving details of solids margins or the like.

Where an item is required to be measured by volume and the thickness stated,

then items of differing thickness may be grouped together, provided that the
range of the different thickness is stated.
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C3 Reinforcement

The weight of bar reinforcement shall be the net weight without addition for
rolling margin, supports, spacers or tying wire.

Bar reinforcement shall be measured by weight, stating the diameter; bars or

differing diameters shall be given separately.

Fabric reinforcement shall be measured by area, without addition for laps.

Reinforcement shall be given as an item where the detailed design work is the
responsibility of the contractor.

C4 Shuttering

Unless otherwise stated, shuttering shall be measured by area, taken as the net
area in contact with the finished concrete, classified as follows:

1. Soffits; shuttering to soffits of special construction shall be so described

2. Sloping soffits, which shall include soffits of staircases
3. Sloping upper surfaces, which shall include surfaces more than 15”
form horizontal
4. Slides of foundations, which shall include bases, pile caps and ground
beams
5. Sides of walls, which shall include attached columns
6. Returns to walls, which shall include ends, projections and reveals of
openings or recesses
7. Sides and soffits of beams, which shall include lintels and breaks in
soffits; isolated beams shall be so described
8. Sides and soffits of sloping beams, which shall include lintels and
breaks in soffits; isolated beams shall be so described.
9. Sides of columns
10. Staircases, which shall include treads, risers and strings but exclude
soffits
11. Other specifications (for example, tunnel linings, bridges, bridge
abutments) as may be appropriate

Shuttering to edges, which shall include face of curb or upstand or break in

upper surface of floor, shall be measured by length; items of differing height
may be grouped together, provided that the range of different heights is stated.
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Grooves, which shall include throats, rebates, chamfers or the like, 2500 mm2
sectional area or over shall be measured by length; grooves less than 2500 mm2
sectional area shall be understood to be included.

Shuttering may be enumerated where it is more appropriate to do so (for

example, decorative features).

Shuttering which is required by the specification to be left in position shall be

so described.

Shuttering to curved, conical and spherical surfaces shall each be so described.

Shuttering to provide s special finish shall be so described.

Unless otherwise stated, if the volume of concrete has not been deducted,
shuttering to the faces of a void shall be understood to be included.

C5 Precast concrete

Moulds for precast units shall be understood to be included.

Reinforcement shall be measured in accordance with clause C3 and given

under an appropriate heading; alternatively, it may be described in the item.

Floor slabs, partition slabs or the like shall be measured by area.

Lintels, sills, duct covers or the like shall be measured by length; alternatively,
duct covers may be measured by area.

Structural units (for example, beams, stanchions, tunnel rings) shall be

enumerated.

Padstones, cappings or the like shall be enumerated.

C6 Prestressed concrete

Prestressed concrete work shall be given under an appropriate heading.

Prestressed concrete shall be measured by volume, classified in accordance

with clause C2.

Reinforcement shall be measured in accordance with clause C3; supporting

steel wires or cables shall be measured by weight.
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Shuttering shall be measured in accordance with clause C4, stating whether to

pre-tensioned or post-tensioned members.

C7 Sundries

Surfaces finished to falls or cross-falls shall be measured by area.

Surface finishes shall be measured by area, except that tamped finishes shall be
understood to be included.

Expansion material or the like shall be measured by area.

Designed joints, water stops, cast-in channels or the like shall be measured by
length.

Forming sinkings, channels or the like shall be measured by length and, where
appropriate, the item may include additional excavation, hardcore, shuttering
and concrete; alternatively, they may be enumerated.

Fixings, ties, inserts or the like shall be enumerated; alternatively, they may be
measured by area.

Mortices, holes, or the like shall be understood to be included.

SECTION D – MASONRY

D1 Generally

Sloping, battering and curved work shall each be so described.

Reinforced masonry shall be so described.

D2 Walls and piers

Walls and piers shall be measured by area, classified as follows:

1. Walls; integral piers shall be measured as walls of combined pier and

wall thickness
2. Walls, built against other construction
3. Cavity walls measured as a composite item, including skins and cavity;
alternatively, the skins and cavity may each be measured by area.
Closing cavity walls at ends or around openings shall be understood to
be included
4. Isolated piers
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Faced or fair faced work shall each be so described; alternatively, it may be

measured as extra over walls, stating whether faced or fair faced on one or both
sides (that is, the area of faced or fair faced work shall be measured but no
deduction shall be made from the area of walling on which the faced or fair
faced work occurs).
D3 Sills, etc.

Sills, copings, over sailing or receding courses or the like shall be measured by
length.

Arches shall be measured by length.

D4 Reinforcement

Reinforcement shall be measured in accordance with clause C3; alternatively,

fabric reinforcement may be measured by length.

D5 Sundries

Concrete filling to cavities shall be measured by area.

Expansion joints or the like shall be measured by length.

Air bricks or the like shall be enumerated.

 P a g e | 186

SECTION E – METALWORK

E1 – Generally

The weight of metalwork shall be the net weight, without addition for rolling
margin or welding material and without deduction for holes, splay cuts,
notches or the like.

Welded, riveted or bolted work shall be so described.

E2 Structural metalwork

Unless otherwise stated, structural metalwork shall be measured by weight,

classified as follows:

1. Grillages
2. Beams
3. Stanchions
4. Portal frames, stating the number
5. Roof trusses, stating the number
6. Support steelwork, which shall include sheeting rails, braces, struts or
the like
7. Other classifications, as may be appropriate

Fittings (for example, caps, brackets) shall be given as an item.

Fixings (for example, bolts, distance pieces, rivets) shall be given as an item.

Wedging and grouting bases or the like shall be enumerated.

Holding down bolts or the like shall be enumerated; temporary boxes and
grouting shall be understood to be included.

Protective treatment shall be given as an item.

E3 Non-structural metalwork

Floor plates, duct covers, sheet metal coverings and linings or the like shall be
measured by area.

Bearers, balustrades, handrails, (except where included with a staircase),

frames or the like shall be measured by length.

Matwell frames, cat ladders, gates, staircases or the like shall be enumerated.
 P a g e | 187

SECTION F – WOODWORK

F1 Generally

Timber which is sawn (that is, not milled) and timber which is finished (that is,
milled) shall each be so described.

Descriptions of timber members shall state whether the sizes are basic (that is,

before machining) or finished (that is, milled, within permitted deviations).

F2 Structural timbers

Structural timbers shall be measured by length, classified as follows:

1. Floors and flat roofs

2. Pitched roofs
3. Walls
4. Kerbs, bearers or the like
5. Cleats, sprockets or the like

Strutting and bridging between joists shall be measured by length, taken

overall the joists.

F3 Boarding and flooring

Unless otherwise stated, boarding and flooring shall be measured by area,

without addition for joints or laps, classified as follows:

1. Floors, which shall include landings

2. Walls, which shall include returns, reveals of openings or recesses and
attached and unattached columns
3. Ceilings, which shall include attached and unattached beams and soffits
of staircases
4. Roofs, which shall include tops and cheeks of dormers and sides and
bottoms of gutters, stating whether flat, sloping or vertical; firring
pieces and bearers shall be understood to be included.

Eaves and verge boards, which shall include fascias, barge boards or the like,
shall be measured by length.

Fillets and rolls shall be measured by length.

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F4 Grounds and battens

Open-spaced grounds and battens shall be measured by area, taken overall.

Individual grounds and battens shall be measured by length.

F5 Framework

Framework shall be measured by area, taken overall; alternatively, it may be

measured by length.

F6 Finishings and fittings

Finishings shall be measured by length, classified as follows:

1. Cover fillets, which shall include architraves, skirtings or the like

2. Beads, which shall include stops or the like
3. Edging, which shall include window boards, nosings or the like

Unless otherwise stated, fittings shall be measured by length, classified as

follows:

1. Work tops, which shall include seats or the like

2. Handrails or balustrades

Shelving shall be measured by area; alternatively, it may be measured by

length.

Backboards or the like shall be enumerated.

Built-up members shall be so described.

Plastic coverings or the like shall be described with the item on which they
occur, stating whether on one or more faces; alternatively, they may be
measured separately by area.

Sheet linings shall be measured by area, classified as follows:

1. Walls, which shall include returns, reveals of openings or recesses and

attached and unattached columns
2. Ceilings, which shall include attached and unattached beams and soffits
of staircases
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F7 Composite items

Unless otherwise stated, composite items (which shall mean items which might
be fabricated off-site whether or not they are fabricated off-site) shall be
enumerated; all metal work or the like shall be understood to be included.

Any associated work (for example, decorations) shall be measured in

accordance with the relevant sections of this document.

F8 Sundry items

Finish surfaces on sawn items shall be measured by length.

F9 Metalwork

Metalwork items associated with woodwork shall be enumerated; alternatively,

waterbars or the like may be measured length.

F10 Ironmongery

Units of ironmongery shall be enumerated.

 P a g e | 190

SECTION G – THERMAL AND MOISTURE PROTECTION

G1 Generally

Work shall be measured flat without addition for laps or seams.

Curved, spherical and conical work shall each be so described.

G2 Coverings and linings

Unless otherwise stated, roofing, tanking, waterproof coverings, linings or the

like shall be measured by area, classified as follows:

1. Flat coverings
2. Sloping coverings
3. Vertical coverings

Eaves, ridges, skirtings, fascias, flashings, aprons or the like shall be

enumerated; alternatively, special roofing sheets may be measured as extra
over roofing (that is, the special roofing sheets shall be measured but no
deduction shall be made from the roofing in which the special sheeting occurs).

G3 Damps-proof courses

Damp-proof courses shall be measured by length; alternatively, they may be

measured by area.

G4 Insulation

Insulation shall be measured by area; alternatively, it may be described with

items of composite roofing.
 P a g e | 191

SECTION H – DOORS AND WINDOWS

H1 Doors

Doors shall be enumerated

Jambs, heads, sills, mullions, transomes, or the like shall be measured by

length; alternatively, frame and lining sets may be enumerated.

H2 Windows

Windows, skylights or the like, together with their frames, shall be

enumerated; sub-frames of a different material shall be separately enumerated
or may be measured by length.

H3 Screens

Screens, borrowed lights, curtain walling or the like shall be measured by area;
alternatively, they may be enumerated.

Doors and frames within a screen shall be enumerated.

H4 Ironmongery

Units or sets of ironmongery shall be enumerated

H5 Glass

Unless otherwise stated, glass shall be measured by area; panes of irregular

shape shall be measured as the smallest rectangle from which such irregular
shape can be cut.

Sealed factory-glazed units shall be enumerated.

Glass louvres shall be enumerated; alternatively, they may be measured by

length, stating the number.

Glass panes of special shape or with decorative treatment shall be enumerated.

 P a g e | 192

H6 Patent Glazing

Patent glazing shall be measured by area, classified as follows:

1. Roofs
2. Skylights, which shall include lantern lights
3. Vertical surfaces

Opening portions shall be enumerated.

SECTION J – FINISHES

J1 Generally

Work shall be measured flat without addition for laps or seams; finishes on
corrugated or ornamental surfaces shall each be so described.

Curved, spherical and conical work shall each be so described.

Internal and external work shall each be so described.

J2 Backgrounds

Backgrounds shall be measured by area; backgrounds for floor, wall or ceiling

finishes shall each be so described.

Poured backgrounds (for example, screeds) shall each be given separately,

stating the surface finish. Pre-formed backgrounds (for example, plasterboard,
expanded metal lathing) shall each be given separately.

J3 Finishings

Unless otherwise stated, finishing shall be measured by area, classified as

follows:

1. Floors, which shall include landings

2. Walls, which shall include returns, reveals of openings or recesses and
attached and unattached columns
3. Ceilings, which shall include attached and unattached beams and soffits
or staircases
4. Staircases, which shall include treads, riser and edges of landings but
exclude soffits
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J4 Sundries

Non-slip inserts, dividing strips, metal angle beads, lathing at junction of

differing backgrounds or the like shall be measured by length; alternatively,
they may be described with the items in which they occur.

J5 Suspended ceilings

Suspended ceilings shall be measured by area, classified as follows:

1. Ceilings, stating the drop

2. Sides and soffits of beams or upstands

J6 Decorations

Decorations on different surfaces shall each be given separately.

Details shall be given of any special method of application (for example,

spraying)

Unless otherwise stated, decorations shall be measured by area, classified as

follows:

1. Floors, which shall include landings

2. Walls, which shall include returns, reveals of openings or recesses and
attached and unattached columns
3. Ceilings, which shall include attached and unattached beams and soffits
of staircases
4. Staircases, which shall include treads, risers, strings and edges of
landings but exclude soffits
5. Cornices
6. General surfaces, which shall include doors, close-type fencing or the
like; glazed general surfaces (measured flat over glass) shall be so
described.
7. Isolated general surfaces, which shall include door frames, linings, sub-
frames of a differing material to the window, skirtings, rails,
architraves, bars, posts, balusters or the like
8. Windows (measured flat over glass, frames, mullions, transomes and
architraves), which shall include glazed partitions or the like, but
exclude sub-frames of a differing material to the window; edges of
sashes shall be understood to be included
9. Radiators, measured over the area of heating surface
10. Gutters, measured inside and out
 P a g e | 194

11. Large pipes (that is, pipes with an internal diameter exceeding 60 mm),
including trunking or the like, unless measured as incidental work;
hangers, supports or the like(except common supports to services) shall
be understood to be included
12. Structured metalwork, which shall include roof trusses

13. Decoration on small pipes (that is, pipes with an internal diameter of 60
mm or less) unless measured as incidental work, shall be measured by
length; hangers, supports or the like (except common supports to
services to services) shall include roof trusses.

Decoration on gratings, rainwater heads or the like shall each be enumerated

separately irrespective of size.

Sign writing letters or the like shall be enumerated.

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SECTION K – ACCESSORIES

K1 Generally

For the purposes of identification, accessories to be measured in accordance

with the principles in this section shall be defined as those being specially
manufactured or proprietary items not included in other sections.

Unless otherwise stated, accessories shall be enumerated.

K2 Partitions

Partitions shall be measured by length, taken over all doors and glazed units.

Doors and glazed units shall be enumerated, stating the partition in which they
occur.

Cubicles or the like shall be enumerated.

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SECTION L – EQUIPMENT
L1 Generally

For the purposes of identification, equipment to be measured in accordance

with the principles in this section shall be defined as specialist equipment
related solely to the function of a building or department (for example, good
preparation or service equipment, laboratory equipment, stage equipment).

SECTION M – FURNISHINGS

M1 Generally

For the purposes of identification, furnishings to be measured in accordance

with principles in this section shall be defined as loose furniture, fittings or the
like related to the occupation and use of a building or department (for example,
rugs, curtains, artwork, ashtrays, furnishing accessories).

Each category of furnishing shall be given as an item; alternatively, individual

items of furnishing may be enumerated or measured by length, as may be
appropriate.

M2 Curtain Track

Curtain track shall be measured by length; hooks, gliders, stops or the like
shall be understood to be included.

SECTON N – SPECIAL CONSTRUCTION

N1 Generally

For the purposes of identification, special construction to be measured in

accordance with the principles in this section shall be defined as either
enclosures of a specialist construction (for example, air supported or geodetic
structures, prefabricated buildings) or installations of a specialist nature (for
example, radiation protection).

N2 Enclosures

Enclosures shall be enumerated; work within the enclosure, not being part of
the enclosure construction, shall be measured in accordance with the relevant
section of this document.
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N3 Installations

Installations shall each be given as an item; alternatively, they may be

measured in accordance with the relevant sections of this document.
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SECTION P – CONVEYING SYSTEMS

P1 Generally

Lifts, hoists, conveyors, escalators or the like shall be enumerated.

P2 Sundries

An item shall be given for each of the following:

1. Supports, which shall include fixings, anchors, insulating blocks and

anti-vibration devices
2. Identification, which shall include plates, discs, labels, charts and
colour coding
3. Testing and commissioning, which shall include operating completed
installations and providing fuel and power
4. Tools and spares, which shall include loose keys and consumable stores
5. Documents, which shall include drawings, operating instructions and
maintenance manuals.

P3 Work incidental to conveying systems

An item shall be given for incidental work, which shall include:

1. Co-ordination with other engineering installations

2. Cutting or forming holes, mortices, chases or the like and making good
finishings
3. Building in or cutting and pinning brackets or the like and making good
finishings

Protective painting and decorative painting shall each be given as an item for
each system and shall include:

1. Removing protective coating or wrapping

2. Cleaning and polishing exposed surfaces

Other incidental work shall be measured in accordance with relevant sections

of this document and grouped under an appropriate heading.
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SECTION Q – MECHANICAL ENGINEERING INSTALLATIONS

Q1 Generally

Installations shall be classified by function and given separately under an

appropriate heading.
Installations shall be measured in accordance with the relevant clauses in this
section; alternatively, they may be enumerated on a locational basis (for
example, cold water installation to ground floor).

Q2 Pipework and gutterwork

Pipes and gutters shall be measured by length, taken along the centre line over
all fittings.

Fittings to small pipes (that is, pipes with an internal diameter of 60 mm or

less) shall be understood to be included. Fittings (except joints in the running
length) to large pipes (that is, pipes with an internal diameter exceeding 60
mm) and to gutters shall be enumerated, grouped together for each size of pipe
or gutter and described as fittings.

Valves, traps, expansion compensators or the like shall be enumerated; sleeves,

cover-plates or the like shall be understood to be included.

Rectangular ductwork shall be measured by weight, based upon the area

calculated as the length, taken along the centre line over all fittings, times the
net girth of nomila dimensions. Blank ends shall be added to the area for
weighting but no deduction shall be made for intersections or openings; extra
weight for seams, stiffeners, supports, fixings or the like shall be understood to
be included.

Circular, oval and flexible ductwork shall be measured by length, taken along
the centre line over all fittings.

Fittings to rectangular ductwork shall be understood to be included; fittings to

circular and oval ductwork (excluding test holes and covers) shall be
enumerated, grouped together for each size of duct and described as fittings.

Dampers, grilles, flexible connectors or the like shall be enumerated.

Q4 Equipment

Sanitary fittings, tanks, fans, pumps, hoods, air-handling units or the like shall
be enumerated.
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Continuous convectors or the like shall be measured by length.

Heated or ventilated ceilings or the like shall be measured by area.

Q5 Automatic controls

Sensing or activating devices (for example, thermostats, humidistats, motorized

valves), control panels, air compressors and receivers or the like shall be
enumerated.

Wiring, pneumatic tubing, isolators, starters, relays or the like associated with
automatic controls shall be understood to be included.

Alternatively, automatic control systems shall be given as an item for each

installation but equipment common to more than one system shall be
enumerated.

Q6 Connections to supply mains

Connections to supply mains shall be enumerated, subject to clause GP8.

Q7 Insulation, including linings and protective coverings

Insulation to pipe work shall be measured by length, taken along the centre line
over all fittings.

Insulation to rectangular ductwork shall be measured by area, calculated as

described in Q3; additional insulation to flanges or the like shall be understood
to be included.

Insulation to circular, oval and flexible ductwork shall be measured by length,

taken along the centre line over all fittings.

Insulation boxes around accessories shall be enumerated.

Insulation to equipment shall be enumerated.

Q8 Sundries

Sundries shall be measured in accordance with clause P2.

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Q9 Work incidental to mechanical engineering installations

Work incidental to mechanical engineering installations shall be measured in

accordance with clause P3.
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SECTION R – ELECTRICAL ENGINEERING INSTALLATIONS

R1 Generally

Installations and auxiliary installations shall be classified by function and given

separately under an appropriate heading.

Installations shall be measured in accordance with relevant clauses in this

section; alternatively, they may be enumerated on a locational basis (for
example, lighting installation to ground floor).

The references herein to cable shall be understood to include tape, bus-bar

trunking or the like.

The references herein to conduit shall be understood to include trunking, cable

tray, ducting and the like.

R2 Main circuits

For the purposes of measurement, main is defined as the incoming supply to

the main distribution board within a building or complex.

Cable shall be measured by length.

Conduit shall be measured by length.

R3 Sub-main circuits

For the purposes of measurement, sub-main is defined as the supply from the
main distribution board to a sub-main distribution board.

Cable and conduit to individual sub-main circuits shall be enumerated and

separately identified as may be appropriate; alternatively, sub-main circuits
may be measured in accordance with clause R2.

R4 Final sub-circuits and auxiliary installations

Cable and conduit to termination points shall be enumerated, classified as

follows:

1. Lighting points
2. Lighting switch points, stating whether one-way, two-way or intermediate
3. General purpose socket outlets; multi-gang socket outlets or the like shall
count as one point.
 P a g e | 203

4. Equipment points, stating type of equipment or the electrical rating;

contactors, starters or the like shall be measured separately as equipment
points
5. Auxiliary installation points (for example, bell push, telephone outlet).

R5 Accessories

Ceiling roses and pendants, lighting switches, socket outlets, bell pushes or the
like shall be enumerated.

R6 Control gear

Switchgear, distribution gear, contactors, starters, composite switchboards or

the like shall be enumerated.

R7 Equipment

Transformers, generators, standby power cubicles, luminaires, external lighting

columns, clocks, loudspeakers, bells or the like shall be enumerated.

Controls, which shall include accessories and interconnecting cables, shall be

measured in accordance with the relevant clauses in this section; alternatively,
they may be included with the items of equipment.

R8 Connections to supply mains

Connections to supply mains shall be enumerated, subject to clause GP8.

R9 Sundries

Sundries shall be measured in accordance with clause P2.

R10 Work incidental to electrical engineering installations

Work incidental to electrical engineering installations shall be measured in

accordance with clause P3.
 P a g e | 204

Contracting General Safety, Health and Environmental

Regulations

Introduction

The prevention of injury and/or illness to site personnel and the public,
damage to the Works and to public and private property, protection of the
environment, and compliance with applicable laws, are primary objectives of the
Employer).

Because of the importance places on meeting these objectives, selected

minimum requirements are outlined in these Safety, Health and Environmental
Regulations with which Contractors shall comply while working on contracts.

Given that these Regulations cannot cover every eventuality, the

Contractor shall be expected to exercise good judgment all such matters, even
though not mentioned in these Regulations, and shall take any and all additional
measures, as required or necessary, to meet his responsibility for safety, health
and environmental matters during the period of the Contract.

The owner and its representatives shall not be held liable for any actions
taken by the Contractor that are attributed to following the minimum
requirements stated hereinafter.

The Contractor shall, throughout the execution and completion of the

Works and the remedying of any defects therein:

(a) have full regard for the safety of all persons on the Site and keep the Site and
the Works in an orderly state appropriate to the avoidance of danger to any
person;

(b) know and understand all laws governing his activities along with any site
requirements and work site hazard. Such information shall be communicated by
the Contractor to his personnel and subcontractors;

(c) take all necessary measures to protect his personnel, the Employer's
personnel, other persons, the general public and the environment;

(d) avoid damage or nuisance to persons or to property of the public or others

resulting from pollution, noise or other causes arising as a consequence of
carrying out the Works.
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Compliance with Regulations

The Contractor shall comply with the requirements of these Safety, Health
and Environmental Regulations and all other applicable regulations or
requirements under LOCAL laws, laid down by relevant authorities or issued by
the Employer or the Engineer concerning safety, health and the environment, in
force or introduced or issued from time to time during the period of the Contract.

In so far as these Regulations are applicable, they shall apply to sites and
personnel outside the Site associated with the performance of the Contract.

The Regulations equally apply to subcontractors and all other parties

engaged by the Contractor and their personnel. The Contractor shall ensure all
such parties are fully aware of and comply with the Regulations.

The Contractor shall comply with all notifications and written or verbal
instruction regarding safety issued pursuant to these Regulations by the
Employer, Engineer or relevant authorities within the time specified in the
notification or instruction.

Whenever the Contractor is required to obtain the approval, agreement,

permission, etc of the Engineer, such approval, agreement, permission, etc shall
not relieve the Contractor of his responsibilities and obligations under these
Regulations or the Contract.

The Contractor shall adopt a positive approach, awareness and

responsibility towards safety, health and the environment, and take appropriate
action, by:

(a) Ensuring the Regulations are enforced and followed by the Contractor's
personnel. Any failure by the Contractor's personnel to follow the Regulations,
shall be regarded as a failure by the Contractor.

(b) Paying attention to possible injury to unauthorized persons entering the site,
particularly children.

Whenever in these Regulations the Contractor is required to provide test

certificates for equipment and personnel or to comply the relevant authorities'
requirements and no independent test facilities are available or no relevant local
authorities, the Contractor shall provide:

a) in lieu of independent test certificates for:

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Equipment - details of the tests and the date of the tests that have been carried
out by the Contractor and a written statement that the Contractor has satisfied
himself that the item of equipment is fit and safe for use;

Personnel - details of the training and experience and a written statement that
the Contractor has satisfied himself that the person has the required level of
competency;

b) in lieu of relevant authorities' requirements produce:

Details of the Contractor's own rules, regulations, requirements and procedures

regarding safety, health and the environment.

If the Engineer is dissatisfied with the details provided by the Contractor, the
Contractor shall provide further details or carry out further tests or provide
further written statements as may be reasonably required by the Engineer.

When the Engineer has satified himself regarding the Contractor's own rules,
regulations, requirements and procedures provided in accordance with (b) above,
such rules, etc shall be deemed to form part of these Regulations and to which
Clause 3 shall equally apply.

Failure to Comply with Regulations

General

Should the Contractor fail to comply with any of the Regulations or

requirements:

 the Engineer may suspend the Works or part of the Works until the
Contractor has taken necessary steps, to the satisfaction of the Engineer,
to comply with the regulations or requirements.

 the Employer may, following written notice to the Contractor, carry out
themselves or arrange for another contractor to carry out such measures
as they consider appropriate on behalf of the Contractor. Any such
actions by the Employer shall not affect or diminish the Contractor's
obligations or responsibilities under the Contract.

 the Engineer may, following written notice to the Contractor specifying

the breach or breaches of these Regulations by the Contractor, impose
the fines Engineer will be subject to the approval of the Employer.
 P a g e | 207

 the Engineer may, by written notice of suspension to the Contractor,

suspend all payments to the Contractor under the Contract if the
Contractor fails to rectify any breach of the Regulations within the
period specified by the Engineer, provided that such notice of
suspension:

a. Shall specify the nature of the failure or failures;

b. Shall request the contractor to remedy each such failure within a

specified period after receipt by the Contractors of such notice of
suspension.

Such suspension of payment will remain in force until such time as the
Contractor has rectified the breach or breaches to the satisfaction of the
Engineer. No interest shall be paid on the suspended payments. Failure to
comply with the Regulations or requirements shall be considered a breach of
contract by the Contractor and may result in termination of the Contract by the
Employer.

General Requirements

Preamble

All references to safety shall be deemed to include health and the environment.

Safety Officer

The contractor shall appoint a competent safety officer who shall be responsible
for safety, health and the environment. The Safety officer shall be given
sufficient time by the Contractor to carry out his duties and the minimum
requirements shall be as follows:

 Workforce on site over 250 requires a full time safety officer;

 Workforce on site between 100-250 requires a half-time safety officer;

and

 Workforce on site below 100 requires minimum 5 hours per weeks on

safety instruction and procedures development.

The Contractor shall provide the Safety Officer with appropriate identification,
including a white hard hat with red cross symbol and a identification badge. The
appointment of the Safety Officer shall be in writing and copied to the Engineer.
 P a g e | 208

The appointment shall include specific instructions to enforce these Regulations

and delegated authority to take any action, measure or to issue instructions
regarding their enforcement. All persons on Site shall be made aware of the
name and authority of the Safety Officer and instructed to comply with any
instruction or direction on safety matters, verbal or in writing, issued by the
Safety Officer.

The Safety Officer shall be provided with a mobile phone or other similar means
of communication. The Safety Officer shall be accessible and available at all
times including outside normal working hours.

Safety Training

The Contractor shall provide safety induction training for all site personnel upon
starting on site.

The Contractor shall provide safety refresher/reinforcement training at regular

intervals for his staff.

Safety Meetings

The Contractor shall hold regular safety meetings to provide safety instructions
and receive feedback from site personnel on safety, health and environmental
matters. A weekly Safety Meeting shall be chaired by the Safety Officer and
minutes shall be taken of the meeting.

The meeting/minutes shall cover all relevant issues including actions to be taken.
A copy of the minutes shall be given to the Engineer. The Safety Officer should
attend the Contractor's weekly site meetings and "Safety" should be an item on
the agenda.

Safety Inspections

The Safety Officer shall make regular safety inspections of the work site. The
Safety Officer shall prepare a report of each inspection. This report shall include
details of all breaches of these Regulations and any other matters or situations
relating to safety found during the inspection, instructions issued by the Safety
Officer and actions taken by the Contractor. A copy of the Safety Officer's
inspection reports shall be given to the Engineer.
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Control of Substances Hazardous to Health

Hazardous materials shall be stored in approved safety containers and handled in

a manner specified by the manufactures and/or prescribed by relevant
Authorities.

Only properly trained and equipped personnel shall handle hazardous materials.

Potential Hazards

The Contractor shall inform employees of potential hazards, take appropriate

steps to reduce hazards and be prepared for emergency situations.

The Contractor shall make an assessment of every operation involving hazardous

substances. The assessment shall be recorded on a Hazardous and Flammable
Substances Assessment Method Statement which shall be submitted to the
Engineer prior to the delivery and use of the substance on Site.

Accident Reporting

The Contractor shall report all accidents and dangerous occurrences to the
Engineer. The Contractor shall prepare a report on each accident or dangerous
occurrence and a copy of the report, together with witness statements and any
other relevant information, shall be submitted to the Engineer.

A reportable accident or dangerous occurrence shall include any accident to any

person on Site requiring medical attention or resulting in the loss of working
hours or any incident that resulted, or could have resulted, in injury, damage or a
danger to the Works, persons, property or the environment.

In the event of an accident or dangerous occurrence, the Contractor shall be

responsible for completing all statutory notifications and reports. Copies of all
statutory notifications and reports shall be passed to the Engineer.

All accidents and dangerous occurrences shall be recorded in a Site Accident

Book. The Site Accident Book shall be available at all times for inspection by
the Engineer.

The Contractor shall immediately rectify any situation or condition that could
result in injury, damage or a danger to the Works, person, property or the
environment. If the situation or condition cannot be corrected immediately, the
Contractor shall provide temporary barriers and appropriate warning signs and
devices and/or take other appropriate action necessary for the protection of
persons, property and the environment.
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Notices, Signs, Etc

All safety, health, environmental and other notices and signs shall be clearly
displayed and written in both Arabic and either English or French. All
requirements, instructions, procedures, etc issued by the Contractor concerning
these Regulations shall be printed in both Arabic and English and displayed and
readily available to Contractor's personnel.

First Aid and Medical Attention

The Contractor shall have comprehensive First Aid Kit(s) on Site at all times.
First Aid Kits shall be conveniently located and clearly identifiable.

The Contractor shall have one employee on site trained in first aid for every 25
employees. Such persons shall be provided with appropriate identification,
including a red hard hat with a white "red cross" symbol and a identification
badge.

The Contractor shall make contingency arrangements for calling a Doctor and
transporting injured persons to hospital. The telephone numbers of the
emergency services and the name, address and telephone number of the Doctor
and nearest hospital shall be prominently displayed in the Contractor's site office.

Employee Qualifications and Conduct

The Contractor shall employ only persons who are fit, qualified and skilled in the
work to be preformed. All persons shall be above the minimum working age.

Contractor's personnel shall use the toilet facilities provided by the Contractor.

The Contractor shall ensure:

a) No firearms, weapons, controlled or illegal substances or alcoholic beverages

are brought onto the Site and that no personnel under the influence of alcohol or
drugs are permitted on Site.

b) All personnel obey warning signs, product or process labels and posted
instructions.

c) Drivers or operators of vehicles, machinery, plant and equipment follow the

rules for safe operations. Drivers shall wear seat belts and obey all signs and
posted speed limits.
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Safety Requirements

Personal Protective Equipment

The Contractor shall provide personal protective equipment, including hard hats,
safety glasses, respirators, gloves, safety shoes, and such other equipment as
required, and shall take all measures or actions for the protection and safety of
Contractor's personnel.

Non-metallic hard hats shall be worn at all times by all personnel at the worksite
with the exception of those areas where the Engineer has indicated it is not
necessary to do so.

Safety glasses shall meet international standards and be available for use and
worn in specified worksite areas. As a minimum, safety glasses shall be worn
for the following types of work: hammering, chipping, welding, grinding, use of
electrically powered or pneumatic equipment, insulation handling, spray
painting, working with solvents, and other jobs where the potential of an eye
injury exists.

Face shields and/or monogoggles shall be worn where possible exposure to

hazardous chemicals, cryogenic fluids, acids, caustics, or dust exists and where
safety glasses may not provide adequate protection.

When handling acids, caustics, and chemicals with corrosive or toxic properties,
suitable protection, such as acid suits or chemical resistant aprons and gloves,
shall be worn to prevent accidental contact with the substance.

Personnel shall not be permitted to work whilst wearing personal clothing or

footwear likely to be hazardous to themselves or others.

The wearing of safety shoes with steel reinforced toes is recommended for all
Contractor's personnel on site. In all cases, Contractor's personnel shall wear
substantial work shoes that are commensurate with the hazards of the work and
the worksite area.

Hearing protection, including muffs, plugs or a combination thereof, shall be

provided for all personnel operating in areas where the noise level exceeds 90
decibels. Such protection shall also be provided for operators working with
equipment exceeding such a level. This may include equipment such as
excavators, shovels, jackhammers, saws, drills, grinders, and the like are being
used.
 P a g e | 212

The Contractor shall encourage employees to wear substantial work gloves

whenever practical and safe to do so.

Fire Protection and Prevention

The Contractor shall comply with fire protection instructions given by the
Authorities having jurisdiction in regard to fire protection regulations.

The Contractor shall, upon moving on site, provide to the Engineer and the
Authorities a fire prevention and evacuation plan. This shall include drawing(s)
showing the fire assembly points. The fire prevention and evacuation plan and
drawing(s) shall be updated from time to time as the Works progress. The
Contractor shall ensure all personnel are fully informed on escape routes and
assembly points and any changes thereto.

Fuel storage will not be permitted in construction work areas. Contractors may
establish fuel storage tanks in special areas set aside for the purpose and
approved by the Engineer. Storage tanks shall be adequately bounded to control
spillage. Fire extinguishers shall be provided and installed in a suitable nearby
location.

Highly combustible or volatile materials shall be stored separately from other

materials and as prescribed by relevant authorities and under no circumstances
within buildings or structures forming part of the permanent Works. All such
materials shall be protected and not exposed to open flame or other situations
which could result in a fire risk.

No combustible site accommodation shall be located inside or within 10 meters

of a building or structure forming part of the permanent works. Where units have
to be used in these circumstances, they shall be constructed of non-combustible
materials and have a half-hour fire rating inside to outside and outside to inside.
Non-combustible furniture shall be used where practical.

All temporary accommodation and stores shall be provided with smoke detectors
and fire alarms.

Smoking shall be banned in high risk areas.

Expanded polystyrene with or without flame retarding additive, polythene,

cardboard and hardboard shall not be used as protection materials.

Plywood and chipboard shall only be used as protection on floors. Vertical

protection shall be non-combustible. Debris netting and weather protection
sheeting shall be fire retardant.
 P a g e | 213

When using cutting or welding torches or other equipment with an open flame,
the Contractor shall provide a fire extinguisher close by at all times. All
flammable material shall be cleared from areas of hot works, or work locations
prior to welding or oxy/gas burning operations. All hot works shall cease half an
hour before the end of a work shift to allow for thorough checking for fires or
smoldering materials. Where appropriate, areas of hot works are to be doused in
water before the shift ends.

An adequate number of fire extinguishers of types suited to the fire risk and the
materials exposed shall be provided. These shall be placed in accessible, well-
marked locations throughout the job site. Contractor's personnel shall be trained
in their use. Extinguishers shall be checked monthly for service condition and
replaced or recharged, as appropriate after use.

Only approved containers shall be used for the storage, transport and dispensing
of flammable substances. Portable containers used for transporting or
transferring gasoline or other flammable liquids shall be approved safety cans.

Fuel burning engines shall be shut off while being refueled.

Adequate ventilation to prevent an accumulation of flammable vapors shall be

provided where solvents or volatile cleaning agents are used.

Flammables shall not be stored under overhead pipelines, cable trays, electrical
wires, or stairways used for emergency egress.

Paints shall be stored and mixed in a room assigned for the purpose. This room
shall be kept under lock and key.

Oily waste, rags and any other such combustible materials shall be stored in
proper metal containers with self-closing lids and removed every night to a safe
area or off site. Every precaution shall be taken to prevent spontaneous
combustion.

Electrical Safety

All temporary electrical installations, tools and equipment shall comply with
current regulations dealing with on-site electrical installations.

The Contractor shall establish a permit-to-work system for work on or in

proximity to energized circuits of any voltage. Contractor's personnel shall not
commence work on such circuits unless a permit to work has been issued and
 P a g e | 214

adequate safety measures have been taken and the work operation has been
reviewed and approved by the Engineer.

Only authorized personnel shall be allowed to work or repair electrical

installations and equipment.

Portable tools and equipment shall be 110 volt, unless otherwise agreed by the
Engineer.

When portable or semi-mobile equipment operates at voltages in excess of 110

volts, the supply shall be protected by a Residual Current Device (RCD)
regardless of any such device fitted to the equipment. The RCD must have a
tripping characteristic of 30 milliamps at 30 milliseconds maximum.

All static electrically powered equipment, including motors, transformers,

generators, welders, and other machinery, shall be properly earthed, insulated,
and/or protected by a ground fault interruption device. In addition, the skin of
metal buildings and trailers with electric service shall be earthed. Metal steps,
when used, shall be securely fixed to the trailer.

Lamp holders on festoon lighting shall be molded to flexible cable and be of the
screw in type. Clip on guards shall be fitted to each lamp unit.

All tungsten-halogen lamps shall be fitted with a glass guard to the element.
These lamps must be permanently fixed at high level.

Electrical equipment shall be periodically inspected and repaired as necessary by

competent persons.

Any work on electrical equipment and systems shall be made safe through
locking, tagging, and/or isolation of the equipment before work commences.
Prior to the start of the work, the equipment or systems shall be tested to insure
that they have been properly de-energized and isolated.

Electrical repair work on energized systems shall be avoided whenever possible.

Electrical trouble shooting shall be conducted only after getting written approval
of the Engineer.

Unauthorized personnel shall not enter enclosures or areas containing high

voltage equipment such as switch gear, transformers, or substations.
 P a g e | 215

Oxygen/Acetylene/Fuel Gases/Cartridge Tools

Compressed oxygen shall never be used in the place of compressed air.

Flash-back (Spark) arrestors shall be fitted to all gas equipment.

Liquid Petroleum Gas (LPG) cylinders shall not be stored or left in areas below
ground level overnight. Cylinders must be stored upright.

The quantity of oxygen, acetylene and LPG cylinders at the point of work shall
be restricted to a maximum of one day's supply. Cylinders shall be kept in
upright vertical rack containers or be safely secured to a vertical support.

Cartridge tools shall be of the low velocity type. Operators must have received
adequate training in the safe use and operation of the tool to be used.

Scaffolding/Temporary Works

No aluminum tube shall be used, except for proprietary mobile towers, unless
otherwise agreed with the Engineer.

Drawings and calculations shall be submitted to the Engineer, prior to

commencement of work on site, for all Temporary Works, including
excavations, falsework, tower cranes, hoists, services and scaffolding. Design
shall conform to international standards.

The Engineer will not approve Temporary Work designs but the Contractor shall
take account of any comments on such designs made by the Engineer.

The Contractor shall inspect and approve all Temporary Works after erection
and before access, loading or use is allowed. Completed and approved
Temporary Works shall be tagged with a scaff-tag or similar safety system and
the Safe Structure insert displayed.
 P a g e | 216

For scaffolding, one tag shall be displayed every 32 m2 of face area. A central
record system shall be kept on all Temporary Work. Temporary Works shall be
inspected weekly and similarly recorded.

All mobile scaffold towers shall be erected in accordance with the manufacture's
instructions and a copy of these shall be submitted to the Engineer prior to any
use on site. Additionally, all towers shall be erected complete with access
ladder, safety rails and kick boards whatever the height.

The Contractor shall repair or replace, immediately, any scaffold including

accessories, damaged or weakened from any cause.

The Contractor shall ensure that any slippery conditions on scaffolds are
eliminated as soon as possible after they occur.

All scaffolds used for storing materials, for brick or block laying, for access to
formwork or for any other purpose where materials may accidentally fall, shall
be provided with wire mesh guards or guards of a substantial material, in
addition to kick boards.

Use of Ladders

Manufactured ladders shall meet the applicable safety codes for wood or metal
ladders. Metal ladders shall not be used where there is any likelihood of contract
with electric cables and equipment. All metal ladders shall be clearly marked:
"Caution - Do not use around electrical equipment".

Job made ladders shall not be permitted.

Extension or straight ladders shall be equipped with non-skid safety feet, and
shall be no more than 12 m in height. The maximum height of a step ladder
shall be 2 m. Ladders shall not be used as platforms or scaffold planks.

Ladders rungs and steps shall be kept clean and free of grease and oil.

Extension and straight ladders shall be tied off at the top and/or bottom when in
use. Only one person shall be allowed on a ladder at a time.

Defective ladders shall be taken out of service and not used. Ladders shall not
be painted and shall be inspected for defects prior to use.
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Elevated Work

The Contractor shall provide all personnel, while working at an elevated

position, with adequate protection from falls. Details of such protection shall be
submitted to and approved by the Engineer.

The Contractor shall carry out daily inspections of all elevated work platforms.
Defects shall be corrected prior to use.

Roofing & Sheet Material Laying

a) Method Statement detailing the procedures to be adopted shall be submitted to

and agreed with the Engineer prior to commencement of work on site.

b) Mobile elevating work platforms or the equivalent shall be used to install

roofing and sheet materials wherever practicable and a suitable base is available.

Erection of Structures

i. A Method Statement detailing the procedures to be adopted shall be

submitted and agreed with the Engineer prior to commencement of work
on site.

ii. Safety harnesses and lines shall be provided by the Contractor for use by
the erection personnel and worn at all times.

iii. Mobile elevating work platforms or the equivalent shall be used to erect
structures wherever practicable and a suitable base is available.

Mobile Elevating Work Platforms

Operators shall be trained in the safe use of such platforms and hold a current
Certificate of Competence.

Hoists

(a) A copy of the current Test Certificate shall be submitted to the Engineer
before any hoist (personnel or material) is brought into operation on the site.
Where the range of travel is increased or reduced a copy of the revised Test
Certificate shall be submitted.

(b) Each landing gate shall be fitted with a mechanical or electrical interlock to
prevent movement of the hoist when any such gate is in the open position.
 P a g e | 218

(c) Safety harnesses must be worn and used by personnel erecting, altering and
dismantling hoists.

Suspended Cradles

a) Suspended cradles shall be installed, moved and dismantled by a specialist

contractor.

b) Suspended cradles shall comply with local regulations.

c) All powered suspended cradles shall incorporate independent safety lines to

over-speed braking devices and independent suspension lines for personal safety
harness attachment.

Use of Temporary Equipment

The safe design capacity of any piece of equipment shall not be exceeded, nor
shall the equipment be modified in any manner that alters the original factor of
safety or capacity.

Mobile equipment shall be fitted with suitable alarm and motion sensing devices,
including backup alarm, when required.

The Contractor shall ensure that the installation and use of equipment are in
accordance with the safety rules and recommendations laid down by the
manufacturer, taking into account the other installations already in place or to be
installed in the future.

The Contractor shall inspect Equipment prior to its use on the Works and
periodically thereafter to ensure that it is in safe working order. Special attention
shall be given to such items as cables, hoses, guards, booms, blocks, hooks and
safety devices. Equipment found to be defective shall not be used and
immediately removed from service, and a warning tag attached.

Natural and synthetic fiber rope made of material such as manila, nylon,
polyester, or polypropylene shall not be used as slings if approved by the
Engineer.

Only trained, qualified and authorized personnel shall operate equipment. All
drivers and operators shall hold a current Certificate of Training Achievement
for the equipment being used.
 P a g e | 219

A safety observer shall be assigned to watch movements of heavy mobile

equipment where hazards may exist to other personnel from the movement of
such equipment, or where equipment could hit overhead lines or structures. The
observer shall also ensure that people are kept clear of mobile equipment and
suspended loads.

When mobile or heavy equipment is traveling onto a public thoroughfare or

roadway, a flagman shall insure that traffic has been stopped prior to such
equipment proceeding. While the mobile or heavy equipment is traveling on a
public roadway, a trailing escort vehicle with a sign warning of a slow-moving
vehicle that is dangerous to pass shall be provided.

Cranes:

a) The Contractor shall give a minimum of 48 hours notice to the Engineer prior
to bringing a mobile crane on site.

b) No cranes shall be erected on the site without the prior approval of the
Engineer. The Engineer may direct the Contractor as to locations where cranes
may not be located. The Contractor shall take such directions into account when
submitting his proposals for crane location points, base footings, pick up points
and swing radius. Compliance with any such direction shall not entitle the
Contractor to any extension of the Period of Completion or to any increase in the
Contract Price.

c) Safety harnesses shall be worn and used at all times by personnel engaged on
the erection, alterations and dismantling of tower cranes.

d) The Contractor shall provide a copy of the current Test Certificate to the
Engineer before any crane (tower or mobile) is brought into operation on the
Site.

e) All lifting tackle must hold a current Test Certificate. All lifting tackle must
be thoroughly examined every 6 months and an inspection report must be
produced.

f) All fibrous/web slings shall be destroyed and replaced 6 months after first
use.

g) All crane drivers/operators shall hold a Certificate of Training Achievement

for the class of crane operated (see Sub-Clause 2.5).

h) All banksman/slingers shall hold a Training Certificate from a recognized

training agency (see Sub-Clause 2.5).
 P a g e | 220

i) Only certified slingers/banksmans shall sling loads or guide crane/load

movement.

j) The maximum weekly working hours of a crane driver or banksman shall be

restricted to 60 hours.

k) Under no circumstances, shall a crane or load come within 4 m of any

energized overhead power line or other critical structure.

Locking-out, Isolating, and Tagging of Equipment

Equipment that could present a hazard to personnel if accidentally activated

during the performance of installation, repair, alteration, cleaning, or inspection
work shall be made inoperable and free of stored energy and/or material prior to
the start of work. Such equipment shall include circuit breakers, compressors,
conveyors, elevators, machine tools, pipelines, pumps, valves, and similar
equipment.

Where equipment is subject to unexpected external physical movement such as

rotating, turning, dropping, falling, rolling, sliding, etc., mechanical and/or
structural constraints shall be applied to prevent such movement.

Equipment which has been locked-out, immobilized, or taken out of service for
repair or because of a potentially hazardous condition shall be appropriately
tagged indicating the reason it has been isolated and/or taken out of service.

Where safety locks are used for locking out or isolating equipment, the lock shall
be specially identified and easily recognized as a safety lock.

Installation of Temporary or Permanent Equipment

During installation and testing the Contractor's specialist engineer shall be in

attendance.

All control mechanism panel and wiring diagrams shall be available and printed
in both Arabic and either English or French.

Laser Survey Instruments

Details of the types and use of laser instruments shall be submitted and agreed
with the Engineer.
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Working in Confined Spaces

Confined spaces, including tanks, vessels, containers, pits, bins, vaults, tunnels,
shafts, trenches, ventilation ducts, or other enclosures where known or potential
hazards may exist, shall not be entered without prior inspection by and
authorization from the Site Safety Officer and the issuance of a Hazardous Work
Permit.

Prior to entering the confined space, the area shall be completely isolated to
prevent the entry of any hazardous substances or materials which could cause an
oxygen deficient atmosphere. All equipment that could become energized or
mobilized shall be physically restrained and tagged. All lines going into the
confined space shall be isolated and/or blanked.

Personnel working in a confined space where emergency escape or rescue could

be difficult, shall wear a safety harness attached to a lifeline.

A qualified attendant(s), trained and knowledgeable in job-related emergency

procedures, shall be present at all times while persons are working within the
confined space. The attendant shall be capable of performing a rescue, have
necessary rescue equipment immediately available, and be equipped with at least
the same protective equipment as the person making entry.

All equipment to be used in a confined space shall be inspected to determine its

acceptability for use. Where a hazard from electricity may exist, equipment
utilized shall be of low voltage type.

The atmosphere within the confined space shall be tested to determine it is safe
to enter. Acceptable limits are:

 Oxygen: 19.5% lower, 22% higher;

 Flammable gas: not to exceed 10% of lower explosion limit; and
 Toxic contaminants: not to exceed the permissible exposure limit.

Subsequent testing shall be done after each interruption and before re-entering
the confined space, as well as at intervals not exceeding 4 hours. Continuous
monitoring is preferable and may be necessary in certain situations.

Adequate ventilation shall be provided to ensure the atmosphere is maintained

within acceptable limits.
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Demolition

A detailed Method Statement detailing the demolition procedures/techniques to

be used shall be submitted to and approved by the Engineer prior to
commencement of work on site.

The Method Statement must include full details of measures to be taken to

ensure that there are no persons remaining in the building/structure and to
distance members of the public and Contractor's personnel from the
building/structure prior to demolition.

Use of Explosives

The Contractor shall not use explosives without the written permission from the
Engineer and relevant authorities.

The Contractor shall observe all regulations regarding proper purchasing,

transportation, storage, handling and use of explosives.

The Contractor shall ensure that explosives and detonators are stored in separate
special buildings. These secured buildings shall be constructed, located and
clearly marked in Arabic and English:

"DANGER - EXPLOSIVES"

The Contractor shall ensure that all possible precautions are taken against
accidental fire or explosion, and ensure that explosives and detonators are kept in
a proper and safe condition.

The Contractor shall ensure that explosives and detonators are always
transported in separate vehicles and kept apart until the last possible moment and
that metallic tools are not used to open boxes of explosives or detonators.

Blasting Procedure: the Contractor shall carry out blasting operations in a

manner that will not endanger the safety of persons and property. The
Contractor shall, along with other necessary precautions:

a) clear all persons from buildings and the area affected by the blasting. All
such persons shall be given adequate notice of the actual time and date of
blasting,

b) ensure that police and other local authorities are kept fully informed, in
advance, of the blasting program so that they may be present when blasting takes
place if they so require,
 P a g e | 223

c) erect warning notices around the area affected that blasting operations are in
progress,

d) carry out a thorough search of buildings and the area affected prior to
blasting,

e) ensure that blasting is only carried out by experienced shot firers. Priming,
charging, stemming and shot firing shall be carried out with greatest regard for
safety and in strict accordance with the rules and regulations of the relevant
authorities.

f) ensure that explosive charges are not excessive, charged boreholes are
properly protected and proper precautions are taken for the safety of persons and
property.

The Contractor shall maintain an up-to-date inventory of all explosives and

explosive devices and shall submit a monthly report to the Engineer, detailing
the use of all explosives by date and location.

Excavation and Trenching

An excavation permit signed by the Engineer must be issued before excavation

proceeds in any work location. The Contractor shall investigate and identify the
location of existing services by study of the drawings, a visual/physical study of
the site, sweeping by appropriate detection equipment and where necessary hand
excavation of trial holes.

Following this investigation, the Contractor shall submit a written request for an
excavation permit to the Engineer.

The Engineer will return the permit signed and dated to indicate:

 Services which are to be maintained;

 Services which are to be isolated; and
 Any special precautions to be taken.

A sample Excavation Permit is given in Appendix 1.

The issue of an Excavation Permit by the Engineer shall not relieve the
Contractor of his responsibilities under the Contract.

The side of all excavations and trenches exceeding 1.3 meters in depth which
might expose personnel or facilities to danger resulting from shifting earth shall
 P a g e | 224

be protected by adequate temporary supports or sloped to the appropriate angle

of repose.

All excavations, slopes and temporary supports shall be inspected daily and after
each rain, before allowing personnel to enter the excavation.

Excavations 1.3 meters or more in depth and occupied by personnel shall be

provided with ladders as a means for entrance and egress. Ladders shall extend
not less than 1 meter above the top of the excavation.

The Contractor shall provide adequate barrier protection to all excavations.

Barriers shall be readily visible by day or night.

Excavated or other materials shall not be stored at least 0.65 meters from the side
of excavations.

Concrete Reinforcement Starter Bars

The Contractor shall ensure concrete reinforcement starter bars are not a danger
to personnel. Where permitted by the Engineer, starter bars shall be bent down.
Alternatively, the starter bars shall be protected using either hooked starters,
plastic caps, plywood covers or other methods agreed with the Engineer.

Environmental and Health Requirements

Protection of the Environment

The Contractor shall be knowledgeable of and comply with all environmental

laws, rules and regulations for materials, including hazardous substances or
wastes under his control. The Contractor shall not dump, release or otherwise
discharge or dispose of any such material without the authorization of the
Engineer.

Any release of a hazardous substance to the environment, whether air, water or

ground, must be reported to the Engineer immediately. When releases resulting
from Contractor action occur, the Contractor shall take proper precautionary
measures to counter any known environmental or health hazards associated with
such release. These would include remedial procedures such as spill control and
containment and notification of the proper authorities.

Air Pollution

The Contractor, depending on the type and quantity of materials being used, may
be required to have an emergency episode plan for any releases to the
 P a g e | 225

atmosphere. The Contractor shall also be aware of local ordinances affecting air
pollution.

The Contractor shall take all necessary measures to limit pollution from dust and
any wind blown materials during the Works, including damping down with
water on a regular basis during dry climatic conditions.

The Contractor shall ensure that all trucks leaving the Site are properly covered
to prevent discharge of dust, rocks, sand, etc.

Water Pollution

The Contractor shall not dispose of waste solvents, petroleum products, toxic
chemicals or solutions in the city drainage system or watercourse, and shall not
dump or bury garbage on the Site. These types of waste shall be taken to an
approved disposal facility regularly, and in accordance with requirements of
relevant Authorities. The Contractor shall also be responsible to control all run-
offs, erosion, etc.

Solid Waste

General Housekeeping

(a) The Contractor shall maintain the site and any ancillary areas used and
occupied for performance of the Works in a clean, tidy and rubbish-free
condition at all times.

(b) Upon the issue of any Taking-Over Certificate, the Contractor shall clear
away and remove from the Works and the Site to which the Taking-Over
Certificate relates, all Contractor's Equipment, surplus material, rubbish and
Temporary Works of every kind, and leave the said Works and Site in a clean
condition to the satisfaction of the Engineer. Provided that the Contractor shall
be entitled to retain on Site, until the end of the Defects Liability Period, such
materials, Contractor's Equipment and Temporary Works as are required by him
for the purpose of fulfilling his obligations during the Defects Liability Period.

Rubbish Removal and Disposal

a) The Contractor shall comply with statutory and municipal regulations and
requirements for the disposal of rubbish and waste.

b) The Contractor shall provide suitable metal containers for the temporary
storage of waste.
 P a g e | 226

c) The Contractor shall remove rubbish containers from site as soon as they are
full. Rubbish containers shall not be allowed to overflow.

d) The Contractor shall provide hard standings for and clear vehicle access to
rubbish containers.

e) The Contractor shall provide enclosed chutes of wood or metal where

materials are dropped more than 7 meters. The area onto which the material is
dropped shall be provided with suitable enclosed protection barriers and warning
signs of the hazard of falling materials. Waste materials shall not be removed
from the lower area until handling of materials above has ceased.

f) Domestic and biodegradable waste from offices, canteens and welfare

facilities shall be removed daily from the site.

g) Toxic and hazardous waste shall be collected separately and be disposed of in

accordance with current regulations.

h) No waste shall be burnt on Site unless approved by the Engineer.

Asbestos Handling and Removal

The Contractor shall comply with all local regulations regarding the handling of
asbestos materials. In the absence of local regulations, relevant International
Standards shall apply.

Pest Control

The Contractor shall be responsible for rodent and pest control on the Site. If
requested, the Contractor shall submit to the Engineer, for approval, a detailed
program of the measures to be taken for the control and eradication of rodents
and pests.

Noise Control

The Contractor shall ensure that the work is conducted in a manner so as to

comply with all restrictions of the Authorities having jurisdiction, as they relate
to noise.

The Contractor shall, in all cases, adopt the best practicable means of minimizing
noise. For any particular job, the quietest available plant/and or machinery shall
be used. All equipment shall be maintained in good mechanical order and fitted
with the appropriate silencers, mufflers or acoustic covers where applicable.
 P a g e | 227

Stationary noise sources shall be sited as far away as possible from noise-
sensitive areas, and where necessary acoustic barriers shall be used to shield
them. Such barriers may be proprietary types, or may consist of site materials
such as bricks or earth mounds as appropriate.

Compressors, percussion tools and vehicles shall be fitted with effective

silencers of a type recommended by the manufacturers of the equipment.
Pneumatic drills and other noisy appliances shall not be used during days of rest
or after normal working hours without the consent of the Engineer.

Areas where noise levels exceed 90 decibels, even on a temporary basis, shall be
posted as high noise level areas.

Additional Requirements for Work in Public Areas

General

These additional requirements shall apply to all works carried out in Public
Areas.

Public Areas are defined as areas still used by or accessible to the public. These
include public roads and pavements, occupied buildings and areas outside the
Contractor's boundary fencing.

All work in Public Areas shall be carried out to minimize disturbance and avoid
dangers to the public.

Before commencing work, the Contractor shall ensure that all necessary
resources, including labor, plant and materials, will be available when required
and that the works will proceed without delays and be completed in the shortest
possible time.

Periods of inactivity and slow progress or delays in meeting the agreed program
for the works, resulting from the Contractor's failure to provide necessary
resources or other causes within the control of the Contractor, will not be
accepted.

In the event of such inactivity, slow progress or delays, the Contractor shall take
immediate action to rectify the situation, including all possible acceleration
measures to complete the works within the agreed program.

Details of the actions and acceleration measures shall be submitted to the

Engineer. If the Engineer is dissatisfied with the Contractor's proposals, the
 P a g e | 228

Contractor shall take such further actions or measures as required by the

Engineer. All costs incurred shall be the responsibility of the Contractor.

Method Statement

The Contractor shall submit to the Engineer a method statement for each
separate area of work in Public Areas. The Method Statement shall include:

(a) a general description of the Works and methodology of how it will be carried
out.

(b) details of the measures and temporary works to minimize disturbance and
safeguard the public. These shall include temporary diversions, safety barriers,
screens, signs, lighting, watchmen and arrangements for control of traffic and
pedestrians and advance warning to be given to the public.

(c) details of temporary reinstatement and maintenance of same prior to final

reinstatement.

(d) for works involving long lengths of trenches or works to be completed in

sections, the lengths or sections of each activity (e.g. up to temporary
reinstatement, temporary reinstatement, final reinstatement) to be carried out at
at any one time.

(e) details of the availability of necessary resources (labor, plant, materials, etc)
to complete the work.

(f) a program showing start and completion dates and periods for all activities of
each length or section, including temporary works, and the works overall.

(g) such further information as necessary or required by the Engineer.

The Contractor shall not commence work, including temporary works, until
approval of the Contractor's Method Statement by the Engineer.

Method Statements shall be updated based on actual progress or as and when

required by the Engineer.

Closure of Roads, Etc

The closure or partial closure of roads, pavements and other public areas will
only be permitted if approved by the Engineer and Relevant Authorities. The
Contractor shall detail for each closure the extent of area to be closed, the
reasons and duration of the closure and, where appropriate, proposed diversions.
 P a g e | 229

A sample Street Closure Permit is given in Annex 2.

Trench and Other Excavations

The requirements covering trench and other excavations will depend on the
location and type of the excavation and the potential risks to the public.

The following guidelines apply particularly to trenches but shall also apply to
other types of excavations:

(a) before commencing work the Contractor shall:

 notify the Engineer on the location and duration of the work. An

excavation permit signed by the Engineer must be issued before
excavation proceeds in any work location.;
 obtain permission from relevant authorities including the police when
required;
 erect all temporary works such as barriers, warning signs, lighting, etc;
 have available adequate materials for temporary supports to sides of
excavations and necessary labor, plant and materials to complete the
work within the shortest possible time;

(b) in carrying out the works the Contractor shall, unless otherwise permitted or
required by the Engineer:

 not open more than one excavation within a radius of 250 meters;
 limit the length of trench excavation open at one time to 150 meters;
 maintain and alter or adapt all temporary works including supports to
sides of excavations;
 remove all surplus excavated material the same day it is excavated.
 complete the works, including final reinstatement within ten days;
 where final reinstatement is not achieved within the required time, to carry
out temporary reinstatement; and
 ensure that any temporary reinstatement is maintained at the correct level
until final reinstatement is achieved.

The above guidelines shall not relieve the Contractor of his obligations and
responsibilities.
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Safety Barriers

Safety barriers shall be provided to the perimeter of work areas and to trench and
other types of excavations and to existing openings such as manholes, drawpits
and the like. When exposed to the public, safety barriers shall be provided to
both sides of trenches and around all sides of openings.

The Contractor shall provide details of the type or types of safety barriers for
each excavation for the approval of the Engineer prior to commencing work. No
work shall commence until the safety barriers are in place.

The type of safety barrier used shall be appropriate to the particular location and
the potential risks to the public. Examples of different types of safety barriers
are given below:

 Type 1 - excavated material;

 Type 2 - non-rigid barrier of rope or florescent tape strung between metal rods
driven into the ground;
 Type 3 - rigid barrier of timber, steel or concrete. Such barriers could be in the
form of horizontal rail(s) or sheet material secured to posts driven or concreted
into the ground.

The following are guidelines on the type of safety barriers that could be used in
differing situations. They apply particularly to trenches but also apply to other
types of excavations, existing openings and to the perimeter of work areas:

 areas not subject to vehicular traffic - Types 1 or 2;

 roadways (low traffic speed) - Types 1 or 2;
 roadways (high traffic speed) - Types 1 or 3.

The above examples of the types of barriers and the guidelines on situations in
which they could be used shall not relieve the Contractor of his obligations and
responsibilities.

Contractor's Site Checklist

A sample Contractor's Site Checklist is included in Annex 3. This is included to

assist contractors should they wish to introduce such a system as part of their site
management procedures. The list is not exhaustive and further items will need to
be added by the Contractor.

The list is issued for guidance only, and does not, in any way, revise or limit the
requirements covered elsewhere in these Regulations.
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Annex 1
Excavation Permit

To: ...................................................... (Engineer)

From: .................................................... (Contractor) Date: .........................

Contract No: ...................

Request for Excavation Permit No: ..........

Please give approval for excavation to proceed in the following area:

Work to start on:

Existing services have been checked and identified by:

Signed (Contractor): ..............................................

Approval of Engineer

The above excavation may proceed, subject to the following:

Services to be maintained:

Services to be isolated before work proceeds:

Other matters:

Signed (Engineer): ..............................................

Date: ....................................
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Annex 2
Street Closure Permit

To: ...................................................... (Engineer)

From: .................................................... (Contractor) Date: .........................

Contract No: ...................

Request for Street Closure Permit No: ..........

Please give approval for the closure of the following street(s) from ............... to
............... (dates)

Street(s):

Reasons:

Proposed diversions:

Signed (Contractor): ..............................................

Approval of the Engineer

The above street(s) may be closed for the periods stated subject to the following
conditions:

Approval has been given by relevant authorities and the police;

Other:

Signed (Engineer): ..............................................

Date: ....................................
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Annex 3
Contractor's Site Checklist

Safe Access:
 arrangements for visitors and new workers to the site
 safe access to working locations
 walkways free from obstructions
 edge protection to walkways over 2m above ground
 holes fenced or protected with fixed covers
 tidy site and safe storage of materials
 waste collection and disposal
 chutes for waste disposal, where applicable
 removal or hammering down of nails in timber
 safe lighting for dark or poor light conditions
 props or shores in place to secure structures, where applicable

Ladders:

 to be used only if appropriate

 good condition and properly positioned
 located on firm, level ground
 secure near top. If not possible, to be secured near the bottom, weighted
or footed to prevent slipping
 top of ladder minimum 1 meter above landing place

Scaffolding:

 design calculations submitted

 proper access to scaffold platform
 properly founded uprights with base plates
 secured to the building with strong ties to prevent collapse
 braced for stability
 loadbearing fittings, where required
 uprights, ledgers, braces and struts not to be removed during use
 fully boarded working platforms, free from defects and arranged to avoid
tipping or tripping
 securely fixed boards against strong winds
 adequate guard rails and toe boards where scaffold 2m above ground
 designed for loading with materials, where appropriate
 evenly distributed materials
 barriers or warning notices for incomplete scaffold (ie not fully boarded)
 P a g e | 234

 weekly inspections and after bad weather by competent person

 record of inspections

Excavation:

 underground services to be located and marked and precautions taken to

avoid them
 adequate and suitable timber, trench sheets, props and other supporting
materials available on site before excavation starts
 safe method for erecting/removal of timber supports
 sloped or battered sides to prevent collapse
 daily inspections after use of explosives or after unexpected falls of
materials
 safe access to excavations (e.g. sufficiently long ladder)
 barriers to restrict personnel/plant
 stability of neighboring buildings
 risk of flooding
 materials stacked, spoil and vehicles away from top of excavations to
avoid collapse
 secured stop blocks for vehicles tipping into excavations

Roof work:

 crawling ladders or boards on roofs more than 10 degrees

 if applicable, roof battens to provide a safe handhold and foothold
 barriers or other edge protection
 crawling boards for working on fragile roof materials such as asbestos
cement sheets or glass. Guard rails and notices to same
 rooflights properly covered or provided with barriers
 during sheeting operations, precautions to stop people falling from edge
of sheet
 precautions to stop debris falling onto others working under the roof
work

Transport and mobile plant:

 in good repair (eg steering, handbrake, footbrake)

 trained drivers and operators and safe use of plant
 secured loads on vehicles
 passengers prohibited from riding in dangerous positions
 propping raised bodies of tipping lorries prior to inspections
 control of on-site movements to avoid danger to pedestrians, etc
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 control of reversing vehicles by properly trained banksmen, following

safe system of work

Machinery and equipment:

 adequate and secured guards in good repair to dangerous parts, e.g.

exposed gears, chain drives, projecting engine shafts

Cranes and lifting appliances:

 weekly recorded inspections

 regular inspections by a competent persons
 test certificates
 competent and trained drivers over 18 years of age
 clearly marked controls
 checks by driver and banksman on weight of load before lifting
 efficient automatic safe load indicator, inspected weekly, for jib cranes
with a capacity of more than one ton
 firm level base for cranes
 sufficient space for safe operation
 trained banksman/slinger to give signals and to attach loads correctly,
with knowledge of lifting limitations of crane
 for cranes with varying operating radius, clearly marked safe working
loads and corresponding radii.
 regularly maintenance
 lifting gear in good condition and regularly examined

Electricity:

 measures to protect portable electric tools and equipment from

mechanical damage and wet conditions
 checks for damage to or interference with equipment, wires and cables
 use of the correct plugs to connect to power points
 proper connections to plugs; firm cable grips to prevent earth wire from
pulling out
 "permit-to-work" procedures, to ensure safety
 disconnection of supplies to overhead lines or other precautions where
cranes, tipper lorries, scaffolding, etc might touch lines or cause arcing
 P a g e | 236

Cartridge operated tools:

 maker's instruction being followed

 properly trained operators, awareness of dangers and ability to deal with
misfires
 safety goggles
 regular cleaning of gun
 secure place for gun and cartridges when not in use

Falsework/formwork:

 design calculations submitted

 method statement dealing with preventing falls of workers
 appointment of falsework coordinator
 checks on design and the supports for shuttering and formwork
 safe erection from steps or proper platforms
 adequate bases and ground conditions for loads
 plump props, on level bases and properly set out
 correct pins used in the props
 timberwork in good condition
 inspection by competent person, against agreed design before pouring
concrete

Risks to the Public:

 identify all risks to members of the public on and off site, eg materials
falling from scaffold etc., site plant and transport (access/egress) and
implement precautions, e.g. scaffold fans/nets, banksmen, warning
notices etc
 barriers to protect/isolate persons and vehicles
 adequate site perimeter fencing to keep out the public and particularly
children.
 secure the site during non-working periods
 make safe specific dangers on site during non-working periods, e.g.
excavations and openings covered or fenced, materials safely stacked,
plant immobilized, ladders removed or boarded

Fire - general:

 sufficient number and types of fire extinguishers

 adequate escape routes, kept clear
 worker awareness of what to do in an emergency
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Fire - flammable liquids:

 proper storage area

 amount of flammable liquid on site kept to a minimum for the day's work
 smoking prohibited; other ignition sources kept away from flammable liquids
 proper safety containers

Fire - compressed gases, e.g. oxygen, LPG, acetylene:

 properly stored cylinders

 valves fully closed on cylinders when not in use
 adopt "hot work" procedures
 site cylinders in use outside huts

Fire - other combustible materials:

 minimum amount kept on site

 proper waste bins
 regular removal of waste material

Noise:

 assessment of noise risks

 noisy plant and machinery fitted with silencers/muffs
 ear protection for workers if they work in very noisy surroundings

Health:

 identify hazardous substances, e.g. asbestos, lead, solvents etc and assess
the risks
 use of safer substances where possible
 control exposure by means other than by using protective equipment
 safety information sheets available from the supplier
 safety equipment and instructions for use
 keep other workers who are not protected out of danger areas
 testing of atmosphere in confined spaces; provision of fresh air supply if
necessary
 emergency procedures for rescue from confined spaces

Manual handling:

 avoid where risk of injury

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 if unavoidable, assess and reduce risks

Protective clothing:

 suitable equipment to protect the head, eyes, hands and feet where appropriate
 enforce wearing of protective equipment

Welfare:

 suitable toilets
 clean wash basin, hot/warm water, soap and towel
 room or area where clothes can be dried
 wet weather gear for those working in wet conditions
 heated site hut where workers can take shelter and have meals with the
facility for boiling water
 suitable first aid facilities

Work in Public Areas

 all risks to the public identified

 method statement approved
 road closures approved
 temporary diversions in place
 safety barriers erected/maintained
 safety signs and lighting installed/maintained
 labor, materials, plant and other resources sufficient to meet program
 temporary reinstatement completed and properly maintained
 permanent reinstatement completed at earliest possible date
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PROJECT MANAGEMENT
MANUAL
PART 3

CONTRACTUAL CLAIMS &

COST AND SCHEDULE
CONTROL SYSTEM CRITERIA
2014
 P a g e | 240

Table of Contents Part 3

Subject Page

Introduction to Projects Environment 241

Projects Life Cycle 242

Basic Project Management Principles 251

Claim Avoidance Pre-Tender Phase 258

Claim Avoidance Tender Phase 265

Claim Avoidance Construction Phase 280

Construction Claims Management 282

Earned Value Management 303

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Introduction to the Projects Environment

Design modifications, variation orders, delays, misinterpretations, substitutions
of comparable materials, and changed site conditions are among an almost
infinite list of events hanging around our projects ready to take us for a ride on
disputes forensic engineering and endless negotiations.

Fortunately enough, project managers can now count on a series of well-

engineered management tools to prevent undesirable situations becoming a
project disruption, a dispute, and most likely a claim.

Unlike in the past, these management tools are now being applied right from
the inception of the project creating a parallel dimension during the project life
cycle to protect us against damaging and usually costly constraints.

The real novelty on this matter is that of practicing full project management at
earlier stages of development and integrating tools usually given low priorities
by project team members.

Disputes and claims can definitively be avoided. There is no reason to think

otherwise when we have excellent tools such as:

 Project Life Cycle Analysis;

 Constructability;
 Value Engineering Analysis;
 Critical Path Method;
 Just in Time Procurement;
 Modern Contracting Administrative Strategies; and
 A good cost and schedule control system criteria.

Although these tools have been available to all us for quite a long time, they
have never been successfully applied to project management due to
conventional management wrong belief requiring them to be used only on
limited basis at later stages of the project life cycle.

Modern project management is not only integrating these tools in all the stages
of the project life cycle, but it is emphasizing their priority as decision-making
tools and indispensable requirements to guarantee accomplishment of targets
and disputes prevention.
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Project Life Cycle

The project life cycle of a project may be the most important tool for
visualization of appropriate project management tools utilization in order to
avoid unbecoming situations normally ending up in unresolved disputes,
arbitration or plain claims.

The figure below shows a typical summary schedule network depicting the
main activities involved in a typical project life cycle.

When a project is proposed a very elementary procedure based on personal

experience, historical data, project analogy, incipient design or a combination
of them is set on the table in the form of a package usually called Conceptual
Estimate Scoping Paper. (CESP)

The conceptual estimate paper should be more than a description of the project
in question. It should be an incipient engineering study required as part of the
initiation review package before a budget item is incorporated into the
company's business plan.

The CESP should contain as a minimum, the following kind of information:

 Purpose of the proposed project;

 Description of the project;
 Conceptual Constructability Analysis;
 Conceptual Procurement Strategy;
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 First CPM schedule for the project main activities(duration estimate);

and
 An Order of magnitude cost estimate.

The CESP gives management a first rough idea about the size of the project, its
financial commitment and timing for the execution. This document is
developed in-house by the interested party and it usually is inexpensive and
fast, but at the same time its accuracy is limited. It really serves as a basis to
proceed to further development when circumstances permit.

Once the CESP is approved, additional activity is generated by starting a

deeper engineering study which in time will be the baseline to develop a
project proposal for expenditure approval. This engineering study along with
other related information outlines is called the design basis paper (DBSP).

The DBSP clearly defines the project scope and supports the technical
development of the project proposal later on in the project life cycle. It also
encourages completion of a planning study before a project team is given the
responsibility for the item.

Although the DBSP makes emphasis on what has to be done rather than how it
will be done, it should be given enough support to further work on
constructability and procurement issues thereby minimizing the chances of
construction problems during the implementation phase.

The design basis paper should incorporate:

 The purpose of the proposed project;

 The relationship of the project to existing plans;
 The description of the proposed project;
 Constructability update;
 Procurement strategy update;
 Preliminary cash flow implications;
 A review of the alternatives studied;
 An order of magnitude estimate (-40, +40 % accuracy); and
 An improved version of the original CPM.

If the DBSP is approved the cycle should continue with a selection of a

contractor to proceed with a more elaborated design that will support a better
cost and time estimate in order to seek funds for project implementation. This
more elaborated design is usually called the project proposal and it usually
provides the final design basis and scope of work for the proposed project.
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This kind of approach to preliminary stages of the project life cycle will
introduce a substantial amount of engineering creativity focus on better
management and design definition to avoid confusion usually resulting in
misunderstandings, disputes, and claims during subsequent phases of the
project.

Constructability

As it is well-known, the objective of this engineering procedure is to make

optimum use of construction knowledge and experience in planning, design,
procurement, and field operations to achieve overall project objectives.

A common view of design guidelines involves only:

 Determining more efficient methods of construction after mobilization

of field forces;
 Allowing construction personnel to review engineering documents
periodically during the design phase;
 Assigning construction personnel to the engineering office during
design; and
 A modularization of pre-assembly program.

In fact, each of these represents merely a part of the optimization process. Yet
only through effective and timely integration of construction input into
planning, design, and field operations will the potential benefits of
optimization be achieved.

Planning/execution phases for a typical major industrial project involve

conceptual engineering, detailed engineering, procurement, construction, and
start up. Construction optimization analysis should begin during the conceptual
stage, at the same time as operability, reliability and maintainability
considerations surface.

It can then continue through the remaining phases. Planners must recognize
that the payoff for optimization analysis is greatest in the earliest phases of a
project, growing progressively less, but never ceasing, until the end of the
project.

In modern engineering jargon this process of design optimization is called

constructability and you better believe it, claims can be avoided by giving it a
proper priority.
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Value Engineering Analysis

Both the value engineering team and the project manager are seeking the same
goal during a project, namely, increased efficiency and economy in achieving
the desired operational objectives. Value engineering analysis should be part of
every activity within the project life cycle in order to be effective as a disputes
avoidance tool.

Value engineering (VE) seeks to improve the management capability of people

and to promote progressive change by identifying and removing unnecessary
cost and promoting quality. Saving money and at the same time providing
better value and quality without disputes and claims is a concept that everyone
should support at all times. It seems there are always reasons for projects to be
developed as fast as possible consequentially limiting the amount of time
available for the designer to look not only for more efficient alternatives, but to
avoid future misunderstandings and disputes.

Relying on old solutions when changes are occurring around us is usually the
safest route, except that the competition will rapidly surpass us with creativity
to say the least. Experience sometimes loads us with honest wrong mistakes
because we are not exposed to new developments changing the truth we
believe in. Experience is always valuable, but when it comes with unbending
habits that will keep sensible ideas away it may not be as worthy as initially
thought.

Temporary changed circumstances may also be converted in perpetuation of

obsolete requirements and one of the main evils of cost confusion and inflation.

As creatures of habits that we are we build skills, response and speed in our job
based on habits but them they turn against us when it comes to design which
has nothing to do with habits.

Uncompromising, defensive attitudes may keep us away from reality and the
new needed information. The need to please many people at the same time
created by politics is another great factor for introducing poor value and
consequently disagreement in our projects.

Finally, shortcuts taken to stay within schedule and budget often add to the
unnecessary costs in a design. The design fee is a small percentage of the total
cost of a project but its reduction influences the total life-cycle cost of the
facility and makes the project vulnerable to arguments and claims.
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Critical Path Method

Old-fashioned project management finds it useless to start a network plan until

project definition is completed. Modern project management knows CPM is a
tool for all occasions providing information and discipline not achieved by any
other means.

CPM helps avoiding rows, disputes and claims because it gives us project
managers:

 Estimates of time and resources required to accomplish the plans;

 A sequence of events and responsible personnel;
 Time-cost trade-offs for all activities involved;
 Resource allocation for all phases of the plan;
 Activity completion and cost compliance control;
 An organized, clear, concise way of documenting plans, programs start
 and completion dates and cost performance;
 Easy training and indoctrination of new management personnel; and
 A comprehensive, psychological communication resource to foster
team togetherness and delineate responsibilities.

Just in Time Procurement (JIT)

JIT also called “continuous flow manufacturing” by IBM, “stockless
production and repetitive manufacturing systems” by Hewlett-Packard,
“management by sight” by General Electric, and “the Toyota production
system” in Japan, and “lean manufacturing” by others in the USA, is one the
most efficient tools to avoid disputes and claims on procurement delays.

JIT as a cost reducing and efficiency improving tool is the result finding out
high levels of construction materials while implementing projects, which are
frequently used to cover up construction problems. If working conditions in a
construction project precludes working in a phase of the project, other phases
of the project can be continued thanks to the availability of materials (work
around practice).

The benefit of these high buffer inventories is the continued operation, thus
reducing both equipment and worker downtime. Unfortunately, the benefits of
reduced equipment and worker downtime seldom exceed the cost of
maintaining materials stock in a project.

JIT has been called a system of enforced problem solving because nothing is
left to chance. There should be no weak links in the operations chain. Quality
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improvement is achieved by increased focus on the design and workability of

the project and by employee training to ensure that each operation is performed
as specified. All the above will be accompanied by a cleaner less cluttered
workplace which are motivators for employees’ productivity.

Although achieving JIT procurement requires a number of cooperative

activities with suppliers, subcontractors, and other parties in the procurement
string, the effort will be rewarded by the reduction of construction problems
and progress in the claims prevention department.

Development of suppliers and improving supplier relationships should be

required as the first steps to achieve results. Just imposing JIT deliveries on a
vendor will not be sufficient to achieve it.

If necessary, purchasers should work closely to the supplier to help reduce

costs finding mutually beneficial ways to achieve JIT delivery of goods.

Price should not be the only consideration in JIT purchasing. Performance

factors such as delivery schedules, product quality, timely communication,
mutual trust, and dependence are important in selecting and developing a long-
term supplier and obtain the full rewards of a disciplined, formal system.

JIT operations are currently widely practiced by all progressive firms, but it
needs to be nearly foolproof and failure-proof. A successful JIT system should
be operative nearly all the time and achieving this requires a highly functional
operating system with extensive backup systems and procedures.

Contracting Strategies
Avoiding possible disputes means making it essential that the administration
and management of contracts results in a strategy for reducing risks,
maximizing cost savings, minimizing misunderstandings, and improving
economic return. These can only be achieved through effectively managing
contract risks by developing tough but fair contract documents, engaging in
creative negotiating practices, and employing outstanding communication
skills.

The process of reaching a contract requires a specific sequence of steps. In

taking these steps, the project manager should make a series of choices
between priorities for project objectives, degrees of risk to be assumed by the
contracting parties, control over project activities, and the cost of achieving
selected goals.
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This process should first be fully understood by the project manager, then be
tempered by experience, and finally be expanded into the ability to reach a
contract through the exercise of negotiating and communicating skills. While
developing a contract strategy for the project, the following considerations
should lead the process to successfully accomplish the forecasted targets:

 Division of work;
 Type of contract or contracts to be used;
 Definition of licensors and consultants;
 Potential conflicts of interest;
 Availability of skilled labor; and
 Quality and availability of personnel to develop, evaluate, and
administer the required type of contract/contract.
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Cost and Schedule Control System Criteria

The cost and schedule control systems criteria should not represent a
management system nor should they prescribe specific methods of organization
or operation. The criteria should be intended to serve as standards for
measuring adequacy of management control systems.

Project Managers should be free to organize in the manner best suited to their
individual environments and management philosophies and may select the
internal methods and procedures of their choice. However, these methods and
procedures should result in systems providing the data and capabilities
specified in the criteria in order to be acceptable claim avoidance and control
tools.

In an effort to obtain consistent, reliable data on the status of major system

acquisitions and major projects, governments have instituted a number of
different approaches, ranging from complete reliance on contractors’ existing
internal systems to the imposition of detailed management systems for
contractors to use during the performance of contracts. The criteria approach
allows contractors to use the specific management procedures of their choice,
but sets forth the characteristics and capabilities which should be inherent in an
effective cost and schedule control system.

The objective is twofold: First to obtain assurance that contractors’ internal

management systems are sound and, once this is accomplished, to rely on
summarized data for contract management requesting detailed data only in
those areas where problems exist.

Conclusions

Project management should use all its arsenal of tools right from the inception
of the project to allow them achieve their full benefit potential during the
project life cycle.

Golden rules for claims’ prevention have been with us for quite a while only
we have been using them on a limited time frame lacking the focus and
integration we have suggested they should have.

Testing of the golden rules in recent projects has shown more than encouraging
results to go on deeper research and development of the concepts.
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REFERENCES

Kaoru Ishikawa, “INTRODUCTION TO QUALITY CONTROL”, Juse Press

Ltd.,1989

Khaled Bu-Bushait, Ignacio Manzanera, “CLAIM MANAGEMENT”, Project

Management Magazine, Butterworth-Heinemann Ltd, 1990

Ignacio Manzanera, “PLANNING AND SCHEDULING REFERENCES”,

Aramco Saudi Arabia, 1991

Lucey T.,: "QUANTITATIVE TECHNIQUES" D.P. Publications 1993

Larry Reynolds, “BEYOND TOTAL QUALITY MANAGEMENT”, Sheldon

Press, 1994

Cecil R. Phillips, Edward W. Davis, “PROJECT ANAGEMENT

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Project Risk Management and Claims Avoidance

1 General Principles of Project Risk Management
1.1

As previously noted, proper project management is an essential component

of successful claims avoidance efforts. In particular, claims avoidance is
closely connected to project risk management. If risks can be identified early,
then the Department can decide how to manage them before they occur. This
lessens the opportunities for claims to develop if such risks actually occur
during the project.

1.2

Project risk management is the science of identifying, evaluating and seeking

to avert or contain those events or circumstances the occurrence of which
would result in increased costs and/or delays to the project’s completion.
Possible risks are evaluated in terms of their potential costs and likelihood of
occurrence. These factors are then weighed against the cost and effectiveness
of avoidance measures. The objective is to promote the timely and economical
completion of the project works by avoiding the occurrence of identified risks,
or by minimizing their impact on the project. An employer can manage project
risks either by risk control or by loss control.

1.3

Risk control seeks to limit exposure to risks by avoidance measures or by risk

apportionment. Through the Contract, the Department can transfer contractual
responsibility for a given risk to the Contractor, who then has the option of
including contingencies for such risk in his bid or of assuming the risk.
Alternatively, the Department may determine that it is in the best position to
most economically prevent or limit the impact of certain risks and may choose
to retain contractual responsibility for their occurrence.

1.4

Project risks may also be managed by loss control. Loss control involves
financial provisions such as the retention of Contractor payments, budgetary
allowances, and provision of bank guarantees or commercial insurance.
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Provisions such as these give the Department a financial offset to losses or

delays to the project.

1.5

While the objective of project risk management remains constant, i.e. avoiding
or minimizing risks, the strategy adopted for its achievement will vary
depending upon the nature of the project and the special risks it presents. For
example, the strategy adopted in connection with the construction or widening
of a road through a highly developed area containing extensive existing utility
services must address risks such as delays or damages resulting from the
removal and replacement of discovered services installations.

On the other hand, the strategy for the construction of a new road through an
undeveloped area will not need to address such risks but will need to take into
account the possibility of other kinds of risks, such as unexpected sub-soil
conditions

2 Categories of Risk and Risk Apportionment

2.1 While each project will present unique risks, general categories of risks are
common to the construction industry as a whole and their consideration should
be a part of every risk management strategy. The User who has knowledge of
these general categories of risk can consider them in the context of his specific
project and will be better able to identify and avoid potential claims situations.

2.2 The general categories of construction project risks include:

1) Force Majeure
2) Political Risks
3) Economic Risks
4) Design Risks
5) Physical Risks
6) Construction Risks

Table 1 next page presents the general categories of risk and gives examples of
some of the specific risks associated with each risk category.

2.3 One of the methods of risk reduction available to an employer is the

contractual transfer of risk responsibility to the Contractor. Table 1 also
indicates relevant Articles of the General Conditions of Contract for Civil
Engineering Works that address the general risk categories.
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Note that risk elements not addressed in the General Conditions may be dealt
with in the particular project’s Form of Agreement, Special Conditions or other
parts of the Contract.

The User, therefore, should review carefully his project’s entire Contract, in
particular the Special Conditions, to determine which other risks have been
addressed contractually and whether responsibility for them has been allocated
to the Department or to the Contractor.

TABLE 1: Project Risk Categories

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Basic Project Management Principles

The application of project and construction management principles and
techniques is as essential to the success of the project as are sound engineering
design and planning.

The paragraphs below outline the most essential elements of project

management which are so crucial to claims avoidance and claims management.

Basic construction project management skills include:

 contract preparations;
 effective communication (both written and oral);
 conducting inspections of the work;
 assuring the quality of materials and workmanship;
 utilizing practical techniques for tracking documents;
 keeping accurate records;
 obtaining information from various project participants;
 keeping the Department informed of the project status;
 conducting progress meetings and preparing minutes;
 estimating, budgeting and controlling the project costs;
 planning, scheduling, and controlling the project time;
 monitoring project payments;
 closing out each phase of the project; and
 authority and decision-making.

Basic project management skills encompass important components of

effective claims avoidance, including:

 Contract Administration;
 Planning and Scheduling;
 Cost Estimating and Cost Control;
 Negotiations of Variations; and
 Document Control.
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Contract Administration - Knowledge of basic contract principles and the

ability to apply the provisions of the Contract to construction events through
effective contract administration are indispensable to the day-today functioning
of the construction project manager. This aspect of claims avoidance is
especially important for Department Representatives and Engineers, as how
they interpret and apply the Contract during the construction phase often will
be a determinative factor in whether a dispute becomes a claim, and if it does,
in how the claim is resolved.

Planning and Scheduling - Planning and scheduling requires highly technical

training to understand the Contractor’s proposed approach and to ensure the
completion of a construction project within the Department’s time constraints.
In particular, training in the principles and use of the Critical Path Method
(CPM) scheduling is indispensable for analyzing the logic of the Contractor’s
baseline schedule, determining whether the project is on schedule or delayed,
determining the cause of any delays, and allocating responsibility for delays to
variations, lack of progress by the Contractor, delayed approvals by the
Engineer or other parties or any other specific events.

The most difficult claims against employers are those for delays and delay
impacts—consequently the more knowledgeable the construction project
manager of the techniques for planning, scheduling, and schedule monitoring,
the more effective he will be in preventing or mitigating claims.

Planning and programming all phases of a project’s life cycle can greatly assist
efforts to mitigate or eliminate claims. Project programming and the tasks
leading towards project completion are typically focused on the construction
period, and this is with due cause because the majority of claims arise from
events that occur during the Construction Phase.

However, each phase of the project’s life cycle should be evaluated in terms of
programming. Left unconfirmed, the impacts of unreasonable planned
durations, actual durations, and/or delays occurring during any of the phases
leading to completion of construction could have adverse impacts on the
overall project completion date.

The Engineer with the Department should develop the initial programme at a
summary level at the very beginning of the Pre-Tender Phase. It is typically at
that time that the Owner is able to identify the ‘Owner defined need date’, or
the date operations of the completed facilities are to commence. The duration
between the early days of the Pre-Tender Phase and the Owner defined need
date becomes the window of time within which the Pre-Tender, Tender, and
Construction Phases need to be accomplished.
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Impacts occurring during any of the three phases can have a negative effect on
the project completion and lead to claims. The following diagram represents a
typical project life cycle illustrated by a CPM programme. This is the very first
summary programme format from which further development is applied
toward detailed programmes.

Typical Summary Project Life cycle

The above CPM summary programme illustrates that a delay during the Pre-
Tender or Tender Phase may have an adverse delay impact on the Construction
Phase. Such a delay may then cause events that lead to a claim. Programming of
each and all phases of the project to a certain extent at the beginning of the Pre-
Tender Phase may help mitigate claims during the Construction Phase.

It is the combined duration and ‘give-and-take’ relationship between the durations

of these three phases during the up-front planning process that can have an impact
on the potential for claims arising during the Construction Phase. For example, the
longer the duration planned and/or required to complete the Pre-Tender and
Tender Phases, the shorter the duration becomes to complete the Construction
Phase, and this compressed construction duration not only increases the cost of
construction, but also may create an increased potential for claims.
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Planning and programming at the onset of the Pre-Tender Phase can greatly assist
project risk management and achieve a balance between the potential amount of
construction costs and likelihood of claims.

The situation may also exist where the Owner has not defined a need date that
defines the window of time to complete the Pre-Tender, Tender, and Construction
Phases. In such cases, the up-front planning still needs to be accomplished by the
Engineer / Department to properly monitor progress and sequence of operations.

Cost Estimating and Cost Control

Cost estimating is another invaluable tool for the construction project manager, as
variations in the work are inevitable in the completion of a modern, highly
complex construction project. In proper cost estimating and cost control, the
construction project manager prepares “what-if” scenarios of the impact of
variations before implementation.
Sheet 1 of 1

This kind of analysis results in more accurate and timely information to the
Department, so that decisions involving cost issues can be made with a reasonable
degree of certainty in “real time”. Utilization of cost control techniques also
minimizes the possible overruns and allows the Department to monitor and
prepare for its financial obligations in an orderly manner.

Negotiations of Variations

Contractor negotiations can be stressful to the untrained construction

project manager and can result in a breakdown of communication and
a lack of trust. In such environments, claims are almost a certainty

The project manager’s negotiation skills are, therefore, important to the

successful completion of the project with the least amount of claims and
the greatest satisfaction to both parties.

Document Control

The organization and management of all project documents and records

through systematic document control is an integral part of successful project
management and claims avoidance
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CLAIM AVOIDANCE PRE-TENDER PHASE

Pre Tender Activities

Contractor Classification and Short-listing
Tender Documents
Design Stages
Plans and Specifications
Contract Articles
Geotechnical Reports
Constructability Review
Construction Coordination
Generally
Notice of Intent
No Objection Certificates and Permits
Pre-Tender Checklist
Invitation to Tender

Pre-Tender Phase

The pre-tender phase of the project life cycle includes all activities leading up to
the issuance of the invitation to tender. Pre-tender activities relevant to claims
avoidance include the preparation of the following:

 Feasibility Study;
 Engineer Agreement;
 Concept Design;
 Preliminary Design;
 Detailed Design;
 Tender Documents; and
 Invitation to Tender.

One of the first and most critical steps to a successful project is the selection of the
Engineer. The Engineer, under the direction and supervision of the Owner, will
prepare the Tender Documents including the project design, drawings, and
specifications. Generally, the same Engineer will be responsible for the
supervision of the daily progress of the project.

The pre-qualification of prospective Engineers is therefore of the utmost

importance. The Owner must ensure that the Engineer has the requisite experience,
available staff and financial capacity to perform.
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The pre-tender phase includes the all-important preparation of the Tender

Documents, which become part of the Contract after the execution of the
Contract Agreement. The Tender Documents are comprised of the Invitation
for Tenders, Instructions for Tenders and Tender Forms. These documents
include the specifications, drawings, the Bills of Quantities, Tender addendum
and the Conditions of Contract.

The Tender Documents contain a description of the work and describe the
procedures to be followed in the submittal of tenders including the documents
that must accompany the tender. The Tender Documents provide the guidelines
under which tenders will be considered responsive, the evaluation process to be
followed in the award of the contract, and the requirements to be met by the
successful tenderer prior to the execution of the Contract.

The very careful review of the Tender Documents prior to their release is
critical to claims avoidance. Claims frequently result from ambiguities in or
discrepancies among Tender Documents and correction of the documents
prior to issuance is one of the most economical and efficient means of claims
prevention.

It is particularly important that great care be exercised during the design stages
to develop complete, correct, and coordinated documents as follows:

Plans and Specifications

Tender plans and specifications that are ambiguous or that give rise to
conflicting interpretations are a major source of Contractor claims. The
inherent complexity of major construction projects makes complete avoidance
of these errors difficult, and even a minor contradiction between tender
drawings and specifications can lead to a Contractor claim under the Contract
Modifications articles of the Contract.

All parts of the Tender Documents must be carefully reviewed during the
design phase to eliminate ambiguities and conflicts. In addition, Tender
Documents should be subjected to careful examination in both a
constructability review and through a quality control review to assure their
adequacy, accuracy and completeness. A constructability review will review
the plans from a contractor’s viewpoint to see if the design indicated is really
buildable. This review may indicate whether there are methods to improve the
efficiency of the construction.
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Specifications are meant to serve two purposes:

a) to enable the Contractor to interpret contract documents toward

construction of the project; and
b) to enable the Owner to maintain its budget and obtain its basic
requirements.

Typically specifications should provide all information and requirements

regarding fabrication, manufacture quality, type, methods of installation, field
testing or inspection, guarantees or warranties, and finishing and cleaning.

Plans or drawings generally indicate the method of connection, general

locations of material, and to a limited extent, size and shape. Plans and
drawings should show the physical relationships of materials, facilities or
equipment while the specifications should detail the nature or content of
project materials and equipment.

Accuracy and consistency in terminology between the plans and specifications

are essential to claims avoidance. It is vital that the scope of the Engineer’s
duties with respect to the design of the project be clear and consistent with the
design responsibilities delegated to the Contractor. Disputes between the
Contractor and theEngineer over who bears responsibility for elements of the
design are common and often result in claims.

The Tender Documents should clearly distinguish detail design from shop
drawings or working drawings so that there is no gap between the respective
duties of the Engineer and Contractor.

If the Contractor is expected to provide design, the Tender Documents should

clearly say so and should provide procedures for submittal, review, approval
and warranty of the design.

One problem area where this kind of dispute commonly arises is that of
proprietary specifications. Proprietary specifications identify a particular
project requirement by the manufacturer’s trade name. However, sole sourcing
is usually not permitted. The Owner cannot specify the design by referring to a
particular manufacturer but instead specifications regarding such items can
only describe in general terms the Contract requirements.

In this case, the Owner will be limited in its ability to provide the detail design,
which often will have to be achieved through the shop drawing or work
drawing process. Contractors often object to this design responsibility and
claim for resultant delays and additional costs. To avoid claims of this nature,
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the Owner must ensure that responsibility for this design work is clearly placed
upon either the Engineer or the Contractor.

Contract Clauses

Ambiguous and conflicting contract clauses can make resolution of contract

disputes more difficult and may create additional disputes. Therefore, every
effort should be made prior to advertisement of tenders (or contract award) to
identify and resolve ambiguous and conflicting provisions in the Tender
Documents. This effort should also apply to conflicting provisions between the
General Conditions, specifications, plans and other documents comprising the
Tender Documents.

Geotechnical Report

Where the nature of the project requires a geotechnical report of existing site
conditions, all prospective tenderers should receive the geotechnical report as
part of the Tender Documents. The purpose of the geotechnical report is to
inform the prospective tenderer of the site conditions that may be encountered.
It is expected that, with this information, Contractors will have no need to add
a contingency to their tenders as an allowance for the costs of unanticipated
subsurface conditions.

However, note that under the General Conditions of Contract, the Contractor is
usually responsible for inspecting the site and for evaluating soil conditions.
While it may be in the project’s interest for the Owner to provide tenderers
with geotechnical data, it should be clearly stated that such data is provided for
information only and does not relieve the tenderers of their responsibility to
make their own assessments of soil and sub-soil conditions.

In the industry as a whole, this issue is frequently present in contractor

claims.

It is critical to claims avoidance that any geotechnical data provided to the

Contractor be accompanied by a clear disclaimer of responsibility so that there
can be no question about the Contractor’s ultimate responsibility for sub-soil
conditions.

Constructability Review

Defective Tender Documents can constructively change a contract and lead to

Contractor claims against the Owner. If any part of a project cannot be
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constructed in the manner set forth in contract documents, the Contractor may
make a claim for increased project cost and delay under the Amendment of
Contract articles.

In order to minimize this occurrence, it may be appropriate to evaluate the

constructability of the project prior to issuing the Tender Documents. The
Engineer should perform such evaluation. The Engineer should also work
closely with the Owner Representative to evaluate and resolve constructability
problems as they are discovered during construction.

Owner Coordination

Wherever a project will interface or possibly conflict with the services

(existing or under construction) of another Owner, the Owner should
endeavour during the design phase to coordinate the project with such other
services to the greatest extent possible. Such coordination serves several ends.
First, it will help to avoid delays that otherwise would arise during the
construction phase in the form of the interfacing problems or services conflicts.

Delays frequently arise as a result of conflict between existing services and

new construction or between the requirements of projects of different Owners
under construction in the same area or that ultimately must interface with each
other. The likelihood of such delays can be greatly reduced by thorough inter-
Owner coordination during the design phase.

Secondly, inter-Owner coordination will facilitate and encourage the

responsiveness of the other Owners to the Contractor’s Notice of Intent, which is
filed to advise of the intended works and to request drawings or information
regarding the other Owners’ works or services in the area.

Where such coordination has been conducted during the design of a project, other
Owners will be better prepared to respond quickly and more precisely to the
Contractor’s request.

Finally, inter-Owner coordination will facilitate the Contractor’s receipt of the

required No Objection Certificates and receipt of any required permits to proceed
with the Works. Under Article 27 of the General Conditions (Compliance with
Laws, Regulations and Special Instructions) the Contractor bears contractual
responsibility for obtaining any required Governmental approvals or permits.

The Owner can, in the interest of the project, help to avert delays in this regard by
coordinating the project with the services or works of other Owners during the
design phase.
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Construction documents will inevitably contain some errors or omissions.

Checklists should be developed to assist the Owner in optimizing the quality of
construction documents by the careful selection and monitoring of the Engineer
during the design phase. The checklist should also offer guidelines regarding the
issuance of the invitation to tender and the selection of the form of contract to be
used.

The pre-tender phase concludes with the issuance of the Invitation to Tender. To
be eligible to provide a tender on a given project, a contractor must be qualified.
Generally all Contractors within the qualifying class for a given project may bid
for the work. However, a contractor may be eligible to bid on a project according
to his classification but he may be without the financial or physical resources
required to execute those works if he is currently engaged in other major projects.

In some instances, the Owner may determine that it is in the best interest of the
project to limit the number of Tenderers to only those Contractors with the
appropriate resources available at that time. The Owner may do so within the
framework of the existing classification system by short-listing prospective
Contractors for specific projects.

In such cases, the Owner may invite qualified contractors intending to bid the
project to submit their qualifications for the particular project, noting any unique
characteristics of the project and identifying the special resources it is likely to
require. In view of the subject project’s particular needs, the Owner may request
prospective Tenderers to demonstrate their experience in that particular field.

The Owner may also request the Contractor provide evidence that the financial
resources, facilities, equipment, labor and material are sufficient to perform the
work are or will be available within the anticipated time frame for the project.

The Owner would be especially interested in determining the prospective

Tenderers’ ability to perform the work in accordance with the planned
completion schedule. Short-listing preference would be given to contractors
demonstrating that their existing or pending business commitments would not
jeopardize their ability to devote sufficient resources to the project at hand.

Project delays, and subsequently claims, often result when the Contractor’s
resources are over-extended or when he does not have thespecial expertise
required for a particular project. Short-listing providesthe Owner an effective
means of avoiding claims by allowing it to ensurethat the Contract will be
performed by an able and adequately resourcedContractor.
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Another way in which the Owner might ensure that the special needs of a
particular project will be met by the Contractor is to provide for the
separate submissions of technical and commercial proposals.

The Owner can then short-list candidates on the basis of their technical
proposals and from the short-list proceed with selection on the basis of the
commercial proposals.
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CLAIM AVOIDANCE TENDER PHASE

Introduction
Clarification of Tender Documents
Response to Inquiries
Pre-Tender Conference
Tender Evaluation
Disclosure of Available Data
Tender Phase Checklist

Tender Phase

The tender phase of the project life cycle spans the time period from the
issuance of the invitations to tender up through the award of the Contract.

The tender phase presents a number of important opportunities for the

Owner to take action to avert claims during subsequent phases of the project.

During the tender phase, the Owner has a second opportunity to identify and
correct errors, omissions or discrepancies in the Tender Documents. Tender
Documents review that commenced during the pre-tender phase should
continue during the tender phase to incorporate corrections or clarifications
into any addenda issued by the Owner prior to the receipt of Contractor’s
tenders.

Response to Inquiries

Contractors often raise questions about the interpretation of Tender Documents

prior to submitting tenders. These inquiries should be reviewed by the
Engineer and answered promptly. Owner with prompt and complete
explanations made to all interested contractors through the issuance of an
addendum to the Tender Documents. Contractor doubts about the scope and
content of the Contract often result in higher tender prices as a contingency
against an incorrect interpretation.

It is recommended that all inquiries by prospective tenderers should be routed

to the Engineer.
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It is important during the tendering phase, that the Engineer be the single
source of information from the Owner to insure consistency and so that a
central record of responses can be maintained. All inquiries should be
submitted only by writing and answered in writing. Response to telephoned
inquiries should be only direction that the request for information be made in
writing.

It is particularly important that any interpretations or clarifications made by the

Engineer be issued to all prospective tenderers as an addendum to the Tender
Documents. If it is impossible to respond within a reasonable time before bid
opening, it may be necessary to postpone the date of tender opening to ensure
that all tenderers receive the addendum in sufficient time prior to the tender
due date.

Pre-Tender Conference

The Owner may hold a pre-tender conference prior to the receipt of Contractor
tenders as a result of questions and problems identified by prospective
tenderers. The purpose of the pre-tender conference is to give the Owner and
the Engineer an opportunity to explain and clarify specifications and special
project requirements. In addition, the Owner and Engineer should respond to
questions by interested tenderers.

Adequate notice of this meeting must be given so that all prospective tenderers
can arrange for attendance or representation. If time permits, prospective
tenderers should be asked to submit their questions in advance so that the
Owner may have time to prepare a complete response.

The Owner should maintain an attendance list identifying all individuals

attending and the organization they represent.

All prospective tenderers should receive identical information in connection

with the proposed project. Oral or verbal
remarks and explanations will not qualify
or amend the terms of the Tender
Documents. All attendees should be
advised that the Tender Documents may
only be amended by a written addendum.

A written record should be made of the

conference and furnished to all
prospective tenderers, including those
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who do not attend. The record should include the questions asked,
identification of the individual asking the question and the response or answer
given.

Tender Evaluation

The “Instructions to Tenderers” should state that an award will be made to the
lowest, responsive, responsible tenderer. To be considered responsive, the
tender must conform in all material respects with the requirements of the
tender advertisement and not limit the tenderer’s liability or the Owner’s rights
in a way which gives one tenderer an advantage over other tenderers.

A non-responsive tender to be rejected.

The question as to whether a tender differs from the tender requirements in a

“material” respect is often difficult to answer.

A deviation from the tender requirements should not be considered material if

it is merely a matter of form or if it has no effect on price, quality, quantity, or
delivery of contract items.

Any discrepancy must, however, be correctable prior to contract award without

prejudicing other tenderers or altering the relative standing of tenderers.
Generally, the Engineer determines non-responsiveness.

Discrepancies due to clerical errors are generally considered not to be material.

For example, where unit or lump sum prices must be written both as figures and in
words, a typographical error which results in the figure amount being different
from the written version will not result in a non-responsive tender since the written
amount takes precedence.

Any addenda to the Tender Documents must be submitted with the Contractor’s
tender, or the Contractor must acknowledge receipt of the addenda in the space
provided on the tender form. As addenda are part of the Tender Documents, failure
to do so may result in rejection of a tender as non-responsive.

A tender may be rejected if it contains conditions or qualifications. Each tender

must be an unconditional offer by the tenderer to perform the work indicated. If
specifically required, all tenderers must submit with their tenders a list of proposed
subcontractors, suppliers, manufacturers, etc. Failure to do so will make the tender
non-responsive.

A tender is non-responsive if it is not signed by a person with the legal authority to

commit the tenderer to a contract. A stamped, printed or typewritten signature is
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acceptable only if the tenderer furnishes evidence with the tender of an

authorization to execute documents in that manner.

A tender may be submitted with unbalanced prices, so that bid prices for some
items appear to be very low and others quite high. This practice often indicates a
belief on the part of the tenderer that some estimated contract quantities are
incorrect. Unbalanced pricing is also used by tenderers to increase the value of
items to be completed early in the work or that they anticipate will be subject to
change. The Tender Documents should provide that a tender which is judged by
the Owner to be unbalanced may be rejected.

Disclosure of Available Data

The Owner may determine that it is in the best interest of the project to release to
the tenderer’s all Owner information relevant to the project. Such disclosure may
be desirable to optimize the quality of the bids received. However, information
should be released with an explicit qualification that it is for information purposes
only and does not release the tenderers from their responsibility to perform their
own investigation and that no claims will be allowed on the basis of any errors
contained in the information.

Information released to prospective tenderers typically includes all known

information about subsurface conditions.

During the tender phase, the most important functions of the Owner and its
representatives are:

a) the furnishing of clear and complete responses to questions posed by

tenderers without contradicting the intent or purpose of the construction
documents and
b) the evaluation of tenders.

Table 2 below sets-out in a checklist format some of the more important

tenderphase actions the Owner can utilize to reduce the occurrence of claims.

TABLE 2: Tender Phase Checklist

1 Determine how best to publicize the notice of solicitation, for example: through print media
(including trade journals and newspapers), through official notices, through electronic means
(internet), and/or through other sources intended to obtain the widest possible dissemination
of the notice and the greatest participation of qualified contractors.

2 Arrange a pre-tender site visit and conference for potential tenderers, so they can familiarize
themselves with the requirements of the project and ask questions to clarify areas of concern
within the tender documents.

a) Keep minutes of all pre-tender conferences including all questions asked and answers
given.
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b) Include the principle design engineer in the pre-tender conference and be prepared to
respond immediately to both technical and contractual questions by tenderers.

c) Make a record of the questions that were not answered at the pre-tender conference and
provide the answer, in writing, to all tenderers that have requested tender documents.

3 Clarify areas of concern during the pre-tender stage by issuing written amendments to the
tender documents. Aside from specific oral representations made by authorized
representatives of the Owner at the pre-tender conference(s), insist that all questions by
tenderers be submitted in writing.

4 Avoid all unofficial communications with tenderers during the tender period and avoid the
appearance of any impropriety in the tender process.

5 Advise all tenderers of the date and place for the receipt of tenders by the Owner and the
precise time after which tenders will not be received.

6 Where technical and commercial proposals will be evaluated separately, identify all
evaluation factors and any significant sub-factors that will be considered in making the award.
State the relative importance of the evaluation factors and sub-factors, including price or cost.

7 Provide tenderers with instructions for completing the tender and bond forms.

8 Instruct tenderers to return tenders in a sealed envelope or, if appropriate (pursuant to the
instructions for tenderers), in two separately sealed envelopes—one containing price and
commercial data, the other containing all non-price related data. All tenders must be marked
with the date and time of receipt, and kept secure until opened and recorded.

9 Make a written notice of award as soon as it is practicable after the evaluation and
clarification of tenders. Notify unsuccessful tenderers of the award and, if appropriate, of the
amount of the award.

10 Consider incorporating in the instructions to tenderers a requirement that the successful

tenderer must provide a complete copy of its detailed tender papers and summary sheets into a
secure escrow account within five days after contract award. The Owner may use the secured
copies only if there is a dispute between the parties over quantities, pricing, or computations
regarding specific work elements.

11 Keep accurate records of the tender process in case of any protest.

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CLAIM AVOIDANCE CONSTRUCTION PHASE

Introduction
Importance of Project Management / Checklist
Monitoring Schedule and Costs
Schedule Control
Cost Control
Document Control
Generally
Major Categories
Relevance to Project Life Cycle Phases
Correspondence
Status Reports
Test Reports
Photographs
Video Tape
Document Control Checklist

Construction Phase

The most difficult part of any project occurs during the construction phase.

All parties involved, including the Owner, the Owner’s Representative, the
Engineer, the Contractor and the Subcontractors and Suppliers must keep open
the communication lines and function professionally to ensure the ultimate
success of the project.

Claims avoidance at this phase of the project requires that all parties perform
their respective roles efficiently, effectively, and fairly. The best way to avoid
claims is through preparation and planning, for the unforeseen events as well as
for events that are anticipated, i.e., project risk control through effective project
management.

The basic principles of project management and project risk management

have already been addressed in previous sections.

Table 3 next page presents some primary project management concerns in a

check list format for use during the construction phase of the project.
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TABLE 3: Construction Phase Project Management Checklist

1 Assemble the Owner’s construction project management team during the tendering phase, so
they can begin to familiarize themselves with the demands of the project. Perform a
constructability review.

2 Establish clear lines of authority and responsibility within the Owner for various construction
phase functions (e.g.: technical/design functions; financial and accounting functions; contract
interpretation and administration; and legal functions).

3 Develop a plan for efficiently handling the following typical items of Contractor requests and
submissions:

a) Request for information (RFI’s): these are routine requests which the Contractor makes
to clarify requirements contained within the drawings and specifications—typically of a
technical nature.
b) Technical submittal: in most cases, the specifications will require that the Contractor
submit product data, catalog information, calculations, samples and shop drawings of
individual equipment items and systems for approval by the Engineer. The Owner’s
construction project management team is responsible for providing a timely review and
approval or rejection of the submittals.
c) Variation/notice of variation/proposal for extra cost: when the Owner or its authorized
representative requests (orally or in writing) that the Contractor perform work that is a
modification or change to the Works, the Contractor may submit a notice of variation and/or a
written proposal advising the Owner of the extra costs to be anticipated as a result of the
change.
d) Critical path method (CPM) or other form of scheduling information: the Owner must
insist that the Contractor submit a detailed plan for performing the work, so that the Owner can
monitor the Contractor’s performance against an approved “baseline” schedule. Usually, the
specification allows for the Owner to review and comment upon the proposed plan prior to its
approval for use as the baseline.
e) Schedule update: the Contractor must update the schedule periodically (usually once
every month). This updated schedule is provided to the Owner for approval. Any changes in
the sequencing or number of activities in the schedule must be addressed by the Owner in an
expedited fashion.
f) Material test results: test results will frequently be provided by an independent
materials testing agency hired by the Contractor. The Owner’s representatives must be in the
position to monitor the Contractor’s compliance with the testing requirements of the Contract
and immediately review all test results to determine if the materials used for construction meet
the minimum demands of the specifications.
g) Payment requisitions/certificate: to facilitate periodic (usually monthly) payment of the
Contractor, the Contractor will present a monthly statement of work completed and materials
on site. The Engineer will verify and prepare a payment certificate for 90% of completed
works and 75% of materials on site, or on such other basis as may be determined according to
terms of Contract. national contractors are exempt from retention if a bank guarantee is
provided. Payment is required within 45 days of issuance of payment certificate by Engineer.
h) Request for deviation: in some cases, the Contractor will request that a deviation from
the Contract drawings and specifications be permitted to expedite the work or prevent delays.
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i) Request for time extension: should the Contractor’s progress fall behind the plan
established in the approved baseline schedule, the Contractor may request a time extension to
avoid delay penalties. The Owner’s representatives must have the ability to quickly analyze
such requests to determine if the time extension is justified, analyze the period of extension to
be granted.

j) Claim correspondence: from time-to-time, the Contractor may claim that the Owner or
its representatives have improperly administered the Contract. In such situations, the Owner
must scrupulously follow the dispute provisions of the contract and attempt to resolve quickly
any differences of interpretation in order to avoid an adversarial relationship with the
Contractor.

4 Study the Contract—become familiar not only with the technical specifications of the
project, but also with the requirements of the Agreement, the General and Special Conditions,
Amendments to Tender Documents, etc. In particular, note the following:

a) The notice requirements for requesting variations in the work and any additional
compensation.
b) The notice requirements by which the Contractor must request an extension of time
for unforeseeable delays or other circumstances.
c) The notice requirements for making any claims by or against the Owner.
d) The notice requirements and specific procedures for terminating the contract, either
due to the default of the Contractor or for the convenience of the Owner.
e) All phasing requirements, interim milestones, and related delay penalty provisions.
f) All submittal requirements and times within which submittals are due from the
Contractor and its suppliers.
g) Payment, bonding, guarantee, and other articles relating to the financial
responsibilities of both the Owner and Contractor.
h) Responsibilities of the Engineer.
i) CPM or other scheduling specifications.
j) The timing requirements for providing all pieces of Owner-furnished equipment and
materials.

5 Understand the contractual relationships of the parties involved and the risks assumed.

6 Utilize standard form RFI Logs, Variation Logs, Proposal Logs, Material Testing Logs,
Correspondence Logs, and other documents which summarize events of a recurring nature.

7 Recognize the importance of scheduling—make a commitment to use CPM or other

scheduling tools, as appropriate, and make them work successfully by:

a) Reviewing and approving (or rejecting) Contractor prepared schedules and updates on
a timely basis.
b) Attending joint meetings to resolve technical differences.
c) Updating the schedules at least monthly in joint sessions.
d) Maintaining accurate records on file of each update including network diagrams,
computer generated reports, and electronic records.
e) Maintaining a ledger of all Contract time extensions requested, approved, pending or
denied (either partially or totally).

8 Keep senior management and legal counsel informed of any breach of the contract or
anticipatory breach requiring early intervention.
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9 Monitor the Contractor’s daily workforce and compare actual labor utilization with planned
labor utilization.

10 Monitor the Contractor’s productivity at various stages and compare actual productivity
with planned productivity.

11 Interview worker’s periodically at the project site to determine if the Contractor is

conforming to any labor hour requirements of the Contract and/or to any applicable labour
laws.

12 Prepare interim reports of deficiencies and omissions in the work and obtain the
Contractor’s commitment to correct same immediately without waiting to the end of the
project.

13 Keep accurate and detailed records of events in the field—establish regular meeting times to
discuss progress, negotiate variations, and resolve problems.
14 Maintain detailed safety records of job related injuries—be proactive about job safety to
eliminate the possibility of serious injuries to persons and property.
(end of table 3)

The items contained in Table 3 above reflect basic project management

objectives, including the monitoring of time, costs and compliance with the
Contract. By pursuing these objectives, the Owner also will be able to
anticipate and mitigate disputes and delays.

Three important components of project management useful in achieving these

objectives are:

(1) schedule control;

(2) cost control; and
(3) document control.
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Schedule Control
The construction schedule is an effective project management tool for
monitoring current activities and for anticipating future events which may
impact work progress. The Contractor should be required to develop a project
network schedule showing in detail and in an orderly sequence all activities,
both on and off-site, necessary for timely completion of the work.

In addition, the Contractor should develop a manpower schedule for each

section of the work showing labor resources expected/required over the
duration of the Contract and a plant schedule detailing the plant requirements
needed to achieve the durations established in the construction schedule.

The value of a schedule will be dependent on the effort expended in its

preparation and use as a management tool by both the Engineer and the
Contractor.

Optimization of the schedule as a management tool requires that it must be

constantly updated and kept current. Such schedule maintenance is a joint
responsibility of the Contractor and the Engineer.

Pursuant to Contract requirements, the contractor is required to submit to the

Owner a detailed schedule for the phases of the construction of the works. This
submittal is to be made within two (2) weeks of the signing of the Contract.
Wherever possible and according to the project needs, the Contractor’s
schedule should utilize the Critical Path Method (CPM), consisting of a
network of activities, with estimated durations, times for completion and
depicting the sequence and relationships of activities.

The sequence of activities comprising the longest path through the schedule
will be the “critical path” for the project and should be consistent with the
overall Contract duration as agreed by the Contractor and the Owner.

The Owner should approve the Contractor’s schedule only if it conforms to the
overall Contract duration and presents a reasonable plan for accomplishing the
Works. In accordance with usual contracts, the approved schedule may not be
amended unless by written consent of the Owner. The approved schedule is to
be used by the parties to monitor the Contractor’s progress and to measure any
delays to the Works.

As noted above, the approved schedule must be reviewed and updated

regularly so that it reflects the actual work completed. Schedule updates should
be accomplished at least on a monthly basis. The Owner may require more
frequent updates if the nature of the project warrants.
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Cost Control
Cost control is achieved by monitoring actual project costs, estimating
remaining costs, and computing the variance between the total estimated cost
to complete and the original contract value. This information can be used to
reverse trends so that project cost overruns are avoided or minimized.

Cost reports, along with the project schedule, are used to forecast total project
costs and completion dates. Estimates of cost to complete should be based on a
detailed schedule of values along with reliable measures of actual completion
to permit the identification of problems to pre-critical stages of the work so that
suitable corrective measures can be taken.

Certification of payments to the Contractor by the Owner should be a

simple process to ensure prompt payment and avoid an usually
disputed area.
Document Control

Document control - the organization and maintenance of project records is one

of the most critical components of claims avoidance and management.

The avoidance of claims and early resolution of disputes

often will depend on the quality and thoroughness of records that have
been maintained throughout the project.
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Accurate records of meetings, conversations, work performed evidence,

construction equipment on site, daily labour force on site by craft or trade, and
material or equipment deliveries may prove indispensable in the event of a
contract dispute.

Accurate records must be kept on a regular basis. The credibility of records is

much greater when it can be shown that they were prepared as a regular
business practice regardless of the circumstances and formally delivered to the
other party. Suggested major categories of documents to be maintained
include:

 Correspondence
 Submittals
 Status Reports
 Variation Orders
 Test Reports
 Issue Files
 Photographs
 Meeting Minutes
 Video Tape
 Requests for Information

Note that while document control is most active during the construction phase,
it is important to maintain records with a view to claims avoidance during all
phases of the project life cycle.
Correspondence
All communications between parties such as memos, faxes and letters should
be preserved for future reference. No correspondence should be discarded.

A document which appears unimportant at one stage of a

job may develop greater significance at a later date.

Parties unfamiliar with the job may have to analyze a claim after the project
has been completed largely on the basis of such documentation, especially if
key
participants in the disputed project have moved on to other projects. It is also
important that letters and memorandums be written in a timely fashion.

Letters written long after the issue they address are less
valuable in dispute resolution because they are often viewed as being
“self serving.”
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The facts of any situation should always be stated clearly and thoroughly.
Verbal communications always should be confirmed in writing if having any
contractual, cost or time significance.

All written communication should be drafted bearing in mind that the

Contractor may subsequently use it in a claim against the Owner.

Written communications should not be used for apologies or self criticism and
the writer should avoid admissions of fault wherever possible. This practice is
not intended to deceive or to avoid being truthful but rather to protect the
Owner from admissions that may not reflect the full facts or circumstances.
Once written they may nevertheless be used against the Owner.

Status Reports

Daily logs and reports, progress schedules, minutes of job meetings, CPM
schedule updates with accompanying progress reports, evaluations and
recommendations are valuable records that should be maintained in an accurate
filing system. Such information is often essential to reconstruct the “as-built”
schedule for a project.

Test Reports

Test reports and test records made prior to and during construction should be
organized and maintained with the date and results of each test, including
failures and re-tests. When questions arise about the quality of construction,
tests should be taken promptly. Note that the Contractor’s responsibility for the
costs of such test will depend upon the ultimate result, in accordance with
General Conditions Articles on Materials Goods and Workmanship.

Photographs

Photographs can be of significant importance in establishing the circumstances

and liability for claims by the Contractor.

All photographs should be clearly marked to identify the location, date and a
description of the work or area photographed.

Video Tape
A record of some construction activities on video tape may be necessary when
a still photograph cannot adequately capture the event. Table 4 below provides
a checklist of specific records usually maintained by highly effective and
organized construction employers. The User should note that some of these
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records may not be appropriate or practical for a specific project and should
consider whether his project calls for any unique records.

TABLE 4: Document Control Checklist

1 Daily Inspection Reports (detailing the type and location of work by the Contractor and each
Sub-Contractor on site)
2 Daily Contractor Labor Records/Certified Payroll Records (indicating the number of hours
worked by each employee of the Contractor and all subcontractors on site)
3 Daily Equipment Utilization Reports (indicating all equipment on site and whether operating
or not)
4 Daily Record of Stored Equipment (on and off site) 5 Daily Diaries of the On-Site Project
Manager (hand-written notes of communications, instructions issued, and problems
encountered)
6 Weekly Project Summary Reports (summarizes the information contained in the above
reference daily reports)
7 Monthly Project Summary Reports (summarizes the information contained in the Weekly
Project Summary Reports and includes payment and cash flow projections for the balance of
the project performance period)
8 Monthly Progress Payment Records (Contractor’s application for payment and any changes
made thereto by the Owner including the reasons for the change and whether the Contractor
agreed to the change)
9 Progress Meeting Minutes (documenting priority activities and events and indicating which
parties have primary and secondary responsibility for implementation)
10 Deficiency and Omission Reports (documenting the discovery of defective workmanship
and equipment, and the instructions issued to the Contractor for corrective action, Contractors
response should be included)
11 Safety Meeting Minutes (documenting safety hazards, issues raised at weekly or regular
safety meetings)
12 Project Scheduling Records and Updates (including chronology and comments made prior
to the approval of the “baseline” schedule and all computer-generated update reports, progress
narrative reports, and network diagrams)
13 RFI Log (showing the disposition of each RFI issued on the project—i.e.: dates of RFI
submissions and response times from the Engineer or Owner’s Representative and whether or
not the RFI was converted into a variation)
14 Variation Log (showing the disposition of each variation issued on the project—i.e.: dates
of variation orders from the Engineer or Owner Representative, dates of proceed orders in
advance of cost negotiation, dates that cost estimates were prepared, dates of negotiation, and
the cost of each variation along with cumulative cost totals)
15 Variation Records and Supporting Files (Contractor initial and revised proposals, the
Owner Representative or Engineer’s cost estimate, memorandum of pre-negotiation objectives,
memorandum of negotiation, final accepted Contractor proposal including, where appropriate,
“fragnets” for incorporating the variation activities into the CPM schedule, and the formal
contract modification document)
16 Telephone Conversation Logs (date, from whom the call was received or to whom the call
was placed, subject of the call and instruction or disposition of the call)
17 Correspondence/Facsimile/Electronic Mail Log (date of message, date of receipt, name of
person sending the message, name of person to whom the message was sent, the subject matter,
the disposition of the message, and a cross-reference to the response message or other
instruction)
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18 Submittal Log (submittal dates from the Contractor, dates sent to and returned from the
Engineer, disposition, re-submission and re-review dates and final “record set” submittal and
approval dates)
19 Submittal Files (for catalog drawings and description of materials and equipment—
organized by specification section)
20 Materials Testing Logs (dates, description of test performed, numerical test score,
disposition, re-testing dates, etc.)
21 Bonds, Guarantees, General Warranties (performance and payment bonds, guarantee
agreements, and official warranty documentation for the maintenance period in the contract)
22 Contract File(s) (all tender documents, contract documents, drawings, specifications, and
addenda thereto)
23 Contract Drawings (tender set and as-built set)
24 Project Photographs/Videotapes (aerial photographs preferred, if appropriate, with date
stamp information and all negatives organized by date; narrated videotapes of problem areas
demonstrating equipment/labor performance and time-and-motion studies)
25 Punch list Files (retain all iterations of punch lists with date work was completed sorted by
each area of the project, by trade)
26 Major System Testing Procedures/Results Records (for major mechanical, electrical,
plumbing, and special systems)
27 Operating Instruction Manuals (organized by system)
28 Maintenance Manuals (organized by specification section)
29 Inspection Reports by Outside Agencies (e.g.: fire alarm testing and approval, certificate of
occupancy inspection, electrical inspection, etc.)
30 Claim Issue Files (containing notice dates, subject of the claim, relevant contract
provisions, analysis of claim, summary of disposition, and whether or not the Contractor has
appealed the decision of the Owner)
31 Preliminary Acceptance Certificate
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CLAIMS AVOIDANCE POST CONSTRUCTION PHASE

Generally
Contract Close-out Checklist

Post Construction (Operations & Guarantee) Phase

The operations and guarantee phase commences on completion of the project

works (preliminary handing-over) and continues through to the final handover
of the project to the user.

During this phase, the Department’s claim avoidance efforts are aimed
primarily at obtaining correction of any defects in the works and documenting
the conclusion of the Contract.

At the conclusion of the maintenance period, the final handover of the project
is accepted by the Department, which issues the Final Acceptance Certificate
and releases retention monies and the Performance Bond.

There are a number of important activities which must be carried out during
close-out of the Contract and the proper execution and the careful
documentation of these activities are important to preclude claims.

The table 5 next page lists activities which should be carried out to ascertain
and record fulfilment of the Contract requirements.
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TABLE 5: Contract Close-out Checklist

1 Inspect and prepare detailed punch list items by trade for the completion of each project area
(e.g.: room-by-room, public areas, outdoor areas, sections, buildings, infrastructure systems,
etc.).
2 Obtain all material and equipment warranty information and ascertain that the warranties
meet the contract requirements.

a) Observe performance testing of all equipment and life safety systems.

b) Obtain written operating and maintenance instructions for mechanical, electrical,

plumbing, and specialty systems and equipment. Where possible schedule the attendance of
operating and maintenance personnel at operating and maintenance classes provided by
suppliers and manufacturers of installed equipment.
c) Obtain as-built drawings for the project showing all deviations and changes from the
contract drawings and specifications.
d) Provide the Contractor with the Preliminary Acceptance Certificate when no contract
work other than minor punch list items remains to be completed by the Contractor.
e) Obtain written Contractor warranties, bonds, or guarantees according to the Contract
requirements.
f) Resolve any outstanding claims in the best interests of time, cost, and potential
escalation.
g) Make any remaining adjustments to the contract sum to reflect all variations to the
work and to account for delay penalties assessed or any incentive payments earned by the
Contractor.
h) Obtain Contractor’s full and complete Release of Claims.
i) Provide the Contractor with the Final Acceptance Certificate (with a copy to its
bonding company) only when all of the Contract work has been fully inspected and completed
and when the Contractor has furnished acceptable contract closeout documentation including
furnishing the Department with the final payment requisition.
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Construction Claims Management

Claim analysis has become such an important issue for project management
and it cannot be left out of any respectable publication on the subject.

As with any human endeavor where more than two parties are involved,
contracting operations are fraught with controversy and dispute, and it has
become important to know how to prevent and solve claims in time to avoid
compounding the problem later on in the contract.

It is everybody's dream to have a construction contract where the conditions

are ideal, to have a job that is completed on schedule and within budget with
few changes in scope and without unexpected occurrences. Unfortunately, such
conditions are seldom found.

This discussion will deal with the subject of claims on construction contracts,
and related areas, as follows, Typical construction claims against owners,
Typical construction claims against the contractors, Legal implications of
critical path method schedules, Claim-analysis procedures, Claims-prevention
suggestions, Record management.

Typical Construction Claims against Owners

The most frequently found reasons to file a claim against the owner of a project
are:

 Poor project planning;

 Scope changes ;
 Constructive change orders;
 Errors and omissions;
 Contract acceleration and expediting;
 Work suspension and stoppages;
 Site access or availability;
 Other contractors interferences and delays;
 Strikes and acts of God; and
 Low bidders.
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Poor Project Planning

Inadequate attention to front end project planning usually ends in:

 Inadequately defined scope of work; or

 Incomplete and/or incorrect design.

Most of the time, poor planning is attributed to rushed (fast track) projects
bringing about:

 Shortened bid periods;

 Limited site investigation;
 Unreasonable construction periods;
 Badly specified construction materials; and
 Inappropriate manpower.

Whatever the reason, claims are abundant when planning is not taken seriously
enough to produce an adequate environment to develop a project.

Scope Changes

Scope changes are usually initiated by a change order, letter of intent, or a field
directive. All of these may direct changes or deletions in the work required by
the contract, but within physical limits and the general scope of the work.

Change orders become part of the contract as soon as they are signed by the
contractual owner representative. The contractor may or may not sign the
change order but is required to proceed immediately.

If the contractor does not agree with the change order time or price he must
contest it within the prescribed period of time stated in the contract document.

Change orders and their compounding effects on the contract execution are the
most usual source of claims.

Constructive Change Orders

Sometimes owners or their authorized representatives give or fail to give

directions that interfere with the normal contract development. These actions
have the same effect as if a formal change order has been issued, and a
constructive change is usually claimed by the contractors.
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Constructive changes are some times found after the fact, when reviewing
schedules, records, letters and minutes of meetings. This does not negate the
contractor's right to submit a claim.

Contractors are advised to train their construction teams to recognize

constructive changes since this can make the difference between a profit and a
loss situation.

Errors and Omissions

A potential for claims arises when the contractor questions plans and
specifications given by contractual terms and the owner or his representative
fail to recognize it as a valid change order.

It is essential to document the case as it develops and communicate the results

and possible impact according to contractual stipulations. Errors and omissions
are difficult to prove because technical issues can become unclear due to
circumstances such as:

 Change of design perspective;

 Change of vendors specifications; and
 Changes in staff originally handling the contract.

Contract Acceleration and Expediting

Contractors are frequently directed to accelerate performance of the contract or

a portion of it within the original or adjusted completion date. This direction
constitutes a change in the contractual obligations and the contractors have the
right to pursue compensation for it.

Also, contractors may expend extra effort in response to a directed increase in

work without an increase in time allocated to the contract. This constitutes a
constructive acceleration. Validation of this kind of claims is, of course,
difficult and requires the contractor to prove his case.

Work Suspension and Stoppages

When contractors are notified to suspend work under circumstances other than
those for which they are to blame, they have the right to be compensated for
the time and cost involved in the suspension or part of the suspension even if
the contract document calls for work-around directives.
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Documentation related to the status of the job at the time when the stoppage
takes place must be accurately established for settlement of work suspension
and stoppages related disputes.

Site Access or Availability

When the contractor scheduled activities have the need for a right of way or a
location to proceed and the owner fails to provide it on time, the contractor
may pursue compensation for the time and cost of the resources scheduled and
proved unable to perform.

Since this situation is usually aggravated by owner’s failure to recognize any

implication on the development of the job, it is recommended to faithfully
document the situation by related correspondence, schedules, photographs and
the like.

Other Contractors' Interference and Delays

When the contractual obligation forces the contractor to joint-occupancy,

interferences resulting from the lack of progress by other owner's contractors in
the area may hamper performance and a justifiable claim for compensation will
arise.

Planning and scheduling of this type of jobs must be broken down in as much
detail as possible to allow proper of interfacing with others and analysis of
delays should they occur.

Strikes and Acts of God

Time delays due to facts beyond contractor's control as union strikes, boycotts,
unusual weather, earthquakes, fires, and floods are excusable delays and the
contractor is entitle to a time extension.

Low Bidders

Due to a number of circumstances such as, failure to understand the scope of

the job, misunderstood technical requirements, bid mistakes, and desire to
improve competitive edge, contractors occasionally come up with extremely
low bids which make them excessively cost conscious in their efforts to
recover from their tight situation generating disputes and claims for almost
every other issue during the contractual period.
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Typical Claims against Contractors

Owners also have the right to claim to recover from issues that may harm them
economically. Claims by the owners usually concern:

 Contractors late completion;

 Out of specification materials;
 Defective work; and
 Property damages.

Contractor’s Late Completion

Contracts usually call for a completion date on the assumption that the owner is
in need of the facility by that date. A late finish by the contractor may bring
inconvenience and/or financial losses to the owner.

Some contracts include clauses where penalties are considered against the
contractor in the event of completion delays, but whether or not the contract
contains such a clause, the owner may claim damages for late completion.

Out of Specification Materials

Discrepancies may result due to differences in interpretation of contractual

material specifications. Contract specification omissions are frequent, with the
undesirable result that decisions have to be waited for or directions given at the
job site, with the consequent delays and/or increases in scope of the job.

The main problem comes while supplying materials where it is known there
are numerous competitive manufacturers which might substitute for one
another. Decisions have to be taken on the run and it is usually all left to the
discretion of the owner's engineer.

The contract language is to be followed, but when the issue is material

specifications multiple complications arise since every owner wants to save
money by competitive bidding prices from different manufacturers while at the
same time achieving the maximum financial and functional efficiency.

Defective Work

Contractors are responsible for the quality of their work as specified in

contractual terms. This is not always easy to establish due to the fact that by
definition defective work is difficult to spot and decide upon.
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Defective work may be blamed on the designer due to lack of adequate

specifications, on the owner due to after-the-fact actions that disturbed the
original design; or on the contractor due to lack of skills.

It is not difficult to see why so many claims are generated on this subject.

Property Damages

Property damages claims may result from several sources such as:

 Damaging owner's installations;

 Damaging neighbors installations;
 Violating rights of adjacent property owners; and
 Violating Government area regulations.

Even if contractual clauses call for holding the owner blameless in all of the
above cases, it may happen that law suits have to be settled by the owner
before he can pass the blame to the contractor and accepted by him.

Legal Implications of Critical Path Methods

Critical path methods (CPM's) have become the most useful and practical tool
for negotiating contractual disputes.

Properly designed schedules include consideration for:

 Total scope of the job;

 Organized sequence of activities needed to perform the job;
 Duration for all activities involved; and
 Resources needed to accomplish each activity

In other words critical path method schedules depict what has to be done, when
it has to be done, how it has to be done, who has to do it, and where it has to be
done.

Contractual obligations usually include the following:

 Approval of an original CPM;

 Procedures to update the CPM periodically;
 Procedures to revise the CPM; and
 Procedure to utilize the CPM as a tool for claim settlements.
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The legal implications of an approved critical path method schedule are as

follows:

 Both parties are bound to follow the schedule specifications;

 There is an implied guarantee by both parties that they will not hinder,
delay and/or disrupt the other party;
 Manpower levels and crew sizes established in the schedule have to be
followed unless changes are duly authorized;
 Equipment utilization incorporated in the schedule is binding and
failure to follow it, constitutes a breach of the contract;
 Materials, tools and consumables as specified in the schedule are
equally binding;
 Contractors are liable for productivity lower than that allocated in the
schedule;
 Job manning and lay off schedules are contractual obligations and lack
of compliance constitutes a breach of the contract;
 Inspections and approvals by the owner, should be performed according
to schedule; and
 Any deviation from schedule should be settled as per contractual
procedures involving schedule revisions.

Claim Analysis Procedures

The main purpose of establishing a claim analysis procedure is to have a

comprehensive, consistent and systematic approach to claim analysis and
evaluation during the negotiation period.

The following outline has proved successful in accumulating the required data
for an analysis as well as aiding the analyst in his approach to the problem at
hand.

All available documentation and information which is pertinent to the claim

should be gathered and examined closely. It is essential to realize that the
analyst should exercise complete and unbiased judgment in reviewing the
contractor's position as well as that of the owner.

Study review data pertinent to the claim must be categorized as follows:

1.- Brief of the Case .-

Contract study

Contracts should be read and analyzed carefully. Contracts differ depending on

the nature of the job; special clauses can be found, scheduling requirements are
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not always<N>the same, unit rates do not necessarily follow a set pattern, and
a number of minor changes peculiar to the claim in hand may have to be taken
into consideration.

The analyst must not forget that the contract is his most important document
and that having a detailed knowledge of it facilitates understanding and
appropriate interpretation.

Claim submission

Study of the claim submitted by the contractor gives the analyst the necessary
guidance in deciding which areas of the contract should be investigated in
more detail than others. Furthermore, it sets out the contractor's standing and
pretensions.

Change order log and associated schedule areas

Since most of the problems during the development of a contract are derived
from change-order generation, it is essential to have a well- organized change-
order log which must include schedule association, type of settlement, job
definition, and resource allocation plus stipulated progress, cost and schedule
controls.

Progress reports

These documents will show figures duly approved by both parties and they will
provide a firm basis for reconstruction of the facts. They will be the
foundations of an as-built schedule which in turn will present irrefutable
evidence.

Job explanation meeting minutes

Having a good record of what transpired during the job-explanation meeting

has proved to be helpful in resolving parts of a claim which may be subject to
different interpretations, all of them apparently reasonable.

Weekly construction meeting minutes

A careful reading of the minutes of the weekly construction meeting gives the
analyst a good idea of how the relationship between the owner and the
contractor developed and how problems in different areas were handled.
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Once the brief of the case, as outlined above, has been completed, the analyst
will have form his own opinion of the job and can now start to study the
owner's position on the claim.

2.- Owner's Position.-

Job philosophy

Due to ever-changing circumstances, owner policies at times affect the

contractor in a way that might be overlooked by the owner's representatives,
thereby creating an unfair situation for the contractor.

The analyst must determine from his studies and job-related interviews if the
job philosophy had been changed at any time and decide thereafter what kind
of impact it might have produced.

Scope of the job

Careful study of all drawings and specifications stipulated in the contract is a

must for the analyst and will give him the edge at the negotiation table over
misinterpretations of the scope of the job by the owner or the contractor.

Owner expectations

Owners’ expectations are generally understated, seeking the lowest starting

position in negotiations. Recognition of this fact should enable the analyst to
make unbiased recommendations.

3.- Contractor’s Position.

Scope of the claim

Having an open and receptive mind when analyzing the contractor's claim, will
allow the analyst to clearly understand the claim’s foundations and to avoid
getting involved in issues not being addressed by the contractor.

Contractor expectations

Contractors' claims are generally overstated seeking the highest starting point
in negotiations. Analysts must be aware of this fact and be ready to disclose it
at the first contact with the contractor.
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4.- Claim Analysis and Evaluation.

Based on all the information gathered thus far the analyst should be able to
organize the available data to establish a comparison between what was
planned and what actually happened and why. In evaluating the results of the
above-mentioned comparison the analyst must keep in mind that contractual
stipulations will govern decision-making at this stage.

If schedules are an essential part of the claim, 'as-planned' and 'as-built'

schedules must present a clear picture to all parties.

Schedules should only show the part of them that have been affected by the
issue in dispute and the resulting impact on major milestones.

5.- Recommendations.

The analyst should complete the investigation by offering specific, constructive

suggestions in terms familiar to the party's representatives. Presentation is a
key factor in claim analysis. If all parties can understand the results and
recommendations presented by the analyst, they will create an environment for
fruitful, positive negotiations.

Claim Prevention Suggestions

1.- Carefully analyze and consider exactly what you are building and precisely
how it will be built so the contractor does not have to assume or guess about
any aspects of the job.

2.- Complete the project design before the contract is bid, and if some parts of
the project cannot be completely designed at bid stage, clearly identify them
and its possible impact.

3.- Conduct a thorough review of the design prior to the bid stage to identify
and correct any design errors or inadequacies.

4.- Give bidders sufficient time to carry out a complete review of the bid
package and an investigation of the construction site.

5.- Allow enough construction time, remember that in this context, time is not
money. Do not assume that bidders will simply increase their bids to cover a
short schedule.
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6.- Identify with enough anticipation what type of contract will best suit the
project.

7.- Think about every sentence included in the contract, why it is there and
whether it is necessary.

8.- Clearly identify in the contract every operation that the contractor must
accomplish to complete the job.

9.- Draft for clarity, not confusion. Use a standard list of definitions, and
always use the same defined word consistently.

Never use statements such as:

 About 2 meters;
 Roughly;
 Firm (How firm?);
 As soon as possible; and
 Frequently (How frequent?).

10.- Consider material arrival schedule as part of the contract. Identify long
lead items and possible vendors in the bid package. Avoid sole-source
procurement unless absolutely necessary.

11.- Clearly identify who will be responsible for material delays.

12.- Analyze all potential bidders before preparing a bid slate. Examine
contractors' prior contracting experiences, claims history, management
capabilities and financial ability.

13.- Carefully analyze contractors' technical proposal paying particular

attention to the proposed method of construction and the planned number of
manhours claimed necessary to execute the job.

14.- Seriously question contractors' excessively low bidding on :

 Scope of the job;

 Technical requirements;
 Schedules and crew sizes;
 Material suppliers;
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15.- If you are forced to live with a 'low-ball' contractor, anticipate a claim and
work on it from the beginning :

 Get your law department involved in all transactions;

 Reinforce your cost estimating and planning and scheduling units;
 Alert all members of the project team; and
 Keep extremely tight records especially on progress measurement and
quality assurance.

16.- Be reasonable when analyzing contractors' complaints about changes and

omissions. Negotiate settlement as soon as possible and keep in mind that the
older the issue is the more difficult it will be to settle.

17.- Appreciate the contractors' right to perform the contract in any fashion he
deems appropriate, as long as the methods and results conform to contractually
specified standards.

18.- Keep in mind that the owner has the obligation to provide:

 A suitable construction site ;

 Accurate plans and specifications;
 Well-defined scope of the job; and
 Inspection without interference.

19.- Understand how many factors can affect a contract and delay and disrupt
the work. Cooperate to establish an atmosphere of understanding and mutual
respect.

20.- Keep strict control of :

 Progress reports;
 Daily meetings;
 Schedule revisions;
 Cost estimates;
 Change orders and their justification; and
 Correspondence.

21.- Develop a document control plan including provisions for :

 Drafting letters to and from contractors;

 Handling drawing transmittals between design group and contract
administrator and between contract administrator and contractor;
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 Responding to any query within 3 days, even if only to say "we are
working on your query";
 Do not let change orders pile up, deal with schedule extension requests
promptly either accepting or denying them so the contractor knows
where he stands;
 Producing accurate minutes of all meetings, and having the contractor
signature on them;
 Asking at every meeting if there are unresolved claims or delays, or
changed work without change orders and documenting the responses;
 Be sure the minutes reflect the problems like lack of manning, lack of
productivity, broken-down equipment and the like; and
 Taking job progress photographs, mounting them with accurate
captions, and filing them with their corresponding negatives.
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Records Management

Good, accurate records are a great help when negotiating changes and claims.
This is particularly true for the contractors since they usually have the burden
to prove the effect of the issue under dispute.

The records usually needed to substantiate a claim are:

 Progress schedules;
 Daily and weekly reports;
 Change order log;
 Purchase orders and delivery receipts;
 Correspondence from and to the contractor;
 Photographs;
 Job diary;
 Plan and schedule revisions; and
 Minutes of daily and weekly meetings.

Performance is usually documented through a periodic review of the project

approved schedule. Updates determine the project status of schedule versus
actual performance so anybody can visualize the work completed to date, the
rate at which the work was performed, and the costs incurred.

Daily and weekly reports should include:

 Issue date, weather conditions;

 Manpower levels;
 Equipment used and idled;
 Materials utilized and future requirements;
 Subcontractors' performance;
 Details on controversial matters;
 Change- order work status; and
 Safety.

Since change orders are one of the major causes of claims, it is important to
maintain good records of them including:

 Initiations;
 Cost and time estimates;
 Approvals;
 Current status;
 Requests for project completion revision; and
 Daily progress.
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Keeping the correspondence well organized by subject will provide the means
of understanding what happened in an after-the-fact claim and of relating new
problems to old ones.

REFERENCES

Daniels, J.D.,Ogram E.W., Radebaugh, L.H."INTERNATIONAL

BUSINESS", Addison Wesley Publishing Co., 1983

Bu-Bshait, K, Manzanera I., “Claims Management”, Project Management

Magazine, Butterworth-Heinemann Ltd., 1999

O'brien, J.J.,Zilly, R."CONTRACTOR'S MANAGEMENT HANDBOOK",

McGraw Hill Co., 2001

Moder, J.J., Phillips, C.R.,"PROJECT MANAGEMENT WITH CPM AND

PERT", Van Nostrand Reinhold Co., 2002

Manzanera, I, "PROJECT MANAGEMENT REFERENCES", Saudi Aramco,

1989, 1990, 1991, 1995, 2000, 2004, 2010
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Cost Management - Cost Control

The primary purpose of the Cost Control process is to influence the factors that
create cost variances and to control changes to the project budget.

One of the most common problems in project management is overrunning the

project budget. There are a number of plausible explanations for this. People
may be more focused on the technology and making sure that the project
requirements are met, literally at the expense of the budget. In other situations,
the need to define and observe a budget constraint is not recognized; therefore
cost performance is running "open loop," until the sponsor or customer calls
attention to the problem.

Project Cost Control includes:

 Influencing the factors that create changes to the cost baseline;

 Ensuring that requested changes are agreed upon;
 Managing the actual changes when they occur;
 Assuring that potential cost overruns do not exceed the authorized
funding for a particular phase and the total funding for the project;
 Monitoring cost performance to detect and understand variances from
the cost baseline;
 Recording all appropriate changes accurately against the cost baseline;
 Preventing incorrect, inappropriate, or unapproved changes from being
included in the reported cost or resource usage;
 Informing appropriate stakeholders of approved changes; and
 Acting to bring expected cost overruns within acceptable limits.

What information do you need to implement cost control?

Cost Baseline

The cost baseline, also described as the time-phased budget or S-curve, was
created in the Cost Budgeting process. Once established, the baseline serves as
a constant reference for measuring and monitoring cost performance on the
project.

Project Funding Requirements

Funding requirements are derived from the cost baseline. Fund flow should be
positive; it should exceed the cost baseline in every period by an amount that
will cover expenditures associated with both early progress and cost overruns.
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Funding occurs in incremental amounts. Each increment must be sufficient to

cover all expenditures in every period between the posting of the first
increment and the posting of the next increment.

Funding sources include payments from the customer, revenue from sales,
loans from a bank, or appropriations from the organization's financial
authority.

Performance Reports

Performance reports organize and summarize information gathered; present the

results of any analysis performed; and provide information and the level of
detail required by stakeholders.

Common performance report formats include:

 Bar charts;
 S-curves;
 Histograms; and
 Tables.

Performance reports generally should be short documents (one to two pages for
a monthly report) that relate the relevant facts of the project performance.
Although formats can vary significantly to address different stakeholder needs,
many common elements are included in most performance reports; for
example:

 Reporting period;
 Work accomplished in reporting period;
 Schedule and cost status and performance;
 Problems experienced or approaching;
 Corrective actions, or plans;
 Summary of accomplishments planned for the next reporting period;
and
 Detailed quantitative reports, included as attachments (such as earned
value analysis data).
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Work Performance Information

Work performance information provides data on the status of project activities,

for example, if project deliverables are not being completed on a timely basis
and at or below the planned cost. Information includes, but is not limited to:

 Costs authorized and incurred;

 Estimates to complete the schedule activities;
 Activities completed or incomplete, or percent complete of the schedule
activities; and
 Deliverables that have been completed and those not yet completed.

Approved Change Requests

Approved change requests from the Integrated Change Control process are
documented, authorized changes that can modify terms of the contract, project
scope, cost baseline, or cost management plan. Changes are usually
implemented by the project team once they have been approved.

Project Management Plan

The project management plan is a document that specifies how the project is
executed, monitored and controlled, and closed. The project management plan
can be a summary level or detailed document and can contain one or more
subsidiary plans or other components. The cost management plan component
and other subsidiary plans are considered when performing the Cost Control
process.

Cost Control Process

Cost Change Control System

A change control system is a formal documented process that describes when

and how project documents may change. It describes the people who are
authorized to make the changes and the paperwork needed to make the
changes.

Assuming that a variance from the plan has been identified and a course of
action has been determined, the change control system is employed to
coordinate an integrated change to the project baseline.
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Normally the change control system is a single, integrated mechanism for

controlling changes. The cost element of that change control system should be
just one additional aspect of the overall system. Details on controlling cost
changes should be described in the project's cost management plan.

Performance Measurement Analysis

Performance measurement analysis is a mechanism for quantifying the current

level of accomplishment of the project management plan. Any deviations from
the plan (i.e., over or under budget) are to be reported as variances. Variances
exceeding a prescribed threshold must be clearly identified and managed to
reduce the impact to an acceptable level. The Earned Value Technique (EVT)
is an example of a performance measurement technique, discussed further in its
own section.

Forecasting

In assessing current project performance as well as the impact of known

variances, forecasting is a technique for extrapolating current performance data
to an estimate of future performance. In other words, will the project continue
to operate at, under, or over budget and by how wide a variance? Forecasting is
one of the functions performed by the EVMS.

Trend analysis is a forecasting technique that involves examining project

results over time to determine if performance is improving or deteriorating.

Key functions of trend analysis include:

 Evaluating a project's results over a period of time;

 Identifying a pattern of performance; and
 Showing improvement, stabilization, or decline.

Proper trend analysis requires:

 A controlled baseline;
 Correct and timely data; and
 Comparison of recent and long-term performance.

Trend analysis looks at performance to date and identifies a pattern of results

that indicates a trend. The trend is used to forecast future results.
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Successful trend analysis depends on:

 Controlled Cost Baseline: The project manager must assess the actual
spending and schedule performance against the planned spending during the
same schedule period. Without a time-phased cost plan, the project manager
cannot compare the burn rate to any comparable baseline;
 Data and timing: If cost and schedule data are based on vague estimates,
the trend analysis will be equally vague. If performance reports are
scheduled quarterly, they may not be frequent enough to measure trends
unless the project is very long-term (several years); and
 Identified trend: The trend is the important element in trend analysis; it
may indicate a a pattern toward satisfactory or unsatisfactory performance.
The focus is on the long term. Often, project managers focus too much on
the current data and immediate needs.

Project Performance Reviews

Project performance reviews are typically formal meetings held to assess the
current status of the project in terms of scope, schedule, and budget. The
completion of work should be reported with an assessment of the health of both
the schedule and budget.

Performance reviews are usually used in conjunction with other performance

reporting techniques. For example, the need for corrective and preventive
action may be identified in the performance review through the review of the
quantitative results from the EVMS. Discrete issues should be identified as part
of an issue management process and new risks should also be identified.

Project Management Software

Project management software tools of various types are helpful in creating

estimates, assembling budgets, and controlling cost performance. They range
from spreadsheets and project scheduling tools to project management tool
suites.

Project managers enter cost or labor rate data in the project management
software, or into a spreadsheet, to manipulate variables in order to see the
results of different options. Other, more advanced statistical analysis tools are
also used in some cases.
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Variance Management

The cost management plan as discussed previously should contain specific

thresholds and descriptions of appropriate corrective actions to be used in
response to budget variances.

For example, a relatively minor variance, such as less than 5%, should be
reported and noted. The project manager should be aware of the reasons for the
variance and should form a strategy for how best to deal with it.

As variances grow to a larger percentage of budget (perhaps 10%), formal

reporting using the variance management system should be required. This will
call for an analysis and a written corrective action plan.

If the control account variance continues to expand and does not respond to
corrective action, it should be escalated to higher levels of attention in the
organization. A formal system such as this minimizes surprises to the customer
or to senior management. Also, it ensures that more senior management has the
opportunity to assess the problem as early as possible.

Conducting a Performance Measurement Analysis

The first step in performance measurement analysis is to ensure the completion

of a project management plan and the establishment of a cost baseline. This
baseline becomes known as the planned value (PV) of the project (and is the
same as the previously mentioned S-curve). It is represented as a spending
curve for each period of the project.

Periodically during execution of the project, usually monthly, but perhaps more
frequently, the following steps are performed.

1. Collect performance reports from each control account manager. These

should state which planned tasks for the reporting period have been
completed.
2. Compute the value of these planned tasks. The total value of completed
tasks is known as earned value (EV). These amounts are summed and
compared to the planned value (PV).
3. Compute a schedule variance (SV) by subtracting PV from EV.
4. Collect actual cost performance from the finance team. They will
calculate the actual cost by summing all paid invoices and labor sheets
during the reporting period. This sum is called actual cost (AC).
5. Compute the cost variance (CV) by subtracting AC from EV.
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The implementation of performance measurement analysis can generate some

confusion, but given a well-defined process and a commitment to the goal of
simplicity, it is possible to achieve a practical and quantitative method for
measuring project performance.

Earned Value Management System (EVMS)

An EVMS is the most commonly used performance measurement technique
for managing projects. An EVMS compares the schedule and cost information
at a point in time and avoids using the project manager's subjective
interpretation of data.

Earned Value Analysis

The EVMS is based on the technique referred to as earned value analysis,

which integrates scope, cost (or resource), and schedule measurements to
assess project performance. Earned value provides a determination of whether
or not work is being completed as planned.

Earned value analysis is not new. The government has used it for decades in
the formal Cost/Schedule Control System (C/SCS). In its current form, the
government method describes thirty-five criteria to guide effective
performance measurement, and requires formal certification.

Earned value analysis is now broadly accepted as an efficient, quantitative

method for assessing project status. Current project management software tools
include features that incorporate earned value management techniques into
project planning.

Benefits of Using an EVMS

Using an EVMS allows the project manager to integrate both schedule and cost
information to gain a more comprehensive understanding of project
performance. This gives the project manager a more complete view of project
performance; schedule-only or cost-only comparisons do not provide the same
data. This missing data could lead to misinterpretations of project performance.

An EVMS compares the scope, schedule, and cost information at a point in

time. In a sense, it provides a snapshot of the Triple Constraint triangle,
showing the current status of the project. This minimizes the errors and
misrepresentations possible with a schedule-only or cost-only comparison.
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Integrating schedule and cost status lets project managers forecast project
status from trend information. An EVMS requires the project management
team to correctly establish baselines and to learn earned value management
terms.

For an EVMS to be effective, it is important for the project manager to ensure

that the project baseline is valid, otherwise the data resulting from the
calculations cannot be compared to a standard. An EVMS also allows the
project manager to forecast future project performance by identifying trends
and calculating results if the trend continues.

Earned Value Management System (EVMS) Terms

An EVMS uses a concept of "dollarizing" the schedule and performance data.

A solid understanding of earned value concepts and terms is a prerequisite for
the effective use of the associated methods.

Three fundamental EVMS terms include:

o Planned Value (PV): Agreed value of work to be accomplished in a

given period;
o Earned Value (EV): Agreed value of work that was actually
accomplished; and
o Actual Cost (AC): Real cost of the work performed.

Collecting and Analyzing Planned Value (PV)

Planned Value (PV), previously called budgeted cost of work scheduled

(BCWS) in the government system, is the value of work that was scheduled to
be completed as of a certain date. The PV is really a curve, or time-phased cost
budget.

At the end of the project, the final PV equals the budget at completion
(BAC). PV is established by time-phasing the project's budgeted costs.

When the project plan is approved, the PV becomes a fixed standard of

reference. When it comes time each status reporting period to update the
earned value analysis, the PV value is obtained by consulting the project
baseline information for the associated time period.
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Collecting and Analyzing Actual Cost (AC)

Actual Cost (AC) is another parameter that must be measured during each
status reporting period. This is typically information collected by the
organization's cost accounting group, using the company cost accounting
system.

The cost accounting group collects all costs against the project work packages
and control accounts, including labor accounting sheets, materials invoices,
and other direct costs such as travel and contract labor. AC identifies what it
really cost the project to operate during the reporting period, independently of
what work was actually accomplished.

The AC is reported as both the new costs for the current period and the
cumulative cost for the project since inception. The reporting of cost is
independent of the project team and represents the expenditure of real money,
unlike the earned value discussed further in the course. The only control the
project manager has over AC is to ensure that work is performed efficiently, as
planned, using the appropriate resources. Inaccurate accounting of labor is a
common cause for cost variances.

AC is also referred to in older earned value management systems as the actual

cost of work performed (ACWP).
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Collecting and Analyzing Earned Value (EV)

EV, the central concept in this technique, is slightly difficult to grasp at first. In
very basic terms, every activity or item of work is associated with a dollar
value. When you complete a particular activity, you "earn," or receive credit
for, that declared value.

A frequent point of confusion is that the actual cost of the job may be different
from the earned value. Earned value is the agreed value of the task, not what
you actually spend on it. If a contractor submits an invoice for an unforeseen
additional amount, the actual cost of the job will be the amount of the invoice,
but the earned value remains the original negotiated amount. The difference
between the earned value and actual cost will be an indication of cost variance.
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Methods for Computing Earned Value

EV, the method for assigning value earned, is calculated based on one of
several predetermined methods. In the simplest concept, the value earned is
exactly the planned value of the task. However, determining when or how the
value is applied may use different methods.

Keep in mind that the calculation of earned value for a task is different than an
individual reporting status against the task. Status reporting and earned value
analysis serve different purposes. Earned value analysis allows the project
manager to measure and report the overall project health, evaluating project
schedule, cost, and work performed. It provides measures to detect variances,
and therefore determine the overall ability to meet project objectives.

The information presented below outlines the various methods for computing
earned value along with descriptions of how earned value is assigned and their
recommended uses.

In practice, a project manager may elect to use only a few of these earned value
techniques. They are discussed in more detail on the pages that follow.

0-100 %

How earned value is assigned for this method

No credit for the start of a task, but 100% upon completion

Recommended use of this method

When tasks are scheduled to complete within one accounting period

50-50 %

How earned value is assigned for this method

50% value when the task starts, and 50% upon completion

Recommended use of this method

When tasks are scheduled to complete within two accounting periods

Percent Complete

How earned value is assigned for this method

Value estimated by the person responsible for the task's completion
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Recommended use of this method

Not generally recommended, although it may be used for longer work

packages in which distinct milestones are not recognized

Weighted Milestones (WM)

How earned value is assigned for this method

Value given upon milestone completion, where interim milestones mark the
completion of a longer task or work package

Recommended use of this method

For longer work packages for which discrete methods do not seem appropriate

Level of Effort (LOE)

How earned value is assigned for this method

Value earned is proportionate to the total budget of the work package and
based on elapsed duration

Recommended use of this method

Minimize the use of LOE to less than 10% of the total project budget

Apportioned Effort (AE)

How earned value is assigned for this method

Value is planned and measured in relation to another (non-LOE) task

Recommended use of this method

Not recommended for frequent use but may help in instances where it is
difficult to determine the exact value of the work

Percentage Methods for Computing Earned Value

0-100%

The 0/100% method is the simplest and usually the best method for tasks of
relatively short duration compared to the standard reporting period length. For
example, if the project status data is collected once per month, this method
should be used on tasks of less than 30 days duration.

As an example of computing earned value using the 0/100% method, assume

that there is a work package to paint a room in your company's headquarters.
You approved the painter's estimate totaling $1,000 in labor and materials to
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perform the job, with a completion date of Friday. When the job is complete,
you will credit the EV column with $1,000, the agreed value of the job. This
tracks the completion of the SCOPE leg of the triangle. If the painter submits
an invoice for an unforeseen additional $50 in materials, the actual cost of the
job will be $1,050, but the earned value remains the original negotiated amount
of $1000.

Suppose that on Friday the job has not yet been completed, so when the status
report is filed, the value earned remains at $0. The difference between the
earned value and planned value is an indication of schedule variance. This
variance will continue until the work is completed.

So, if the job is delayed until Wednesday of the next week, the schedule
variance will be negative $1,000 until the completion is recorded, at which
time the schedule variance returns to $0. Alternatively, if the painter finished
the job early, a positive schedule variance would be posted.

The 0/100% method is the-all-or-nothing approach, in which no credit or value

is earned until the task in question is completed. In the above example, the
painter earned no value until the room was completely painted (and
presumably cleaned up and inspected). This method eliminates the common
project management problem of subjective reporting such as "we're almost
done" or "97% complete", etc. Instead, the task owner must ensure complete
execution, which generally also assures higher quality results.

50-50%

The 50/50% method is a minor adjustment to the 0/100% for tasks of longer
duration compared to the reporting period. If project data is collected monthly,
but a task is planned to take six weeks, the task owner would be showing a
negative variance for the first status report, even though the work may be on
track. In fairness, the 50/50% method allows the task owner 50% credit for the
work, as long as the work has been started. This reduces the negative variance
to a smaller amount, and assuming the job finishes on time, the variance will
disappear by the end of the next reporting period.

Other variations on 50/50% may be defined, such as 25/75%, 40/60%,

depending on the rules in the organization. These should be established as
standards in the project's cost management plan.

Percent Complete

The Percent Complete method is one of the recognized methods, but should
not be used as a general practice. The discrete 0/100%, 50/50% or milestone
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methods are much more effective in controlling the reporting of task

completion. The percent complete method is subject to abuse, as task owners
may have no objective definition of what "60% complete" actually means.
Often this is reported incorrectly as the percent of the time that has elapsed
rather then the percent of the work that has been completed.

While not generally recommended, this method can be useful for longer work
packages in which distinct milestones are not recognized. If percent complete
is allowed as a method, the work package template should provide an objective
basis for awarding percent complete.

For example, if the work package involves testing to ensure 30 test cases pass
successfully, one could earn 10% each time 3 more test cases pass. The cost
management plan or the specific work package planning template must provide
explicit definitions of each milestone.

Milestone and Effort Methods for Computing Earned Value

Weighted Milestone

The Weighted Milestone method is used for longer work packages for which
discrete methods do not seem appropriate. Assuming that the process in the
work package has clearly understood interim milestones, appropriate credit
should be assigned to the accomplishment of each milestone.

Level of Effort (LOE)

The Level of Effort (LOE) method should be used very sparingly, usually only
for the supervisory tasks on the project. The labor costs of the supervisors, such
as the project manager and any clerical support staff, must be accounted for in
the PV and EV baselines. The problem, however, is identifying exactly what
work has been done, or what deliverables have been produced. After all,
supervisors have highly unpredictable days, integrating all the other team
members' activities, attending meetings, filing reports, and communicating
with the stakeholders.

Therefore, one assumes that the supervisors are always on schedule and allows
them to earn value proportionate to the total budget of the supervisor's work
package. For example, if there are 30 days of supervisory labor planned, the
supervisors "earn" 1 day each day of the project.

A general rule of thumb is to minimize the use of LOE to less than 10% of the
total project budget. Otherwise, large sums of LOE value will mask or disguise
smaller variances in other work packages.
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Apportioned Effort Method

The Apportioned Effort Method falls into a category similar to LOE, in that it
should not be used often but may help in instances where it is difficult to
determine the exact value of the work.

For example, if a quality inspector is needed to monitor the activities of the test
group, the quality work package would earn value at a predetermined rate
proportional to the test work package. As the testing progresses, the quality
work earns a corresponding percentage of work complete.

Analyzing Cost and Schedule Variances

Earned Value Variances and Indices

Once the status has been determined for the project, i.e., the PV, EV, and AC
values have been determined for the current period for each work package,
what does the data mean and how is it presented in a useful way?

Several earned value calculations allow the project manager to evaluate both
schedule performance and cost performance.

A variance is a difference between actual project results and planned or

expected results. A positive variance means that a project is ahead of schedule
or under budget, while a negative variance indicates that a project is behind
schedule or over budget.

An index is a measure used to assess the magnitude of any project variances

that do occur. For indices, a value greater than 1.00 is better than planned
efficiency, while a value less than 1.00 indicates that efficiency is less than
planned.

EVMS Schedule Formulas

o Schedule variance (SV) = EV - PV

o Schedule performance index (SPI) = EV/PV
o Preferred state: SV is positive, and SPI is greater than 1.00
o This means that the earned value is greater than the planned value. More
work has been earned than planned, so the project is on or ahead of
schedule.
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EVMS Cost Formulas

o Cost variance (CV) = EV - AC

o Cost performance index (CPI) = EV/AC
o Preferred state: CV is positive, and CPI is greater than 1.00
o This means that the earned value is more than the actual cost. More
value has been earned than the actual cost expended, so the project is on
or under budget.

Example of EV Components

The example below illustrates these values at a time of status measurement.

EV Component Example

In this example, the project is to build five prefab sections of a house for a total
project budget of $500 (BAC). Recall that at the end of the project, the final
PV equals the budget at completion (BAC). The task now is to compute the
PV at this point in time.

It was expected that $300 worth of tasks were to be completed (PV). In reality,
only $200 worth has been completed (EV); but the accounting system collected
expenses of $400 (AC) on the project.

EVMS Example

The following EVMS example uses the earned value formulas to calculate the
variances and indices.

 PV = 300
 EV = 200
 AC = 400
 SV = EV-PV = 200 - 300 = (100)
 SPI = EV/PV = 200/300 = 0.67
 CV = EV-AC = 200 - 400 = (200)
 CPI = EV/AC = 200/400 = 0.50
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The calculations in this example indicate that the project is behind schedule
and over budget, with poor schedule and cost efficiency ratios.

o The SPI of 0.67 indicates that the project has accomplished only 67% of
the work it was scheduled to accomplish by the status date.
o The CPI of 0.50 indicates that for every $1.00 spent on the project, only
$.50 worth of work has been completed.

EVMS Diagram

The results of the EVM analysis are usually graphed to provide a powerful
status report for the project. Such a diagram can be tracked at the total project
level, and also for each control account. Project management software tools
can help present this information.

The EVMS data in the diagram below depicts the values over time for the three
key parameters, PV, EV, and AC. The status reporting period during which
these parameters were calculated is shown via the Update Now vertical line. At
that point in time, the schedule and cost variances are depicted on the graph as
the difference between EV and PV (schedule variance) and between EV and
AC (cost variance).

Another powerful feature of the diagram is its ability to show the trends in
performance from one reporting period to the next. An experienced eye can
read these charts quickly and draw conclusions about the project's
performance, past, current, and future.
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The EVMS diagram also illustrates how EV calculations provide more insight
into the overall project health than straight comparisons between the original
baselines and actual costs.

If the actual costs are less than the original cost baseline, it may appear that the
project is under-spending. However, by comparing EV to AC, a project
manager realizes that, in reality, the project is paying too much for the work
actually performed.

By comparing EV to PV, it is apparent that less work was accomplished than

planned at the point of determining the project's status; therefore, the project is
behind schedule.

The key to understanding EV is that the cost or schedule is always compared to

the value of the work performed-EV or the earned value.

Forecasting Costs

When the project manager knows the current project cost, he can also predict
where the project is going using EV. This requires calculating at-completion
and to-completion costs. There are several terms to define in learning and
applying these calculations.

Estimating the At-Completion Project Cost (Terms)

Budget at Completion (BAC)

 Total cumulative PV at completion of a schedule activity, work package,

control account, or other project component
o When applied to the entire project, BAC represents the total budget of
the project, not including management reserve
o At project completion, BAC will equal PV

Estimate at Completion (EAC) - also called Latest Revised Estimate (LRE)

 Estimate, or forecast, of the most likely total value based on project

performance and risk quantification
o EAC can be greater than or less than BAC
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Estimating the To-Completion Project Cost (Terms)

Estimate to Complete (ETC)

 Estimate for completing the remaining work for a schedule activity,

work package, control account, or other project component
o ETC is the difference between EAC and actual costs to date

Various techniques to calculate EAC and ETC are discussed on the following
pages.

Estimating the At-Completion Costs

Examples of Estimating At-Completion Costs

At-completion values of interest to the project manager and stakeholders are

calculated using the methods below. These calculations use the same data as
the EVMS example of the prefab construction project:

o Total budget, or budget at completion (BAC) = 500

o Planned value (PV) for this stage of project = 300
o Earned value (EV) of project completed at review = 200
o Actual cost (AC) = 400
o Schedule variance (SV) = EV-PV = 200 - 300 = (100)
o Schedule performance index (SPI) = EV/PV = 200/300 = 0.67
o Cost variance (CV) = EV-AC = 200 - 400 = (200)
o Cost performance index (CPI) = EV/AC = 200/400 = 0.50

There are many forecasting techniques to calculate EAC. Each of these

approaches can be the correct approach for any given project and will provide
the project management team with a signal if the EAC forecasts are not within
acceptable tolerances.

Calculating EAC using earned value data

 Using remaining budget: The cumulative actual costs to date plus the
budget required to complete the remaining work, which is the budget at
completion minus the earned value
o EAC = AC + (BAC - EV) = 400 + (500 - 200) = 700
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 Using CPI: The cumulative actual costs to date plus the budget required
to complete the remaining work, which is the BAC minus the EV, modified by
a performance factor (often the CPI).
o EAC = AC + [(BAC - EV)/(CPI)] = 400 + [(500 - 200) / .50] = 1,000

Calculating EAC using ETC (ETC is discussed further on the following

page)

 A bottom-up Estimate to Complete (ETC) for the remaining work is

provided by the performing organization. Often used when past performance
shows that the original estimating assumptions were fundamentally flawed or
are no longer relevant due to a change in conditions.
o EAC = AC + ETC

ETC based on new estimate

The ETC is a manual revised estimate for the remaining work in the control
account, as determined by the performing organization. This more accurate and
comprehensive completion estimate is an independent, non-calculated estimate
to complete all of the work remaining, and considers the performance or
production of the resource(s) to date.

The ETC for the project is calculated by summing the manually revised
individual control account estimates.

The decision to manually create a new ETC should be balanced with the time it
will take to perform it. If not calculated manually, the ETC can be calculated
based on earned value data.

Importance of Early Analysis

Hundreds of studies across many industries have revealed that a pattern of

variance from the baseline is usually set early, and the variances only get worse
as the project continues. If a project manager's ability to predict the first 20%
of the project is poor, his ability to predict the remainder of the project is
usually worse.

Early analysis results provide forecasting input. Based on history, after 15% to
20% of a project has been completed, the CPI will not change by more than
10%, and will probably get worse. For example, a CPI of .80 at the 20% point
will probably not recover to reach a CPI of over .88.

It is the project manager's responsibility to keep the project on schedule and

within the project budget, keeping the at-completion costs as close to the
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original estimate as possible. It is also the project manager's job to get the
project back on track when a variance has been discovered. Historical data
indicate that early project analysis has the most potential for impacting the
project, if corrective actions are necessary.

The ‘To Complete Performance Index’ (TCPI)

The TCPI is a calculation that indicates the cost performance (CPI) needed for
the remainder of the project to complete either on budget (BAC) or at an
estimated at completion (EAC) value. The denominator of the TCPI formula is
adjusted depending upon which parameter is used, BAC or EAC:

 CPI needed to complete on budget: (BAC - EV)/(BAC - AC)

 CPI needed to complete at the EAC value: (BAC - EV)/(EAC - AC)

Other Performance Measurements

Many types of performance measures are available, such as:

 Status of quality measurements;

 Status of risk management plan;
 Status of technical performance measurements; and
 Status against other planned baselines
 Lines of code
 Labor hours.

Many different items can be tracked and used as performance measurements.

Run charts, statistical process control charts, and other measurements from the
quality plan are all performance measurements. Tracking identified risks and
mitigating the risks are areas that affect performance as well as cost and
schedule.

Technical Performance Measurements (TPMs) are used by some industries to

track how well the product is achieving critical performance parameters.
Depending on the product, the metric being tracked could be weight, power
consumption, fuel consumption, power output, throughput, production price,
utilization percentage, capacity, or operational use data

Variance Analysis

Variance analysis involves comparing actual progress results to planned or

expected results. The differences between actual project results and planned or
expected results (baseline values and current or projected results), becomes the
variance. Variance analysis can be used to quickly detect deviations from
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desired baselines. The comparison can be within the current period or

cumulative over several periods.

Variance analysis allows the project manager to identify differences between

the work results and the project plan. Identifying these variances from the
desired baselines is only the first step in status reporting. Simply knowing the
variances will be of little value in ensuring a project's success.

Once a variance is identified, the project manager should determine what

caused the variances (root cause) and plan a corrective action. Action must be
initiated if the variances are negative or potentially harmful to the project's
intended outcome.

In many cases, the corrective actions will require some changes to the project.
These must be documented and managed; in many cases, the changes will need
to come under configuration control.

Variance Analysis Reports

Once a variance is detected, whether it is in cost, schedule, or scope and

quality, it should be corrected. A return to baseline is the desired result of a
recovery plan. A completed variance analysis report is a good starting place for
the recovery plan.

When completing variance analysis reports, ask these questions:

o What is the variance?

o What caused the variance?
o What is or could be the impact on the project?
o What is the planned corrective action?
o Specific plan, with milestones?
o Responsible person?
o Milestone completion dates?

A solid plan of recovery must be established, as recovery at a later date is

nearly impossible. The project manager must ensure that a person is assigned
to the task of leading the corrective action, and must make the recovery plan
part of the weekly status review.

Problem Resolution Strategies

Problem resolution strategies can be simple to complex, depending upon the

problem. Project variables of cost, schedule, and scope and quality can be
negotiated with the customer. There is usually one element about which
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stakeholders may be flexible in accepting changes. This can be exploited to the

benefit of the project.

The key to altering the variables is to keep the customer involved in the
problem-resolution process. Remember that customer satisfaction is usually
one of the quality metrics.

Examples of problem resolution strategies include:

 No action required; accept non-critical variance.

 Schedule variances
 Alter schedule dependencies to get back on schedule.
 With cooperation of customer, extend the project to cover slip in
schedule.
 Use the management reserve and assign additional resources.
 Cost variances
 With cooperation of customer, alter scope and quality or schedule.

Revising the Project Baseline

Once the project status has been analyzed and clear trends have been
established over several reporting periods, it may become advisable to revise
the baseline.

Such a decision is not reached easily or very often. The point of the baseline is
to illuminate areas of performance variance. Changing the baseline to correct
variances would be counterproductive.

If, however, attempts to correct the performance problems do not have a

significant effect, and if the variances continue to worsen, the project manager
should seek concurrence of the sponsor and key stakeholders to revisit the
project management plan. This decision should be supported by a clear
understanding of the variances and the dynamics of the project that are limiting
the effectiveness of the corrective actions.

Usually the decision to rework the project's baseline is accompanied by

discussions about renegotiating scope, budget, and schedule expectations.

Get a copy of a project management references book using the internet link
shown below：

https://www.dropbox.com/s/60cik9szolqx8qt/PM%20REFERENCES%20IM.p
df
 P a g e | 320

PROJECT MANAGEMENT
MANUAL
PART 4

SKILLS FOR SUCCESS

2014
 P a g e | 321

Table of Contents Part 4

Subject Page

Work Simplification 322

Success Hints 339

Checking your basic qualities 341

Winners Qualities 343

Creativity: Open your Mind 348

Listen and Learn 351

Cut back the paper work 354

Communicating 364

Skills for the future 371

Motivation: it is up to you 381

Give Valuable Feedback 388

Improve your Delegating Skills 390

Negotiate to a Win 397

Making Meetings Worthwhile 401

Leadership the Real Test 411

Pitfall of Success 414

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WORK SIMPLIFICATION
Work simplification can be described as the intelligent use of well-established
human patterns to encourage and expedite the finding and implementation of
more efficient work methods. Over the years the work simplification approach
rooted in bio-mechanics has earned a rapidly expanding popularity.

Many industrial companies have sponsored formal work-simplification

programs. Most of these have been quite successful in delivering a multitude of
cost-reducing and profit-increasing innovations.

Originally, work-simplification was conceived as an application concentrated

in the area of production methods. Experience has expanded its applicability.
Work-simplification concepts are now utilized to improve performance in
many other activities, including clerical functions, supervisory techniques,
research, and maintenance.

In fact, the term work-simplification has become almost a synonym for an

organized grass-roots methods improvement technique.

The traditional approach to methods improvement has been to employ highly

trained specialist in industrial engineering techniques to spend full time on this
activity. These experts are assigned the task of studying one activity after
another throughout the entire organization.

They are expected to locate opportunities for improved performance

development ways for these improvements to be achieved, evaluate their
feasibility, sell their acceptance, and assist in their implementation. A great
deal of progress has been achieve in this manner. Nevertheless, it has been
found that the effectiveness of this traditional approach may become diluted in
two ways:

 Much time and effort is expended by the expert to become familiar with
each new activity studied in order to ascertain that all pertinent aspects and
interactions with related activities are uncovered and properly evaluated.

 Improvements developed by the experts are usually resented by prospective

users, mainly due to typical reaction to outsiders usually found among
company employees.

The work-simplification approach is designed to minimize these difficulties.

Each employee is assisted to become his own expert and is encouraged to study
and recommend way to improve the performance of his own job motivation is
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develop by demonstrating the value to both workers and management of the

results they can achieve by working together as a team.

Training in the use of a collection of simple but ingenious techniques provides

each employee with adequate know-how to make the required methods-
improvement studies.

Work-simplification is more productive when there is widespread participation

by many individuals from all levels in the company in an organized program.

Carefully planned indoctrination sessions must be provided to develop

effective motivation. All participants should receive training in basic methods-
improvement tools and techniques.

A means of handling ideas, such as a suggestion system, should be developed

to make a method of communication readily available, to provide a way for
obtaining prompt management review of improvement proposals, to facilitate
recognition for contributions and to provide adequate rewards for
achievements.

THE LAW OF INTELLIGENT ACTION

William J. Reilly, in his book entitled the law of intelligent action, states that
"When confronted with a problem, the intelligence of an individual's actions is
dependent upon:

 His desire to solve the problem;

 His ability to perform the tasks required; and
 His capacity to handle the human relations involved."

DESIRE

Motivations for the actions of human beings can be divided into two basic
categories:

 To gain (What is in it for me?); and

 To avoid loss (That is mine. Hands off).

Thus the employee seeks employment as a means of gaining:

 Security or reasonable control over his own future;

 Material reward or money to buy things;
 Opportunity to improve his position in an economic or social way; and
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 A sense of participation (belonging to the group and having a say in the

activities of the group).

It can be expected that the attitude of the individual toward an opportunity for
personal gain will be almost entirely selfish. His controlling interest will be
"What is in it for me?" but his decisions and actions will tend to be rational,
logical, and based on facts.

A direct appeal toward actions which will result in benefit to him and others
can be expected to receive objective analysis.

However, the attitude of the individual toward the possible loss of something
he already possesses can be expected to be entirely different. Decisions will
tend to be base on emotion rather than facts.

Actions taken in connection with a possibility of losing existing possessions

may often be devious and will sometimes appear completely illogical.

This difference in attitudes is of great significance when the acceptance of

methods improvement is being sought.

To an individual not directly involved, the introduction of a cost-saving

proposal involving the use of a new piece of equipment or a new method can
have the appeal of intelligent selfishness, but to a person directly involved, a
change from the existing implies the loss of his own know-how applicable to
the old procedure or equipment.

The fear generated by the prospect of such a loss can be completely cancel out
any appeal of mutual benefit. Therefore, to be successful a work-simplification
program must have identified with it specific management policies and
practices which will assure the individual that the can gain and will not
personally lose as the result of implementation of the proposals.

A suggestion system can provide recognition and financial rewards, but an

additional guarantee by management indicating that participants will not suffer
personal loss through downgrading or layoff is essential.

An agreement to achieve force reductions via attrition or transfer of displaced

individuals to other expanding activities is often a mutually acceptable
approach. With careful planning, this method is usually adequate to absorb
force reductions made possible by work-simplification proposals. Reductions
via layoffs can eliminate any possibility of a successful program.
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After all, the cooperation of the individual just cannot be expected if he can see
that this cooperation will result in direct losses to himself, his friends, or his
associates.

ABILITY

Until the introduction of participating work-simplification programs, which

provided both the receptive climate and the necessary training of the
participants, the idea that the average employee could successfully conceive,
develop and implement worthwhile methods improvements was only a
hypothesis.

Management possessed little evidence and even less faith that such efforts were
likely to be really productive of meaningful results. Today, however, the
impressive results of many successful industrial work-simplification programs
amply document the validity of this hypothesis.

It has been unquestionably proved that the latent ability to develop methods
improvements exists in the majority of individuals and can be effectively
utilized if proper motivation and training are provided.

It has been shown that with only minimal training in a few of the simple basic
industrial engineering tools the average individual can develop an amazing
ability to recognize opportunities for improvement and to implement workable
solutions.

HUMAN CAPACITY TO CHANGE

The basic pattern of human nature has been fairly well established and
demonstrated to be essentially unchangeable. Human behavior, however, can
be modified and to a certain extent controlled. In fact, human behaviour, is
relatively predictable and can be measurably influenced by anyone with a
thorough understanding of the basic mechanics of human nature plus a
willingness to take the prerequisite actions.

In respect to influencing attitudes toward prospective methods-improvement

installations, it is usually sufficient to learn to recognize and deal with two of
the most basic traits of human nature:

 Resistance to change or to accept something new; and

 Resentment of criticism.
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The user can see nothing in a change for him and an excellent chance of
insecurity. Naturally, he resists change. It is almost a conditioned reflex.
Everyone tends to be critical or, and resistant to change.

A successful work-simplification program must make provision to assist

participants to become familiar with this universal reaction and to learn how to
minimize its hampering effect.

Participants must:

1. Learn to avoid confusing fact and opinion. Practice results in habits and can
lead to the development of biased opinions that cannot be properly
extrapolated. Experience increases knowledge of facts which provide a sounder
basis for extrapolation.

2. Learn how to avoid misunderstandings represented as failure to ascertain all

the facts which provides a sounder basis for extrapolation.

3. Learn how to avoid rush judgment. Time is required for mature judgment.
Lack of experience must be taken into consideration in making evaluations.

A change for the better implies criticism of the old method and what is even
worse, criticism of the user of the old method. Direct or implied, constructive
or destructive, the immediate reaction is fast and always the same. No one likes
criticism. It is always taken as a personal affront. It is resented.

To develop a successful work-simplification program, participants must learn

to expect this reaction in others and in themselves. They must learn to
minimize offending others, to keep criticism from improperly affecting their
own judgment and to help others keep it from confusing their decisions.

Methods for solving problems

A problem occurs when people believe they want to know the exact
relationship between two or more measurable facts. For example, if a person
wants to make an increased profit by reducing the costs of materials used in a
work process, there is a problem.

What would happen to profits if plastic instead of steel parts were used in a
machine? What would happen to quality and safety? Plastic, steel, profit and
safety can be measured in exact ways. Therefore, a person can test the specific
relationship between these facts to obtain an answer. A result of using the
answer would be increased profits and productivity.
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All problem-solving techniques have ways of identifying the exact problem,

getting facts, testing for results, reaching conclusions and verifying what you
believe to be true. Several methods exist for modern problem solving, each has
its advantage.

The scientific method

This how all research in science and industry, medicine and business takes
place. A hypothesis (statement of relationship between measurable facts) is
formed and test facts gathered. A conclusion is reached based on math
(probability theory) patterns and later verified with additional or varied testing.

According to A. D. Little there are four facets to be considered by the scientific

approach:

 The simplicity to wonder;

 The ability to question;
 The power to generalize; and
 The capacity to apply.

The work simplification approach applies each of these in a very literal

fashion.

Maintaining an open mind.-(The simplicity to wonder)

The participant with an open mind wonders about everything. He is willing to
explore all alternatives. He is not restricted by past practice, precedent,
tradition, habits, customs, or fear of the consequences of change.

Observing the present way.-(The ability to question)

Few people know how to do an adequate job of questioning. Most of them stop
asking too soon. Sometimes this is merely to avoid embarrassing the person
questioned. To succeed in work simplification, one must get use to question
everything. Work simplification provides an organized plan for questioning. It
is called the questioning pattern and it is a definite sequence of question:

 What is done?
 Where is it done?
 When is it done?
 Who does it?
 How is it done?
 Why is it done at all?
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 Why is it done here?

 Why is it done then?
 Why does this person do it?
 Why is it done this way?

This is a training pattern which is to be followed literally at first but which

soon becomes simply an organized way of thinking.

Exploring opportunities for improvement.- (the power to

generalize)
From the answers, tentative conclusions (generalizations) can be developed.
Possibilities for improvement are then investigated:

What?, Where?, When?, Who?, How?, Why eliminate?, Why change place?,
Why change sequence?, Why combine?, Why change a person?, Why improve
method?

It should be remembered that the person is searching for possible solutions. If

it has never been done before, it may be a better way.

Do not admit it cannot be done or you are defeated before you start. Try to find
ways to make new ideas work, not to prove then unworkable.

Implementing the new method.-(The capacity to apply)

It is not enough to wonder, ask why and develop a workable improvement. An
idea has no value until it is put to use. The capacity to apply implies two
things:

 The ability to see the application of a general rule to a specific problem;

and

 The ability to convert an understanding of human nature into an

approach to the new method which will gain the cooperation of the
people involved.

The statistical method

Observational facts are gathered until a recognizable pattern is identified.
Comparisons are then made to the experiences we usually expect under normal
or average conditions.
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The correlation method

Using records of events that happened in the past, relationships between what
you are investigating and what you are measuring can be identified
mathematically.

The British method

After describing the problem and getting facts, the person or group describes
their present and future position. A plan of action is then organized, followed
and adjusted periodically.

The Japanese method

This method calls for describing the problem and asking the staff for
volunteers. Young, inexperienced people usually volunteer. It emphasizes
improvement of the situation at a slow but firm pace along with company
culture and work satisfaction improvement.

The Ordione method

This method stresses time. Its basic idea is that, if things do not change, results
remain the same. Therefore, if your work results change you have a problem.
One or more factors must have changed at the same time. Find out what
changed in the same time frame and that should correct the deficiency.

The brainstorm method

This method uses a group to identify several answers rapidly. First you select a
group of five to seven people, some with experience with the problem area.
Some are warned in advance about the job and others are not. A short time
limit is set.

One person records the answers group members rapidly fire; objections or
explanations are not allowed at first. What you wind up with is a variety of
answers, some better than others.

One offshoot method is called the Delphi method, in which members of the
group are hidden from each other. The idea is that some members with a great
deal of power or prestige can influence other's ideas excessively, so this
method prevents such influence.
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Deductive reasoning
After gathering specific facts or clues, the solver uses them to reach a general
conclusion. For example, a person might say, 'Because the wind is blowing, the
clouds are darkening and the lightning is flashing.... I believe the rain will
come down in the next thirty minutes.

Inductive reasoning

In this method, a person starts with a general conclusion and then looks for
supporting facts or clues. In law enforcement, an officer might hear a
confession and later search for clues or evidence that the crime actually
happened in that manner. In business, if a bankruptcy happens, auditors may
search for exact problem areas they know may exist.

Judicial Thinking
To solve problems or reach decisions with this method, a businessperson might
assign someone to present all the facts possible to support a 'yes' decision to
buy a mainframe computer. Another person should then present all the 'no'
facts about the possible purchase. The company executive team would then
judge where its best interests lie.

New Thinking Techniques

This method suggests that people often think only in straight-line fashion,
using normal logic. This can be symbolized by a person thinking one-two-
three-four-five-six and so on.

New thinking techniques suggest entirely changing the framework of reference

of the problem situation to achieve results in different ways. This kind of
thinking could be symbolized by a person thinking one-two-three-four-a-b-c-
five-six and so on. An example of this kind of problem solving technique
would be the following:

An office building six stories high with old/slow elevators causes tenant
complains. Renters are threatening to move out. Lack of profits would be
catastrophic for the owners. Engineers are hired to devise a solution. No luck.
Repairs to the elevators would be too expensive because they are built into the
inner office structure (the engineers are thinking along logical or usual lines).

The problem is solved by an employee in the boiler room who used absolutely
different thinking. He purchased six full-length mirrors from a department
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store. The installed them, one at each of the elevator doors on six floors.
People, who were so busy looking at themselves, did not notice or complain
about the slow elevators afterward.

The Kissinger method

This method depends on language. The exact problem is re-described in
various ways. Questions by an outside expert are used to encourage two or
more arguing parties to define what they can and cannot accept in the way of a
settlement or answer. This method is based on the fact that language is vague,
and people usually do not get angry if they are asked questions that concentrate
on facts instead of repeated emotional statements.

Hard work method

In this procedure, you assume hard work will accomplish any task. Past
generations were often trained to work hard regardless of any situation. So this
method is still popular with supervisors, regardless of results.

Lazy man method

Should you have a problem, just hire and expert to solve it. Why try to invent
the chicken when you live next to a farmer with a front yard full of the birds?
Consultants or experts are very cost-effective when properly introduced.

The subconscious method

With this method, you define your problem and get all the facts you can.
Decide which characteristics the solution must have. Relax your mind and
body in a quiet, interruption-free place. As your mind moves from relaxation to
sleep, it enters the Alpha condition which registers ten megacycles per second
on an electronic measuring device.

The average person can better identify the Alpha stage by merely noting that he
is fully relaxed and is moving toward sleep. Curiosity disappears, too.

During this stage, people seem to access most of their memory and make
creative associations that help find solutions to difficult problems. The answer
often comes all at once, not in pieces, so be prepared to write it down quickly!
Bio-feedback training can help you train yourself to get into and out of this
Alpha condition with ease whenever you wish.
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Problem solving general facts

A problem exists when you want to establish the relationship between two or
more measurable facts.

 All problems have answers. There are no exceptions!

 Problems usually have several answers, not just one.
 No one solves a problem without first defining it exactly.
 Logic is not enough. Since we never have all the facts, we must depend
on creative intuition to some degree. Therefore, logic and intuition are
equally valid.
 All elements of the problem situation must be measurable.
 Everything is measurable. There are no exceptions.
 Finding the answer is not the last step, merely the last point before
taking action.
 It is human to seek solutions even before the problem is understood. But
do not do it yourself.
 Let your purpose guide your choice of alternatives.

Five Steps of Methods Improvement

A definite and permanent advance is seldom made until use is made of
measurement. This is particularly true where human factors are involved.

Human performance tends to vary so much that unless some form of

measurement is provided and used as a basis for decisions, there is little
possibility of repeating a process accurately or predicting or controlling future
conditions sufficiently to allow introduction
of improvements.

Mere observations done objectively, is a form of measurement. It can be used

to classify, label, and compare. An interesting demonstration is to pick a task
with which you are familiar but not directly involved.

Now, subject the performance of this task to your concentrated and undivided
attention. Chances are that you will find that you were completely unaware of
many important aspects. It can be truthfully said that the commonest article of
commerce is misinformation about fundamental things.
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An organized pattern of observation is of great assistance. Work simplification

suggests a step-by-step program for studying tasks:

1.- Select the task to be studied.

Be careful that only one task is studied at the time. Failure to observe this
caution can lead to confusing results or to ineffective efforts.

Because time is valuable, the best possible use of it must be made by doing
first things first. Pick the job that needs improvement most. But remember the
human problem. do not rush in too fast. Start by improving your own job or
jobs in your department.

Remember, if you work on someone else's problems, they will probably resent
your help as implied criticism.

Look for situations as:

a. Bottlenecks.
Leave the smooth-flowing jobs alone until you crack troublesome ones.

b. Time-consuming operations.
Lengthy jobs usually offer the greatest opportunity for improvement.

c. Chasing around.
Activities of this type are almost always unproductive and often can be eliminated or
drastically reduced.

d. Waste.
We become so accustomed to some forms of wasted materials, time, or energy that we have
difficulty in recognizing it as such. Increases go unnoticed. Look carefully.

2.- Observe the present way in which the task is performed.

Get all the facts. Be sure to include all the requirements for the performance of
the task. Do not forget to determine interactions with related tasks. Make a
process chart and use it to record all details.

3.- Challenge everything. Question what is done.

a. Challenge the whole job being investigated. Why is it done? Is it necessary?
Can it be done another way or at another time or place?
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b. Next, challenge each 'do' operation. This is because if you eliminate the 'do'
you automatically eliminate the make-ready and put-away that go with it.

c. Then supply the checklist of questions to every detail.

WHAT?
What is done? What is the purpose of doing it? Why should it be done? Does it do what it is
supposed to do?

WHERE?
Where is the detail being done? Why should it be done there? Could it be done somewhere
else?

WHEN?
When is the detail done? Why is it done then? Could it be done at some other time?

WHO?
Who does the detail? Why does this person do the detail? Could someone else do it?

HOW?
How is the detail performed? Why is it done that way? Is there any other way to do it?

This questioning attitude helps develop a point of view that considers the good
of the whole operation rather than that of any one department or individual. It
will often bring to light possibilities for eliminating useless or unnecessary
work which adds no real value to product.

It tends to bring out the type of operation or equipment needed to perform the
required work most economically. Do not overlook the possibility of obtaining
ideas from other people working on the same operation. And do not forget that
when you ask for these ideas you have a human problem.

You will get the ideas only if they want to give them to you. they must be
convinced that improving performance will help them.

4.- Explore opportunities for improvement.

Consider all possibilities. Examine each in detail. Evaluate, compare, and
select the best alternative. Use the flow process chart or multiple-activity chart
to pretest and demonstrate the feasibility of new methods.
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a. Can operations be eliminated?

What is done?, Why is it done?, Is it necessary?. In far too many instances a
good deal of time is spent studying major operations for possibilities of
improvement without asking the question, 'Why is this operation performed?'

If it is found that an operation has been in the plant in the same way for a year
or longer, it should be questioned. A better way is probably available. If
operations cannot be eliminated, perhaps there are unnecessary transportation
and storage. Question every handling.

Then, if handling is absolutely necessary, look for:

 Back-tracking of work;
 Heavy lifting or carrying;
 Trucking;
 Bottlenecks; and
 Skilled operators doing handling work.

b. Can activities be combined? Can sequence, place, or person be

changed?
This is an important opportunity for improvements. Whenever two or more
operations can be combined, they are often performed at a cost approaching or
even equal to the cost of one.

Likewise, transportation and storage between the operations may be

eliminated. If operations cannot be combined, find out if it is possible to
combine a transportation and an operation. By changing the sequence of an
operation, one may eliminate backtracking and duplication of work.

The order in which operations are performed may have been derived from the
original nature of the process. The process or product design may have been
changed since then. But has the order of operations been restudied and changed
to regain optimum efficiency?

Sometimes, just changing the place where the work is done or by whom it is
done will help. Better lighting, better ventilation, better tools may be available
elsewhere. Perhaps another operator is better equipped to do the operation.

c. Can the 'do' operation be improved?

How is it done?, Why is it done that way?, Is better equipment available?, Are
other materials available?, Can new techniques be applied?.
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Unfortunately, it is here that a great deal of work simplification started in the

past. We must learn to consider this step the last resort. Major savings can
usually be found, but the price of the new equipment, materials, training, etc.,
is also usually high, sometimes beyond our reach.

Often relatively small rearrangements, method changes, and layout revisions

will accomplish almost as much with negligible cost.

5.- Implement the new method.

See that all people involved understand the objective of the task and
desirability of the new method. Take care that each person involved knows and
understands his or her part in the new method. Be sure that none involved will
lose financially or socially as a result of the change. And, even more important,
be sure that they know it!
Charting Techniques

There are many charting techniques which have been designed to assist in the
development of improved methods. They are:

 Flow process chart;

 Multiple-activity process chart;
 Pareto;
 What if?
 Gantt chart;
 Critical path network; and
 PERT.

All these charting techniques are similar in principle. They are a means of
recording and studying activities required to perform a task. The above list is in
order of increasing complexity.

The flow process chart is used to record a single sequence of activities. The
multiple activity chart is used when several sequences of activities occur at the
same time and their relationship with respect to time are significant.

The Gantt chart is utilized when the number of simultaneously occurring

sequences of activities becomes large. The use of the critical path method
network is desirable when some of the sequences of activities are time-related
and some are not. This approach can become quite complicated and then
computer programs must be used in conjunction with it.

PERT (program evaluation and review technique) is a variation of the critical

path technique into which another variable, probability, has been introduced.
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Applications of Work Simplification to Quality

Quality control work is different from production work in two basic ways:

o Most quality control work input is assigned and controlled on a job-by-

job basis rather than unit-of-time or product-output. For this reason,
work content is usually non-repetitive in nature.

o Direct correlation between work output and product or service output is

seldom feasible. This tends to make verification of savings difficult.

These differences do not limit the usefulness of the work- simplification

approach. But they do change the emphasis somewhat.

Improving Management Efficiency

The problems encountered in applying intelligent management to quality

control are very complex. Effective management usually requires a great deal
of data. A huge volume of records are often generated. Work simplification can
give a big assist to the streamlining of these activities. For instance:

1. Work-control procedures.
Efficient assignment and control of work on a job-by-job basis requires much
planning and a large volume of paper work. This work is very repetitive in
nature and an excellent subject for work simplification.

On work of caution: simple elimination of paper work or arbitrary reduction in

the number of work orders is not the answer if it results in loss of control.
Much can be done, however, to reduce complexity of this documents and
decrease the effort and time required to process them without destroying their
effectiveness.

2. History records.
The development of maintenance history records is absolutely essential to
carrying on a productive quality control program. But these records are often
quite voluminous and time-consuming in both preparation and use. The
methods used for the assembly and retrieval of information from these records
represent an excellent area for work simplification.
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Improving Technical Decisions

The following are areas of effort which can greatly benefit from the use of the
work-simplification approach, specially when equipment grows more and more
complex:

1. Pre-detection of incipient failures.

Effective preventive quality control will require improved techniques for predicting when,
where and how failures are likely to be incurred. This probably involve the development of
better inspection techniques, the introduction of the use of more diagnostic instruments, and
perhaps the introduction of continuous monitoring techniques.

2. Post-failure remedial-action decisions.

The determination of the exact nature and extent of equipment malfunctions and remedial
action indicated is becoming increasingly difficult as the variety and complexity of facilities
increase. The advance of standard diagnostic routines offers excellent opportunities for
development of better methods.

3. Repetitive-job standardization.
Use of standardized, pre-selected procedures for the same or similar jobs will increase the
volume of work upon which detailed methods-improvement studies can be justified.

Improving manpower and machine utilization

The multiple-activity process charting technique provides an excellent vehicle
for exploring ways to:

1. Reduce crew sizes.

This is accomplished by using pre-planned, shop make-ready, prefabrication or pre-assembly,
special-handling equipment or tools, etc., can frequently reduce the amount of work done by
field crews.

2. Reduce out-of-service time.

Careful pre-scheduling can often appreciably reduce the total time required to complete jobs.
The multiple-activity process chart is a good tool for this purpose. When jobs are large and
complicated, it is usually necessary to resort to the more complex critical-path technique.
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Success Hints
We all want to be proud of who we are and what we have accomplished. We
want the satisfaction of knowing we are making the most of our potential. In
short, we all want to be successful in our own eyes and in the eyes of others.

But what exactly is success? What makes a person successful, someone others
look up to and turn to for direction?

Even more important, how do you join the ranks? How do you grow and
advance and reach a point in life that you would be happy to define as
successful?

There is, according to George Gallup Jr. and Alec M. Gallup, a "success
personality." In The Great American Success Story, a book based on a survey
of 1500 successful people, they list characteristics typical of those who reach
the top of the ladder:

1.Common Sense.

Successful people can make sound judgments on the everyday affairs of life
and brush away extraneous, irrelevant thoughts and ideas to get to the core of
what matters. The humorist Dr. Charles Jarvis said we all have a lot of it
because we certainly "ain't used any." That's not so with the achievers.

In their survey, the Gallups found a strong majority listing common sense as
the cornerstone of their successes. A Texas oil magnate looked on common
sense, in part, as the ability "to reduce one's understanding of a complex
problem to the simplest terms."

2.Specialized knowledge of your Field.

This results from making an effort to keep learning constantly throughout life.
“Do your homework," said an industrial corporate leader. "Nothing helps
success more than knowing what you're doing. It reduces the risks and works
like an insurance policy for your own stability." Another corporate official
seconded this, then said that in order to achieve success, you must want it. He
paused, then added, "Then you must work to keep it."
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3. Self-reliance.

This is the courage to get things moving in life, relying primarily on your own
resources and abilities. You do so by setting goals and exerting plain old
willpower.

4. General intelligence.

The achievers polled indicated they meant something specific when they
mentioned intelligence. They looked on it as an extensive vocabulary, good
reading skills, and good writing skills.

5. The ability to get things done.

Successful people are diligent and hard-working. They have good

organizational abilities and productive work habits and can distinguish between
what is important and what is not. That doesn't mean being a compulsive
perfectionist who strives endlessly toward impossible goals, terrified by the
threat of failure and never feeling rewarded by accomplishments.

6. Leadership.

Successful people lead through motivation, not intimidation.

7. Knowing right from wrong.

It's important to be sensitive to moral and ethical concerns.

8. Creativity.

Natural talent plus insight or intuition equals creativity. Natural gifts are not,
however, as important as making the best use of your abilities. Even an artist
rated his hard work over his talent as the reason for his broad public
acceptance. That same artist put ambition, motivation, and a desire to excel
before his talent.

9. Self-confidence.

This feeling of assurance is based on knowing you've done everything possible

to prepare. It doesn't imply a willingness to take foolhardy risks, but it does
indicate a willingness to strike out in new, uncharted directions.
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10. Expression.

This is the ability to get your message across, even in front of a large group.
The noted investor John Templeton figured out an approach to public speaking
when he was in high school. He stood before an audience of more than 100
persons and understood the meaning of stage fright. It didn't stop him. He
with himself that he wasn't perfect, but nobody expected him to be perfect.
"All I can do is the best job I know how. If I pray ahead of time, I'm likely to
do as well as God wants me to. So there's no reason to be shy or frightened
about it."

11. Concern for others.

At the very least, successful people can get along with others.

12. Luck.

Luck always helps, but it's never enough. The head of a major insurance firm
expressed his thoughts about luck this way: "Given basic education and good
health, it seems to me that individual drive, initiative, and efficient hard work
are the ingredients of success - provided the person has a well-balanced
personality and high ethical standards. These attributes will position you to
exploit good luck and contain the effects of bad luck."

The true achievers interviewed agreed on something most of those striving for
success might not believe:

The monetary measures of success - a lot of money, extra homes and cars, and
other trappings - lose their importance, once achieved. But the achievers
continue to strive for a sense of personal worth and self-respect. And they
value - and many of them still desperately seek - those two elusive benefits,
great happiness and satisfaction.

Checking Your Basic Qualities

Stephen Strasser, author of Working It Out, believes that persons intent on

success should first check and improve characteristics linked with their
interpersonal relationships. Here are four of them:

1. Empathy.

Empathetic managers and employees express to others a sense of

understanding and compassion. One manager showed this in a simple way.
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Employees often expressed to him a multitude of work frustrations, career

disappointments, and even their personal family problems. All got the
impression that the boss really understood how they felt.

His secret was that he would listen - intently. He said virtually nothing, but his
attitude said a lot. He showed compassion and understanding, but never pity.
And he made them move toward a solution. "What are you going to do about
it?" he would ask. "And what can I do to help you get exactly what you want?"

2. Humor.

Being able to laugh at yourself is one of the greatest talents that skilled persons
have. It tells others you will take responsibility for your mistakes. Revealing
some of your human frailties, opening yourself up, sharing your personal self,
all those contribute to solid interpersonal relationships. But keep humor
positive. There is nothing less funny than hurtful sarcasm or putdowns.

3. Courtesy.

Common courtesy helps to build strong relationships. It also creates long-

lasting impressions of you. By being courteous, you are telling others you are
thinking of someone other than yourself, you are treating others as you wish to
be treated, and you are an approachable person, willing to engage in a
relationship.

4. Building trust.

To get the trust of others, you must demonstrate that you will never breach
their confidence, that you will be honest, and that you have their self-interest in
mind. Words to others usually aren't enough. Only actions - your actions -
count.
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WINNERS QUALITIES
George Sullivan explores definitions of success in his book Work Smart, Not
Hard, which divides people into winners and losers. Winners, he says, have
critical skills that they've developed to a high degree. They don't leave
winning to chance; they make it happen. Winners usually have these qualities:

The success mindset.

They have a winning attitude. They're enthusiastic about their work. Under
stress, they have no doubt about themselves. There's pride and self-esteem
involved. They have both a desire for and an expectation of success. Persons
who fail often have the desire but not the expectation.

Setting goals.

Winners are single-minded in setting, then pursuing goals. Your main goals
should be five or ten years in the future and should involve more than a good
wins or lavish perks. Without goals, chance and circumstances will determine
where you will go. You also need short-range goals, for today, next week, and
next month. Achieving those enables you to attain your long-range goals.
Having goals increases your efficiency and effectiveness, and makes it easier
for you to make decisions.

The education advantage.

Education pays big dividends in terms of winning. While many of the

dividends of an education are not measurable, some, such as salaries, are, and
they demonstrate conclusively that money spent on education is well spent.

Controlling others.

Winners need to deal effectively with other people. Some do it intuitively,

others learn it. They know what makes people tick. They really care about
others. They're good listeners and quick to show appreciation. They avoid
head-on collisions with people, realizing a heated argument accomplishes
nothing.

Playing the part.

This means dressing in a way that says success. It means being able to present
ideas clearly and with authority, and doing this in front of a group as well as on
paper.
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Achievers
In The Achievers, Raymond Johnson takes a different look at success.
Achievers, he says, are workers. They enjoy what they do. If you want to be an
achiever, Johnson suggests, clearly define what you mean by work. The
average person knows what it means to his bank account. The achiever knows
what it means to his life.

Setting Goals
Successful people succeed because they know where they want to go. You must
decide what you want to be and what you want to accomplish. The best way is
to set goals that will point you in the right direction. Goals will also help you
to determine when you've arrived - or if you have got off the track.

Areas to Cover
Goals must be specific, and they must cover many areas. It's not enough
simply to decide you want to have a million dollars or be president of your
company. In Work Smart, Not Hard, Sullivan suggests that you set goals in
these categories:

Career. Reach a certain professional level, get promoted, be given greater

responsibility, learn a new job skill, complete a project in a specific amount of
time.

Financial. Earn a certain amount of money in a specified time, get a raise, set
up an investment program.

Educational. Earn credits toward a degree, take courses in subjects in which

you've always been interested.

Physical Fitness. Jog five or four times a week, quit smoking, join a health
club, diet.
Community/charity. Do volunteer work at the hospital, sign up with Literacy
Volunteers or a similar organization.

Personal. Work to become less anxious, hostile, jealous, or insecure; meet

new people, cultivate new friendships.

Leisure. Do something different - go whale-watching, visit a country or city

you have never been to before, join an archaeological dig in Mexico.
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Planning Your Goals

As you plan your personal life goals, ask yourself what else you want in life,
what changes you hope to make in yourself and your environment, advises
Charles R. Hobbs, author of 7-time Power. Dream a little. You have your
whole life to accomplish these goals, so think of your major interests and
assess your abilities realistically.

Few people undertake this type of analysis, often because they're reluctant to
leave their "comfort zones," the areas such as the office and the home where
they feel most at ease. To set and achieve goals, you have to move out of those
zones and stretch yourself.

The areas for personal life goals recommended by Hobbs are different than
those suggested by Sullivan. Hobbs urges you to plan at least one personal life
goal in each of the six categories that add up to a balanced life: spiritual,
professional, financial, social, intellectual and cultural, and physical and
recreational.

Write Them Down

Write each of your goals at the top of a sheet of paper. Now think of the ways
to reach them, and write them down. These will be your intermediate goals,
and they should be prioritized.

As an example, if your long-range financial goal is to have a net worth of $1

million by the time you retire, an intermediate goal might be to start by
investing $2,000 this year in a growth mutual fund.

A long-range goal of maintaining excellent health might include an

intermediate goal of having an annual physical examination. Make such a goal
specific. Have a physical every December. Then, when you are listing your
immediate goals, you will write, "Make an appointment for an annual physical
on December l."

Make Goals Specific

It is important to keep goals specific and measurable. One good way is to date
them, such as "By August 1, I will . . . " . For goals where dates don't apply,
such as "I will exercise daily," assign a beginning date.

Putting goals in writing is important, but that doesn't mean carving them in
stone. Be adaptable if circumstances call for change. Make your goals a part of
your daily life. Commit at least thirty minutes first thing every morning to a
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planning session when you will translate your long-range and intermediate
goals into immediate goals. These will be the prioritized items that will make
up your daily action list.

Setting Priorities
Sullivan notes that it takes many steps to reach your goals, so deciding which
steps to take means you must set priorities about your daily activities, so they
fit with the goals.

Tom Landry of the Dallas Cowboys uses a method told to him years ago. At
the end of each day, he lists on paper all the things he must do the next day.
Then he numbers them in the order of importance. He carries this list, and
checks each item off as he accomplishes it. He doesn't worry at the end of the
day whether he hasn't completed all of them, because he has worked on the
most important ones.

Says Landry, "I have used this same idea for many years and have found that I
can accomplish more things with this method than with any other idea I have
ever received."

A refinement of this is to use the list to make a daily schedule, blocking out
chunks of time to handle the most important items.

Enjoy Reaching Goals

Stephen Strasser, in Working It Out, offers some guidelines to make your
selection of goals a greater success. He promises that if you follow these rules,
you'll learn that the process of attaining goals is fully as satisfying as actually
reaching them.

Goals, says Strasser, must be concrete, measurable, and understandable. "I

want to be rich" is a goal that breaks that rule. It's understandable - but that's
all. They must be attainable. Goals that are impossible shouldn't be called
goals. They're simply daydreams. They must be challenging. If you set goals
that are too easy to attain, you'll lose interest in them.

You need feedback on whether you are attaining them. Short-term goals help
in such cases. It may be difficult to judge whether you are making progress on
a goal to "Get an education." You get immediate feedback at the end of a term
if your goal is to get a specific number of credits toward a college diploma.

Finally, you must value your goals and find their pursuit personally
meaningful. By following these suggestions when you draw up your goals,
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you'll find you are focusing your attention and energies, and you will be moved
to make action plans to attain them.

Three authors, Matthew J. Culligan, Suzanne Deakins, and Arthur Young, in

their book, Back-to-Basics Management, provide some concrete suggestions
for goal-setting. They define goals as the internalized drives that make all of
us go.
Look At Yourself
They say the first step in setting goals is to take a long look at yourself. Form a
picture in your mind as to what you want that reflection to look like.

Write down your financial and personal goals in time sequences. Make a list
of what must be done to achieve them. Then break it down even further by
goals for career, physical, family, attitude, education, and entertainment. And,
when you've finished them, don't set them aside. You must work on your goals
every day. That doesn't mean working on every goal every day; it does mean
working every day, keeping your whole system pointed in the direction of
action.

Special Handling
You have probably selected goals in categories where you've been less than
successful in the past. If so, give these special handling. Visualize yourself
completing them - every day. When you speak of them, say "I have decided to
. . . " rather than "I have to . . . " Talk about them and yourself in positive
terms, focusing on the rewards of success, not the cost of failure. When you
have written down these goals, show them to someone who can help you to
accomplish them.

Act and think like a winner

The authors of Back-to-Basics Management conclude with this thought: The
key to being organized is not penciling notes on your calendar, but rather
applying self-discipline to your system. It takes more than writing out a set of
goals to make them influence your life.

Your Mental Attitude

W Clement Stone and Napoleon Hill, noted in the field of motivational
literature, offered seventeen principles of success. Writing about those in
Believe and achieve, Samuel A. Cypert said that list must be headed by having
a positive mental attitude, for that has helped millions to take charge of their
lives, realize their potential, and reach the lofty goals they have set for
themselves.
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A positive mental attitude is composed of faith, optimism, hope, integrity,

initiative, courage, generosity, tolerance, tact, kindness, and good sense.

It is the most personal of principles. You - and you alone - can control what
your mind accepts or rejects. You know that you face a barrage of negative
influences every day. But you can replace those negative, self-defeating
thoughts with positive, self-fulfilling thoughts.

Practice Daily
It's not always easy. You must practice it during every waking hour until it
becomes a habit to greet self-doubt with self-confidence. You must have
goals, develop self-confidence, and know that you are going to succeed. Cypert
promises that when you do this, the result is mind-boggling. You will find that
you have unleashed a powerful force that will allow you to achieve any goal
that you set for yourself.

Creativity: Open your mind!

Once you know where you want to go, there are several abilities you can
develop to speed you on your way. One that's often overlooked is creativity.
Most people think of creativity as the province of artists, but there is room for
creativity in all walks of life. Learn to open your mind and take advantage of
your experience and abilities.

You then will be better able to recognize and maximize opportunities and to
turn problems into solutions. If you develop your creativity, you'll be
welcomed by businesses who know the premium that today's competitive firms
put on discovery and initiative.

The individual creativity is spirited, says William C. Miller in The Creative

Edge. It's based on key strengths in at least some of the following
characteristics:

Spontaneous: fresh, curious, willing to take risks, sense of humor.

Persistent: energetic, courageous, assertive, independent, determined.

Inventive: looks at problems in new ways, likes challenges, sometimes

skeptical, comfortable with ambiguity.
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Rewarding: willing to share credit, values personal satisfaction and peer

recognition over money.

Inner openness: intuitive, easily switches from logic to fantasy, open to

emotions, think/act/create/innovate in different modes.

Transcendent: sees situations realistically, fantasizes how he or she wants

things to be, is confident he or she can effect change, chooses growth over fear.

Evaluative: discerning, discriminating, judgmental at appropriate times.

Democratic: values and respects people, seeks stimulation from variety

of people, responsible, promotes highest benefits of all concerned.

Key Characteristics

Courage to take risks and persistence are the key characteristics of the creative
person. The other characteristics are repeated patterns of thinking, feeling, and
behaving.

We become that which we dwell on and to which we give our attention. So

focus attention on yourself in your most creative moments. Imagine yourself
as the creative person you want to be.

Start with a vision of who you are and want to be rather than what you want to
do or have. You can build in the "doing" and "having" to fill out your vision.

Enhancing Creativity
While we're all creative, it may take some effort to bring out that creativity.
Miller offers seven activities in which things "appear" to get created. He calls
this the APPEARE process.

A Be AWARE of your complete current situation. For a scientist, that means

analysing the available facts and research. For a meeting planner, it could be
who will attend and what will be covered. Keep your mind open. Useful
information can come from unexpected sources.

P Be PERSISTENT in your vision. A persistent vision must be specific.

Imagine it with all your senses. Focus on it often and positively,
acknowledging doubts without investing energy in holding on to them. A
writer may have a vision of a completed book, an entrepreneur a vision of a
thriving business.
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P PERCEIVE all your alternatives. Avoid "idea killers," people who make
you feel impractical, stupid, or unsuccessful.

E ENTERTAIN your intuitive guidance. Relax so you can assimilate

information and envision solutions. Your intuitive self compiles verbal and
non-verbal information, then your muse takes over.

A ASSESS and select from among your alternatives. Sort them by category
and rank them by criteria. Then choose combinations of solutions and
eliminate unacceptable alternatives. Look for the best solution for all those
affected, based on your emotions, intuition, and analysis. Don't let your ego tie
you into a pet solution or a hidden agenda.

Be REALISTIC in your actions. Act on the best knowledge available then, go

with the results. Each result will stimulate more creativity and problem-
solving for the next situation.

E EVALUATE your results. The creative process demands answers to the

questions "Has the vision been realized? What are the results? What still
needs to happen?" You can measure success by how well you foster an open,
questioning environment for ideas or develop and document new ideas worth
testing or accomplish positive results using documented innovative approaches.

Creativity is more than an act or a skill or a style of working. It is a way of

being and of benefiting society.

Have Better Ideas

Creativity is a matter of unlocking the ideas that are within each of us,
say Jimmy Calano and Jeff Salzman in Career Tracking.

Your inner voice, the subconscious mind, is at work when the conscious mind
is doing something else. Learn to listen for that voice. When insights hit, turn
your attention to them. Write them down immediately.

Break out of your thinking patterns. Try putting your problems on paper - by
drawing them. Or snap yourself into a creative mood by doing your thinking in
a different location - in an airplane or driving home by a different route.

Look for Answers

Look for more answers. Once you have thought of a “right” answer, try to
think of three or four more. Something better usually surfaces.
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Enlist the help of others. Write out the facts of a problem and your solutions.
Then circulate these to those who work with you, from entry-level clerks to top
management, anyone who might have an opinion. Set up brainstorming
sessions. Open yourself up to new and more ideas wherever and however you
can.

Listen and Learn

Tom Peters (Thriving on Chaos) puts it succinctly. If you want to foster
involvement in the team concept in management, you have to listen constantly,
share ideas and information, recognize achievement, and celebrate the small
victories in day-to-day performance.

Emphasize listening, he says. It means paying attention to subordinates,

teammates, and others. It can be informal, such as at a coffee break, or it can
be formal, a planned meeting, complete with an agenda.

But listening is not that simple - and it is a skill few people think of
developing. It is such a routine, everyday activity that most people give it little
or no thought. Yet it can have a tremendous impact on success in your
personal and business life.

When you know how to really listen, you gain a strong advantage in your
ability to acquire and retain knowledge. Listening is also a key factor in
understanding and influencing other people.

Listen Better
"All of us can learn to listen better," says Thomas E. Anastasi, in his book
Listen!

Listening is getting meaning from situations involving the spoken word. The
more familiar you are with words people use, the less often you need to
interrupt the speaker to ask for clarification.

Listening can also tell us what people fear. It makes us aware of how we may
unintentionally threaten and intimidate others. Before we can deal with people,
it helps to know their motivations, fears, and goals. We learn by listening.
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Listening Is Hard Work

Listening can be more tiring than talking. That is because it demands
intellectual, perhaps even emotional, effort. It is draining and tiring because
unlike hearing - it demands total concentration. Listening is an active search
for meaning while hearing is passive. When you listen, two people are
thinking you and the speaker.

Focus on Listening
Words spoken to you come at the rate of 90 to 200 a minute. The differential
between the speech and speed of thought explains why we are so easily
distracted. The plodding speaker is using only a fraction of our listening
capacity. With the most of that capacity, our mind wanders.

You will concentrate better if you listen with questions in your mind.
Evaluate, process, and use incoming information. Ask yourself:

 What's the speaker saying?

 What does it mean?
 How does it relate to what was said before?
 What point is the speaker trying to make?
 How is this helpful?
 How can I use the information the speaker is giving me?
 Does it make any sense?
 Am I getting the whole story?
 Are the points being backed up?
 How does this relate to what I already know?

You should also question the speaker, given the opportunity. The speaker will
then perceive you as someone helping to develop the meaning in the situation.
You and the speaker need to become partners in the exchange of meaning.

To Listen Better
Words have definitions but meaning comes from the people you're listening to.
Feeling and emotion are part of that meaning. Being a good listener doesn't
mean you have to be a psychologist, but it does mean you should be alert to the
full dimension of meaning - not just words. To do this, you may have to help
the speaker get the meaning across through your clarifying questions and by
acquainting the speaker with your listening level.
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Maintaining eye contact and an appropriate nod or two also help to let the
speaker know you are listening. Evaluation, positive or negative, affects the
meaning a speaker will give you. To get into the speaker's mind, withhold
evaluation until after the speaker has finished.

Be Patient and Paraphrase

One of the best ways to get people to listen to you is to listen to them. This
may mean waiting for them to finish what they have to say. Paraphrasing is
another effective skill. When you paraphrase, you check your understanding of
meaning, and show the speaker you have listened accurately.

Paraphrase when you want to make sure you've understood, when you're not
sure you have caught the meaning, or before you agree or disagree. The
paraphrase is also useful in dealing with people who repeat themselves. They
need this assurance that they have communicated their ideas to you.

Phillip L. Hunsaker and Anthony J. Alessandra offer these tips for "power
listening" in The Art of managing People:

 Don't interrupt
 Listen for main ideas
 Concentrate on substance, not style
 Fight distractions
 Stifle anger
 Take brief notes
 Let others talk first
 Empathize
 Withhold judgment
 React to the message
 Read the feelings between the lines
 Ask questions.
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Cut Back the Paperwork

Most of our technological advances in the world of the business office in recent
years - the computer, the photocopying machine, the fast-printing shops, the
modem, and the fax - enable us to turn out more and more paperwork faster
and faster. And we have learned to use them - with a vengeance.

One goal of the computer was to move toward communication in a paperless

business society where words and figures passed from your monitor to mine
without paper But link that computer to a modem printer and it will spew forth
words faster than they can be read.

Are we offering you a nostalgic plea to return to the good old days before
Gutenberg? Is this a suggestion that we go back to a day - even before the use
of the mimeograph machine and carbon paper - when so little paperwork could
be produced by so many? Of course not.

We are just issuing a warning. Your career, if you let it, can be buried beneath
paper. To avoid this, you need a system that will quickly sort out what you
need and move the remainder out of your way. Stephanie Winston, in The
Organized Executive, offers such a system. The key to managing the paper
you receive, she says, is decision-making and processing.

The TRAF Technique

There are two things you can do with a piece of paper on your desk. You can
avoid managing it by leaving it there to gather dust. Or you can TRAF it.
TRAF is an acronym for the four decisions you can make about each piece of
paper.

You can TOSS it in the wastebasket, REFER it to someone else, ACT on it, or
FILE it. The only way to handle your paperwork successfully is to TRAF every
single piece of it.

Toss. The Magazine Business Week once said,

"Man's best friend, aside from the dog, is the wastebasket."

If you hate to toss papers in the wastebasket, keep asking yourself what is the
worst thing that could happen if you tossed them out. But don't agonize over
this. If in doubt, keep it with other papers to be filed.
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Refer. That means delegating the paper to a secretary or staffer, or passing it

along to a colleague with greater knowledge or expertise in the area. Some of
this can just be marked for a specific person and dropped into your out-box.

If you wish to follow up on any of it, make up a personal track file, with
folders marked for your secretary, your boss, and all reporting staff members -
Drop a carbon of any assignment or idea in the person's folder, then once a
week or so, review the files and ask for progress reports.

Act on it. Put all the papers that require action on your part into an action
box or folder. Acts include writing a letter or report or doing research.

File it. Set up a folder marked "to file" for your own files. Put papers that go
to the general office files in your out-box. Remember that if you have to do
something with the paper, it is an "Action," not a "File."

Acting on the Action Pile

Once you have TRAFed every piece of paper on your desk, you are ready for
the second half of the daily paper processing routine, and that is acting on the
"Actions."

Start by moving all the follow-ups scheduled for today to the action stack.
Then go through it and take out the two or three most urgent tasks. After
taking care of these, work through the rest of the box as it falls. Do not shuffle
pieces of paper around. Make a decision about each piece of paper you pick
up.

Take each piece as far as you can go with it, or until it is ready to be referred to
someone else. When you can't sign off on it right away, arrange to follow it
up, as discussed below. In this process, do not forget to TRAF your briefcase,
which is a mode of transport, not a long-term storage facility.

Following Up
Keeping track of yourself and others is the essential flip side of the action
process. You have to be sure that deadlines are met and commitments
honored. Failure to follow up can produce not just disorganization, but
disaster. Memory is a very inefficient way of keeping track. Much more
effective are calendar/holding files and tickler files.

In using the calendar holding file, put each item in the file, then make a note on
your calendar on the date you must follow it up. Keep leaving reminders on
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your calendar, and when the transaction is finally completed on the date
chosen, recirculate the original papers by putting them through the TRAF
process again.

Set up a file folder for each day of the current month, plus folders for each
month, then put documents into the file for the date on which you must follow
up. Each day, process the paper in that day's file.

Digging Out From Under

You should start the TRAF process by working through your first day's supply
of paper. But once you have got this under control, you are ready to deal with
the backlog, the papers that have piled up over the past few weeks, months. or
years. If you have a lot, you might schedule two or three Saturday sessions -
and have lots of trash bags ready for the Toss material.

If your desk is a pile of paperwork, start by dividing it into four sections, then
clearing those sections, one at a time. TRAF each piece of paper in the first
section until you reach the desk top. Then start on the second section.

Clear Out Drawers

Once your desk top is clear, clear out the drawers. Next, do any papers stacked
elsewhere in your office. Often this "dig out" will leave you with a massive
Action box. Delegate as many of these papers as possible, and divide the
remainder into two levels of priority, A and B.

Integrate the A material gradually into your daily processing routine, until you
are caught up. Then do the B material. Do not be dismayed if the whole
process takes several weeks,

The Fine Art of Filing

If you do not know where to find a document, it might as well not exist. There
is probably buried treasure in your file - ideas, information, business leads.
The reason you can't find that treasure is because you do not have a map, a
clearly defined classification system for your files.

An effective system is based on clear, simple categories that reflect your needs
for information. There are three basic rules of file classification:
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o Use broad generic headings, based on your reason for keeping the
papers. A note from a new business acquaintance may be a "Prospect"
or a "Contact." If you file it under the person's name, it will be lost for
good.

o Use headings comprehensive enough to absorb a substantial quantity of

papers. If your file drawers are full of skinny folders, you almost
certainly have more headings than you can keep track of. The idea is to
merge similar materials into a few "fat" files.

o Head folders with a noun, not an adjective, adverb, date, or number. A

list of new "hot" prospects will be lost forever if filed under "new" lists.
Nobody will remember what the "new" meant.

Reduce the Load

You will reduce your workload if you cut back the amount of paper you must
TRAF. Start by collecting a month's worth of reports, then analysing them.

First, eliminate all reports that provide you with vital information you can get
any other place. If you can't ask the originator of these reports to take you off
the list, ask your secretary to discard them automatically.

Second, look at the remaining reports. Do you need to know everything in the
report, or just sections of it? Get your assistant to flag the pertinent stuff, or to
tear off the pages you need and toss the rest. If you can, get the report writers
to provide you with summaries. You can always get more detailed information
if you need it. If you can delegate certain reports directly to staff members, do
so.

Get Some Help

Many other approaches to handling paperwork have been developed. George
Sullivan suggests that you begin by having someone else sort what comes into
your office, separating what you should see from what can be discarded or
passed on to another person for action.

Then take the paper that ends up on your desk and divide it into five categories:

Urgent. Papers that demand immediate attention. If a decision is

needed, make it. If a letter must be answered, dictate that answer. If a
telephone call is needed, make it. Do not put off anything you decide is urgent.
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Read and save. Put these papers in a folder, and read from the folder
when you have time, such as when you are traveling. If the stack gets too
large, schedule time for reading. As each item is read, mark it for filing or for
action by a subordinate.

Read and discard. This is material of secondary importance, such as

trade newspapers and magazines. If, after a week or two, you have not read it,
discard it. It has undoubtedly lost whatever importance it once had.

File. Make a note, if needed, telling where to file each item.

Discard. This should be the largest pile.

A common rule is to handle a paper only once. Most of us have tried this, and
failed. Instead, make it a rule to do something that advances the project every
time a particular paper is picked up. Failure to do this means you are going to
have to pick up that paper again sometime in the future. That is not working
smart.

Here is a way to test your effectiveness. Every time you pick up a paper, make
a tiny check in the lower right corner of page one. When check marks begin to
accumulate, it is a sign you are wasting time on the subject, and you must make
a final decision.

Cutting Your Production

You may be contributing to the paper glut with your production of reports and
other papers. Start by analysing a month's worth of the reports you and your
staff produce.

Judge them. Reports should not be simply a collection of facts. They should
provide the information in the right form so that people can use them to make
decisions.

See if each report is needed. Assume, to begin, that all the reports have been
wiped out and you must justify reinstating each one. What are the objectives
of each report? What would be the consequences if each one were
discontinued?

If you are in doubt about the value of a report, delay distributing it and see how
many of those who usually receive it ask about it. If only a few ask, and the
information is available elsewhere, eliminate the report. Look for opportunities
to consolidate reports to give more information in fewer pages.
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Shorten Reports
Now that you have eliminated the unnecessary reports, shorten the ones you
must produce. A chart or graph will often be worth many pages of narrative,
and convey the information more sharply. Look at the writing. Is it simple and
to the point? Is it clear and sharp?

Think of your readers. Are you telling them what they need to know? Above
all, fight the tendency to tell them more than they need to know, or to tell them
things they really do not need to know.

Target Unnecessary Paperwork

You can't eliminate all paperwork, says Dianna Booher in Cutting Paperwork
in the Corporate Culture, but there are items that are excellent targets for
reduction. Here are some of them:

 Customer cover letters that say only, "I'm sending you something; you
have it in your hands now."
 Memos written as self-protection.
 Forms that collect duplicate information.
 Reams of computer printouts of information that has to be interpreted
before it is usable.
 Reports that are requested but never read.
 Routine activity and trip reports.
 Distribution lists that include everyone who is anybody with any
possibility of being needed in the next ten years.
 Fifty-page documents sent to a manager who wants only a page of
conclusions and recommendations.
 Policy and procedure manuals that outline responses to every
contingency possible

If Not Needed
Here are some ways to eliminate reports once you have found they are
unnecessary. Start by stretching the report period. If it is a weekly report, try
by-weekly. If monthly, make it quarterly.

Cut its length. Get it to an overview message, recommendations, and a few

details - or even shorter. If any readers want more details, let them ask for
them. Try attaching a cover memo to your report. Say, "To cut distribution
costs and to reduce your reading load, I plan to stop sending this report unless I
hear from you."
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If you do not hear, stop sending it. You may find that no one wants the report.
And if they ask for it, ask why they need it. You may find another report being
issued will meet their needs.

If they still feel they need it, ask more questions. Is it timely? Could it be
shorter, with fewer details? You may be able to at least shorten it, and thus
better meet your readers' needs.

Use the MADE Format

If, as you should, you are writing to express rather than to impress, here is a
system that will help you to give your readers information as quickly as
possible.

Call it MADE. Try expressing yourself in this sequence:

M. Message. What is the bottom-line message of interest to your reader?

("The auditors have noted that some oil storage tank valves are not being
locked. ")
A. Action. What action do you plan to take, or expect the reader to take,
based on the message? ("Please check in your region, and by August 15 give
me a list of deficient sites and your plans for securing those sites.")
D. Details. Who, when, where, why, how, how much? Include only those
details that are essential, usually the why and how. Often all necessary details
are in the first paragraph. If so, don't add unnecessary ones.
E. Optional Evidence. Mention any attachments or enclosures you are
sending to make the message clearer or the action easier to take. ("Enclosed is
the company's latest lease security policy.")

Management Style
Management style - how you handle your staff and do your work enters into
the production of unnecessary reports. Some managers document. They do not
want to be held accountable, so they demand volumes of paperwork to prove
they aren't responsible if things go wrong.

Others delay, distributing paper up the corporate ladder and laterally, hoping
someone else will make a decision.

And still others delegate, sending paperwork downward, over and over, asking
for more and more information. Everyone is kept busy, and all think the
reports they are doing are causing the delay in reaching a decision.
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Check Yourself
To make certain you are not adding to the paper glut, ask yourself some
questions. Are people on your staff writing memos on phone conversations,
rewriting policy, writing detailed activity reports on routine duties, or
designing new forms to use? If your answer is yes, maybe you are overstaffed.
And if you are, say so.

When things go wrong, do you ask what caused it and how you can fix it? Or
do you ask who is to blame? If the latter, expect a lot of "cover" memos and
reports. Your employees see the need for self-protection. If you will
concentrate on fixing the difficulty rather than the blame, that defensive
paperwork will stop.

Do you really need those weekly reports, or is the information available in

another report? Eliminate as many of them as you can. Ask your employees
for "exception" reporting (report only when things are not working as they
should). Encourage them to bring to your attention things about which they
need guidance, or to which you should be alerted.

When you compliment employees, do not base your compliments solely on

paperwork such as sales records. To do this is to invite more and longer
reports. Instead, compliment them for such things as good handling of angry
customers, building goodwill with a client, or grooming a subordinate for
promotion.

Do you ignore talk? If you do, people around you may learn that the way to
get a response from you is to hand in a report. And up goes the paperwork.
When you start to write, ask why are you writing. And stop if you do not like
the answer.

When your subordinates send you something worthless in writing, ask why. It
will make them think twice about sending you more meaningless pages.
Finally, ask your boss why you're being asked to submit a report. If the report
is necessary, the reply will help you to make it more useful. If the boss can't
tell you why, you probably don't need to write it.

Hold That Blue Pencil

Many managers believe they have not done their job unless they make a few
changes in a letter or report prepared by subordinates. If this is a habit, and it
contributes nothing to the writing, subordinates quickly learn this. The brighter
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among them will insert obvious errors, so the manager will have something to
change, and thus be satisfied.

In business writing, there is a difference between editing and rewriting.

Editing involves marking unclear or incorrect phraseology, then returning the
work to the author. Rewriting means a complete overhaul. Careful on that.
You will get poor copy because "the boss always rewrites everything anyway."

Here are some areas of editing where you have to make decisions:

 Content. Raise questions about incorrect details and facts.

 Organization. If material isn't presented logically, go for a revision.
 Clarity. If writing is muddy or questions are left unanswered, call for
some rewriting.
 Grammar and punctuation. Walk a middle line. Edit for any errors that
reflect poorly on the company. Minor ones (a comma or not) may be
style matters and not worth the cost involved in the rewriting or
retyping.

Try to limit the number of people who have the power to change a document.
One company traced a four-paragraph letter through seventeen rewrites before
it went out.

Unnecessary Reports
Here are two findings that you should know about reports:

1. Many people label the reports they receive as unnecessary, but only 20
percent would put the reports they write in that class.

2. The higher up the officials, the more apt they are to think they both write and
receive unnecessary reports.

Conclusion: the job of eliminating unnecessary reports falls to senior

managers.
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Communicating
To move ahead, you must be able to communicate effectively with bosses,
peers, subordinates, and customers. That means not only expressing yourself
clearly, but tailoring your message to the needs, concerns, temperament, and
even the vocabulary of your listeners.

One-on-one communications call for somewhat different strategies and skills

than presentations or speeches. But if you start with the individual, you will
find it is easier to translate your skills to group communication situations.

Try for Rapport

Before you can communicate anything effectively to another person, you need
a sense of rapport, says Genie Z. Laborde in Influencing with Integrity.

Rapport, the business of building a sense of faith or trust in the other party, is
the most important part of any interaction. You build rapport by finding
common ground with the other person. You can also develop it subtly by
matching the other person's voice or tempo, breathing rate, movements or
gestures, or body postures.

What's Your Goal?

Before trying to communicate, you must determine what you are trying to
accomplish. To identify and achieve your desired outcome, Laborde suggests
the following approach:

1. Aim for a specific result. Pinpoint exactly what you want the other party to
comprehend.

2. Be positive. Communicate enthusiasm to the listener

3. See, hear, and feel sensory data. Listen to the type of words others use and
tailor your images accordingly. Some people relate to visual images such as "I
hope to see my name in lights." Others are more auditory: "I loved it when the
crowd started to cheer." Another possibility is touching or feeling sensations:
"It was like walking on air."

4. Dovetail your desires with the listener's. View the other person as an ally,
and try to achieve something for both of you.
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5. Entertain short- and long-range objectives, communicating in a way that

will help you to reach both.

What Is a Good Communicator?

The essence of communication is people talking with people, observe Richard
S. Ruch and Ronald Goodman in Image at the Top. Good communicators have
an attitude of caring instantly, and it is sensed instantly by others. They can
project and practice ideal communications. They refuse to become isolated
from constituencies and have the ability to stand up to interrogations by telling
the truth.

Effective corporate communications have to be based on honesty, the authors

say. Try following these simple rules:

* Tell it straight from the shoulder. Plain talk, maybe salty and definitely
colorful, make you and your communications real. Talk across to your
audience, never down. Watch for hip-shooting and foot-in-mouth disease.
* Be human. And admit it. No one, no business is perfect. If you foul up, tell
your constituencies. No one expects you to be superman. If your company is
forced to retrench, tell them why and how.
* Keep it simple. Avoid jargon. Nothing is as potent as a polished, bare
bones, well-presented idea.
* Look for the drama. Dig it out. Mix it with your communications. Let
excitement in your business come through. You may find it fun.
* Be a good listener. ‘Nose to the grindstone and ear to the ground’. Get out
and talk to your customers and employees.
* Package your message attractively. An interesting bottom line can be dull
in plain black and white.
* Keep it short. Sift through it all and only present the nuggets of gold. Keep
your eyes on what's important to the audience, not what's important to YOU.
* Avoid legalese. Don't sell out to the lawyers.
* Saying won't make it so. Trust in advertising will sell a lot more than high-
pitched hyperbole.

Get Feedback
Fred Pryor, author of The Energetic Manager, would add a rule to this list:

Get feedback. After you have talked with a person, make certain he or she
understands what you are saying. This calls for getting feedback. "I want to
know what you think about all this" is a way to seek such feedback. Then, if it
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is evident that persons do not understand what you are saying, you must clarify
and refine your message.

This is time-consuming, of course, but not half as time-consuming as dealing

with the problems that result from a lack of clear communications.

Verbal Persuasion
The authors of Back-to-Basics Management emphasize that before you can
persuade, you must motivate the other person or persons to listen. To do that,
respond to emotions with encouragement, reassurance, and praise. Encourage
expression and tension release. You will have a more comfortable situation.

When Things Go Wrong

Things do go wrong, and when they do, managers indicate how skilled they are
in managing, says Pryor.

 Here are a few pointers for communicating when problems arise:

 Attack issues, not people.
 Ask for input and insight to solve problems.
 Avoid using labels such as "slow" or "incompetent."
 Give feedback that is pointed and specific. A report given you is not
"lousy." Instead, it may require further development in the section on
possible solutions.

If you are meeting over a problem, use this four-step method of changing grips
to goals, using it to ask for help rather than attacking others:

a. My frustration is
b. Why I would like is
c. Therefore, my goal is
d. So the meeting subject is

Reading Body Language

Realize that your body language mirrors your verbal language. Don't just read
body language and interpret symbols at the unconscious level. Assign
meanings at a conscious level, too. Work to understand the silent language of
body gestures, eye motions, skin/touch sensations, and space (standing or
sitting far apart). Many gestures have more than one meaning. You must
consider where it is done, who is present, and what preceded and followed the
action. Remember that body language reflects feelings, not facts.
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Here are some common body language signs and their possible meanings:

 Crossing arms or legs indicates defense.

 Lack of movement indicates that a person is trying not to be noticed, or
is listening and planning, or is playing it safe.
 Leaning forward vs. sitting back is the difference between "tell me more,
I'm interested" and "let me think about it; I may not be that interested."
 Cocking the head signals interest and a willingness to hear the opinions
of others.
 Hands folded in the lap or on the stomach is a protective gesture.
 Hands placed on a desk says, "Let's get right down to business."

You Are on Stage

No matter how good your skills and virtues are, they will not advance your
career unless others are aware of them. You can't depend on your
accomplishments to sell you.

You must learn to sell yourself

It is not as bad as it sounds. Selling yourself is simply a combination of trying

to make a good impression on others and looking for and making the most of
opportunities to let others know about what you have done and what you can
do.

As Raymond C. Johnson puts it in The Achievers, you have to get your foot in
the right doors and make a favourable impression on those who can help you
toward success. And you can't get ahead if you do not feel confident and
secure in your appearance and ability to express yourself.

Play the Role

You are on stage when you are at work.

An actor projects a constant image of ability and confidence. If you want to be

recognized as an outstanding manager or department head, be prepared to play
the role at all times and back it up with extensive homework. Those you work
with and for are your audience.

Acting, in this sense, includes looking the role you have chosen to play. Fine
quality clothing and careful grooming are important to making your mark as an
achiever. When you think you can't afford expensive clothing, buy them
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anyway. Often your dress is the first impression formed of you. Dress for
your way of life and invest in your future.

Look the Part

When you are on that work stage, carry yourself like a supremely confident
actor making an opening night entrance to thunderous applause. And stay in
the character you have written for yourself. The next step is a personal public
relations program that allows others - friends, colleagues, neighbours - to sing
your praises. People love to talk about important friends. Your success builds
their importance.

Be subtle. Look for the right occasions to brag a bit, then give a copy of a
newspaper clipping or other explanation of your achievement to others. They
will pass the word along.

Help Others
Other suggestions in The Achievers for becoming favorably known include:

 Help others to attain their goals. Sooner or later, they'll send

opportunities your way.
 Analyze your habits and make a conscious effort to build on the good
and eliminate the bad.
 Be enthusiastic. No quality attracts people more.
 Act enthusiastic. Most of the power of enthusiasm comes from its effect
on others.
 Cultivate empathy. Try to put yourself in other people's shoes.
 Make friends. No one gets ahead alone.
 Ask for help. You gain the benefit of others' experience and expertise
and most people like to be asked.

Planned Self-marketing
In Blow Your Own Horn, Jeffrey R. Davidson notes that self-marketing does
not mean using people or employing deceit or trickery. It is not being boastful,
arrogant, pushy, or egotistical.

The most effective self-marketing is done with class and honesty, based on a
genuine respect and concern for the needs of others. The secret is to develop
the skills that will make you a valuable professional and then to learn to
promote those skills in a way that will earn you the respect and success you
deserve.
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Start by developing a plan. Define what you have to offer or want to offer the
world. Draw up a career list of the things you want and don't want in your
career. Focus on a few challenging, realistic goals. List the components of
your ideal career or work situation, and consider these very specific goals.
Finally, establish timetables for achieving those goals.

Become Indispensable
An effective marketer creates a niche for the product or service being
promoted. To advance your career, you must create a niche for yourself. That
means making yourself indispensable - the person supervisors ask for first
when reorganizations begin, the office expert in certain subjects, the mentor to
many junior employees. You can do this by finding out what is needed on the
job, not just what is expected.

There are many ways to make yourself indispensable. Here are nine of them:

1. Take the unwanted job. Pick up a skill or technology that is vital to your
company, but relatively hard to learn. Or be the best at something no one else
wants to do.

2. Go the extra mile. Take on more work than you are assigned. Volunteer to
help on a project that is running over deadline. Help out on rush jobs. Help a
fellow worker who is having problems.

3. Work harder when unsupervised. You know how it is. The boss goes on
vacation and production drops. Employees drift into each other's offices,
stretch lunch hours, and make more personal phone calls. Do the opposite.
Work extra hard. Try to complete jobs assigned to you before the boss left.
There is nothing a supervisor appreciates more after a trip than "Here is the job
you wanted. It is done." The subtle yet deep-seated message you convey is
long-lasting.

4. Get credit for the group. Those who make it to the top levels of
management are able to motivate others to do their best and to work well
together. Those above you know that when a group does well, it is at least
partly because someone exhibited leadership. If you were managing the group,
you have proven your ability to facilitate good work.

5. Make your boss look good. Both bosses and their supervisors appreciate
this. The best way to make your boss look good is to handle your work
efficiently and thoroughly. A fair boss will give you credit for this, increasing
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your chances of promotion. If your boss leans on you heavily without giving
you credit, you will still probably win the promotion. That boss understands
your importance to him and will not want to take a new position without your
assistance.

6. Handle key client development. Each time you interact with a client, you
are planting the seeds of a personal and professional relationship. If you have
done your job well, that relationship becomes one of the company's most
important assets.

7. Become a mentor. No matter how young you are, you may be in a position
to help junior members of your firm. This can be accomplished on an informal
basis, and you can choose the amount of energy you are willing to commit.
Helping junior members looks good to those above you, especially at
performance review time.

8. Be aware of a supervisor's needs. If your boss has been extra supportive

of you, tell him or her that you appreciate it. Remember to praise your boss to
your co-workers and other supervisors. Be sure to be honest. A phony attempt
can be detected immediately.

9. Know what's needed. This means knowing the basics - being on top of
your job, your department's goals, and your company's objectives. This
strategy calls for specific actions.

Protect Yourself
Knowing your job description and following it, or getting it amended if
necessary, will protect you from misunderstandings and give you a good idea
of the part you play in the organization. This is important to both your work
satisfaction and your chance of promotion.

Be sure to learn and understand the goals of your department. They are
important to guide action as well as to mark milestones. Knowing your group's
goals will help you to set priorities for your own work and to make intelligent
decisions about how jobs should be done.

Be aware of your company's objectives. They may be to expand sales, increase

mergers, or solidify a market. Your organization's brochure, annual report,
promotional literature, or employee handbook should have the objectives
spelled out. It should unify and give meaning to all the department goals. Be
aware that the objectives can change with differing economic and market
conditions.
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If you are not receiving sufficient guidance, look at any problem in light of
your company's objectives.

Keys to Promotion
You can anticipate organizational changes and carve your own niche in any
new structure. Do this by being on the lookout for needs you can fill in any
new organizational chart, and be qualified to fill that need. That often means
becoming an expert and that a new job, and a new title, will be created for you,
so that you can carry out that aspect of the company's functions.

If you have already developed such expertise, make your superiors aware of
your special knowledge and how much people depend on you to provide that
knowledge.

Another way to increase your chances of promotion is to turn that annual

performance review into an opportunity for better things. To do this, keep track
of your performance for a year. Review your appointment book, your list of
goals, and other materials. Then compare how you have done with what you
set out to do. Armed with this, you can take more control of the performance
review sessions.

Spread the Word

Create opportunities for more people to know you and your
accomplishments.

Join local professional and community organizations and attend their meetings.
Try to attend at least two major professional conventions a year. Become an
active member of your groups. Choose organizations that genuinely interest
you and be active on committees and task forces.

Prepare to do some public speaking. Develop a few topics to speak on, look
for organizations that might be interested, and send them letters explaining
your background and the topics about which you can speak.

Have your articles published. This establishes your credentials as an expert

and gets favorable exposure for you and your company. Start with in-house
publications, then try for professional and general newsletters or magazines.
Submit suggestions before you write an article, focusing on successful work
you have done. "How-to" formats are always popular.

Prepare reprints of your articles and circulate them to friends and associates.
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Skills for the Future

Career success is a moving target for the years ahead. Good organizational and
communications skills are a must. So is keeping up with the latest trends in
your field.

But what else will it take to keep moving up in your company in an era marked
by constant change and hot individual and corporate competition? Many
experts have peered into their crystal balls trying to help ambitious men and
women identify and develop the skills they will need to get ahead.

In Creating Excellence, Craig R. Hickman and Michael A. Silva say:

The successful managers of the future will be those who master six
interdependent "New Age" skills.

Creative insight: Asking the right questions. This requires

concentration and adopting a variety of perspectives so you can ask questions
from far-ranging points of view - questions others might not think of asking.
Insight forces you to move away from reliance on rules, logic, efficiency, and
black and white thinking to get at the heart of a problem, not just its visible
symptoms.

Asking the right questions - and you have to ask a lot of questions - enables
you to discover all facets of an issue, the hidden opportunities, advantages, and
strengths, opening the door to the best strategies.

Sensitivity: Doing unto others. Understand people's moods and

expectations, and act on that understanding. To bind people together so they
feel motivated to achieve high goals, you have to look inside each individual to
gain knowledge of that person's expectations and needs. All people are not the
same, and they're certainly not all the same as you. People don't stay the same
throughout their lives, either.

Vision: Creating the future. Vision is a mental journey from the

known to the unknown, creating the future from a montage of facts, figures,
hopes, dreams, dangers, and opportunities.

An offensive and a defensive skill, vision helps you to position yourself and
your organization to create and take advantage of opportunities. You search
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out ideas and concepts that add up to a vision, articulate that vision, and
persuade others to embrace it and look for ways to develop it.

Vision helps to chart a course that creates change and helps you to respond to
external changes. It joins strategy and culture to achieve corporate excellence.

Versatility: Anticipating change. Welcome change as an opportunity,

not a threat, and learn to control it to your advantage. Change is unavoidable,
and there's no point in resisting it. Develop goals beyond your immediate
problems and pursue interests outside your own field. That will keep you from
getting too complacent or inflexible. Stay alert to anything in your
environment that might signal a trend or change in customer or competitor
behavior and move in a bold but orderly fashion to make those changes work
for you.

Focus: Implementing change. To exploit change effectively, take a

step-by-step approach. Assess how a particular change will affect your
organization before you start. Be sure it's realistic for you. Determine what
specific people and operational changes it will require. Still realistic? If so,
develop a plan and timetable for shifting focus, then begin implementation,
monitoring and adjusting as you go. And always be prepared for the inevitable
surprises.

Patience: Living in the long term. Move away from the emphasis on
short-term returns on investment and fast-track careers. You can have
immediate goals, but you need a long-term view that evaluates those goals in
terms of a more distant future.

Rise above the thoughts and actions of others and have the patience to see your
vision through. Patience helps you to use the other five "New Age" skills at the
right time and in the right combination and proportion.
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HOW TO GET THE MOST FROM

OTHER PEOPLE
You do not operate in a vacuum. Other people play vital roles in your life and
you can't succeed unless you can manage your relationships in a way that
moves you toward your goals.

Of course, other people have goals, too. One of the keys to productive
relationships is learning how to create situations that benefit all parties. A
manager, after all, is defined as one who gets things done through other people.
That requires sensitivity to their needs and wants as well as skill in creating a
team that is pulling in the same direction.

This part explores some of the critical interactions in business and offers
specific approaches you can use to handle such potentially difficult tasks as
hiring, firing, motivating, giving feedback, and delegating.

This part also covers negotiating - a subtle skill you need in a wide range of
business and personal dealings. You will also find detailed suggestions on
getting the most from the most common business interaction of all: meetings.

Finally, this part discusses leadership. You will see how all the abilities and
skills discussed here come together to develop leadership and make it work.

As you read this part, keep in mind the advice of Dale Carnegie, author of the
timeless classic, How to Win Friends and Influence People.

Carnegie points out that people are not creatures of logic but of emotion. And
the only way to get anyone to do anything is to make the other person want to
do it. You influence other People by talking about what they want and
showing them how to get it.

When you have a brilliant idea, let others cook and stir it themselves. They
will then regard it as their own and like it better.

Other key Carnegie principles to remember as you finish reading this paper
are:

 Become genuinely interested in other people.

 Make the other person feel important and do it sincerely.
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 Try honestly to see things from the other person's point of view.
 Make the other person happy about doing what you suggest.

HIRE THE RIGHT PEOPLE

You need all of your communicating, listening, decision-making, and "people"
skills working in top form when you are hiring. Interviewing and hiring new
employees is, if done right, one of the most important ways to achieve your
goals. With the right team in place, you can move ahead more quickly and
effectively.

Many people neglect to give the interviewing and hiring processes the attention
they deserve. Robert Heller observes in The Supermanagers that picking the
right people for the right jobs is a high-risk area. It can never be an exact
science, but you can learn to go beyond your "gut feeling" to make productive
choices.

Get the Facts

First, get the facts. Check out what you see on the resume. Follow up every
reference.

At the interview, notice whether the applicant is observant (looking around

your office for indications of your interests). Do you feel that you are being
listened to and understood? Do you get more than "yes" and "no" answers?
Do you see signs of boredom or impatience? Is there free admission of
mistakes or confessions of ignorance on some counts?

Remember that you are trying to hire. The purpose is not to hire. You are
after proof that the person has the qualities and abilities you are looking for.

Two Rules for Hiring

Robert Townsend summarizes his hiring philosophy in Further Up the
Organization.

To keep an organization young and fit, he says, do not hire anyone until
everybody is overworked. That way your people will welcome the newcomer
no matter who. Besides, a new person who comes aboard in circumstances
other than absolutely necessary makes people wonder what is happening in the
organization.
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Rule one in hiring is to take your time. Tell the candidate who is pressing you
to cool it or take the other offer. Get to know each candidate as well as you
can. Remember, if you pick a lemon, you will suffer.

Rule two in hiring, and it is particularly important when all of the candidates
seem outstanding, is to hire the one for whom you would prefer to work.

Candidate Assessment
What makes for success in hiring? In 1000 Things You Never Learned in
Business School, William N. Yoemans states that good executives have learned
to see a candidate clearly in terms of the two things that count - evidence that
he or she can do the job at hand, plus the personality and character that is right
for the organization.

Start by analysing the job, in terms of the skills it calls for, the responsibilities
it entails. Gauging each candidate accurately calls for some gut sensitivity and
a lot of reading between the lines. One way to do this is to pick a subject to
talk about that is neutral but not trivial, and try to establish a warm rapport.

Ask for Details

When it's time to turn to the nitty-gritty, do not hesitate to ask for details. Most
resumes list past experience that lends itself to exploration. With the
requirements of your own situation in mind, ask something like, "How would
you tackle that problem today?" or "What would you have done if the test
results were less promising?" What you are after here is quality of thinking.
The more specific you get, the more you will learn about the candidate.

When you interview someone, be careful about leaping to first impressions.

From time to time, try saying nothing and see what happens. In any case, do a
lot of listening. It is important to find out what the candidate wants to ask. Are
the questions frivolous and self-serving, or is there a professional level of
interest in the job? People are anxious to know about such things as working
hours. They do, after all, have personal lives. But there can be revealing
nuances in all of this, if you know how to spot them.

If the interview leaves you definitely uninterested, you may find it more
comfortable to talk around the bad news and handle it by letter. Courtesy
suggests that you do this within two weeks.
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The Hiring Process

Beverly A. Potter suggests certain interview principles in Changing
Performance on the Job.

Establish rapport. Put candidates at ease with casual comments. Be relaxed

but attentive.
Don't talk too much. When you're talking, you are not getting information
about the candidate.
Maintain control. Decide what topics to cover and stay on target. Cut off
irrelevant chatter.
Don't be interviewed. Acknowledge questions about the job and company,,
but hold them off until you want to discuss them. This will keep your
interview on track.
Avoid leading questions. Don't suggest the desired answer with a question
like "Are you looking for responsibility?" Of course the candidate will say yes.
Don't give any clue as to what answer you want, with questions such as this
one: "What are you looking for in a job?"
Don't jump to conclusions. Interviewers tend to interpret vague general
statements like "I want a job with potential" according to their own
expectations and stereotypes. Do not make assumptions.
Get specific information. Ask questions that will give you specifies about
experience. skills, and work habits.

Effective Interviewing Techniques

Try these interviewing techniques to get more information quickly out of job
candidates:

Be an active listener. That means giving verbal feedback like "uh huh" or
"hmmm," or non-verbal responses like nodding and smiling that communicate
interest.

Repeat. Repeat a key word or echo it with a slight inflection to get

amplification of a general word or phrase.

Probe. Ask open-ended questions that begin with how, when, who, what, in
what way, or which, to get a particular point clarified. Do not ask questions
that bring only a yes or no response. Do not ask why. This implies justifying
something and puts people on the defensive.

Silence. When a candidate is speaking relevantly and pauses or stops, remain

silent for a moment. The candidate generally will continue on the subject.
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Check answers. Probe to clarify and get specific information. If the candidate
says, "It was a good job," ask, "Do you mean you liked the people you worked
with?" Whether you are right or not, the candidate will clarify. Present your
question tentatively to reduce defensiveness.

Sum up. When you reach the end of a section of your interview, summarize
the candidate's main points, then ask, "Is there anything else?" This gives the
candidate an opportunity to add more. If not, you can move on to the next
topic.

Use this same method to end the interview, summarizing the main points
discussed and asking if there is anything else. If you have forgotten or missed
information important to the candidate, the person will repeat it. If you have
misunderstood, the candidate will correct you. If the candidate forgot
something, this is an opportunity to add it. This technique of summing up can
also be used to get a wandering interview back on target.

Demonstrate Skills
Some candidates can demonstrate skills. A sales person could deliver a
product pitch. An editor could edit a sample text.

To evaluate administrative ability, try the in-basket approach. Assemble a

packet of letters and memos. Provide a brief situation scenario, then have the
candidate read over each item and write out an appropriate action and rationale.
This lengthy exercise can be taken home by the candidate and done there.

Use role playing to assess complex interaction skills such as supervision. If

you're interviewing electronic assembler trainees, for example, have the R&D
department develop a task that requires eye-hand coordination and manual
dexterity.

Look Within
To find the best employees for promotions, Lee Bowes, who wrote No One
Need Apply, suggests a different tack.

Look within, she advises. Those people know the company, have proven
abilities, and when promoted, can hit the ground running. Hiring costs will be
minimal. In addition, promoting from within sends a loud voice throughout
your company: Jobs are not dead-end here. Thus the best and brightest will
not be tempted to move elsewhere, and the turnover at the entry level will be
reduced.
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And to find new employees? Use networks. She bases this on two beliefs:

1. People are hired because they know somebody.

2. Hiring through networking is an effective way to get the best possible
candidates. Here are some ways to do that:

Establish employee networks, so employees know about job openings and can
recommend their friends. Most employees will recommend only the best.
They feel their own reputations are hanging on the recommendation. This
approach will pay off by identifying people who can do the work and will stay
with you.

This is particularly useful if you want more minorities in a department.

Create new networks by attending job fairs and meetings of professional

associations. where job-seekers abound.

Keep Interviews Short

Bowes believes lengthy interviews are a waste of time. But abbreviated ones
can help you by allowing you to measure a candidate's sophistication,
adaptability, and interpersonal skills. You can judge how well a candidate will
fit into the corporate structure, recognizing that very competent people, stars in
other firms, can perform miserably in your company simply because they do
not fit in.

One reason for interviews is to make the candidate want to work for you. This
means everyone meeting the candidate should sell the firm, or you will miss
out on some of the best people.

When you are filling new positions or vacancies, do not toss aside those
unsolicited letters and resumes. These persons who have taken an interest in
your firm can be excellent potential employees.

Dealing with Applicants

Here is a step-by-step system for handling the applicants for a position in your
company:

A. Have all candidates fill out a standard application form, showing work
history, dates of employment, and salary history. This is much more reliable
than their own resumes.
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B. Interview those who meet strict requirements. Spend ten to thirty minutes
per candidate.

C. Schedule detailed interviews for those who pass these first two steps. You
are now trying to assess which of several candidates is best. These interviews
should take about an hour. Spend ten to fifteen minutes on the question, "Can
you briefly say what your work and work history have been?"

Look for Advancement

Look for some progression in a career, some sign of commitment. Find out
why the candidate left each key position.

Get as much background as you can on the most recent position the person
held. Go into detail on responsibilities handled, supervisory experience, and
job accomplishments.

Then describe a job or task and ask each applicant how he or she would
approach it. Describe a problem you had and ask applicants what they would
have done. Finally, discuss the salary histories and expectations of each
applicant.

Firing: It Must Be Done

Sometimes you will make a mistake in hiring. Or you may inherit a person
who can't or will not do the job. Then you will be faced with the task most
people dread most: firing an employee.

Firing someone is never pleasant, but there are ways to do it that minimize the
pain for both of you.

A Test of Leadership
In his book Managing, former ITT head Harold Geneen calls firing a test of
leadership for the company and the executive.

There is no formula for doing it, he notes, as he analyzes three typical

situations.

If a person has done a poor job, and knows it, you are faced with a question:
was it because he was not helped? He was entitled to that help, so perhaps it
was not his fault, and it was you who failed.
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Look for Reason

Sometimes a person fails because he inherited a tough problem that no one else
could solve, or because he was caught in a situation completely beyond his
control.

The most difficult of all is firing the person who works hard, doing the best he
can, but whose confidence in himself far outstrips his abilities. He is in over
his head. His judgment or lack of judgment might even endanger the whole
operation.

It is difficult to tell such a person that he is incompetent. After all, you may
have given him raises and promotions for years. It was you who put him in
water over his head.

Finally, there is the person who has served the company faithfully for twenty
or more years, and now is failing in health and ability. Perhaps he is a few
years from retirement. What do you do with him?

Handling each of these cases will determine what kind of a leader you are.

Probably you will let the first two go, but keep the third. He has earned his
right to stay on, even at the expense of efficiency. If possible, move him
laterally and let someone else take over his job. If you fired him, the message
would be clear: It's company policy to pay you as long as you are useful, and
then throw you on the junk heap when you are old and gray. No one would
give loyalty to a company like that.

Keep Records
The editors of Working Woman put it succinctly in the summary of The
Working Woman Report:

If an employee is not doing well, keep records of unsatisfactory work,

criticisms, and warnings. Try to help him or her to reform by discussing
specific problems and possible improvements.

If you must fire someone, do not wait. Do it in your office, with the door
closed. Make certain it is not a holiday or the person's birthday. Don't dwell on
your affection for the person, do not stress your guilt or discomfort, and do not
act to brisk or coldly businesslike. At the other extreme, do not hold out false
hopes that the person will be hired again, do not allow the employee to stay on
indefinitely and be thorough in describing the company’s termination policy.
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We hope you know this already: do not discuss with other the reasons for your
firing.

Legal Aspects
Firing an employee has many legal ramifications, so be sure you follow the
company’s procedure to the letter, checking with the personnel department
every step of the way.

If you have to perform this unpleasant task, you want to be sure it will stick.

Motivation: It is Up to You
Even the best people will not perform up to their capabilities without a
motivating environment - and a manager with leadership skills.

One Motivation Strategy

Former football great Fran Tarkenton offers a comprehensive motivation
system in How to Motivate People.

People don't change their behavior unless it makes a difference to them to do

so, he says. You have to recognize that you can't change a person's mental
state or some cause of their behavior. What you can change is the external
behavior, and you can change that by manipulating the consequences.

That is as much a matter of rewarding good behavior as it is of changing poor

behavior. Provide positive reinforcement for "normal" behavior as well as for
superior work.

Tarkenton says that most workers do a good job about 80 percent of the time.
If they do poor work more frequently than that, they do not last long.

Managers focus on the 20 percent of the time when workers are performing
under par and allow the time that they work well to go by unnoticed. The
individual concludes that if he does not foul up, nobody is going to notice he is
there. He may even be encouraged to perform badly because that at least will
get him noticed.
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Rules of Behavior
Tarkenton offers these three rules of behavior for you to remember:

1. Good behavior that is reinforced by positive consequences tends to continue

or to improve. (A plant supervisor creates a new preventive maintenance
system. His boss writes him a letter of appreciation. From that day onward,
that system will be checked and updated.)

2. Behavior that is demotivated by negative consequences tends to decrease.

(The boss criticizes the plant manager for not having a preventive maintenance
system. The plant supervisor will look into that deficiency in the near future.)

3. Good, productive behavior that goes unnoticed tends to decrease over time.
(The plant manager's Herculean effort is seen by top managers as "just part of
his job description." Expect Hercules to turn into Tom Thumb. Nobody will
continue to perform well unless you reinforce his motivation to do so.)

One of the American business community's principal challenges is to overcome

the traditional managerial view that "you don't reward somebody for doing
what he's supposed to do." We must move toward a policy of expending as
much energy in keeping the up side up as keeping the down side down.

The Right Rewards

Financial rewards are only one motivating factor, and never the most important
one. If they were, GM workers would be outperforming Toyota workers three
to one.

Tarkenton says he knows this sounds comy, but equally important to getting
people moving are such things as a letter of appreciation, coffee and doughnuts
when they do not expect them, the human touches that make a job worth doing.
And this is particularly true when the person you are trying to motivate is a
sales rep or a secretary - not a superstar.

It is these people managers prefer to ignore. Managers have time to tack up an

"Employee of the Week" award or punish a worker whose sloppiness costs the
company down time, but ignore the large number of people in between, not
eagles or slackers, who may need reinforcement more than that Employee of
the Week or that slacker.
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The PRICE System

Tarkenton applies behavioral principles through what he calls the PRICE
Motivation System. That acronym stands for Pinpointing, Recording,
Involvement, Consequences, and Evaluation.

Pinpoint the behavior you are trying to influence, then set precise objectives of
what needs to be done, by whom, and by what date. Objectives must be
realistic, easily understood, meaningful, and the result of every member of the
team getting together to set them.

Recording, keeping score, is a motivator in business as it is in sports. Keep

score of performance: production scores, weekly waste retrieval results, any
other performances that can be measured. And post those scores publicly.
Then tie results to positive consequences such as bonuses and promotions.

Scorekeeping lets each individual and group know how they are doing and how
their performance ties in with the organization's. In addition to any tangible
consequences such as bonuses, people gain the satisfaction of knowing they
have contributed to a winning team.

Involvement means getting away from the old boss vs. worker mindset, and
getting people to play a real role in their work. It takes a while for a
participative approach to get off the ground, but it does work and the benefits
of getting the most from everyone extend to individuals and the company.

Consequences are where you actually start to change behavior. You can
provide positive reinforcement, negative reinforcement, or no reinforcement.

The last is the most typical and the most useless. Poor behavior does not
change and positive behavior that goes unnoticed may change for the worst.

Tie consequences directly to performance improvement. When someone does

something right, let them know immediately that you have noticed and
appreciate it. When you want to change the behavior, proceed just as quickly.
Focus on the behavior and not the person, and make it clear that change is a
must.

Evaluation, the last stage in the process is determining whether what you tried
worked. Did you pinpoint the behaviors that were holding you back? Were
you on target with recording, involvement, and consequences? Keep fine
tuning the system.
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Remember - in the end the most successful managers will be those who can
motivate to win because they understand what turns people on.

The Motivation Climate

In 1000 Things You Never Learned in Business School, William N. Yoemans
says creating a climate that motivates is an important part of a business leader's
job.

People in such a climate radiate self-respect. They always know what is going
on in their organization, what is expected of them, and how they are doing.
They never feel isolated because both their achievements and their problems
are acknowledged continually. At even the lowest level, each has some kind of
start-to-finish responsibility that keeps him from feeling like a gear in some
vast, impersonal machine.

Not an Accident
This kind of thing does not happen accidentally. As a manager, you should do
all you can to create a climate in which all feel involved at all times, and are
expected to make most of their own decisions. What you offer is the clear
outlines of a goal. You are their, to advise and help.

Your people should know that they can explore new and offbeat approaches,
even take judicious risks, without fear of forfeiting your support. They should
also know that they will be called in next week to hear how much sales rose (or
fell) as a result of their most recent efforts. A manager's role as intelligent
coach, informant, and cheerleader must not be underestimated.

Another aspect of motivating is providing access to the boss. People need to

know that they can come to you with problems and get a respectful and
constructive response. The subject may seem unimportant to you, but to the
other guy it might be essential.

When they ask for help, give it to them, or explain why you can't. Do not leave
anyone hanging, unless you are willing to accept a sudden but subtle transfer of
responsibility. Of course, if this is an area in which you feel they should be
making their own decisions, say so.
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The Power in Your Hands

As manager, you have the power to raise or lower subordinates' levels of
motivation, John Adair says in Effective Leadership.

Human motives have their sources in the deeper needs and values within
people. A need that becomes conscious is called a want. A leader can help the
process by which needs are transformed into wants. As leader, you can also
work with each individual to realize those wants in the context of the common
task.

Five Musts of Motivation

If you are to influence for the common good, if you are to address personal
wants, you will need an understanding of motivational chemistry. For
motivation and job satisfaction to be strong, rather than adequate or weak, each
individual must:

1) Feel a sense of personal achievement in the job he is doing, and must

believe that he is making a worthwhile contribution to the objectives of
the group or section.
2) Feel that the job itself is challenging, is demanding the best of the
individual, is giving him the responsibility to match his capabilities.
3) Receive adequate recognition for his achievements.
4) Have control over those aspects of his job which have been delegated to
him.
5) Feel that he, as an individual, is developing, that he is advancing in
experience and ability.

To provide the right climate and opportunities for these five musts to be met
for each individual in the group is possibly the most difficult, the most
challenging and rewarding of the leader's tasks.
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Specific Motivators
What about specific motivators? The key, says Henry C. Rogers in The One-
Hat Solution, is to find the trigger that will encourage people to do better.

Some believe only money will do it. Money is important up to a point, but in
most cases it is just a way to keep score. It indicates that people are
appreciated, too, that they enjoy a certain position in the company. The actual
dollars constitute only a small part of the motivation. Titles are the same.
Everyone wants a title because it indicates a rise above the rest.

Hand Out Praise

Make a point of praising anyone who does a job "above and beyond the call of
duty." This might include working overtime to get the job completed, working
on a weekend, solving a problem that has perplexed everyone, or handling an
assignment that wins the approval of a client. Try giving praise, too, to those
who are doing a routinely good job.

They will try even harder. By praising people, you make them feel important.
Now they are ready to extend, themselves, and there is a good chance their
levels of performance will skyrocket.

Praise the Sales Force

In Thriving on Chaos, Tom Peters emphasizes that to be successful, a firm
must be as close as possible to its consumers. The people in most companies
who have this role are the sales and service forces. They are the firm to most
customers. If your company and our American industry are to become
competitive, those people close to the consumer must achieve preeminence.

Over invest in dollars and people for your front lines sales, service, and
distribution people and those who support them, Peters says. Pay them well.
Train them excessively. Give them the tools and the opportunity to participate.
Listen to them. Above all, praise them. Make them the company heroes.
Companies who do this find their "ordinary" people do extraordinary things.
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How Do You Rate on Motivating?

Take this test - but the rating of your answers is
up to you. One piece of advice on it: Work on
any negative responses.

Have you agreed with each of your subordinates about main targets and
continuing responsibilities, together with standards of performance, so that you
both can recognize achievement?

Do you recognize the contribution of each member of the group and encourage
other team members to do the same?

In the event of success, do you acknowledge it and build on it? In the event of
setbacks, do you identify what went well and give constructive guidance for
improving future performance?

Can you delegate more? Can you give more discretion over decisions and
more accountability to a sub-group or individual?

Do you show to those that work with you that you trust them?

Are there adequate opportunities for training and (where necessary) retraining?

Do you encourage each individual to develop his capacities to the fullest?

Is the overall performance of each individual regularly reviewed in face-to-face

discussion?

Does financial reward match contributions?

Do you make sufficient time to talk and listen, so that you understand the
unique and changing profile of needs and wants in each person, so that you can
work with the grain of nature rather than against it?

Do you encourage able people with the prospect of promotion within the
organization, or, if that is impossible, counsel them to look elsewhere for the
next position fitting their merit?
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Give Valuable Feedback

As the motivational approaches make clear, it is extremely important for
people to know where they stand. You have to provide continuous feedback,
and it has to be feedback that's specific and directed to both the situation at
hand and the goals you as manager and the employee are trying to reach.

Good feedback must be built on clear goals and checkpoints so that the person
knows what to do or not to do and what specific behavior you are commenting
on. Most people have trouble giving feedback properly, notes Patricia King in
Performance Planning and appraisal.

Both praise and criticism are difficult for managers to handle. Many managers
praise too seldom. Some never do. Yet praising the behavior you want to see
continued can be one of your most powerful management tools.

Avoid sounding insincere by looking for specific behaviors to praise. People

often interpret vague praise as phony, and nothing more than manipulative
flattery. Even if your employees have a hard time accepting a compliment,
they will hear it and it will have its effect if it is sincere.

Offering Criticism
You may avoid criticizing your subordinates because you fear their reactions.
Or you may need to get angry in order to voice your criticism. Either of these
behaviors robs you of the chance to influence your employees positively.

Deliver criticism in a matter-of-fact manner with little or no emotion. Focus

only on the behavior and the work problem it causes. Be ready to handle the
defensive reaction you are likely to get. Do this by assuring the employee that
you know that no harm was meant.

Finally, express your faith that together you can solve the problem. You may
need to describe again the behavior and the work problem it causes. Offer your
help and support, but make it clear that you expect the subordinate to cooperate
by taking responsibility for solving the problem.

Your subordinate may have personal problems that affect job performance. Be
careful to concentrate only on how the problems affect the job. Beyond that,
turn to professionals in your organization for advice and encourage the person
to seek help either within or outside the organization.
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Do not assess character. Concentrate instead on what the subordinate did or

did not do, and why objectives were or were not met.

Guidelines
Here are guidelines for managers offering praise or criticism:

When praising: Do it often. Be specific and be direct.

When criticizing: Make it specific. Suggest what to do. Offer

encouragement by expressing your faith that the person can change.
Offer your own help.

Rewards
Give some thoughts to developing various ways to reward people for doing the
right thing. A reward is nothing more than a manager paying attention to a
worker, according to Marvin Karlins, author of The Human Use of human
Resources.

Your goal should be to give each worker the reward that best satisfies that
worker's needs. You will usually have to vary rewards so that boredom does
not set in. There are many from which to choose:

 Praise, when honestly deserved, works well if you use it equally for
similar performance, but not so frequently that it loses effectiveness.
 Public recognition for outstanding services rendered to the company is
often highly appreciated.
 Job security is an effective reward, particularly in layoff-prone industries
and for older workers.
 Money is a satisfying reward for everyone.
 Fringe benefits are effective in some cases, but most companies have a
sufficiently strong benefits package to limit the value of this reward.
 Employee development programs that allow the individual to build job,
leadership, or personal skills help keep workers sharp. Be sure the
individual actually wants job enrichment and is not being overwhelmed
with new responsibilities.
 Involvement in decision-making gives employees a feeling of having some
say in their own destinies and the operation of the company. It also
enhances employees' understanding of the company's general workings
and problems.
 More leisure time, by telescoping either production or work time, can be
an effective motivator that also creates savings for the employer. A four-
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day week, with ten-hour workdays, gives workers more free time and often
enhances their motivation on the job.
 Opportunity for achievement and advancement in the organization is an
important reward for capable employees.
 Greater freedom at work is also a valuable reward for the best employees,
who often perform better when not closely watched by management.
 Finally, feedback itself is a reward. People want to know. Be
informational an nonjudgmental, corrective, but not critical when there is
something you want to change.

Improve Your Delegating Skills

Never do anything that someone else can do for you, as well or better. That is
the advice of Raymond C. Johnson, author of The Achievers.

Simply put, delegation begins by determining all the tasks that must be
performed to reach your organization's goals. Then select the individual or
individuals best qualified to handle each duty and empower them to do it.
Finally, check results regularly to make sure the productivity goals you have
set are being reached or surpassed.

Why People Don't Delegate

In Delegation, Robert B. Nelson says these are the excuses managers give for
not delegating:

1) My employees lack the experience.

2) It takes more time to explain than to do the job myself.
3) A mistake by an employee could be costly.
4) My position enables me to get quicker action.
5) There are some things that I should not delegate to anyone.
6) My employees are specialists, and they lack the overall knowledge that
many decisions require.
7) My people are already too busy.
8) My employees just are not ready to accept more responsibility.
9) I am concerned about lack of control over employee performance when I
delegate.
10) I like keeping busy and making my own decisions.
11) Delegating is terrifying to me.
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Insecurity?
Johnson says that the most common reason for failure to delegate is deep
seated insecurity. This self-defeating attitude influences how you accept and
recognize the performance of those who work under you.

If this is your problem, ask yourself these questions: Is my assistant really after
my job? Am I afraid he will do the work better than I can? Am I afraid to give
him either overt praise or more authority because I fear he will replace me?

If this is your attitude, it is holding you back. Failing to share authority and
responsibility may protect your immediate status at the expense of an
opportunity to move up. The fastest way to promotion is to have a solid
understudy in the wings, ready and able to step into your shoes when the time
comes.

Finally, delegating some of your authority only makes your work easier.

Remember Your Benefits

When you delegate, do not think of it as doing the other person a favor. The
use of effective delegation, says Robert Nelson, will pay off for you, as
manager, and your company in many ways.

You will mobilize resources to achieve more results than you ever thought
possible. You will have more time for managerial activities. These are the
jobs - project planning, monitoring team members, and handling personnel
problems - that no one else can do. You will focus on doing a few tasks very
well, rather than doing a lot rather poorly.

You will increase your managerial potential. You will have someone trained to
succeed you, so you will not be shackled to one particular area.

The organization benefits in many ways. Output goes up, work is completed
more efficiently, and employees feel free to offer new ideas and suggestions to
improve the operation of the company. Decision-making is improved, so the
organization becomes more responsive and thus more competitive in the
marketplace.
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The Delegating Procedure

There's more to delegating than saying, "Do what I tell you to do," cautions
Stephanie Winston in The Organized Executive.

It is entrusting the matter to the other person. It involves mutual commitment.

The person to whom you are delegating makes a commitment to meet your
expectations. For you, it means a commitment to give staff full cooperation,
backing, and recognition.

Four-Point Procedure

A four-point procedure is involved in effective delegation.

1. Define the purpose and importance of the project, together with its deadline
and the scope of the delegate’s responsibility. The responsibility for
clarification lies with you. Don't expect your employees to ask enough
questions to clarify this. If possible, get your employees to set their own
deadlines.

They're more apt to meet those. Try to delegate a whole job, not bits and
pieces. Staffers can waste a lot of time trying to put the pieces together to
make a whole job. They also feel a greater sense of responsibility when
handling an entire job.

2. Provide the necessary authority, resources, and support. Make sure your
subordinate has the authority needed to complete the task. Otherwise, the
staffer's requests to others for help and information may be ignored because
they don't come from you. it's up to you to clarify the staffer's degree of
authority and autonomy.

3. Delegate for results. The key here is accountability, setting standards and
making sure staffers know they're responsible for meeting those standards. For
example, don't rewrite poor work. Return it with comments and the demand
for a better job. But be careful here. It's important not to confuse tactics with
goals.

Set a standard for results, but don't hamstring your staff by overcontrolling how
they do their work. When a problem arises, don't second-guess your staffer by
making a decision over his head. Use the opportunity to show him or her how
to handle it.
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4. Review progress and follow-up. Setting deadlines and enforcing them

establish a company tempo, ensuring that decisions are made promptly and
tasks are handled with dispatch. For ordinary purposes, follow up with calendar
or tickler files. But if the job assignments are very complex or numerous, you
may need to set up an assignment control log.

This records all department projects. It shows dates, nature of assignment, to

whom assigned, dates due, any postponements, and completion dates. This log
is a ready source of data for performance evaluations, and ensures that staffers
receive credit for their work.

Slowly Reduce Supervision

In Work Smart, Not Hard, George Sullivan offers advice about delegating.

On a first assignment, he writes, give the person as much supervision as you

feel is required. Reduce it on the second assignment if the person was quick
and efficient in completing the first task. This will save you time and increase
the abilities of the person handling the task.

Encourage all who work for you to increase their duties and responsibilities.
For example, a secretary who is a whiz at typing should be encouraged to try
writing the letters as well.

Watch Out!

Once you've assigned a task, do not be manipulated into relieving the

subordinate of the responsibility for taking the next step.

Here is how that can work: John meets you in the hallway and says, "Boss, we
have got a problem. . . " Say the wrong thing, such as "Let me get back to you
in an hour," and John has put the weight back on your shoulders.

Instead, see to it that the next move is his. "You are right. There is a problem.
Give me a call tomorrow and tell me how it should be handled."

Selecting the Right Persons

One of the most crucial steps is selecting the right persons for jobs. You have
to consider factors such as these:

 Friction. Disagreement between you and the person taking the assignment
is healthy while the assignment is being made. It is only a problem if it
extends into the execution stage.
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 Track record. Match the job to the person. Past performance is significant
only as it relates to the job you are delegating.
 Location. Don't delegate just because someone is close by and convenient
to use, or maybe just not busy. Suit the job to the person.
 Organization level. If you want to delegate a job to someone several levels
down in the organization, first confer with his or her supervisors and explain
the situation. It will make the delegation smoother and keep noses from
getting out of joint.
 Compatibility. Ideally, the styles of both persons involved are
complementary. You are not looking for a carbon copy of yourself. You're
looking for someone who can do the job.

Robert Nelson says you should consider four factors when selecting a person
for an assignment. You should know each person's record for success on
similar assignments, and how well they work with others. You should know
their interests in such assignments. You need to know the professional
interests and goals of each employee.

Finally, you must consider which employees have the time to take on the task.
Remember, when considering this, that some people work best handling
routine assignments every day, while others, realizing they can advance only
through work and achievement, are far more interested in receiving
assignments.
Getting Their Trust
To get delegating to work, the persons to whom you delegate must have trust in
you.

Talk is not enough to create this. You must back up the employee who needs
support sometimes even though you may not agree with a decision that's been
made.

Do not attack on errors. Those making them usually know it. Instead, give
them a chance to correct them. Be open with your people. Do not try to hide
your errors. Provide any information about the organization that would be
helpful.

As you are working with your team members, clarify their expectations so they
know in advance what is expected of them. Treat them with courtesy and
respect.
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Giving Assignments
As a manager, one of your most important jobs is communicating while
delegating. Effective delegation demands effective communication. Without
it, assignments are blurred, deadlines are vague, and results are predictably
poor.

Communicating calls for mutual consultation and agreement between c

manager and team members. It calls, too, for you to solicit team members'
actions and ideas throughout the process.

Start by telling team members very clearly what they are being asked to
describe the performance standards to be used to evaluate the work, and lake
sure the team has, and knows it has, both the authority to do the job and the
level of support (money and other resources) required.

Evoke a feeling of obligation and commitment within team members, Then

establish a system to reward outstanding performances.

During this communicating process, focus on results rather than ways to

accomplish the task. That way, team members will learn more, take more
initiative, and have greater enthusiasm for the task.

Evaluating
As a follow-up to any assignment, you should appraise the completed task and
discuss your evaluation with the team member. Measure the degree of success
against the standards set when you made the assignment. This should provide
insight for both of you, showing how each performed, as well as suggesting
how you worked together as a team.

At this time, ask yourself two questions: Was the task completed as intended in
a timely manner? What could be done to delegate such a task better ,in the
future?

Failure usually is due to a lack of understanding about what was to be done or

to a lack of authority for completing the task. If either of these caused, less-
than-expected results, you need to pay attention to communication when
Delegating a task. You must clearly describe the task, then ask the team
member )r members to speak up if the delegated authority turns out to be
inadequate.

Discuss your evaluation of their work with team members. This should be a
two-way exchange of perceptions and feedback on each other's work style.
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You should provide both positive and negative comments so team members
will understand what they are doing well and where they need to improve. you
withhold negative comments, the team members, not knowing that problem
areas exist, will continue to make similar mistakes.

Rewards
If you want a team's exceptional performance to continue, recognize and award
it. This is a simple, fundamental rule of management, and one that many
managers ignore. Such a failure can undermine both your and a team
member's Effectiveness, and can create major obstacles to accomplishing the
goals of the department.

Wise managers reward exceptional performance with exceptional salary

increases, promote individuals who consistently perform well, and frequently
link everyone whose efforts they appreciate.
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Negotiate to a Win
The skilful negotiator is the person who moves ahead in the business world.
He or she has a skill that today is used in everything from getting a raise to
delegating an unwanted assignment to reaching a manufacturing agreement
worth billions.

In Getting to Yes, Roger Fisher and William Ury caution that negotiation is not
a matter of making concessions or butting heads. They call for principled
negotiations - deciding issues on their merits. When you bargain over
positions, you get locked in and get sidetracked from meeting both parties'
concerns. Agreement is less likely.

Four Negotiation Points

Principled negotiation has four basic points:

1. Separate the people from the problem, the relationship from the substance of
the negotiation. Try to view the situation from the other person's perspective
and provide opportunities for both of you to express your emotions. Pay
attention, listen, and do whatever you can to build a working relationship.

2. Focus on interests, not positions. You know your interests, the ones that
have caused you to take your position. Now try to figure out the other parties'.
Acknowledge their interests; give the people on the other side positive support
equal in strength to the vigour with which you emphasize the problem.

3. Invent options for mutual gain. Then broaden your options, looking for
room to negotiate. Look for mutual gain by identifying shared interests. These
opportunities exist in every negotiation. Stress them to make negotiations
smoother and more amicable. Make the other person's decision easy. Look for
possible agreements early in the process.

4. Insist on objective criteria. That takes advance preparation and evaluation of

alternatives.

Frame each issue as a joint search for objective criteria, as if you assume the
other party is doing the same thing. Reason soundly and be open to reason.
But yield only to principle, not pressure. When you feel pressure, invite the
other side to state its reasoning. Then suggest objective criteria, and refuse to
budge except on this basis.
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Problem Negotiations

Sometimes, Fisher and Ury note, you are not negotiating on a level playing field. The
other side may be richer, better connected, with a larger staff, have more powerful
weapons. You can't change that, but you can protect yourself from making a bad
agreement.

Before negotiations start, know the worst outcome you will accept. Keep that in mind
as your bottom line. At the same time, make the most of your assets. Know what
you'll do if the negotiations fail. Be willing to break off negotiations if you can't reach
an acceptable agreement.

You may encounter opponents who won't bud-e from their positions. Do not push
back. Silence is your best weapon. It can create the impression of a stalemate,
which the other side will be impelled to break- by offering something different.

Do Your Homework
More advice is offered by David D. Seltz and Alfred J. Modica in Negotiate
Your Way to Success.

Never lose sight of the fact that settlements are negotiated because they are
beneficial to both sides. Before you enter the negotiation do your homework,
including these steps:

o Research. Amass factual information to back up the case you

want to make.

o Psychological detective work. Think about your adversary.

Likes? Dislikes? Flexible? Narrow-minded?

o Self-evaluation. What are your strengths and weaknesses?

o Plan your strategy. What will happen if you get what you
want'? When, where, and how will the negotiations be
scheduled?

o Practice. Actually rehearse the negotiations, using another

person as the devil's advocate.
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Setting the Stage

Leave nothing to chance. One of the most basic details is the place and time of
the negotiating session. A neutral location is preferable. A "home team"
always has an advantage that makes the visitors resentful and is a detriment to
a successful negotiation.

Keep the meeting free of distractions. Best time? Most individuals are at their
peak efficiency at about 11 a. m. Early in the week is better, too. Never
negotiate on Friday. People are thinking about the weekend.

Commitment: the Vital Factor

Start by identifying the committed parties, the person or persons in position to
sit down with you and negotiate. If one is obviously not right, broaden the
discussion group to include others. And remember that commitment and
negotiation are not inevitable. Sometimes the opportunity to negotiate is just
not there.

Dressing Up the Negotiations

Use props and personal attitudes to dress up your negotiations and build
credibility and impact. Start off with an air of formality. It gives you room to
maneuver that you lose if you open more casually.

Use some sort of prop to help you to control the pace of the session. Carefully
prepared research notes, blank legal pad and pen, videotape, or audio tape will
help.

Hand your adversary something - a photocopy of your material, perhaps - that

captures his attention and allows you to lead the conversation.

Consult a special prop, such as an expert or consultant in your field of

endeavor

Using Leverage
Leverage is the ability to get multiple benefits from your assets. Truthful self-
evaluation is the key to the successful use of leverage.

If you have a certain character, admit it and use it to your own advantage.
Glenn W. Turner, who built a quick empire with his "Dare to be Great"
organization, started with a serious problem for a door-to-door salesman - a
distinct and glaring harelip. He capitalized on it. "I see you are looking at my
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harelip, ma'am," he said to prospects. "Heck, it is Just something I put on this

morning so a pretty lady like you would notice me."

Use leverage to maximize your efforts. Do not waste it in unproductive

gambits with your adversary. Many people negotiating for a job begin with
two strikes against them because their resume includes too much that is not
applicable to the job. Be selective. Negotiation is communication. Don't
confuse the main issues by heaping on irrelevant factors.

Never abuse your adversary. You'll get a lot more by using "I really wish I
could afford to pay you what this fine old house is worth than with "This old
junk pile is about to fall over, and it will take a lot to get it in shape, so here is
my top offer."

For every gain You make, give something back in return, even if it is little
more than a formality.

It is important to you to have clearly in your mind what you want and what you
can afford to give up. The shortest distance between two positions in
negotiations is never a straight line.

Keep It Simple
The successful negotiator is an expert at clarifying and conveying a point of
view to an adversary.

Never be afraid of offending someone with simplicity.

First, break up your discussion into compact and understandable little bites of
information and begin to chew on them with your adversary. Next, let your
adversary swallow and digest. But don't take on faith that all key points have
been communicated. Keep returning to them. A little redundancy will not
hurt. .Most individuals actually enjoy hearing information they have just
learned.

You are Succeeding

There are five key signs that negotiations are turning in your direction:

1. Fewer counterarguments.
2. Both sides' points are closer together.
3. The other person talks about final arrangements.
4. The other person extends a personal invitation to you and your spouse.
5. The other person is willing to put the agreement in writing.
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Cement the completed negotiations by meeting to sign. Never put the formal
agreement in the mail.

Be a good winner. Do not brag. You are in the game for the long run. Send
the other person a thank-you letter noting that you look forward to a long
working relationship.

International Negotiations

Jack Nadel, who wrote Cracking the Global Market, is a veteran of years of
negotiations, here and abroad. His advice on the subject is down-to-earth and
practical, and it applies both to the international field and to the most simple of
deals.

His thinking differs in marked fashion from the authors we just quoted. His
first guideline is: "Get away from the other side of the desk." This means
ridding yourself of an adversary role. The reality is that you have a mutual
problem which you are going to solve to your mutual advantage. Your
intention and the intention of the person with whom you are negotiating must
be to structure a deal that resolves the problem and gives each of you what you
want.

It is not always possible. When it can't be done, it is better to make no deal than
to make a poor deal.

Much of your work must be done before you approach the negotiating table.
You must learn all you can about what you want to accomplish, the product,
the market, and the people with whom you will be negotiating.

Visualization
Visualization is a technique you can use that can spell the difference between
success and failure. It means acting out in your mind the logical actions of
what you are going to do - before you do it.

"I first complete all of my homework on the deal," Nadel says. Then I turn on
the screen in my mind. I see myself entering the room where we will
negotiate. I see the people, and we introduce each other and start our
conversation.

"I run the tape all the way through to the end - through the objections, the price
levels, the counteroffers, the reactions, the teasing, everything. I do the entire
meeting in my mind."
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Note that this is not just thinking about the meeting. It is going through it in
your mind. Then, when Nadel goes into the real meeting, it is as if he were
entering it for the second time. He says that most of the time he is 60 to 70
percent right as to what happens. That gives him an enormous advantage.

It has had different results for him. Sometimes he is gone through the
visualization, felt lousy about it, and passed on the deal.

Starting the Negotiations

Nadel has a formula for starting negotiations. Get the other person to answer
this question: "Look, if you could write the script for the deal that you want,
what would you write?" Sometimes that person will ask for less than what you
are willing to pay.

Do not be greedy. That's trying to wring the last drop of blood out of someone
in negotiation. It can blow deals, destroy relationships, and ruin businesses. It
is totally unnecessary, too. If there is not enough fair profit in the deal for
both, move to something else.

Make Meetings Worthwhile

Meetings are a fact of business life, but most of them are frustrating and time-
consuming. The results are rarely worth the time and effort of the many people
involved.

Yet meetings are a sensible way to handle many kinds of discussions.,

problem-solving sessions, presentations, and general updates on what's
happening.

If you learn to plan, structure, and participate in meetings effectively, you will
be able to improve your own time management and productivity as well as that
of other participants.

Room for Improvement

And there is a lot of room for improvement. In We've Got to Start Meeting
Like This, authors Roger K. Mosvick and Robert B. Nelson reported on a poll
of managers and professionals to identify the specific problems of meetings.

These participants listed 1,305 problems. The top one was that meetings too
often get off the subject. Others, in order of rank were, no goals or agendas,
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too lengthy, poor or inadequate preparation, inconclusive, disorganized, and

ineffective leadership/lack of control.

Less than 10 percent of all meetings have agendas, say Listen!! author Thomas
E. Anastasi, Jr. But an agenda is essential if participants are to prepare for
meetings by gathering relevant information.

Even better is a timed agenda that tells participants in advance that they will
deal with topic A from 9 to 10, topic B from 10 to I 1, and so on. That way,
participants can attend only at the times when they can contribute and benefit.

Before the Meeting

If a meeting is to be effective, preparation must start long before the
meeting leader greets the participants. Determine the purpose of the meeting.
But before you set the date, consider the other available communications
media. If the most effective is a meeting, follow these guidelines. If not,
forget the meeting and use another more effective medium.

Select the participants on the basis of their abilities to contribute to and profit
from the meeting. If participation and discussion are important - and they are -
limit the number of participants to five or six. It is difficult for a dozen or
more people to participate effectively in a discussion.

Prepare a draft agenda. List the items the meeting can usefully discuss, and the
times allotted to each topic. Circulate this draft agenda to the participants, and
set a firm return date for comments.

Prepare the Firm Agenda

Having received the comments on the draft agenda, prepare the firm agenda.
Include the topics to be discussed, the date, time, place of the meeting, a list of
participants and their functions, and, to help manage the distracting
interruptions for your meeting, an indication on how messages will be
delivered to participants during breaks in the meeting.

Arrange the logistics. These include the room, any, necessary audio-visual
support that is needed, and the amenities such as ashtrays, pencils, note paper,
water, and glasses. Also arrange for coffee breaks and meals, if necessary.

If persons from out of town will participate, coordinate travel and hotel
arrangements.
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Prepare sufficient copies of any documents to be used at the meeting. If the

flow of the meeting would be smoothed by an advance reading of such
documents, send them to participants.

Name a Leader
Select a meeting leader on the basis of ability to make the meeting work.
Select someone else to take notes, if this is necessary. Prepare an attendance
sheet, not to record truancy but to help the notetaker prepare the meeting
minutes.
At the Last Minute
Just before the meeting, check on the documents you will hand out. Visit
the site in advance to make certain it is ready. Set up and focus any audio-
visual equipment.

Conducting the Meeting

Start on time. The people who are on time deserve this courtesy. It assures all
participants that this will be an orderly meeting which deserves their listening
attention.

If participants do not know each other, introduce them by name and function.
Name badges may help. The badges can be prepared in advance, or the
participants can write their own names if given blank cards and felt-tip
markers.

Tell the participants where they can find rest rooms, a coffee machine,
telephones, and whatever else they may need. This promotes listening, since
participants will not be wondering about these things later when they should be
listening.

Review the agenda. Reinforce the purpose of the meeting. Modify the agenda
as needed to take care of any last-minute developments.

Summarize Action
As you move into consideration of the agenda items, summarize and note
action items or agreements.

Keep your eye on the clock and match the meeting's pace with the time
available. If people know that your meeting will start and end on time, they
won't be distracted by worry that the meeting will run overtime.
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After the Meeting

Prepare the minutes promptly. Minutes are not a transcript. They should be
concise, giving the meeting date, time, place, and purpose, the names of those
who attended, any conclusions, agreements, action items, or assignments.
They may also list open items.

The minutes should not try to summarize the discussion or point out who said
what and who disagreed with whom.

Finally, review the meeting in your own mind. What did you learn that would
be useful in planning, conducting, and following up other meetings?

The Planning Process

Roger K. Mosvick and Robert B. Nelson go even deeper into the meeting
planning process.

They recommend writing down the purpose of the meeting in one clear
sentence, the expected outcomes in another For example: "To decide on a
marketing plan and determine implementation responsibilities for everyone in
the group. To be completed by July. "

Meeting Formats
Meetings usually have one of these formats:

Consultation. This is for an ad hoc group, usually called on short notice and
for a specific decision. Supervisors call them to get input on a problem. The
supervisor should listen as much as possible. Participant input is spontaneous,
usually without the benefit of long consideration. The supervisor chairs the
meeting and clearly is responsible for the final decision.

Recommendation. This meeting is more formal, lasts longer, and features

independent deliberations by the group. The manager meets with the group to
outline the problem, then leaves the group to conduct deliberations. It is clear
that while the group will choose its own leadership and decision process, the
manager retains final decision power, and can reject all recommendations.
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This meeting is particularly valuable in companies where convening

supervisors come and go, so committee members take their assignments
seriously.

Delegation. The manager delegates complete decision-making responsibility

to a group of trusted subordinates. Such meetings are less frequent because
managers fear they will lose control. There is no more powerful demonstration
of trust and respect than the delegated decision. Once this course is taken, the
manager must let the group work out the solution without intervention or later
modification. One of the worst errors a manager can make is to delegate a
decision, then intervene in the decision process.

No matter which format is selected, the manager should report back to the
committee on the final decision.

Planning Checklist
Here is a checklist prepared by Mosvick and Nelson to help meeting planners:

 Write the purpose and general objectives of the meeting.

 Select the type of format and leadership style.
 Decide who will attend.
 Select a chairperson.
 Decide how and when participants will be notified of their tasks.
 Pick the time, place, and duration of the meeting.
 Compose an agenda.
 Name a recorder to report on results.
 Decide who will have responsibility for implementation steps and action
items.

Leading a Meeting
The successful meeting leader or chairperson is the person who can adapt
leadership styles to different groups, different members, and different tasks.
The failure is the person who uses one role, usually authoritarian, when the
group expects another.

Much of the role of the leader is linked with the purpose of a meeting. Meeting
to inform subordinates of a decision calls for one approach; a completely
different one is needed if the meeting is to gain their commitment to carry out a
decision made by others.
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Decision-Making
Managers call most meetings to gather informed opinions from expert
subordinates or colleagues to help make decisions for which the manager is
responsible. Managers need to tap the expertise of their subordinates and to
use them as sounding boards for the managers' ideas.

In this situation, managers who overemphasize their own contributions do

more harm than good by inhibiting the contributions of the others.

Leaders should consider participants as equals, each to be respected for having

information and judgment at least equal to and often superior to the leader's.
This attitude sets an appropriate tone for the meeting.

A strong leader often errs by not being willing to share chairperson functions
and by reacting sharply to perceived dominance by group participants. This
style may be appropriate when meeting procedures and mechanics are
discussed, so the chairperson can monitor and direct progress, but if used in
other areas, it will discourage creative contributions.

Dissent is Essential
Effective leaders recognize that dissent is essential. The purpose of many
meetings is to scrutinize ideas in order to reach the best decision possible. The
alternative is the agreement of "yes-men" who withhold negative information.

Group leaders need to make it plain that disagreement and constructive

criticism are encouraged and expected in group deliberations. It is the only
way to achieve free and open participation in decision-making. One of the best
techniques used by chairpersons to accomplish this is to refuse to take sides in
a dispute until all evidence is presented.

Leaders must make absolutely clear the roles of participants in decision

making. This means spelling out whether any committee conclusion is a
recommendation or a decision. To do otherwise invites bad feelings and
plummeting morale.

Managers jealous of their rank have been known to shift goals in the middle of
a committee's work, or to fail to give any feedback to a group about its
recommendations. Such practices are fundamentally bad management.
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Orientation Speech
The chairman should kick off the meeting with an orientation speech lasting
from three to five minutes. This should serve as the foundation of the entire
decision process. It also orients the group on the meeting's purpose and
procedures, provides an information base, and reaches clear agreement on how
the group can proceed.

A good orientation speech can cut meeting time in half and increase the
probability of a better decision.

Checklist for Speech

Here's a checklist to use when preparing your orientation speech:

 State the problem, general objectives, and procedures.

 Provide the information base, including present status and consequences
if not resolved.
 Define the territory, the topics you'll discuss and the boundaries of the
discussion. Set criteria for a good solution.
 Review the agenda, then ask for any changes.
 Appoint a recorder, (who knows of this in advance) and explain the
recorder's role.

While it takes time to prepare this speech, it does not take half as long as a
meeting that gets off track.

Chairman's Responsibilities
As chairman, you have certain responsibilities during the meeting. By carrying
them out, you will do much to insure the success of the meeting.

 Start on time.
 Build a permissive climate.
 Follow the agenda.
 Give or get accurate summaries.
 Give or get clarification of vague statements.
 Encourage evaluation of all generalizations.
 Protect the expression of minority opinions.
 Minimize conflict over issues that have nothing to do with the meeting.
 Try to reach a consensus on all conclusions.
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 End the meeting by reviewing accomplishments, answering questions,

and specifying actions to be taken, and by whom.
 End the meeting on time.

The Participant's Role

Your role as a meeting participant isn't a passive one. You should prepare for
the meeting, and then have something to offer. You should be prepared to
influence the group effectively and manage conflict if it arises.

If you have been told about a meeting, but haven't received an agenda, ask the
chairperson for one.

Conduct research into problems that will be discussed so that you can offer
stimulating, well-grounded views. If you are strongly involved in the problem,
try to sell in advance your ideas to other group members.
There is much that you and other participants can do to make a meeting more
successful.

First, organize your contributions. Think before you speak. If what you will
say is complicated, rehearse it before the meeting. Make one point at a time.
Speak clearly and forcefully, offering valid evidence rather than vague
statements.

Listen to the discussion. Then speak when your contribution is relevant. If the
conversation has moved past your point, don't try to backtrack. And when you
are listening, monitor your non-verbal signals. Facial expressions can speak
volumes. So can yawns and doodling.
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How to Influence Groups

If you want to influence your group's deliberations, try to speak in the first five
minutes of discussion of a topic. Speak frequently. Talk each time for thirty
seconds or so. But don't feel obligated to respond to every point mentioned.
Limit yourself to good ideas. Speak fast, fluently, and forcefully. (Rehearsing
what you will say helps here.)

State your idea, relate its significance, support it with evidence, then ask for
responses.

Those Worthless Sessions

Ever the realist, Charles R. Hobbs recognizes that on occasion you will be
roped into attending a meeting that promises little and produces less.

What to do?

 Ask if there are any further contributions you can make. If not, leave.
 Have your secretary or someone else call for you with "urgent" business
elsewhere.
 Use meeting time to plan or write.
 Put your mind on something more productive.
 Sit in the back of the room and slip out when the meeting is no longer
productive for you.
 Tell your boss that you feel you could be more productive if you didn't
lose so much time in unproductive meetings.
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Leadership: The Real Test

If you are ambitious, you probably envision yourself becoming a leader. an
individual who others respect and follow. Leadership is not limited to the
person at the top of the pyramid. It is a mix of traits and skills that you can
develop at any time and that will help move you up the ladder.

Harold Geneen, a recognized business leader, gives his version of what it takes
in Managing. Management and leadership are intertwined. Geneen says.
Business management is something objective. You want to get from here to
there, and your performance can be measured. What is more, you can be
taught the tools of the trade in a school of business administration.

Leadership is something else again.

It is purely subjective, virtually impossible to measure objectively, and can't be

taught in school. Leadership is the ability to inspire other people to work
together as a team, following your lead, in order to attain a common objective.
The ability to lead is acquired through the experience of everyday life.

Getting People to Follow

Leaders try to get people to reach for goals they may think are beyond them.
They try to get people to accomplish more than they think is possible.

They do this by running the kind of work place where it is possible for workers
to enjoy the process of tackling a difficult job and solving it. They make
people realize that in working this way, they are part of a team, and each one is
a valued contributor to that team.

Show Appreciation
In that connection, leaders let team members know that they are needed and
appreciated, so they can take pride and satisfaction from playing a winning
game. Leaders create a climate of growth and opportunity, a climate in which I
want to carry their fair share and to excel.

The leaders do this in part by unlocking any inhibitions or fears that may
contribute to making people insecure.

The mark of a leader is a willingness to provide participatory leadership. That

means being willing to grab an oar and pull with other team members. Leaders
set an example for others by working long hours, not merely telling others to
do this.
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Finally, says Gencen, they are not satisfied with mediocre results. If they were.
that is exactly what they would get.

Leadership Styles
In The Creative Edge, William C. Miller describes five leadership styles in
common use.

1. Tell."Based on my decision, here is what l want you to do."

2. Sell."Based on my decision, here is what l want you to do because..."
3. Consult."Before l make a decision, l want your input."
4. Participate. "We need to make a decision together."
5. Delegate. "You make a decision.”

Delegation can be made at three levels:

1. Ask: "Produce this result, and ask me before you take any action."

2. Inform. "Produce this result, and keep me informed of what action you have
taken."

3. Do. "Produce this result, and I don't need to know what you have done. "

Miller notes that participation is widely promoted today, but it is not always
desirable. Would you want a participatory style of leadership if you were a
passenger in a nose-diving airplane?

A Leader's Abilities
The authors of Back-to-Basics Management say a leader has the power to
shape and mold an organization through group cooperation. This calls for
many abilities. Among them:

 Recognize weaknesses and strengths in yourself and others.

 Set goals and meet them.
 Pass on credit to others for personal contributions.
 Find and use the right resource to accomplish a task.
 Measure the degree of success or failure in an operation.
 Turn every situation into a learning experience.
 Understand the use of power. Accept it in your position.
 Deal with the present realistically, while retaining the stuff of which
dreams are made.
 Constantly strive to know and understand more about everything.
 P a g e | 413

 Discriminate between truth, wishful thinking, and hard facts.

 Awaken those around you to an understanding of their full potential.

Skills of Leadership
Get to know the tangible and intangible needs of everyone in your group. Give
them what satisfies their needs. Each time you reinforce this capability of
yours, they will become more loyal, more cohesive, more motivated.

You should concentrate on certain basic actions.

One of these is to process information, not just job information, and, use it.
Form premises that lead to useful conclusions. Be innovative, able to take the
information and resources at hand and give your people the competitive edge.

Finally, continue gathering the knowledge and honing the skills that
complement your position as a leader.

Setting an Example
John Adair, who wrote Effective Leadership, emphasizes that one of the most
important moves a leader can make is to set an example. He makes a good
point: You set an example whether you want to or not The trick is to set a good
example. to be what you want others to be.

Example is important because people take in information more through their

eyes than through their ears. What they see you do has far greater impact than
what they hear you say. Word and example must match up, must not conflict.

If bosses set office hours from nine to five. but show up at ten and leave at
four, if the mistakes of others are fodder for public discussion, but theirs are
never mentioned, expect that behavior to become contagious. Then
subordinates will realize it is impossible to follow the leader's example without
getting into trouble, and they will become frustrated.

Francis Bacon said it well: "He that gives good advice builds with one hand.
He that gives good counsel and example builds with both. But he that gives
good admonition and bad example builds with one hand and pulls down with
the other."

A good leader uses creative power. especially if it involves an element of self-

sacrifice. Seeing this can work in people's minds to alter their ways. The
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process may take time, but the leader whose example backs up his words puts
himself in an unassailable position. No one can accuse him of hypocrisy.

"Leadership is example, wrote one officer cadet at military school, making that
perhaps the shortest and at the same time the most vivid definition of
leadership.
Pitfalls of Success
A leader is ultimately the person at the top of the pyramid, the person who has
made it.

But there is no more security at the top than anywhere else. As Raymond
Johnson points out in The Achievers, success sets traps for the unwary that
keep you from achieving your full potential.

One of the most difficult problems to conquer when you reach the top is the
ivory tower syndrome, or executive isolation. The farther an executive moves
from the roots of the business, the harder it is to keep up with what's happening
in that business.

Avoid Isolation
Most executives work and live and lunch and play golf or tennis with the same
people. That means that all of their person-to-person contact is with people
who live, work, and think alike.

This gradual isolation from reality is a trap you must fight from the beginning
of your rise in the organization. You must work to keep lines of
communication open, and you must make certain that communication comes
up to you from the bottom.

There are many tried and true methods to achieve this. You can use advisory
committees, market and employee surveys, and suggestion boxes. One of your
musts should be maintaining contact with customers. Another is to make sure
you are getting good information from a wide variety of sources.

A leader has the responsibility and authority for making the final decision. He
may not always get credit when things go right, but he will get the blame when
things go wrong. So It is critical to have a total grasp of the situation before
making decisions.
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Take It in Stride
Another common pitfall of success is getting carried away with the excellence
of one's own work. Once you start believing your own press releases, you are
in trouble.

A successful achiever can be overwhelmed with excessive praise to the point

that he stops forward progress. The key is to learn to take it all in stride - the
successes and the failures. Both are usually temporary, and both provide
valuable lessons.

When you think you have the whole world in the palm of your hand and that
there's no one quite like you, stop. Do not think of the great things you've
done. Instead, think of all the things that still need to be done. Then get
started.
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PROJECT MANAGEMENT
MANUAL
PART 5

CONTRACTS KNOWLEDGE
2014
 P a g e | 417

Table of Contents Part 5

Subject Page

Contracting Principles 418

Sufficiency of the Plans and Specifications 423

Architect/Engineer Liability to Third Party 424

Architect/Engineer Inspection Responsibility 427

Certification of Completion 434

Contracting Terms 440

Contract General Conditions+3 449

Defining the Scope of Work 451

Contract Must be Read as a whole 460

Sample Contract Administration Plan 468

Sample Contract for Consultant 491

Sample Joint Venture Agreement 511

A Guide for Best Practices in Contract Administration 531

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CONTRACTING PRINCIPLES

Site Engineer’s Obligations

A site engineer on a typical project is wearing several hats. First and foremost,
he is functioning as an independent professional and he is providing services
for a fee. He also functions as an agent of the owner and as an arbitrator of
disputes between the owner and the contractor.

Standard of Care
The engineer’s obligation is to exercise the degree of care, skill, and
knowledge that is generally expected within the profession. It is the same
standard applied to doctors, lawyers, and other providers of professional
services.

A site engineer’s service or advice need not reflect superlative brilliance in the
field, but it must meet a certain minimum level of expertise that is vaguely de-
fined as “acceptable” or “average.” When performing design calculations, for
instance, the engineer must follow certain procedures that are generally
accepted in the profession. The failure to do so will probably be considered
negligence or professional malpractice.

It is important to note that an engineer who holds himself or herself out as pos-
sessing particular expertise in a field will be held to a standard of care applied
to such experts. For instance, if a civil engineer takes it upon himself or herself
to evaluate subsurface data or perform structural calculations, the civil engineer
will be expected to possess and exercise the same degree of care, skill, and
knowledge expected of a geotechnical engineer or a structural engineer. Once
an engineer undertakes a particular endeavor, it is no excuse to later argue this
was really outside the his field of expertise. This explains the widespread use
of technical consultants and subcontractors.

Over the years, a few court decisions have held that an engineer extends an
implied warranty that its design documents are complete and accurate and suit-
able for their intended purpose. Although doctors and lawyers have never been
asked to warrant the successful outcome of their services, some courts have
reasoned that the design professions are more empirical and more subject to
perfection.
 P a g e | 419

These court decisions have been greeted with alarm in the design professions.
It must be stressed, however, that these decisions are anomalies. They do not
represent the mainstream of judicial thinking regarding the engineer’s standard
of care.

In the absence of contractually assumed liability, which is discussed below, the

engineer is held only to a standard of due care and that standard is measured by
the skills and knowledge of the average practitioner.

CASE STUDY

Owner awarded Contractor a contract for construction of a sewer project. The

contract stated that neither Owner nor Engineer assumed responsibility for
Contractor’s ability to meet the specified infiltration limits and if Contractor
felt the design was inadequate to meet the limits, Contractor must notify
Engineer in writing.

Contractor was unable to meet the infiltration limits. Contractor sued Owner
for breach of implied warranty of the specifications and sued Engineer for neg-
ligent preparation of the specifications. Defendants relied on the disclaimer in
the construction contract.

The Appellate Court ruled that all owners extend an implied warranty to
contractors that the plans and specifications are accurate, complete, and
suitable for the completion of the project. The engineer in turn assumes a duty
to prepare design documents that meet this standard.

These fundamental obligations cannot be disclaimed or shifted to the

contractor. The language in the contract was unenforceable. W.H. Lyman
Construction Co. v. Village of Gurnee. 403 N.E.2d 1325 (Jll.App. 1994).

Engineer’s Contractual Obligations

In addition to the engineer’s general obligation to exercise due care, he has a
number of specific contractual obligations established in its agreement with the
project owner. An architectural or engineering services agreement bears little
resemblance to a construction contract.

To begin with, it is always negotiated, not competitively bid. Additionally,

there are not a large number of contingencies that need to be addressed in a
 P a g e | 420

construction contract. A typical engineer agreement addresses the basic issues

of fee, schedule, insurance and use of consultants. The agreement then devotes
most of its space to defining the scope of the engineer’s work.

As mentioned earlier, the definition of the scope of work is crucial in defining

the engineer’s contractual obligations. Without a detailed, complete, and un-
derstandable scope of work, it is impossible to determine where the engineer’s
responsibilities began and where they ended. It is also impossible to identify
and recover payment for extra work items not included in the original scope.

Most engineers use a standard, preprinted form of agreement for their contracts
with project owners. This may be a form prepared by their attorney for their
use, or it may be one of the forms published by the professional organizations.
Both the American Institute of Architects and the Engineers’ Joint Contract
Documents Committee publish such forms.

These forms have been officially approved by their respective organizations,

and they avoid the serious pitfalls of engineer agreements that are described
below.

There are two serious pitfalls that should be avoided by engineers when
entering into agreements with project owners. They are two forms of
contractually assumed liability: warranties and indemnification clauses.

As described earlier, courts have refused to read an implied warranty into an

engineer’s agreement. The engineer has a duty to exercise due care in carrying
out his or her professional responsibilities, but the engineer does not impliedly
warrant to the owner that the work product is flawless or will accomplish
everything the owner wanted.

CASE STUDY

Owner retained Engineer to design wastewater treatment plant. Engineer

based design on use of cement-bentonite slurry wall. Engineer relied on
Supplier’s representations regarding the compressive strength of the product
and conducted no independent investigation into the properties of the product.
The wall failed and caused extensive damage to the treatment plant. Owner
sued engineer for professional malpractice.
 P a g e | 421

The District Court ruled that Engineer failed to exercise the skill and judgment
expected of a design professional. An engineer does not guarantee the
sufficiency of his design. Nor is an engineer expected to conduct and extensive
independent testing program on every product he specifies.

It was negligent, however, for this engineer to blindly rely on Supplier’s

representations without checking some independent verification. City of Columbus
v. Clark-Dietz & Associates—Engineers. Inc..550 F.Supp. 610 (N.D.Miss. 1989).

Even though courts have refused to find an implied warranty, it is still possible
for the engineer to extend an express, or written, warranty to the owner. This is
seldom labeled as a warranty in the engineer services agreement, but it occurs
nonetheless. For instance, the designer of an industrial facility may be asked to
guarantee that the facility as designed will be capable of meeting certain per-
formance standards. This would be considered an express warranty.

The problem with warranties is twofold. First of all, an engineer may exercise
due care and even professional excellence at all times, and still have a project
fall short of expectations because of variables beyond the engineer’s control.
With a warranty, the engineer is liable nonetheless, and this greatly expands
the engineer’s liability exposure.

The second problem with warranties is insurance coverage. There simply isn’t
any. The insurance companies who write ‘errors and omissions” or pro-
fessional malpractice policies for engineers are alarmed at any contractually as-
sumed liability. They are only willing to cover the risk that the engineer will
fail to meet the required professional standards.

The policies invariably exclude coverage for liability resulting from warranties.
It is therefore in the best interest of the owner and engineer that warranties be
kept out of the agreement.

The second form of contractually assumed liability is the indemnification

clause. Again, the problems are the expansion of liability exposure and the lack
of insurance coverage.

An agreement to indemnify another party is an agreement to protect them, pay

them, and otherwise make them whole in the event a claim is asserted against
them. To the extent the indemnification clause is limited to claims against the
 P a g e | 422

owner arising solely out of the engineer’s negligence, this is not a problem, as
the engineer would be liable for its negligence anyway.

The problem is that indemnification clauses are frequently written in such a

way that the engineer’s liability is contractually expanded to include claims not
arising out of its own negligence. The most common example is the indemni-
fication clause referring to claims arising “in whole or in part” from the
engineer’s services. In other words, the engineer may be 10 percent responsible
for the problem, but it has agreed to fully compensate the project owner.

As with express warranties, insurance companies are not willing to cover

expanded liability resulting from indemnification clauses. There are almost al-
ways exclusions in the insurance contracts, although these exclusions can
sometimes be removed or reduced through the purchase of indemnification
riders.

While on the subject of contractually assumed liability, there is one other topic
which should be addressed. This is the engineer’s effort to contractually limit
its liability for its own negligence.

These “limitation of liability clauses” typically state that the engineer’s liability
to the owner shall not, under any circumstances, exceed a certain stated
amount. The use of these clauses, which are legally enforceable, has been
pushed by some engineer insurance carriers and professional associations.

Just as engineers and their insurers have been reluctant to agree to a contractual
expansion of engineer liability, project owners have been reluctant to agree to
the contractual limitation of the engineer’s traditional liability. It is fair to say
that the use of limitation of liability clauses is not gaining widespread
acceptance in the industry.
 P a g e | 423

Sufficiency of the Plans and Specifications

Probably the single most important obligation the engineer has toward the
project owner is the obligation to prepare a complete, accurate, and
unambiguous set of plans and specifications.

It was stated earlier that implied warranties are not read into engineer service
agreements. It is so well established, however, that an engineer has a
professional obligation to produce sufficient plans and specifications that it
almost rises to the level of an implied warranty.

The plans and specifications should not omit anything that is necessary or
include anything that is redundant. They should be free of conflicts and ambi-
guities. They should be accurate regarding existing site conditions. And it
should be possible to construct the project as designed using commercially ac-
ceptable construction methods in order to end up with a functioning facility.

As will be seen later, the sufficiency of the plans and specifications is crucial
regarding the engineer’s liability to the owner, the owner’s liability to
construction contractors, and the engineer’s liability to construction
contractors.

Liability for Cost Estimates

It is common, at the planning stage of a project, for the owner to tell the
engineer that there is a certain maximum budget for the project. This is
obviously a crucial consideration throughout the design phase of the project.
The engineer must estimate the construction cost of the facility he or she is
designing. This is difficult, because it involves assessing such intangibles as
the local competitive bidding climate.

The question arises, what happens when all the bids or quotations come in and
the project, as designed, is over its budget? What are the engineer’s responsi-
bilities in this situation?

To begin with, the engineer is expected to use ordinary professional skill in es-
timating construction costs but is not expected to predict costs with dead ac-
curacy. It is unusual for a construction cost overrun to be successfully asserted
as a malpractice claim against an engineer.
 P a g e | 424

Most engineer service agreements address this issue. Typically, they state that
the engineers sole responsibility if bids come in over budget is to provide
redesign’ work at no additional charge in order to bring the project within
budget. The engineer cannot be held liable for monetary damages.

Sometimes the agreement will state that the engineer’s obligation to provide
free redesign services will accrue only if the low responsive, responsible bid
exceeds the budget by a certain stated percent. In any event, the engineer’s
obligations in this situation should be expressly established in the engineer
service agreement.

Engineer’s Liability to Third Parties

Traditionally, the engineer’s only responsibilities were owed to the project
owner, the client with whom the engineer did business. Evolving legal trends
have changed all that. Along with every other participant in our economy, the
engineer now finds itself exposed to liability to third parties with whom the
engineer never did business.

The Demise of “Privity”

“Privity of contract” means that a direct contractual relationship exists be-
tween two parties. They have entered into an agreement.

Traditionally, the law held that an engineer could not be sued by a construction
contractor or any other third party not in privity with the engineer. The
engineer’s professional obligations were owed strictly to its client, the project
owner. It was the owner that the engineer contracted with and the owner who
paid the engineer. Therefore, the engineer need consider only the interests of
the project owner.

The past 40 years have seen the near total demise of privity as a requirement
for maintaining a lawsuit for commercial damages. The trend began in the
context of product liability litigation and spread to every area of law including
engineer liability.

Today, it is safe to say that the lack of privity of contract will rarely protect an
engineer in a suit alleging the negligence or professional malpractice of the
engineer. As a result, engineers are being sued by contractors, subcontractors,
bonding companies, construction lenders, and other parties on the construction
project with whom the engineer has no contractual relationship.
 P a g e | 425

Foreseeable Harm
With the demise of privity the new operative phrase is “foreseeable harm.”
Today’s rule can be summarized as follows: In carrying out its professional
responsibilities, the engineer has a duty to exercise ordinary ski1l and due care.
That duty is owed to all parties who could foreseeably suffer economic harm as
a result of the engineer’s failure to exercise due care. If one of those parties is
harmed as a result of the engineer’s lack of due care, that party may maintain
an action against the engineer for negligence.

CASE STUDY

A Mechanical Engineer prepared drawings pursuant to agreement with

Owner. Contractor later complained that the drawings were inaccurate and
sued Engineer for the increased cost of performing the construction work.

Engineer responded that its only obligation was to its client, the Owner.
Engineer said it had no contract, and therefore no legal obligations, with
regard to Contractor.

The Superior Court ruled that Contractor could sue Engineer for its increased
costs. Privity of contract is no longer required in order to maintain a suit of
this nature. Engineers may be held liable to any party for the economic conse-
quences of their professional negligence if it was reasonably foreseeable that
the injured party would be affected by the engineer’s performance of its
professional duties. Conforti & Eisele, Inc. v. John C. Morris Associates, 418 A.2d 1290
(N.J.Super. 1992).

Common Contractual Claims against engineers

The most common source of third-party claims against engineers is the
engineer’s inspection and certification role in the construction process. This is
discussed in detail below. The other two common sources of third-party claims
are design deficiencies and delayed response to request or submittals.
 P a g e | 426

Design deficiencies would include inaccuracies or conflicts in the plans and

specifications, as well as any insufficiencies in the design documents. The
plans and specifications must be complete and sufficient so that if they are
adhered to by a construction contractor, a complete, operational project will
result.

Contractors are entitled to rely on the plans and specifications when bidding
and planning a job. To the extent design deficiencies increase the cost of the
contractor’s performance, the engineer may well be held liable to the
contractor.

An engineer’s delayed response to requests or submittals is another source of

claims by contractors. When a contractor seeks clarification or direction from
the engineer when faced with an unanticipated problem, the engineer has an
implied obligation to respond within a reasonable period of time. If the
engineer does not and the lack of a response delays the contractor or extends its
total performance time, the engineer may be held liable to the contractor for its
delay damages.

Submittals typically involve product catalogs, shop drawings, and other things
that must be approved by the engineer before the contractor incorporates them
into the project. Sometimes the construction contract stipulates that these
documents will be turned around in a certain minimum time. Even if the
contract contains no such provision, there is an implied obligation for the
engineer to make a decision within a reasonable period of time. Prompt
decisions on these matters are frequently crucial to the contractor’s ability to
maintain its schedule.

CASE STUDY

Engineer prepared plans and specifications for wastewater treatment plant

pursuant to agreement with Owner. The specifications required certain
internal components in the sludge pumps.

Contractor prepared its bid in reliance to a quotation from Supplier. Engineer

refused to accept the particular model pump being offered. Supplier had to fur-
nish Contractor with a more expensive pump in order to obtain Engineer’s ap-
proval. Supplier then sued Engineer for
 P a g e | 427

the increased cost, arguing that Engineer had negligently drafted and
incorrectly interpreted the specification. Engineer responded that it owed no
duty to an equipment supplier.

The Court of Appeals ruled that Engineer did owe Supplier a duty to exercise
due care in the drafting and interpretation of specifications. An engineer’s
obligation to exercise appropriate professional skill and judgment extends to
all parties who may foreseeably rely on the engineer’s services. Waldor Pump &
Equipment Co. v. Orr-Schelen-Mayeron & Associates. Inc.. 386 N.W.2d 375 (Minn.App. 1996).

Engineer’s Inspection Responsibilities

During the construction phase of a project, it is common for the engineer to
inspect the contractor’s work on behalf of the project owner. This gives rise to
questions regarding the scope of the engineer’s inspection responsibilities and
the engineer’s liability for shortcomings in carrying out those responsibilities.

Scope of Responsibility
The scope of the engineers inspection responsibilities is primarily established
in the written agreement between the engineer and the project owner. A very
precise and well-considered scope of work is therefore necessary in order to
avoid misunderstanding on the owner’s part and unintended liability exposure
on the engineer’s part.

Very few owners are willing to pay an engineer to station personnel at the job
site 50 or 60 hours a week to observe every move of the contractor. Nor are
owners willing to pay to have every piece of material used by the contractor
laboratory-tested.

Most owners are seeking periodic inspection of the work. The owner-engineer
agreement should reflect this. The scope of work should be explicit as to how
many times a week or a month the engineer is expected to visit the site.

If particular materials or installations are to be tested, this should be clearly

spelled out. The agreement should then make it clear that the engineer’s
inspection and testing responsibilities do not extend beyond those specifically
listed and the engineer does not guarantee the sufficiency of the contractor’s
work.
 P a g e | 428

CASE STUDY

Contractor awarded purchase order to Fabricator for exterior metal stairway.

Fabricator submitted shop drawings to Contractor, who in turn submitted the
drawings to Architect for approval. Architect was slow reviewing the shop
drawings. The delay increased Fabricator’s costs. Fabricator sued Architect
for unreasonably withholding approval of the shop drawings. Architect argued
that its only duty in reviewing shop drawings was to protect the interests of its
client, the Owner.

The Court of Appeal disagreed. It was foreseeable that subcontractors such as

Fabricator would be economically affected by Architect’s performance of its
functions. Architect therefore owed a duty to those parties to exercise due care
in carrying out its responsibilities. Gurtler, Hebert & Co., Inc. v. Wevland Machine Shop.
Inc.. 405 So.2d 660 (La.App. 1991).

In recent years, a somewhat semantical debate has arisen regarding the use of
the term “monitoring” rather than “inspection.” The rationale is that if an
engineer “inspects” the work, the engineer will be liable for failing to detect
problems, whereas if the engineer only “monitors” the work, it will be held to a
lower standard of observation.

This distinction has its genesis in several arcane court decisions, but it is
generally lacking in validity. It is unlikely that a modern court would allow the
question of an engineer’s liability to turn on the use of the verb “inspect” rather
than ‘monitor.”

There is certainly no harm in the cautionary use of the term “monitor.” Many
engineers influenced by their liability insurers, have become more comfortable
with this parlance. This is fine, but engineers should not be lulled into believ-
ing that the use of the term “monitor” will excuse the failure to meet profes-
sionally accepted standards or otherwise lessen their obligations.

Even if the owner-engineer agreement calls for the engineer to monitor the
contractor’s work, the engineer will still be required to authorize release of
payments and acceptance of the work. This authorization requires an
affirmative determination on the part of the engineer. The engineer will not be
able to hide behind the somewhat passive connotations in the term “monitor.”
 P a g e | 429

CASE STUDY

Owner awarded architectural agreement to Architect using the AIA Standard

Form of Agreement between Owner and Architect. Architect prepared
specifications requiring liquid mortar to be poured in a particular fashion.

Contractor had trouble with the pours and poured mortar in a manner that
deviated from the specifications. Architect observed these pours but did not
object. When the walls developed problems, Owner sued Architect for failing to
inspect Contractor’s work in the manner required by the AIA architectural
agreement.

The Supreme Court noted that the AIA agreement does not require the
architect to make continuous or exhaustive inspections and does not make the
architect the guarantor of the contractor’s compliance with the plans and spec-
ifications. However, the agreement does require the architect to “guard the
owner against defects and deficiencies in the work.” If Architect observed
nonconforming work being performed and failed to object, Architect breached
its inspection duties under the agreement. Dan Cowling & Associates, Lnc. v. Board of
Education of Clinton District School, 618 S.W.2d 158 (Arkansas 1981).

Engineers who are concerned about the liability exposure arising from
construction phase activities should focus their attention on the preparation of a
detailed, explicit scope of work in the owner-engineer agreement. This is the
best precaution to take against expansive liability exposure.

Conformance with Plans and Specifications

One of the engineer’s primary inspection responsibilities is to determine
whether the contractor is conforming to the plans and specifications for the
project. The owner is entitled to strict conformance with the plans. This is what
the owner is paying the contractor for. If the contractor is deviating from the
plans and specs, it is important for the owner to know so that the owner may
take protective measures such as withholding payment.

When inspecting the contractor’s work for conformance to the plans and
specifications, the engineer is expected to use the skill and care generally
accepted within the profession. The engineer is not expected to perform
material tests or take other elaborate measures unless this is called for in the
agreement with the owner.
 P a g e | 430

There are two common pitfalls for engineers when inspecting the work. The
first is a lack of familiarity with the contract requirements. This is particularly
inexcusable, as the engineers usually have prepared the plans and
specifications themselves. If the architect is not thoroughly familiar with the
detailed requirements of the construction contract, it will be impossible for the
engineer to determine whether the contractor is conforming to those
requirements.

The second pitfall is the failure to inspect work before it is covered up. Most
construction contracts prohibit the contractor from covering up work before the
owner or his representative has inspected it. Engineers must be alert to strictly
enforce this provision. It is impossible for an engineer to reach a responsible
professional opinion regarding the sufficiency of the work if the work is now
under 4 feet of backfill or concealed by a new wall.

Frequently, the plans and specifications require a certain amount of inter-

pretation. Plans that require a great deal of interpretation are probably sloppy
or incomplete. Nonetheless, it is inevitable that questions will arise regarding
the intended meaning of the plans and specs or their application to particular
field conditions. In rendering these interpretations, the engineer is expected to
be objective and to avoid an expansive reading of the contract requirements.

Because plans and specifications require a certain amount of interpretation, it is

customary for the owner to hire the same engineer who designed the project to
perform construction phase activities. The rationale is that the designer is in the
best position to interpret the design and judge the contractor’s conformance to
that design.

Some large institutional project owners prefer to hire a separate engineer for
construction phase activities. The concern is that the engineer who designed
the project will have a vested interest in defending the adequacy and integrity
of the design. If there are problems with the design, the engineer will not be
objective in arriving at an appropriate solution.

Still, the prevailing practice is for the project owner to hire the designer to
inspect the contractor’s work.

Occasionally, matters of artistic interpretation arise during construction. For

instance, this could involve the approval of a particular shade of paint.
Construction contracts typically give the architect broad discretion to make
these determinations.
 P a g e | 431

Engineers should not confuse the unfettered discretion they have in making ar-
tistic determinations with their role in interpreting the plans and specifications.
Properly prepared design documents should speak for themselves and require a
minimum of elaboration. The engineer’s inspection responsibility is to render
an opinion regarding the contractor’s conformance with those objective
requirements. The engineer is not allowed to embellish the design as the work
progresses.

A final issue involving conformance with the design has to do with the
engineer’s approval of shop drawings and other submittals. Shop drawings are
drawings submitted by construction contractors to project owners depicting the
way certain aspects of the work are to be performed. Shop drawings typically
address such matters as the fabrication or assembly of a particular item or the
form and fit of a particular aspect of the work.

Shop drawings are necessary, particularly on large or complex construction

projects. It is impossible for even the most complete set of plans and specifi-
cations to depict every detail of every installation throughout the project. Fur-
thermore, there are certain aspects of the work where the owner and engineer
look to the contractor to provide expertise in fabrication or installation of an
item or even selection of a particular proprietary product.

In reviewing and approving shop drawing submittals or submittals proposing

the use of a particular product, the engineer should be guided by a desire for
conformance with the expressed intentions of the plans and specifications. This
is what the architect’s approval of a shop drawing submittal indicates. The
work as depicted in that drawing will conform to the plans and specifications.

Much has been made of the choice of language used in approving shop
drawings. Engineers are concerned that when approving shop drawings, they
will inadvertently waive or alter contract requirements, thereby exposing them-
selves to a liability claim by the project owner. They therefore use very equiv-
ocal, noncommittal language in “approving” shop drawing submittals.

One typical statement, found on a stamp affixed to a shop drawing submittal,

reads as follows: “Review is only to check for compliance with the design
concept of the project. Approval does not indicate the waiver of any contract
requirement. Changes in the work may be authorized only by written change
order.”
 P a g e | 432

The use of this language does little to protect the engineer, but a great deal to
create confusion. Under the terms of the typical contract documents, the con-
tractor cannot proceed with the work until it receives approval of submittals.
Either the submittal was approved or it wasn’t approved. Once it was
approved, contractors are entitled to act in reliance on that approval.

Courts are not sympathetic to an engineer’s after-the-fact, self-serving

explanation of what he or she really meant to say when he or she approved a
shop drawing submittal.

Engineers who are concerned about inadvertently waiving contract require-

ments can take solace from one basic legal principle. If a contractor submits a
drawing which entails any deviation from the plans and specifications, this
deviations must be prominently noted on the drawing itself. If the drawing
involves a change which the contractor fails to flag, the engineer’s approval of
the drawing will not constitute a waiver of the contract requirements.

Contractor’s Percentage of Completion

Another of the important inspection functions of the engineer during the
construction phase of the project is to determine the amount of progress the
contractor has made. This is crucial, as it relates to the owner’s release of
payment to the contractor.

Most construction contracts call for periodic progress payments from the
owner to the contractor. Typically, payment is to be made based on the con-
tractor’s percentage of completion, as measured by the value of the work. For
instance, if the total contract price is $1 million and the contractor has com-
pleted work at the site with a value of $150,000. the contractor is entitled to be
paid the $150,000 less the stipulated “retainage” (usually 10 percent). The job
would be said to be 15 percent complete.

It should be apparent that the determination of percentage of completion

involves a fair amount of subjective judgment on the part of the engineer.
Additionally, the architect is subject to conflicting pressures from the owner,
who wants to make sure the contractor is not receiving advance payment for
work not yet performed, and the contractor, who is hungry for maximum cash
flow. It is far easier for the engineer on a unit-price contract, where an
objective measurement of quantity or number of items can be applied.
 P a g e | 433

When determining percentage of completion, engineers should rely on any

schedule of values established in the contract between the owner and the
contractor. Progress payment issue is a very good reason to insist that a
schedule of values be agreed upon in advance. Without such a schedule, the
engineer must apply its subjective judgment to a matter that is fraught with
potential litigation.

The legal ramifications of an engineer’s authorization of release of a progress

payment are significant. If the engineer fails to exercise due care in
determining the Contractor’s percentage of completion and the contractor is
paid in excess of the value of the work in place, the engineer could be held
liable.

If the overpaid contractor becomes insolvent or disappears, the engineer could

held liable to the owner, the owner’s construction lender, and the contractor’s
bonding company. It was foreseeable that all these parties would rely on
engineer’s determination to avoid overpayment. And all these parties would
foreseeably be harmed if the contractor was overpaid and then defaulted. Funds
exceeding the value of the work in place would have been irretrievably dis-
bursed. The engineer could be held liable for the difference between the value
of the work in place and the total payments to the contractor authorized by the
engineer.

CASE STUDY

Owner awarded Contractor a lump-sum construction contract. Contract called

for Owner to make monthly progress payments to Contractor based on
Architect’s certification of Contractor’s percentage of completion. Architect
certified a particular percentage of completion, but Owner refused to make a
progress payment for that amount unless certain changes were made in the
terms of the contract. Contractor sued Owner for breach of contract.

The Court of Appeals ruled that Owner did breach the contract. When a
contract establishes Architect as the party responsible for determining Con-
tractor’s percentage of completions that determination is binding on both
Owner and Architect. Owner was not entitled to ignore Architect’s certification
or to impose additional preconditions before making the progress payment.
Hart and Son Hauling, Inc. v. MacHaffie, 706 S.W.2d 586 (Mo.App. 1996).
 P a g e | 434

Certification of Completion
The conclusion of a construction project is marked by two significant
milestones: substantial completion and final acceptance. Each carries certain
legal ramifications.

When the contractor has achieved substantial completion of the project, the
project is suitable for its intended purpose. The project owner can take occu-
pancy of the project and make use of the project. The risk of loss due to ca-
sualty is shifted from the contractor to the owner. Typically, the contractor is
entitled to receive payment of the contract balance except for enough retainage
to cover the cost of any “punch list,” or last-minute completion items.

Once the punch list is completed by the contractor, the owner is ready to finally
accept the project. The contractor is paid the remaining contract balance. Upon
final acceptance and final payment, the owner waives the right to bring any
claims against the owner for defective work unless the defective work was
“latent,” or hidden, or was covered by a warranty. Conversely, the contractor
loses the right to assert any claim for additional compensation if it was not
asserted prior to final acceptance and payment.

Not surprisingly, it is the engineer who is called upon to certify that the
contractor has achieved substantial completion or final completion of the
project. This certification typically is issued to the project owner. It is also
common, however, for the engineer to certify to public authorities such as a
building inspector that a project is substantially complete in accordance with
the plans and specifications and the applicable building codes.

If construction defects are discovered after the engineer’s certification of com-

pletion, litigation may result. For instance, in recent years there have been a
rash of lawsuits by condominium associations against engineers who certified
to public authorities that the project had been completed in accordance with the
plans and specifications.

There is not a great deal engineers can do to avoid this problem. Public author-
ities, construction lenders, and others customarily require an architect’s cer-
tificate before issuing an occupancy permit or authorizing the release of a final
construction loan disbursement. The only thing the engineer can do is to try to
convince project owners to use certification language which accurately reflects
the engineer’s limited role during the construction phase of the project. Rather
 P a g e | 435

than blankly certifying that the contractor’s work complies with all plans,
specifications, and ordinances, engineers could more appropriately be asked to
certify that to the best of their knowledge and belief this is the case. Engineers
might also want to state that they are not and cannot be guarantors of the
sufficiency of the contractor’s work.

Architect/Engineer’s Role in the Claims Process

Considering the engineer’s intimate involvement with a typical project from
beginning to end, it is not surprising that engineers become very involved in
the claims process. The claims process refers to the process whereby the
construction contractor requests additional compensation or other benefits
under the contract from the project owner.

The engineer’s responsibilities during the construction phase make it almost in-
evitable that the engineer will get involved in claims situations. Many
construction contracts recognize this reality and specifically delineate a certain
role for the engineer.

Engineer as Agent of the Owner

If the architect is given responsibilities during the construction phase of the
project, the engineer carries out those responsibilities as the agent of the owner.
This is a crucial factor, as the agency relationship has a number of legal
ramifications. A construction contractor has the right to rely on the words and
actions of the engineer if the engineer is acting within its actual or apparent
authority on the project.

An owner cannot designate an engineer as an on-site representative and then

disown the remarks or directives of that representative. The law recognizes this
by holding that the project owner, as “principal,” will be bound by the acts of
its agent, the engineer. Engineers must constantly keep this in mind during the
construction phase. Every directive and every interpretation must be consistent
with the terms of the contract the construction contractor agreed to. If the
engineer’s directives are inconsistent with the terms of the contract, the
contractor may very well be entitled to additional compensation or some other
remedy under the contract. The owner will pay for this remedy, as the owner is
bound by its agent’s actions.
 P a g e | 436

Conversely, any information that comes to the attention of the engineer during
the construction process will be imputed to the project owner. If a contractor
points out a differing physical condition at the site to the engineer or informs
the Engineer of a problem that is delaying progress, the engineer has a duty to
promptly inform its principal, the owner. Even if the engineer fails to transmit
this information to the owner, the knowledge will still be imputed to the owner
because of the agency relationship. The contractor has the right to assume that
anything said or given to the owner’s designated representative will be
transmitted to the owner.

The legal impact of this agency doctrine is significant. An engineer, as agent of

the owner, has the ability to inadvertently waive contract rights possessed by
the owner or grant certain contractual remedies to the contractor.

CASE STUDY

Owner solicited bids for construction contract. The contract drawings

contained a conflict regarding responsibility for relocation of a gas line. One
bidder telephoned Owner’s Engineer and asked for a clarification. Engineer
said the utility would take care of it.

Bidder was awarded the contract. Owner then required Contractor to relocate
the gas line. Contractor sued Owner for additional compensation saying it had
been entitled to rely on the pre-bid oral statement by Engineer.

The Court of Special Appeals acknowledged that under similar circumstances,

it had held project owners accountable for the pre-bid statements of engineers
functioning as agents of the owners. In this case, however, the bid documents
expressly stated that all clarifications must be in writing and oral explanations
would not be binding. Therefore, Engineer was acting outside the scope of his
agency authority in giving an oral explanation and Contractor was not entitled
to rely on that explanation. Mass Transit Administration v. Granite Construction Co., 471
A.2d 1PI (Md.App. 1994).

It is crucial that any change in the legal relationship between owner and
contractor result from a thoughtful, deliberate decision which the project owner
has expressly authorized. An owner which discovers that its engineer has
inadvertently waived certain contractual rights will not be pleased.

In order to protect itself and its client the owner, an engineer must be
thoroughly familiar with the construction contract. This includes not only the
 P a g e | 437

technical aspects of the contract but the general provisions and other “legal”
aspects as well. If the engineer is not familiar with the rights and
responsibilities of each party, how can it appreciate the ramifications of its
actions or directives’?

CASE STUDY
Construction contract specified a particular product “or equal.” Contract also
stated that Engineer was responsible for determining Contractor’s compliance
with the plans and specifications.

Contractor proposed an alternate product and Engineer approved the substitu-

tion. Owner later refused to allow Contractor to install the approved alternate
product. Contractor installed the more expensive product named in the
specifications and sued Owner for the increased cost.

The Appeals Court ruled that Engineer was the authorized agent of Owner in
matters of compliance with the specifications. Once Engineer had approved the
product in accordance with the procedure established in the contract, Owner
was bound by that determination and could not rescind the approval. E. A.
Berman Company v. City of Marlborough. 419 N.E.2d 319 (Mass.App. 1991).

While discussing agency, it is necessary to note the importance of the scope of

the engineer’s authority. Frequently, the engineer is not designated as the
owner’s on-site representative. The engineer’s construction phase
responsibilities may be limited to monthly inspections and a final certificate of
completion.

The engineer’s agreement with the owner should make this clear. So should the
construction contract. There is nothing worse for an engineer or an owner than
working with a construction contract which implies the engineer has broad job
site authority when in fact the owner has given the engineer very little
authority. All the contract documents should accurately reflect the engineer’s
scope of authority. All parties will know where they stand, and there will be no
problem with the contractor relying on apparent authority which the engineer
actually does not possess.
 P a g e | 438

Engineer as Arbitrator
It is common for construction contracts to state that any claim for a price
increase or extension of time must first be presented to the engineer for a
decision. When presented with such a request, the engineer is expected to make
an independent judgment as a professional, not a parochial decision based on
the engineer’s loyalty to the project owner.

This is a difficult task, as the engineer is being asked to function

simultaneously as agent of the owner and as a neutral arbitrator. Furthermore,
the engineer may be faced with a direct conflict of interest if the claim relates
to the sufficiency or accuracy of the engineer’s work product.

For instance, a contractor may claim that the drawings inaccurately por-
trayed site conditions or failed to address the fit of particular components. The
sufficiency of the engineer’s professional work product is called into question.
It is difficult for the engineer to be entirely objective, knowing that a favorable
recommendation on the contractor’s claim will raise questions from its client,
the project owner. Nonetheless, the engineer has an obligation to make an
objective determination and give the contractor that which it is entitled to
under the contract.

The effects of this conflict are mitigated by the fact that when the architect
functions as an arbitrator during construction, it is usually just dispensing a
preliminary administrative remedy.

The contractor must, under the terms of the contract, seek the engineer’s
decision first, but it is not ultimately bound by that decision.

Typically, the decision can be appealed to an administrative board or a court.

Frequently, an arbitration clause calls for formal, binding arbitration of the
dispute. This is separate from the engineer’s “arbitration” role during the con-
struction phase, and the engineer would never serve on a panel of arbitrators if
the engineer had been involved in the project.

In the past, some public contract documents purported to give the engineer
final authority to resolve all claims. These so-called engineer decision clauses
stated that there could be no appeal from the engineer’s decision on a claim.

Courts were hostile toward these clauses, recognizing the inequity of allowing
the owner’s agent or employee to make decisions without appeal. Although the
 P a g e | 439

clauses were considered enforceable, courts were resourceful at finding ways

to limit their effect. Today, engineer decision clauses are rare in public
construction contracts. Most jurisdictions have established administrative
boards to decide contractor’s claims.

While the engineer’s opinions and the engineer’s initial response to the claim
will certainly be considered, the board will have authority to make independent
findings of fact, rulings of Law, and a decision on the claim.

CASE STUDY

Construction contract stated that Engineer “will decide all questions which
may arise as to the acceptable fulfillment of the contract on the part of the
contractor.”

Owner and Contractor got into a dispute over late completion of the project.
Engineer made a determination regarding the amount of liquidated damages
that Owner could withhold from Contractor’s final payment. Contractor sued
to recover the money withheld. Owner argued that
the terms of the contract made Engineer’s decision final and binding on all the
parties.

The Court of Appeals ruled that an engineer’s resolution of a dispute will be

final and without appeal only if the construction contract expressly states that
the engineer will be the final arbitrator. In this case, the contract contained no
such statement. Engineer’s authority was limited to interpreting the contract
documents and making decisions during the performance of the work. Engineer
was not the final arbitrator of disputes. New Pueblo Constructors, Inc. v. State of
Arizona, 696 P.2d 203 (Ariz.App. 1985).
 P a g e | 440

Contracting Terms

Standard of care

In carrying out its responsibilities, the engineer is required to possess and

exercise the level of skill and judgment that is accepted among similarly
situated design professionals.

Warranty of plans and specifications

The owner extends an implied warranty to the contractor that the plans and
specifications are accurate, complete, and suitable for the successful
construction of the project. The engineer therefore has an obligation to furnish
the owner with design documents that meet this standard.

Privity of contract

Privity is a direct contractual relationship. There used to be a legal require-

ment, now virtually obsolete, that a party be in privity of contract with another
party before the party could be held liable to that other party.

Foreseeable harm

If a party is negligent in the performance of its duties, it may be held liable to

any party who suffered harm that was foreseeable at the time the duties were
undertaken. Therefore, an engineer may be held liable to contractors or
subcontractors despite the lack of privity of contract.

Limitation of liability

A contractual provision whereby the two parties to a contract agree to establish

an upper limit of liability for certain specified shortcomings or breaches of
contract. The clause cannot limit liability toward parties who did not sign the
contract.

Construction monitoring

It is a general term referring to the services provided by the engineer to the

project owner during the construction phase of the project. The specific scope
of the engineer’s responsibilities must be established in the owner-engineer
 P a g e | 441

agreement. The scope of responsibilities will determine the degree of liability

exposure.

Agency

Agency is a legal relationship whereby one party gives another party authority
to represent and act on behalf of the former party. An engineer is frequently the
agent of the owner on a construction project. The owner is therefore bound by
the actions of the engineer and the knowledge of the engineer is imputed to the
owner.

Certification

It is a written statement that something has occurred. engineers are frequently

called upon to certify to the owner (and any other party that may foreseeably
rely on the certification) that the contractor has achieved certain milestones in
its performance of the construction work.
 P a g e | 442

REFERENCES

Emory C.W. : "BUSINESS RESEARCH METHODS" , R.D. Irwin Inc., 1995

Pfaffenberger R.C. and D.A. Walker,: " MATHEMATICAL

PROGRAMMING FOR ECONOMICS AND BUSINESS", The Iowa U.
Press, 1976

Hackney J.W.,: "MANAGEMENT OF CAPITAL PROJECTS", John Wiley &

Son, 1995

Bu-Bhsait K, Manzanera I, “CLAIMS MANAGEMENT”, Project

Management Magazine, England, 1992

Buffa E.S. : "MODERN PRODUCTION MANAGEMENT", John Wiley &

Son 1985

Bruce M. Jervis and Paul Levin, :”CONSTRUCTION LAW PRINCIPLES

AND PRACTICE, McGraw-Hill series in construction engineering and project
management.

Specthrie S.W. : "INDUSTRIAL ACCOUNTING" , Prentice-Hall, Inc., 1989

Lucey T.,: "QUANTITATIVE TECHNIQUES" D.P. Publications 1993

Peters M.S. and K.D.Timmerhaus,:"PLANT DESIGN AND ECONOMIC FOR

CHEMICAL ENGINEERS" McGraw-Hill, 1996

Buffa E.S. : "MODERN PRODUCTION MANAGEMENT", John Wiley &

Son 1995

Kaoru Ishikawa, “ INTRODUCTION TO QUALITY CONTROL”, Juse Press

Ltd., 1989
Ignacio Manzanera, “PROJECT MANAGEMENT REFERENCES”, Aramco
Press, 1992

W. Edwards Deming, “OUT OF THE CRISIS”, Cambridge University Press,

1994
 P a g e | 443

THE CONTRACT DOCUMENTS

The document agreement

There is no particular mandatory form of document agreement required to

create a construction contract. Despite of this, the construction industry has
developed to the point where most contracts follow a fairly predictable format
and consist of certain standard parts.

An “agreement” itself is usually the shortest document of all the contract

documents. It establishes the essential elements of the contract varying from
project to project. These essential elements are price, payment, quality, risk,
and schedule.

To agree on a fixed price for a construction contract, it is necessary to have a

well-defined scope of work. Any contractor will be unable to estimate its costs
if the owner has failed to depict the work in detail and specify the materials and
equipment that will be required. A poorly defined scope of work on a fixed-
price contract will almost certainly result in disputes and claims.

If bid contracts are required by policy to be fixed-price, both a detailed scope

of work and a reasonable change order process for these contracts should be
expected.

Cost plus contracts are priced on the basis of the contractor’s cost of the work
plus a fixed fee. These contracts call for the contractor to be paid its direct and
indirect costs of performing the work, plus a fixed fee serving as the
contractor’s profit. While the total cost of the project may be more or less than
the original estimate, the owner will bear this cost and the contractor will
receive the same fee originally negotiated.

One of the real difficulties while drafting a cost-plus contract is to come up

with a good definition of the contractor’s performance cost. Direct costs, such
as labor and materials, are usually not much of a problem. Indirect costs, such
as insurance and office overhead, are a problem, as these costs must be
allocated among all the projects being performed by the contractor. On cost-
plus, it is not unusual for the definition of “cost” to cover several pages. This is
necessary to avoid misunderstandings and disputes.
 P a g e | 444

A cost-plus contract enables the contracting parties to work with less precise
scope definition. This is true only to some extent and it should be carefully
controlled to avoid the contractor thinking he has a blank check to incur all the
costs it wants.

Cost-plus contracts usually include a guaranteed maximum price cost plus fee,
which is not to be exceeded without owner’s consent. On the other hand, a
contractor cannot commit itself to a guaranteed maximum price unless it has an
accurate idea of what it will be required to construct.

Cost-plus contracts may also include a “shared savings” provision. In addition

to establishing a guaranteed maximum price, the contract states a target amount
of costs to be incurred in constructing the project and if the contractor is able to
complete the work for less than the target cost, the contractor and the owner
share the savings according to a previously established formula.

The purpose of the shared savings provision is to give the contractor an in-
centive to minimize costs, because in the absence of such a clause, the
contractor has no incentive to optimize operations as long as the total cost plus
fixed fee stays within the guaranteed maximum price.

Another method of pricing construction work is the “unit-price” method. The

project is divided into certain elements which can be quantified, such as linear
meters of conduit or cubic meters of concrete. The contracting parties agree on
a price per unit of each element of the work and payment is made on the basis
of the actual quantities of work executed.

Typically, the contract documents for a unit-price contract will state estimated
quantities for the various elements of the work. These quantities are not
binding on the owner and are used primarily for purposes of bid comparison.
Total bid amounts are computed by applying the bid unit prices to the esti-
mated quantities of work.

Unit-price contracts are widely used on projects such as excavation, highways,

sewer lines, and water pipe networks. The routine nature of this work lends
itself to unit-price measurement. The contractor knows it will be paid for all
work performed and the owner knows that it will pay for no more than the
actual volume of work performed. This kind of contract is also called re-
measured.
 P a g e | 445

Yet another method of pricing construction work is “time and materials.” A

fixed price is placed on each hour of labor the contractor furnishes. The owner
also agrees to pay the direct costs of the material and equipment used on the
project. Typically, no payment is made for any indirect costs. The parties
should agree in anticipation as to who will receive the benefit of any trade
discounts on materials that the contractor receives from its suppliers.

The time and materials method provides very little certainty for project owners
and is not typically used on large projects. It is a useful method for small
projects where the parties want to avoid the time and expense of a detailed
scope of work and detailed cost estimates. It is also widely used as a method of
pricing extra work on change orders.

Method of Payment

A construction agreement should also establish the method of payment to be

used by the owner. Most construction projects are performed over a period of
months or even years. It would be not only inequitable but probably not
feasible to ask the contractor to wait until completion to receive payment
because contractors will add the financing costs to the bid price thereby further
complicating the awarding issues.

Construction contracts commonly call for progress payments, usually monthly

ones based on the value of the work performed during the preceding payment
period.

On a unit-price contract, the value is easy to measure, as the unit prices are
simply applied to the actual quantities of work performed. On a fixed-price
contract, it is necessary to measure the value of the work in place by deter-
mining percentage of completion. Usually, a weighting value for various
phases or portions of work is established under the contract and payment is
then calculated according to routine workouts.

A contract agreement usually calls for an amount of the corresponding

payment to be withheld as retainage to protect the owner against construction
defects. The amount retained is usually 5 to 10 percent of the progress
payment. The retained funds have already been earned by the contractor, but
they will not be released until completion of the project. Payment of the
retainage will be subject to final acceptance of the project.
 P a g e | 446

Contract agreements usually call for a reduction of retainage as the contractor

makes progress toward completion. For instance, once the contractor completes
50 percent of the project, retainage may be reduced from 10 percent of each
progress payment to 5 percent of each payment. The rationale for this decision
is that after 50 percent completion of the project, the owner already has a large
pool of retained funds and as the contractor gets closer to completion, there is
somewhat less risk to the owner.

The construction agreements usually establish the timing of final payment to

the contractor. Final payment must consists of the last monthly progress
payment plus the accumulated retainage. It should be noticed that there are a
number of important legal consequences attached to release of final payment
which an agreement itself does not address.

Usually, the agreement will state that once the contractor finishes all but the
“punch list,” or touch-up items, the contractor will be entitled to the contract
balance less 1.5 or 2 times the estimated cost of completing the punch list
items. In other words, the retainage will be reduced to leave only enough to
assure the owner of proper completion of those items.

Once the punch list has been completed, the work will be inspected again and
if everything is in order, the owner will release final payment. The contract
agreement should establish whether final payment is due immediately upon
final acceptance, 30 days after final acceptance, or some longer period of time
after final acceptance.

Schedule

One of the essential ingredients of the construction documents which should be

thoroughly addressed in the contract agreement itself is the project schedule. A
contract agreement should establish the period within which the contractor
must complete its work. This may be expressed as a specific calendar date.
More frequently, it is expressed as a stated number of calendar days.

When the performance period is expressed in calendar days, the period starts to
run upon the owner’s issuance of a formal, written notice to proceed. A formal
notice is desirable because it avoids any confusion as to when the performance
period started to run.
 P a g e | 447

A contract agreement not establishing the specific interim schedules, which the
contractor must meet while performing the work along with specific updates
and status reporting will disable any opportunity of control the job properly,
avoid claims, and settle construction issues.

Documents Incorporated by Reference

Incorporation of a number of separate documents into a contract agreement by

reference is usually done. A construction agreement is frequently quite
succinct, simply naming the parties, stating the name and location of the
project, and establishing the terms of price, payment, and schedule. The actual
terms and conditions of the contract, as well as the definition of the work, are
contained in separate documents listed in the agreement and physically at-
tached to the agreement.

Incorporated documents, discussed in greater detail below, commonly consist

of:

a. “general conditions,” which are usually pre-printed, so-called boilerplate

provisions under which the work must be performed;

b. “supplementary general conditions, “ which are usually customized

provisions developed by the parties to address particular concerns which
have arisen with regard to the project;

c. plans, or drawings, depicting the work, usually listed in the agreement

by number;

d. the specifications which define the standards which the work, material,
and equipment must meet;

e. Additional schedule requirements; and

f. the various government regulations which the contractor will be required

to conform to during performance of the work.
 P a g e | 448

Quality of work
A contract agreement should include the project quality plan as designed by the
project’s owner and including all the activities related to quality assurance and
quality control.

Distribution of risk

A contract agreement is by definition a distribution of risk while executing the

projected works. Special care should be given to ascertain these risks are
equally distributed since legal courts will immediately dismiss any intent of
unbalanced allocation. A risk plan as design by the project’s owner should be
part of the approved contract document.
Execution of the Contract

Last but certainly not least, the agreement provides for the signing, or
“execution,” of the contract documents. Usually, it is the only document which
is actually signed by the parties. As all the other documents are incorporated by
reference into the agreement, it is not necessary that they be signed in order to
become binding on the parties.

It is important that the agreement be signed by an individual who is authorized

by its organization to bind that organization to the agreement. For instance, an
agreement should be signed by a duly authorized officer of a corporation or the
general partner of a limited partnership. Below the signature line, it should
indicate the name and title of the signing individual and recite the fact that the
individual is duly authorized to do so by its organization.

Ideally, each singing individual should produce documentation of their

authority, i.e., a corporate resolution or a copy of partnership agreement. This
should be attached to and incorporated into the agreement. Unfortunately, this
procedure is seldom followed.

It is common for the parties to make last-minute changes to the contract

documents, frequently just prior to execution. Changes should be handwritten
and in ink. Every change should then be initialed in the adjacent margin by the
parties executing the agreement. This way, there will be no confusion regard-
ing the parties’ intent to include these changes in the agreement.
 P a g e | 449

THE CONTRACT GENERAL CONDITIONS

Function

As described above, the construction agreement itself usually covers only the
basic business terms of the transaction. The function of the general conditions
is to establish the legal terms and conditions that will govern the construction
of the project. They include a number of provisions that are crucial in deter-
mining the respective rights and responsibilities of the owner and contractor.

With most preprinted contract forms, the general conditions comprise a

separate document which is attached to the agreement. Sometimes, however,
the general conditions are simply a section of a single integrated document. It
makes no difference from a legal standpoint, of course.

From a practical standpoint, it is advantageous to keep the two documents

separate. The agreement necessarily requires extensive customization and may
be altered right up to the time of execution. The bulky general conditions tend
to be less extensively modified. By keeping the documents separate, the parties
can make last-minute changes with greater ease and clarity.

Contents of the General Conditions

General conditions should address everything from the mundane such as site
cleanup or maintaining order among the crew to the crucial such as change
order procedures or compensation for unanticipated subsurface conditions.

A list of the important issues addressed in the general conditions basically

describes: insurance requirements, change order procedures, time extensions
for excusable delay, compensation for differing site conditions, the resolution
of disputes, etc. This is the document where the respective rights and
responsibilities are established, and all kind of risks are shared.
 P a g e | 450

Supplementary General Conditions

Considering the legal significance of the general conditions, it is not surprising

that one or both of the parties may want changes made in the preprinted terms.

These changes are usually contained in a document labeled “Supplementary

General Conditions.’’

The supplementary general conditions are really a “catch-all” document

covering any aspect of the arrangement which is peculiar to that project and
therefore not addressed in standard. Certain limitations on site access may be
established, local ordinances affecting the work may be referred to, and as
mentioned above, if the parties have rewritten the indemnification clause
contained in the preprinted general conditions, this is the place for the new
clause.

The supplementary general conditions take precedence over the general

conditions. It is a good practice to include a written statement to that effect in
the supplementary general conditions in order to avoid any ambiguity.
 P a g e | 451

DEFINING THE SCOPE OF WORK

Drawings

Drawings are the documents most commonly associated with construction

design. One or more drawings will depict the elevations of the structure. This
indicates the height above sea level of the footings, foundation, etc. Addi-
tionally, a number of sectional drawings will depict the various sections of the
building in detail.

The drawings described above are typically prepared by an architect who is

serving as the prime design contractor. On an “engineered” project such as a
bridge or highway, an engineer usually serves as the prime design contractor
and prepares the plans, elevations, and sectional drawings.

Regardless of who serves as the prime design contractor, it is customary to

retain the services of design consultants from various specialized disciplines.
The drawings prepared by these consultants also become part of the contract
drawings. It is common to find structural drawings depicting the conformation
and connection of structural members of the structure. Another set of com-
monly found trade drawings depicts the building’s mechanical and electrical
systems. Foundation drawings prepared by a soils and foundation engineer are
also common.

Many drawings, regardless of their nature, contain “details.” As the name

implies, these drawings depict a certain small portion of the structure in greater
detail and smaller scale than that shown on the drawing itself. This is usually
done because of the complexity or sensitivity of that particular portion of the
work. The details are set off to the side of a larger drawing. They are seldom
found on separate sheets.

Another traditional aspect of drawings is schedu1es of materials to be used.

Generally, the selection of materials is mandated in the specifications. It is
customary, however, to list the selection of certain items such as wall and floor
finishes and hardware in schedules written on the side of a drawing. This
practice probably stems from the fact that the drawings sometimes take pre-
cedence over the specifications and cautious designers have wanted to make
sure that their selection of materials was followed.
 P a g e | 452

Specifications

Specifications are a volume of written material which defines the equipment

and materials to be used on the project and, to a lesser extent, the method of
applying, installing, or assembling this equipment and material. The
importance of the specifications has grown through the years due to the
complexity of construction and the larger number of options available with re-
gard to equipment and material.

The growing importance of specifications also reflects the reluctance of project

owners and engineers to rely simply on “trade practice” to define the method of
application or installation. The specifications give the owner and designer
greater control over these methods.

With regard to the selection of equipment or materials, there are two basic
types of specifications:

 Proprietary: and
 Performance.

Proprietary specifications call for a particular brand and model to be used. On

private construction contracts, the contractor is required to use that specific
product.

On public contracts, a proprietary specification is usually stated as “brand

name or equal.” In order to foster competition, public laws and regulations
prohibit specifying a single product. If the contractor can convince the engineer
that a different product is “equal,” it must be allowed to use that product.

If a proposed alternate product possesses all the “outstanding characteristics”

of the specified brand, it is considered equal. The outstanding characteristics
are the physical properties and performance capabilities that reasonably meet
the public project owner’s minimum needs for the project.

Performance specifications do not refer to any particular brand or product.

Instead, the specification states certain performance capabilities which the
equipment or material must meet. For instance, a pump might be required to be
capable of moving a specified number of gallons per minute, or roofing ma-
terial might be required to be guaranteed for a certain number of years. The
selection of a particular product is left up to the contractor.
 P a g e | 453

Performance specifications are not as widely used as proprietary specifications

because the project owner and engineer do not have the same degree of control
over the contractor’s work. However, some of the emerging forms of
construction contracting make it necessary to use performance rather than
proprietary specifications.

Specifications are usually organized according to the 16 standard section of the

Uniform Construction Index, originally developed by the Construction
Specifications Institute. The sections generally reflect the customary building
trades and are listed below.

1. General requirements
2. Site work
3. Concrete
4. Masonry
5. Metals
6. Carpentry
7. Moisture protection
8. Doors, windows, and glass
9. Finishes
10. Specialties
11. Equipment
12. Furnishings
13. Special construction
14. Conveying systems
15. Mechanical
16. Electrical

In recent years, standard, computerized master specifications have been

developed to assist the designer in defining the work. The most widely used is
a system cal1ed ‘Masterspec’. While these standard specifications can be a
useful tool in getting started in defining the work, they are not a substitute for
the careful individual attention of an experienced specification writer.

Owner’s Implied Warranty

When discussing plans and specifications, there is one legal principle which is
of crucial importance to the engineer.
 P a g e | 454

Courts have long held that when a project owner provides a set of plans and
specifications to a construction contractor, the owner extends an implied
warranty that the documents are accurate, complete, and suitable for their in-
tended purpose. If they are not, the contractor will be entitled to recover its
increased cost of performance caused by the defective design documents.

This warranty is implied; so it need not be stated in the contract documents

themselves. It applies regardless of whether the project is public or private and
regardless of whether the contract is competitively bid or negotiated.

This doctrine is of great significance to the engineer because the project owner
relies on the professional expertise of the engineer in developing a set of
complete, accurate plans and specifications. If the plans and specifications are
defective and the owner pays the contractor additional sums as a result, the
owner will probably seek reimbursement from the engineer. Given the scope of
the engineer’s professional responsibilities, the owner will in all likelihood
succeed in this quest.

CASE STUDY

Owner awarded a contract for construction of a water pumping station. The

drawings indicated the presence of an electrical pole 50 feet from the
structure, but failed to indicate that a telephone service could be made
available from that pole. In order to bring in a telephone cable, contractor was
forced to dig an 11,000-foot trench. Contractor claimed additional
compensation. Owner relied on contract language stating that utility locations
were only approximate.

The Appeals Court ruled that Owner extended an implied warranty that the
plans and specifications were accurate and complete. The failure to indicate
that no telephone service was available from the pole rendered the contract
documents incomplete. Therefore, Owner breached the implied warranty.
Richardson Electrical Co., Inc. v. Peter Franchese & Son, Inc.. 484 N.E.2d 108 (Mass.App. 1995)
 P a g e | 455

INTERPRETING THE CONTRACT

Considering the complexity of the contract documents described above, it is

not surprising that the various parties on the project sometimes have differing
interpretations of what is required. Over the years, courts have developed
certain basic rules of interpretation which should be kept in mind when dealing
with these disagreements. The most significant rules of interpretation are de-
scribed below.
CASE STUDY

Owner awarded a contract for highway construction. Elevations indicated in

the drawings were higher than the actual elevations in the field. This forced
Contractor to bring in additional fill. Contractor brought a claim for addi-
tional compensation. Owner argued that elevations indicated in the drawings
were for informational purposes only and could not be relied on without
independent verification.

The Appellate Division of the Superior Court held that notwithstanding the
contractual disclaimer, Owner extended an implied warranty of the accuracy
of all affirmative representations in the contract documents. The elevations
were inaccurate, and this was a breach of the implied warranty. Golomore
Associates v. New Jersey State Highway Authority. 413 A.2d 361 (N.J.App. 1980).

Construed against the Drafter

If any provision of a contract is ambiguous, that provision will be construed, or

interpreted, against the party who prepared the agreement. This rule of law is
sometimes referred to by the Latin phrase contra proferentem.

A contract provision is considered ambiguous if it is subject to two different

interpretations and each interpretation is reasonable. In that event, the
reasonable interpretation of the party that did not draft the agreement will
prevail.

As agreements are usually prepared by project owners, this rule of interpre-

tation is more frequently applied against owners to the benefit of contractors.
This is particularly true on publicly bid projects where the complete set of con-
tract documents is presented to prospective bidders on a “take it or leave it”
basis. If a bidder’s interpretation of the contract requirements was reasonable
and the bidder relied on that interpretation when pricing its bid, then that in-
terpretation will prevail.
 P a g e | 456

On private projects, there tends to be more negotiation, more give and take, in
arriving at the terms of the contract. The more negotiation there is, the less
likely that a court will characterize the owner as the drafter of the agreement.

Even on private projects, however, it is common for the owner to present the
contractor with a complete set of contract documents. Negotiation is usually
limited to matters such as price or schedule. In this situation, courts will not
hesitate to apply the rule of contra proferenten against the project owner when
interpreting an ambiguous provision in the specifications or general conditions.

CASE STUDY

Contractor did award a subcontract using Contractor’s preprinted subcontract

form. Subcontract stated that payment to Subcontractor would be due 10 days
after Contractor received payment from Owner.

Owner did not pay contractor, so contractor refused to pay subcontractor.

Subcontractor argued that clause in subcontract was intended only to give
Contractor a reasonable time to make payment, not to excuse payment
altogether if contractor did not get paid by Owner.

The Court of Appeals ruled that the intended meaning of the payment clause
was ambiguous. The preprinted subcontract form had obviously been drafted
by contractor. Therefore, the clause was construed against contractor and
subcontractor’s interpretation prevailed. Cahn Electric Co.. Inc. v. Robert E. McKee,
Inc., 490 So.2d 647 (La.App. 1996).

Trade Usage

In any industry, and certainly in the construction industry, a number of

terms take on a specialized meaning among those in the industry. Courts
consider these terms to be “trade terms.” If a contract uses trade terms (and of
course any set of specifications is laden with them), courts will interpret the
terms according to their commonly accepted meaning within the industry.

It matters not that the judge, the jury, and members of the general public don’t
understand the term. If the term has a widely accepted meaning in the industry,
it will be interpreted accordingly. Individuals and organizations who engage in
commerce will be presumed to understand the meaning of trade terms used
within their particular industry.
 P a g e | 457

Neither a contractor nor a project owner would benefit from arguing that it did
not understand “rebar” to mean steel reinforcing bars.

Internal Contradictions

One of the primary concerns of a party putting together a set of contract doc-
uments is to avoid conflicting provisions within the documents themselves. In-
ternal contradictions are a common source of claims and disputes. At best, they
appear sloppy and unprofessional.

Internal contradictions result primarily from the widespread use of standard

forms of agreement and standard sets of specifications within the construction
industry although the use of standard forms is generally beneficial and it is by
no means a bad practice to be avoided.

The danger in using standard forms, however, is that they are frequently pulled
off the shelf and thrown together with little forethought. They are not tailored
to fit the particular project. Worse yet, they are not even carefully read in their
entirety in order to flush out ambiguities and contradictions.

For instance, an engineer working on behalf of a public owner may use the
same standard form of agreement he has used successfully in the past. The
engineer then learns that certain public regulations or mandatory contract
provisions must be incorporated into the contract documents. If a careful effort
is not made to reconcile all the documents, the engineer may end up in the
embarrassing position of having prepared a contract with a number of
conflicting requirements.

CASE STUDY

Owner awarded a contract for construction of a medical clinic. The contract

included two “typical wall details” which were conflicting with each other
regarding the installation of rebar. Contractor chose to follow one drawing.
Owner ordered Contractor to rip out the work and follow the other drawing
which, said Owner, was consistent with local trade practice. Contractor
appealed.

The Court of Appeals ruled that the drawing details were patently ambiguous.
When interpreting ambiguous contract documents, it is appropriate to rely on
 P a g e | 458

local trade custom to determine intended meaning. Contractor’s appeal was

denied. Fortec Constructors v. United States,760 F.2d 1288 (Fed.Cir. 1985).

Similarly, the use of standardized or computerized specifications such as

Masterspec can produce troublesome results if care is not taken to customize
the specifications for each individual project and reconcile the specifications
with the other contract documents. The blind use of “canned” specifications
will frequently result in provisions which conflict with drawing notes or other
documents.

The duty to avoid internal contradictions falls largely on the engineer, as the
project owner typically relies on the engineer to prepare so many of the
contract documents, technical and otherwise. Constant vigilance is required to
avoid embarrassing or troublesome situations. Given the length and complexity
of a typical set of contract documents, however, it is inevitable that
contradictions will occasionally occur. As a result, courts have developed
certain rules of interpretation to be applied when one provision of the contract
documents says something that contradicts a statement found elsewhere in the
documents.

When a direct contradiction exists, the terms of the agreement take prece-
dence over the terms of the general conditions. If supplementary general
conditions have been incorporated into the contract documents, these
supplementary conditions will prevail over the general conditions. They will
not take precedence over the terms of the agreement itself, however.

When contradictions exist between the drawings and the specifications, the
more specific item governs the more general item. It is frequently stated that
the specifications prevail over the drawings. This is true, however, only to
the extent the specifications are more detailed and specific than the information
in the drawings. This is usually the case, but not always. For instance, drawing
notes take precedence over the provisions in the specifications.

CASE STUDY

Owner awarded a contract for BOT-financed project. The contract was a

standard BOT document, but it incorporated an American Institute of
Architects (AIA) document as the general conditions of the agreement.

The BOT document and the AIA document contained conflicting definitions of
when substantial completion of the work was achieved. It later became
 P a g e | 459

important to determine the date of substantial completion in order to compute

the early completion bonus to which Contractor was entitled.

A. District Court noted that the BOT document contained an ‘order of

precedence” clause stating that the BOT document took precedence over any
conflicting provisions in any other document. Therefore, the BOT definition of
substantial completion was determinative. McCarthy Brothers Construction Co. v.
Pierce, 626 F.Supp. 981 (E.D.Mo. 1993)

CASE STUDY

Owner issued a written change order for Contractor to furnish and apply
130 tons of asphalt at a unit price of $180 per ton.

Owner later orally requested another 381 tons of asphalt with no discussion of
price. In the subsequent dispute, Owner contended it should only have to pay
the reasonable value of the additional asphalt and that value should reflect
certain economies of scale.

A District Court of Appeal ruled that the oral change order was ambiguous
because of the failure to establish a price. When interpreting an ambiguous
provision of a contract, the past actions of the parties are the best indication of
intent. Therefore, Owner must pay at the $180 per ton rate established in the
original written change order. Forest Construction, Inc. v. Farrell-Cheek Steel Co., 484
So.2d 40 (Fla.App. 1994).

The general principle which is at work here is that the specific takes
precedence over the general. Terms that were customized by the parties will
prevail over “boilerplate” provisions of the contract documents.

As described before, a written contract is nothing more than a memorialization

or documentation of the mutual understanding of the parties. In trying to
determine what that understanding was, a court will be more persuaded by
something the parties developed for this specific project as opposed to a
standard document which was pulled off the shelf and incorporated into the
documents with no modification whatsoever.

For instance, specifications are frequently standardized. Drawings, by def-

inition, must be customized for each individual project. In the event of a direct
contradiction between the two, it is logical to assume that the drawing more
 P a g e | 460

accurately reflects the intent and the understanding of the parties. It is for this
reason that the old adage of specifications governing drawings is misleading.

Contract Must Be Read as a Whole

The final rule of interpretation is simply common sense. When interpreting
a set of contract documents, all provisions must be considered and they all
must be presumed to be complementary. No provision may be considered in
isolation and no provision may be presumed to be useless.

Again, the logic behind this rule is that the written contract documents are
simply a reflection of the parties’ mutual understanding. If the parties did not
intend for a provision to have meaning, why would they include it in the con-
tract documents?

While a provision standing alone may indicate a certain understanding, this

must be modified by any other contract provisions that relate to the same
matter. All provisions are presumed to reflect intent and each is considered to
complement the others. This assumes, of course, that there is not a direct con-
tradiction between two provisions, in which case the rules of interpretation de-
scribed above will be applied.

This rule of interpretation is probably the one which is most frequently applied
to contract documents. When a dispute arises, it is common for one of the
parties to latch onto a particular aspect of the contract documents to support its
argument as to what was or was not required by the contract. In interpreting the
intended meaning of the contract, it is important to consider all provisions and
avoid focusing solely on one isolated clause.

CONTRACTOR’S PERFORMANCE OBLIGATIONS

When discussing the interpretation of the contract documents, it is important to

mention the standard of performance to which the contractor will be held. This
standard is interesting because it appears to be contradictory.

On the one hand, the project owner is entitled to insist on absolute compliance
with the plans and specifications. Close is not good enough. The contractor
must fully perform the work in strict compliance with every specific re-
quirement in the contract. This is what the owner bargained for and this is what
the owner is entitled to get for its money.
 P a g e | 461

On the other hand, courts recognize that it is unrealistic to expect a contractor

to conform exactly to every single requirement on a project which may be large
and complex. It would be unfair to allow a project owner to hold a contractor
in breach of contract, and refuse to make payment, simply because minor
aspects of the work have not been completed in strict conformance with the
plans and specifications. Consequently, courts have developed the doctrine of
“substantial completion.” It is a legal doctrine peculiar to construction
contracts.

Under this doctrine, a Contractor is deemed to have fulfilled its contractual

obligation once the project is “substantially complete.” Substantial completion
is achieved once the project is fit to be used for its intended purpose.

For instance, an office building is substantially complete once the project

owner can take beneficial occupancy of the building. The fact that some
decorative woodwork is missing or some sinks are scratched would not prevent
the owner from using the building.

What, one might ask, became of the requirement that the contractor fully
perform the work in strict compliance with the plans and specifications? Courts
accommodate this requirement by allowing the owner to set off sums from the
final payment sufficient to cover the cost of repairing or completing any minor
items. This process will be described in greater detail.

In considering the contractor’s performance obligations under the contract

documents, then, it is important to remember that the owner can insist on strict
compliance. Once the project is substantially complete, however, the Owner
cannot rely on lack of compliance as an excuse for failing to pay the Contractor
or terminating the contract.’ Once substantial completion is achieved, the
owner’s only remedy is to withhold, or set off, sufficient funds to cover the
cost of repair or completion of any outstanding items.

Finally, it should be noted that determining when substantial completion is

achieved is usually a judgment call. The owner and contractor may have dif-
ferent interpretations of when the project is fit for its intended purpose.
Common sense must prevail. While lack of decorative woodwork does not
prevent the beneficial use of an office building, the lack of a functioning
elevator or air-conditioning system certainly does.
 P a g e | 462

STANDARD AGREEMENTS
Importance of Standard Agreements
It should now be quite apparent that a typical set of contract documents for
even a modest-sized construction project is a rather thick volume. If the parties
to the project had to draft each contract from scratch, it would be a mon-
umental undertaking. If the parties hired attorneys to do the drafting, it would
be a very expensive undertaking.

In response to this problem, certain standardized form contracts have been

developed. The use of standard form agreements is probably more widespread
in the construction industry than in any other industry.

It should be noted that when one refers to “standard agreements” in the

construction industry, the reference is not to the standardized specifications
that were mentioned earlier in this chapter. Standard agreements spell out the
legal and financial terms and conditions of the construction project. They typ-
ically consist of an agreement and a set of general conditions.

The widespread use of standardized forms in the construction industry is

attributable to two compelling advantages they offer. As mentioned above,
they save time. It is far more efficient to make additions, deletions, and other
changes to a preprinted form than it is to draft a 20-page contract on blank
paper.

In addition to saving time, standard contracts offer more certainty than in-
dividually drafted agreements. Many of the standard forms have been in use for
years. Their terms and conditions have been repeatedly interpreted by the
courts. When areas of ambiguity or misunderstanding have come to light,
changes have been made in the forms. Considering the fact that most construc-
tion contracts are not assembled by attorneys, the predictability that results
from using standardized, widely accepted terminology is very desirable. For
these reasons, standard forms have become prevalent on both private and
public construction projects. Many public project owners such as state agencies
or municipalities have developed their own standard contract documents.
Regardless of the particular form that is used, the use of a standardized form
offers the advantages of greater predictability and less time.
 P a g e | 463

Having glorified the virtues of standard agreements, it is time to again stress

the dangers. As described earlier in this chapter, the careless, unthinking use of
standardized contract forms can produce a disaster. At best, there will be many
contract provisions which are simply irrelevant to the project at hand. At worst,
there will be internal contradictions in the contract documents. Provisions in
the standard form may conflict with other supplementary provisions required
by law or with statements made in the specifications.

There is no substitute for a careful, thoughtful review of all the contract

documents as a whole. Irrelevant provisions should be eliminated. Any partic-
ular items peculiar to the individual project must be addressed, and the docu-
ments should be consistent and clear.

The proper role of legal counsel in assembling the contract documents should
also be considered. It is customary in the industry for the engineer to assemble
the documents on behalf of the project owner. This is an acceptable practice. It
is only prudent, however, for the engineer to ask the project owner to have its
legal counsel review the completed package. This should not require a great
deal of time, as the attorney is not being asked to draft the documents.

The attorney’s review can be very useful, as it brings a different perspective

and different professional skills to the contract documents. From a practical
standpoint, the attorney’s review will protect the engineer from a great deal of
embarrassment and possibly even liability if contradictions or other problems
are later discovered in the contract documents.

Development of Standard Agreements

With the exception of contract documents developed by government entities,

the standardized forms of agreement have been developed by professional and
trade associations. These documents were developed as a service for members
in order to offer the advantages described above.

Since the agreements were developed as a service for a particular trade or

professional group, one might wonder how fair and balanced they would be.
Initially, one of the primary purposes of these agreements was to protect the
interests of the group’s members. The forms were full of provisions designed
to limit liability, maximize authority, assure payment, etc.
 P a g e | 464

To the extent these forms were skewed in favor of a particular group, they met
resistance from other members of the construction community. It was in the
best interest of each trade or professional association to see that its forms
became as widely used and accepted as possible. Consequently, compromises
were made and the standardized forms became more balanced as they evolved.

In recent years, this process has been formalized. In order to foster the
widespread use of its forms, an association will solicit the opinions of other
industry groups and even seek the formal endorsement of the form by the other
groups. For instance, standard forms published by both the National Society of
Professional Engineers and the American Institute of Architects have been
approved and endorsed by the Associated General Contractors of America

It can be stated that today the commonly used standard forms are fair, balanced
agreements. They are generally free of the one-sided provisions that private
project owners sometimes try to impose on contractors. As a general rule, they
can be considered far more balanced than a customized contract prepared by an
attorney who is representing the interests of only one party to the agreement.
After all, the standard forms already reflect a certain amount of compromise
that was necessary to gain the acceptance of diverse industry groups.
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The Widely Used Standard Agreements

There are four sets of standard contract documents that are widely used in
the construction industry today. These standardized documents are briefly sum-
marized below.

The American Institute of Architects (AIA) contract documents are the oldest
and most widely used standard forms. Some of the documents were in use as
early as 1915. AIA has developed forms governing the relationships between
not only owner and contractor, but owner and architect, architect and engineer,
contractor and subcontractor, and bonding company and owner.

The various documents are coordinated to avoid conflicting provisions. They

may be purchased from AIA’s Washington office.

The Associated General Contractors of America (AGC), also publishes a set of

contract documents. These documents are limited to relationships between
owner and contractor and contractor and subcontractor. AGC has many
different forms of owner-contractor agreements reflecting different business
arrangements that may be made on particular projects. The AGC forms are
probably the second most widely used standardized contract documents.

The Engineer’s Joint Contract Documents Committee is a consortium of the

National Society of Professional Engineers, the Consulting Engineering Coun-
cil, the American Society of Civil Engineers, and the Construction Specifica-
tions Institute, Inc. The engineer’s contract documents were published largely
in response to the growing influence of the AIA documents. As yet, these doc-
uments have not become as widely used as either the AIA or AGC documents.
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Trade Terms
Incorporation by reference

It is a reference in an agreement to other documents which are not physically

part of that agreement stating that the other documents are hereby incorporated
into and made a part of the agreement. Documents that are incorporated by
reference into an agreement become binding terms of that agreement.

Order of precedence

It is a statement in an agreement that in the event of internal contradictions in

the agreement, certain documents or certain portions of the agreement shall
take precedence over other portions of the agreement.

Contra proferentem

A latin phrase meaning “against the party who proffers a thing.” Any
ambiguities in an agreement will be construed or interpreted against the party
who drafted the agreement.

Implied warranty of the plans and specifications

The project owner impliedly warrants to the contractor that the plans and
specifications are complete, accurate, and suitable for the intended purpose of
the project.

Substantial completion

It is the point at which the project is sufficiently complete to be occupied by

the owner and used for its intended purpose. Once a project is substantially
comp1ete, the contractor cannot be defaulted or held in breach of contract.
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REFERENCES

Emory C.W. : "BUSINESS RESEARCH METHODS" , R.D. Irwin Inc., 1995

Pfaffenberger R.C. and D.A. Walker,: " MATHEMATICAL

PROGRAMMING FOR ECONOMICS AND BUSINESS", The Iowa U.
Press, 1976

Hackney J.W.,: "MANAGEMENT OF CAPITAL PROJECTS", John Wiley &

Son, 1995

Bu-Bhsait K, Manzanera I, “CLAIMS MANAGEMENT”, Project

Management Magazine, England, 1992

Buffa E.S. : "MODERN PRODUCTION MANAGEMENT", John Wiley &

Son 1985

Bruce M. Jervis and Paul Levin, :”CONSTRUCTION LAW PRINCIPLES

AND PRACTICE, McGraw-Hill series in construction engineering and project
management.

Specthrie S.W. : "INDUSTRIAL ACCOUNTING" , Prentice-Hall, Inc., 1989

Lucey T.,: "QUANTITATIVE TECHNIQUES" D.P. Publications 1993

Peters M.S. and K.D.Timmerhaus,:"PLANT DESIGN AND ECONOMIC FOR

CHEMICAL ENGINEERS" McGraw-Hill, 1996

Buffa E.S. : "MODERN PRODUCTION MANAGEMENT", John Wiley &

Son 1995
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SAMPLE CONTRACT ADMINISTRATION PLAN

1.01 Scheduling Terminology.

A. Acceptance of the Preliminary, Baseline or Updated Baseline Schedule: The

Accepted Preliminary, Baseline or Updated Baseline Schedule is the Schedule submitted by the
CONTRACTOR and accepted by the ENGINEER. Use of the terms accepted, acceptance, and
acceptable, within this specification section, are defined as meeting all the contract
requirements. Acceptance does not mean that the ENGINEER agrees or disagrees, approves or
disapproves of the constructability, means and methods, validity and accuracy of the schedule.
The CONTRACTOR is solely responsible for the constructability, means and methods, validity
and accuracy of the submitted schedule.

B. Activity: An element of work performed during the course of the project. An activity
normally has an expected duration, an expected cost, an expected resource requirements.

C. Baseline Schedule: The Baseline Schedule does not contain any progressed activities.
Therefore, each activity’s early and late dates are planned dates, not actual dates. The Baseline
Schedule contains the necessary breakdown of activities to adequately track the progress of the
project. Activities in the Baseline Schedule shall include, but not be limited to, activities for all
work to be performed. In addition, the baseline schedule should include milestone activities,
and activities for the procurement of significant equipment and materials, including activities
for submittals and approvals, orders, fabrication, request for delivery and delivery.
Procurement activities should be logically tied to their respective work activities.

D. Contract Completion Date: The Contract Completion Date is calculated by adding

the number of calendar days, weeks or months as the case may be, stated in the Contract to
complete all work, to the Commencement Date pursuant to Clause 41 of the General
Conditions of Contract. For time extensions granted by the ENGINEER, the Contract
Completion Date is calculated by adding the number of calendar days granted to the Contract
Completion Date.

E. Controlling Item of Work: In this and any other section of the contract specifications,
a controlling item of work is defined as a CPM Project schedule activity residing on the longest
path of the schedule.

F. CPM: Critical Path Method of scheduling.

G. Data Date (DD): Also called cut-off date, the date at which, or up to which, the
project’s reporting system has provided actual status and accomplishments.

H. Early Dates: The earliest scheduled start and/or finish date assigned to a CPM
scheduled activity.

I. Lag: An undefined delay between two scheduled activities. For instance, a 5 day lag
between activity A(the predecessor) and activity B(the successor) with a Finish to Start (FS)
relationship would mean that activity B would not start until 5 days after the finish of activity
A.

J. Late Dates: The latest scheduled start and/or finish date assigned to a CPM scheduled
activity.
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K. Logical relationship: A dependency between project activities, or between project

activity and a milestone.

L. Longest Path: In a Baseline Schedule, the Longest Path of the CPM schedule is a
continuous series of activities starting from the first scheduled activity and ending with the last
scheduled activity, which are linked in a logical sequence and where each activity in the
sequence has the least value of total float in the schedule. If each of the longest path activities
were assigned the same calendar, then each activity on the longest path would have the same
value of total float. In an Updated Baseline Schedule (a baseline with actual progress
recorded), the Longest Path will begin at the data date (also known as the cut-off date) and
extend to the last activity scheduled in the contract. The CONTRACTOR shall sequence work
so that only one Longest Path is created in the Baseline or Updated Baseline schedule.

M. Negative Total Float: Also called Negative Float. The greatest number of days stated
as a negative number, that the Contract Completion Date is delayed. When an activity has
negative total float, the activities with negative total float have early dates scheduled later than
their late dates.

N. PDM: Precedence Diagram Method.

Planned Dates: Also called early and late dates.

O. P3: The scheduling software Primavera Project Planner, produced by Primavera

Systems, Inc., which shall be used by the CONTRACTOR for all CPM scheduling tasks.

P. Preliminary Schedule: The Preliminary Schedule shall be a NON-CPM generated bar

chart schedule submitted at the Pre-Construction Conference.

Q. Revised Baseline Schedule: The Baseline Schedule shall be revised only at the request
of the ENGINEER. Primary reasons for a baseline schedule to be revised include, but are not
limited to: 1) A significant or major change in the direction or sequence of Work, which the
ENGINEER believe significantly diminishes the accuracy and reliability of the schedule, and
2) Incorporation of negotiated or Engineer directed changes, additions, or deletions of Work.

R. Total Float: Also called Float. The number of days an activity can be delayed without
delaying the contract completion date. The CONTRACTOR agrees that total float is a shared
commodity, not for the exclusive use or financial benefit of either the CONTRACTOR or the
Employer. Either party has the full use of the total float until it is depleted.

S. S-Curve: Graphic display of cumulative costs, labour hours, percentage of works, or

other quantities, plotted against time.

T. Updated Baseline Schedule: Also called the Schedule Update, is a copy of the
Baseline Schedule with activities updated for actual start and/or finish dates and percent
completion.

U. Work Breakdown Structure (WBS): A deliverable – oriented grouping of project

elements that organizes and defines the total work scope of the project. Each descending level
represents an increasingly detailed definition of the project work. CONTRACTOR shall
establish the type and style of the WBS on the basis of the CONTRACT Work Packages and
units. This system to be provided by a common coding structure that to be approved by
ENGINEER.
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1.02 General.

A. Schedule Content: Failure to include any element of required Work in the schedule
shall not relieve the CONTRACTOR from completing all Work necessary to complete the
Project on time.

B. Scheduling Costs: All costs incurred by the CONTRACTOR to create and maintain
the Preliminary and CPM schedules including, but not limited to, updates, revisions, time
impact analyses, and any additional required scheduling data shall be borne by the
CONTRACTOR and are part of the Contract requirements.

C. Utility Coordination, Permits and Licenses: Sufficient liaison shall be conducted and
information obtained at the pre-construction conference to coordinate activities with utility
owners having facilities within the Project limits. The schedule shall conform to the utility
adjustments and Maintenance of Traffic sequencing included in the Contract Documents unless
changed by mutual agreement of the utility company, the CONTRACTOR and the
ENGINEER. The schedule shall show any utility adjustments that start or continue after the
Contract time has started. In addition, the CONTRACTOR shall show the acquisition of
permits or licenses needed for the Project.

D. Required Labelling of all Correspondence and Associated Documents: All

Schedule related correspondence, including transmittals and attachments shall have the
Schedule number and cut-off date (data date) entered in the document heading. A sample
format to be used is as follows: “301A03-25AUG99”, where 301A03 is the schedule update
number and 25AUG99 is the cut-off date (data date).

E. Impacts by adjacent Contracts: When there is a potential impact between two or

more contracts due to close proximity or to logistics in moving labour, materials and
equipment between contracts all authorized representatives of the parties performing the
contracts have a responsibility to communicate and coordinate their work so that impacts to
either party, (including to the Employer and its consultants), are eliminated or mitigated and do
not endanger, delay, or create additional work or costs to either party, (including to the
Employer and its consultants). In addition, the CONTRACTOR is responsible to immediately
notify the ENGINEER of any impact or potential impact caused by adjacent Contractors.

1.03 Qualifications.

A. The CONTRACTOR’S scheduling capability shall be verified by description of

construction projects to which CONTRACTOR or CONTRACTOR’S consultant has
successfully applied computerized CPM utilizing P3 and shall include at least two (2) projects
each with values of at least the expected value of this WORK, and at least one project which
was controlled throughout the duration of the project by means of computerized, periodic,
systematic review of the CPM schedule utilizing P3.

B. The CONTRACTOR shall designate a “Schedule Engineer” who shall be responsible

for the creation and maintenance of all project schedules. The “Schedule Engineer” shall not
be the CONTRACTOR’s Engineer, Project Engineer, or Superintendent. The CONTRACTOR
shall submit a written notice to the ENGINEER of the “Schedule Engineer’s” name, company
employed by, business phone number and complete business address. The CONTRACTOR
shall also submit a resume of the “Schedule Engineer”, which details the last 10 years of
employment. The “Schedule Engineer” shall be responsible to create and maintain all project
schedules submittals and attend all schedule meetings.
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1.04 Submittal Procedures for Preliminary Schedule.

A. The naming format of the Preliminary Schedules below use contract package CP 301
as a sample. The CONTRACTOR shall name the Preliminary Schedules as follows:
For Package CP 301(a) as an example:

“ 301APA” = Package 301(a), Preliminary Schedule Submittal 1

“ 3010PB” = Package 301(a), Preliminary Schedule Submittal 2

Note – 1st four digits = Last four digits of package number.

5th Digit - “P” = Preliminary Schedule.
6th Digit – Preliminary Schedule Submittal Number.

Zero at the end should be added if package number is five (5) digits as total,

B. The naming format of the Updated Preliminary Schedule below uses contract package
CP 301 as a sample. The CONTRACTOR shall name the Preliminary Schedules as follows:

“ 301AP1” =301(a), Update 1

“ 301AP2” =301(a), Update 2
“ 301AP3” = 301(a), Update 3

Note – 1st four digits = Last four digits of contract number.

5th Digit - “P” = Preliminary Schedule.
6th Digit – Updated Preliminary Schedule number.
Zero at the end should be added if package number is five (5) digits as
total,

C. At the Pre-construction conference, the CONTRACTOR shall submit to the

ENGINEER, a Preliminary Schedule, written narrative, geographical layout of the project, and
a written Crew/Trade report.

D. The Preliminary Schedule shall cover the entire scope of the CONTRACTOR’s
responsibilities for the entire Contract time.

E. The Preliminary Schedule shall be a NON-CPM generated bar chart schedule. The
schedule shall contain a legend showing the CONTRACTOR Name, Project Name, Contract
Number, 4 digits P3
schedule name and data date representing the commencement day of the contract. Each bar in
the bar chart shall have associated columns for activity number, activity description, original
duration, remaining duration, planned start, actual start, planned finish, actual finish, and
percent complete. Milestones shall be graphically represented by pink coloured triangles. All
bars representing planned work shall be green.
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F. The Preliminary Schedule shall present the CONTRACTOR's general approach to the
Project and show adequate detail for work, procurement, and submittal and approval activities
covering the first 120 days of work from commencement. The remainder of the Contract time
shall be represented by summary activities. Each activity shall have a planned start date,
planned finish date and original duration and remaining duration in calendar days and percent
complete. All Contract required milestones shall be shown in the barchart schedule. Each
utility shall be represented in the bar chart as a separate activity showing planned start, planned
finish, original duration, and remaining duration representing the full scope of the respective
utility work. The timescale for the bar chart shall show increments of one week with a
summary row for each month from the commencement day to the Contract completion date.

G. Submission of Written Narrative: The CONTRACTOR shall submit to the

ENGINEER and distribute to all in attendance, a written narrative explaining the preliminary
schedule’s scope and approach to the Project in sufficient detail to demonstrate that the
CONTRACTOR has a reasonable and workable plan to complete the Project within the
Contract time allowed.

H. Submission of a Geographical Layout of the Project: The CONTRACTOR shall

also submit to the ENGINEER, and present to all in attendance, a geographical layout graphic
of the project, which is suitable in size and content for presentation to those in attendance. The
CONTRACTOR shall also distribute a copy of the geographical layout of the project in a legal
landscape format to all those in attendance.

I. Submission of Crew/Trade Report: For horizontal construction, the CONTRACTOR

shall submit to the ENGINEER a list of crews for each type of Work to be performed during
the first 120 days of Work. Each crew shall have a description describing the work to be
performed by that crew. If the crew will be used for different types of work, the
CONTRACTOR shall show that information in the description. The crew list shall show the
labour breakdown by title and number of people for each title, such as 1 - foreman, 1 - crane
operator, 2 - labourers, etc. The CONTRACTOR shall also show each type of equipment used
and the number of pieces of each type of equipment used for each crew. The CONTRACTOR
shall also show the equipment manufacturer and model number on the list.

J. For vertical construction, the CONTRACTOR shall submit a list of trades to the
ENGINEER. The list shall contain the number of people to be used for each trade. In addition,
the CONTRACTOR shall also show each type of critical equipment used in the vertical
construction and the number of pieces of each type of equipment used and where they will be
used. The CONTRACTOR shall also show the equipment manufacturer and model number on
the list.

K. For horizontal and vertical construction, the CONTRACTOR shall include the average
expected production rate for each crew or trade based upon the normal operating conditions
expected. Each activity duration shall be calculated by dividing the quantity of each resource
assigned to that activity by the average expected production rate per day for that resource. If
there are multiple resources assigned to one activity, the activity’s original duration shall
reflect the greatest number of workdays generated by one of its assigned resources.

L. For horizontal construction, the CONTRACTOR shall also include the number of
crews expected to work concurrently for each type of work, such as two post tensioning crews,
two steel fixer finish crews, two carpentry crews, two plumbing crews etc.
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M. CONTRACTOR’s Oral Presentation: The CONTRACTOR shall show and refer to

the geographical layout of the project in an oral presentation of the CONTRACTOR’s
approach to performing the work under the contract. The CONTRACTOR’s oral presentation
shall conform to the format and content of the written narrative.

N. Acceptance of the Preliminary Schedule: The Accepted Preliminary Schedule is the

last Preliminary Schedule submitted and accepted by the ENGINEER. The CONTRACTOR
shall submit their preliminary schedule with narrative and Crew/Trade Report to the
ENGINEER no later than 5 calendar days after signing the Contract. The ENGINEER shall
notify in writing whether or not the preliminary schedule meets the requirements set forth in
the Specifications no later than 7 calendar days after receipt of the preliminary schedule. The
ENGINEER shall either accept or reject the CONTRACTOR’s Preliminary Schedule.. If the
ENGINEER rejects the CONTRACTOR’s Preliminary Schedule, the ENGINEER shall meet
with the CONTRACTOR within 3 days of receipt of the Preliminary Schedule and present to
the CONTRACTOR a list of changes to be made so that the Preliminary Schedule can be
accepted. The CONTRACTOR shall make those changes and submit a preliminary schedule
acceptable to the ENGINEER within 3 days. The time expended from the CONTRACTOR’s
initial Preliminary Schedule submittal due date until submittal of an acceptable preliminary
schedule by the ENGINEER shall not exceed 20 calendar days. The CONTRACTOR shall
present the accepted Preliminary Schedule with all required documents at the Pre-Construction
Conference.

O. Updating the Preliminary Schedule: The CONTRACTOR shall update each activity
in the Preliminary Schedule with an actual start date, actual finish date, percent complete, and
remaining duration each month until the accepted Baseline Schedule is updated and submitted
to the ENGINEER. The cut-off date for the preliminary schedule shall be the last calendar day
of the month. The submittal due date for the Updated Preliminary Schedule shall be the
seventh calendar day of the month. The Updated Preliminary Schedule shall show a data date
vertical line running through the bars of the bar chart and set to the established cut-off date.
The portion of each bar to the left of the data date line shall represent progress and shall be
coloured blue. The portion of each bar to the right of the data date line shall represent planned
work and shall be coloured green. The CONTRACTOR shall include a written narrative with
the Updated Preliminary Schedule explaining the progress made, any delays that have
occurred, and work planned to be accomplished in the next month. In addition the
CONTRACTOR shall include an updated the Crew/Trade report to reflect the current crew
strengths and production rates for the current month.

1.05 Submission of the CPM Baseline and Updated Baseline Schedules.

A. The CONTRACTOR's CPM schedule shall be a detailed CPM schedule using the
Precedence Diagram Method (PDM). The CPM schedule shall only be generated by the latest
version of Primavera Project Planner (P3) by Primavera Systems, Inc. The CONTRACTOR
shall pay the scheduling software yearly maintenance fees and maintain scheduling software
upgrades throughout the duration of the contract. The CONTRACTOR shall use all default
settings in Primavera Project Planner for all schedule submittals. This includes using the
“Retained Logic” setting for all calculations, unless the ENGINEER chooses to allow the use
of the P3 “Progress Override” setting.
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B. Each Baseline and Updated Baseline schedule submittals shall include all reports and
graphics listed in the specification. All Baseline Schedule submittals shall also include the
Logic Diagram required under item Q number 6, unless the ENGINEER waives that
requirement in a written notice to the CONTRACTOR.

C. Schedule Naming Format: The naming format below uses contract package CP 303”
as a sample. The “3030” is the last four digits of the contract number. Zero at the end should
be added if package number is five (5) digits as total,
Schedule submittals shall be named as follows:

1. Baseline Schedule Submittals:

For Package CP 301(a) as an example:

“ 301AB1” = CP 301(a), Baseline Submittal 1
“ 301AB2” = CP 301(a), Baseline Submittal 2
“ 301AB3” = CP 301(a), Baseline Submittal 3
Note –1st four digits = Last four digits of contract number.
5th Digit - “B” = Baseline.
6th Digit – Baseline Submittal Number.

Zero at the end should be added if package number is five (5) digits as total,

NOTE: The Accepted Baseline Submittal is the last Baseline Schedule submitted and accepted
by the Engineer.

2. Updated Baseline Schedule Submittals:

“301A01” = CP 301(a), Update 1
“ 301A02” = CP 301(a), Update 2
“ 301A03” = CP 301(a), Update 3
Note –1st four digits = Last four digits of contract number.
Last 2 digits – Update Number.
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D. Baseline Schedule Submittal and Acceptance: The CONTRACTOR shall prepare

and submit a detailed CPM construction schedule. The schedule shall be prepared according to
the specifications and submitted no later than 30 calendar days after signing the Contract. The
ENGINEER shall have 21 calendar days from the CONTRACTOR’s submittal date to review
and notify the CONTRACTOR in writing of its findings. The CONTRACTOR shall have 15
calendar days from the date of the ENGINEER’s written notice to make all requested
modifications to the schedule and re-submit the schedule for acceptance. The CONTRACTOR
shall have sixty days from Notice to Proceed date to submit a baseline schedule that is
acceptable to the ENGINEER.

Updated Baseline Schedule Submittal and Acceptance: The CONTRACTOR shall submit
an Updated Baseline Schedule for each month of the Contract. After acceptance of the first
Baseline Schedule, the CONTRACTOR shall submit schedule updates retroactively from the
first month of the contract. The Cut-Off date for each schedule update shall be the last
workday of the month. The Due Date for each Updated Baseline Schedule shall be the 7th
calendar day of the month. The Due Date for the Updated Baseline Schedule may be changed
from time to time, by the ENGINEER, due to holidays and weekends. The ENGINEER shall
have 15 calendar days from the CONTRACTOR’s submittal date to review and notify the
CONTRACTOR in writing of its findings. The CONTRACTOR shall have 5 calendar days
from the date of the ENGINEER’s written notice to make all requested modifications to the
schedule and re-submit the schedule for acceptance. The CONTRACTOR shall have until the
end of the current month to submit an acceptable schedule update.

F. Submittal Process for the Procurement of Materials, Equipment, Shop Drawings,

Certificates, etc.:

1. Every schedule submitted by the CONTRACTOR shall include, but not be limited
to, activities for the following items:

2. Preliminaries

3. Key Milestones / Flag Activities.

4. Shop drawings Activities.

5. Procurement/submittal processes.

6. Subcontracting Activities.

7. Pre-commissioning / Commissioning Activities.

8. As built drawings

G. Measurement of Progress: As the contract work progresses and the baseline schedule
is updated with progress, each subsequent schedule update shall become the schedule upon
which all Work progress will be measured.

H. CPM Activity Creation

1. Each schedule activity shall include the following detail in P3:

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a. ID Number - The format followed shall be uniform throughout the schedule. The
activity number shall not exceed 8 digits.

b. Description – The description shall be formatted as follows with a colon between each
element:
<Phase: <Package>: <Building>: <Desc>:
This should be agreed later with the ENGINEER.

c. Original Duration (Working Days): No activity shall have a duration greater than
20 working days unless approved by the ENGINEER. However, activities such as
long-term procurement, certain approvals and submittals may have durations greater than 20
working days or have a 7 day calendar assignment.

2. At the minimum, the schedule shall include but not limited to the following activities:

a. Preliminaries

b. Key Milestones / Flag Activities.

a. Shop drawings Activities.

b. Procurement/submittal processes

c. Subcontracting Activities.

d. Pre-commissioning / Commissioning Activities.

e. As built drawings

3. The CONTRACTOR agrees to submit for acceptance a CPM baseline schedule

showing work commencing on the commencement day and finishing on the completion day,
thereby showing zero total float.

4. The CONTRACTOR shall sequence work so that only one Longest Path is created in
the Baseline or Updated Baseline schedule.

5. The CONTRACTOR must submit evidence to the ENGINEER that any activity to be
added or removed from the schedule is a logical and reasonable change. If the ENGINEER
decides that the activity is not sufficiently supported and does not serve a useful purpose, the
ENGINEER shall request that the CONTRACTOR remove the activity from the schedule, and
the CONTRACTOR shall comply.

6. The schedule shall include a task activity for commencement day of the contract and a
task activity for the completion day of the contract with one-day duration and a 7-day calendar
assignment. The Contract Completion Date as defined in section 1.01.D shall be entered into
the Primavera Project Overview window under “Project must finish by”.
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7. Mobilization Activities:
Activities representing the contract pay item for mobilization shall be divided into two or more
work activities with duration no greater than 20 workdays.

I. Activity Codes

1. The CONTRACTOR shall develop and create program-wide activity codes that will be
used for the Doha 2006 Asian Games athlete’s Village/Hamad Medical City Schedule and
submit to the Engineer for approval. The activity Codes should consist as minimum the
following Codes:
Area: Geographical Area
Phas: Project Phase
Buid: Building Type/Numbering
Type: Work Type
Item: Work Item
Resp: Responsibility
Crew: Crew Name
Subc: Subcontracting

J. Activity Relationships

1. Relationships between activities shall be identified with the following information:

a. Activity ID - Shall not exceed 8 characters in length.

b. Predecessor and successor activity ID.
c. Relationship types:

FS -Finish to start
SS -Start to start
FF -Finish to finish
SF -Start to finish – This relationship is not allowed, unless authorized by the
Engineer.
d. Lag -Negative lag is not allowed, unless authorized by the ENGINEER.

Project Calendars

1. Calendars shall use day as the planning unit for the schedule. One of four calendars
shall be used for each activity:

b. Calendar 1: shall be used for 6-day workweek activities. No non-work days shall be
entered into this calendar.

c. Calendar 2: shall be used for 6-day workweek activities. All holidays shall be entered
into this calendar.

d. Calendar 3: shall be used for 7-day workweek activities. All holiday and non-work
days shall be assigned to this calendar.
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e. Additional calendars: May be assigned depending upon need. However, the

CONTRACTOR shall consult with the ENGINEER before other calendars are entered and/or
used in the Project schedule.

Revenue Loading the Schedule

a. Each work activity in the schedule shall be revenue loaded using all the contract pay item
amounts related to the work activity. The CONTRACTOR shall verify that each pay item is
represented in the schedule. The total of all revenue loading shall equal the Contract amount.

b. The ENGINEER shall request that the CONTRACTOR revise their revenue loading in the
accepted baseline schedule and the most current updated baseline schedule if the monthly
payment requests do not reasonably agree with the monthly schedule updates’ budgeted
revenue of Work performed. In addition, the ENGINEER shall request that the
CONTRACTOR revise their revenue loading in the accepted baseline and updated baseline
schedules to incorporate all change orders affecting the contract amount.

M. Resource Loading the Schedule:

1. The P3 Resource Dictionary shall contain the necessary crews and trades.

2. Vertical and Horizontal construction work activities shall be resource loaded with the
number of mandays per trade.

3. Each schedule work activity shall have a resource name and quantity assigned. The
resource quantity assigned shall be the number of mandays per trade necessary to complete the
activity within the original duration assigned.

4. Each work activity shall have a duration based on the average expected production rate
for each crew and/or trade performing that work under normal conditions. Each activity
duration shall be calculated by dividing the quantity of each resource assigned to that activity
by the average expected production rate per day for that resource. If there are multiple
resources assigned to one activity, the activity’s original duration shall reflect the greatest
number of workdays generated by its assigned resources.

5. If there are two person of the same type assigned to an activity with an original
duration of 5 days, then the resource quantity assigned shall be ten mandays. If there are two
people of the different trade assigned to an activity with an original duration of 5 days, then the
resource quantity assigned for that trade shall be ten mandays.

6. The CONTRACTOR shall resource load every work activity in the baseline schedule.
The CONTRACTOR shall also be responsible for the accuracy of all resource loading of any
activity added or modified due to the incorporation of Change Orders

7. The CONTRACTOR shall maintain an accurate resource loading of each month’s

updated baseline schedule for the duration of the contract.

Updating the Baseline Schedule

1. Monthly Schedule Update Meetings: The monthly schedule update meetings shall be
held on the last business day prior to the schedule cut-off date.
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2. The updated baseline schedule, project progress, issues, delays, claims, planned work,
CONTRACTOR’s monthly pay estimate, and baseline schedule revisions shall be among the
priority items addressed in detail.

3. Schedule Update Process: The schedule update process shall include updating the
activity actual start and finish dates, percent completion, remaining duration, and adjusting
schedule logic to correct for activities being performed out of sequence, adjusting resource
allocations for activities, and changing the calendar assignments to activities as needed.

4. The CONTRACTOR shall not change an activity original duration for any
reason.

Revisions to the Baseline Schedule

1. The ENGINEER shall request in writing that the CONTRACTOR submit a proposed
revision to the Accepted Baseline Schedule to incorporate a change order.

2. The CONTRACTOR shall have fifteen calendar days from receipt of the
ENGINEER’s request to submit a proposed revision to the Accepted Baseline Schedule.

3. The CONTRACTOR’s proposed revision shall include all transmittals, reports,

diagrams, and barcharts unless the ENGINEER requests otherwise in writing.

4. The CONTRACTOR shall submit two Schedule Comparison reports to the

ENGINEER. The first report shall be a comparison between the Accepted Baseline Schedule
and the Revised Baseline Schedule. The second report shall be a comparison between the
current updated baseline schedule and the next scheduled updated baseline schedule containing
the proposed revision to the accepted baseline schedule.

5. In their required narrative report, the CONTRACTOR shall state whether or not the
proposed changes affect the longest path of both the accepted baseline schedule and the next
scheduled updated baseline schedule.

6. The ENGINEER shall have 21 calendar days to review and transmit a written notice of
acceptance or rejection of the CONTRACTOR’s proposed revision. If the ENGINEER rejects
the proposed revision they shall state the reasons for the rejection in a written reply to the
CONTRACTOR. The CONTRACTOR shall have 5 calendar days to re-submit their proposed
revision to the ENGINEER.

7. Upon the ENGINEER’s acceptance of the proposed revision to the accepted baseline
schedule, the proposed revision to the baseline schedule shall become the accepted baseline
schedule. The CONTRACTOR shall incorporate the revision into the next scheduled updated
baseline schedule submittal.

8. Incorporating Multiple Plan Revisions into the Accepted Baseline and/or Updated
Baseline Schedule:

a. When multiple plan revisions are to be incorporated into the schedule, it is

necessary to isolate each plan revision in order to show its impact on the schedule. In addition,
each plan revision shall be isolated from work progressed during the update period.
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a. A sample schedule name is used below to illustrate the procedure. For the
purposes of this sample, the accepted baseline schedule for the Package CP 301(a) is 301AB2-
01AUG99. There are two plan revisions that were added to the work within the first schedule
update 301A01-25AUG99. The following procedure shall be followed:

1. A copy of the previous schedule, 301AB2, is made and named 301A-A. The first plan
revision is added to 301A-A and 301A-A is then re-calculated. A copy of 301A-A is then
made and named 301A-B. The next plan revision is added to 301A-B and that copy is re-
calculated. 301A-B now contains both plan revisions. 301A-A contains only the first plan
revision. This process shall be repeated if there are more revisions to be incorporated into the
schedule.
2. One final copy is made to incorporate progress up to the data date of the schedule
update in which the plan revisions are incorporated. Therefore, a copy of 301A-B is made and
named 301A01. Progress is then added to 301A01 up its data date, 25AUG99. Schedule
update 301A01 is then re-calculated.
3. The copies generated are listed below:

301A-A = Copy of 301AB2 + Plan Revision 1.

301A-B = Copy of 301A-A + Plan Revision 2.
301A01 = Copy of 301A-B + Progress up to 25AUG99.

NOTE: 301A01 is the Updated Baseline Schedule

for 25AUG99.

c. The CONTRACTOR shall submit to the ENGINEER two copies of each of the above
schedules created using the P3 Backup feature.

Schedule Submittals

Each baseline, revised baseline, and updated baseline schedule submittal shall include the
following documents, unless the ENGINEER sends the CONTRACTOR a written request to
limit their submittal to certain documents.

1. Transmittal: Shall be signed by the CONTRACTOR’s “Schedule Engineer” and shall

contain the following information:

Submittal date.
CONTRACTOR Name.
Complete Contract Number.
Project Description.
Four character P3 Project Number “-“ Data Date
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2. Schedule Update Narrative Report: The CONTRACTOR shall prepare a written

narrative to accompany the required reports and graphics for the schedule update submittal.
The narrative shall have the following sections:

a. Schedule Status: The Schedule Status shall be a written narrative explaining the
progress during the month in sufficient detail and referencing specific activities, including
longest path activities, milestones, design issues, means and methods issues, out of sequence
activities, and actual production rates for various types of work performed by the crews loaded
as resources in the schedule.

b. Delays: If the CONTRACTOR has experienced any delay, the CONTRACTOR shall
explain what activities in the current period were affected by the delay and what caused the
delay and how the CONTRACTOR intends to address the delay.
c. Milestone Comparisons: Current period projected milestone dates versus previous
period projected milestone dates, and current period projected contract completion date versus
previous period projected contract completion date.
d. Production Status: Current period production rates versus previous period production
rates for each resource crew.

3. Schedule Comparison Report: The CONTRACTOR shall submit to the ENGINEER

a detailed report showing all changes to the Project schedule since the previous monthly
update, including, but not limited to the following information:

a. Activities worked out of sequence.

b. Changes in Total Float.
c. Changes in Early and Late Dates.
d. Changes in Original and Remaining Duration.
e. Changes in Activity Constraints.
f. Changes in Activity Predecessors, Successors, Relationship Type, and Lags.
g. Changes in Activity Resource Assignments.
h. Changes in Activity Cost Loading.
i. Changes in Activity percent completion.
j. Changes in Longest Path Activities.

4. Progress S-Curve: The CONTRACTOR shall submit to the ENGINEER a detailed

progress S-Curve that indicate both weekly cumulative planned percentage progress spread
over the duration of the project and the weekly actual cumulative percentage progress. Weekly
or Monthly cumulative planned progress shall be based upon the resource loading input in
detailed project schedule and percentage weighting system. The cumulative planned S-Curve,
when approved by ENGINEER, shall not change throughout the project duration and shall
become the baseline from which progress shall be measured against each update period. All
Progress curves shall include a data table below graphics providing planned, actual, cumulative
data and forecasting.

5 Activity Predecessor/Successor Report When requested by the ENGINEER, the

CONTRACTOR shall submit a predecessor / Successor report, which lists all activities in the
project schedule. The report shall be sorted by Activity ID and shall show the subject activity
Id and description first, its predecessors second, and its successors third. The report shall show
each activity’s relationship type and lag, early and late dates, total float, original duration, and
percent complete. There shall be two blank lines between each subject activity.
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6. Logic Diagram: When requested by the ENGINEER, the CONTRACTOR shall

submit a color non-time-scaled pure logic diagram plotted on continuous A1 and AO paper
size as appropriate. The logic diagram shall be formatted as follows:

a. All text shall have a point size no less than 6. Each activity shall have a single box
containing the following text:

1. Work Breakdown Structure (WBS) Identifier

2. Activity ID Number
3. Activity Description
4. Original Duration
5. Remaining Duration
6. Percent Complete
7. Total float
8. Calendar ID
9. Early Start and Finish dates

b. Blue lines and arrows representing driving relationships and green lines and arrows
representing non-driving relationships.

c. Legend Key to identify all components in the drawing.

d. Title section containing the following information:

1. Company name
2. Complete Contract number
3. Title of Diagram
4. P3 project number and Data Date formatted as follows:
“301001-25AUG00

7. Longest Path Barchart: Barchart shall be time scaled and filtered on the Longest Path
activities and sorted by early start, early finish and total float.

8. Area Code Barchart: Barchart shall be time scaled and sorted by area code, early
start, early finish, and total float. The bar chart shall include:

a. Each activity on a single line containing ID number, activity description, and a bar
representing activity original duration, early start dates, early finish dates, late start dates, late
finish dates and total float.

b. Key to identify all components in the bar chart and CPM.

c. Key to identify all the abbreviations used.

9. Early Start Barchart: Barchart shall be time scaled and sorted by Early Start and
Early Finish and Total Float.

10. Total Float Barchart: Barchart shall be time scaled and sorted by Total Float and
Early Start and Early Finish.
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11. Barchart by Activity Id: Detailed schedule report sorted by ID number and total float
and shall include original duration, calendar ID, listing of the predecessors and successors for
each activity, their relationship type, early start and finish dates, late start and finish dates, lag,
and total float.

12. Revenue Loading Report: The CONTRACTOR shall submit to the ENGINEER a
report entitled “Revenue Loading Report”. The report shall include the following information:

a. Work Breakdown Structure (WBS) Identifier

b. Activity ID number
c. Description of activity
d. List of pay items included in activity including:

1. Pay item number

2. Pay item description
3. Quantity of pay item to be applied
4. Unit measure of pay item
5. Unit-price of pay item
6. Total price for pay item to be applied

d. Total revenue loading of activity (Sum of "C")

13. Revenue Flow Diagram: For any baseline Schedule, the CONTRACTOR shall submit
to the ENGINEER a Revenue Flow Diagram by month. The Revenue Flow Diagram shall
show the early and late curves representing the accumulated projected dollars to be earned for
each month of the contract.

14. Tabular Revenue Report: For any Baseline Schedule, the CONTRACTOR shall
submit a Tabular Revenue Report by day. The tabular report shall show columns for the
accumulated and incremental projected dollar amounts to be earned on the early and late curve
for each contract day.

15 Crew/Trade Report:

a. The CONTRACTOR shall submit to the ENGINEER a Crew/Trade report for each
type of Work to be performed during the duration of the contract. Each crew and/or trade shall
have a description describing the work to be performed. If the crew and/or trade will be used
for different types of work, the CONTRACTOR shall show that information in the description.
The Crew/Trade report shall show the labor breakdown by title and number of people for each
title, such as 1 - foreman, 1 - crane operator, 2 - laborers, 2 – plumbers, etc. The
CONTRACTOR shall also show each type of critical equipment used and the number of pieces
of each type of critical equipment used for each crew and/or trade. The CONTRACTOR shall
also show the critical equipment’s manufacturer and model number.

b. The Crew/Trade report shall also include the number of crews and/or number of people
per trade expected to work concurrently for each type of work, such as two shuttering crews,
five steel fixers, etc.

c. The Crew/Trade report shall contain the activity id numbers assigned to each crew
and/or trade.
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16. Resource Diagram: The CONTRACTOR shall submit to the ENGINEER a resource
diagram for each resource that shows the resource amount available and the resource amount
required as a histogram per week and as a cumulative curve with a timescale per week. The
diagram shall show whether the resource is sufficiently available to complete the work in the
time period in which it is scheduled. All Histograms shall include a data table below graphics
providing planned, actual and cumulative data.

17. P3 Schedule Backup: The CONTRACTOR shall submit to the ENGINEER two
copies of each baseline, revised baseline, and updated baseline schedule using the P3 backup
option. The backed up copies shall be compressed and without an access list. The backups
shall be submitted on CD/ROM. Each diskette shall have a typed label showing the following
information:

Contractor name
The complete Contract number
The four character P3 project number
Data Date in format -> “25AUG00”
Volume number “of” total volume numbers

18. Paper Sizes and Orientation: All printed reports shall be submitted on A4 portrait
bond paper. All printed bar charts and revenue flow diagrams shall be submitted on A4
landscape bond paper. All presentation layouts and logic diagrams shall be plotted in colour
with a colour design jet plotter and submitted on A1 and AO paper as appropriate

Q. Project Progress Meeting:

1. The CONTRACTOR shall submit a two-week look-ahead barchart schedule produced

in Microsoft Excel. The barchart shall show all major Work in progress.

2. The barchart shall show at least one week behind for actual Work performed and at
least two weeks ahead for planned Work.

3. The barchart shall be date synchronized to the Inspector’s Weekly Summary Report,
which is created from their Daily Reports.

4. The CONTRACTOR shall correlate work shown in the barchart to work shown in the
Inspector’s Weekly Summaries. The barchart shall include, but not be limited to, the following
information:

a. Work Breakdown Structure (WBS) Identifier

b. Activity ID number
c. Activity description
d. Each bar shall show the following abbreviations where applicable.
1. “PS” - Planned start
2. “PF” – Planned finish
3. “AS” – Actual Start
4. “AF” – Actual Finish
5. “LP” – Longest Path activity

5. Changes and revisions that require the approval of the ENGINEER shall be brought
forward to the ENGINEER for discussion
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Adjustments to Contract Time:

1. The Contract Completion Date shall not be changed in any schedule unless the
ENGINEER, at the BED’s request approves a Change Order granting an extension to the
Contract Time.

2. The CONTRACTOR agrees that a contract time extension request shall only be
considered for one of the following reasons:

a. The CONTRACTOR performed extra work that met all of the following conditions:

1. The ENGINEER, at the direction of the BED states that the extra work was not to be
performed concurrently with other contract work.
2. The extra work impacted one or more activities on the current CPM schedule longest
path and therefore impacted the Contract Completion Date.

b. The CONTRACTOR experienced an Excusable Delay that met the following

conditions:

1. For a delay caused by unusually severe weather, the CONTRACTOR presented

weather records of the same period for the last five years that showed the weather it
encountered surpassed in severity the weather usually encountered or reasonably expected in
the particular locality during the time of year involved.

2. The CONTRACTOR agrees that there shall be no basis for a Contract Time extension as a
result of any reduction in Total Float as long as the Contract Completion Date was not delayed.

3. Recovery Plan: During Contract execution, if performance deviates from the Contract
master Program to the point where the original plan can no longer be an effective basis for
control, then it is appropriate and desirable to create a new performance measurement plan,
based upon a revised schedule and manpower deployment.

At a mutually agreed cut off date, CONTRACTOR shall establish the balance of work
remaining to be completed for the Contract, at a measurement level, and reschedule activities
to achieve SHEDULED COMPLETED DATE. All plans shall be rescheduled based on the
remaining duration for each activity. Remaining duration values must be realistic and reflect
the previous recorded value. Up to date shall then be fed into the computer for a new time
analysis run. A revised document known as the RECOVERY PLAN shall be produced for
ENGINEER consideration.

Under no circumstances shall the RECOVERY PLAN indicate a revised SCHEDULED

COMPLETION DATE without prior approval and agreement from ENGINEER.

The proposed RECOVERY PLAN shall include a revised manpower deployment program,
inline with the remaining duration and shall be incorporated into the baseline schedule to
achieve the SCHEDULED COMPLETION DATE.

The revised baseline schedule along with the proposed RECOVERY PLAN, CRITICAL
PATH ANALYSIS, manpower employment histogram (Revised & Original) and other
planning reports shall be submitted to ENGINEER for approval. Contractor shall ensure that
all the above mentioned reports substantiate the RECOVERY PLAN to achieve handover
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SCHEDULE COMPLETION DATE. Once this RECOVERY PLAN is approved by

ENGINEER, all planning and scheduling reports shall be corrected to reflect revised
percentage progress and revised plan along with original percentage progress and plan. The
project shall be re-baseline to reflect the revised schedule.

S. Progress reporting

General:

CONTRACTOR shall report to ENGINEER on the progress of his work during the entire
duration of the Contract. Presentation of the reports shall be of the highest quality.
CONTRACT shall draft Weekly and Monthly report formats for ENGINEER approval. Once
by approved ENGINEER the format shall not be altered in a way, except in agreement with
ENGINEER.

Reports shall be issued observing the following timing:

 Weekly report
 Monthly report
 Special and Exception reports ( as and when required by the ENGINEER)
 Close out report

Weekly Reports

CONTRACTOR shall submit during the entire duration of the CONTRACT a Weekly
Progress Report under cover of a transmittal sheet and/or by facsimile and shall include as a
minimum the following:

a Overall contract Status (Narrative)

 Planning and Scheduling-overview of performance

 Procurement
 construction/erection
 Pre-commissioning &Commissioning
 Areas of concern
 Forecasting
 Recovery actions (when required)

b Weekly Progress Tables

 Project Progress Report (bar chart summary)

c Overall Progress Curve

 Contract ‘S’ Curve

d Manpower

 Management
 Project Control Staff
 Engineering Staff
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 Construction Labor
 Sub- Contractors labor

e Plant/ Equipment Return

 Plant Description
 Plant location
 Plant on Hire
 Plant unserviceable

f Milestone Status Report

 Contract achieved dates

 Contract planned dates
 Forecast planned date (to date)
 Comments on variations (notes)

g Material Procurement Register

 Key vendor data received dates

 Material description
 Name of supplier
 Requisition status report
 Purchase order issue date planned, actual and forecast

h Bar Chart

 Activity key identifier

 Activity Description
 Activity Progress
 Activity Duration
 Imposed date (if any)
 Early start and Finish dates
 Actual start and actual finish dates
 Forecast start and finish dates
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Monthly Reports

CONTRACTOR shall submit during the entire duration of the Contract a Monthly Report
under a cover of transmittal sheet which shall include (as minimum) the following:

 Management / Executive summary

 Project Control
 Procurement
 Construction, Pre-commissioning and Commissioning
 Planning and Cost Control
 QA/QC
 Safety Aspects, including health and Environment
 Area of Concern
 Record of Expenditure
 Recovery actions (when necessary)
 Photographic Record

a Management /Executive Summary

This section shall include:

 Execute summary (Narrative)
 Main decisions taken, problems solved, new problems arisen
 Updated Schedule /Progress Curve (Summary)

b Project Control

This section shall include:

 Updated Milestones Status Report

c Procurement

This section shall include:

 A narrative of the month events
 Progress per requisition
 Requisition Status Report
 Expediting Status Report
 Forwarding and Shipping Report
 Forecast for next period

d Construction, Pre-commissioning and Commissioning

This section shall include:

 A narrative of the month events

 Progress per discipline
 Problems area
 Forecast for the next period
 Any other information deemed necessary
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e Planning and Cost Control

This section shall include:

 All areas of progress and impact on Contract Schedule

 An updated bar chart plan
 S-Curve
 Look-ahead schedule (Forecasting)
 Manpower histograms

f QA/QC

This section shall include a comprehensive report on QA/QC aspects of the project. QA/QC
matrix formatting shall be provided detailing for each QA/QC procedures.

g Safety Aspects

This section shall include:

 Lost Time Accident/ Severity Index

 Safety man-hour status table

h Areas of Concern

This section shall include:

 Last months Areas of Concern still valid

 This month raised Areas of Concern
 Contractors recommendation for remedial actions

i Record of Expenditure

This section shall include:

 Number of invoices submitted

 The amount of each invoice
 Number of invoices paid
 Date when payment was received

j Recovery Actions

This section shall include:

 A full description of recovery actions being considered to recover program slippage

 Areas which could be carried out ahead of program
 Material or equipment delivery dates which could be accelerated
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SPECIAL AND EXCEPTION REPORTS

If deemed necessary by ENGINEER, reports shall be generated by Contractor, which cover all
aspects of the clarifications and/or the problems identified during the course of the project
execution and duration.

CLOSE OUT REPORT

Contractor shall produce for ENGINEER review and approval a Close Out Report including a
detailed narrative of main events/problems and solutions for technical aspects, Project
Management, Procurement, Testing, Construction, Commissioning, Planning, Cost,
Contracting, Interfaces etc. this shall include all major decisions undertaken during the
performance of the work. The Report shall include a copy of all Schedules, Progress Curves,
Histograms, and Status Tables as listed in the Planning Section. The report shall be submitted
to ENGINEER on or before the Scheduled Completion Date.
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SAMPLE CONTRACT FOR CONSULTANTS

This CONTRACT (hereinafter, together with all Appendices attached hereto and forming an
integral part hereof, called the "Contract") is made the day of the month of 199., between, on
the one hand, the ............. (hereinafter called "the Client") and, on the other hand ............
(hereinafter called the "Consultants").

WHEREAS

(A) the Client intends to carry out a............ project as defined hereinafter (hereinafter called
the "Project");

(B) the Client has requested the Consultants to provide certain consulting services required
for the Project, as defined in Appendix B for a period of..... months and against remuneration
as set out in Appendix D.

(C) the Consultants, having represented to the Client that they have the required
professional skills, personnel and technical resources, have agreed to provide the Services on
the terms and conditions set forth in this Contract;

NOW THEREFORE the parties hereto hereby agree as follows:

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GENERAL PROVISIONS

Definitions

Unless the context otherwise requires, the following terms whenever used in this Contract have
the following meanings;
(a) "Applicable Law" means the laws and any other instruments having the force of law in
the (enter name) .
(b) Note: [This paragraph applies only in case of foreign funding] "Bank" means ......
...............................................................................
(c) "Contract" means this Contract between the Client and the Consultants;
(d) "Effective Date" means the date on which this Contract comes into force and effect
pursuant to Clause 2.1 hereof;
(e) "foreign currency" means any currency other than the currency of the (enter name);
(f) "Government" means the Government of the (enter name);
(g) "Local currency" means the currency of the (enter name);
(h) "Personnel" means persons hired by the Consultants or by any Subconsultants as
employees and assigned to the performance of the Services or any part thereof; "foreign
Personnel" means such persons who at the time of being so hired had their domicile outside
the (enter name) and "local personnel" means such persons who at the time of being so
hired had their domicile inside the (enter name) ;
"Party" means the Client or the Consultants, as the case may be;
(j) "Project" means the project for.......................................................................... described
in Appendix E hereto, for which the Consultants are expected to provide services;
(k) "Services" means the work to be performed by the Consultants pursuant to this
Contract for the purposes of the Project, as described in Appendix B hereto;
(l) "Starting Date" means the date referred to in Clause 2.3 hereof,
(m) "Subconsultants" means any entity to which the Consultants subcontract any part of the
Services in accordance with the provisions of Clause 3.8 hereinafter; and
(n) "Third Party" means any person or entity other than the Government, the Client, the
Consultants or a Subconsultant.

1.2 Relation between the Parties

Nothing contained herein shall be construed as establishing a relation of master and servant or
of agent and principal as between the Client and the Consultants. The Consultants have
complete charge of Personnel performing the Services and shall be fully responsible for the
Services performed by them or on their behalf hereunder.
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1.3 Law Governing Contract

This Contract, its meaning and interpretation, and the relation between the Parties shall be
governed by the laws of the (enter name).

1.4 Language

This Contract has been executed in the English language, which shall be the binding and
controlling language for all matters relating to the meaning or interpretation of this Contract.

1.5 Headings

The headings shall not limit, or alter or affect the meaning of this Contract.

1.6 Notices

1.6.1 Any notice, request or consent required or permit to be given or made pursuant to this
Contract shall be in writing. Any such notice, request or consent shall be deemed to have been
given or made when delivered in person to an authorized representative of the Party to whom
the communication is addressed, or when sent by registered mail, telegram or confirmed
facsimile to such Party at the following address:

For the Client:

For the Consultants:

Attention:.............

................................
.................................
P.O.Box
Attention:
Telephone:
Facsimile:
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1.6.2 Notice will be deemed to be effective as follows:

(a) in the case of personal delivery or registered mail, on delivery;

(b) in the case of telegrams, twenty-four (24) hours following confirmed transmission; and
(c) in the case of facsimiles., twenty-four (24) hours following confirmed transmission,

1.6.3 A Party may change its address for notice hereunder by giving the other Party notice of
such change pursuant to this Clause.

1.7 Location

The Services shall be performed at such locations as are specified in Appendix .. [Note:
Appendix B or E as the case may be] hereto and, where the location of a particular task is not
so specified, at such locations as the Client may approve.

1.8 Joint Ventures

Where the Consultants are a Joint Venture the members of the joint venture shall each be held
jointly and severally liable for the completion of the Services and they shall enter into an
agreement to this effect in a form acceptable to the Client, The members of the joint venture
hereby authorise .......................(insert here name of one of the entities forming together the
consultants) to act on their behalf in exercising all the Consultant’s rights and obligations
towards the Client under this Contract, including without limitation the receiving of
instructions and payments from the Client.

[Note: This clause is to be used only if the Consultants consist of more than one entity. The
entity to be listed here will normally be the one whose address is quoted in Clause 1.6.1.
However it remains recommended that all members entities sign this contract].

1.9 Authorized Representatives

Any action required or permitted to be taken, and any document required or permitted to be
executed under this Contract, may be taken or executed:

(i) on behalf of the Client by the Director General of the MRMEWR or his designated
representative;

(ii) on behalf of the Consultants by............... or his designated representative.

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1.10 Taxes and Duties

The Consultants shall be subject to all taxes, duties and charges in force in the (enter name)
................ [Add in case of foreign funding.] Any such taxes, duties and charges paid by
Consultants shall be separately mentioned in the Consultants' invoices and the Consultants
shall provide evidence through original documentation of the actual payment of such taxes,
duties and charges.

[Note: It may be necessary subject to requirements of Funding Agencies or as a result of

negotiations with the Consultants to adopt different measures. Please revert to client Legal
department for further information on this issue as it is liable to frequent changes.]

2. COMMENCEMENT, COMPLETION, MODIFICATION AND TERMINATION

OF CONTRACT

2.1 Effectiveness of Contract

This Contract shall come into force and effect on the date (the "Effective Date") of the
Client's notice to the Consultants confirming that the following conditions have been met:
(a) [Note: This paragraph applies only in case of Foreign Funding] The Contract has been
approved by the Bank;
(b) The Contract has been signed by both parties;
(c) The Contract has been approved by the Client;

2.2 Termination of Contract for Failure to Become Effective

If this Contract has not become effective within three (3) months of the date hereof, either
Party may, by not less than thirty (30) days written notice to the other Party, declare this
Contract to be null and void, and in the event of such a declaration by either Party, neither
Party shall have any claim against the other Party with respect hereto.

2.3 Commencement of Services

The Consultants shall begin carrying out the Services not later than the "Starting Date" which
is fifteen (15) days after the "Effective Date", or on such later date as the Parties may agree in
Writing.

2.4 Expiration of Contract

Unless terminated earlier pursuant to Clause 2.9 hereof this Contract shall be completed when
pursuant to the provisions hereof the Services have been completed and accepted by the Client
and the payments of remuneration and reimbursable expenditures have been made.
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2.5 Entire Agreement

This Contract contains all covenants, stipulations and provisions agreed by the Parties. No
agent or representative of either Party has authority to make, and the Parties shall not be bound
by or be liable for any statement, representation, promise or agreement not set forth herein.

2.6 Modification

Modification of the terms and conditions of this Contract, including any modification of the
scope of the Services, may only be made by written agreement between the Parties and shall
not be effective until the consent of the MRMEWR Director General has been obtained. [Note:
Italics only applicable in the event of foreign funding].

2.7 Force Majeure

2.7.1 Definition

(a) For the purposes of this Contract, "Force Majeure" means an event which is beyond the
reasonable control of a Party, and which makes a Party's performance of its obligations
hereunder impossible or so impractical as reasonably to be considered impossible in the
circumstances, and includes, but is not limited to, war (whether declared or not), riots, civil
disorder, earthquake, fire, explosion, storm, flood, strikes, lockouts or other industrial action
(except where such strikes, lockouts or other industrial action are within the power of the Party
invoking Force Majeure to prevent), confiscation or any other action by government agencies.

(b) Force Majeure shall not include (i) any event which is caused by the negligence or
intentional action of a Party or such Party's Subconsultants or agents or employees, nor (ii) any
event which a diligent Party could reasonably have been expected to both (A) take into account
at the time of the conclusion of the Contract and (B) avoid or overcome in the carrying out of
its obligations hereunder.

2.7.2 No Breach of Contract

The failure of a Party to fulfil any of its obligations hereunder shall not be considered to be a
breach of, or default under, this Contract insofar as such inability arises from an event of Force
Majeure, provided that the Party affected by such an event has taken all reasonable
precautions, due care and reasonable alternative measures, all with the objective of carrying out
the terms and conditions of this Contract.
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2.7.3 Measures to be Taken

(a) A Party affected by an event of Force Majeure shall take all reasonable measures to
remove such Party's inability to fulfil its obligations hereunder with a minimum of delay.

(b) A Party affected by an event of Force Majeure shall notify the other Party of such event
as soon as possible, and in any event not later than fourteen (14) days following the occurrence
of such event, providing evidence of the nature and cause of such event, and shall similarly
give notice of the restoration of normal conditions as soon as possible.

(c) The Parties shall take all reasonable measures to minimize the consequences of any
event of Force Majeure.

2.7.4 Extension of Time

Any period within which a Party shall, pursuant to this Contract, complete any action or task,
shall be extended for a period equal to the time during which such party was unable to perform
such action as a result of Force Majeure.

2.7.5 Suspension of Contractual Obligations

During the period of Force Majeure, the obligations of each party under this Contract shall be
suspended until the situation of Force majeure has ceased to exist or the Contract has been
terminated in accordance with Clause 2.9.1 (e).

2.7.6 Consultation

Not later than thirty (30) days after the Consultants, as the result of an event of Force Majeure,
has become unable to perform a material portion of the Services, the Parties shall consult
together with a view to agreeing on appropriate measures to be taken in the circumstances.

2.8 Suspension of Payments

The Client has the right, by written notice of suspension to the Consultants, to suspend all
payments to the Consultants hereunder if the Consultants fail to perform any of their
obligations under this Contract, including the carrying out of the Services provided that such
notice of suspension (i) shall specify the nature of the failure, and (ii) shall request the
Consultants to remedy such failure within a period not exceeding thirty (30) days after receipt
by the Consultants of such notice of suspension.
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2.9 Termination

2.9.1 By the Client

The Client has the right to terminate this contract by giving not less than thirty (30) days
written notice of termination to the Consultants, such notice to be given after the occurrence of
any of the events specified in paragraphs (a) through (f) of this Clause 2.9. 1:

(a) if the Consultants fail to remedy a failure in the performance of their obligations
hereunder, as specified in a notice of suspension pursuant to Clause 2.8 herein above, within
thirty (30) days of receipt of such notice of suspension or within such further period as the
Client may have subsequently approved in writing;

(b) if the Consultants become insolvent or bankrupt or enter into any agreements with their
creditors for relief of debt or take advantage of any law for the benefit of debtors or go into
liquidation or receivership whether compulsory or voluntary;

(c) if the Consultants fail to comply with any final decision reached as a result of legal
proceedings pursuant to Clause 8 hereof,

(d) if the Consultants submit to the Client a statement which has a material effect on the
rights, obligations or interests of the Client which the Consultants know to be false;

(e) if, as the result of Force Majeure, the Consultants are unable to perform a material
portion of the Services for a period of not less than sixty (60) days; or

(f) if the Client, in its sole discretion and for any reason whatsoever, decides to terminate
this Contract.

2.9.2 By the Consultants

The Consultants have the right to terminate this contract by not less than thirty (30) days'
written notice to the Client, such notice to be given after the occurrence of any of the events
specified in paragraphs (a) through (d) of this clause 2.9.2:

(a) if the Client fails to pay any money due to the Consultants pursuant to this Contract
and not subject to dispute pursuant to Clause 8 hereof within forty-five (45) days after
receiving written notice from the Consultants that such payment is overdue;

(b) if the Client is in material breach of its obligations pursuant to this Contract and has not
remedied the same within forty-five (45) days (or such longer period as the Consultants may
have subsequently approved in writing) following the receipt by the Client of the Consultants'
notice specifying such breach;
 P a g e | 499

(c) if, as the result of Force Majeure on the side of the Client, the Consultants are unable
to perform a material portion of the Services for a period of not less than ninety (90) days; or

(d) if the Client fails to comply with any decision reached as a result of legal proceedings
pursuant to Clause 8 hereof.

2.9.3 Cessation of Rights and Obligations

Upon termination of this Contract pursuant to Clause 2.9 hereof, or upon expiration of this
Contract pursuant to Clause 2.4 hereof, all rights and obligations of the Parties hereunder shall
cease, except (i) such rights and obligations as may have accrued on the date of termination or
expiration, (ii) the obligation of confidentiality set forth in Clause 3.3 hereof, (iii) the
obligation of the Consultants with respect to inspection and auditing as defined in Clause 3.7
(ii) hereof, and (iv) any right which a Party may have under the Applicable Law.

2.9.4 Cessation of Services

Upon termination of this Contract by notice of either Party to the other pursuant to Clauses
2.9.1 or 2.9.2 hereof, the Consultants shall, immediately upon dispatch or receipt of such
notice, take all necessary steps to bring the Services to a close in a prompt and orderly manner
and shall keep expenditures for this purpose to a minimum. With respect to documents
prepared by the Consultants and equipment and materials furnished by the Client, the
Consultants shall proceed as provided, respectively, by Clauses 3.10 or 3.11 hereof.

2.9.5 Payment upon Termination

Upon termination of this Contract pursuant to Clauses 2.9.1 or 2.9.2 hereof, the Client shall
make the following payments to the Consultants:

1. remuneration pursuant to Clause 6 hereof for Services satisfactorily performed prior to the
effective date of termination;

2. reimbursable expenditures pursuant to Clause 6 hereof for expenditures actually incurred

prior to the effective date of termination; and

3. except in the case of termination pursuant to paragraphs (a) through (d) of Clause hereof,
reimbursement of any proven expenditures incidental to the prompt and orderly termination of
the Contract.
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3. OBLIGATIONS OF THE CONSULTANTS

3.1 General

3.1.1 Standard of Performance

The Consultants shall perform the Services and carry out their obligations hereunder with all
due diligence, efficiency and economy, in accordance with generally accepted techniques and
practices used in the..... [insert appropriate qualification such as "construction" or
"telecommunication”] industry and with professional engineering and consulting standards
recognized by international professional bodies, and shall observe sound management, and
technical engineering practices, and employ appropriate advanced technology and safe and
effective equipment, machinery, materials and methods. The Consultants shall always act, in
respect of any matter relating to this Contract or to the Services, as faithful advisers to the
Client, and shall at all times support and safeguard the Client's legitimate interests in any
dealings with Subconsultants or Third Parties.

3.1.2 Law Governing Services

The Consultants shall perform the Services in accordance with the Applicable Law and shall
take all necessary steps to ensure that any Subconsultants, as well as the Personnel and agents
of the Consultants and any Subconsultants, comply with the Applicable Law. The Client may
advise the Consultants in writing of relevant local customs and the Consultants shall, after such
notifications, respect such customs.

3.2 Conflict of Interests

3.2.1 Consultants not to Benefit from Commissions, Discounts, etc.

The remuneration of the Consultants pursuant to Clause 6 hereof shall constitute the
Consultants' sole remuneration in connection with the Contract or the Services and the
Consultants shall not accept for their own benefit any trade commission, discount or similar
payment in connection with activities pursuant to this Contract or to the Services or in the
discharge of their obligations hereunder, and the Consultants shall ensure that any
Subconsultants, as well as the Personnel and agents of either of them, similarly shall not
receive any such additional remuneration.

3.2.2 Procurement Rules of Funding Agencies [Note: only in case of foreign funding]

If the Consultants, as part of the Services, have the responsibility of advising the Client on the
procurement of goods, works or services, the Consultants shall comply with the applicable
procurement guidelines and shall at all times exercise such responsibility in the best interest of
the Client. Any discounts or commissions obtained by the Consultants in the exercise of such
procurement responsibility shall be for the account of the Client.
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3.2.3 Consultants and Affiliates not to be otherwise Interested in Project

The Consultants agree that, during the term of this Contract and after its termination, the
Consultants and any entity affiliated with the Consultants, as well as any Subconsultant and
any entity affiliated with such Subconsultant, shall be disqualified from providing goods,
works, or services (other than the Services and any continuation thereof) for the Project.

3.2.4 Prohibition of Conflicting Activities

Neither the Consultants nor their Subconsultants nor the Personnel of either of them shall
engage, either directly or indirectly, in any business or professional activities in the (enter
name) which would conflict with the activities assigned to them under this Contract.

3.3 Confidentiality

The Consultants, their Subconsultants and their Personnel shall not, either during the term or
after the expiration of this Contract, disclose any proprietary or confidential information
relating to the Project, the Services, this Contract, or the Client's business or operations without
the prior written consent of the Client.

3.4 Liability of the Consultants

The Consultants shall be liable to the Client for the performance of the Services in accordance
with the provisions of this Contract and for any loss suffered by the Client as a result of their
default in such performance, subject to the following limitations:

1st.The Consultants shall not be liable for any damage or injury caused by or arising out of the
act, neglect, default or omission of any persons other than the Consultants, its Subconsultants
or the Personnel of either of them; and

2nd.The Consultants shall not be liable for any loss or damage caused by or arising out of
circumstances of Force Majeure.
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3.5 Indemnification of the Client by the Consultants

The Consultants shall keep the Client, both during and after the term of this Contract, fully and
effectively indemnified against all losses, damage, injuries, deaths, expenses, actions,
proceedings, demands, costs and claims, including, but not limited to, legal fees and expenses,
suffered by the Client or any Third Party, where such loss, damage, injury or death is the result
of a wrongful action, negligence or breach of Contract of the Consultants or their
Subconsultants., or the Personnel or agents of either of them, including the use or violation of
any copyright work or literary property or patented invention, article or appliance.

3.6 Insurance to be taken out by the Consultants

The Consultants (i) shall take out and maintain at their own cost but on terms and conditions
approved by the Client, insurance against the risks, and for the coverage, set forth below, and
(ii)
at the Client's request, shall provide evidence to the Client showing that such insurance has
been taken out and maintained with an Insurance Company licensed by the Ministry of
Commerce of the (enter name) and that the current premiums therefore have been paid:

1. Third Party motor vehicle liability insurance in respect of motor vehicles operated in the
(enter name) by the Consultants or their Personnel or any Subconsultants or their Personnel,
with a minimum coverage of R.O. 50,000; [minimum coverage may be subject to change
depending on size of contract]

2. Third Party liability insurance, with a minimum coverage of R.O. 200,000; [minimum
coverage may be subject to change depending on size of contract]

3. Professional liability insurance (if available) with a minimum coverage of at least R.O.
1,000,000.- [Note: only for foreign consultants as this type of insurance is not yet available on
the country insurance market]

4. Employer's liability and workers' compensation insurance in respect of the Personnel of the
Consultants and of any Subconsultants, in accordance with the relevant provisions of the
Applicable Law, as well as, with respect to such Personnel, any such life, health, accident,
travel or other insurance as may be appropriate; and

5. Insurance against loss of or damage to (i) equipment purchased in whole or in part with
funds provided under this Contract, (ii) the Consultants' property used in the performance of
the Services, and (iii) any documents prepared by the Consultants in the performance of the
Services.
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3.7 Accounting, Inspection and Auditing [Note: this Clause does not apply to lump sum
type of contracts]

The Consultants (i) shall keep accurate and systematic accounts and records in respect of the
Services hereunder, in accordance with internationally accepted accounting principles and in
such form and detail as will clearly identify all relevant time charges and cost, and the basis
thereof, and (ii) shall permit the Client or its designated representative periodically, and up to
one year from the expiration or termination of this Contract, to inspect the same and make
copies thereof as well as to have them audited by auditors appointed by the Client.

3.8 Consultants' Actions requiring Client's prior Approval

The Consultants shall obtain the Client's prior approval in writing before taking any of the
following actions:

a) appointing Personnel (other than the Personnel mentioned in Appendix C) to carry out any
part of the Services in (enter name), including the terms and conditions of such appointment;

b) entering into a subcontract for the performance of any part of the Services, it being
understood (i) that the selection of the Subconsultant and the terms and conditions of the
subcontract shall have been approved in writing by the Client prior to the execution of the
subcontract., and (ii) that the Consultants shall remain fully liable for the performance of the
Services by the Subconsultant and its Personnel pursuant to this Contract;

c) [Note: This paragraph applies only to contracts including design and supervision] taking
any action in the capacity of "Engineer" with respect to civil works executed under the Project
for which action, pursuant to such civil works contract, the written approval of the Client as
"Employer" is required.

3.9 Reporting Obligations

The Consultants shall submit to the Client the reports and documents specified in the Appendix
B hereto, in the form, in the numbers and within the time periods set forth in the Appendix.

3.10 Documents prepared by the Consultants to be the Property of the Client

All plans, drawings, specifications, designs, reports and other documents prepared by the
Consultants in performing the Services shall become and remain the property of the Client, and
the Consultants shall, not later than upon termination or expiration of this Contract, deliver all
such documents to the Client, together with a detailed inventory thereof. The Consultants may
retain a copy of such documents but shall not use them for purposes unrelated to this Contract
without the prior written approval of the Client.
 P a g e | 504

3.11 Equipment and Materials furnished by the Client

Equipment and materials made available to the Consultants by the Client, or purchased by the
Consultants with funds provided by the Client, shall be the property of the Client and shall be
marked accordingly. Upon termination or expiration of this Contract, the Consultants shall
provide to the Client an inventory of such equipment and materials and shall dispose of such
equipment and materials in accordance with the Client's instructions. While in possession of
such equipment and materials, the Consultants shall, at their own cost., adequately protect and
maintain such equipment and materials and shall insure them in an amount equal to their full
replacement value.

4. CONSULTANTS PERSONNEL

4.1 General

The Consultants shall employ and provide such qualified and experienced Personnel as are
required to carry out the Services.

4.2 Description of Personnel

The titles, agreed job descriptions, minimum qualifications and estimated periods of
engagement in the carrying out of the Services of each of the Consultants' Personnel are
described in Appendix C.

4.3 (open)

4.4 Working Hours, Overtime, Leave, etc.

The remuneration of the Consultants shall be deemed to cover any overtime, sick leave or
vacation leave. Any taking of leave by Personnel shall be subject to the prior approval of the
Consultants who shall ensure that absence for leave purposes will not delay the progress and
adequate supervision of the Services.

4.5 Removal and/or Replacement of Personnel

I. Except as the Client may otherwise agree, no changes shall be made in the Personnel. If,
for any reason beyond the reasonable control of the Consultants, it becomes necessary to
replace any of the Personnel, the Consultants shall forthwith provide as a replacement a person
of equivalent or better qualifications.
 P a g e | 505

II. If the Client (i) finds that any of the Personnel has committed serious misconduct or has
been charged with having committed a criminal action, or (ii) has reasonable cause to be
dissatisfied with the performance of any of the Personnel, then the Consultants shall,, at the
Client's written request specifying the grounds therefore, forthwith provide as a replacement a
person with qualifications and experience acceptable to the Client.

III. Any of the Personnel provided as a replacement under Clauses (a) and (b) above,, the rate
of remuneration applicable to such person as well as any reimbursable expenditures (including
expenditures due to the number of eligible dependants) the Consultants may wish to claim as a
result of such replacement, shall be subject to the prior written approval by the Client. The
Consultants shall bear all additional travel and other costs arising out of any removal and/or
replacement. The remuneration to be paid for any of the Personnel provided as a replacement
shall not exceed the remuneration which would have been payable to the Personnel replaced.

4.6 Resident Project Manager

The Consultants shall ensure that at all times during the Consultants' performance of the
Services in the country, a resident project manager, acceptable to the Client, shall take charge
of the performance of such Services.

5. OBLIGATIONS OF THE CLIENT

5.1 Assistance

The Client shall use his best efforts to facilitate the issue by the Government of documents and
permits which are necessary for the prompt and effective implementation of the Services.

5.2 Access to Land

The Client warrants that the Consultants shall have, free of charge, unimpeded access to all
land in the (enter name) in respect of which access is required for the performance of the
Services.

5.3 Change in the Applicable Law

If., after the date of this Contract, there is any change in the Applicable Law which increases or
decreases the cost or reimbursable expenses incurred by the Consultants in performing the
Services, then the remuneration and reimbursable expenses otherwise payable to the
Consultants under this Contract shall be increased or decreased accordingly by agreement
between the Parties hereto.
 P a g e | 506

5.4 Payment

In consideration of the Services performed by the Consultants under this Contract, the Client
shall make to the Consultants such payments and in such manner as is provided by Clause 6 of
this Contract.

6. CONTRACT PRICE AND PAYMENTS

6.1 Contract price

One) The price of the Services to be executed under this Contract amounts to............. as
specified in Appendix D. [Note: specify the nature of this contract: lump sum, man months,
remeasurement or cost reimbursement, percentage of project value, all with/without ceiling
as the case may be]

Two) In addition to the remuneration for Services, the Consultants will be reimbursed for
expenditures as mentioned in Appendix D. [Note: only in remeasurement and cost
reimbursement type contracts including reimbursable expenses]

6.2 Currency of Payment

Except as may be otherwise agreed between the Client and the Consultants:

(a) payments in foreign currency shall be made in US Dollars; and

(b) payments in local currency shall be made in Omani Riyals................;

6.3 Securities

[Note: Some Funding agencies in their Guidelines do not require and normally recommend
against performance guarantees and deduction of retention money. However it may be
decided by the client to apply one of the alternatives as indicated below in particular with
respect to local Consultants.]

[Alternative I] Performance Security

The Consultants shall provide the Client with a Performance Security of 10% of the price of
the Contract as referred to in Clause 6.1 (a) in the form of a bank guarantee to be submitted
within fifteen (15) days following the "effective date". A specimen of the required bank
guarantee for good performance of the Contract is attached hereto as Appendix F.
This guarantee shall be finally released to the Consultants upon completion of the Services in
accordance with Clause 6.5 (d).
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[Alternative II] Retention Money

A retention amounting to 10% percent of the amounts due to the Consultants shall be made by
the Client from each payment (except the advance payment). The retention money shall be
paid by the Client upon completion of the services in accordance with Clause 6.5 (d).

[Alternative III] Penalties

If the Consultants fail to submit to the Client the deliverable reports, drawings and/or designs
or other services as defined in the time schedule mentioned in Appendix B, the Client shall
have the right to impose a penalty on the Consultants at a daily rate of 0.2% of the price of the
delayed part of the Services. The penalties shall be limited to a cumulative amount of I 0% of
the total contract price. In case the delay would exceed a period of 50 days the Client shall
have the right to terminate the contract for default of the Consultant in accordance with Clause
2.9.1 above.

6.4 Valuation of Currencies

Whenever it shall be necessary to determine the equivalent amount in one currency in terms of
another for the purpose of this Contract, the conversion shall be made at the rate commercially
applicable at the time and place of, and to the currency utilized in, the underlying expenditure
or transaction.

6.5 Mode of Billing and Payment

[Note: in case of lump sum price or percentage of project value, payments will be made on the
basis of milestones and the wording below has to be modified accordingly]

Billings and payments in respect of the Services shall be made as follows:

(a) Within 60 days after the Effective Date, the Client shall cause to be paid to the
Consultants advance payments of ..% [5 - 10 ] of the estimated contract amount in foreign and
local currency. The advance payments will be set off by the Client in equal instalments against
the statements for the first .. [Note: MRMEWR policy is recovery in half of the lead lime of the
contract] months of the Services until said payments have been fully set off.

The advance payments will be due after provision by the Consultants to the Client of a bank
guarantee by a bank acceptable to the Client in an amount in foreign currency (for advance
payments in foreign currency) and/or in an amount in local currency (for advance payments in
local currency). Such bank guarantee shall remain effective until the advance payments have
been completely set off as provided above. They shall be in a form as specified in Appendix G
hereto. Such guarantee shall be accompanied by the Consultant’s statement in duplicate
requesting payment of the advance.
 P a g e | 508

(b) [Note: only for remeasurement and cost reimbursement type contracts] As soon as
practicable and not later than fifteen (15) days after the end of each calendar month during the
period of the Services, the Consultants shall submit to the Client, in duplicate, a statement
showing the personnel actually employed at any location and the remuneration due to the
consultants for that month. Separate monthly statements shall be submitted in respect of
amounts payable in foreign currency and in local currency.

(c) The Client shall cause the payment of the Consultants' statements within (..) days of
receipt by the Client of such statements with supporting documents. Only such portion of a
statement that is not satisfactorily supported may be withheld from payment. Should any
discrepancy be found to exist between actual payment and cost authorized to be incurred by the
Consultants, the Client may add or subtract the difference from any subsequent payments.

(d) The final payment under this Clause shall be made only after the final report (as
mentioned in the Terms of Reference included in Appendix B) and a final statement, identified
as such, shall have been submitted by the Consultants and approved as satisfactory by the
Client.

The Services shall be deemed completed and finally accepted by the Client and the final report
and final statement shall be deemed approved by the Client as satisfactory ninety (90) calendar
days after receipt of the final report and final statement by the Client unless the Client, within
such ninety (90)-day period, gives written notice to the Consultants specifying in detail
deficiencies in the Services, the final report or final statement.

The Consultants shall thereupon promptly make any necessary corrections, and upon
completion of such corrections, the foregoing process shall be repeated. Any amount which
the Client has paid or caused to be paid in accordance with this Clause in excess of the
amounts actually payable in accordance with the provisions of this Contract shall be
reimbursed by the Consultants to the Client within thirty (30) days after receipt by the
Consultants of notice thereof.

Any such claim by the Client for reimbursement must be made within twelve (12) calendar
months after receipt by the Client of a final report and a final statement approved by the Client
in accordance with the above.

(e) All payments under this Contract shall be made to the account of the Consultants
with:

(i) For Foreign Currency Payments:

............................
............................
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(ii) For Local Currency Payments:

............................
............................

7. FAIRNESS AND GOOD FAITH

The Parties undertake to act in good faith with respect to each other's rights under this Contract
and to adopt all reasonable measures to ensure the realization of the objectives of this Contract.

8. SETTLEMENT OF DISPUTES

8.1 Amicable Settlement

The Parties shall use their best efforts to settle amicably all disputes arising out of or in
connection with this contract or the interpretation thereof.

8.2 Jurisdiction

In the event the Parties should be unable to arrive at an amicable settlements, the dispute shall
be submitted to the competent courts of the (enter name).

[Note: Foreign Consultants/Contractors will be allowed access to Arbitration in accordance

with the Rules of Arbitration and Conciliation of the International Chamber of Commerce as
follows: "If amicable settlement of differences of opinion cannot be reached all disputes
arising in connection with the present Contract shall be finally settled under the Rules of
Conciliation and Arbitration of the International Chamber of Commerce, Paris, by one or
three arbitrators appointed in accordance with the Rules, who will decide on the basis of this
Contract. Arbitration Proceedings shall take place in Geneva and be conducted in the English
language. The Parties shall conform to the decision of the arbitrators without recourse.”]
 P a g e | 510

IN WITNESS WHEREOF, the Parties hereto have caused this Contract to be signed in their
respective names as of the day and year.

FOR AND ON BEHALF OF THE CLIENT

By (Name:)

Authorized Representative

FOR AND ON BEHALF OF THE CONSULTANTS

By (Name:)

Authorized Representative
 P a g e | 511

SAMPLE JOINT VENTURE AGREEMENT

This Agreement is made the day of , 200__

Between (name and address of first Member)

(hereinafter called “ “)
And (name and address of second Member)

(hereinafter called “ “)

Whereas (name of the Client, and a statement of its intention to proceed with a project, to invite
proposals, and to appoint a Consultant to provide professional services for it, or similar
particulars)

And whereas (names of the Members)

(hereinafter called
"the Members") have agreed to form a joint venture to provide the said professional engineering
services,

Now it is hereby agreed as follows:

1. DEFINITIONS AND INTERPRETATION

The following words and expressions shall have the meanings assigned to them, except where
the context otherwise requires:

1.1.1 "Client" means the person, firm, company or body named in Schedule 1 and none
other, except its legal successors and permitted assigns;

1.1.2 "Project" means the undertaking or proposed or actual works named in Schedule
1 in connection with which the Client intends or has commenced to proceed and requires
professional services;

1.1.3 "Works" means the permanent works to be constructed, including the goods and
equipment to be supplied to the Client, for the achievement of the Project;
 P a g e | 512

1.1.4 "Joint Venture" means the joint venture formed between the Members in accordance
with this Agreement;

1.1.5 "Invitation" means the invitation of the Client to a Member or Members to submit a
proposal for the provision of professional engineering services for the Project;

1.1.6 "Proposal" means the proposal to be prepared and submitted by the Joint Venture in
response to the Invitation;

1.1.7 The Joint Venture Agreement, hereinafter referred to as "this Agreement", comprises the
document entitled Conditions and Terms together with Schedules 1 to 4 attached there to and
such other documents as may be specified in Schedule 1 to form part of this Agreement;

1.1.8 "Services Agreement" means the agreement between the Client and the Joint Venture for
the provision of professional services for the Project;

1.1.9 "Services" means all the services to be performed by the Joint Venture in accordance
with the Proposal or the Services Agreement, as the case may be;

1.1.10 "Country" means the country named in Schedule 1 where the Project is located;

1.1.11 "Members" means the individuals or firms which have agreed to Joint Venture in
connection with the Project;

1.1.12 "Leading Member" means the member which will take the lead in the management of
the Joint Venture's affairs and which will provide the Joint Venture's Representative for liaison
with the Client and, unless otherwise agreed by the Members, the Services Manager for
direction of the conduct of the Services;

1.1.13 Except where otherwise specified, "day" means the period between any one midnight
and the next, and "month" means a period of one month according to the Gregorian calendar
commencing with any day in the month; and

1.1.14 "Document" means written, drawn, typed, printed, magnetized or photographic material,
which is capable of being copied.

1.2.1 Words importing the singular also include the plural and the masculine includes the
feminine and vice-versa where the context requires.
 P a g e | 513

1.2.2 The headings in this Agreement shall not be taken into consideration in its
interpretation.

1.2.3 Unless otherwise stated, all references to clauses are references to clauses numbered in
the Conditions and Terms of this Agreement and not to those in any other document attached
or incorporated by them.

2. JOINT VENTURE

2.1 The Members hereby establish a joint venture being an unincorporated association
under the name of (name of joint venture) or such other name as the Members shall
unanimously agree from time to time (hereinafter called the "Joint Venture")for the purposes
of:
 Preparing and submitting the Proposal to the Client;
 Providing any further information the Client may require or negotiating with the Client on
any matters requiring negotiation in connection with the Proposal;
 Entering into the Services Agreement with the Client, if the Proposal is accepted; and
 Performing all the Services to he undertaken for the Project by the Joint Venture under the
Services Agreement.

2.2 The Members hereby appoint the Leading Member and, pursuant to Clause 3.6, the
representative of the Joint Venture, and confirm the addresses of the Joint Venture and the
addresses of the Members respectively, as stated in Schedule 1.

2.3 Unless otherwise agreed in writing by the Members, this Agreement shall not terminate
if a Member changes its name or is taken over by, or merged with, another company or
partnership provided that that such successor name, company or partnership is an independent
professional firm acceptable to the Client.
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3. PROPOSAL SUBMISSION

3.1 The Members shall make all reasonable endeavours to obtain from the Client the award
of the Services Contract in accordance with the conditions of the Invitation or such conditions
as may subsequently be agreed between the Client and the Joint Venture.

3.2 The preparation and submission of the Proposal shall be undertaken jointly by the
Members. The Leading Member shall co-ordinate the preparation of the Proposal and its
submission to the Client. The Members shall cooperate with the Leading Member. The
Members shall perform with all reasonable skill, care and diligence their respective functions
as allotted by the Policy Committee until the award of the Services Agreement to the Joint
Venture or until the provisions of Clauses 16.1 and 16.3 have been satisfied.

3.3 Once the proposal has been submitted to the Client no changes may be made or
additional information or explanations given without the consent of all the Members until the
Services Agreement is effective.

3.4 The Members shall enter into the Services Agreement, if it is awarded to the Joint
Venture, in accordance with the Proposal, or the Proposal as amended, subsequent to its
submission, by agreement between the Client and the Joint Venture.

3.5 Upon the execution of this Agreement, each of the Members shall grant a Power of
Attorney in favour of a person nominated by it as its Representative, as designated in Schedule
1. The Representatives of each Member will constitute the Policy Committee of the Joint
Venture. Under the Power of Attorney granted him, the Representative of a Member shall
thereby have authority to sign the Proposal and the Services Agreement on behalf of and in the
name of that Member. The signature of its Representative shall bind each Member in respect of
all obligations and liabilities it assumes under this Agreement.

3.6 Subject to directions of the Policy Committee, the Representative of the Leading
Member shall be the representative of the Joint Venture for the purpose of correspondence and
discussion with the Client on matters involving the interpretation of the Services Agreement
and alterations to its terms and to the Services to be performed.
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4. PERFORMANCE OF THE WORK

4.1 The work to be performed under the Services Agreement shall be carried out in
accordance with the terms and conditions of the Services Agreement and this Agreement. In
the event of any inconsistency between the terms of the Services Agreement and this
Agreement regarding the Performance of the work, the Services Agreement shall prevail,
subject to Clauses 4.3 and 4.4 below.

4.2 Each Member shall be responsible for fulfilling the obligations

prescribed in Schedule 3 in accordance with the terms of the Services
Agreement to the satisfaction of the Client, subject to Clauses 4.3. and 4.4
below.

4.3 The apportionment of the Joint Venture's obligations between the Parties in accordance
with Schedule 3 can be amended by agreement between the Members, subject to the consent of
the Client if required by the Services Agreement.

4.4 Any alterations or additions to the Services to be carried out under the Services
Agreement shall be made only with the consent or on the instructions of the Client in
accordance with the Services Agreement. Responsibility for carrying out additional obligations
shall be as agreed between the Members, subject to the consent of the Client if required by the
Services Agreement.

5. LANGUAGE AND LAW

5.1 The following shall be stated in Schedule 1:

 The language in which this Agreement shall be written and interpreted; and
 The country or state, the law of which shall apply to this

6. EXCLUSIVITY

6.1 Unless otherwise agreed by the Members, no member shall engage in any activity
related to the Project, unless otherwise agreed by the Parties, other than as a Member of the
Joint Venture and in accordance with the terms and conditions of this Agreement. Each
Member warrants that its subsidiaries and other firms or individuals over which it has control
will comply with this requirement.

7. EXECUTIVE AUTHORITY

7.1 No Member shall have authority to bind or to make any commitment on behalf of the Joint
Venture or of any other Member unless such authority is expressed in writing by the Members
jointly in regard to the Joint Venture, or by a Member individually in regard to the (other)
Member.
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7.2From the date of this Agreement until the award of the Services Agreement to the Joint
Venture or until this Agreement shall terminate in accordance with its terms, whichever is the
earlier, the following matters shall require the unanimous consent of the Members:
 For the purpose of submitting the Proposal, the respective responsibilities and obligations to
be undertaken by the Members under the Services Agreement, subject to the conditions of the
Invitation;
 For the purpose of submitting the Proposal, the prices and terms and conditions of payment
comprised in the Proposal as applicable to the Joint Venture generally, and to the Members
separately, subject to the conditions of the Invitation; and
 Any communication to, or response to communication from, the Client either written or oral
and any commitment of any kind to the Client or any other party in connection with the
Proposal.

7.3 From the date of the award of the Services Agreement to the Joint Venture, decisions on
the policies of the Joint Venture shall be vested in a Policy Committee comprising the
Representative of each of the Members specified in accordance with Clause 3.5.

7.4Each Member shall provide notice of its Representative on the Policy Committee and shall
give prior notice of any change in such appointments, temporary or otherwise, as may occur
from time to time.

7.5 The representative of the Leading Member on the Policy Committee shall be the Chairman
of the Committee. The Chairman shall ordinarily convene the meetings of the Committee and
may invite others whom he wishes to attend, in order to inform or advise the Representatives,
or to record the proceedings of the Committee.

7.6 In the event of there being disagreement between members of the Policy Committee on
matters not otherwise prescribed in this Agreement the Chairman shall be entitled to use a
casting vote

7.7 Meetings of the Policy Committee shall take place at least as frequently as prescribed
in Schedule 1, unless otherwise agreed by the Members. A Member may convene a meeting of
the Committee at any time by giving at least fourteen days notice in writing to the Members.

7.8 Minutes shall be kept, in the language named in Schedule 1, of all meetings of the Policy
Committee and copies of all such minutes shall be circulated to the Members.
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7.9 The Members respectively agree to act (and agree that their respective representatives on
the Policy Committee shall act) at all times in the best interests of the Joint Venture in taking
any actions relating to the Project and shall use all reasonable endeavours to settle any disputes
arising between them in connection with the Joint Venture.

7.10 Each Member shall appoint a Local Representative in each locality where that Member is
to work. The Local Representative of a Member shall be responsible for the obligations to be
undertaken by it in the said locality and for performance of its responsibilities in that locality
under this Agreement.

7.11 Each Member shall notify the other of its Local Representative and responsibilities
assigned to him and shall give prior notice of any change in such appointments or assignments
of responsibilities as may occur from time

7.12A Services Manager shall be appointed. Unless otherwise agreed by the Members, the
Leading Member shall appoint him and will be entitled to subsequently remove him from that
position and appoint a replacement.

7.13The Services Manager shall manage and supervise the performance of the work under the
Services Agreement in accordance with the directions of the Policy Committee, and shall
report to the Policy Committee on the performance and progress of the work as and when
required by that Committee.

7.14 The Local Representatives shall work under the direction of the Services Manager.
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8. DOCUMENTS

8.1 All documents produced by a Member or the Members in connection with the Project
which are made available to persons other than the Members shall bear the name of the Joint
Venture.
8.2 All documents prepared by either of the Members in connection with the performance of
work under the Services Agreement, and which are submitted to the Client or are to be made
available to third parties, shall be signed by the Services Manager, unless they concern the
interpretation of the Services Agreement or alteration to its terms or Services to be performed.
8.3 Each Member shall have unrestricted access to any work carried out by the Members in
connection with the Project.
8.4 Copies of all documents submitted to the Client by or on behalf of the Joint Venture by a
Member shall be circulated to the Members as soon as reasonably practicable following such
submission.
8.5 During the period of the Agreement and after the termination of this Agreement without
limit in point of time, no Member shall disclose to any person any information which it obtains
through its participation in the Joint Venture (and shall ensure that its employees shall observe
such restrictions) unless the said information:

 Becomes public knowledge;

 Must be disclosed for the proper performance of the services; and
 Is published with the approval of the Joint Venture and, when required under the Services
Agreement, of the Client.

No member shall utilize photographs, or other data describing the Project, in promoting its own
business, without the approval of the other Member.
8.6 Except as may be otherwise provided under the Services Agreement or in Schedule 1, the
copyright in documents produced by a particular Member in connection with the Project is
granted to the Members and each Member hereby licenses the Members to use and reproduce
documents produced by it.

8.7 Except as provided in Clause 8.6, each Member shall indemnify the Members against all
claims, liabilities, damages, costs and expenses sustained as a result of re-using the designs,
drawings and other documents produced for the Project on other projects.
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9.0 PERSONNEL

9.1 Each Member shall assign a sufficient number of its employees to the Project so that the
provisions of this Agreement are complied with and the Services are carried out in accordance
with the Services Agreement. Unless specifically agreed otherwise, the Joint Venture shall
have no employees of its own.

9.2 Each Member shall be responsible for all actions of its staff and shall continue to be
responsible in all ways for its own obligations as employer of its employees.

9.3 Notwithstanding the foregoing provisions of this Clause, each Member may allow any
person, firm or corporation over which it exercises management control to fulfil any of the
obligations for which it is responsible under this Agreement provided that, in such
circumstances, the control of and responsibility for those obligations shall at all times remain
vested in the Member.
9.4 Each Member shall be entitled to invite, subject to the approval of the Client (if required)
and to the agreement of the Members, sub-consultants to carry out any of that Member's
obligations, provided that in such circumstances the control of and responsibility for
undertaking those obligations shall at all times remain vested in the Member in question

9.5 The engagement of Sub-consultants by the Joint Venture shall be subject to the
provisions of Clause 7.
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10. ASSIGNMENT AND THIRD PARTIES

10.1 No Member shall sell, assign, mortgage, pledge, transfer or in any way dispose of any
rights or interests under this Agreement, or its interests in any sums payable by the Client other
than by a charge in favour of its bankers of any monies due or to become due under the
Agreement, without the prior written consent of the Members.

10.2 This Agreement is exclusively for the benefit of the Members and shall not be construed
as conferring, either directly or indirectly, any rights or causes of action upon third parties.

11. SEVERABILITY

11.1 If any part of any provision of this Agreement is found by an arbitrator or Court or other
competent authority to be void or unenforceable, such part of the provision shall be deemed to
be deleted from this Agreement and the remainder of such provision and the remaining
provisions of this Agreement shall continue in full force and effect.

11.2 Notwithstanding the foregoing, the Members shall thereupon negotiate in good faith in
order to agree the terms of a mutually satisfactory provision to be substituted for the part of the
provision found to be void or unenforceable.

12. MEMBER IN DEFAULT

12.1 In the event of insolvency of a Member, the other Member is hereby irrevocably
constituted and appointed to act for it in all matters affecting performance of this Agreement.

12.2 A Member that delays or fails to fulfil its obligations in whole or in part under this
Agreement shall be deemed in default and shall indemnify the other Member in respect of the
consequences.

12.3 A notice in writing from the Client that the performance of obligations under the Services
Agreement is unsatisfactory or that the continued involvement of a Member is no longer
required in whole or in part shall for the purposes of this Clause mean that the Member
concerned is in default unless otherwise agreed by the other Member.

12.4 If the default of a Member shall be such that the Member in question shall be substantially
in breach of its obligations hereunder, the other Member shall be entitled to reassign the work
concerned.

12.5 Any actions taken by the other Member against the defaulting Member pursuant to this
Clause shall be without prejudice to any rights to which he may be entitled at law against the
defaulting Member.
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12.6 If a reassignment of work under the Services Agreement is made in accordance with the
Clause, the defaulting Member shall not obstruct the Member who undertakes the reassigned
work and shall provide him with access to all documents and information necessary for its
proper performance.

12.7 Any sums received by the Joint Venture in payment for the defaulting Member's
obligations already undertaken shall be used to compensate any loss or damage resulting from
the default of that Member. The defaulting Member shall remain responsible for providing
guarantees and bonds relevant to the obligations allocated to that Member prior to such
reassignment until the completion of the Services.
12.8 If all of the defaulting Member's obligations are reassigned in accordance with the
Clause, the other Member shall be entitled to and shall:
 Carry on and complete the performance of the Services Agreement without the participation
of the defaulting Member, its successors, receivers or other legal representatives and continue
to act in accordance with the terms of this Agreement (as amended to take account of the non
participation of the defaulting Member); and
 Retain for the performance of the Services Agreement all equipment and materials
purchased therefore and all assets owned by the Joint Venture at the time of the default by the
defaulting Member until the completion of the Services. The defaulting Member, its
successors, receivers or other legal representatives shall execute and do all deeds, documents
and things necessary to enable the said equipment and materials to continue to be so used and
to enable the Joint Venture to continue without its involvement.

12. 9 Upon completion or earlier termination of the Services Agreement and receipt of all
amounts due there under, the remaining Member shall account to the Member in default which
shall be entitled to receive an amount equal to any sums provided by the defaulting Member
towards any general funds which shall not previously have been expended, plus such Member's
share of any funds of the Joint Venture due to it, reduced by any losses or damage occasioned
by its default.

12.10 In the event that the share of the losses chargeable to the defaulting Member exceeds
any sums provided by the defaulting Member to any general funds and the share of any funds
of the Joint Venture due to it in accordance with the terms of this Agreement, the defaulting
Member shall promptly pay the excess to the
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13. DURATION OF THE AGREEMENT

13.1If it has been jointly established by the Members that the Proposal will not be accepted by
the Client or if it has not been accepted by the Client within the period allowed for acceptance
in accordance with the Proposal or any extension of that period subsequently agreed between
the Client and the Joint Venture, this Agreement shall thereupon terminate forthwith.

13.2If the Proposal is accepted by the Client, this Agreement shall continue to have full force
and effect and shall continue the same when the Services Agreement is entered into with the
Client, until confirmation has been received from the Client that the Services have been
completed, or the Services Agreement has been terminated, and all accounts relating to the
Services between the Joint Venture and the Client and third parties and between the Members
are acknowledged as settled.

13.3 Provided that the terms of this Agreement shall nevertheless continue to bind the
Members to such extent and for so long as may be necessary to give effect to the rights and
obligations specified in the Agreement.

14. LIABILITY

14.1Each of the Members warrants that it will indemnify and keep indemnified the other
Member against all legal liabilities arising out of or in connection with the performance, or
otherwise, of its obligations under this Agreement.

14.2 In the event of it being alleged by one Member in writing that any legal liability is
attributable to the other Member or to the Members, the Members shall use reasonable
endeavors to reach agreement on the liabilities to be borne by each of the Members, and in the
event of the Members failing to so agree, a proper apportionment shall be determined by
arbitration in accordance with Clause 19.
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15. INSURANCE

15.1 Unless otherwise agreed by the members, each Member individually shall make all
reasonable efforts to maintain insurance coverage in the amounts stated in Schedule 1 as
protection against all legal liabilities arising out of or in connection with the performance, or
otherwise, of its obligations under this Agreement.

15.2 Each Member shall make all reasonable efforts to maintain insurance cover in the
amounts stated in Schedule 1 for public/third party liability insurance and any other insurances
necessary to comply with the Services Agreement.

16. PROMOTIONAL AND PROJECT COSTS, PROFITS,

LOSSES AND REMUNERATION

16.1 Each Member shall be reimbursed the costs and expenses incurred by it in connection
with the promotion, preparation, negotiation and submission of the Proposal, as prescribed in
Schedule

16.2 If Schedule 4 does not prescribe the reimbursement of promotional costs and expenses
each Member shall bear the costs and expenses which it incurs.

16.3 All payments to the Members shall be made in accordance with Schedule
4 and the financial policy of the Joint Venture is as set out in that Schedule.
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17. FINANCIAL ADMINISTRATION AND ACCOUNTING

17.1 Each Member shall be responsible for keeping its own accounts in respect of payments
due to it and for its own financial affairs generally. Each Member shall be responsible for
dealing with its own income tax affairs, and its own social security affairs where relevant, and
for accounting accordingly to the relevant authorities.

17.2 The Leading Member shall be responsible for provision of Financial

Administration Services as set out in Schedule 2.

18. GUARANTEES AND BONDS

18.1 Unless otherwise agreed by the Members, the Members severally shall provide
guarantees and bonds in proportion to their respective shares in the Services sufficient for the
total of guarantees and bonds required of the Joint Venture by the Client. The Members
severally shall be responsible for administration and extensions, if required, of the guarantees
and bonds they have provided.

19. ARBITRATION

19.1 Any dispute arising in connection with this Agreement which cannot be resolved by the
Members in accordance with the terms of this Agreement shall be settled by arbitration in
accordance with the Rules stipulated in Schedule 1. The Members agree to comply with the
awards resulting from arbitration and waive their rights to any form of appeal insofar as such
waiver can validly be made.
19.2 Judgement upon the award rendered in any arbitration proceedings may be entered in
any court having jurisdiction by any of the Members or application may be made to such court
for a judicial acceptance of the award and an order for enforcement (as the case may be).
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20. NOTICES

20.1 Notices under the Agreement shall be in writing and will take effect from receipt at the
address stated in Schedule 1. Delivery can be by hand or facsimile message against a written
confirmation of receipt or by registered letter or by telex subsequently confirmed by letter.

20.2 The official address of the Joint Venture to be included on all documentation signed in
the name of the Joint Venture shall be as designated in Schedule 1 hereto or such other address
as shall be agreed from time to time by the Members, subject to the requirements of the
Services Agreement.

21. SOLE AGREEMENT AND VARIATION

21.1This Agreement is as specified in Clause 1. 1.7 and is the sole agreement between the
Members and supersedes any previous agreements between them relating to the matters referred
to herein. Variations and addenda may be made to this Agreement, including the admission of
new members to the Joint Venture, by written instrument which shall be effective upon being
signed by all Members (or on their behalf by their Representatives), provided that if a Member is
considered by the other Member to be in default pursuant to Clause 12 his agreement and
signature is not required.
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In Witness whereof the Members hereto have executed This Agreement in (place of signing
agreement)

the day and year first above written.

Signed on behalf of (name of Member)

Witness to the signature (name of signatory)

Signed

Signed on behalf of (named of member)

Witness to the signature (name of the signatory)

Signed
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SCHEDULE 1

PROJECT AND AGREEMENT

PARTICULARS
Clause 1 The Client is (name and address of Client)
. The Project is (name of Project)
1 The Country where the Project is located is (name
of Country)
Other documents incorporated in this Agreement
are (list, if any)

Clause 2 Leading Member

. The Leading Party of the Joint Venture is (name
2 of Leading Member)

Clause 3 The Representatives of the Members respectively

. for signature of the Proposal and the Services
5 Agreement are as follows:
(name of first Member) (name of Member's
representative)
Clause 5 (name of second shall
This Agreement Member) (nameand
be written of Member's
interpreted
. representative)
in (state language or languages)
1 The Law which is to apply to this Agreement
shall be the Laws of (state
Country)

Clause 7 Meetings of the Policy Committee shall take

. place (state interval i.e., bi-monthly, quarterly
7 etc.)

Clause 7 Minutes shall be kept in (state language).

.
8
Clause 8 Add any special copyright protection required by
. the Members.
6
Clause 1 Insurances shall be in the amount of cover stated
5 below:
Professional liability (state amount).
Public/Third Party Liability Insurance (state
amount).

Clause 1 State the Rules of Arbitration

9
Clause 2 State the addresses of the Members and of the
0 Joint Venture.
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SCHEDULE 2

FINANCIAL ADMINISTRATION
SERVICES
(Clause 17 of the Conditions and Terms)
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SCHEDULE 3

ALLOCATION OF THE OBLIGATIONS

(Clause 4 of the Conditions and Terms)
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SCHEDULE 4

FINANCIAL POLICY
AND REMUNERATION
(Clause 16 of the Conditions and Terms)
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A GUIDE TO BEST PRACTICES ON CONTRACT ADMINISTRATION

These guidelines contain best practices in contract administration that should

be useful tools to projects, programs, and contracting officials while
administering contracts. The covered areas are:

 Roles and Responsibilities of the Contracting Officer's Technical

Representative (COTR);
 Reviewing and Processing Invoices/Vouchers; and
 Contract Closeout.

These practices should not be viewed as mandatory regulatory guidance;

instead they should be viewed as proven techniques that are useful in
performing the contract administration function.

Contract Administration

Contract Administration involves those activities to be followed by owner

contracting officials after a contract has been awarded to determine how well
the owner and the contractor perform to meet the requirements of the contract.

It encompasses all dealings between the owner and the contractor from the
time the contract is awarded until the work has been completed and accepted or
the contract terminated, payment has been made, and disputes have been
resolved. As such, contract administration constitutes that primary part of the
procurement process that assures the owner gets what he paid for.

In contract administration, the focus is on obtaining supplies and services, of

the required quality, on time, and within budget. While the legal requirements
of the contract are determinant of the proper course of action of owner officials
in administering a contract, the exercise of good skills and judgment is often
required in order to protect effectively everyone’s interest.

The specific nature and extent of contract administration varies from contract
to contract. It can range from the minimum acceptance of a delivery and
payment to the contractor to extensive involvement by program, audit, and
procurement officials throughout the contract term.

Factors influencing the degree of contract administration include the nature of

the work, the type of contract, and the experience and commitment of the
involved personnel.
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Contract administration starts with developing clear, concise performance

based statements of work to the extent possible, and preparing a contract
administration plan that cost effectively measures the contractor's performance
and provides documentation to pay accordingly.

Post award orientation, either by conference, letter or some other form of

communication, should be the beginning of the actual process of good contract
administration. This communication process can be a useful tool that helps
owner and contractor achieve a clear and mutual understanding of the contract
requirements, helps the contractor understand the roles and responsibilities of
the owner officials who will administer the contract, and reduces future
problems.

It is helpful to have a pre-meeting with applicable program and contracting

officials prior to the post award orientation conference so that there is a clear
understanding of their specific responsibilities and restrictions in administering
the contract.

Items that should be discussed at the pre-meeting include such things as the
authority of owner personnel who will administer the contract, quality control
and testing, the specific contract deliverable requirements, special contract
provisions, the owner’s procedures for monitoring and measuring performance,
contractor billing, invoices approval, and payment procedures.

Where appropriate, an alternative dispute resolution (ADR) technique known

as "partnering" should be discussed with the contractor to help avoid future
contract administration problems. Partnering is a technique to prevent disputes
from occurring. It involves owner and contractor management staff mutually
developing a "plan for success," usually with the assistance of a neutral
facilitator. The facilitator helps the parties establish a non-adversarial
relationship, define mutual goals, and identify the major obstacles to achieve
success at project execution.

Potential sources of conflict are identified, and the parties seek cooperative
ways to resolve any disputes that may arise during contract performance. The
process results in the parties developing a partnership charter, which serves as
a roadmap for contract success. Many agencies have successfully used
partnering on construction projects and are now beginning to apply these
principles in the automated data processing/information resources management
area.

Good contract administration assures that the end users are satisfied with the
product or service being obtained under the contract. One way to accomplish
customer satisfaction is to obtain input directly from the customers through the
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use of customer satisfaction surveys. These surveys help to improve contractor

performance because the feedback can be used to notify the contractor when
specified aspects of the contract are not being met.

In addition, the contracting and program officials can use the information as a
source of past performance information on subsequent contract awards.
Customer satisfaction surveys also help to improve communications between
the procurement, program, and contractor personnel.

Overview of the Contract Administration

Several weaknesses have been identified in contract administration practices

used by contracting agencies. The principal problem is that contracting
officials often allocate more time to awarding contracts rather than
administering existing contracts. This often leads to problems in contractor
performance, cost overruns, and delays in receiving goods and services.

Several other deficiencies have been noted such as unclear roles and
responsibilities of the contracting officer's technical representatives (COTR),
excessive backlog in contract closeout and costs audits, improperly trained
officials performing contract oversight, unclear statements of work that hinder
contractor performance, and inadequate guidance on invoice/voucher
processing and contract closeout.

The primary objective of the contract administration project is to establish best

practices that agencies can use to improve contract administration to assure
responsiveness to customers and best value to project owners. Improving
contract administration practices will help to achieve excellence in contractor
performance so that the project owners receive quality goods and services on
time, and within budget.

Best practices are defined as techniques that contracting agencies may use to
help detect and avoid problems in the acquisition, management, and
administration of contracts. Best practices are useful techniques gained from
practical experience that may be used to improve the procurement process.

These guidelines provide best practices in three areas of contract

administration:

 Clarifying the COTR's roles and responsibilities;

 Improving methods of processing contract vouchers and invoices; and
 Improving procedures for closing contracts.
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Matrixes have been developed stating the concerns surrounding these three
areas, with suggested best practices that can be used to help address them.

Contracting Officer’s Technical Representative (COTR)

Project owners are becoming increasingly aware of the importance of proper

contract administration in ensuring the maximum return on contract dollars.
The COTR plays a critical role in affecting the outcome of the contract
administration process.

The technical administration of contracts is an essential activity. It is absolutely

necessary that those entrusted with the duty of ensuring the owner gets all that
it has bargained for, be competent in the practices of contract administration
and aware of and faithful to the contents and limits of their delegation of
authority from the contracting officer.

The COTR functions as the "eyes and ears" of the contracting officer,
monitoring technical performance and reporting any potential or actual
problems to the contracting officer. It is imperative that the COTR stay in close
communication with the contracting officer, relaying any information that may
affect contractual commitments and requirements.

The COTR's contract administration duties can be simple or complex and time-
consuming, depending on the type of contract, contractor performance, and the
nature of the work. Minimizing the use of cost-reimbursement contracts and
relying more on fixed price performance based contracts should reduce the
amount of resources and time devoted to contract administration.

For example, a fixed-price contract requires less surveillance by the COTR

than a cost-reimbursement contract with its technical surveillance and auditing
of cost-requirements.

Agencies and departments have many different phrases to describe the COTR.
Other titles used are: Contracting Officer Representative (COR), Owner
Technical Representative (OTR), and Owner Technical Evaluator (OTE). For
purposes of these guidelines, COTR is being used, as it is the most common
title for this function.
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CONTRACTING OFFICER'S TECHNICAL REPRESENTATIVE

CONCERNS BEST PRACTICES

Lack of training Establishing a COTR training and

on COTR duties. certification program is a well
balanced approach that prepares the
COTR to perform the job and also
strengthens contract administration.

Many agencies have a mandatory

COTR training program. COTRs
should attend a basic COTR course;
procurement ethics training;
refresher COTR training; and
Procurement Integrity training.

COTRs are encouraged to keep

pace with changes in procurement
by completing a minimum of eight
additional hours of contract
administration training every three
years, preferably through a
refresher COTR training course.

Courses in service contracting and

preparing statements of work are
very helpful for COTRs who
handle complex contracts and
service contracts; it helps them in
the preparation of the contract
administration plan.

In addition to the general training

on COTR duties, many agencies
have their contracting officers and
the COTR review the contract in
detail and concur on the specific
oversight approach for the contract.

To emphasize the importance of the

COTR role, some agencies conduct
Executive Seminars to train the
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CONCERNS BEST PRACTICES

COTR's supervisors.

An example of a unique COTR

certification program is one that
correlates the amount of training to
the dollar value and complexity of
contracts:
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CONCERNS BEST PRACTICES

Lack of a well- It is essential that the program

defined personnel and the procurement
relationship office work as a team. In many
between the agencies, this is accomplished by
contracting contracting officers attending
officer and the training with the COTR and
COTR. discussing relevant questions and
concerns about the contract. In
other agencies, the teamwork
concept is enhanced by
designating the COTR early in
the process which helps the
COTR to become familiar with
the program requirements and
assist the contracting officer in
developing the contract
administration plan and the
statement of work.

In an effort to help the

contracting process work better
and foster teamwork, the COTR
should ensure that the contracting
officer understands the program
mission. In some cases, the
COTR could invite the
contracting officer to accompany
him/her to meetings, conferences,
and inspections so that the
contracting officer can become
familiar with the program
requirements. Also this affords
other field program personnel an
opportunity to meet the
contracting officer.

The COTR should furnish to the

contracting officer a copy of
government-contractor
conference reports and
correspondence in order to keep
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CONCERNS BEST PRACTICES

the contracting officer up-to-date
on contractor performance.

The COTR should be identified

as the primary focal point for the
customers to call concerning
contractor performance. The
COTR should also provide the
customers with a copy of contract
requirements.

An example of a relationship that

may exist between the
procurement office and the
program office is where the
contracting officer works for and
reports directly to the program
manager. The program manager
has full authority for fulfilling the
requirements of the contract with
the client.

The contracting officer may be

viewed as a facilitator to ensure
that good contracting principles
are adhered to while achieving
the program's goals.

Undefined COTRs are responsible for

limitations of understanding the contract terms
authority. and conditions and knowing the
scope and limitations of their
authority. COTRs are encouraged
to contact the contracting officer
for guidance if they are unclear
about their authority or any
aspects of the contract.
 P a g e | 539

CONCERNS BEST PRACTICES

Some agencies specify in Section
G, Contract Administration, of
the contract, information on the
COTR's limitation of authority.

As a result of lessons learned

from contracting officials,
COTRs should avoid the
following:

Awarding, agreeing to,

modifying, increasing the scope
and dollar value of, or signing
any contract.

Making commitments or
promises (oral or written) to any
contractor.

Issuing instructions (oral or

written) to a contractor to start or
stop work.

Directing changes (oral or

written).

Authorizing delivery or
disposition of owner-furnished
property.

Obligating the owner.

Granting deviations from or

waiving any of the terms and
conditions of the contract.

Changing the period of

performance.

Authorizing subcontracting or the

use of consultants.
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CONCERNS BEST PRACTICES

Authorizing the use of overtime.

Executing a contract on behalf of

the owner.

Lack of Consider giving an incentive

incentives. award to the COTR of the year
based on such criteria as the
amount of savings achieved,
quality, timeliness, minimum
technical contract changes, and
customer satisfaction.

Some agencies cover COTR

duties in the COTR position
description and have contract
administration as a critical job
element in the COTR's
performance evaluation. This is
essential for COTRs who handle
large, complex contracts,
especially cost-reimbursement
ones, that requires extensive
surveillance.

An agency COTR newsletter is

one mechanism for promoting the
accomplishments of the COTR,
as well as providing information
on changes in procurement laws
and legislation.
 P a g e | 541

VOUCHER / INVOICE REVIEW, APPROVAL, AND PROCESSING

Voucher processing is just as important as any other aspect of contract

administration. Payment to the contractor for the supplies and services
delivered is the owner's obligation under the contract. The project owner
expects the contractor to meet all contract requirements for quality, quantity
and timeliness. The contractor expects no less of the owner in meeting its
obligation to timely, accurate payment for supplies and services received. A
plan or process for quickly and efficiently meeting this obligation is as
essential as the COTR's oversight monitoring plan.

Therefore, it is incumbent upon program, procurement, and finance officials to

understand clearly their roles and responsibilities related to reviewing and
processing vouchers. This will ensure that payment is only made to contractors
who perform in accordance with contract terms and conditions. It is essential
that these tasks are discussed with the contractor and COTR during the post
award orientation conference. An important aspect of voucher review,
approval, and processing is good communication between the COTR,
contracting officer, and finance official to ensure that payment is made on
time.

For purposes of this guidebook, the words "vouchers" and "invoices" are used
interchangeably.

VOUCHER PROCESSING

CONCERNS BEST PRACTICES

Unclear roles and Although recommendation for
responsibilities of approval is often obtained from
procurement, the COTR, authority to approve
program, and or disapprove payment of
finance officials vouchers and invoices is the
with regard to responsibility of the contracting
review and officer.
approval of
contractor invoices Creating a good working
and vouchers. relationship between the
contracting officer, the financial
officer, and the COTR is vital for
the voucher review and approval
process. This, in turn, helps
agencies to comply with the
 P a g e | 542

VOUCHER PROCESSING

CONCERNS BEST PRACTICES

Prompt Payment Act.

Reviewing the first voucher with

the contractor about format and
level of detail makes the second
and subsequent vouchers easier to
review and process.

Unclear roles and

responsibilities of
procurement,
program, and
finance officials COTRs are in the best position to
with regard to assess the reasonableness of costs
review and and expenditures on vouchers and
approval of invoices.
contractor invoices
and vouchers. COTRs must always remember
that payment to a contractor
implies work is progressing
according to the contract;
therefore, COTRs must be
assured that the owner is getting
what it is paying for.

The COTR's recommended

approval of a voucher implies
that to the best of the COTR's
knowledge, the nature, type, and
quantity of effort or materials
being expended are in general
accord with the progress of work
under the contract.

COTRs provide support to the

 P a g e | 543

VOUCHER PROCESSING

CONCERNS BEST PRACTICES

contracting officer and ensure
that payments are made to
contractors that perform
according to contract terms and
conditions by monitoring
contractor's performance through
review of monthly reports, onsite
visits, and surveillance reviews.

It may be helpful for agencies to

have procedures requiring the
COTR to certify on the invoices
that supplies and services have
been received and accepted.

In some cases, the contracting

officer may designate a resident
auditor as the contracting officer's
representative for reviewing and
approving vouchers under cost-
reimbursement contracts.

Contracting and financial

officials should always check the
mathematical accuracy of the
voucher to avoid any
overpayment to the contractor.

Financial officials should ensure

that a copy of each paid voucher
is returned to the contracting
office for inclusion in the official
contract file.
 P a g e | 544

VOUCHER PROCESSING

CONCERNS BEST PRACTICES

Inconsistent More in depth review of vouchers

review and under cost reimbursement
approval by contracts is needed to ensure that
contracting costs are not being incurred
officials of prematurely and relate to progress
vouchers for cost under the contract.
reimbursement
contracts prior to Although agencies may have
payment. different procedures to review
and approve vouchers, some
agencies have successfully
avoided problems by having
contracting officials review each
voucher.

Insufficient When reviewing vouchers under

guidance to cost reimbursement contracts,
Contracting COTRs should check the voucher
Officer's Technical date against the contract
Representatives performance period to ensure that
(COTRs) on how costs are being billed for the
to conduct proper timeframe, and compare
voucher reviews. the contractor's billing rates
against the contract rates to
ensure that indirect costs are
being billed properly. These
measures, along with monitoring
the contractor's performance,
helps the COTR determine if
claimed costs are reasonable for
the period covered by the
voucher.

In addition, comparing the

contractor's production report
with any information gathered
through monitoring the
 P a g e | 545

VOUCHER PROCESSING

CONCERNS BEST PRACTICES

contractor's performance gives
the COTR some indication of the
contractor's workload. If the
contractor reports the same
workload for two different tasks,
this is an indication to the COTR
that something maybe wrong with
the invoice and it should be
discussed with the contractor.

When reviewing vouchers under

cost reimbursement contracts, the
COTR should review the
contractor's time cards, sign-in-
sheets, and overtime records to
help assess the reasonableness of
direct labor costs.

Maintaining monthly reports or

spreadsheets on costs incurred
against the contract amount helps
the COTR monitor the
contractor's expenditures under
the contract.

A checklist or some other

voucher review form that
includes the major cost categories
(labor, travel, supplies, other
direct costs, subcontract costs)
may be a useful tool in reviewing
vouchers to determine the
reasonableness of the contractor's
claimed costs. The checklist helps
the reviewing official remember
to check all cost categories before
recommending approval of the
voucher for payment.

VOUCHER PROCESSING
CONCERNS
No assessment of
reasonableness of
direct costs when
approving
vouchers under
cost-
reimbursement
contracts. (Only
technical progress
and product or
service quality are
reviewed).
No verification
that approved
indirect cost rates
are being used.
P a g e | 546
BEST PRACTICES
Some agencies conduct a
financial management review of
the contractor's current invoices
during contract performance. The
review is conducted at the
contractor's location. The review
helps the agency determine if the
contractor's accounting and
billing systems, and internal
control policies and procedures
are adequate to support costs
claimed on the invoice. The
review, which may be done by in-
house officials with audit
experience results in timely
recovery of overpayments and
lost interest, settle cost
allowability issues, and other
matters associated with the
contractor's invoice. The review
can fill the gap between the initial
invoice review and the contract
audit.
If there are large cost-
reimbursement contracts where a
resident auditor is at the
contractor's location,
consideration should be given to
sending a copy of the voucher
directly to the main auditing
office for review prior to
payment. This reduces the burden
on the contracting officer and
helps detect unallowable costs.
Subsequent review by the COTR
helps the contracting officer
determine if contractor
performance is commensurate
with the amount shown on the
voucher.
 P a g e | 547

VOUCHER PROCESSING

CONCERNS BEST PRACTICES

Insufficient Notify contractor of defects in
policies and invoice, i.e., an "improper
procedures on invoice," within seven (7) days
voucher after receipt.
submission and
approval. Authorization to pay may be
indicated by an approval stamp
on the reverse of the original
voucher.

Insufficient Including detailed billing

information on the instructions in the contract
voucher for provides information to the
thorough desk contractor on how to complete
review of claimed vouchers and invoices properly.
costs to determine The instructions could provide
allowability, samples of how a voucher should
allocability, and be prepared and submitted to the
reasonableness. government for payment.

When appropriate, it may be

helpful to define in the contract
the distinction between a
completion voucher (cumulative
claim and reconciliation) and a
final voucher so that the
contractor can provide correct
information on the voucher.

If the contractor provides its final

settlement of claimed costs on the
completion voucher, that voucher
should be considered the final
 P a g e | 548

VOUCHER PROCESSING

CONCERNS BEST PRACTICES

voucher.
Delays in Designating alternate COTRs and
processing contracting officers that have
vouchers. authority to review and approve
contractor vouchers and invoices
may alleviate delays in the
approval process.

Performance measurements may

be useful tools to help the finance
office determine how well the
agency is doing in reviewing and
processing invoices/vouchers for
payment in order to comply with
the Prompt Payment Act.

Prompt payment performance

standards may help detect
weaknesses in the process and
thus improve business
relationships with the contractors,
and reduce costs to the
government.

Tracking such performance data

as the amount and number of
penalty payments, the reason,
number and amount of discounts
taken, the number and amount of
lost discounts, and late payments
provide valuable information to
the finance office.

Established standards, i.e., the

number of days for review and
approval by the contracting
officer and COTR, helps to
process vouchers in a timely
 P a g e | 549

VOUCHER PROCESSING

CONCERNS BEST PRACTICES

manner.

If timely payment of vouchers is

a problem, a dedicated person in
the contracting office (normally a
clerical position) may be needed
to log vouchers in and out, check
figures for accuracy, and assist
the contracting officer, the
financial officer and COTR in
timely processing of vouchers
and invoices.

Insufficient Maintaining a voucher payment

documentation, log, either manually or
record keeping, computerized, in the contract file
and tracking of helps to track the contractor's
invoices and claimed costs and fee (if
vouchers. applicable) against contract costs
and fee.

Maintaining a copy of each paid

voucher in the official contract
file helps to ensure proper
accountability. Establishing a
separate post office box for
receipt of vouchers may help to
avoid delays in processing.

Automated invoice tracking

systems may help to track
vouchers and provide information
to show if they are delinquent for
payment because standards were
not met. Automated invoice
tracking systems may provide
such reports as: voucher status by
specialist, overdue vouchers,
 P a g e | 550

VOUCHER PROCESSING

CONCERNS BEST PRACTICES

vouchers that have been rejected,
and voucher history.

Contractor support may be used,

if necessary, to operate the
automated invoice tracking
system. Care should be taken to
ensure that the contractor does
not make decisions about
vouchers that should be made by
contracting officials. Sending a
list of names of authorized
persons to sign invoices and
vouchers on each contract to the
finance office with periodic
updates avoids delays in paying
vouchers.
 P a g e | 551

CONTRACT CLOSEOUT

Contract closeout begins when the contract has been physically complete, i.e.,
all services have been performed and products delivered. Closeout is
completed when all administrative actions have been completed, all disputes
settled, and final payment has been made.

The process can be simple or complex depending on the contract type for cost-
reimbursement contracts. This process requires close coordination between the
contracting office, the finance office, the program office, and the contractor.
Contract closeout is an important aspect of contract administration.

The contract audit process also affects contract closeout on cost-reimbursement

contracts. Contract audits are required to determine the reasonableness,
allowability, and allocability of costs incurred under cost reimbursement
contracts. Although there is a pre-award audit of the contractor's proposal,
there is a cost-incurred audit of the contractor's claim of incurred costs and a
close out audit to reconcile the contractor's final claim under the contract to
incurred costs previously audited. When there is a delay in completing the cost-
incurred and closeout audits, contracting officials often can not complete the
closeout process for many cost reimbursement contracts. Although the FAR
does allows agencies to use quick closeout procedures (desk reviews) to close
some cost reimbursement contracts without a closeout audit, inconsistencies
have been noted in the use of the procedures.

It is important that contracting officials have a good working relationship with

the agency's auditors and the cognizant audit agency to accomplish contract
closeout under cost-reimbursement contracts.

CONTRACT CLOSEOUT BEST PRACTICES

CONCERNS BEST PRACTICES

Lack of Establishing a separate closeout

management function within the contracting
attention to contract organization emphasizes the
closeout. importance of contract closeout.

The best time to concentrate on

contract closeout is during the
October to February timeframe
when the contract placements
 P a g e | 552

CONTRACT CLOSEOUT BEST PRACTICES

CONCERNS BEST PRACTICES
workload may be less.

Using contractor support may be

an efficient way to accomplish
contract closeout when in-house
resources are limited.

Such administrative functions as

creating the closeout file,
soliciting required closeout forms
from internal organizations,
obtaining the contractor's release
are duties that can be performed
through contractor support as long
as the forms are executed and
approved by the contracting
official.

Although the contract specialist

continues to work with the
contractor through physical
completion under "cradle-to-
grave" contract administration,
this does not prohibit a separate
group from performing the
closeout function.

For civilian agencies entering into

agreements with the Defense
Contract Management Command
to perform contract administration
and contract closeout functions
may be useful when in-house
resources are limited.

Rewarding employees through

incentive awards (i.e., on-the-spot
cash awards) for the highest
number of closeouts completed is
 P a g e | 553

CONTRACT CLOSEOUT BEST PRACTICES

CONCERNS BEST PRACTICES
a good motivation factor.

Using measurements standards

such as those prescribed in the
FAR for closing various types of
contracts helps to keep the focus
on the closeout effort.

Cross-training in contract closeout

is good for contract specialists as
it helps them to understand the
importance of writing good
contracts.
Poor Management Consider using a management
Information information system with
Systems to monitor milestones to track contract
the contract closeout from physical
closeout process. completion through final
payment.

Integrating the closeout system

with a word processing capability
allows for automatic generation of
closeouts letters which speeds up
the closeout process.

Using contractor support for data

entry services may be an
alternative when in-house
resources are limited.

Poor coordination It may be helpful to notify the IG

between contracting and the cognizant audit agency
activity, inspectors whenever a cost-reimbursement
general (IG), and contract is awarded that requires
cognizant audit an incurred cost or indirect cost
agency. rate proposal audit. Providing that
information at the time of award
 P a g e | 554

CONTRACT CLOSEOUT BEST PRACTICES

CONCERNS BEST PRACTICES
helps the audit agency program
future requirements into its
workload projections.

Forecasting audit needs and

communicating those needs to the
IG and the cognizant audit agency
helps to improve working
relationships. Developing an
information management system
may be a useful tool to facilitate
that process.

Prioritizing audit requirements

and communicating these
requirements to the IG and the
cognizant audit agency helps in
projecting the audit workload.

Specifically stating in the audit

request any special information
that should be included in the
audit report makes the report
more useful and improves
working relationships between the
contracting office, the IG's office,
and the cognizant audit agency.

Using a team approach consisting

of contracting officials and audit
staff to determine those
contractors that should be audited
helps to forecast audit
requirements better.

Sharing such information with the

cognizant audit agency as a listing
of prime and subcontracts
awarded that are subject to
defective pricing reviews or
contracts physically completed
 P a g e | 555

CONTRACT CLOSEOUT BEST PRACTICES

CONCERNS BEST PRACTICES
but not closed over three years
helps the auditors better to define
the audit backlog, determine audit
resources, and prioritize
contractor locations for audits.

Poor coordination Subsequently, requesting the

between contracting cognizant audit agency to provide
activity, inspectors such information as the directory
general (IG), and of for-profit contractors with the
cognizant audit audit office responsible for the
agency. contractor's audit and those
(CONTINUED) contractors that are late in
submitting their indirect cost rate
proposals or submitted inadequate
proposals helps the contracting
office project its closeout
workload.
Large backlog of Using quick closeout procedures
unscheduled audits. to the extent practicable helps to
reduce the audit workload. When
a determination can be made that
there is no evidence of fraud or
waste, the contractor's
performance is good, and there is
no history of unallowable costs,
then quick closeout procedures
may be appropriate.

Performing risk assessments to

determine contractors that should
be audited will help to better
manage the audit workload.
 P a g e | 556

CONTRACT CLOSEOUT BEST PRACTICES

CONCERNS BEST PRACTICES
Using more fixed price contracts
helps to reduce the requirements
for contract audits.

Encouraging contractors to submit

their final vouchers in a timely
manner avoids delays in
requesting the final closeout audit
under cost reimbursement
contracts.

Using rate checks (labor and

indirect cost rate) to the maximum
extent possible instead of full
blown audits when such audits
would not add value helps to
reduce audit backlog.
Noncompliance Using the post award orientation
with FAR provision session to educate the contractors
for submitting (in particular small business
Indirect Cost Rate firms) on the requirements for
(ICR) Proposals by contract closeouts and the need to
some contractors submit ICRs in a timely manner
delays the audit should help make the closeout
process. process easier.

Avoiding Disputes In construction, claims sometimes

in Contract cause closeout problems. An
Closeout. alternative dispute resolution
technique known as "partnering"
should be considered. Creating a
partnership agreement with the
contractor helps to avoid disputes.
Having the partnership agreement
signed by all parties -- the
contracting officer, COTR, and
the contractor -- creates a buy-in
to the overall goal: "Completion
 P a g e | 557

CONTRACT CLOSEOUT BEST PRACTICES

CONCERNS BEST PRACTICES
on time, within budget, and
without claims."

Lack of a specific Using specific dollar thresholds

dollar threshold for for quick closeouts may be
using quick closeout practicable so long as the
procedures. government's interests are
protected, low risk is involved,
and indirect rates can be verified.

Knowing the contractor's history

of incurred costs, billings, and
performance are additional factors
to be considered when
establishing thresholds for using
quick closeouts.

Establishing a good working

relationship with the finance
office helps in the closeout
process. Getting the finance office
to provide a listing of contracts
where money will be lost if final
settlement does not occur helps to
target attention on those contracts
that may be closed through quick
closeout procedures.
Closeout Always use a checklist and
documentation. include it in the contract file when
closing contracts. This helps to
assure that all actions have been
completed.
 P a g e | 558

CONCLUSIONS

A good contract administration program is essential to improving contractor

performance. The best practices that have been included in this guidebook are a
first step at providing some practical guidance that should help to improve the
contract administration process.

We believe that program and contracting officials need to realize the

importance of good contract administration. Convening a forum to discuss
these best practices may help agency components focus more attention to them
and begin using them to help resolve problems they may encounter. Structuring
a contracting administration program by the type of activity, e.g., contract
monitoring, voucher review, contractor performance evaluation, using various
levels (Level 1 - proactive, level 2 - active, and level 3 - reactive) may also
help to better allocate contract administration resources so that these best
practices can be useful.

In addition, giving an annual contract administration award to recognize

individual and group accomplishments in contract administration highlights its
important to the procurement process. Some agencies even include contract
administration as a performance goal of contracting officials as an incentive for
them to do a good job in this area.
 P a g e | 559

PROJECT MANAGEMENT
MANUAL
PART 6

CONTRACTING SKILLS
2014
 P a g e | 560

Table of Contents Part 6

Subject Page

Owner Assurance of Performance 561

Warranties and Guarantees 576

Competitive Bidding 583

Unbalanced Bids 594

Contracting Pitfalls 614

Changes in the Scope of Work 620

Constructive changes 626

Pricing Change Work 632

Emerging forms of Contracting 638

Risk of Construction Management 641

Design/Build 647

Turn-Key Developments 649

 P a g e | 561

Owner Assurance of Performance

The primary concern of the owner of any project, large or small, is to see that
the project is completed properly. Owners are all too familiar with tales of
shoddy workmanship, unexpected costs, and contractors that walk off the job.
The construction process is complex and capital-intensive. The successful
completion of a project is never a foregone conclusion.

In order to improve the odds that the contractor will perform as agreed,
construction contracts typically contain a number of provisions designed to
give the owner some leverage. This chapter will focus on the most important of
these provisions: performance bonds, termination clauses, payment provisions,
and warranties and guarantees. Each of these provisions is designed to give the
project owner some assurance that it will be protected from an unscrupulous or
incompetent contractor.

PERFORMANCE BONDS

A performance bond is a legal instrument whereby a third party, usually a cor-

porate surety, guarantees the contractor’s performance to the project owner.
Performance bonds provide a significant benefit in terms of assurance of per-
formance, although the project owner must directly or indirectly pay the pre-
mium on the bond.

Nature of the Relationship

A performance bond involves a three-way arrangement whereby a bonding

company (the “surety”) agrees to issue bonds on behalf of a contractor (the
“principal”) on various construction contracts in exchange for a premium
computed as a percentage of the face amount of the bond. The contractor in
turn agrees to indemnify, or reimburse, the surety if the surety is forced to pay
out on any bond due to the contractor’s default. This indemnification agree-
ment usually includes a pledge of assets by the contractor.

Performance bonds are issued on a project by project basis. Each bond names
the specific project owner, who is the “obligee,” or beneficiary of the bond.
The bond states that if the contractor/principal fails to fully complete the
project in compliance with the terms of the contract and the plans and speci-
fications, then the bonding company/surety will complete the project for the
 P a g e | 562

owner/obligee at its expense. The surety’s obligation is limited to the “face

amount” stated on the bond. Regardless of how the surety elects to complete
the project, it cannot be required to spend more than the face amount of the
bond. This is the limit of the risk it has agreed to assume in exchange for the
premium.

On public construction projects, the bond is usually required to be in the

amount of the full contract price. In some ways this is overkill because once a
project gets underway, the cost of completion starts to decline. The project
owner is indirectly paying for more protection than it needs in the event of a
contractor default. For this reason, privately financed projects sometimes re-
quire a performance bond only for 60 or 80 percent of the contract price.

There is resistance to this arrangement among corporate sureties, however,

who feel that as a practical matter they have the same amount of risk but less
premium. Some sureties will not write bonds for less than the full contract
amount. Sometimes a performance bond will name two or more obligees.
These bonds are known as “dual obligee” bonds. Typically, the obligees are the
project owner and the construction lender whose loan to the owner is secured
by the project itself. The lender in this situation wants the same assurance of
contractor performance as the owner.

CASE STUDY

Contractor furnished a performance bond naming Owner of public project as

obligee. After completion of the work and acceptance of the work, Owner
discovered latent deficiencies in the work.

Owner sued Surety on the performance bond, arguing that bond served as a
guarantee of faithful performance and the defects in the work were the result of
Contractor’s failure to fully and faithfully perform.

The District Court of Appeal of Florida agreed with Owner and allowed
recovery against Surety. In so doing, the Court disagreed with an earlier
Florida case which had held that a performance bond guarantees only the
physical completion of the project and the bond obligation ended upon the
Owner’s acceptance of the project.

School Board of Pinellas County v. St. Paul Fire & Marine Insurance Co.. 440 So.2d 872 (FIa.App.
1984).
 P a g e | 563

Advantages for the Owner

The primary advantage of a performance bond has already been stated. If the
construction contractor walks off the job, goes bankrupt, or otherwise fails to
faithfully complete the project, the owner has a corporate institution, presum-
ably solvent, it can look to complete the work. There is a second, more subtle,
advantage as well.

Corporate sureties will not agree to bond just any contractor who walks
through the door. In order to keep their level of risk reasonable, sureties try
very hard to write bonds only for contractors that will complete their projects.

As a result, contractors must undergo a thorough evaluation by sureties before

sureties agree to issue performance bonds. This evaluation focuses on the past
history of the contractor and its principals. Do they have a history of
successfully completing projects of this nature? Do they have the technical and
administrative expertise that will be required for successful completion’? And
finally, does the company have access to sufficient capital to complete the
project’?

This extensive evaluation of a contractor’s history, abilities, and financial

situation can only benefit a project owner. By requiring a contractor to furnish
a performance bond, the Owner is getting a surety to prequalify the contractor.
The owner knows that at least one reputable corporate surety has sufficient
faith in the contractor to take that contractor on as a risk.

Sureties frequently possess the resources and knowledge to investigate a con-

tractor’s financial and technical situation in a way that most project owners
could not. They are familiar with the contractor’s overall situation. For
instance, each contractor has a specific bonding limit based on the contractor’s
financial resources. The bonding company will not allow the total amount of
outstanding performance bonds to exceed that limit. It would be difficult for
the average project owner to accomplish this type of financial evaluation
independently.

If a project owner elects to award a contract to an unbonded contractor, the

burden of evaluating the contractor falls squarely on the owner. Most owners
are unable or unwilling to carry out this function. And the ramifications of an
 P a g e | 564

error in judgment will be severe if the owner ends up with an unbonded con-
tractor who defaults on the contract.

What Triggers the Surety’s Obligation?

The surety’s obligation on the bond arises only if the contractor/principal fails
to fulfill its obligations under the construction contract. This failure is
commonly referred to as a “default”.

In order for the contractor to be considered in default, its shortcomings under

the contract must be sufficiently serious to be considered a breach of contract.
In other words, the project owner cannot expect the surety to get involved
every time the contractor’s workmanship leaves something to be desired.

Usually, an owner who is experiencing persistent problems with a contractor

will first threaten to notify the surety and then, if necessary, actually put the
surety on notice that the contractor is not performing as required by the
contract. When a surety receives such a notice, it contacts the contractor and
prods the contractor to improve its performance. Contractors are very respon-
sive to this type of pressure, as their business depends on maintaining a good
working relationship with a corporate bonding company. If a contractor cannot
get bonded, it is precluded from bidding on a great deal of work.

As a practical matter, a surety will work with a contractor to the maximum

extent possible to see that the contractor lives up to the contractual obligations
guaranteed by the bond. This is in everyone’s best interest. It usually requires a
catastrophic occurrence, such as a contractor’s abandonment of the work,
before the surety will formally declare the contractor to be in default and get
actively involved in the completion of the project.

In the event of a contractor’s default, the surety has three options. The first is to
provide the contractor with a line of credit in order to give it the capital
necessary to complete the contract. This is the surety’s preferred course of
action, but it is feasible only if the contractor’s problems are strictly financial.
Frequently, by the time a contractor has defaulted on a contract, the surety has
lost confidence in the administrative and/or technical abilities of the contractor
and is unwilling to commit substantial sums to that contractor.

The surety’s second option is to contract with another construction company to

complete the contract. There are disadvantages to this option, however. If the
original contractor is in default, the project is usually in total disarray and the
 P a g e | 565

project owner is upset and suspicious. Recognizing this, contractors are

reluctant to step into someone else’s mess. Additionally, equipment and crews
must be mobilized and there will be a learning curve as supervisors and crews
master an unfamiliar project. For all these reasons, a replacement contractor
will charge a premium to come in and take over a job that has gone bad. These
increased costs will have to be picked up by the surety, not the project owner.

The third option exists more in theory than in practice. The surety of a de-
faulted contractor can bring its own forces, its own employees, in to finish a
contract. Sureties, however, are in the financial service business, not the con-
struction business. Few corporate sureties have the ability or the interest to
complete contracts with their own forces, and this option is seldom exercised.

In considering the three options of the surety of a defaulted contractor, it is

important to remember the concept of the face amount, or penal amount, of the
performance bond. This face amount establishes the surety’s maximum
liability exposure on the bond, regardless of how it elects to complete the con-
tract. If it appears to the surety that the penal amount of the bond will be in-
sufficient to complete the contract, the surety will simply tender that amount to
the project owner. The project owner will have no choice but to accept it, as the
surety’s obligation cannot possibly exceed that amount.

What Discharges the Surety of Its Obligations?

Once a contractor has completed a contract, the surety is relieved of any ob-
ligations on the bond that applies to that contract. There are a few instances
where courts have allowed owners to recover from performance sureties for
workmanship problems discovered well after completion. The general rule,
however, is that the surety’s obligation ends when the construction contract is
completed and the project accepted by the owner.

There are also certain occurrences during the construction of the project that
can relieve the surety of its obligations under a performance bond. All these
occurrences involve action or inaction by others that prejudices the surety’s
ability to protect its legitimate interests.

If a contractor is in default, the project owner/obligee has a duty to give the

contractor’s surety prompt notive of the default. This enables the surety to
evaluate its options and select the most expedient way to complete the contract.
If the owner fails to give prompt notice, and the surety suffers some sort of
 P a g e | 566

financial harm or prejudice as a result, the lack of timely notice may discharge
the surety of its obligations under the performance bond.

During the course of construction the owner and contractor frequently agree to
a number of changes. It is expected that change orders will be issued and the
performance bond will apply to the construction contract as modified.
Sometimes, however, the changes will be so major that they completely alter
the nature of the project and greatly expand the nature of the risk.

An example would be a change order which doubles the price of the con-
struction contract or adds extensive work by trades not covered in the original
contract. This is not a risk that the surety contracted to assume, even given the
limitation of the penal amount of the bond, because it increases the likelihood
of a contractor default.

If a change is so major that it is considered a “cardinal change” in the contract,

the surety will be discharged from its obligation on the bond.

Finally, a surety will be partially discharged if the owner negligently releases

payment to the contractor and it turns out that the contractor had not performed
the work for which it was being paid. This is because the performance surety
has an equitable interest in undisbursed construction funds until the contract is
completed. If that money had not been released to the defaulted contractor, it
would be available to help pay for completion of the contract. To the extent the
owner negligently overpays a contractor who later defaults, the surety’s
obligation on the bond is reduced accordingly.
OWNER’S RIGHT TO TERMINATE THE CONTRACT

One of the most important tools reserved by project owners to assure the con-
tractor’s compliance with the terms of the construction contract is the right to
terminate that contract. Construction contracts typically allow for “termination
for default” and “termination for convenience.”

Termination for Default

It is customary for construction contracts to state that if the contractor fails to

perform fully and faithfully in accordance with the terms of the contract, the
owner may terminate the contract for default and the contractor will be entitled
to no additional compensation.
 P a g e | 567

Terminations by default clauses usually contain a long list of offenses, short-

comings, and omissions which will constitute default.

It is important to keep in mind that despite this threatening language, not every
shortcoming will support a default termination. The ramifications of a default
termination for the contractor are severe, as will be seen below. Therefore,
courts usually require that the contractor’s shortcomings amount to a material
breach of contract.

For instance, most default termination clauses contain a provision requiring the
contractor to adhere to the agreed construction schedule. It is unlikely,
however, that a court would uphold a default termination if the contractor was
1 week behind schedule halfway into an 18-month project. The problem is not
sufficiently serious to warrant it.

Certain problems are sufficiently serious to warrant a default termination,

however. The most common is the failure to pay subcontractors or suppliers. If
unpaid parties begin asserting mechanic’s liens against the owner’s property,
the owner may very well exercise its right to terminate the contract for default.

Similarly, a persistent failure to adhere to the plans and specifications may

warrant a default termination. Minor problems are inevitable on any project,
and a certain amount of corrective work is to be expected. If the contractor
intentionally deviates from the contract requirements, however, or persists in
providing shoddy workmanship, the owner may consider it a breach of contract
and terminate for default.

The third common ground for default is the failure to follow the schedule. As
mentioned earlier, a modest delay by the contractor will not be considered an
act of default. The test is whether, at that particular time, the contractor has a
reasonable chance of completing the work by the contractually stipulated date.
The completion date should be adjusted, if necessary. to allow for any
excusable delay the contractor may have encountered. If the contractor has no
chance of finishing the work by the required completion date, the contractor
may be considered to be in breach and the contract may be terminated for
default.
 P a g e | 568

CASE STUDY

Owner terminated Contractor under the termination for default provision of a

contract, citing Contractor’s tardy performance of the work. Contractor
challenged the termination, arguing that it should have been given an
administrative hearing prior to being terminated.

The New York Supreme Court, Appellate Division, rejected Contractor’s argu-
ment. A default termination is a contractual right the owner may exercise when
justified by the facts.

The Court said that although a contractor may be entitled to an opportunity to

tell its side of the story and an opportunity to cure the defects in its
performance, this does not mean the contractor is entitled to an adversarial,
administrative hearing before the contract may be terminated for default.

Albert Saggese, Inc. v. Town of Hempstead. 474 N.Y.S.2d 542 (N.Y.A.D. 1994).

It should be noted at this point that most default termination clauses require
both notice and the opportunity to cure the default. Typically, the owner is
required to give the contractor written notice that it is considered to be in de-
fault. The contractor is then given a stated number of days, established in the
contract, to “cure” the default. This may involve performing corrective work or
working overtime to bring the job back on schedule. If the contractor fails to
cure the default within the stated period, the owner sends a second notice
actually terminating the contract for default.

The requirements for a notice and opportunity to cure are consistent with the
concept that a contract should be terminated for default only if the contractor
has materially breached the agreement. If the problems can be promptly cured
when they are brought to the contractor’s attention, they were not serious
enough to warrant a default.

The owner’s right to terminate for default should be exercised only when there
are serious problems, because the financial ramifications for the contractor are
severe. If a contract is terminated for default, the contractor may be held liable
for what are commonly referred to as “excess reprocurement costs.” That is,
to the extent the owner’s cost of having the work completed according to the
original plans and specifications exceeds the original contract price, the
defaulted contractor, or its surety, will be liable for the difference.
 P a g e | 569

Given the problems with bringing in a substitute contractor, these excess costs
can be significant. The delay and difficulty can be harmful to the owner, as
well. Therefore, it is not only fair to the contractor but also in the owner’s best
interest, to give a contractor notice and an opportunity to cure its default prior
to terminating a contract for default.

Termination for Convenience

Most construction contracts also contain a clause giving the owner the right to
terminate the contract for its own convenience. This provides crucial protection
to the owner because it is the only way the owner can maintain any flexibility.

The termination for convenience clause allows the owner to terminate the
contract for any reason or for no reason at all. It essentially allows for termi-
nation “without cause.” All the owner has to do is give the contractor notice of
termination. As discussed below, the owner will also have to pay the con-
tractor. An example of a termination for convenience clause appears below.

The owner may, at its sole discretion, terminate all or part of the work covered
by this contract at any time the owner concludes such termination is in its own
best interest. Termination shall be accomplished by delivery of a written notice
of termination to the contractor.

Upon receipt of such notice, the contractor shall immediately stop work and
shall expeditiously cease incurring obligations relating to the performance of
the terminated work. The contractor shall be entitled to payment for work
performed prior to receipt of the notice of termination. Such payment shall be
based on the percentage of the total work completed multiplied times the total
contract price.

This sum shall be presumed to include the pro rata share of overhead and
profit on the completed work. The owner shall be credited with all payments
made prior to the effective date of termination.

The termination for convenience clause allows the owner to terminate the
contract without breaching the contract. The owner needs this flexibility be-
cause a variety of things can imperil a project after the construction contract
has been signed. Financing may fall through. There may be problems with
public regulatory authorities. The owner’s need for the additional space may
change.
 P a g e | 570

In the absence of a termination for convenience clause, the owner would

breach the contract by “canceling” its commitment to the contractor. This
would subject the owner to liability to the contractor for lost profit and other
damages. The termination for convenience clause is the only vehicle giving the
owner the flexibility it needs. The owner will be able to terminate the contract
at any time for any reason.

Termination for convenience clauses usually allow the contractor to recover

the contract costs it has incurred prior to the effective date of termination. The
direct cost of labor and material is almost always paid. Indirect costs such as
home office overhead and profit on the completed work may or may not be
recoverable. All these items must be addressed in the termination clause.
Sometimes even the cost of administering the termination may be recovered.

Lost profit on the terminated work is never recoverable. Termination clauses

usually make this emphatically clear. After all, the purpose of a termination for
convenience clause is to give the owner the flexibility to terminate the contract
without having to pay this type of damage settlement. In return for this
flexibility, however, the owner is expected to reimburse the contractor for its
costs in order to keep the contractor from being harmed by the owner’s
unilateral decision.

CASE STUDY

Owner awarded Contractor a lump-sum contract for rehabilitation of a bridge.

Serious structural deterioration was discoved after work started. Owner
elected to terminate the contract for convenience while it evaluated the
bridge’s condition. Contractor submitted its actual costs incurred prior to
termination. Owner insisted that Contractor should be compensated based on
the percentage of contract completion rather than actual costs incurred.

The Court of Appeals of Ohio ruled in favor of Contractor. The language of the
contract determines the form of compensation in the event of a convenience
termination. This contract referred to the contractor’s “reasonable costs.” It
was therefore improper for Owner to base Contractor’s recovery on the
percentage completion.

Conn Construction Co. v. Ohio Department 470 N.E.2d 176 (Ohio App. 1995).
 P a g e | 571

OWNER’S RELEASE OF PAYMENT

The flow of cash on a construction project typically runs from the construction
lender to the project owner to the prime contractor and then to the
subcontractors and suppliers. As the disburser of funds to the contractor, the
owner is in an excellent position to structure payments in a manner that will
assure proper performance by the contractor.

Progress Payments

Construction contractors are not expected to wait until final completion of a

project to receive payment. The capital requirements of a project are usually so
large that few companies could afford to work on this basis. The financing
charges on borrowed capital would have to be passed through to the owner at
considerable cost.

To avoid this problem, the construction industry has traditionally used a system
of progress payments from the owner to the contractor. The basic concept is
that each month the contractor will be paid for the value of the work it has
completed during that period. The owner is paying only for work that is in
place on the construction site; it is paying only for value received. This is cru-
cial from an owner’s standpoint. If it pays for more than the value of the work
place, it loses a certain amount of leverage with the contractor and increases its
exposure in the event of a default.

The value of some work items is easily determined. On a unit price contract,
for instance, it is simply a question of measuring the units and applying the unit
prices. Frequenly, progress payments cover the value of material delivered and
stored at the job site. This value can be determined from supplier invoices. On
a fixed-price, lump-sum construction contract, however, the task becomes
more difficult. A single dollar figure has been established for a large and
complex project. How can the owner reasonably determine the value of one
month’s work?

The method that is commonly used is the percentage of completion method. If

the project architect certifies to the owner that 15 percent of a $1 million
contract is complete, the contractor is entitled to receive $150,000, less any
amounts received in previous progress payments. Although simple in theory,
this method becomes difficult in application. There are inherent conflicts in
determining the percentage of completion at any given time.
 P a g e | 572

The owner wants to pay as little as possible, preserving its capital and its
leverage with the contractor. Construction lenders are notoriously conservative
in authorizing loan disbursements being are also based on the work in place.

Contractors, on the other hand, are eager to be paid as much as possible. They
are seldom happy with the owner’s estimate of the percentage of completion.
All in all, the determination of the proper amount of a progress payment is a
contentious affair.

To mitigate this problem, many construction contracts call for the establish-
ment of a “schedule of values.” This schedule assigns dollar values to the var-
ious segments of the work, either by phase or by trade. In essence, it allocates
the lump-sum price among a large number of identifiable work items. This
makes the task of determining progress payments much simpler and less
divisive.

UsuaI1y,.a schedule of values is determined after the contract has been

executed. The contract simply states that a schedule will be negotiated between
the parties. Some project owners attempt to allocate the price among the var-
ious segments of the work within the contract itself. Although this avoids the
uncertainty of negotiating a schedule of values after the contract has been
signed, it is not a recommended procedure.

CASE STUDY

Owner awarded Contractor a contract for sewer construction. Contract, called

for periodic progress payments based on the value of completed work. Because
of inaccurate determinations by its own engineer, Owner made progress
payment to Contractor for pipe that had not been installed. Contractor then
defaulted on its contract. Owner brought action against Contractor’s Surety on
the performance bond.

The U.S. Court of Appeals, Ninth Circuit, ruled that Surety’s obligation on the
performance bond was partially discharged to the extent Owner had overpaid
Contractor. Overpayments deprives Surety of contract funds which would be
otherwise be available for completion of the project. To the extent that
premature progress payments are financially harmful to Surety, Surety will
have its obligation on the performance bond reduced. Transamerica
Insurance Co. v. City of Kennewick, 785 F.2d 660 (9th Cir. 1996).
 P a g e | 573

A contractual schedule of values can be a potent weapon for a contractor

seeking additional compensation for alleged changes in the work. It also vio-
lates the principle that the contractor is responsible for determining what is
required and how much it will cost to perform the work. A schedule of values
is a useful tool for determining the amount of progress payments, but it should
not be included in the contract.

The last two important topics regarding progress payments are retainage and
setoffs. Retainage is a percentage of each progress payment which is retained
by the project owner until completion of the project and release of final
payment. The purpose of retainage is to protect the owner against latent defects
or other problems which were undetected at the time the progress payment was
made.

Typically, 10 percent of each progress payment is retained until final payment.

On large, long-term projects, it is common to reduce retainage after the
contractor achieves 50 percent completion, as the owner’s risk declines as the
value of work in place increases. It is unusual, and from the owner’s standpoint
imprudent, to retain less than 5 percent of the progress payments under any
circumstances. The amount of retainage must be established in the construction
contract itself.

A setoff serves the same purpose as retainage: protection for the owner against
shortcomings in the contractor’s performance. Like retainage, the owner’s right
to assert a setoff should be established in the contract. Unlike retainage. setoffs
are not applied automatically. They are applied only when there is a specific
problem the owner is aware of and seeks to protect itself against. For instance,
if the prime contractor fails to pay a subcontractor who in turn puts a
mechanic’s lien on the owner’s property, the owner may withhold, or setoff,
the amount of the lien from the contractor’s next progress payment. This setoff
would be in addition to the normal retainage called for in the contract. If the
prime contractor fails to correct a particular problem prior to conclusion of the
project, the owner could setoff an appropriate amount from final payment.

Lien Waivers

There is a statutory right of unpaid contractors, subcontractors, and material

suppliers to place a lien on the property of the project owner. Liens resulting
from the prime contractor’s failure to pay its subcontractors or suppliers are of particular
concern to project owners.
 P a g e | 574

CASE STUDY

Contract allowed Owner to retain 10 percent of each progress payment until

“all work” was completed. Contractor finished all work except some minor
“punch list” items. Owner continued to hold 10 percent retainage and was
challenged by Contractor.

The Court of Appeal of Louisiana ruled that the retainage provision should not
be interpreted literally. The purpose of retainage is to protect the owner
against incomplete work. Therefore, an owner should not be allowed to hold
10 percent of the total contract price to secure the completion of a few minor
items.

The Court said that once a contractor achieves substantial completion of the
work, the retainage should be reduced to reflect the cost of the remaining
punch list items.

State v. Laconco. 430 So.2d 1376 (La.App. 1993).

As a result, it is customary for owners who are making progress payments to

contractors to ask for lien waivers. These waivers basically acknowledge that
the party has been paid in full for labor furnished or materials supplied during
the applicable period. The document goes on to state that the party waives its
statutory right to assert a lien against the property of the project owner.

Every time a progress payment is made, lien waivers should be obtained from
the prime contractor and every subcontractor or supplier who furnished labor
or materials during the applicable time period. The prime contractor should be
required to certify that no other parties furnished labor or materials during that
period and that all parties have been paid in full. The prime contractor should
also be required to agree to indemnify, or reimburse, the owner if any liens are
asserted due to the prime contractor’s failure to make full payment.
 P a g e | 575

CASE STUDY

Contract required Contractor to furnish Owner with lien waivers from all
subcontractors and suppliers prior to receiving payment.

Owner refused to make payment to Contractor unless Contractor provided lien

waiver from plumbing subcontractor. Subcontractor signed the waiver even
though it had not actually been paid yet by Contractor. When Contractor failed
to pay Subcontractor, Subcontractor placed a lien on Owner’s project. Owner
argued that the lien was barred by Subcontractor’s prior execution of lien
waiver.

The California Court of Appeal ruled that Subcontractor’s lien waiver could
not be enforced against Subcontractor because it had been coerced in order to
secure payment from Owner to Contractor. Subcontractor was allowed to
maintain its lien on Owner’s project.

Bentz Plumbing & Heating v. Favaloro, 180 Cat.Rptr. 223 (CaI.App. 1992).

If a party has completed its work on the project, it should be required to sign a
full waiver and release of lien rights. If it still has more work to do, it should
sign a partial release covering all labor and materials furnished through a stated
date. By the time the owner makes final payment to the prime contractor, it
should have full waiver and release forms from the contractor and from every
subcontractor or supplier who furnished labor or materials to the project.

In order to avoid misunderstandings or disagreements as to the form or nature

of the lien waivers that will be required, this should be established in the
construction contract itself. An example of a lien waiver is printed next page.
 P a g e | 576

Release of Lien

WHEREAS, ____ (Contractor) has been paid in full by ____ (Owner) for
labor, materials, and/or equipment furnished under a contract dated _____

AND WHEREAS, said labor, materials, and/or equipment was applied to real
property located at ____ (Project) which is owned by Owner.

THEREFORE, in consideration of the reliance of Owner upon this agreement

and final payment by Owner, the Contractor does hereby:

1. Certify to Owner that all subcontractors and suppliers to the project

have been paid in full.

2. Release, waive, and forever quitclaim unto the owner any and all
manner of liens Contractor now has or may acquire in the real property
associated with Project.

3. Agree to indemnify and hold harmless Owner, its successors or assigns.

against any loss claim or lien asserted by a subcontractor or supplier against
Owner or against the real property associated with Project.

IN WITNESS WHEREOF, Contractor has caused this release to be signed by

its duly authorized owner, partner, or corporate officer on the ____ day of
____ , 200___

WARRANTIES AND GUARANTEES

Warranties and guarantees are contractual commitments extended by the

contractor to the contract owner. As a practical matter, the two terms are
synonymous in the context of construction contracting.

Warranties may be “express,” that is, stated in writing in the construction

contract itself. Some warranties are “implied.’’ Although they are not stated in
writing, they are implied as a matter of law.

The Uniform Commercial Code (UCC), which has been adopted in almost
every state, contains an elaborate system of warranties. The UCC applies only
to the sale of goods, however; so these warranties do not apply to construction
contracts. Material suppliers are subject to the UCC when they sell goods to
contractors or project owners.
 P a g e | 577

Warranties

The most basic warranty extended by contractors is the warranty of workman-

like construction. Most construction contracts include a statement that the
contractor extends such a warranty. The wording varies, of course, but typi-
cally the contractor warrants that it will use construction methods and tech-
niques that are recognized as acceptable within the trade or industry. The con-
tractor also warrants that the materials it will use will be new and will be
suitable for the successful accomplishment of the work.

If a construction contract does not contain an express warranty of work-

manship, courts will be quick to read an implied warranty into the contract.
The rationale is that acceptable workmanship is essential to the contract, and it
is implicitly understood by both parties that the project owner would not
contract for anything less that acceptable workmanship. When reading an
implied warranty into a contract, courts are somewhat restrained in determining
the scope of the warranty. An express warranty of workmanship will probably
be broader than the implied warranty a court would find. Therefore, express
warranties are more useful for owners and may enable the owner to hold the
contractor to a higher standard.

As a practical matter, the implied warranty of workmanship comes into play

only on small projects, typically residential. Commercial construction contracts
usually contain express warranties and detailed plans and specifications. These
explicit contractual statements provide the owner with a far more viable
remedy than a general, implied warranty. In situations where the contract
documents are sparse or even nonexistent, the implied warranty of
workmanship does give the courts an opportunity to provide the owner with a
remedy for egregiously poor workmanship.

CASE STUDY

Contract contained an express warranty of the Contractor’s materials and

workmanship. Owner informed Contractor that it was dissatisfied with the
quality of Contractor’s work and would be forced to withhold future progress
payments. Contractor treated this as a breach of contract and walked off the
job. Owner argued that Contractor breached the contract first by breaching
the express warranty of the workmanship.

The Court of Appeals of Indiana ruled that Owner breached the contract.
Before a workmanship warranty problem becomes a material breach of
 P a g e | 578

contract, the contractor must be given a reasonable opportunity to correct the

problem. Owner never gave Contractor that opportunity. Therefore, Owner
was not justified in unilaterally changing the payment terms of the contract.
Owner, rather than Contractor, breached the contract.

Burras v. Canal Construction and Design Co.. 470 N.E.2d 1362 (Ind.App. 1994).

Express warranties of labor and material generally run for a stated period of
time, usually 1 year. This means that if during the 1-year period the owner
notifies the contractor of a defect in the materials or the work, the contractor
must return to the job site and correct the problem at no charge to the owner. If
there is a dispute as to whether the item falls under the warranty, the owner has
the burden of establishing that the problem does in fact result from defective
workmanship.

A common question that arises regarding warranties is the expiration date. As

the express warranty typically runs for 1 year, the determinative factor is the
date the warranty starts to run.

Some contracts state that the warranty runs for 1 year from the date of sub-
stantial completion. This is the date when the project becomes suitable for its
intended purpose and the owner is able to take occupancy and make use of the
structure.

Other contracts state that the warranty runs for 1 year from final completion
and acceptance of the project. In other words, all the punch list items have been
completed and the owner has made final payment to the contractor. Contractors
are understandably reluctant to have a warranty start to run upon final
acceptance. The process of completing the punch list and closing out the con-
tract can be a lengthy one. In effect, the warranty period is extended for far
more than 1 year from the owner’s beneficial use and occupancy of the project.

Contractors have a limited ability to speed up project close-out, as so much

depends on the owner’s efficiency and reasonableness. Contractors therefore
prefer to have the warranty commence upon substantial completion.

If the contract fails to establish the date when the warranty starts to run, the
courts are left with the difficult task of establishing the date. There is no clear-
cut rule. Some courts have reasoned that the warranty should start to run upon
substantial completion. The owner has use and occupancy of the building and
will have the opportunity to discover any defects in the workmanship.
 P a g e | 579

Other courts have adopted the stricter rule that the warranty period cannot
begin to run until final payment and final acceptance. In order to avoid
uncertainty, construction contracts should always clearly state the date upon
which the 1-year warranty of labor and materials will start to run.

There is one final item of importance regarding the warranty period. It is well
established that the warranty period is not extended by the contractor’s
performance of corrective work under the warranty. In other words, if the
contractor repairs something 6 months into the warranty, that item is still under
warranty for only another 6 months. The warranty does not extend for 1 year
from the date the corrective work was performed.

In addition to the express warranty of workmanship, construction contracts

sometimes contain other express warranties. It is common for a contractor to
warrant, or guarantee, the roofing system, sometimes for periods of 10 years or
more. Expensive equipment such as mechanical systems or elevators are also
commonly warranted for periods in excess of 1 year.

As mentioned earlier, in the context of construction contracting the terms

warranty and guarantee are functionally synonymous. There are two situations
where the term “guarantee” is widely used.

When a contractor warrants a roof or other system for a long period of time, it
is common for the owner to require the contractor to furnish a “guarantee
bond.” This is a contractual promise by a third-party corporate surety to pay for
the correction of defective labor or materials during the stated warranty period.
The owner requires it because there is no certainty the contractor will still be in
business 6 or 8 years after completion of the work. The guarantee bond makes
the long-term warranty a more meaningful form of protection for the project
owner.

The term “guarantee” is also used in design/build contracts, which will be

discussed later on. When a single entity is going to perform both design and
construct a project, it is common for the owner to require that entity to
guarantee that the completed project will be capable of meeting certain
performance standards. This is most common on industrial projects, and the
performance guarantee is usually stated in terms of production capability.
 P a g e | 580

CASE STUDY

Roofing contractor extended a special guaranty to Owner whereby Contractor

agreed to maintain the watertight integrity of the roof for a period of 5 years
regardless of the cause of any leak.

Owing to a design flaw in the roof, leaking occurred. Contractor argued that it
should not be held responsible because it did not cause the problem.

The Court of Appeals of North Carolina acknowledged that normally a

contractor is not responsible for problems caused by inadequate design. In this
case, however, Contractor failed to limit is guaranty to workmanship
problems. Under the terms of the special guaranty, Contractor was obliged to
correct the problem regardless of its cause.

Burke County Public Schools v. Juno Construction Corp..273 S.E.2d 504 (N.C.App. 1991).

KEY TERMS AND CONCEPTS

performance bond A contract entered into between a contractor (referred to

as the “principal”) and a bonding company (referred to as the “surety”)
whereby the bonding company guarantees to the project owner (referred to as
the “obligee”) the contractor’s faithful performance of its contractual duties
and completion of the project.

The project owner is not a party to the suretyship agreement (or ‘bond”) but is
named as an obligee in the bond. The surety’s obligation under the bond arises
only if the contractor defaults on the contract by failing to complete the work
in accordance with the contractual requirements. In the event of a contractor
default, the surety must complete the work or reimburse the owner for the cost
of completing the work.

termination for default A project owner’s right, established in the terms

of the contract. to remove the contractor from the project because of the
contractor’s material breach of contract.

In the event of a termination for default, the owner has no further contractual
obligations to the contractor. The contractor, however, is obligated to
reimburse the owner for costs incurred in completing the work to the extent
such costs exceed the original contract price.
 P a g e | 581

termination for convenience A project owner’s right, established in the

terms of the contract, to remove the contractor from the project despite the
absence of any contractor wrongdoing. Termination for convenience clauses
are intended to give the owner the flexibility to abort a project for reasons of its
own convenience.

In the event of a termination for convenience, the owner must pay the
contractor for all work completed prior to the effective date of termination, as
well as other contractually stipulated termination costs. The contractor has no
right to sue for breach of contract or to recover lost profit on work it was
unable to perform.

progress payment Interim payments made to the contractor reflecting the

value of work completed to date. The value is usually determined by the
percentage of completion” method but may be measured according to
contractually stipulated unit prices or a schedule of values.

retainage A contractually stipulated amount, usually 5 or 10 percent. which

is withheld, or retained, by the project owner from each progress payment. The
purpose of retainage is to provide the owner with security in the event of
defective or incomplete work by the contractor. Retainage is released to the
contractor upon final acceptance of the completed project.

lien waiver A document whereby the contractor acknowledges it has been

paid for completed work and waives its statutory right to assert a mechanic’s
lien against the owner’s project.

Generally, a contractor is required to furnish partial lien waivers upon receipt

of progress payments and a final lien waiver upon final payment. Contractors
are also usually required to furnish the owner with lien waivers from all the
subcontractors and suppliers with whom the contractor has done business.

warranty A contractual commitment to replace or repair any defective

work. All construction contracts contain an implied (or unstated) warranty that
the workmanship will meet the accepted standards of the construction industry.
Most construction contracts contain an express (or stated) warranty that the
contractor will correct any defective work discovered within 1 year of
completion of the project.

guarantee A contractual obligation to replace or repair defective items for a

stated period of time. Guarantees usually apply to specific pieces of equipment
or specific portions of the work, such as the roof. Guarantees are frequently
 P a g e | 582

backed up by bonds. Guarantees are commonly furnished by equipment or

material suppliers to the prime contractor, who in turn assigns the guarantee to
the project owner upon completion of the work.
 P a g e | 583

COMPETITIVE BIDDING

Purpose

In this country, competitive bidding is required by law on virtually all con-

struction contracts that involve public funds. The competitive bidding require-
ment serves two primary purposes:

 Conserving tax dollars; and

 Promoting fairness.

If a project is to be built with public funds, the public authorities have an

obligation to accomplish the work in an economical fashion. The assumption is
that the lowest possible price will be received if the contract is awarded on the
basis of open competition.

The desire to minimize cost by maximizing competition is sufficiently strong

to cause public authorities to reject all bids if not enough are received. For
instance, if only two bids are received and they both exceed the public owner’s
estimate for the cost of the work, it is common for the public owner to reject
the bids.

As strong as the need to conserve tax dollars is, the promotion of fairness is an
even more imperative purpose of the competitive bidding system. There is a
broad consensus in our society that public contracts should be awarded on the
basis of the contractor’s ability and willingness to offer the low price. Graft
and local favoritism must not play a role in the selection of contractors.

The rigid, formalistic structure of competitive bidding which will be described

in this chapter is designed to avoid not only impropriety but even the
appearance of possible impropriety. In order to maintain public confidence in
the system, appearances are very important. Courts frequently refer to this as
“maintaining the integrity of the competitive bidding system.”

The inflexible structure of the system is designed to preclude any opportunity

for impropriety. As important as it is to conserve public funds, public project
 P a g e | 584

owners will reject a low bid due to a “technical” violation of the bidding
procedures and award the contract to the second low bidder.
This is not because anything improper has actually taken place but because a
failure to strictly follow the rules and compete on an identical basis violates the
integrity of the competitive bidding system. Even if more public funds must be
expended to accomplish the work, the integrity of the process is a priority.

When Is Competitive Bidding Required?

As stated above, competitive bidding is required on virtually every construc-

tion project which involves public funds. There are frequently statutory excep-
tions for very small items of work and emergency situations. Other than that, it
should be assumed that competitive bidding will be required when public funds
are expended.

Laws requiring competitive bidding exist at every level of governments.

Municipalities have ordinances and regulations governing competitive bidding.

It is common for a central government to make grants of funds to local
governments. To a lesser extent, Muhafazas make grants to local governments.
It is common for construction projects to be built with a mixture of funds from
various public sources. The question then arises, which competitive bidding
statute governs the procurement’?

As a general rule, the laws of the grantee, the authority that actually awards the
contract and owns the project, will govern the procurement. For instance, when
the Central government gives a grant to a local municipality, the central
government requires that the contract be publicly bid and that the “basic prin-
ciples” of the central procurement system be observed. The central government
does not require, however, that all the procedures and requirements of the
central system be observed. The procurement is conducted in accordance with
the competitive bidding laws of the local grantee.
 P a g e | 585

CASE STUDY 3

Public Owner negotiated a contract with a firm to provide “construction

management” services. These services included coordination of the bidding
and coordination of several construction contractors. Contractor argued that
the sole-source, negotiated award of the construction management contract
violated the competitive bidding statute. The contract should have been put out
to bid.

The Court of Appeals of Indiana rejected this argument. The contract was
primarily for professional services, not construction work. The firm receiving
the contract did not perform construction work or guarantee a price. The
competitive bidding statute does not apply to contracts for professional
services because these services can only be evaluated by subjective criteria,
unlike bids for construction contracts, which can be objectively evaluated.

Public versus Private Bidding

It is common for private developers to refer to “putting a contract out to

bid.” Private developers are of course not subject to the requirements of public
competitive bidding laws. Therefore, the process followed by private project
owners bears little resemblance to that followed by public owners.

When a private owner solicits bids, he does it motivated by financial savings. It

wants the work performed at the lowest possible price. The appearance of
fairness is not a consideration. Private funds are involved, and the owner is free
to award the contract to any company it chooses and free to follow any
procedure it chooses.

As a result, “bidding” on private contracts really consists of competitive

negotiation. Usually the owner selects two or three companies it is familiar
with based on experience on prior projects or based on reputation. Each com-
pany is invited to price the work.

3
Attlin Construction, Inc. v. Muncie Community Schools, 413 N.E.2d 281 (Ind.App. 1990).
 P a g e | 586

Frequently the owner makes changes in the definition of the work in order to
reduce prices. Sometimes one company is played off against another in an
effort to reduce the price. Contractors are sometimes required to invest in the
project if they want to receive the construction contract.

All these procedures are perfectly legitimate business practices. The important
thing to remember is that the private “bidding” of contracts bears no re-
semblance to the rigid, formal system of competitive bidding on public con-
tracts. The remainder of the discussion in this chapter is limited to the bidding
procedures followed by public project owners.

The Bid Documents

One of the primary principles of public competitive bidding is that all

bidders compete on an equal footing. In preparing bid prices, each bidder must
be given the same information and must be required to follow the same proce-
dures. When the public owner evaluates bids, it must be comparing apples and
apples, not apples and oranges.

In order to accomplish this, a package of bid documents must be prepared. This

includes the plans and specifications defining the scope of the work and the
contract, complete with general conditions, that the successful bidder will be
required to sign. It also includes the bid solicitation itself.

CASE STUDY4

Public owner did not award contract to low bidder, but rather to the second
low bidder.

When challenged in court, Owner said that it favored second low bidder
because that company was located within the municipality, paid taxes to the
municipality and employed local residents.

The Supreme Court of Ohio ruled that this was not a valid reason to fail to
award the contract to the low bnidder. Loca bidders cannot be favored unless

4
City of Dayton. ex rel. Scandrick v. McGee, 423 N.E.2d 1095 (Ohio 1991).
 P a g e | 587

such favoritism is authorized by law and the advantage given to local bidders
is clearly stated in the bid solicitation.

Owners may not apply evaluation criteria that are not stated in the bid
solicitation.

Bid solicitations are frequently referred to as an “invitation to bid” or a

“request for bids.” This is exactly what a solicitation is. A notice or an-
nouncement is published in newspapers informing contractors that a particular
contract is being put out to bid and informing them where they may obtain a
bid package. The time and place of publication is frequently specified by law.

The notice is also frequently published in services such as the Dodge Reports
and made available to local chapters of trade organizations such as Associated
General Contractors of America. The purpose of the notice is to make as many
prospective bidders as possible aware of the upcoming contract and to put bid
packages in their hands.

When contractors respond to the notice, they receive a copy of the bid package
including the solicitation itself. The solicitation establishes the procedures to be
followed. This includes the bid form itself, the time and place the bid must be
submitted, any rules or formulas that will be applied in evaluating bids, and the
method for amending or clarifying the bid documents.

This last item is very important. In examining bid documents, bidders will
frequently have questions regarding the definition of the work. Sometimes a
bidder will discover an ambiguity or discrepancy in the plans and specifica-
tions. It is advantageous for the project owner to resolve any problems prior to
bid submittal, but questions must be answered in a manner that does not give
any one bidder a competitive advantage.

In order to assure that all bidders receive the same information, most bid
solicitations state that all questions must be submitted in writing and answered
in writing. Copies of the question and answer are provided to every prospective
bidder who has requested a bid package.
 P a g e | 588

If any change is required in the plans and specifications or other contract

documents, it will be accomplished by a formal written amendment to the bid
solicitation which must be acknowledge in writing by each bidder.

It is also common for public project owners to hold a prebid conference also
known as a job explanation meeting. All prospective bidders are invited to
attend. Questions may be asked regarding the bid documents, and all
prospective bidders are free to be there to hear the answers. If a bidder elects
not to attend the prebid conference, it does so at its peril.

Once bids are opened and the low bidder determined, a “notice of award” is
issued to that bidder. The bid package usually states that a notice of award will
be issued within a stated number of days of bid opening. Once the formal
notice has been issued, the contractor will have a stated number of days to
provide the necessary bonds and insurance certificates and execute the actual
Construction contract.

After contract execution, the contractor usually must wait for a formal “notice
to proceed” before starting work. It is usually stipulated that the notice to
proceed must be issued within a certain number of days of contract execution.
With this, the bidding process and the bid documentation is complete and con-
struction can begin.

BID EVALUATION

Responsiveness

In order to be eligible for contract award, a bid must be “responsive.” A bid is

responsive if it is an unqualified offer to perform the work in exact accordance
with the terms of the bid solicitation. If the bid deviates or takes any exceptions
to the terms of the solicitation, it is considered “non-responsive.”

Examples of such deviations would be: “We will require 120 days to perform
the work rather than the 110 days specified.” Or: “We propose to use vinyl
gutters rather than aluminum.
 P a g e | 589

The reason a bid must conform exactly to the solicitation goes back to the
discussion of offer and acceptance. In order for a contract to be formed, there
must be a mutual understanding, a meeting of the minds, regarding its terms. A
bid is an offer. The project owner can either accept it or reject it. If the owner
accepts a bid that deviates from the terms of the solicitation, the owner won’t
be getting what it asked for.

For instance, it is common for owners to amend the terms of the bid solicitation
prior to bid opening. Bidders are asked to acknowledge receipt of the
amendment in writing and include the acknowledgment with their bid. If a
bidder fails to acknowledge an amendment and the owner accepts the bid any-
way, the owner could not force the contractor to perform the work added or
changed by the amendment. The contractor never offered to perform that work
at the contract price. The owner would have to issue a change order and pay
the contractor an additional sum. Therefore, it is a basic rule that failure to
acknowledge all amendments renders a bid non-responsive.

A bid must be responsive at the time of bid opening. Once bids are opened,
problems cannot be corrected. For instance, if a bid is low but non-responsive,
it is common for the bidder then to offer to acknowledge the amendment or
waive the exception it took to the specifications. It is improper for an owner to
allow a bidder to do this, however. A bidder gets one chance to submit a re-
sponsive bid. Once bids are opened, no bid can be altered.

CASE STUDY5

Low bidder failed to sign bid but did sign the accompanying bid bond which
incorporated the bid itself by reference.

Public Owner rejected the low bid as non-responsive. Low bidder appealed.

The Supreme Court of Washington ruled that the signature on the bid bond
incorporating the bid istself was sufficient to unequivocally bind the bidder to
the terms of the bid solicitation. The low bidder did not take exception to any of
the terms in the bid solicitation, so the bid was responsive.
5
Farmer Construction. Ltd. v. State of Washington. 656 P.2d 1086 (Wash. 1983).
 P a g e | 590

While this rule seems harsh, it can be traced to one of the primary goals of the
competitive bidding system: fair and open competition. If a bidder was al-
lowed to correct a non-responsive bid after bid opening, it would gain a com-
petitive advantage over the other bidders. It would give that bidder the option.
after seeing all the other bid prices, of either correcting its bid and receiving the
contract or electing to walk away from the bid with impunity. This obviously
works to the disadvantage of the other bidders who submitted responsive bids.

A final, but important, aspect of responsiveness involves the timeliness of bid

submittal. Bid solicitations typically specify a precise time and place for bid
opening. In order for a bid to be responsive, it must be submitted on time.

On Central Government procurements, this rule is sternly enforced. There are

cases where bids that arrived 30 seconds late at the designated room were ruled
non-responsive. Cases involving local procurements have been a little more
forgiving in this regard. One rule is ironclad at any level of public pro-
curement, however: Once the first bid has been opened, no bids may be
received, altered, or suplemented.

The reason for this rule is the same as stated above. A bidder could submit a
non-responsive bid, see how the first few bid prices were coming in, and then
elect to cure the bid by supplementing it with the required acknowledgment,
bid bond, etc., or leave the bid non-responsive and simply walk away. This
would be unfair to other bidders and a corruption of the system.

A common mistake made by project owners and their A/E’s at bid openings is
to receive and open untimely bids. If a bid or a supplement to a bid arrives after
the first bid has been opened, the correct procedure is to refuse to physically
accept or open that envelope. To open an untimely bid and “take it under
advisement” creates confusion and the appearance of possible impropriety. It is
also unfair to the bidder to reveal its bid price to its competitors knowing full
well that the bid is not eligible for award. An untimely bid simply should not
be opened.
 P a g e | 591

Bidder Responsibility

In addition to submitting a responsive bid, a bidder must be deemed “respon-

sible” in order to be eligible for contract award. The purpose is to protect the
public treasury by avoiding the award of public contracts to companies or in-
dividuals that will be unable or unwilling to properly perform the work.

In determining responsibility, it is appropriate to examine a company s fi-

nancial condition, its managerial competence, its production capability (does it
have access to sufficient equipment and labor?), and its history of performance
on similar projects.

Unlike bid responsiveness, which is a very objective determination, bidder

responsibility is necessarily a somewhat subjective determination involving the
exercise of discretion. Unless a public project owner is arbitrary, capricious, or
unreasonable in making this determination, courts will defer to the discretion
of the owner.

Certain basic steps can be taken to assure the reasonableness of responsibility

determinations. If the owner has any specific responsibility criteria in mind,
they should be clearly stated in the bid solicitation. If the owner wants a
contractor who has successfully completed at least three similar projects in the
past 2 years, it should be stated. The owner shouldn’t spring this on bidders
after they have already gone to the time and expense of bid preparation.

All responsibility criteria should bear a reasonable relationship to the owner’s

actual needs. For instance, what difference does it make to the owner if the
contractor leases, rather than owns, certain necessary equipment?

In requesting information pertaining to responsibility, identical information

should be requested from all bidders. Detailed documentation of the informa-
tion received should be kept. This information should relate directly to the re-
sponsibility criteria being applied. If these steps are followed, it is unlikely that
a court will later second-guess an owner’s determination of bidder responsibil-
ity or non-responsibility.
 P a g e | 592

There are always unpleasant little surprises that can arise, for instance, dis-
covering that the president of a company has been indicted, but not convicted,
for fraud. If the project owner and it’s engineer can demonstrate a pattern of
thorough, businesslike consideration of responsibility matters, however, they
may exercise their discretion with confidence.

Bidder responsibility is determined at the time of bidding. The fact that a

company had severe problems in the past may not be relevant to present re-
sponsibility.

A project owner cannot rely on past history alone in making a finding of non-
responsibility. There must be a showing that those problems exist or are likely
to exist today. A contractor may be able to show, through current financial
statements or recent performance records, that it has improved itself and is now
a responsible bidder. A history of defaults is certainly relevant to the
responsibility determination, but if that contractor has successfully completed
its last six contracts, the owner would act at its peril in relying on prior defaults
to find that contractor non-responsible.

CASE STUDY6

Public Owner refuse to award to low bidder, saying that low bidder was not
responsible. Owner’s determination of non-responsibility was based on the fact
that low bidder was “unknown” to Owner and Owner had heard that low
bidder had been late completing a contract in another location.

The Supreme Court of Georgia ruled that these were insufficient grounds for
finding a contractor to be non-responsible. Owners have broad discretion in
making responsibility determinations, but they must conduct an independent,
objective investigation into the contractor’s financial, managerial, and
technical abilities, as well as its past performance. Rumors or a lack of
personal familiarity are insufficient.

6
Hilton Construction Co.. Inc. v. Rockdale County Board of Education, 266 S.E.2d 157 (Ga. 1980).
 P a g e | 593

Unlike bid responsiveness, bidders may provide additional information or

correct or clarify information after bid opening if that information pertains to
bidder responsibility. Whereas modifying a bid may lend itself to manipulation
of the system, there is no competitive advantage to be gained by clarifying
one’s financial statement after bid opening. Therefore, the general rule is that
information pertaining to bidder responsibility may be furnished right up to
contract award.

It is sometimes difficult to distinguish whether information pertains to re-

sponsiveness or responsibility. For instance, the solicitation may require bid-
ders to include an equipment list with their bids. If a bidder omits the list, does
that render the bid non-responsive? Probably not. The equipment relates to the
bidder’s ability to perform. Failure to include the list would not enable the bid-
der to avoid performing the contract in the exact manner specified. Therefore,
the bidder should be allowed to furnish the list after bid opening.

A final matter involving bidder responsibility is the prequalification of bidders.

Sometimes public owners will conduct a responsibility inquiry before
distributing bid packages. The financial, managerial, and performance records
of interested, prospective bidders are examined to arrive at a so-called short list
of qualified bidders. Only companies on the pre-qualified list receive bid
packages and are eligible to bid.

The prequalification of bidders is perfectly acceptable as long as public owners

adhere to necessary notice and publication requirements in order to see that no
interested companies are excluded from the responsibility inquiry. And, of
course, the responsibility determinations must be made in a fair, reasonable
fashion as described above.

It is expensive and time-consuming to pre-qualify bidders. The records of a

large number of companies must be examined, as opposed to a detailed exam-
ination of only the lowest two or three bidders. This procedure is primarily
used on projects that are unique or extremely sophisticated because bidder re-
sponsibility is of paramount concern and there are a limited number of pro-
spective bidders to begin with.
 P a g e | 594

Unbalanced Bids

An unbalanced bid is a bid where one portion of the work does not carry its
reasonable share of direct cost, overhead, and profit. This cost and profit is
presumably carried in other items of work under the contract, as contractors
seldom intentionally price a bid for a loss.

Unbalanced bidding occurs most commonly on unit price bids where estimated
quantities of various work items are stated. It also occurs on fixed-price
contracts where the work is divided into subitems which are added to arrive at
the total bid price.

Unbalanced bids create tension between contractors and owners and raise
questions of bid responsiveness. Contractors submit unbalanced bids for one of
two reasons. The first is to “front load” the contract. That is, the bidder carries
a disproportionate part of the contract price in work items that will be
performed early in the job. This enables the contractor to get more money
sooner and reduces the contractor’s risk and financing charges.

The other reason for unbalancing a bid is to speculate on quantity overruns on

a unit price contract. If a contractor thinks that the estimated quantity of item A
is understated and the estimated quantity of item B is overstated, it may bid an
unrealistically low price for item A and an unreasonably high price for item B.
Its bid price will still be competitive because it will be computed using the
owner’s estimated quantities. If the contractor is awarded the contract and its
hunch proves true, it will reap a windfall by performing large volumes of item
B work at an inflated price.

It should be clear by now that unbalanced bids are not in an owner’s best
interest. If an owner pays out too much money at the front end of a project, he
increases the risk the contractor will default and it increases its own construc-
tion financing charges. And of course, no owner wants to pay out a windfall on
a quantity overrun.
 P a g e | 595

In an attempt to avoid this problem, Owners commonly state in the bid so-
licitation that unbalanced bids will be considered non-responsive. This is quite
easy for a private owner who is free to reject any bid for any reason it wants.
Public project owners are greatly restrained in their ability to reject unbalanced
bids, however.

The general rule in this country is that submission of an unbalanced bid is

permissible. If a public owner is going to reject an unbalanced bid it must show
that the bid is not only “mathematically unbalanced” but also “materially
unbalanced.”

CASE STUDY7

Public Owner solicited bids for construction of sewer lines. Low bidder bid 1
cent per square foot, for temporary sheeting. Owner rejected low bid, saying
that it was unbalanced because the cost of the work was not appropriately
allocated.

Relying on an affidavit from the bidder stating that it had temporary sheeting
left over from another job, the Appeals Court of Massachusetts ruled that the
low bid had not misallocated costs.

More important, said the court, the low bid was not materially unbalanced
because it did not create a risk that Owner would not get the lowest price or
would make progress payments in excess of the value of the completed work.

The bid was not “front-load” to enable the bidder to derive payments in excess
of the value of the work in place.

7
Department of Labor and Industries v. Boston Water and Sewer Commission 469 N.E.2d 64
(Mass.App. 1994).
 P a g e | 596

A mathematically unbalanced bid simply misallocates cost and profit as de-

scribed above. In order to be materially unbalanced, the owner must be able to
demonstrate that acceptance of that bid would result in a higher total cost to the
owner than acceptance of the second low bid. This is usually impossible for the
owner to prove.

There are things owners can do to discourage the submission of unbalanced

bids. These include quantity variation clauses a formal schedule of values, and
reserving the right to award a contract for only a portion of the work.

These devices will be discussed in subsequent sections. Suffice it to say that it

is very difficult to reject a bid as non-responsive strictly because it is
unbalanced.

Computing the Bid Amount

In order to determine the low bidder, it is obviously necessary to compare the

various bid amounts. This sounds straightforward, and it usually is. On a fixed-
price contract, the owner or it’s engineer simply compares the total bid
amounts. Other types of contracts require more computation, however.

On unit-price contracts, it is necessary to multiply each unit price times the

estimated quantity of units stated in the bid solicitation. These subtotals are
then added to arrive at the total bid price.

Frequently, the bid solicitation will list certain alternate packages of work that
the owner wants the contractor to provide prices for. For instance, alternate A
may require bidders to add certain work items to the total scope of work.
Alternate B may retain the original scope of work but ask the bidder to price
the work on the basis of using a different type of equipment.

A bidder who is low based on one alternate may not be low based on other
alternates. The project owner has discretion to base contract award on any
alternate or combination of alternates it chooses, as long as it is consistent with
any evaluation method or formula established in the bid solicitation. This
decision will not be disturbed by the courts if it is based on the owner’s good
 P a g e | 597

faith determination of its actual needs and is not being done to manipulate the
bidding system to exclude a particular contractor.

BID SECURITY

Bid Bonds

Once an owner determines the low responsive bid submitted by a responsible

bidder, that owner wants assurance that the bidder will honor the bid and ex-
ecute the contract. The failure of a low bidder to honor its bid would wreak
havoc with the competitive bidding system and force the owner to spend more
money by accepting a more expensive bid.

It is therefore customary for public project owners to require each bidder to

submit a bid bond with its bid. The bond is typically in the amount of 10 per-
cent of the total bid amount, but it may be more.

If a bidder receives a notice of award and refuses to execute the contract, the
bond will be forfeited. The owner will award the contract to the second low
bidder. The owner will retain, from the bond proceeds, the difference between
the low bid and the second low bid. if that amount exceeds the total face
amount of the bond, the entire bond is forfeited. The purpose of the bond is to
compensate the owner for the additional costs incurred because of the low bid-
der’s failure to honor its bid.

In order to understand how bid bonds work, it is important to consider the legal
relationship among the owner, the contractor, and the bonding company.
Within the context of this relationship, the owner is known as the “obligee,”
the contractor is known as the “principal.” and the bonding company is known
as the “surety.”

The principal and the surety enter into a contract whereby the surety agrees to
provide bonding, or security, for the principal’s contractual endeavors. The
principal agrees to honor all its contractual commitments so that the surety will
not have to pay out on the bonds. The principal also agrees to reimburse the
surety for any amounts paid out on bonds. Typically, the principal must pledge
all its assets to the surety in order to get bonded.
 P a g e | 598

The owner, or obligee, is not a party to the agreement between the surety and
its principal. Each time the principal bids on a contract and submits a bid bond,
the project owner is the named obligee on the bond. If the principal defaults, or
fails to live up to its contractual obligations, the owner can then bring a direct
legal action against the surety on the bond even though the owner and surety
never entered into a contractual relationship.

In order for a bid to be responsive, it must be accompanied by a bid bond in the

required amount. Usually the bid solicitation will require that the bond be
furnished by a corporate surety licensed to do business where the project is
located.

The bond is usually signed by the surety’s local bonding agent, so it must be
accompanied by a valid power of attorney indicating that the corporation has
given the agent authority to obligate it on the bond. If the bond does not meet
all these requirements, the bidder has failed to provide adequate bid security
and the bid is non-responsive.

Owners frequently will allow forms of bid security other than bid bonds. The
security may be equivalent to cash, such as a certified check in the required
amount. It may also be in the form of an irrevocable letter of credit. It may
never be in the form of an instrument which could be revoked or dishonored by
any party. Personal checks are never adequate.

The use of a cash equivalent as bid security is generally a last resort for
bidders. It ties up far less money to simply pay a bond premium to a corporate
surety.

The surety’s obligation comes into play only in the event of a default.

Owner’s Right to Reject Bids

Many bid solicitations state that the owner reserves the right, at its discretion to
reject “any and all bids.” The question arises as to whether or not the pubic
project owner really has legal authority to do this.
 P a g e | 599

Public owners do not have authority to reject “any” bid at their discretion. This
would be contrary to the entire concept of competitive bidding. If the owner is
going to award a contract, it must make that award based on the lowest
responsive bid submitted by a responsible bidder.

Public owners do, however, have the right to reject all bids and decline to
award a contract. Courts will allow public owners broad discretion to do this
for a variety of reasons. The most common and acceptable reason is a problem
with adequate appropriations. Rejection of all bids would probably be allowed,
however, even if the owner simply changed its mind. Courts are reluctant to
meddle in this function.

The only judicially imposed restraint on the public owner’s right to reject all
bids is that the owner must exercise its judgment in good faith. When public
owners solicit bids, there is an implied obligation to consider all bids fairly and
good faith. The cancellation of a procurement item after bid opening has a neg-
ative impact on all the bidders. The time and money expended on bid prepara-
tion have been wasted. Their bid prices have been exposed to all their
competitors.

If an owner doesn’t like the low bidder, rejects all bids, and then re-solicits
bids for an identical scope of work, this would be considered a bad faith exe-
rcise of the right to reject bids. The original low bidder could probably recover
its bid preparation costs from the project owner. In the absence of such extreme
course of behavior, however, the public owner is generally entitled to reject all
bids and return the bid bonds to the bidders.

It should be noted at this point that if there are problems with project financing
or necessary regulatory approvals, it is more common, and preferable, for the
owner to ask the bidders to extend their bid acceptance periods. For instance, if
the solicitation stated that bids must be firm for a period of 60 days, the owner
may ask bidders to extend that acceptance period for an additional 60 days.
This will give the owner more time to resolve the problem and avoid turning
the solicitation into a wasted effort for all involved.

A bidder faced with such a request may extend its acceptance period, holding
its bid price firm and keeping its bid bond on line to secure that bid. Al-
 P a g e | 600

ternatively, the bidder may decline to extend its acceptance period. Once the
original acceptance period has passed, the bidder may walk away from its bid
with no negative consequences. The bid bond would not be in jeopardy
because that bond secured a bid which was firm only for the original period of
time stated in the solicitation.

CASE STUDY8

Public Owner solicited bids for a construction project. The bid solicitation
stated that Owner reserved the right to reject all bids. Owner did in fact reject
all bids. One bidder inquired as to the reason for rejection of the bids, but
Owner said it had no obligation to give an explanation or show cause.

The Court of Appeals of Louisiana ruled that Owner must give reasons for
rejecting all bids. Onwer must act in good faith when soliciting bids and may
not act arbitrarily in rejecting all bids. If Owner is not required to give an
explanation for rejection of bids, it would be impossible to determine if Owner
was acting in good faith.

MISTAKES IN BIDS

It is not unusual for a bidder to allege, after bid opening, that it has made a
mistake in preparing its bid. The public project owner is then faced with the
decision of allowing the bidder to correct its bid, allowing the bidder to with-
draw its bid, or attempting to hold the bidder to its bid. The financial conse-
quences of this decision can be very significant for both parties.

This issue arises with great regularity. Consequently, the courts have de-
veloped a fairly clear set of guidelines for parties to follow when dealing with
bid mistakes.

8
Milton J. Womack, Inc. v. Legislative Budgetary Control Council, 470 So.2d 460 (La.App. 1985).
 P a g e | 601

What is a “Mistake”?

In order to qualify as a “mistake” in the competitive bidding context, the

mistake must be of a factual or arithmetic nature. Classic examples would be
the failure to correctly total a column of subitems or the failure to properly
apply unit prices to estimated quantities.

A “mistake” cannot involve an error of judgment such as the failure to properly

estimate the cost of performing the work or the misreading of a section of the
specifications. The failure to include the cost of a specified piece of equipment
or material is usually considered factual, not judgmental, however.

Bidder’s Right to Withdraw Bid

As a general rule, a bidder is entitled to withdraw its mistaken bid if (l) the
mistake is both factual and “material”; (2) there is no gross neg1igence on the
part of the bidder; (3) it would be unconscionable for the owner to enforce the
bid; (4) the bidder promptly notifies the owner of the mistake; and (5) the
owner can be returned to its prior position.

CASE STUDY9

Contractor price bid on the assumption it would not be responsible for the
transportation of union workers. Contractor’s bid was low. After bid opening,
Contractor learned of a union “precedent” which required it to provide
transportation. Contractor asked to be allowed to withdraw its mistaken bid.
Public Owner refused.

The Supreme Court of Missouri ruled that a bidder cannot obtain relief from a
mistaken bid if the mistake was judgmental, rather than clerical or
mathematical in nature. This was an error of judgement; so Contractor could
not withdraw the bid. Owner could recover against Contractor’s bid bond
because of Contractor’s refusal to sign contract.

9
State of Missouri v. Hensel Phelps Construction Co., 634 S.W.2d 168 (Mo. 1982).
 P a g e | 602

The distinction between a factual and judgmental mistake has been described
above. In order for the mistake to be “material,” it must involve one of the
fundamental aspects of the transaction. Price is always material unless one is
talking about a fraction of a percent of the total contract amount. Virtually
every bid mistake affects price. Therefore, it is hard to imagine a mistake in a
competitive bidding context which is not material.

The requirement that the bidder not be guilty of “gross negligence” is an

amorphous one. The courts have never drawn a clear line indicating when neg-
ligence becomes gross negligence. As a practical matter, this requirement is
invoked by the courts only in those rare instances when the bidder’s mistake
resulted from such extreme carelessness or sloppiness that the bidder is not
deserving of relief.

Courts also require that it be “unconscionable” to hold the bidder to its

mistaken bid if the bidder is to be allowed to withdraw the bid. In some ways,
this is a redundant requirement. If the mistake has a sufficiently serious impact
on price to be considered “material,” courts will consider it unconscionable for
the owner to enforce the bid.

The final two requirements are interrelated. As soon as the bidder discovers its
mistake, it must promptly inform the owner of the mistake and its desire to
withdraw the bid. This usually occurs right after bids are opened and there is a
large discrepancy between the mistaken bid and the other bids.
 P a g e | 603

CASE STUDY10

Contractor submitted low bid on construction contract. After bid opening,

Contractor discovered that it had made an error in transposing a
subcontractor’s price from a worksheet onto the bid sheet itself.

Contractor asked permission to withdraw the bid. Public Owner refused. When
Contractor declined to sing the contract, Owner sued.

The Appellate Court of Illinois said a mistaken bid may be withdrawn only if
the mistake occurs despite the bidders’s exercise of reasonable care. In this
case, Contractor’s bid checking procedures were so lax that Contractor failed
to exercise reasonable care.

Contractor was not entitled to withdraw mistaken bid and was liable to Owner
for failure to honor bid.

The reason for the prompt notification requirement is to inform the owner
before the owner takes any steps to its detriment. If the owner has not yet made
financial or other commitments based on the mistaken bid, it can simply award
the contract to the lowest nonmistaken bid. It will be in the same posifion it
would have been in if the mistaken bid had never been submitted.

Therefore, there is no reason not to allow withdrawal of the mistaken bid.

There will be no harm to the project owner, and an inequity against the bidder
will be avoided.

10
Community Consolidated School District No. 169 v. Meneley Construction Co.. 409 N.E.2d 66
(Il1.App. 1990).
 P a g e | 604

Bidder’s Right to Correct the Bid

Sometimes a bidder will not want to withdraw its mistaken bid. It will want to
correct the bid and be awarded the contract at the corrected price. In this sit-
uation, the courts are less sympathetic toward the mistaken bidder.

The general rule is that a bidder may correct its mistake and receive the award
only if the nature of the mistake and the intended bid amount are clearly
evidenced on the face of the bid itself:

Usually, the only mistakes that can meet this test are mathematical errors
involving the addition of columns or the extension of unit prices. A mistake
involving the omission of a necessary piece of equipment would not qualify, as
the intended bid amount could not be clearly determined from the bid sheet
itself.

It is impermissible to allow the bidder to offer any documents or other ev-

idence other than the bid form itself if the bidder wants to receive the contract
at the corrected price. If the intended amount isn’t clear from the face of the
bid, the best the bidder can hope for is withdrawal of its bid.

Low bidders sometimes allege mistake and seek contract award at an increased
price which still leaves them as low bidder. Occasionally, a second or third low
bidder will seek a downward correction of its bid to a price which makes it the
low bidder. The question then arises, may a mistaken bid be corrected in a
manner which displaces other bidders?

On central contracts, the displacement of an apparent low bidder will be al-

lowed if the intended amount of the mistaken bid is clearly and convincingly
established on the face of the bid itself. Most courts do not follow this rule,
however. On local procurements, the general rule is that the displacement of a
low bidder will not be allowed regardless of clear evidence of the intended bid
amount.
 P a g e | 605

Duties of Owner and Contractor

When considering bid mistakes, several well-established legal duties should be

kept in mind. The first is the project owner’s duty to seek the bidder’s verifi-
cation of its bid amount.

If the owner has any reason to believe that the bidder may have made a mistake
in computing its bid, the owner must so notify the bidder and ask the bidder to
check its bid and verify its accuracy.

The occurrence that causes the owner to seek verification is usually the fact
that the bid is considerably lower than all other bids received and/or consid-
erably lower than the owner’s estimate for the cost of the work. There is no
definitive rule as to how much lower the bid has to be in order to trigger the
owner’s duty to seek verification.

Five percent lower probably would not cause the owner to suspect a mistake.
Thirty percent lower almost certainly should. For the reasons described below,
owners and their A/Es should always err in the direction of seeking
verification. From the owner’s standpoint, there is nothing to be lost and much
to be gained.

If the owner fails to seek verification, the successful bidder may later allege
mistake. If it appears that the owner should have suspected a mistake and failed
to seek verification, the contractor will be able to avoid its contractual
obligations or have the contract reformed to state the higher intended amount.

The owner will not be allowed to exploit a known bid mistake in order to get a
lower contract price. If the owner requests verification and the bidder verifies
its bid, however, it will be virtually impossible for the bidder to later argue that
it made a mistake. Once the bid amount has been verified, the owner has a
great deal of assurance that it can hold the bidder to that price.

The bidder has legal duties that affect its ability to allege mistake as well. The
first is the bidder’s duty to inspect the site prior to submitting its bid. This will
be discussed in greater detail, but it should be noted at this point that the bidder
 P a g e | 606

will be held responsible for information that could have been gleaned from a
reasonable inspection of the site.

The bidder is also responsible for any information that would have been gained
by attending the prebid conference with the owner’s representatives. If the
bidder fails to inspect the site or attend the prebid conference, it does so at its
peril. It should be noted, however, that the type of “mistake” that results from
one of these omissions is not usually grounds for correction or withdrawal of a
bid anyway. This is because it would usually be considered a judgmental, not
factual, error.

Finally, the bidder has a duty to notify the owner or its engineer of any
“patent,” or obvious, errors in the plans and specifications. If the bidder knew
or should have known of an error, it cannot price its bid on the basis of the
flawed contract documents and then later allege mistake or request a change
order.

Just as the owner will not be allowed to exploit a known bid mistake, the
bidder will not be allowed to exploit a known error in the plans and
specifications. This does not mean, however, that the bidder must check
calculations or independently verify other information furnished by the owner.
The mistake must be obvious.

SUBCONTRACTOR PROBLEMS

When preparing a bid on a project, a prime, or general, contractor typically

obtains bids or quotations from a number of subcontractors. This gives rise to
several interesting issues when considering the competitive bidding process.

Holding Subcontractors to Their Quotations

Since the prime contractor is submitting a binding bid in reliance on prices

quoted by subcontractors, it is essential to hold those subs to their quotations.
The failure of a key subcontractor to honor its price can be the difference be-
tween a profitable and unprofitable project.
 P a g e | 607

Unlike the competitive bidding system itself, the procedure for obtaining
subcontractor quotations is very informal, even chaotic. Quotations are typi-
cally provided at the very last minute. This is because subcontractors don’t
want the general contractor to “shop around” their quotation. That is, go to
subcontractor B and say “Subcontractor A offered to do the work for X dollars.
Can you give me a better price?”

Not only are the quotations provided at the very last minute, they are usually
provided over the telephone. There is nothing in writing. (It should now be
increasingly apparent why there are so many bid mistakes.)

Given this informality, how can the general contractor accomplish the crucial
task of holding its subcontractors to their quoted prices? It must rely on the
doctrine of equitable estoppel.

This doctrine holds that if the bidder reasonably relies on a subcontractor s

quotation in submitting a bid, the subcontractor will be “estoppeled,” or pre-
cluded, from reneging on that quotation.

CASE STUDY11

Contractor obtained price quotation over the telephone from Subcontractor.

Contractor relied on that price when preparing its bid on a contract.

Contractor submitted low bid and was awarded the contract. Subcontractor
then refused to honor its quoted price, saying it had inadvertently omitted
certain work when preparing its quotation.

The Supreme Court of Alaska ruled that the doctrine of equitable estoppel
prevented Subcontractor from refusing to honor its quotation. Contractor
reasonably relied on the quotation in submitting an irrevocable, fixed-price
bid. Even though no formal subcontract was ever created, Subcontractor
would be liable to Contractor for refusal to honor the quoted price.

11
Alaska Bussell Electric Co. v. Vein Hickel Construction Co., 688 P.2d 576 (Alaska 1984).
 P a g e | 608

The key for the general contractor who is submitting the bid is to document
both the quoted price and the reliance on that price. This is usually
accomplished by sending a confirming letter right after the oral quotation is
received.

This letter should confirm the quoted price and should state that it was the
lowest received and that it has been relied upon in computing the bid amount.
It need not, and from the prime contractor’s standpoint should not, represent
that the subcontractor will receive the subcontract if the prime contractor
receives the prime contract.

The end result of this machination is that the prime contractor can hold the
subcontractor to its quoted price but is under no obligation to award the sub-
contract to that subcontractor. No contract has been formed with the subcon-
tractor. Unless the sub has justifiably changed its financial position (such as
ordering materials) in reliance on a representation made by the prime, the
prime will be under no obligation.

This is why it is important for prime contractors to avoid making any promises
or representations to subcontractors prior to bid submittal. On the other hand,
the prudent subcontractor may require exactly that kind of representation prior
to going to the expense of preparing a quotation.

Filed Subbids

In America a number of states have passed legislation pertaining to public

procurement which provides structure to this free-for-all. This is a system of
“filed sub-bids.”

Under this system, the work is broken down by trade, and trade contractors,
who traditionally function as subcontractors to general contractors, are invited
to submit bids. These subbids are kept on file. The general contractors who bid
on the prime contract are obligated to use the low subbid in each trade category
unless they intend to perform that work with their own forces and are qualified
to do so. The successful bidder is then obligated to award subcontracts to the
low subbidders.
 P a g e | 609

The filed subbid system provides greater structure and predictability to sub-
contracted work on public projects. This is largely a fortuitous by-product of
political lobbying, however. The filed subbid systems result from the political
influence of trade associations that wanted their members to have more direct
access to public construction dollars and wanted to avoid the evils of bid
shopping. Regardless of the motivation, however, the subbid systems have
been successful in providing some structure to a chaotic aspect of competitive
bidding.

Mistakes by Subcontractors

A mistaken quotation by a subcontractor may be grounds for withdrawa1 of the

prime contractor’s bid if it meets the criteria stated earlier for withdrawal of
bids.

A mistake by a subcontractor will never be grounds for correction of a bid,

however. This is because it is impossible to determine the intended amount of
the subcontractor s quotation from the face of the prime contractor’s bid.

Finally, because of the doctrine of promissory estoppel, a subcontractor will

not be able to get relief from a prime contractor for the sub’s mistake once the
prime has submitted a binding bid in reliance on the sub’s quotation. This as-
sumes, of course, that the sub’s error was not so obvious that the prime should
have requested verification. As with the owner-contractor relationship, contrac-
tors will not be allowed to exploit known mistakes by their subcontractors.

BID PROTESTS

It is quite common in the construction industry for a disappointed bidder to

lodge a formal protest claiming that it, not another bidder, should be awarded
the contract.

Sometimes the basis of the protest is that the protester’s apparent low bid was
wrongfully rejected as non-responsive. Sometimes the protester argues that
another bidder’s low bid should have been rejected as non-responsive. Protests
also sometimes involve the public agency’s alleged failure to follow pro-
curement regulations or alleged irregularities in the plans and specifications.
 P a g e | 610

Forum and Procedure

The threshold question is where are bid protests filed’? The initial protest is
usually filed with the procuring agency itself. Most public agencies have an
established administrative procedure for hearing bid protests. This procedure
must be followed before seeking relief in court.

If the protester is unsuccessful at the administrative level, it may appeal to a

court of competent jurisdiction to enjoin, or halt, the contract award or contract
performance and consider the alleged improprieties in the procurement.

The bid protest procedure on central contracts follows this basic pattern.
Initially, the disappointed bidder must lodge a written protest with the procur-
ing agency itself. If this is denied, the protester has 10 working days to file a
protest with the Comptroller General’s Office of the General Accounting Of-
fice.

Alternatively, the protester may appeal directly to the comptroller general or

may seek an injunction in a High Court. The central courts traditionally show
great deference toward the comptroller general in procurement matters,
however.

The 10-day filing period is worth noting. Bid protests at every level of public
procurement are subject to very short filing deadlines. This is in order to avoid
disruption to the procurement process and to avoid delay in government agen-
cies obtaining the goods and services they need.

Failure to file a timely protest is absolutely fatal to the protest. It won’t even be
considered. Any disappointed bidder considering a protest should immediately
determine the filing deadline and should operate on the assumption that the
protest must be filed very promptly.
 P a g e | 611

Remedies

Considering the large number of bid protests that are lodged each year, it is
ironic that so few meaningful legal remedies are available to the protesters.
One could go so far as to say that it is the least fruitful form of litigation.

Even if the protester obtains an injunction or suspension of the procurement, it

by no means guarantees that the protester will succeed on the merits of its
protest. If the protester succeeds in its protest, it will not automatically be
awarded the contract. The contract will be put out to bid again, and the
protester will simply get another chance to bid.

If the contract has already been awarded, the court will probably just admonish
the agency to adhere to procurement regulations in the future. On rare
occasions, however, the comptroller general will order a contract terminated
and put out to rebid.

Sometimes, however, when the contract has already been awarded, a successful
protester will recover its bid preparation costs and protest expenses. This is
because the public agency has breached the implied obligation to treat all
bidders fairly, as described earlier in this chapter.

The bidder will receive only its out-of-pocket expenses, however. It will not be
entitled to the anticipated profit on the contract or any other damages.

In conclusion, the best a bid protester can generally hope to receive is another
chance to bid on the contract or the recovery of its bid preparation and protest
costs.

GLOSSARY OF TERMS

bid solicitation An owner’s invitation for contractors to submit bids for a

construction project. The bid solicitation should contain a complete detinition
of the work to be performed. as well as a complete statement of the legal terms
and conditions which will govern performance of the work.
 P a g e | 612

bid responsiveness In order to be responsive, a bid must match the

terms of the bid solicitation. It may not deviate from the terms of the
solicitation, take any exceptions to the terms, or place any limitations on the
terms. A responsive bid also must be submitted in a timely manner and comply
with any other requirements for bid submittal that are stated in the bid
solicitation. If a bid is not responsive at the time of bid opening, it must be
rejected. A non-responsive bid may not be corrected, cured, or clarified.

bidder responsibility A bidder is responsible if it possesses the

technical and managerial capability, financial resources, and experience
necessary to perform the particular work for which a bid is being submitted. A
responsibility determination must be based on a bidder’s present condition.
Responsibility can be determined after bid opening. If a public project owner
reasonably determines that a low bidder is not responsible, the owner need not
award the contract to that bidder.

unbalanced bid A bid is unbalanced if unit prices or components of a

lump-sum price do not carry an appropriate share of the total direct cost,
overhead, and profit. A bid is materially unbalanced if acceptance of that bid
creates a risk that the project owner will not obtain the lowest possible price.
Public project owners are not obligated to accept a low bid if that bid is
materially unbalanced.

bid bond A bond furnished by a third-party surety guaranteeing that the

bidder will honor its bid, if accepted by the owner, and sign the contract at the
bid price. If a bidder fails to honor its bid, the owner may recover from the
surety the difference between the bid price and the next lowest bid price. Bid
solicitations usually require that bid bonds be furnished in the amount of a
stated percentage of the bid price. A bid which is not accompanied by an
adequate bid bond is not responsive.

mistaken bid A bid which contains an error of a clerical or

mathematical, as opposed to judgmental nature. If the bidder can demonstrate
the existence of the mistake and show that the mistake occurred despite its own
reasonable precautions, the bidder will be allowed to withdraw the bid and the
bid bond will not be in jeopardy.
 P a g e | 613

equitable estoppel If a contractor reasonably relies on a quotation submitted

by a subcontractor and incorporates the quoted price into a firm bid, the
doctrine of ‘equitable estoppel” will prevent the subcontractor from reneging
on its quotation if the contractor’s bid is accepted by the project owner and the
contractor is called upon to perform the work at its bid price.

filed subbids A system used on some public projects whereby trade

contractors submit bids to the project owner for specified portions of the
project. The general contractor must use the low subbidders when preparing its
bid and performing the work unless the general contractor intends to perform
that portion of the work with its own forces.

bid protest A bidder’s administrative appeal to a public authority

complaining that the procurement has been conducted in a manner that violates
the laws or regulations governing competitive bidding.
 P a g e | 614

CONTRACTING PITFALLS
Excessive Changes

A lump sum contract for the execution of a pump station was awarded to KL
construction Co. Both parties agreed on keeping records of all activities and
communications by the contractor organization. After four months and more
than 50 change orders, KL submits a claim for impact on cost and schedule due
to cumulative effect of change orders.

The owner rejects the claim on the basis that all change orders have been
timely settled.

Contracting Shortcuts

A contractor enters an agreement with an owner to proceed with a letter of

intent on an Engineering, Procurement, and Construction (EPC) reimbursable
cost fixed fee for the construction of a new production line.

When work is underway, the owner proposes a "fast track" execution of the job
and ask the contractor to provide additional resources. Furthermore, the owner
wishes to include a Bonus/Penalty clause in the contract being drafted.

Long Term Project

A large project will require 7 years to develop. Reimbursable cost contracts for
engineering and other front end work are awarded based on contractor’s
experience and competitive rates. The work is planned to be accomplished on
accelerated basis.

The same contractor is awarded the construction contract. Due to owner's cash
flow problems and the market situation the project is slow down and the
contractor is order to proceed on normal schedule basis.

Contractor's key personnel are diverted to a more lucrative contract.

Notices and Prior Approvals

In a reimbursable cost contract with completion incentives, notices and

approvals clauses have been included to prevent the contractor from processing
changes not being properly audited. The contract is suppose to be executed on
a fast track basis.
 P a g e | 615

The contractor processes scope changes while awaiting owner's approval to

ascertain early completion.

Auditors refuse to pay cost for work performed prior to the approval of the
changes.

Work Stoppage

The owner of a project orders the contractor to "slightly" modify some part of
the contracted job. Later on the contractor ask for a change order to pay for the
scope changes proposed by the owner.

The owner refuses to pay on the basis that the changes were minimal and they
took the same amount of resources previously planned by the contractor. The
contractor stops work until after the owner agrees to pay for the changes in
scope.

Owner threatens to sue for lack of performance.

Subcontracting on Lump Sum Contracts

In a lump sum contract, the contractor is utilizing several subcontractors

without prior review and approval of the owner.

The mechanical subcontractor is known by the owner while performing poorly

on recent projects.

Owner request contractor to get rid of subcontractor and requires assurance that
all other subcontractors must be checked prior to enter contracting activities.

Lack of Information by the Owner

A corporation buys a business producing sophisticated devices. Most of the

business key employees are duly compensated and leave the company.

The corporation wants to expand the business and offers one of its civil
contractors to submit a proposal (sole source) to expand the plant. The
contractor accepts and hires most of the previously terminated employees.

Contract Types

An owner has awarded a reimbursable cost contract because design was

grossly incomplete and there was need for expediting matters.
 P a g e | 616

After 3 months, project design is 80 percent completed and the owner wants to
change the contract to a lump sum one for the rest of the project.

The contractor is willing to accept the change only if the scope of the job is
expanded and the contract is signed according to its contract previous format.

Process Guarantees

Owner awards lump sum contract on a "Duty Specification" basis. Technology

is basic and proven. Contractor's proposal included "standard" definition of
process guarantee which becomes part of contract.

When the project is completed, it is found out that the capacity is not in
accordance with "Duty specifications" requirements due to:

 Key equipment failure during test;

 Control system malfunction;
 Chemical engineering basis different from proposal; and
 Feedstock different from that specified in "Duty
specification."

Both parties realize the contract does not spell out liabilities related to process
guarantees

Technical Definitions

In a lump sum contract for construction of a process plant, the contractor

invoices the owner for a bonus for early mechanical completion. The owner
rejects the invoice due to lack of performance according to the contract
language which says:

"contractor shall receive a bonus upon early plant completion, ready for
operation for the owner" "owner will provide plant pre-commissioning and
commissioning with contractor's assistance"

The contract also says "owner will takes over care, custody and control when
the plant is structurally complete and suitable for introduction of feedstock.”

Constructive Cost Increase

In a procure/construct contract, the contractor has made arrangements to obtain

a sophisticated piece of equipment from a vendor on a specific date based on
contractual payments by the owner.
 P a g e | 617

The owner cash flow problems makes impossible to obtain the above
mentioned piece of equipment. Equipment vendor sales the piece of equipment
to another customer and contractor's piece of equipment is scheduled for
delivery in 2 months.

Construction gets delayed due to lack of procurement of the piece of

equipment.

Contractor asks for contract price adjustment.

Force Majeure Coverage

For a lump sum contract in a remote area:

The owner-supplied equipment is delayed due to seasonal flooding. The

contractor claims extra cost and delay in schedule. The contractor equipment
and material delivery is delayed due to overbooked vendor shops. The owner
claims lack of performance

The contractor's progress falls behind schedule due to a large number of the
workforce being ill during the last two months. The owner requires contractor
to add extra staff at its own cost.

The construction is delayed due to lack of sufficient local labor.

The owner claims contract delay

Single Source Negotiation

The owner needs a facility as soon as possible and for that reason a known
contractor is called in as single source to do the job.

A reimbursable contract is negotiated without to many formalities since both

parties know each other pretty well.

The project experiences major problems:

 20 percent budget overrun;

 Six months completion delay; and
 Facility operating at 65 percent capacity.

Owner claims damages.

 P a g e | 618

Responsibility, Liability, Insurance and Risk Issues

A contractor is awarded a lump sum contract and the owner of the project is
requiring a contract document with the following clauses:

Unlimited guarantee and warranties for material, equipment and workmanship.

Indemnification or hold harmless owner for all losses, damages and injuries
during the project.

Contract Incentives

A contractor is executing two reimbursable-cost projects for an owner in the

same location.

Contract 1 is fixed fee and contract 2 is percent of final cost.

The contractor is encourage to finish early on contract 1 by an owner incentive

At the end of three months contract 1 is ahead of schedule and underrun and
contract 2 is behind schedule and overrun.

Formality, Precision and Specificity

On a EPC reimbursable cost contract both parties agree to use a short form
document to give both project management teams room to operate and no
administrative procedures are written.

Project is reported to be doing well according to both parties monthly oral

report.

After a notorious lack of results, an independent review team is sent in to

assess the situation. It is found that:

 Project is late;
 Overrunning is considerable; and
 Quality is not even at minimum standards.
 P a g e | 619

Unethical Practices

An owner opens a bid for lump sum contract requesting several technical
alternatives.

Bids are due in 3 weeks, Contractor 1 hires a senior cost engineer who was
working with contractor 2. Contractor 2 files a complaint with the owner
claiming unethical and unfair practice.

Concealed Pitfalls

1. An owner bids for competitive lump sum proposals for a project and
request each bidder to submit its own document for the contract and
general engineering standards and specifications.

2. An owner wanting to build a small chemical plant decides to bypass

screening of contractors and the selection of a limited, pre-qualified
group of bidders.

3. The owner advertises in local newspapers soliciting open bidding for

engineering, procurement and construction.

4. Owner accepts lower bidder proposal knowing that the contractor has
apparently grossly underestimated piping field labor requirements and
manhours needed.

5. Contractor has been awarded two different contracts in the same area
and with the same owner. Contract 1 started in November and is to be
finished by June next year. Contract 2 started in January and
mechanical completion is expected to be during December the same
year. Due to a political situation in the area contract 2 is unable to
make any progress until two months later. Contractor is given a
contract time extension on contract 2 due to force majeure. Contractor
wants force majeure to be applied to contract 1 too.
 P a g e | 620

Changes in the Scope of Work

One of the factors that makes the construction process a challenging and fas-
cinating field of endeavor is that it defies standardization. Every construction
project is truly unique. Even if the design has been used dozens of times be-
fore, site variations assure uniqueness.

Factors such as financing and regulatory matters also inject a certain degree of
uncertainty into the project. Given the number of variables, it is no surprise that
changes occur during the course of the project.

Changes in the definition of the contractor’s work fall into two basic cate-
gories: directed and constructive. Directed changes are changes that are ex-
pressly ordered by the project owner or its A/E. Constructive changes are
changes caused by factors other than a change order. Usually the contractor
seeks additional compensation for constructive changes.

This chapter examines directed and constructive changes and then discusses
the pricing of changed work.

WHY CHANGES OCCUR

As stated above, changes in the definition of the work are almost inevitable
because the construction process is complex and subject to a large number of
variables. Unfortunately, many in the industry refuse to treat changes as a
matter-of-fact business occurrence. Changes become a major source of con-
tention and even a debilitating distraction on some projects.

Complexity of the Process

Even a relatively small construction project involves a tremendous number of

components. A thorough set of drawings and specifications tends to be a rather
thick volume. Yet even the most carefully prepared set of contract documents
cannot possibly address every piece of material or every method of installation
or application.

It is inevitable that from time to time the contract documents will require some
interpretation from the owner or its A/E. If the documents are silent or
ambiguous on a particular item, the A/E’s interpretation of the requirements
 P a g e | 621

may differ from the contractor’s reasonable interpretation. This may be a con-
structive change in the work.

Differing site conditions almost always require a change in the definition of the
contractor’s work. The drawings and specifications are prepared based on
certain assumptions regarding the site. Despite exhaustive site investigation,
these assumptions may not prove true. Changes will be required.

Additionally, the complexity of the process results in a risk of errors made

during the design of the project. Frequently, these errors are first discovered by
contractors in the field trying to accomplish the work as specified. If this
occurs, it will be necessary to make changes in the definition of the con-
tractor’s work.

Changes in Development Plans

A number of factors having nothing to do with design or construction can also

cause the project owner to make changes in the work. The owner may encoun-
ter unexpected problems with project financing, causing it to scale back the
project. Similarly, a changing real estate market may cause an owner to scale
back or alter a project in midstream.

Regulatory problems can also force a project owner to make changes in the
work. Ideally, all regulatory hurdles should be cleared before a construction
contract is awarded. It is not unusual, however, for owners to encounter reg-
ulatory problems during the course of construction itself. This may result from
the owner’s oversight, but it also may result from citizen opposition or law-
suits.

Finally, the owner may simply change its mind regarding a certain aspect of
the project. As discussed below, a changes clause is an important tool for a
project owner who wants to maintain maximum flexibility in order to cope
with new factors. These factors may be imposed on the owner, but they may be
purely subjective, as well.

Traditional Attitudes toward Changes

Despite the fact that a changes clause provides the owner with important flex-
ibility, owners and A/Es have traditionally viewed the change process with
suspicion.
 P a g e | 622

No one questions the owner’s right to direct changes in the scope of the
contractor’s work. They resist and resent the contractor’s request for change
orders, however. The reason, of course, is money.

If a contractor claims that a certain set of circumstances or a certain directive in

the field amounts to a constructive change in the work, the contractor will
usually ask for a price adjustment to compensate it for that work.
Too many successful claims for price adjustments will threaten the integrity of
the project budget. Owners are understandably concerned about this matter.

The inherent conflict between owners and contractors regarding constructive

changes has caused owners to view claims for additional compensation as an
unethical practice by contractors. Although owners want the flexibility to direct
changes in the work, they want the contractor to honor its original contract
price if changes result from something other than an owner s directive. And
owners also frequently feel that their directives do not increase the contractor’s
performance costs and should not cause a price increase.

In fairness to owners, part of the tainted view toward claims for additional
compensation has resulted from the practices of contractors on competitively
bid jobs. When competition is stiff, bidders must pare their bids to the bone. By
not carrying any contingency funds in their bid prices, contractors place
themselves in a position where they are not prepared to cope with any
unexpected occurrence. An item that otherwise might have been absorbed by
the contractor in order to maintain good relations with the owner and keep the
job running smoothly may become the source of a claim. And it is true that
some unscrupulous contractors have bid jobs with the intent of making a profit
from claims for extras.

The A/Es have a unique perspective on claims for extras. Frequently a claim
arises out of an alleged inaccuracy or omission in the drawings or spec-
ifications. The integrity of the A/Es professional work product is being chal-
lenged. Under these circumstances, it is understandable that the A/E will be
defensive and suspicious of the contractor when addressing the merits of a
claim for additional compensation.

All the attitudes described above are counterproductive to the successful

completion of a project. Every party on a construction project should recognize
that changes, both directed and constructive, are an inevitable part of the
 P a g e | 623

process. An objective, businesslike approach to the process will be in every-

one’s best interest.

As described below, the contract should establish a procedure to be followed.

That procedure should include safeguards to protect owners against “claims-
hungry” contractors. But it should also recognize the contractor’s right to a
price adjustment if the contractor can prove it was required to do something
that deviated from the original scope of work and can itemize and document its
increased costs.

DIRECTED CHANGES

As its name indicates, a “directed change” is a change in the definition of the

contractor’s work that is ordered, or directed, by the project owner or its rep-
resentative. The change may add new work to the scope of work or deduct
certain tasks from the original scope of work. A directed change is typically
accomplished by the issuance of a written change order.

Owner’s Need to Make Changes

If a construction contract lacked a changes clause, the project owner would be

in a very difficult situation indeed. It is axiomatic that the owner may strictly
enforce the contractual work requirements, but the owner may not require
anything not called for in the contract. Considering the owner’s need for flex-
ibility, discussed above, a contract without a changes clause would be a very
impractical form of agreement on a construction project.

Without a changes clause, an owner who wanted to expand the scope of the
work would have to negotiate with the contractor to amend the contract. The
contractor would have tremendous leverage in negotiating with the owner. The
project would be delayed until the parties could reach an agreement. If they
couldn’t reach an agreement, the owner would be forced to bring in a second
contractor to perform the extra work. This in turn would create severe sched-
uling and coordination problems. In short, the owner’s need to expand the
scope of work would disrupt the entire project.

Conversely, if a project owner needed or wanted to delete some of the work in

the contract, it would be unable to do so in the absence of a changes clause.
The owner’s failure to allow the contractor to complete all the work in the
contract and pay for that work would be a breach of the construction
 P a g e | 624

contract. For these reasons, it is imperative that the owner include a changes
clause in the contract.

Before examination of the specific elements of a changes clause, it should be

noted that there is one important limitation on the owner’s right to direct
changes, even when there is a changes clause in the contract. If the owner
awards the contractor a $100,000 contract to build a warehouse and then issues
a $1.4 million change order to build an attached office building, the contractor
will be in a difficult position. It may lack the resources or ability to perform the
vastly expanded scope of work. This may force it into a breach of the contract.

To avoid this inequity, courts will not allow owners to issue change orders that
are considered “cardinal changes.” If the nature of the project is completely
transformed by a change order, it will be considered an impermissible cardinal
change. If the change order is consistent with the original nature of the project,
however, the contractor will be required to honor the directive.

Elements of an Effective Changes Clause

The starting point of an effective change clause is the establishment of the

owner’s right to order changes in the definition or the scope of the work. These
changes can be ordered at any time prior to final completion and acceptance of
the work.

Usually the clause specifies the manner in which the directives are issued, e.g.,
in writing. The clause should also establish which individuals have authority to
issue written changes. This is imperative if confusion and misunderstanding are
to be avoided. Contractors should act only on proper change orders signed by
an authorized individual. Owners should be expected to pay only for extra
work performed pursuant to such change orders.

The changes clause should also make it clear that the contractor has an ob-
ligation to proceed promptly with any change order work. Even if the parties
have not agreed on the appropriate price increase or time extension, the con-
tractor must obey the change order. It may not withhold performance until all
its terms are met. This would defeat the purpose of having a changes clause
from the owner’s standpoint.
 P a g e | 625

The clause should go on to state that if the parties are unable to agree on the
terms of the change order, the contractor may submit a formal claim that will
be resolved in accordance with the “disputes” provision of the contract. In
other words, the contractor must perform the work now and arbitrate or litigate
its claim for additional compensation later.

If possible, the changes clause should establish a formula or method for pricing
the changed work. On some contracts, such as unit-price contracts, this is
relatively easy. Other contracts are more difficult to quantify in advance. The
pricing of changed work is covered at the end of this chapter.

The changes clause should also provide for an appropriate extension of time
for the performance of changed work. The basic principle here is that if the
change order will extend the contractor’s performance period by a certain
number of days, the contractual completion date should be extended by a cor-
responding amount.

The appropriate extension is not necessarily limited to the amount of time

required to perform the changed work alone. Sometimes the change order will
have a ripple effect on other, unchanged aspects of the work, forcing the con-
tractor to perform work out of sequence or pushing the contractor into a period
of inclement weather. The time extension should take the total impact of the
change order into consideration.

Usually the owner looks to the contractor to make the initial proposal regarding
the pricing and time extension for changed work. After all, the contractor is in
the best position to have this information. The changes clause frequently
specifies the format and content of the contractor’s change order proposal or
submittal. Once the submittal has been received by the owner, there is intense
negotiation regarding price and schedule. It is the contractor’s duty, however,
to assemble the original proposal and to document or itemize its anticipated
costs in order to support its proposed price.

Finally, a changes clause should place upon the contractor the duty to give the
owner prompt notice of any directive, interpretation, or situation which the
contractor considers to be a change in the work. These are the “constructive
changes” that are described below. The owner has the right to receive prompt
notification of these matters in order to make a decision. For instance, if the
A/E interprets the specifications in a manner the contractor considers to be a
 P a g e | 626

change, the owner will want the opportunity to evaluate the situation. If the
owner agrees that this would be a change in the definition of the work, the
owner may want to override the A/E’s directive in order to avoid paying for a
change.

CONSTRUCTIVE CHANGES

A “constructive change” is a change in the scope or definition of the contrac-

tor’s work that is directed by the owner or the owner’s authorized represen-
tative. A constructive change can be distinguished from a directed change by
the fact that the owner or its representative does not acknowledge, at least at
the outset, that the directive calls for a change in the work.

When an owner issues a change order, it is implicitly acknowledging that the

scope or definition of the work is being altered. Only price and time extensions
need to be resolved.

If an owner issues a “directive” in a form other than a change order, however,

the owner is not acknowledging that this entails a change in the work. The
owner may very well contend that the directive was within the original scope
of work; the work required by the directive was already called for in the
contract.

Constructive changes must be distinguished from differing site conditions.

With differing site conditions, it is a physical condition in the field, either
natural or manmade, which forces the contractor to perform additional or
altered work. Constructive changes result from an order or a directive issued by
the owner or its representative. If the directive is issued in response to
unanticipated conditions in the field, the contractor’s claim could be more
accurately characterized as a differing site condition. If the directive reflects
the owner’s interpretation of the work requirements, the contractor’s claim is
based on a constructive change in the work.

What Is a Directive?

A directive is an unequivocal order to the contractor from the owner or its au-
thorized representative calling for the contractor to perform a particular item of
work or directing the contractor to perform work in a particular manner.
 P a g e | 627

Sometimes the directive is in writing. This might be in the form of a field order
directing the contractor to do something but not acknowledging that extra or
altered work is involved. More often, however, these directives are oral and are
issued on an informal basis in the field.

In order for a directive to be a constructive change, there must be an

unequivocal order. If the owner or its representative is simply requesting
something or expressing a nonbinding opinion, it is not a directive. A
contractor will be allowed to recover additional compensation only if it can
show it was required to perform the additional or altered work. If the
contractor simply volunteered to do the work or acquiesced in order to
maintain good business relations, it will not be a compensable constructive
change.

Most constructive change claims result from differing interpretations of the

contract. Sometimes provisions of the drawings or specifications are subject to
two or more interpretations. If there is an obvious ambiguity or a direct conflict
among the provisions, the contractor has a duty to inform the owner prior to
submitting a bid or signing a contract. If the ambiguity is subtle, or “latent,”
however, the contractor has no such duty.

The rule regarding latent ambiguities is that if the contractor’s interpretation

of the contract requirements was reasonable, any directive which alters the
contractor’s intended method of performance is a constructive change. This
is the most common source of constructive change claims. The owner or A/E
assumed or believed that the contract called for certain work to be performed in
a certain way. The contractor assumed otherwise. If the drawings or specifi-
cations are latently ambiguous and the contractor’s interpretation was reason-
able, directives requiring the contractor to alter its performance will constitute
constructive changes.

It is important to keep in mind that the owner, A/E, or other owner’s rep-
resentative has no right to tell the contractor how to perform the work. The
“means and methods” of construction are left to the discretion of the contrac-
tor, who is presumably expert in these matters. The contract simply defines, in
an objective, verifiable manner, the end result the contractor must produce. As
long as the contractor complies with these requirements, the method used is
generally none of the owner’s business.
 P a g e | 628

CASE STUDY

Owner awarded Contractor a contract for construction of bridges over a

canal. Contract included construction of concrete barrier rail at a unit price of
$42 per linear foot.

Rather than using fixed forms, as Owner expected, Contractor used slip forms
to build the barrier rail. Owner claimed it was entitled to a price reduction,
because the use of slip forms saved Contractor a great deal of money.

The Court of Appeals of North Carolina ruled that Owner had no right to take
a credit. The contract simply referred to the use of “forms.” When a contract
does not specify a particular method of performance, the contractor is free to
choose any method so long as it achieves compliance with the specifications. If
the contractor complies with the specifications, the owner cannot treat the
contractor’s method of performance as a deductive change in the work.

Hardaway Constructors, Inc. v. North Carolina Department of

Transportation, 342 S.E.2d 52 (N.C.App. 1986).

This, too, is a source of constructive change claims. Sometimes A/Es or other

job site representatives disapprove of or disagree with the contractor’s method
of construction. While the owner certainly has the right to insist on strict
compliance with the specifications for the completed work, the owner and its
representatives must be careful not to confuse the means with the end result.

If the owner’s representative directs the contractor to employ certain methods

of performing the work and the contractor can later show that it would and
could have employed a less expensive method of achieving compliance with
the specifications, the contractor will be entitled to recover its increased costs
under the theory of a constructive change.
 P a g e | 629

The Changes Clause

Most changes clauses contain two provisions important to constructive change

claims. They are the notice requirement and the written change order
requirement.

The notice provision simply states that anytime the contractor receives a
directive which it considers to be a constructive change, it must give the owner
or its representative prompt, written notice. If the contractor proceeds to per-
form the allegedly changed work without giving the owner notice, the contrac-
tor will not be entitled to any additional compensation for the work.

The purpose of the notice requirement is to give the owner the opportunity to
make a judgment as to whether the directive entails a change in the work. If the
owner concludes that it does, the owner may want to override or rescind the
directive rather than paying the contractor extra for the work. Or the owner
may consider it worth the extra money and try to negotiate a price with the
contractor and then issue a formal, written change order for the work.

Finally, the owner may not agree that the directive entails changed work. The
owner may stand behind the directive, require the contractor to perform it, and
let the contractor pursue a constructive change claim under the dispute
resolution provisions of the contract.

The written change order provision simply states that any changed or extra
work must be authorized in advance by the owner. In other words, a written
change order is required.

Despite the seemingly harsh language of these requirements, there are severe
limitations on their enforceability. To begin with, a party to a written contract
may, by its conduct, waive a contract requirement. This means that an owner
may waive the written change order requirement by authorizing orally or by
recognizing oral changes authorized by its representatives. An Owner cannot
avail itself of the speed and informality of oral changes rely on the written
change order requirement to defend a claim for a constructive change. This is
true even though the contract states it can be modified only by written
instrument signed by both parties.
 P a g e | 630

CASE STUDY

Contract for construction of condominium project included clause requiring

prior written authorization from the project owner before the contractor
performed any extra work.

Owing to errors in Owner’s plans, it was necessary for Contractor to make

changes in the roof and trusses. Owner’s superintendent orally directed
Contractor to proceed and assured Contractor that the extra work would be
paid for. No written change order was issued, however.

When Contractor sought to recover payment for the extra work, owner argued
that it was not obligated to pay in the absence of a written change order. The
Supreme Court of Nevada disagreed.By issuing an oral directive and standing
by while Contractor followed that directive, Owner waived the contract
requirement that all changes be authorized in writing in advance.

Udevco, Inc. v. Wagner, 678 P.2d 679 (Nev. 1994).

Even if the owner does not waive the written change order requirement by its
actions, it still may be unable to rely on the absence of a change order to
defend a constructive change claim. In order to rely on this defense, the owner
must be able to show that it suffered some prejudice, or economic harm, as a
result of the contractor’s failure to follow the contractually required proce-
dures.

For instance, if a contractor did not give the owner or its representative notice
that it considered a directive to be a constructive change and then went ahead
and performed the work, the contractor may not be able to prevail on a
constructive change claim. The owner could argue that had it been notified of
the alleged change, it would have investigated the situation and possibly done
something different. The Owner has suffered prejudice as a result of the lack of
notice; so the lack of notice will be a viable defense to the constructive change
claim.

A more common constructive change scenario is that the contractor is directed

to do something and protests to the owner that it involves a change. The owner
or its representative deny that it involves any change in the work and order the
contractor to proceed as directed. The contractor proceeds. There is no written
 P a g e | 631

change order, of course, as the owner denies that change has taken place. If the
contractor requests a change order, the owner refuses to issue one.

In this situation, the owner may not rely on the lack of a written change order
as a defense. The owner was notified that the contractor considered the
directive to be a change. The owner had an opportunity to consider the con-
tractor’s contention and respond to it. The owner was in no way prejudiced by
the lack of a written change order. To enforce that requirement under these
circumstances would enable the owner to reap a windfall at the contractor’s
expense. The contractor will be allowed to pursue its claim for a constructive
change under the dispute provision of the contract.

Quantity Variations

This is a unique type of change that bears little resemblance to either a con-
structive change or a directed change. It arises on unit price contracts where the
contractor has bid or agreed to stated unit prices for estimated quantities of
items, for instance, a bid of $4 per cubic yard for the excavation of a particular
classification of soil.

Problems arise because the owner’s quantity estimate may be inaccurate. After
all, it is only an estimate. On a unit-price contract, the contractor is paid only
for the units of work actually performed. And the contractor’s unit price was
based on the estimated quantity. If the quantity proves to be much less than
estimated, the contractor could suffer a loss on that item because it would not
even recoup its mobilization or start-up costs.

If there is a significant quantity overrun on the item, the contractor might

receive a windfall. After all its initial costs were recouped on the estimated
quantity, the overrun would be gravy.

To mitigate this problem, many contracts state that the unit price will be
“equitably adjusted” if actual quantities vary from estimated quantities by more
than a stated percent, frequently 20 percent. Overruns would presumably call
for a downward adjustment of the price. Underruns would call for an upward
adjustment. The concept of “equitable adjustment” is discussed in the next
section of this chapter.

If the contract does not include a quantity variation clause, the contractor will
be paid the original unit price regardless of the actual quantity of work
 P a g e | 632

performed. If there is a substantial shortfall, it will be virtually impossible to

get a unit-price increase. Contracts typically disclaim the accuracy of quantity
estimates and state they are ‘for bidding purposes only.” And a quantity under
run hardly qualifies as a constructive change. There has been no directive from
the owner requiring anything that wasn’t required in the original contract.

PRICING CHANGED WORK

The most difficult and contentious aspect of changed work is establishing the
price to be paid to the contractor. Even assuming the owner agrees that a
change has occurred, the owner may not agree with the price proposed by the
contractor.

Owners tend to feel that changes have a minimal effect on the contractor’s
costs, while contractors tend to see every change as having a widespread ripple
effect.

The problem is compounded by the fact that usually the work must be
performed right away. There is no time for lengthy negotiations prior to
performance of the work.

When to Price Changed Work

Under a normal changes clause, the contractor has a duty to proceed immedi-
ately in response to any change order or other directive issued by the owner.

It may be possible to quickly agree on a price before the contractor starts the
changed work. This is referred to as ‘Forward pricing” a change order.

Forward pricing is usually accomplished by having the contractor assemble

estimates or quotations for the various items of work included. If the amounts
seem reasonable and authentic, the owner may agree to them, and a total price
for the change order will be established in advance.

The advantage of forward pricing is the certainty it produces and the avoidance
of disputes. For the owner, in particular, it is desirable to know exactly what
the change order is going to cost. The contractor can also benefit, however,
from having a certain price before performing the work and knowing that the
change order will not result in a price dispute.
 P a g e | 633

There are serious disadvantages for the contractor, though. During performance
of the changed work, the contractor may incur costs it did not anticipate. These
may be direct labor and material costs that were either underestimated or
inadvertently omitted. More commonly, they are so-called impact or ripple
costs. These are the indirect cost resulting from the change order. They include
extended job site supervision and delay and disruption to the unchanged
portions of the work.

Impact costs are difficult to estimate in advance and sometimes difficult to

quantify even after the fact. On some projects, the impact costs of a change
order can be very significant. For this reason, many contractors prefer not to
forward price change orders. They prefer to keep detailed cost and schedule
records as they perform the changed work and then submit a proposed price
based on actual costs after completion of the changed work.

Even when the work is not forward determination of change order costs is
priced, however, the measurement or far from clear-cut. The parties and, if
necessary, courts or arbitrators, must look to the pricing formula established in
the changes clause of the contract.

CASE STUDY

During the course of construction of a public building, Owner issued 81

change orders. Each change order stated that the price increase covered “all
charges direct or indirect arising out of this additional work.” Contractor
signed each change order.

Contractor later sought to recover its increased costs caused by the cumulative
impact of the numerous changes. When confronted with the change order lan-
guage, Contractor said it would have been impossible to determine the
cumulative impact during the course of the work and it is customary in the
construction industry to bring these claims at the conclusion of the project.

The California Court of Appeal rejected Contractor’s argument. If Contractor

wanted to reserve the right to seek its cumulative impact costs, it should have
stated so in writing when acknowledging each change order. In the absence of
such a written reservation of right. Contractor is deemed to have waived the
right to any additional compensation arising out of the changes.
Vanlar Construction. Inc. v. County of Los Angeles. 217 Cal.Rptr. 53
(Cal.App. 1985).
 P a g e | 634

Equitable Price Adjustment

Many changes clauses, including the ones used on federal construction

contracts, simply state that a change will entitle the contractor to an “equitable
price adjustment.” This is basically a price adjustment that will leave the
contractor in the same economic position it would have been in had the change
order not been issued. It is intended to “make the contractor whole.”

An equitable price adjustment should certainly include the direct cost of labor
and materials required to perform the work. These items tend to be relatively
easy to document and measure. It should also include the impact of the change
order on the cost of performing other unchanged work. As mentioned above,
this is difficult to document and measure and is a common source of disputes.

There have been many disputes regarding a contractor’s entitlement to

overhead and profit markups on changed work. The large majority of courts
and administrative boards that have addressed the issue have concluded that
these markups should be allowed.

Although home office overhead is a fixed amount not affected by a change

order, certain overhead expenses can be directly attributed to the change and
should be recovered by the contractor. These expenses include increased or
extended job site supervision and also the administrative effort of pricing and
preparing a change order proposal for the owner. The administrative costs are
not always recognized, although the federal boards of contract appeals
recognize them as recoverable costs.

It is well established that a contractor is entitled to mark up the direct and

indirect costs to allow for a profit. After all, the original contract price pre-
sumably allowed for a profit on the work. It would hardly be equitable to allow
an owner to order the contractor to perform extra work at cost. This would
diminish the overall profitability of the contract and amount to asking the con-
tractor to work “for free.”

Ideally, once all the various factors are considered, the owner and contractor
can agree on an “equitable price adjustment” as compensation for the change
order. Although a great number of itemized costs are taken into consideration
in arriving at that figure, the change order itself usually expresses it as a single
lump sum.
 P a g e | 635

The process is difficult, however, as the concept of equitable price adjustment

is inherently loose and subject to differing interpretations. For this reason it is
desirable to establish a formula for pricing changed work in the contract itself.

CASE STUDY

While attempting to lay a sewer line across a river, Contractor discovered that
the specified method of weighting the pipe was inadequate. Contractor notified
Owner’s engineer of the problem and requested guidance. Engineer was slow
responding.

Contractor, eager to accomplish the work while water levels were favorable,
proceeded with the work. Contractor made necessary modification in the
ballast scheme without receiving a written change order.

Contractor later attempted to recover its increased cost of performance

resulting from the ballast modifications. The Court of Appeals of Tennessee
ruled that even though the modifications may have been necessary and even
though the problem resulted from Owner’s defective specifications, Contractor
could not recover because if failed to obtain a written change order as
required by the contract.

State of Indiana v. Omega Painting, Inc.,463 N.E.2d 287 (Ind.App. 1996).

Pricing Formulas in the Contract

Many construction projects defy the use of pre-established formulas for pricing
changed work. Some contracts lend themselves to this approach, however.

Unit-price contracts are ideal, as the work is being paid for according to
measurable quantities. If additional quantities are ordered, the unit prices can
continue to apply, or a quantity variation clause may be used as described earl-
ier.

Even on lump-sum contracts, it is possible to eliminate some areas of disagree-

nent by establishing a formula in the contract. For instance, it is common for a
changes’ clause to state that change orders will be priced according to direct
costs plus a stated percentage markup for overhead and a stated markup for
profit. This nay or may not adequately compensate contractors for impact
costs, but it is an approach that is widely used and is appealing in its simplicity.
 P a g e | 636

Another effective technique is the use of cash “allowances” in the contract.

When bidding or quoting a price, the contractor is instructed to state that its
rice includes an allowance of so many dollars for certain items of work or
items of equipment. If the owner later decides to delete one of these items from
the scope of work, the contract price is simply reduced by the amount of the
allowance. This is a very effective device to use if the owner is seriously
considering such a deletion at the outset.

Finally, the contract may call for changed work to be performed on a “time and
materials” basis, that is, the direct cost of materials plus a stated hourly rate for
labor. Sometimes a stated percentage markup is allowed on the material costs.
This is an effective method on small projects, but not desirable on major
projects.

Owners are uncomfortable with the approach because it resembles writing the
contractor a blank check. The argument can be made, however, that there is no
less uncertainty in paying for changed work on a time rid materials basis than
in ordering a contractor to proceed with the promise of and “equitable price
adjustment” upon completion.

KEY TERMS AND CONCEPTS

change in the work A change in the scope of work established in the contract
documents at the time of contract execution. A change may involve the
deletion of work. the addition of new work, or an alteration in the materials or
equipment to be used.

directed change A change ordered by the project owner and

acknowledged by the owner to be a change in the scope of work.

constructive change A change in the work which the contractor alleges

to have been caused by an act or directive of the owner or owner’s
representative. The owner denies that a change in the scope of work has
occurred and contests the contractor’s entitlement to additional compensation.

deductive change A directed change whereby the owner deletes

work from the original scope of work established in the contract documents.

change order A document issued by the project owner and signed by

both owner and contractor acknowledging that the contract has been modified
to reflect a change in the scope of work. A change order generally reflects the
 P a g e | 637

change in the contract price that has been agreed upon as a result of the
changed work. Change orders frequently contain language whereby contractors
waive and release the right to any further added compensation as a result of the
change.

quantity variations A variation, usually on a unit-price contract, between the

estimated quantities of work stated in the contract and the actual quantities
encountered in the field. A significant underrun can pose a financial hardship
for the contractor, whereas an overrun can produce a financial windfall.
Consequently, many unit-price contracts call for a price adjustment if the
actual quantity varies from the estimated quantity by more than a stated
percentage amount.

equitable price adjustment A general term, frequently used in

construction contract changes clauses, referring to the price increase (or
decrease, in the event of a deductive change) that will leave the contractor in
the same financial position it would have been in but for the change in the
scope of work.

forward pricing The assignment of a contract price adjustment to a

change order before the actual costs of the change are known. Forward pricing
is based on estimates. The owner and contractor agree on the price adjustment
before the changed work is actually performed.
 P a g e | 638

Emerging forms of Contracting

The construction management method of organizing a construction project in-
volves the award of multiple prime contracts by the project owner. Rather than
award a single prime contract to a general contractor who will have sole
responsibility for scheduling, coordinating, and completing the work, the
owner elects to award a series of prime contracts to various trade and specialty
contractors.

Each contractor is given responsibility for a certain defined portion of the

project. Other aspects of the project may not even have complete working
drawings at this point. In the absence of a single, general contractor, the project
owner necessarily assumes responsibility for the scheduling and coordinating
of the work of the various prime contractors.

This situation is usually handled by the owner’s agent also called the
construction manager. The role of the construction manager is discussed in
some detail later in this chapter.

The construction management technique (but not the name) was first used
during wartime periods earlier in this century. Projects of military and indus-
trial significance had to be completed in a short period of time. By awarding
multiple prime contracts for various phases of the project, the government
could start work on the preliminary phases while its architects and engineers
were still completing the design for later phases of the project.

Construction management in the private sector gained prominence during the

decade of the 1970s. Once again, the motivation was to shorten the duration of
the design and construction process. Rather than military emergency, the
problem in the seventies was high construction loan interest charges and
rapidly escalating costs for labor and materials. Construction management of-
fered an opportunity to mitigate those factors.

It should be apparent by now that a construction management project involves

different contractual relationships and a different chain of command than a
traditional construction project. This arrangement is illustrated next page.
 P a g e | 639

ARCHITECT OWNER CONSTRUCTION

ENGINEER MANAGER

PRIME PRIME PRIME PRIME

CONTRACTOR CONTRACTOR CONTRACTOR CONTRACTOR

SUBCONTRACTOR SUBCONTRACTOR SUBCONTRACTOR SUBCONTRACTOR

SUPPLIER SUPPLIER SUPPLIER SUPPLIER

Role of the Construction Manager

The term “construction management” or construction manager” is used very

loosely. It is no wonder that many people, including those in the construction
industry, are unclear as to exactly what the responsibilities of a construction
manager are.

In “pure” construction management, the construction manager (or CM) is an

independent professional serving as the agent of the project owner. The CM is
responsible for scheduling the work of the various prime contractors,
coordinating the division of work and the performance of work in the field and
administering the business and financial aspects of the project. In other words,
the CM carries out most of the functions of the traditional general contractor.

This is necessary because the project owner, by electing to award multiple

prime trade contracts, has implicitly assumed an obligation toward those con-
tractors to properly schedule and coordinate the work. Yet most project owners
lack the resources and expertise to perform this function—thus the advent of
the professional construction manager.

In a pure construction management situation, the CM is retained strictly as an

independent, professional consultant. The CM is paid a fee for this service. The
CM plays no entrepreneurial role in the development, design, or construction
of the project and has no financial interest in its outcome. All contracts are
awarded by the owner directly to the trade contractors, with the CM simply
advising the owner.

As construction management evolved, the pure form of this method quickly

fell by the wayside. The two groups with the most to offer project owners were
the architects and engineers (A/Es) and the traditional general contractors.
 P a g e | 640

These two groups actively marketed their services as “construction managers”

and developed standard contract forms defining their role as CM. In so doing,
they developed two forms of hybrid construction management prevalent today.

The contractors’ approach to construction management is reflected in the

Associated General Contractors of America Document No. 8, Standard Form
of Agreement between Owner and Construction Manager.” Under this ar-
rangement, the CM guarantees a total maximum construction cost to the owner.
The CM, not the owner, enters into contracts with the trade contractors.

The CM also has the option of performing extensive construction work with its
own forces. In other words, the CM functions much like the traditional general
contractor. The primary distinction is that construction work is commenced
before final working drawings are ready for all phases of the project. The CM
guarantees a maximum price based on conceptual drawings and explicit design
parameters.

The A/E’s approach to construction management is reflected in the Engineers’

Joint Contract Documents Committee Publication No. 1910-15, “Standard
Form of Agreement between Owner and Project Manager for Professional
Services.” Under this arrangement. the “project manager,” as it is referred to, is
responsible for providing all architectural and engineering services.

The project manager does not guarantee the maximum cost of the project and
does not enter into any contracts with the construction trades. In fact, the
project manager disclaims any responsibility for construction methods or
techniques. The project manager performs a function much like the traditional
A/E. Again, the primary distinction is that construction contracts are awarded
before final working drawings are complete for the entire project, enabling a
“phased” approach to the work and a shorter total elapsed time.

Both the general contractors and the A/Es have modified the pure construction
management method to make it more similar to their accustomed roles. Yet
each arrangement maintains some of the key characteristics of pure con-
struction management.
 P a g e | 641

Advantages of Construction Management

The primary advantage of construction management has already been

referred to. It is the opportunity to “fast-track” a project. This means that
construction can commence on early phases of the project while working
drawings are still being completed on later phases. This means that the design
and construction overlap, thus reducing the total elapsed time for the entire
process.

It is impossible to fast-track a traditional construction project because a general

contractor cannot agree to a fixed price until all the details of the work
requirements have been established. If an owner wants to fast-track a project, it
must be willing to give up the advantage of a fixed price and deal with
numerous contractors. The potential benefit is that by reducing the elapsed
time of the design and construction process, the owner reduces its construction
financing costs and mitigates future labor and material cost escalation.

The other advantage of the construction management system is that by

awarding trade contracts directly, the project owner avoids the general con-
tractor’s markup on subcontracted work. This advantage may be somewhat il-
lusory, as the owner will have to pay a CM to perform many of the general
contractor’s traditional functions.

Additionally, the general contractor’s markup of subcontracted work is usually

not as large as many owners assume. Nonetheless, the avoidance of general
contractor markup has a strong emotional appeal to many developers and
project owners.

Risks of Construction Management

The construction management method of organizing a project creates

certain risks. On a traditional project, the owner awards a fixed-price contract
for a thoroughly described facility. If all goes well, the owner knows exactly
what it will receive and exactly what it will have to pay for that product.

With construction management, the owner starts with only conceptual plans
and design parameters. Although the various trade contracts are usually of a
fixed-price nature, the owner has no fixed price for the entire project. The use
 P a g e | 642

of construction management therefore results in less control over the nature of

the completed project and less control over the total price.

The absence of a general contractor creates other risks as well. There is no

single point of responsibility and authority for the construction work. In theory,
the construction manager has authority to coordinate the work of the trade
contractors. The degree of authority will depend, however, on the nature of the
agreement between the owner and the CM and the language in the construction
contracts between the owner and the trades.

On a traditional project, the general contractor has ultimate responsibility for

the timely and sufficient completion of the work. If there are problems with
delay or shoddy work, the general contractor cannot simply point its finger at
its subcontractors. Any problems with subcontracted work are the responsi-
bility, and liability, of the general contractor. The project owner need only
make contact with a single party.

A construction management project, on the other hand, lends itself to re-

ciprocal finger pointing. With no single source of responsibility, the Owner is
faced with a situation where the trade contractors blame each other, or the CM,
for the problems which arise. It is harder for the Owner to get problems
resolved when it must act as fact finder and mediator of every dispute.
 P a g e | 643

Construction management also increases the legal liability exposure of the

project owner. Having elected to forgo the general contractor, the owner has
assumed the responsibility for the proper scheduling and coordination of the
project. The fact the owner has retained a CM to perform this function does not
protect the owner. It is usually the owner, not the CM. who has contracted with
the trade contractors.

They will look to the owner when problems arise. The owner may then seek
recourse against the CM for doing a poor job, but this may not be much solace
if the project is coming unraveled and the owner is facing claims from
numerous trade contractors.

This liability exposure is greatest in the area of scheduling and delay. There
have been a large number of lawsuits by trade contractors against project own-
ers alleging that the owner, through its CM, failed to properly schedule or co-
ordinate the work, thereby delaying the trade contractor.

Many of these suits have been successful. In response, owners have started
using no-damage-for-delay clauses in their trade contracts, as well as clauses
stating that the trade contractors are responsible for coordinating the work
among themselves. Some owners have even designated a single trade
contractor as having primary responsibility for coordinating all the work.

These clauses have had varying degrees of effectiveness in insulating project

owners against liability for delay of trade contractors. If nothing else, they call
attention to a fundamental weakness in the construction management method.
Without a single source of authority and responsibility for construction, greater
responsibility falls on the owner, and the likelihood of delay and coordination
problems increases.

Outlook for Construction Management

It is fair to state today that construction management has not lived up to its
promise of the 1970s. Many large project owners, both public and private. have
found that CM projects generate a disproportionate amount of delay claims and
other litigation. Cost overruns have been a problem as well. As inflation and
interest rates have declined, so has the appeal of construction managed
projects. The need for certainty and control may now exceed the need to avoid
cost escalation and finance charges.
 P a g e | 644

Despite these factors, however, construction management in its various forms

is here to stay. Construction will always be a very capital-intensive endeavor.
Anything that can be done to reduce the total elapsed time of design and
construction has an innate economic appeal. When inflation and interest rates
rise once again, many project owners will again prefer to take their chances
with phased construction rather than wait to design an entire project and put it
out to bid.

CASE STUDY

Owner awarded numerous prime contracts for construction of an automobile

assembly plant. Owner retained construction manager (CM) to serve as its
agent for the scheduling and coordination of the project. CM allowed several
contractors to discharge water through partially completed storm drains. This
flooded the sole access road and prevented other contractors from getting their
equipment on site. The concrete contractor sued Owner and CM for delay
damages.

The U.S. District Court ruled that Owner, having elected to award multiple
prime contracts, had an obligation to coordinate the contractors so that no
contractor would be denied timely site access. The concrete contractor
received a $750,000 judgment against Owner and CM jointly.

R. S. Noonan. Inc. v. Morrison-Knudsen Co.. Inc.,522 F.Supp. 1186 (D.C.La. 1981).

CASE STUDY

Owner retained construction manager (CM) using the form of agreement pub-
lished by the Associated General Contractors of America (AGC). Under this
agreement, the CM guarantees a maximum price and contracts directly with
the trade contractors.

After completion of the project, problems developed with the air-conditioning

system. Owner sued CM. CM responded that it was not responsible for the
work of the mechanical contractor.

The District of Columbia Court of Appeals ruled that under the AGC construc-
tion management agreement, the CM is responsible for the work of the trade
contractors because the relationship between CM and trade contractor is
 P a g e | 645

essentially the same as the relationship between general contractor and

subcontractor on a traditional construction project.

Phoenix-Georgetown. Inc. v. Charles H. Tompkins, Inc.. 477 A.2d 215

(D.C.App. 1984).

CASE STUDY

Owner of industrial facility awarded a number of separate trade contracts.

Each contract contained a “no-damage-for-delay’’ clause stating that if the
contractor was delayed by other contractors, it would not be entitled to any
additional compensation.In an effort to speed up the project, Owner gave an
equipment supplier priority access to the building. This impeded the
mechanical contractor’s site access and delayed the mechanical contractor.
Contractor tiled suit against Owner.

The Court of Appeals of Michigan ruled that the delay damage disclaimer is
generally enforceable. On a multiple prime contract project, however, the
contractors are completely dependent on the owner for proper scheduling and
coordination of the work. Owner’s failure to fulfill these obligations amounted
to intentional interference with Contractor’s work. Intentional interference is
an exception to the enforceability of the delay damage disclaimer, so
Contractor could recover.

Phoenix Contractors. Inc. v. General Motors Corp., 355 N.W.2d 673

(Mich.App. 1984).

DESIGN/BUILD

Under the “design/build” method of organizing a construction project, the

owner contracts on a cost-plus basis with a single entity to provide the entire
project. This includes planning, preliminary design, final design, and construc-
tion. Usually the design/build contractor is a general construction contractor,
although it is sometimes a joint venture of a general contractor and an archi-
tectural/engineering firm.

Design/build has two important distinctions from the construction management

method. First, the owner contracts with a single entity rather than contracting
with numerous trade contractors. Second, the owner of a design/build project
does not contract directly with an independent A/E. The A/E is usually a
subcontractor to the prime design/build contractor. Many large engineering
 P a g e | 646

construction firms have sufficient professional staff to perform virtually all the
design in-house.

CASE STUDY

Owner awarded numerous prime contracts for construction of medical school.

The general building contractor was designated as the party having
responsibility for the overall coordination of the project. Each contract
disclaimed Owner liability for delay.

The project ran 25 months behind schedule and the electrical and plumbing
contractors brought delay claims against Owner. Contractors argued that
despite the contract language, Owner was the only party that had actual
authority to properly schedule and coordinate the work.

The Supreme Court of New Jersey ruled that under this contractual arrange-
ment, Owner was not liable for delay of the various contractors. If Owner had
failed to designate a party with coordination responsibility, the contractors’
argument might be persuasive. Owner had effectively delegated the
responsibility, however, and could not be held liable under these
circumstances.

Broadway Maintenance Corp. v. Rutgers University, 447 A.2d 906 (N.J.

1982).

Defining Scope of Work and Payment

Initially, a design/build contractor usually performs a feasibility study for the

project owner. This study would probably include some very preliminary cost
estimates. If the project is deemed feasible, the design/build contractor, through
the A/F, would begin to design the project.

The initial design documents are usually very general. They define the basic
parameters of the project in terms of size, capability, and design standards.
These documents are not sufficiently precise to be used in awarding trade con-
tracts, but they are vital to the design/build process. This is because the owner
and design/build contractor rely on these documents to negotiate a guaranteed
maximum price. This preliminary design work is usually paid for on a lump-
sum basis, as the owner may or may not contract for a completed project.
 P a g e | 647

If the parties agree on a guaranteed maximum price, the actual design/build

contract is executed. Allowable costs are defined in this contract. The con-
tractor receives all allowable costs plus a stipulated fee. If costs exceed the
guaranteed maximum, they are taken first from the contractor’s fee and, if
necessary, from the contractor’s pocket. There is usually a “shared savings”
provision which applies to a cost underrun. By giving the contractor a share of
any savings under the guaranteed maximum price, the owner maintains the
contractor’s incentive to run an efficient project.

Once the design/build contract has been executed, the contractor, through the
A/E, begins to prepare working drawings and complete specifications for the
various trades. Bid packages are assembled and subcontracts awarded much the
same as on a traditional construction project. Design/build contractors
frequently have expertise in particular types of industrial or utility projects and
may elect to perform substantial portions of the construction work with their
own forces.

Advantages of Design/Build

Unlike a construction management project, design/build offers the project

owner a single source of responsibility and authority for the successful
completion of the entire project. If there is any problem with the design or the
construction, the owner can look to the design/build contractor. As the sole
prime contractor, the design/build contractor is liable for the work of all its
subcontractors, including the A/E.
Design/build projects also offer the opportunity to fast-track the design and
construction of a project. It is common for design/build contractors to be con-
structing early phases of the project while working drawings are still being pre-
pared for later phases. The economic advantages of fast-tracking were dis-
cussed in the section on construction management. These advantages are even
more attractive on the heavy industrial and utility projects which are very
capital-intensive and are the most likely projects to be arranged on a design/
build basis.

The final advantage of a design/build project is the opportunity for the owner
to rely on the specialized expertise of the design/build contractor. As
mentioned earlier, many design/build contractors specialize in certain types of
heavy, engineered construction projects. They usually have a large number of
technical experts on their staff. On a complex, capital-intensive project. it can
 P a g e | 648

be reassuring for the owner to deal with a specialist who has a track record of
performing that particular type of project.

Disadvantages of Design/Build

The biggest disadvantage of a design/build project is the owner’s inability to

precisely define the project. As described earlier, the owner signs a contract
based on only a preliminary design establishing certain design parameters. No
matter how many standards, parameters, and “statements of intent” the
agreement has, the owner still cannot be sure of the exact details of the
completed project.

This problem is not too severe on an industrial project, where the parameters
can be objectively stated in terms of production capacity per hour or per day.
The owner is far more concerned with production capacity than it is with
interior wall finishes. On other types of projects, however, the lack of detailed
working drawings can be a source of disappointment and disputes.

Considering the lack of a precise contractual definition of the work, it is not

surprising that change orders are a problem on design/build projects. The con-
tractor may consider the owner’s directive to call for something more than
what was required by the design parameters.

The contractor would understandably want an increase in the guaranteed

maximum price. The owner, on the other hand, may think its directive is
consistent with what the contractor promised to deliver. The lack of precise
contractual drawings and specifications makes these disagreements very hard
to resolve.

A large amount of cooperation and mutual confidence is required. The owner

usually does not have an independent A/E and is therefore highly dependent on
the expertise and integrity of the design/build contractor.

Design/build projects also do not provide the owner with as much cost control
and cost certainty as a traditional fixed-price contract. A shared savings
provision gives the contractor a strong incentive to control costs, however, and
the guaranteed maximum price sets an outer limit on the owner’s obligation.
Nevertheless, there can be a wide gap between estimated price in the cost-plus
contract and the guaranteed maximum price.
 P a g e | 649

Finally, it must be mentioned that the design/build method of organizing a

construction project poses greater liability exposure for the contractor than the
traditional method of construction. Traditionally, the contractor is given de-
tailed plans and specifications to follow. The owner has warranted the accuracy
and sufficiency of those documents. If the contractor faithfully performs in
accordance with those documents, it will have satisfied its legal obligations.
Design problems will be a matter between the owner and its A/E.

On a design/build project the contractor has responsibility for design, either

because it designed the project with its own personnel or because the A/E who
designed the project was working as a subcontractor to the design/build con-
tractor. If the project doesn’t function as promised, the problem is in the con-
tractor’s lap. This liability for design problems also complicates the matters of
obtaining insurance and performance bonds.

TURN-KEY DEVELOPMENTS

The third type of emerging construction project has actually been around a
long time. It is the “turn-key” project where the contractor serves as developer
of the project.

The contractor basically agrees to design and construct a completed project on

land the contractor owns or will obtain. The contractor is responsible for
financing the construction and land acquisition.

The project can be defined in great detail and a fixed price placed on the entire
package. Turn-key projects are seldom fast-tracked, as the end user is
motivated more by certainty and simplicity than by a desire to compress the
design and construction process. Once the project is completed in accordance
with the contract requirements, the owner closes on the purchase of the land
and buildings and walks in the door—thus the term “turn-key.”

For the end user, the turn-key method offers the certainty of knowing exactly
what it will get for a completed project. Also, the end user is spared headaches
of being involved in the construction process. The end user need not obtain
construction financing or monitor progress payment requests. Of course, the
financing costs are hidden in the total purchase price. The contractor is
assuming the entrepreneurial risk of a real estate developer and is pricing the
contract in a way that will allow for a profit. The buyer of a turn-key project is
unlikely to obtain as low a price as it would if it developed the project itself.
 P a g e | 650

CASE STUDY

Owner awarded design/build contract to Contractor for development of a

fertilizer plant. The project was completed and Owner gave Contractor final
payment and a general release pertaining to all obligations arising from or in
any way related to the contract.” The air compressor train later failed and
Owner filed suit against Contractor.

Contractor moved for summary judgment, arguing that the release barred any
action by Owner. The U.S. District Court ruled that the release did not apply
to Contractor’s alleged negligence in providing professional design services to
the project. Although Owner could not sue for construction problems, it was
still entitled to sue for breach of a professional obligation.

Kaiser Aluminum & Chemical Corp. v. Ingersoll-Rand Co..519 F.Supp. 60

(S.D.Ga. 1981).

CASE STUDY

Owner awarded a contract to Contractor to design and build an industrial

plant capable of meeting certain production standards. Contractor awarded
subcontract to A/E for the design of the facility. The subcontract incorporated
the terms of the prime design/build contract. The completed plant was unable
to meet the performance criteria. Owner sued Contractor and A/E for breach
of warranty. Contractor and A/E responded that the production requirements
were simply a way of defining the scope of work and that they never warranted
the performance of the plant.

The U.S. Court of Appeals. Eighth Circuit, ruled that the design/build contract
was set up in such a way that Contractor and A/E had an obligation to produce
a plant capable of meeting the production criteria. Anything less was a breach
of warranty.

Arkansas Rice Growers Cooperative Association v. Alchemy Industries.

Inc.. 797 F.2d 565 (8th Cir. 1986).
 P a g e | 651

KEY TERMS AND CONCEPTS

construction management A method of organizing a construction project

where the owner awards multiple prime contracts to various trade contractors.
The project is usually phased, with construction starting on early phases before
final working drawings have been completed for the later phases of the project.

In the absence of a single “general” contractor, the owner is responsible for the
scheduling, coordination, and management of the project. The owner usually
retains the services of a professional construction manager to perform these
tasks. The term “construction management” is used loosely in the industry; so
the role and compensation of construction managers varies greatly.

design/build A method of organizing a construction project where the owner

awards a single contract to one firm which designs and builds the facility. After
conceptual design documents and a preliminary cost estimate have been
prepared, the parties negotiate a guaranteed maximum price for a cost-plus-
fixed-fee contract. At this stage, the project is defined only in terms of design
parameters and standards. As work progresses, the owner pays all allowable
costs up to the guaranteed maximum price. Design/build techniques are used
primarily on heavy, engineered construction projects such as industrial
facilities and utility plants.

turn-key development A method whereby the contractor not only designs and
builds the project, but purchases the land and finances the construction. When
the project is complete, the buyer purchases the land and buildings in
accordance with a contract defining the project and established a price.
 P a g e | 652

PROJECT MANAGEMENT
MANUAL
PART 7

RISK MANAGEMENT &

COMMUNICATIONS MANAGEMENT
2014
 P a g e | 653

Table of Contents Part 7

Subject Page

Risk Management Plan 654

Typical Risk Categories 656

Fundamental Concepts of Risk Management 661

Organization Risk Tolerance 666

Risk Breakdown Structure (RBS) 669

Communications Management 702

Project Scope Statement 706

Performance Reporting 729

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Risk Management

Risk Management Plan

The risk management plan typically includes the following ten components:
1. Methodology
2. Roles and responsibilities
3. Budgeting
4. Timing
5. Risk categories
6. Definitions of risk probability and impact
7. Probability and impact matrix
8. Revised stakeholders' tolerances for risk
9. Reporting formats
10. Tracking information
1. Methodology
Methodology describes:
 The tools, methods, and sources of information that will be used to perform
risk management, including how risks will be identified, analyzed, and
categorized;
 How risk response plans will be prepared, implemented, and monitored; and
 How risk triggers will be monitored.
2. Roles and Responsibilities
The roles and responsibilities section defines who does what during all risk management
activities. In particular, it specifies who will direct and manage risk management activities,
this person may be the project manager or a designated risk manager for the project.
3. Budgeting
The budget establishes the anticipated cost of the risk management activities and the
associated risk response plans, including contingency reserves.
4. Timing
The timing describes how often risk management activities will be performed, and when
they will take place within the project schedule.
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5. Risk Categories

Risk management deals with eventualities that might affect the project but are not
documented in the project management plan. This means thinking not only of problems
that have occurred with this kind of work, organization, or project approach, but also
imagining problems that have never occurred before, but may occur during the project.
The basic purpose of the Risk Identification process (presented in a subsequent section of
the course) is to ensure that as many of these eventualities as possible are considered. To
do this, it is helpful to have a list of risk categories that the project team will address, so
that the process is as comprehensive as possible. The risk categories generated during the
Risk Management Planning process will be an input to the Risk Identification process.
There is no single, standard list, but there are good starting points from which the team can
build. Agreeing on the categories and making the list complete and practical is one of the
first steps in identifying the risks themselves. Considering each risk category should help
the team generate ideas on risk events specific to those categories.
Most risks fall into one of several broad categories; however, any project may run unique
risks.
Risk categories are tools that:
 Enable the project team to more efficiently analyze and respond to risks with
common characteristics; and
 Ensure that no potential sources of risk will be overlooked during the
subsequent Risk Identification process.
Risk categories can be structured to provide different levels of groups for different risk
management purposes or to provide greater scope or more focus as needed during risk
analysis and response planning.
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Typical Risk Categories

Typical Risk Categories Description

Technology or technical approach chosen to achieve the project
Technology
objectives
Schedule, project completion objectives, other project time-related
Time
issues
Contractor capabilities Ability of contractors or other vendors to achieve project objectives
Work in a multi-project environment, or interfaces with existing
Interfaces
operational activities
Occupational safety, industrial safety, and potential for
Safety
contamination
Environmental laws, licenses, and permits
Environmental

Involvement of any regulatory agency such as EPA or DHEC, or

Regulatory involvement
by local, state, and national governments
Significance or visibility to local, state, or national governments
Political visibility
Availability and cost of using key technologies and techniques for
Intellectual property
critical project activities
Involvement by someone other than a primary owner for decision-
Involvement of key stakeholders
making and management
Issues with design criteria, functional requirements, complex
Product and project complexity
design features, or the condition of existing documentation
Adequate resources, specialty resources, rapid labor force build-up,
Labor skills availability and exposure to environmental extremes
productivity
Site ownership and access issues
Number of locations/site access/site
ownership
Project duration and involvement/funding by other parties
Funding/cost sharing
Presence of hazardous or mixed waste
Magnitude and type of contamination

Requirement for precision work or other QA requirements

Quality requirements

Citizen interest or involvement

Public involvement
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The Project Management Institute (PMI) guide Approach

The PMI approach breaks risks into technical, project management, organizational, and
external risks.
 Technical risks are introduced by the difficulty of the work itself, new or
changed technology, unrealistic performance goals, or changes to standards;
 Project management risks arise from poor use of resources, poor quality of
the project plan, or poor project management discipline;
 Organizational risks are associated with cost, time, and scope objectives. They
materialize when project objectives are incompatible; projects are not
prioritized effectively within the organization; funding is not reliably provided;
or there is competition for project resources from other projects; and
 External risks come from a changing regulatory environment, labor issues,
changing priorities of the organization's owner, political or cultural factors in a
country foreign to the organization, resource and product price fluctuations due
to changing economic circumstances, and weather. They also come from issues
that arise from dealing with the public.
6. Definitions of Risk Probability and Impact
The methods for scoring and interpreting the Quantitative and Qualitative Risk Analysis
processes must be set in advance to avoid injecting personal biases or inappropriate
influence into the attention paid to particular risks. Developing a common standard for
defining different levels of a risk's probability and its impact ensures that risks will be
analyzed and responded to objectively.
Probability and impact are independent variables.
Risk probability is the likelihood that a risk will occur, on a scale between 0% and 100%,
where 0% means it is impossible, and 100% means it is certain.
Risk impact is the effect on project objectives if the risk event occurs.
Risk probability and risk impact are investigated separately; however, a common pitfall is
for these terms to be confused, for example, assigning a high probability to a risk because
the potential impact is severe. For example, imagine the risk of being struck by lightning -
the impact is very high, but the probability is considered very low.
During risk analysis, these two dimensions of risk are applied to specific risks. This helps
determine which risk events should be managed most aggressively, and the level of effort
and investment that is justified.
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7. Probability and Impact Matrix

Each risk's probability rating (P) is multiplied by its impact rating (I) to generate a "risk
score" (RS). Since the number of probability rating values and impact rating values is
limited (normally, five of each), all possible combinations can easily be established and
entered into a table or matrix. (Tables and matrixes are presented in a subsequent unit,
Qualitative Risk Analysis.)
Organizations often find it useful to stratify the resulting RS values into three levels, one
representing "low" risks, one representing "moderate" risks, and one representing "high"
risks. To signify this, the associated matrix entries can be colored to identify which level
they belong to. For example, the low risks may be colored green, the medium risks yellow,
and the high risks red.
Using this technique simplifies applying different policies (and hence effort and resources)
according to the level of the risk's RS. For example, risks rated as "red" may require review
at every weekly status meeting, while "green" risks may be reviewed only monthly, or on a
less frequent, rotating basis.
8. Revised Stakeholder Tolerances for Risk
Risk thresholds define the criteria that a risk must satisfy in order to be acted on.
Example: One threshold may require that if a risk delays the project's schedule objective
by more than 30% and the project team would require another 20% of project budget to
mitigate the schedule impact to below that level, a reevaluation of the project's cost-benefit
ratio is triggered automatically.
Selecting which level of risk factors is "high" risk is a matter of stakeholder tolerance. In
some cases, stakeholders may temporarily adjust their attitudes toward risk for a specific
project, particularly if one or more project objectives represent significant strategic value
to the organization.
Sometimes an organization faces significant external threats, such as the pressure of
competitive innovation or significant restructuring in the industry. Stakeholders may also
be willing to revise their tolerance for risk when a windfall opportunity presents itself. By
temporarily suspending normal risk thresholds, the organization will have the agility to
respond. Such variances from the normal thresholds should be clearly decided and
communicated.
9. Reporting Formats
Reporting formats present:
 How the risk response plan will be organized;
 How the risk management activities will be documented, analyzed, and
communicated to project stakeholders; and
 The contents and format of the risk register (described later).
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10. Tracking Information

The tenth and final component of the risk management plan is tracking information.
Tracking information defines how risk management activities will be documented and
audited for the following uses:
 Evaluation of the current project's performance; and
 Historical information for the benefit of later projects.

G. Probability and Impact Matrix

 Has a matrix been constructed reflecting all possible combinations of risk

impactand probability levels?

 Have the entries in the probability and impact matrix been stratified into a small
number of overall risk levels?

H. Revised Stakeholder Tolerances

 Have the normal risk tolerances of all stakeholders been reviewed and
determined?
 Have any of the stakeholders’ risk tolerances been temporarily relaxed or
tightened for this particular project?

I. Reporting Formats

 Has a standard entry form for the various sections of the risk register been
developed, including the probabilistic project analysis and the revised project
objectives, as well as the risk response plans?
 Have report layouts been defined for the periodic reporting of risks to the
stakeholders?
 Has a form been designed for stakeholders to report the results of implementing
their risk response plans?
 Has a form been designed for identifying new risks?

J. Tracking
  Has a repository been set up to collect risk management work products?
  Are the minutes of risk review meetings being collected and stored in the
repository?
  Are the start and stop dates of risk management activities being reported?
  Are all the significant data concerning risk management (reports, notifications,
memos) that are reported to stakeholders being recorded in the repository?
  How are the audits of the risk management activities going to be carried out?
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Risk Management throughout a Project's Life Cycle

Risk processes should be performed throughout the project life cycle, and can be
performed at any time during the project life cycle. Determining when during the project
life cycle to analyze potential risks should be one of the first actions in the process of
planning risk management planning.

When a project consists of several phases, each phase may have its own unique risk
characteristics; a specific risk assessment may therefore be performed at the beginning and
at key points of each phase to identify risks and to characterize their severity.

Typically, the first risk analysis is performed early in the project, or during the concept
exploration or project definition phases. It is during these phases that risk identification
and management will have the most significant benefit in successful project completion.

The project manager should consider conducting a risk analysis for the following reasons:

 A major risk that has been previously identified has been realized, and new
information is available;
 The potential of a high-risk item has been changed; and
 The potential for new risks has increased.

The Iterative Nature of the Project Risk Management Processes

The Project Risk Management processes are iterative. The very acts of managing the
project and managing existing risks lead to the discovery of new risks. The progress of the
project will unearth new unknowns and assumptions. A project manager may learn very
late in a project about problems that could not have been anticipated; e.g., regulatory
changes, changes in personnel, or changes in relationships with suppliers or contractors.

Over time, the analysis of risk should show the probability and impact of risks decreasing
in response to effective management. However, residual risks may remain even after such
actions are taken. The probability of a risk may be significantly decreased, but it will never
be eliminated.

Project managers should think of risk management as an integrated discipline that is

practiced continually through the life of a project. This means that an action, or failure to
take an action, in one area will usually affect other areas. Risk management often requires
tradeoffs among project objectives. Performance in one area will often be enhanced or
safeguarded only by sacrificing performance in another.
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Managing Risk by Project Phase

Different phases involve different types and sizes of risk. Two main principles cause this
variation in project risk.

1. The kind of work performed in each phase is different, and each kind of work
introduces its own risks.

Example: In the design phase, the faulty application of a design technique or tool
can result in significant difficulties. This problem cannot occur during testing or
implementation because the tool or technique is not in use in those phases.

2. The earlier in the project life cycle the risk is encountered, the greater the
impact on the rest of the project.

Because most problems spread through the remaining project management

activities and deliverables, more of the value of the project is affected by a problem
in an early phase than by a problem in a later phase.

Example: An omission in a specification that occurs in the design phase and

remains undetected until testing or even implementation will usually require
reworking the design and every downstream deliverable that is affected.

Fundamental Concepts of Risk Management

Despite differences across industries, the following seven fundamental components of risk
management are widely recognized. They can be considered imperatives - actions or
attitudes that are required for effective risk management.

Determine Proportionate Expenditure.

The first fundamental principle of risk management is proportionate expenditure. The time
and money spent in analyzing risk and determining strategies for risk management and
mitigation should be considered from the perspective of cost-to-benefit analysis. It should
not cost more to manage or mitigate the risk than to realize the risk.

In other words, if there is a risk of suffering a $1,000 loss on your project, an effective
project manager would look for a preventive solution that costs, for example, no more than
$100 in time or additional resources. If the risk cannot be prevented, a secondary strategy
would be to find a way to limit the value of the loss to much less than $1,000. The goal is
"spend a little to save a lot."
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Determine Proportionate Expenditure to the Realized Risk.

Realized Risk

Realized risk is defined as the impact to the project should the risk actually occur.

This can be understood in terms of financial loss, delay in schedule, or inability to achieve
stated requirements. Ultimately, each of these can be reduced to the time and cost that will
be required to repair or recover from the risk event.

To illustrate, one might wish to estimate the value of realized risk from a public disaster
such as a hurricane. We do not simply declare a "loss" of millions of dollars. Instead, we
define the costs involved to return to normal (rebuilding roads, houses, and public
infrastructure). Likewise, when a project suffers a loss, some course of corrective action is
taken to recover. The cost of that action (in terms of time, resources, and budget) is the true
realized risk.

In some project domains, the idea of realized risk is replaced by the value of the risk
multiplied by the probability that it will occur. Statistically, a risk with an impact of
$50,000 but with only a 10% likelihood of occurring is worth, or has an expected monetary
value, of $5,000. Using the above illustration, you should not spend more than $5,000 to
eliminate such a risk.

In a given project you will have dozens of risks, and only a portion of them will actually
occur. You could not reasonably spend up to the full value of each risk in order to defend
your project. Additional discussion of the statistical basis of risk will be seen in the
material on Monte Carlo analysis presented later in the course.

Be Pragmatic.

The second fundamental principle of risk management is to use a pragmatic approach.

Some risks simply cannot be controlled. For example, if a key resource pool belongs to a
union that is sympathetic to a strike that may take place at an unrelated facility,
management may choose to simply ignore the risk because there are no alternative
strategies and the strike is beyond its control.

Similarly, the possibility of an earthquake is very real in some parts of the world, and the
consequences potentially severe. However, it may not be practical to plan mitigating this
risk into the project itself if the likelihood that an earthquake will occur during the project
is extremely low.
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It may be more cost effective to concentrate management attention on the mitigation of

some moderate risks that can be controlled, rather than on some high risks with results
largely determined by outside influences.

It may not be possible to manage or mitigate every risk; therefore, some risks must simply
be accepted. Also, a risk with major consequences but an extremely low potential of
occurring may not need to be considered a risk with any real potential for the project.

Communicate Effectively.

In order to maximize the probability that information about risks will reach the project
team, every effort should be made to encourage and validate ideas from every possible
source, no matter what the contributor's background or function.

The project management team should also encourage the free flow of information among
all participants in the project. This will ensure that as many available sources of
information about risks as possible will be found and tapped, and that potentially sensitive
information will reach the necessary parties.

Because individuals have specific communications preferences, and because the project
team cannot predetermine who will possess important risk information, the team should
encourage the use of a wide variety of communication vehicles. This will increase the
probability that information about a risk will be communicated effectively to the necessary
parties on the project team.

Apply Processes Continuously.

The project team members and stakeholders must be constantly aware of the emergence of
new risks. They must also continue to carefully monitor information sources that may
provide warnings about impending risks.

The project management team must remain continuously engaged in managing risks
through all phases of the project's life cycle.

Integrate Risk Management with Project Management.

The jobs of the project manager and risk manager include making risk management
activities an integral part of the other project management activities. This includes
considering risk whenever a project status meeting is held, a new resource is introduced to
the project, or an unexpected event occurs.
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In order to make Project Risk Management a more intrinsic part of project management
activities, the project management team should ensure that all aspects of the project's
infrastructure (such as its communication vehicles, repository, and work management
processes) include a risk management component.

Additionally, the project management team should encourage risk awareness within the
project team's culture. For example, the team members should be tolerant of negative
reactions to new circumstances, and should explore them openly for any possible validity.
They should also routinely challenge optimistic assertions and forecasts, discuss how
adverse events might affect the project, and talk about how to prepare for such events in
advance.

Create a Shared Vision.

To increase each team member's effectiveness and enthusiasm for identifying and
managing new risks successfully, the team should share a common understanding of the
final product or service of the project. They should also, to the extent possible, be involved
in defining the product and its functions, not merely depending on the sponsors for
direction.

These two practices will make the team more alert to new threats to the project, and more
tenacious about facing and averting them.

Build Teamwork.

The final fundamental concept of risk management involves teamwork. It is the project
manager's responsibility to ensure that Project Risk Management is carried out, but the best
results are achieved when all the stakeholders who might have information about project
risks and impacts, or how best to mitigate them, are involved.

Reasons for Building Teamwork

The project manager will achieve the best results in risk management by engaging
members of the project team in risk management activities.

This is primarily because:

 Project team members have the greatest familiarity with the kinds of technical risks
that are likely to occur;
 Project stakeholders are in the best position to identify and assess external factors
that may cause risks for the project; and
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 Creative and analytical thinking is enhanced when the team is working well
together.

Benefits of the Risk Management Planning Process

The Risk Management Planning process defines how risk management will be carried out,
both as guidance for the team and as a commitment to the project sponsor.

The benefits of the Risk Management Planning process are the following:

 It ensures that threats do not cause the project to miss its objectives; and
 Opportunities are effectively converted into advantages for the project, all with a
minimum investment of time and money.

For these benefits to be realized, the project management team must thoroughly and
diligently design, then carry out Risk Management Planning and other processes in the
Project Risk Management Knowledge Area.

Tailoring the Risk Management Planning Process

The Project Risk Management Knowledge Area processes, like all other Project
Management processes, must be tailored to match the level of effort in managing risk to
the project's overall value to the organization.

Example: A business-critical project would require more effort and more sophisticated
Project Risk Management processes than a project to perform a routine upgrade to an
infrastructure service.

This tailoring can take the form of:

 A larger budget for risk management activities;

 More time allowed to perform the risk management activities;
 Higher levels of involvement by senior stakeholders; and
 Larger contingency reserves of cost and time to absorb risk impacts that cannot be
efficiently eliminated.

The stakeholders' tolerance for risk is another important factor affecting the Risk
Management Planning process. Their risk tolerance will affect how much they are willing
to invest in Project Risk Management activities and contingency plans, and how much they
set aside for contingency reserves of time and cost.
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Organization Risk Tolerance

The second enterprise environmental factor involved in risk tolerance is the organization's
risk tolerance. With most opportunity comes risk. Organizations are in business today
because they were willing to take risks. The key is to find a balance between the
opportunities they want to pursue and the risks they are willing to take.

Several risk experts have suggested that organizations and individuals strive to strike a
balance between risks and opportunities in all aspects of projects and their personal lives.
The idea of striving to balance risks and opportunities suggests that tolerance for risk is
variable.

The organization's risk tolerance can be affected by:

 The current economic environment;

 The willingness of senior management to take risks; and
 Whether the project is high-value and complex or low-value and relatively simple.

It is important for the project manager and project team to know the risk tolerance of a
company early in the risk-planning phase. A template from previous project efforts can be
used; this helps define and explain the organization's methodology regarding risk
tolerance.

Organizational risk management policies

The organizational risk management policies dictate:

 How risk management is to be performed;

 Who is to participate; and
 What deliverables are required.

Formally established, written rules assign accountability for risk management and ensure
that new initiatives are analyzed for risk. The rules should also define:

 A standard risk process;

 Risk management tools; and
 The frequency and level of reporting.

Organizations may have policies or legal regulations for specific types of risks; for
example, the handling and disposal of hazardous materials.
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Templates

An organization may have a template for Risk Management Planning, especially in

organizations with standards for quality systems, such as the ISO 9000 series. Applying the
template ensures consistency, allowing individuals from different projects to easily
comprehend the risk plans on any project undertaken by the organization.

The risk management plan template will normally include or refer to:

 Specialized tools such as a standard base set of risk categories;

 Risk screening checklists; and
 A standard probability and impact matrix or separate probability and impact scales.

Definitions of roles & responsibilities

The definitions of functional and matrix roles and responsibilities explain:

 Who must participate;

 Who is responsible for reviewing and approving risk management deliverables; and
 Who must be involved in risk mitigation strategies, including monitoring risk
triggers and responding to risk events.

Depending on the organizational structure, certain types of risks may fall under the
responsibility of specific parties in an organization.

The primary technique for the Risk Management Planning process is a combination of
planning meetings and analysis. These are conducted the same way as other planning
meetings, using these tools and techniques:

 An agenda;
 Objectives to create specific deliverables;
 Data-gathering to ensure that all meaningful input is obtained; and
 Objectivity in evaluating and making decisions

Planning Meeting Participants

The Risk Management Planning meeting involves key members of the project team,
including:

 The project manager;

 Project team leaders;
 Key internal stakeholders;
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 Risk officers, consultants, auditors, or others responsible for directing, conducting,

or overseeing risk activities within the organization; and
 External stakeholders as required and allowed.

Purpose of the Planning Meeting

One significant purpose of implementing and following well-defined project management

processes is to minimize the chance of oversights and errors. The project management
team should review the processes for the current project to understand how these processes
already minimize project risks. If a particular project management process does not
minimize risks effectively, the team should determine whether applying the process more
rigorously would help.

In particular, the planning meeting should establish a common understanding of the

extent of control and the types of controls that will be in place for project monitoring
and control. This helps team members understand the generic risk controls for low and
medium risks, which are typically sufficiently covered by the prudent use of standard
project management controls.

Planning Meeting Results

Planning meetings also define:

 Who will lead, support, and identify team members for each type of risk action;
 What approaches, tools, and data sources will be used for risk management;
 What scoring and interpretation methods will be used to categorize and analyze
risks;
 Which team members will be assigned to each identified risk;
 What the criteria will be for the threshold of each level of risk impact;
 How much additional cost for risk mitigation will be acceptable to the project
stakeholders;
 How often each risk management process will be performed;
 How reports will be generated and what standard content will be included,
analyzed, and communicated; and
 How all the risk activities will be recorded and/or tracked.
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The first planning meeting should define:

 How the planning meetings will be conducted throughout the project;

 How organizational process assets will be tailored to meet the needs of the project;
 How the remaining activities in the Risk Management Planning process will be
conducted; and
 Agendas and deliverables for the remaining Risk Management Planning meetings.

Planning Meeting Activities

The planning meeting involves reviewing:

 Key project documents such as:

o Project charter;;
o Project scope statement;
o Project schedule and project budget; and
o Previous project management administrative work products.
 The planning assumptions
 Historical information, such as documentation of lessons learned from similar
projects and risk management plans of previous projects
 Known risks, identified by questions such as:
o What concerns have sponsors or key stakeholders expressed?
o What risks have occurred on recent, similar projects?
o What areas of risk require the team's attention?

Reviewing these materials will facilitate early identification of risks and risk-related
information. Additionally, the materials may serve as examples for the current project to
emulate.

Risk Breakdown Structure (RBS)

Risk Breakdown Structures

A risk breakdown structure (RBS) is a hierarchical, multi-tiered organization of the risk

categories. When risks are being analyzed, grouping them this way makes it possible to
gather and review together risks with a common characteristic, such as their cause, or the
phase or activity in which they occur.

This approach to reviewing risks that appear together in the risk breakdown structure
increases the efficiency of investigating their causes, and may also increase leverage when
risk response plans are developed. For example, risks with similar or a shared cause in a
particular process step may be mitigated by the same process change.
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Definitions of Risk Probability and Impact

The methods for scoring and interpreting the Quantitative and Qualitative Risk Analysis
processes must be set in advance to avoid injecting personal biases or inappropriate
influence into the attention paid to particular risks. Developing a common standard for
defining different levels of a risk's probability and its impact ensures that risks will be
analyzed and responded to objectively.

Probability and impact are independent variables.

Risk probability is the likelihood that a risk will occur, on a scale between 0% and 100%,
where 0% means it is impossible, and 100% means it is certain.

Risk impact is the effect on project objectives if the risk event occurs.

Risk probability and risk impact are investigated separately; however, a common pitfall is
for these terms to be confused, for example, assigning a high probability to a risk because
the potential impact is severe. For example, imagine the risk of being struck by lightning -
the impact is very high, but the probability is considered very low.

During risk analysis, these two dimensions of risk are applied to specific risks. This helps
determine which risk events should be managed most aggressively, and the level of effort
and investment that is justified.

Probability and Impact Matrix

Each risk's probability rating (P) is multiplied by its impact rating (I) to generate a "risk
score" (RS). Since the number of probability rating values and impact rating values is
limited (normally, five of each), all possible combinations can easily be established and
entered into a table or matrix. (Tables and matrixes are presented in a subsequent unit,
Qualitative Risk Analysis.)

Organizations often find it useful to stratify the resulting RS values into three levels, one
representing "low" risks, one representing "moderate" risks, and one representing "high"
risks. To signify this, the associated matrix entries can be colored to identify which level
they belong to. For example, the low risks may be colored green, the medium risks yellow,
and the high risks red.

Using this technique simplifies applying different policies (and hence effort and resources)
according to the level of the risk's RS. For example, risks rated as "red" may require review
at every weekly status meeting, while "green" risks may be reviewed only monthly, or on a
less frequent, rotating basis.
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Reporting Formats

Reporting formats present:

 How the risk response plan will be organized;

 How the risk management activities will be documented, analyzed, and
communicated to project stakeholders; and
 The contents and format of the risk register (described later).

10. Tracking Information

The tenth and final component of the risk management plan is tracking information.
Tracking information defines how risk management activities will be documented and
audited for the following uses:

 Evaluation of the current project's performance; and

 Historical information for the benefit of later projects.

Checklist for the Risk Management Plan

A checklist can be used to complete the risk management plan. The checklist below
includes the ten components described on the previous pages, but can be expanded for the
specifics of a particular project.

The risk management plan checklist should be completed as the risk management plan is
developed, and should be referred to at each planning meeting or review of the risk
management plan.

Next page is an example of a risk management plan checklist.

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CHECKLIST
A. Methodology
 Does the plan describe how it was developed, and how it will be
maintained?
 Does the plan describe how Risk Identification will be carried out?
 Does the plan describe how Qualitative Risk Analysis will be carried out?
 Does the plan describe how Quantitative Risk Analysis will be carried out?
 Does the plan describe how Risk Response Planning will be carried out?
 Does the plan describe how Risk Monitoring and Control will be carried
out?
B. Roles and Responsibilities
 Who will direct all risk management activities?
 Who has been designated to participate in the risk management group’s
work
sessions for risk assessment and Risk Response Planning?
 What are the duties of the participants in the risk management group’s
work
sessions, including preparation, outside research, and documentation?
 What governing body will oversee the execution of risk management
activities?
 Who represents internal stakeholders in risk management activities?
 Who represents external stakeholders in risk management activities?
C. Budgeting
 Have all risk management activities been budgeted?
 Have contingency reserves for cost been set aside to accommodate residual
and secondary risks?
D. Timing
 Has frequency been determined for all regularly occurring risk management
activities, such as risk review sessions?
 Have all risk management activities been incorporated into the project
schedule?
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E. Risk Categories
 If a set of standard risk categories is available in the organization, was it
adopted
for use on the current project?
 Has the set of risk categories been tailored to suit the characteristics of the
current
project?
 If a risk breakdown structure (RBS) will be used, has it been developed yet?
F. Definitions of Risk Probability and Impact
 Has a scale of terms been defined for different levels of risk probability?
 Has a scale of terms been defined for different levels of risk impact?
G. Probability and Impact Matrix
 Has a matrix been constructed reflecting all possible combinations of risk
impact
and probability levels?

 Have the entries in the probability and impact matrix been stratified into a
small
number of overall risk levels?
H. Revised Stakeholder Tolerances
 Have the normal risk tolerances of all stakeholders been reviewed and
determined?
 Have any of the stakeholders’ risk tolerances been temporarily relaxed or
tightened for this particular project?
I. Reporting Formats
 Has a standard entry form for the various sections of the risk register been
developed, including the probabilistic project analysis and the revised
project
objectives, as well as the risk response plans?
 Have report layouts been defined for the periodic reporting of risks to the
stakeholders?
 Has a form been designed for stakeholders to report the results of
implementing
their risk response plans?
 Has a form been designed for identifying new risks?
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J. Tracking
 Has a repository been set up to collect risk management work products?
 Are the minutes of risk review meetings being collected and stored in the
repository?
 Are the start and stop dates of risk management activities being reported?
 Are all the significant data concerning risk management (reports,
notifications,
memos) that are reported to stakeholders being recorded in the repository?
 How are the audits of the risk management activities going to be carried
out?

Being Proactive in Risk Identification

Using a proactive approach to identify risks is far better than waiting for the problems to
arise on their own. Being proactive has the following benefits:

 Anticipating risks allows the participants to become more comfortable discussing

and analyzing circumstances and events that would normally cause anxiety. By
handling the topics in a methodical way, participants are reassured that the risks
will be successfully managed.
 Analyzing the potential for risk helps ensure that all areas of potential risk will be
fully explored and that identified risks will receive balanced treatment, regardless
of personal biases and influences.

One aspect of the methodical approach involves separating the identification of positive
risks from the identification of negative risks. It is usually best to provide separate agenda
time or even to set up separate risk assessment sessions for these two kinds of risks. The
reason for this is that thinking about negative risks tends to dominate the participant's
attention since anxiety is such a powerful emotion. If the two types of risk are considered
in the same period, the positive risks will tend to get overlooked or only reviewed in a
cursory manner.

Some risks will be seen to have both positive and negative impacts, depending on the
actions taken. For example, a risk that a task will take longer than expected may also
present an opportunity to finish sooner than expected.
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Checklist Analysis Advantages and Disadvantages

Advantages of Checklist Analysis

The advantages of using checklist analysis to identify risks are:

 Checklists are helpful when they reflect lessons learned from previous projects; and
 Checklists are simple and efficient.

Disadvantages of Checklist Analysis

The disadvantages of using checklist analysis to identify risks are:

 Checklists can be limiting if the team automatically assumes that the checklists are
comprehensive and complete, which is rarely the case; and
 A large project is likely to require a lengthy checklist and no checklist can be
wholly adequate without being tailored to the current project.

A Sample Checklist
An organization involved in project management should consider developing a risk
checklist specific to its needs; however, the sample below may be sufficient for most
projects.

The checklist below shows risks by category, such as technology and time. When time is
short, this type of checklist lets the team focus on specific areas for their risk potential
rather than running through the entire list. Once an area of concern is flagged, it is
necessary to identify specific risk statements that describe the specific concern more
completely, for example, "Development software vendor fails to provide adequate
technical support," or "Major snowstorm prevents team from reaching offices for two
workdays

A. Technology
New technology?
Unknown or poorly documented technology?
New application of existing technology?
Advanced technology being modernized in existing application?
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B. Time

Project schedule uncertainties or constraints that may impact project

completion or milestone dates?
Procurement items with long lead times that may affect completing
the critical path or milestones?

C. Contractor Capabilities
Potential that qualified vendors or contractors may not be available?
D. Interfaces

Significant transportation or infrastructure impacts?

Multiple project interfaces?
Significant interfaces with an operational facility?
E. Safety
Risks to worker safety during construction?
Significant contamination potential?
Accidents due to new design or other non-reviewed safety
questions?
Involvement of hazardous material?

Sample Risk Register Worksheet

In order for risks to be effectively managed, information about them must be managed and
controlled. Changes and additions to the list, as well as removals from the list, must be
made according to a formal process. The information in this worksheet should be stored in
an automated system (also called a risk register), so that it can be integrated with other
project management processes. Many departmental and enterprise-level project
management systems contain a risk management subsystem for this purpose. For simple
projects, a simple database, such as a Microsoft® Excel spreadsheet, may be perfectly
adequate.

An example of a risk register worksheet for risk identification is displayed below. The
worksheet can be used to catalogue risk information, including severity, triggers, and risk
category. At this point, the only information that is known for sure appears in the first three
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columns, although other information, such as severity, potential response, triggers, and
root cause, may be known or hypothesized. Later Project Risk Management activities will
involve assessing qualitative factors, such as probability and impact, and quantitative
factors, such as costs; selecting appropriate responses to manage the risk; and documenting
the final impact of the risk and the effectiveness of the associated risk responses.

Project: RAZ AZ ZAWR

Risk Register Worksheet

Risk Identification

ID Risk Type Severity Potential Triggers Root Category

Response Cause

1.1 Transport External Assemble Failure of N/A Labor skills availability and
workers threat components negotiations productivity
.05
strike in another
state

Qualitative Risk Analysis

To manage risks efficiently, it is necessary to understand each risk in terms of its relative
significance to the project and its relationship to other risks. Given the list of identified
risks and some conventions for measuring the size of the risk, two primary questions are
answered in the Qualitative Risk Analysis process: how likely is this risk, and, if it occurs,
how significant is its impact on the project? The result of the Qualitative Risk Analysis
process is a prioritized list of all risks that have been identified.

Purpose of Qualitative Risk Analysis

The output from the Risk Identification process provides a comprehensive list of risks.
This list may easily include dozens to hundreds of risks, depending on the size of the
project. Such a long list can overwhelm the project manager and team and can also alarm
the project sponsor and senior management, unless appropriate steps are taken to simplify
and organize the list as much as possible. The goal is to begin establishing order out of
chaos so that prudent and economical actions can be taken to protect the project from the
risks.

This is accomplished by first performing an analysis of each risk that has been identified.
Using a divide-and-conquer approach, each risk is investigated so that it is understood
more fully. Then the project manager prioritizes and allocates resources to all the risks to
address the overall risk most effectively. The Qualitative Risk Analysis process is a way to
determine the importance of addressing specific risks, and allows the team to guide risk
responses based on the following factors:
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 Time criticality of the risk;

 Quality and quantity of information about the risk; and
 The probability of occurrence and impact of the risk

The impact of the risk may affect one or more of the project objectives, including the
schedule, cost, and scope and quality objectives. Because stakeholders' tolerance for risk
varies, it is important to have determined the current stakeholders' tolerance for risk during
the Risk Management Planning process. The tolerance levels will indicate which risk
impacts can be accepted without further intervention, and what level of investment the
stakeholders would consider justified to avoid or minimize the impact of a risk.

Frequency of Performing Qualitative Risk Analysis

As with the Risk Identification process, Qualitative Risk Analysis should be repeated
throughout the project life cycle, especially at major milestones between project phases.
This is done to identify significant risks and formulate strategies for managing and/or
mitigating the risks. A project risk analysis can be performed at any time during the project
life cycle.

Subsequent reviews, revisions, and updates should be performed at least once during each
project phase, preferably at the beginning of the phase, and at any time deemed appropriate
by the project manager. For instance, a project manager should consider conducting a risk
analysis for the following reasons:

 A major identified risk has been realized;

 The potential of a high-risk item has been eliminated;
 The potential for new risks is identified; and
 New information has surfaced that may indicate that a risk's probability or impact
has increased or decreased.

If possible, all participants in the initial risk analysis should participate in subsequent
reviews. When these reviews are performed, all available information on project scope,
project performance, and any other relevant data should be provided to the team.
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Determining the Probability of Occurrence (P) Using a Probability Scale

In the formula Risk Score (RS) = Probability (P) * Impact (I), "P" is the probability of
occurrence.

Assigning a probability to a risk helps management determine whether the risk is likely
enough to be worth addressing, and how much to invest in addressing it.

Setting up a probability scale involves selecting a set of terms for probability so that all
participants can rank risks in a consistent way. This type of scale is known as a Likert
scale, and is frequently used in surveys. Examples of terms for probability are "very
unlikely" and "very likely."

The terms for probability must be assigned meaningful values that indicate their relative
positions. Probability is usually expressed as a percentage. In practice, 0% and 100% are to
be avoided because they signify certainty that the risk will not or will occur, respectively.

Examples of terms and values that can be used in a five-point scale appear below.

Terms of Probability Values

Very unlikely 10%
Somewhat unlikely 30%
50-50 possibility 50%
Somewhat likely 75%
Very likely 90%

A probability of "very unlikely" means that the event is nearly impossible, while a
probability of "very likely" means it is almost certain to happen. A "50-50 possibility"
means it is just as likely to happen as not. An example of a 50% probability is the toss of a
coin: the coin is equally likely to land with the "head" up as with the "tail" up. We say the
probability of heads is 50%, as is the probability of tails.

A five-point (5, 25, 50, 75, 95) scale usually provides enough spread to differentiate
between risks. In cases that are submitted to qualitative analysis, the usual quality of
available data and the lack of a real measurement usually do not justify greater accuracy.
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Cautions on Determining the Probability of Occurrence (P)

It is important to note that the values in the probability scale do not equate to an actual
likelihood; they are simply relative values that permit later numerical analysis. This
numerical analysis enables the project management team and stakeholders to compare
dissimilar risks by ranking them.

The probability of each risk's occurrence should be set at a single value that represents the
best judgment of the team at this time from the available data. The team should not
consider the impact while evaluating the probability. For example, the probability of a train
collision has nothing to do with the freight or passengers carried by the train, or the
damage the wreck will do. It is solely a function of the condition of the locomotives,
tracks, switches, signaling and communications equipment, the weather, the schedule of
trains, and the competence and fitness of traffic controllers and engineers.

Determining the Impact of Risk (I) Using an Impact Scale

In the formula Risk Score (RS) = Probability (P) * Impact (I), "I" is the impact of risk.

The impact of the risk measures the consequence to the project if this risk happens. A scale
similar to that of risk probabilities must be set up for the risk impacts. The risk impact can
be evaluated on a relative scale of values such as "none" to "highly undesirable." These
values can also be assigned as numbers.

Examples of terms and values that can be used in a five-point scale appear below.

Terms of Impact Values

Very low 1
Somewhat low 3
Moderate 5
Somewhat high 7
Very high 9

The scale does not need to use the equally spaced values used by a linear scale. Using a set
of values with unequal intervals can emphasize the undesirability of somewhat high or
even moderate negative impacts, or the desirability of a somewhat high positive impact,
even though the risk has a relatively low probability of occurring. For example, the highest
value might be set at 99, and the value below that at 95. This would inflate the risk score
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for risks assessed as having "failure" and "significant degradation" impact to the point of
justifying significant investments in avoiding or mitigating these risks and getting approval
from the stakeholders. Using a linear scale would not prioritize these risks as highly for
investment in risk response.

Quantitative Risk Analysis

For most projects, the risks that have been prioritized by the Qualitative Risk Analysis
process are put through the Quantitative Risk Analysis process. The main outputs of this
process are a prioritized list of quantified risks, estimates of potential achievement of
schedule and cost objectives, and, as the project progresses, a view of trends in the results
of thee quantitative risk analysis.

Quantitative Risk Analysis includes:

 Understanding the risk's potential effect on each project objective;

 Providing an analysis of potential risk strategies in the face of uncertain outcomes
of related decisions;
 Identifying the risks;
 Identifying the risks requiring the most attention according to their effect on the
overall project risk;
 Determining the risk exposure and contingency costs;
 Modeling the probability of achieving the stated targets as a reality check for cost,
schedule, and scope targets; and
 Setting realistic targets for project objectives that match stakeholder tolerance for
risk.

Quantitative Risk Analysis is more objective than Qualitative Risk Analysis, and
provides a more detailed picture of the effect of the risk on project objectives. It is
more difficult, requires sophisticated tools, and takes more time, making it
substantially more expensive than Qualitative Risk Analysis.

Therefore, it is common practice to put all project risks through the Qualitative Risk
Analysis process first, and only then to put the risks rated high through the
Quantitative Risk Analysis process to more precisely determine their possible effects
on project objectives.

Purpose of Quantitative Risk Analysis

The Quantitative Risk Analysis process is intended to analyze the likelihood and impact of
identified risks using numerical techniques.
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The Quantitative Risk Analysis process helps ensure that:

 No expenditure on managing the risk exceeds the expected cost of the impact of the
realized risk;
 Factors that influence the risk's probability and impact are understood well enough
to leverage them, either to minimize the effect of a negative risk or to maximize the
effect of a positive risk;
 The probability of success for each project objective is thoroughly evaluated; and
 Contingency reserves for project schedule and budget are calculated at prudent
levels.

Application of Quantitative Risk Analysis

An estimator who forecasts that a work activity will take 10 days and cost $50,000 is
probably basing the forecasts on average figures. The actual duration could easily be lower
or more likely, it could end up being higher. When each activity in a collection of activities
in a project network schedule can take more or less time and cost more or less than
forecasted, no one activity determines the outcome. The totality of the durations and costs
and their effects on each other determine whether the entire project takes either less time or
more time than forecasted. Running a set of simulations is the only practical way to
evaluate what the total project performance is likely to be, and within what range.

When the project manager states how much time the task is expected to take as he assigns
it to a team member, he often leaves the impression that it is acceptable to consume all the
time before reporting the task's completion, whether the time is actually needed or not.
This creates a tendency for tasks either to take the estimated time or to overshoot, but
rarely to undershoot. To compensate for this bias toward overshooting, project managers
often resort to adding a schedule contingency to each activity. As task durations expand
and team members continue to overshoot them, an overall trend toward underperformance
can be expected.

To eliminate this phenomenon, the project manager can set the expectation that team
members should do their best to beat the scheduled duration for the task. They should set
the scheduled duration to the mean value for that task, calculated using the three-point
estimating technique. In many situations, incentives for performance can help overcome
the overshooting phenomenon.

Then, the project manager should set up a schedule contingency at the end of the project
schedule network, or distributed throughout the project at the end of each phase, so that the
likelihood of meeting the overall project completion date will be as high as the
stakeholders require.
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Sensitivity Analysis Scenario

In sensitivity analysis, calculations of schedule, cost, and other factors in project

performance are repeated while changing the impact of one risk according to its probability
distribution.

In this scenario, an event coordinator who has scheduled an important convention receives
news of an impending snowstorm, and needs to determine what action to take.

Risk 1: A snowstorm will cause some percentage of the attendees to cancel. Suppose there
is a 10% likelihood that a snowstorm will cause 50% of the convention's attendees to
cancel, a 20% likelihood that it will cause 30% of them to cancel, and a 70% chance that
fewer than 10% will cancel. Suppose also that several speakers are flying into town for the
meeting.

Risk 2: Flights will be diverted from the local airport. The airlines will make decisions to
divert flights based on the depth of snow on the airfield at arrival time. The coordinator
assesses the probability of flight diversions to be 30%. Finally, suppose he considers hiring
a limousine to drive the diverted speakers into town from an alternative airport to which
the speakers' planes would be diverted.

Risk 3: Limousines will not be available for attendees landing at a distant airport. The
coordinator estimates that the availability of limousines will decline rapidly from the time
of the announcement of the snowstorm, so that delaying a request for a limousine by one
hour reduces the probability of success to 90%, by 2 hours to 75%, and by 4 hours to 40%.

He must decide among these choices:

A. Reschedule the meeting at a cost that will exceed the original budget by almost
100%.
B. Keep the meeting on schedule, but be forced to forego a percentage of the fees that
are normally paid by walk-in registrants, who will choose not to attend due to the
storm.
C. Hire limousines that may not be needed, thus doubling the cost of the speakers.

Using the probability distribution of each risk enables the coordinator to forecast the
profitability of the convention based on each strategy. Sensitivity analysis involves
changing each factor separately to see what it does to the overall project's objectives. It
will show the coordinator which risks should be of greatest concern, and which ones he
can mitigate to minimize the impact to the project objectives.
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Expected Monetary Value (EMV) Analysis

The next of the quantitative risk analysis and modeling techniques is expected monetary
value (EMV) analysis.

EMV is a technique for assigning a specific dollar value to a set of alternative, uncertain
outcomes. The EMV of a specific uncertain outcome is the value of the outcome multiplied
by its probability. The EMV of all outcomes is the sum of the individual EMVs.

For example, suppose that if a project risk were realized, it would cost the project $12,000.
Suppose the risk has a 50% probability of occurring. Its EMV is (.50 * -12,000), or -
$6,000. The use of a negative number indicates that it is an outflow, or cost, and is
undesirable.

Suppose the project manager has to choose between two alternatives, and the first one
leads to the risk described above, while the other one leads to a second risk. Suppose the
second risk has an impact of -$15,000, but has only a 33% chance of occurring. The
second risk's EMV is (.33 * -15,000), which is only -$5,000. So (barring other possible
considerations), the project manager should choose the alternative leading to the second
risk, not the first.

Modeling and Simulation: Monte Carlo Simulation

Simulation uses probability distributions to create a set of values for the variables under
consideration. These values are run through a series of experimental trials to determine a
range of outcomes and the likelihood of their occurring. For a project, the simulation uses a
model that translates the uncertainties, or possible risks, associated with certain project
variables into their potential impact on project objectives.

Project simulations are normally performed using the Monte Carlo simulation method.

Monte Carlo simulation is based on statistical probabilities. It is extremely economical in

analyzing complex situations, in which algorithmic calculations are too difficult or labor-
intensive to carry out.

The Monte Carlo method involves randomly generating values for each input variable,
using the probability distribution for the variable as the range within which the values must
fall. The values of the variables are combined in a complex calculation to generate an
outcome. This process is repeated many times, using, if possible, all possible combinations
of values, and the outcomes are plotted into a probability distribution.
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Once a Monte Carlo simulation establishes the probability distribution for a set of
outcomes, the project team can use this information to decide on a course of action. The
result of examining the outcomes may involve either altering the project objective so that
its likelihood of success is sufficiently high or reserving a contingency (usually a schedule
or cost contingency) to reach the desired level of confidence in the project's ability to
achieve the objective.

For example, to determine the correct contingency reserve to establish for a project budget
item, a Monte Carlo simulation would generate random values for the contingency reserve
and apply them to a calculation of the total cost, factoring in the probabilities of other risk
events occurring during the project. After running a number of these simulations, the
project team can identify the cost contingency input value that produces an outcome that
falls within an acceptable range of total cost and schedule, resulting in the lowest impact
on the project objectives, or in achieving the stated target objective with the desired
confidence level.

Typically, the analysis centers on the project schedule network (or at least on its critical
path). Each task on the critical path involves a schedule risk. To understand that risk, the
project management team has to answer the following questions:

 What is the most likely duration of this task?

 What is the risk, or probability, that it will be longer (or shorter)?
 How confident is the stakeholder that the task was estimated and budgeted
accurately?

Basic Steps in Monte Carlo Simulation

As in qualitative analysis, the project manager and key stakeholders on the project will
participate in creating the data used in the analysis. It is likely that they will need a trained
specialist to assist with the Monte Carlo modeling in order to get meaningful results. They
may also use the Monte Carlo simulation capability that is built into some project
management software tools; other software can be augmented with an add-in Monte Carlo
simulation module available from third parties.

The project management team takes these basic steps for Monte Carlo simulation:

 Interview experts on the project to gather likely answers to the questions on the
previous page. Stakeholders who control portions of the work breakdown structure
and associated budgets are included because they have a key interest in this
analysis, and they have valuable experience in their respective areas of expertise.
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 Enter the values gathered from the interviews into modeling tools. Results of
varying complexity are produced, depending on the sophistication of the tool.
 Create the project network of activities in a standard scheduling tool analyze the
project's total duration.
 Estimate the minimum, maximum, and most likely durations for each activity.
 Using the simulation tool, produce an analysis of the network, describing the
critical path, the most likely project duration, and the distribution of project
durations with their associated probabilities.
 If the results indicate that there is too little certainty of achieving the original
project schedule objective, either change the project objective or modify the project
schedule. This adjustment would alter the planned activities by adding resources or
changing dependencies until the resulting analysis indicates a likelihood of success.

Proactive Nature of Risk Response Planning for Negative Risks

Responding to Negative Risks in Everyday Life

For the negative risks naturally encountered in life - such as accidents or illnesses, it is
normally most effective to minimize the probability of the undesired event happening,
and then to minimize the impact.

The probability of a car accident can be minimized by developing rules of the road,
requiring drivers to pass a test demonstrating that they understand and can use them
properly, providing rear-view mirrors, installing stop lights at intersections, and providing
traffic police to deter drivers from ignoring the rules.

The impact of a car accident can be minimized by wearing passenger restraints in cars,
buying insurance to minimize the financial damage, and organizing community medical
services to respond swiftly to minimize the health damage.

Responding to Negative Risks in Projects

What is true for everyday life is also true for project management. Risk responses should
be designed to be cost-effective, and the most cost-effective controls are typically
preventive controls. But the risk response planning process also includes the development
of contingency, or fallback approaches, to be implemented if and when the risk
materializes. In most cases, the ability to implement these contingency plans also requires
advance preparation. Therefore, we can say that all risk responses are to some degree
proactive.
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Proactive Nature of Risk Response Planning for Positive Risks

Responding to Positive Risks in Everyday Life

For positive risks in life, people commonly prepare by enhancing their awareness of
opportunities or their capacity to respond to them.

Someone interested in community service might join a volunteer group in order to find
opportunities to serve in the community. Joining the group does not directly result in
service; it merely presents the opportunities and qualifies the individual to participate in
them. As another example, many people pursue higher education or professional
certifications before they learn of a job opportunity in which they can use their new skills.
Both strategies constitute risk response planning for positive risks.

Responding to Positive Risks in Projects

Similarly, in projects, unexpected opportunities for the project management team to reduce
cost or shorten the project schedule sometimes arise.

For example, acquiring and incorporating a newly released commercial product to replace
a component that the project team originally planned to develop may greatly reduce the
development time and cost.

Risk Responses

The primary outputs of the Risk Response Planning process are updates to the risk register.
These updates consist of risk responses. A complete risk response outlines:

 The identified risk;

 The chosen response strategy;
 Specific actions to implement the risk response strategy;
 Symptoms and warning signs that indicate that the risk is about to materialize or
has already materialized;
 Contingency reserves of cost and time;
 Risk ownership and responsibilities; and
 Information about residual and secondary risks arising from risk responses.

Risk responses vary according to company policies and standards and the types of risks
that have been identified. The risk response should be within the project team's and risk
owner's capabilities, and should integrate smoothly with the existing infrastructure of the
project team and the performing organization.
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Threat and Opportunity Response Strategies

Since threats endanger the project's commitment to deliver its performance objectives, they
generally receive most of, if not all the attention devoted to risk management.

For opportunities, risk response strategies include exploiting the opportunity, enhancing
the opportunity, and sharing it with partners.

The possible strategies for threats are:

 Avoid the risk;

 Transfer possible impact to another party;
 Mitigate the risk (try to reduce the probability of the risk's occurring or its possible
impact); and
 Accept the risk as not worth addressing.

The possible strategies for opportunities are:

 Exploit the opportunity;

 Enhance the opportunity;
 Share the opportunity with partners; and
 Abandon the opportunity as not worth pursuing.

Strategies for Negative Risks or Threats

Strategies for negative risks or threats include:

1. Avoid the risk;

2. Transfer the risk; and
3. Mitigate the risk.

Mitigating the Risk by Identifying the Cause, the Driver, and the Power of the Driver

What causes the risk?

If this can be understood, and the causal relationship can be altered or exploited, it may be
possible to reduce the likelihood that the risk will occur. For example, in research studies
regarding head-on collisions between cars, it was determined that there was always a
significant risk of a head injury.
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During testing conducted on crash test dummies, it was determined that head injuries were
most often caused by striking the car's windshield. By implementing a shoulder restraint
system that crosses the passenger's chest, it was possible to prevent the head from reaching
the windshield and dramatically reduce this type of injury. The use of seat belts is a
preventive risk response that attacks the causal factor in head injuries sustained during
head-on car collisions.

What drives the magnitude of the impact?

If the factors that influence the magnitude can be affected, then it may be possible to
diminish the impact of the risk. As an example, buildings in the city of Venice are sinking,
and the effect of storm tides has been determined to be a significant factor in the rate of
sinking. By installing tidal barriers that move, Venice has been able to reduce the size of
the storm tides, while still permitting tidal basin flows to maintain the healthy flow of silt
into the ocean and salt water into the lagoon. This strategy reduces the risk that severe
storms will cause significant damage to the city.

How controllable is the driver?

In the Venice example, controlling tidal surges was not possible until the British and Dutch
developed tidal barriers for controlling storm surges on the Thames and Eastern Scheldt
estuaries in the late 1970s. As a result of these technical achievements, it became possible
to control tidal surges as a driver of flooding damage in estuaries around the world.

On the other hand, earthquake damage is caused by wavelike motions resulting from the
opening of cracks in the earth, and by sudden vertical displacements in the surface of the
earth. Only wavelike motions can be reliably controlled through the use of flexible
construction techniques and large rollers in building foundations, as in the Transamerica
Corporation building in San Francisco.

Vertical displacement in the surface, which is the other driver of earthquake damage,
remains largely uncontrollable.
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Project Management Risk Mitigation Strategies

The chart below shows suggested strategies for directly mitigating risk for a project.

Project Management Risk Mitigation Strategies

Include the duration of risk response plans in the schedule baseline, and negotiate
additional schedule relief.
Use team reviews at the work package level to validate activity duration estimates.
Clarify the definitions of requirements, deliverables, tasks, and milestones.
Clarify and confirm assumptions and constraints.
Use a change control board to implement formal processes for controlling changes to
the schedule baseline.
Schedule critical resources and technology within acceptable windows.
Write definitions for periodic vendor performance reviews into the purchase contract.
Ensure that vendors use project management tools.
Include vendor representatives as part of the project team.
Evaluate the use of more expert resources on challenging tasks.
Include the cost of risk response plans in the budget baseline.
Validate the budget having the team review bottom-up estimates.
Provide productivity-enhancing tools that have short learning curves so that training on
the tools does not consume the immediate benefits to the project.
Monitor and manage costs using the earned value management system (EVMS).
Conduct periodic performance reviews
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Organizational Risk Mitigation Strategies

The chart below shows suggested strategies to use within the organization to mitigate risk
for a project.

Organizational Risk Mitigation Strategies

Obtain firm commitments for specialized resources, with guarantees, if needed.
Cultivate secondary sources for specialized resources, and implement methods for
rapidly substituting a secondary resource if the primary critical resource becomes
unavailable.
Obtain written commitments for funding and other resources.
Ensure that the project has a committed and active sponsor.
Obtain the highest possible priority for the project by making sure that the cost-benefit
value proposition of the project conforms as closely as possible to the organization’s
priorities.
To ensure the commitment of powerful stakeholders, recommend that the scope of the
project include elements that offer them direct benefits.
Stay apprised of the progress of other projects on which the current project depends, and
respond promptly if progress is unsatisfactory.

External Risk Mitigation Strategies

The chart below shows suggested strategies for mitigating risk that comes from outside the
organization.

External Risk Mitigation Strategies

Minimize development activities in hostile environments (political, business, weather).
Avoid single sources when outsourcing critical capabilities.
Include protections against shortages or price fluctuations in procurement contracts.
Include provisions for quality monitoring and defect correction in procurement
contracts.
Confirm market data and analyses to support decisions.
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Technical Risk Mitigation Strategies

The chart below shows suggested strategies for mitigating risks arising from technical
issues.

Technical Risk Mitigation Strategies

Clarify technical requirements.
Control changes to specifications, deliverables, and acceptance criteria.
In the design, include tolerances and margins for technical products.
Identify the project’s technical limitations early in the design process.
Allocate work based on skill, or train and certify personnel in new or unfamiliar
technologies.
Ensure adequate supervision during early stages of each type of work.
Involve suppliers in the design process.
Conduct reliability studies early.
Enforce discipline regarding the application of technical standards, procedures, and
methods; conduct process training.
Simplify the technical solution where practical.
Conduct concept reviews and internal design reviews.
Implement a phased approach to developing the technical solution with reviews by
experts during each phase.
Use an established project lifecycle.
Build prototypes.
Apply performance modeling, simulation, and analysis of designs.
Implement a change control process for technical specifications and deliverables.
Tie payment milestones to satisfactory technical reviews.
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Risk Mitigation Strategy Guidelines

The following chart shows examples of activities that contribute to risk and strategies that
can mitigate those risks.

Activity Contributing to Risk Mitigation Strategies

Use of new technology or new Prototype testing

application of existing technology

Unique new technology Analytical modeling and simulation

Unusually complex design Use of architecture to reduce coupling of subsystems and their
functional testing

Novel design Formal design review

Significant potential of exposing Safety review

personnel to hazards

Project schedule uncertainties or Subcontracting work to others, financial incentives to

constraints that may impact vendors/subcontractors, additional resources, overtime,
milestones multiple shifts

All involve absorbing a cost impact; appropriate in projects for

which schedule has higher priority than cost

Production shutdown required for Synchronizing implementation schedule with low-demand

project implementation period; contingency schedule in the event of implementation
failure

Use of new technology or new Prototype testing

application of existing technology

For high or medium risks with low probability to low consequences, for which the team
feels that no special mitigation is required (e.g., not cost-effective), acceptance may be the
strategy of choice.
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Strategies for Positive Risks or Opportunities

EXPLOIT

To exploit an opportunity, you take measures to ensure that the opportunity will occur and
will be incorporated into the project. Examples of exploiting are:

 Using more skilled resources on an activity for which the opportunity is expected to
materialize; and
 Partnering with another organization known to provide the opportunity. For
example, one company buys another in order to acquire existing marketing and
distribution channels for a new line of products.

SHARE

You can share an opportunity by choosing a partner who can exploit the opportunity for
the partnership’s joint benefit. For example, creating a joint venture with a firm that has the
capability to complete a difficult project activity and allowing them a share in the product
ownership benefits both the organization that originates the project and the firm that has
the expertise.

ENHANCE

Enhancing an opportunity is the reverse of mitigating a negative risk. To enhance an

opportunity, you try to increase the probability that it will materialize, or you magnify its
beneficial effects when it does. For example, relocating a firm to a university town can
increase its ability to recruit candidates with technical or management ability, and can
reduce hiring costs by avoiding extensive searches and expensive relocations.
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Risk Register: Example of Risk Response Section

The worksheet below is an example of the risk response section of the risk register.
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Minimum Requirements for Managing Project Risk

Scope Definition

Having well-defined technical objectives based on functional and/or physical

requirements: explicit definitions of all tasks necessary and sufficient to accomplish the
technical objectives: a work breakdown structure. Experience shows that getting the
requirements wrong is a major contributor to project failure.

Roles and Responsibilities

Having well-defined roles and responsibilities identified by the project manager. When
each activity is assigned to a team member who is accountable for it, there is no risk that it
will be "lost."

Schedule

Having a master schedule with company-controlled milestones, criteria and dictionary for
milestone completion, documented assumptions, schedule contingency plan. Explicit
milestones clearly understood by all participants in the project limit the risk that the project
will fail to meet stakeholder expectations and lose support, miss obligations to provide
work products for dependent projects, or lose resources to other commitments.

Cost Estimates

Having cost estimates clearly connected to the work package definition, with documented
bases and assumptions, and justified cost contingencies, derived using a methodical
process and associated with specific WBS elements. Clearly associating costs with work
packages greatly reduces the risk that unplanned costs will be incurred without producing
useful deliverables.

Performance Analysis Reporting

Having periodic project status reviews, specific parameters for performance analysis,
specifications for data requirement and report frequency. Continual detailed analysis of
project performance will give the project manager and sponsor the earliest indicators of
whether the project will meet its objectives.

Project Funding

Having a funding commitment plan. Having secure funding will reduce the possibility that
the project will become insolvent.
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Accounting

Having a cost collection system consistent with a time-phased cost budget and cost
accounting standards. This is the basic procedure for ensuring that cost reporting is
accurate, and to detect and deter fraud.

Work Authorization

Having a formal work authorization process. By authorizing the start of every assignment,
the project manager both conserves the project budget and ensures that the risk of rework
due to poor process discipline is minimized.

Change Management

Having defined thresholds and authority for baseline changes. Simply defining a process
and authority for changes to baselines, especially the scope baseline, can greatly reduce the
risk that the project will slip out of control if baselines no longer integrate properly and the
project runs out of time and money.

Risk Triggers

The risk trigger must be periodically monitored to ensure that the risk event is detected
promptly. In the ideal case, an automated system monitors the risk trigger constantly and
sends a notification to the risk owner when the trigger crosses a risk threshold.

In other cases, project management must review the trigger indicator regularly. For
example, if the Number of Issues Opened vs. Number of Issues Closed each week
increases, the project manager should note the trend at each weekly status meeting. When
the number increases for four weeks in a row, she should take action to determine the
causes and address the team's failure to close the existing issues at an equal or better rate.
She may determine that the product design is seriously flawed, and this is now manifested
in design-related issues that are difficult to resolve.
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Risk Monitoring and Control

Risk monitoring involves:

 Tracking changes in risks as the project progresses;

 Identifying new risks as they develop, and deciding whether or not they were
successfully identified and managed before they materialized;
 Tracking the effectiveness of risk response plans; and
 Analyzing whether or not risks materialized.

Risk control involves:

 Choosing among alternative risk response strategies;

 Implementing contingency plans as appropriate;
 Taking corrective actions;
 Redistributing resources previously allocated to risk management activities for a
particular risk when the associated risk no longer exists; and
 Requesting changes to budget, schedule, or scope, up to the point of requiring that
the project plan be revisited.

BEST PRACTICES

Weekly Team Status Meeting

As part of the weekly team status meetings, the project manager should require reports
on progress in managing risks. Depending on severity, some risks may need to be
reviewed as frequently as every day. Monitoring trends in the appropriate risk triggers,
for example, Cost Performance Index (CPI) dropping below .90, serves as an indicator
or trigger to signal when a risk response plan must be activated.

Communicating Risk Assessments to Stakeholders

Periodic working sessions for risk identification and assessment can keep the
stakeholders apprised of risk-related issues. This can help avoid unpleasant surprises:
the project manager will not have to communicate surprising bad news when an
identified risk is realized, and the stakeholders' expectations concerning the risk and its
impact will have been set properly so that they understand the necessity of the risk
response.
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Records of Risk Metrics

A key component of the Risk Monitoring and Control process is recording risk metrics
to compare to the associated contingency plans for each risk. The data gathered from
risk monitoring helps team members make effective decisions about risks before they
occur.

Prompt Implementation of Risk Response Plans

The main indication that the Risk Monitoring and Control process is being successfully
applied is the prompt implementation of risk response plans when risks materialize:
although some project tasks may require more time or budget than planned, there are
adequate contingency reserves to make up the shortfalls, and the total project schedule
and budget are not expected to be exceeded.

Learning from the Updated Risk Register

The primary output of the Risk Monitoring and Control process is an updated risk
register that shows that response plans are current, have been implemented whenever
necessary, and have produced the intended results. If there are indications that any
project risk is changing or not responding to the response plan, the project manager
must ensure that the risk response plan is adjusted to meet the need.
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Technical Performance Measurement

Technical performance measurement is a technique for risk monitoring and control.

Measuring technical performance involves reviewing a specific technical parameter against

the specifications at the end of each phase. This may include reviewing delivered
functionality against specified performance goals according to the project schedule. Any
deviations from a planned schedule may signal that a risk has materialized.

The diagram below shows how one aspect of a project's technical performance rises from a
mid-range level in the Concept and Preliminary Design phases to a higher level in the
Detailed Design and Construction Phases.

Sample Technical Performance Chart

In this example, the initial analysis shows that the technical parameter fails to meet
specifications during the Concept phase that ends in mid-January. The risk is that design
activities will not deliver satisfactory performance. The black line represents the plan to
improve performance from unfavorable to favorable during the Preliminary and Detailed
Design phases, with the intention of proving success by the time of the Detailed Design
milestone in April. Further development work during Integration is planned to continue to
improve the performance, raising it high enough in the favorable range to provide a
sufficient margin.
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REFERENCES

J.T. Brown, "THE HANDBOOK OF PROGRAM MANAGEMENT", McGraw-Hill

Companies 2008

T.J. Esque, " NO SURPRISES PROJECT MANAGEMENT", ACT Publishing 1999

PMI, "THE STANDARD FOR PROGRAM MANAGEMENT", PMI, 2008

PMI, "A GUIDE TO THE PROJECT MANAGEMENT BODY OF KNOWLEDGE", 4th

Edition, PMI 2008

R. Mulcahy, "PMP EXAM PREPARATION", RMC Publications Inc. 2009

PMI, "PRACTICE STANDARD FOR EARNED VALUE MANAGEMENT", PMI 2005

S.J. Amos, "SKILLS & KNOWLEDGE OF COST ENGINEERING", AACEI, 2004

A.Damodaran, "STRATEGIC RISK TAKING", WHARTON School Publishing 2007

W.E. Deming, "OUT OF THE CRISIS", THE MIT PRESS, 1986

M. Imai, "THE KEY TO COMPETITIVE SUCCESS" McGRAW-HILL/Irwin 1986

A.H.Bell, "MANAGEMENT COMMUNICATION", WILEY, 2010

M.Crouhy, R. Mark, D. Galai, "RISK MANAGEMENT", McGRAW-HILL, 2001

M. Effron, M.Goldsmith, "HUMAN RESOURCES IN THE 21st CENTURY", John Wiley

& Sons 2003

J.Fitz-enz, "THE ROI OF HUMAN CAPITAL: MEASURING THE ECONOMIC

VALUE OF EMPLOYEE PERFORMANCE", AMACOM 2000
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Communications Management
Planning

Communications Planning involves identifying the communications needs of project

stakeholders and determining how best to meet these needs. The planning process should
produce a communications management plan that identifies who needs what information,
when they will need it, how it will be given to them, and by whom.

The Communications Planning process results in a communications management plan that

supports the project throughout its life.

The following pages will cover:

 Communications Planning Process;

 Definition of Communications Planning;
 Importance of the Communications Planning Process;
 With Whom Does the Project Manager Communicate?
 Communications Planning Process Considerations.

Importance of the Communications Planning Process

An effective communications management plan is critical to the success of any project and
provides the following benefits:

 Forms the foundation for coordinating project execution;

 Enables successful stakeholder management;
 Supports the establishment of a common team purpose and direction;
 Addresses the needs of complex and geographically dispersed projects; and
 Defines the distributed team and keeps all stakeholders focused on project tasks.

With Whom Does the Project Manager Communicate?

All stakeholders need some level of ongoing contact with the project. Project managers
will find themselves in the center of a communications web that requires them to
communicate with people in various roles.

 Executives or sponsors provide direction on company policy or project

parameters. They expect status reports from the project manager;
 Functional managers provide resources to the project and want to know how their
people are doing and when they will be available to do other work. They expect
information on the project direction;
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 Customers provide direction and need to know if the project is on track. They
expect to receive progress reports; and
 Project team members need directives from the project manager. They in turn
provide status reports.

Project staff need to know their duties, responsibilities, authorities, and how they are
performing.

The information requirements for the various stakeholders will differ in terms of level of
detail, communication methods and formats, and frequency of communications. These
variations must be worked into the communications management plan.

Communications Planning Considerations

Within a complex, distributed project environment, a project manager must analyze

information flow throughout the organization and map this into a viable project
communications management plan. To increase the chance of project success through
managed information flow, the project manager has many options to consider.
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Some of the key considerations are:

 Should the approach be centralized or distributed?

 How will the communications plan help to manage stakeholders?
 How can technology be used to support the plan?

These key considerations are explained on the pages that follow.

Should the Approach be Centralized or Distributed?

Centralized

A project with a strong centralized information distribution node at its core will have all
information flowing through a central control point. This approach may serve a high-risk
environment requiring tight management and control.

On the other hand, it may introduce a single point of failure into the project
communications network. When the project manager is not available, or leaves the project
at a critical juncture, progress may suffer.

Distributed

A distributed approach to communications management may allow the simultaneous flow

of information between different project team members. It may also allow for redundant,
flexible communication patterns in the event of critical resource availability issues. This
approach might create a structural barrier to tight, central coordination.

How Will the Communications Management Plan Help to Manage Stakeholders?

Communications Planning uses tools and techniques to identify all project stakeholders
and their communications requirements, and to manage their issues to ensure project
success.

The project manager must consider the impact of change on project stakeholders and build
a plan that addresses the potential for positive and negative stakeholder reaction. In doing
so, the project manager should keep in mind three primary Project Communications
Management objectives:

1. Enhance the impact of positive stakeholders on the success of the project.

2. Control or diminish the impact of negative stakeholders on the success of the
project.
3. Convert negative stakeholders into positive stakeholders.
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The communications management plan should provide a healthy framework from which to
coordinate the individual efforts and interests of stakeholders. It should establish a
mutually beneficial agreement of interests and negate any unproductive or "negative"
politics that may serve individual interests.

How Can Technology Be Used to Support the Plan?

Delivering the right information to the right people, at the right time, and in a useful format
means using technology effectively. The project manager needs to consider how
technology can enhance information flow whenever it is needed.

Enterprise Environmental Factors on communications planning

Enterprise environmental factors include external and internal influences that can impact
the success of a project.

These factors include:

 Cultural and structural issues that may support or hinder a project;

 Industry standards;
 Infrastructure;
 Human resources;
 Marketplace conditions;
 Stakeholder risk tolerances; and
 Project management systems and software.

It is important to note that stakeholder risk tolerances constitute a significant, if not a

majority share of the enterprise environmental factors. Faced with stakeholder issues, the
project manager should consider how to leverage stakeholder support to combat negative
stakeholder reactions.

Organizational Process Assets and the communications planning

Organizational process assets represent the toolbox from which the project manager can
select the tools to implement the project.

Organizational process assets may include:

 Work processes and procedures;

 Knowledge bases;
 Subject matter experts;
 Lessons learned; and
 Historical information.
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Ultimately, the communications management plan represents the particular combination of

organizational process assets that the project manager brings to bear on relevant enterprise
environmental factors. In other words, the intersection of the communications management
plan, organizational process assets, and enterprise environmental factors represents the
project manager's organizational savvy, or the ability to "get things done" in the
organization or within the project team.

The first input, enterprise environmental factors, and the second input, organizational
process assets, work together for Communications Planning.

Project Scope Statement

The third input to the Communications Planning process is the project scope statement.
The project scope statement is a key input to project Communications Planning. The
project scope statement results from the Scope Definition process and enables a shared
knowledge of project scope among stakeholders.

The project scope statement contains the following elements necessary for planning
effective project communications:

 Project objectives;
 Description of intended outcome;
 Project requirements, including deliverables and stakeholder needs analysis;
 Milestones;
 Cost estimates;
 Risks;
 Constraints; and
 Assumptions.

Constraints are factors that might limit the options or impact of project communications.
Constraints may be related to available technology, expertise, time, budgets, or time zone
differences.

Assumptions are factors that, for planning purposes, are considered to be true, real, or
certain.

They include:

 Immediacy of the need for information. How frequently is information needed to

ensure success and control?
 Expected project staffing. How will communications needs change as the project
team expands to include more people, people with varying skills, and people at
different levels in an organization?
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 Length of the project. How will communications needs change over the life of the
project?

Project Management Plan

The fourth and final input to the Communications Planning process is the project
management plan. The project management plan defines, integrates, and coordinates
subsidiary plans. It details how the project will be executed, monitored, controlled, and
closed. Like the project scope statement, the project management plan contains constraints
and assumptions that will impact Communications Planning.

Communications Planning Process available tools

Two categories of tools and techniques support the Communications Planning process:

 Communications requirements analysis; and

 Communications technology.

These tools and techniques are explained on the pages that follow.

Communications Requirements Analysis

Analyzing communications requirements gives the project manager a clear idea of the
type, format, and value of the information stakeholders need. The project manager must
pay particular attention to communications that contribute to project success.

Information typically needed to determine project communications requirements includes:

 Organization charts;
 Project organization and stakeholder responsibility relationships;
 Disciplines, departments, and specialties involved in the project;
 Logistics information, including how many people will be involved with the project
at various locations;
 Internal information needs (e.g., communicating within the organization);
 External information needs (e.g., communicating across organizations); and
 Stakeholder information.
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A Framework for Requirements Gathering

There are a number of methods for requirements gathering, but for communications
requirements, most organizations follow this general framework:

1. Use the scope documentation and collective team knowledge about the organization
to identify affected roles and responsibilities within the organization. Typically,
these roles may include the project manager, sponsor, customer, performing
organization, and project team members.
2. Identify individuals who are currently performing the affected roles either formally
or informally.
3. Interview these individuals as to their own expectations regarding the project
outcome and communications requirements.
4. Solicit references to other, unidentified stakeholders from the interviewees.
5. Interview stakeholders.
6. Incorporate results into the scope documentation.
7. Repeat steps 1-6 as necessary to link a changing scope document to the
communications management plan.

Communications requirements should not be blindly accepted. Instead, they should be

assessed in terms of potential impact on the project and incorporated into the
communications management plan accordingly.

Internal or External Stakeholders

For analyzing communications requirements, it may be helpful to distinguish internal

stakeholders from external stakeholders. Depending on the project and organization, there
are several ways to make this distinction.

 Internal stakeholders could be those stakeholders who are funding, planning,

managing, and contributing effort to the project, while external stakeholders could
be those who are affected in other ways.
 Internal stakeholders could be employees, while external stakeholders could be
outside contractors, vendors, and others external to the performing organization.
 Internal stakeholders could be the core project team, while external stakeholders
could be all other interested or affected parties.
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Communications Technology

The second of the two types of tools and technologies that support Communications
Planning involves communications technology. The project manager may consider a wide
range of communications technologies to enable and enhance information flow between
stakeholders. The project manager must be careful to match the technology solution to
stakeholder needs. The communication method must be easy to access and use, and must
deliver positive results.

Other factors that may influence the choice of technologies include:

 The urgency of the need for information - How soon and how often is the
information needed?
 The availability of technology - What systems and technologies are available to
the stakeholders?
 The expected project staffing - Will the project participants be able to use the
communications systems immediately, or will training be required?
 The length of the project - Will the available technology be upgraded or changed
before the project is over? Is it worth implementing a new technology for a short
project?
 The project environment - Does the team meet and operate face to face or in a
virtual environment?
 Organizational technical literacy - What are the skill levels of the performing
organizations and external partners?
 Compatibility of systems for transfer of files - Are there differences in technology,
restrictions on the flow of encryption technology, availability of technology across
national borders, or bandwidth availability?
 Organizational acceptance - Are there issues to consider? For example, what about
a centralized "non-silo" project information repository open to appropriate
stakeholders?

Communications Planning Process expected outputs

The Communications Management Plan

There is one output of the Communications Planning process: the communications

management plan. After defining the project scope, identifying the key stakeholders, and
analyzing their communications needs, the project manager may begin to compile the
communications management plan. The communications management plan documents the
format, content, and conventions for project communications. It should answer the
questions of who, how, when, and what frequency; and it should be compatible with the
capabilities and culture of the organization.
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The communications management plan provides:

 Stakeholder communications requirements;

 Information to be communicated, including format, content, and level of detail;
 Person responsible for communicating the information;
 Person or groups who will receive the information;
 Methods or technologies used to convey the information, such as memoranda, e-
mail, and/or press releases;
 Frequency of the communication, such as weekly;
 Escalation process - identifying timeframes and the management chain (names) for
escalation of issues that cannot be resolved at a lower staff level;
 Method for updating and refining the communications management plan as the
project progresses and develops; and
 Glossary of common terminology.

To help organize the communications management plan, a project manager can use a
communications planning matrix, which is explained on the next page.

The Communications Planning Matrix

The communications planning matrix organizes each stakeholder group and specifies what,
when, and how project elements should be communicated. A column for stakeholder role
helps to identify why each individual is listed as a stakeholder. A response column can
identify each stakeholder's expected response.

The communications planning matrix can become part of the overall project plan, and all
or relevant parts should be shared with the project stakeholders. Once completed, it can
serve as the basis for the formal communications management plan or, in certain cases, it
might be the plan itself.

Shown below is a partially completed matrix. It is a simple matrix for organizing the
project communications.

Stakeholders Role What? When? How? Response

Internal
John, Peter, Charles, Developer Project Scope Statement Kickoff Meeting Acceptance

External
Keith, Liz, Mary Contractor SOW Week 3 Meeting Bid
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In the example above, the stakeholder column could be further divided into roles,
responsibilities, names, and other indicators, such as internal and external.

Once completed, the matrix can serve as the basis for the written plan, or it may be the plan
itself.

Another Communications Planning Matrix

This sample shows how a communications planning matrix can be configured into a
different view that facilitates managing specific project communications.

Overview / Frequency
Medium (How) Content (What) Audience (Who)
Description (When)
 Project
developments
Chaired by PM to  Status updates
Team Meetings update team and Weekly Developers
 Issues
facilitate progress
 Decisions

 Issue
 Status
 Owner
Project team
Maintained by PM to  Potential impact
Issues/Issue Log As needed
track and resolve issues  Date logged
Project sponsor
 Closure deadline
 Date closed

Risks/Risk Log
Status Report
Change
Requests/Change
Request
Project Plan
Project Control
Folder
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Communications Roles/Responsibilities of Stakeholders

This simple role/responsibility chart is another way to clarify communications

responsibilities. The project manager should use a tool like this early in the project to
define which stakeholders are involved in creating the communications deliverables.

Project
Communications Deliverables
Stakeholders

Training
User Guide Status Reports
Materials

Louis R R

Charles R R

John C C

Peter X X

Legend

Communications Responsibility

R - Responsible

C - Contributor

X - Receiver
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Building Commitment
When developing the communications management plan, key factors to consider are the
actual commitment, as well as the desired commitment, of the individual stakeholders.

Both actual and desired commitment are a function of the stakeholders' interest in project
success as well as their ability to affect the project outcome positively or negatively. The
gap between actual and desired commitment becomes the basis for creating the
communications management plan.

The communications management plan describes the set of communications activities that
must take place to shift the stakeholder commitment from the actual to the desired state, for
example:

A group of end users considers the project a threat to their current level of job flexibility,
and they are passively resisting the implementation of a new tool.

 The communications management plan should incorporate a plan to inform the end
users that their concerns have been understood and incorporated into the project
scope; and
 In this way, the project manager can alleviate some of the end users' anxiety, and
perhaps transform them into positive project stakeholders.

Stakeholder Actual Commitment Communications Plan Desired Commitment

Pre-installation seminar
End Users Resistant Supportive
and user training
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Changing the Communications Plan

The communications management plan must be continuously assessed and reassessed for
suitability throughout the project life cycle.

 Risk triggers, unforeseen events, and scope changes are some of the factors that
might cause a project team to re-evaluate communications activities;
 Other triggers for changes to the communications management plan during a later
phase might include addition of a new stakeholder, discovery of additional
requirements, changes to other planning outputs (scope, HR, cost, etc.), or
organizational resistance to planned information flows;
 In the case of a troubled project, the project manager might opt to delegate specific
communications duties to allow more time to bring the project back into
accordance with the baseline;
 The project manager must be vigilant to ensure compliance to the communications
management plan. One option might be to audit documentation to see that it is
complete and stored in a central repository;
 As the team moves through the stages of team development and enters the high-
performing stage, the project manager might choose to relinquish the role of central
communications node, and distribute some of the responsibilities for implementing
the communications management plan; and
 Decentralizing project communications would require the project manager to give
up some project control, but would allow quicker team response via multiple
information channels.

Ethics and Integrity in the Communications Management Plan

Project managers must use ethics and integrity as they balance the communications
requirements of their stakeholders with the need to move the project forward.

 Potential conflicts might arise when stakeholders ask for information that may not
be required to perform their function; and
 Other conflicts might arise when the need for project information by an external
partner is contrary to the interests of the performing organization. For example,
there might be a request for information that could compromise the market interests
of the performing organization.
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The Communications Management Plan and Complexity of the Project

Depending on the complexity of the project and potential stakeholder issues, the project
manager might include the following additional components in the communications
management plan:

 A process for escalation of issues that cannot be resolved at a lower staff level;
 A method for updating and refining the communications management plan as the
project progresses; and
 Guidelines for project meetings, presentations, and reports. These guidelines might
include required attendance lists, appointed meeting management roles, and an
approved meeting minutes format.

The Communications Management Plan and International Projects

Particularly on international projects, and those using new personnel or an unfamiliar

approach, terminology definitions and standards will help to prevent possible
miscommunication. Examples of this might include:

 Setting standards for date input - July 4, 2000 can be represented as 7/4/2000,
4/7/2000, or 2000/4/7;
 Setting standards for time notation -Time can be written as 8:00 p.m. or 20:00 to
avoid scheduling issues. Time zones should always be specified. In international
projects it may be helpful to communicate using Greenwich Mean Time, as it is
observed around the world; and
 Specifying a language for all public correspondence -If that is not feasible, plan
into the system a way to translate correspondence into the underrepresented
language groups.
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Checking for Completeness

The checklist below may help you assess the completeness of a communications
management plan. If the answers to several of the questions below are consistently
understood throughout the organization, it may not be necessary to address them in the
communications management plan.

Description

Is the level of detail in the communications management plan appropriate to the risk profile of this
1.
project?

Have you identified every stakeholder who may be affected by the successful or unsuccessful
2.
completion of this project?

3. Have you assessed stakeholder requirements with respect to scope and project communications?

Have you assessed stakeholder levels of interest and impact on your project well enough to categorize
4.
the stakeholder as negative or positive?

Do you have suitable communications policies in place to help neutralize the influence of negative
5. stakeholders? Do you have suitable communications policies to safeguard the continued support of the
positive stakeholders?

Have you received acceptance or approval (as appropriate) of your proposed communications
6.
procedures?

Have you incorporated outputs from the Risk Management Knowledge Area into your
7. communications management plan to adjust communications level commensurate to the level of
realized risk?

Is all confidential information protected from unauthorized interception? Is your plan for information
8.
flow in compliance with national law and corporate regulations?

Is your communications policy suitably flexible to work within the various organizational and national
9.
cultures on your project team?

Has a suitable central location been established for storing all project documents that are relevant to
10.
the team as a whole or that will need to be incorporated into the project archives?
 P a g e | 717

Information Distribution
Information Distribution includes collecting, sharing, and delivering project information to
stakeholders in a timely manner across the project life cycle. It is the process of executing
the communications management plan adapting the plan to meet changing requirements,
and responding to unanticipated information needs.

Information Distribution is the Executing process that implements the communications

management plan. Effective Information Distribution ensures stakeholders' receipt of
information in a timely manner.

Information Distribution includes:

 Implementing the communications management plan;

 Responding to unexpected information needs;
 Using communications skills;
 Using information distribution media;
 Implementing and operating information storage and retrieval systems;
 Documenting lessons learned; and
 Triggering changes to the project communications and project management plans.

As project activity occurs and communications needs arise during the project, Information
Distribution ensures that appropriate stakeholders receive the information they need.

Effective Information Distribution

The project management team uses Information Distribution tools and techniques to
communicate project information. In order for the tools and techniques to be effective, the
project communications should have the following characteristics.

TIMELINESS

Timeliness has a major impact on the value of information. Information received too late
may be worthless, or worse, it may threaten the project success. A project manager must
ensure that information flows in a timely fashion. This is especially critical when changes
to project requirements or scope affect a project in development, or when tasks are being
performed in parallel on fast-track projects.
 P a g e | 718

CLARITY

A project manager is responsible for transmitting information clearly and in a form that is
easily deciphered and analyzed. Clarity also means delivering only the information that is
needed, and nothing more. All too often, project managers overwhelm stakeholders with
unnecessary information. The risk in doing so is that critical, need-to-know information
may be buried or ignored.

UNDERSTANDING

A project manager also needs to ensure that stakeholders receive and understand the
information transmitted to them. There are a number of obstacles ("noise") that may
interfere with the flow of information, including information overload, language issues,
acronyms, and jargon.

APPROPRIATENESS

The method of delivering information to stakeholders must be appropriate to the

information being communicated. Project managers use a variety of communication
vehicles to transmit project information including meetings, presentations, e-mail,
telephone calls, casual conversations, memoranda, databases, etc. To be effective
communicators, project managers need solid communications skills and the ability to
select a means of communicating that is appropriate to the message and the stakeholder.

Barriers to Effective Information Distribution

Barriers can interfere with sending or receiving messages through methods such as:

 Face-to-face communications;
 Telephone communications;
 E-mail; and
 Written documents.

For effective Information Distribution, the project manager must devise methods to
overcome these communication barriers. Such barriers include:

 Information overload;
 Language issues;
 Acronyms; and
 Jargon.
 P a g e | 719

Cultural Factors and Communications Decisions

In addition to what to say and how to say it, project managers must be aware of cultural
factors that may impact communications decisions. These factors may influence the use of
one form of communication over another, or multiple versions of the same message may
be distributed to various personnel.

Formal or Informal

Formal communications usually involve planning and documentation, while informal

communications can be spontaneous and casual. Some organizations demand formality,
while others are very informal and allow a free flow of information.

Written or Spoken

This decision may be based on the need for confidentiality. A sensitive political issue
might best be addressed in a closed-door discussion with very little formal documentation.
A project scope change, on the other hand, would best be addressed with extensive written
documentation of the change.

Vertical or Horizontal

Vertical communication flows up and down the organization, while horizontal

communication is with peers. The particular information need often determines the
direction of the response.

Participatory or Hierarchical

Some decisions may be reached through a participatory exchange of ideas between two or
more stakeholders. Others may require a communications path through levels of authority.

Public or Private

Issues of confidentially and security, as well as the subject of the communication, may
influence this decision. Project successes and praise should be shared in public, as
recognition for good work is a motivator for many project team members.

Any criticism that needs to be shared with a project team member should be done in a
private meeting. Negative feedback to an individual should never be given in a public
forum.
 P a g e | 720

Language Issues

Communications to stakeholders speaking other languages may require written

documentation in simple, unembellished language for clarity and later reference. Some
icons may be interpreted differently in various cultures, or not even recognized, like the
mailbox icons often found in American technical manuals.

Information Distribution Process inputs

Communication Management Plan

The communications management plan should define most of the communications needs
for each stakeholder group, as well as how those needs will be met by information
distribution. The plan should address standard project communications as well as unique
requirements identified in the stakeholder analysis.

Examples of these types of communications include:

 Project status reports;

 Forecasts;
 Contract administration correspondence;
 Work performance information;
 Task coordination;
 Risk trigger status;
 Requirements (new versions); and
 Performance appraisals.

A comprehensive communications management plan might also include details on

handling ad hoc information requests, although these are often handled on an as-needed
basis. The plan may also cover security topics, such as who has the right to access and
share project information.

Finally, the communications management plan must ensure that information is delivered
clearly, on time, in an appropriate form, and by an appropriate method.

Tools and Techniques for the Information Distribution Process

Information Distribution uses a wide range of communications tools and techniques. Some
are technology-based solutions, some are communication methods, and others are basic
communications skills.
 P a g e | 721

Communications Skills

The project management team needs strong communications and other interpersonal skills
to effectively distribute information to stakeholders. Research indicates that these so-called
"soft skills" are the foundational building blocks that enable successful projects. The
project manager should make sure that collectively the team possesses the skills to succeed
in the following aspects of Information Distribution:

 Gathering, using, and referencing information;

 Selecting the best medium for the audience and the message;
 Using the selected communications media effectively by combining media to
strengthen the impact of the message, when appropriate; for example:
o Using body language and tone of voice to help make a point non-verbally
o Using graphics, charts, and illustrations to simplify complex information
 Overcoming the challenges of the sender-receiver model by planning for physical
and cultural barriers and implementing effective feedback loops;
 Saying it positively, convincingly, and directly using writing and presentation
skills, meeting management techniques, and interpersonal skills such as conflict
resolution;
 Mastering the art of persuasion by knowing the audience and building a case with
facts, dates, events, and other objective, substantive information; and
 Understanding "emotional intelligence," which relates to how the project manager
recognizes and deals with the emotional states of stakeholders by factoring that into
communications.
 P a g e | 722

Meeting Management
A critical skill that falls under the general communications skills category is meeting
management.

Productive meetings require planning, active participation, and follow-up. True meeting
management includes soliciting sincere participation and moderating input among
participants.

Tips for Planning a Meeting

 Plan meetings only when necessary;

 Ensure that all essential parties are able to attend;
 Inform each party of his or her expected roles;
 Communicate the purpose of the meeting and the meeting agenda in advance; and
 Communicate the need to prepare, if necessary.

Tips for Facilitating a Meeting

 Begin meetings with a brief report of actions resulting from the last meeting or with
a statement of purpose for the current meeting;
 Focus on the agenda items;
 Avoid distractions. Document important but unrelated points raised at the meeting
on a white board or flipchart visible to all the participants (often called a "parking
lot"). If appropriate, return to these items after completing the agenda items;
 Ask for feedback from specific participants at appropriate times. The types of
feedback solicited should be based on the participant's expertise, role, and position;
 Ensure that the right person provides input when needed; and
 After discussing each topic or at the end of the meeting, summarize and document
decisions and action items.

Information Gathering and Retrieval Systems

Systems for collecting information from team members should be easy to use and efficient
for reporting project information.

Information gathering and retrieval systems give the project team access to appropriate
documentation in a timely manner.
 P a g e | 723

Examples of these systems are:

 E-mail systems;
 Electronic databases;
 Project management software;
 Filing systems that allow access to technical documentation, drawings, and other
project information; and
 Web-based content management systems.

Information gathering and retrieval systems should be efficient for both information
providers and receivers. They should also provide security where it is needed.

Information Distribution Methods

Many tools and methods used in information gathering and retrieval may also be used for
sharing and distributing information.

Information distribution methods include:

 Project meetings;
 Hard-copy document distribution;
 Shared access to networked electronic databases;
 Electronic media including fax, e-mail, voice mail, videoconferencing, project
intranet, and web publishing; and
 Electronic project management tools such as software, portals, and collaborative
work management tools.

Selecting Information Distribution Methods

Depending on the needs of the project, the stakeholders, the information, and the
environment, Information Distribution may be formal or informal, written or spoken,
manual or automated.

For developing the communications management plan and responding to ad hoc requests,
the project team members need to know which tools and techniques are best for
communicating the various elements of project information.

In a world where there is a phone in every pocket and a computer in every home and
office, the options for communicating are expanding every day.
 P a g e | 724

Selecting the appropriate method for delivering information should take into account the
pros and the cons of three basic forms of communication:

 Face-to-face communications;
 Hard-copy communications; and
 Electronic communications.

Pros and Cons of the Three Basic Forms of Communication

Each of the three basic forms of communication has pros and cons.

Face-to-Face

Pros
Personal;
Conveys feelings as well as information; and
Provides immediate feedback.

Useful for:
Confirming understanding;
Gaining trust; and
Conveying bad news or sensitive information.

Cons
Difficult to coordinate;
Costly; and
Physical and time zone issues.

Hardcopy

Pros
Provides a standard reporting format;
Becomes an information record; and
Is portable and readable without technology.

Cons
Information can be lost or not read; and
Sometimes time-consuming to produce.
 P a g e | 725

Electronic

Pros
Quick, immediate;
Useful for:
Shared information needs;
Distributing large amounts of data;
Widespread audience;
Maintaining a record.

Cons
Inappropriate for confidential and sensitive information
Requires tool compatibility
May require training

E-mail Communications Tips
E-mail and other electronic forms of messaging are rapidly growing in popularity. But like any
communication tool, they can easily be misused and misinterpreted. Following are some tips on using e-mail
effectively.
E-mail Tips
Content Do:
 Use e-mail for quick, straightforward, and
brief communications
 Use e-mail for sending documents,
forwarding comments, and copying from
electronically stored documents
 Use discretion about what is communicated
via e-mail. Be careful to communicate only
what is appropriate for public consumption
 State clearly and early what you need from
the recipient. Include any background after
the request
Frequency Do:
 Monitor and control the volume and
frequency of messages sent via e-mail
Recipients Do:
 Limit recipients to those who need to know
 Use copy and blind copy options only as
necessary
 Ask for feedback when necessary to ensure
understanding
 Maintain accurate and up-to-date distribution
lists
 Ensure that all recipients on a distribution list
receive the information being sent
Context Do:
 Realize that e-mail lacks visual and verbal
cues and can thus be misinterpreted. In
general, e-mail tends to read more literally
and seem more emotionally charge than is
intended
P a g e | 726
Don't:
 Send long e-mails. Try to limit the
message to one screen
 Send sensitive information via e-
mail
 Use e-mail to deliver bad news
 Stress the email system by sending
very large attachments (such as
documents rich with graphics) to
multiple recipients
 Leave the recipient guessing why
you sent him this communication
Don't:
 Send too many e-mails
 Rely too heavily on e-mail or use it
as a substitute for face-to-face
communications
Don't
 Send e-mails to too many people
 Assume that a read receipt means
the message was read and
understood
 Send "For Your Information" notes
that require no action, unless
they've been requested as part of
the communications management
plan
Don't:
 Emphasize words for irony and
sarcasm. Emphasis may be
misinterpreted as anger or shouting
 Use small pictorial elements to
indicate mood. Do not show in
recipients' systems, and they may
appear unprofessional
 P a g e | 727

Lessons Learned Process

Documenting lessons learned from the current project for the future benefit and enrichment
of the organization's process assets is a requirement of a good communications
management plan.

A lessons learned session has the following characteristics:

 Focuses on identifying project successes and project failures;

 Includes key internal and external stakeholders;
 Includes recommendations for improving future project performance;
 Focuses on technical, managerial, and process aspects of a project;
 Occurs at any time in the life of a project;
 Increases project management effectiveness and efficiency;
 Helps build strong project teams;
 Promotes the development of business skills;
 Provides:
o Updates to the lessons learned knowledge base
o Updates to the risk management plan
o Overall product and service improvements.

Information Distribution Process expected outputs

The outputs of the Information Distribution process include:

 Organizational process assets (updates); and

 Requested changes.

In the project environment, updating organizational process assets means adding material
to the organizational knowledge base for use in future projects.

Requested changes in the Information Distribution process may, in turn, trigger changes in
the communications management plan and in other planning outputs. These changes are
handled by the Integrated Change Control process.

Organizational Process Assets (Updates)

Examples of organizational process assets (updates) include:

 Lessons learned documentation - This documentation includes the causes of

issues, reasoning behind the corrective actions chosen, and other types of lessons
learned about Information Distribution. Lessons learned are documented to make
 P a g e | 728

them part of the historical database for both the project and the performing
organization;
 Project records - Project records can include correspondence, memos, and
documents describing the project. This information should, if possible and
appropriate, be maintained in an organized fashion. Project team members should
also maintain records in a project notebook;
 Project reports - Formal and informal project reports detail project status and
include lessons learned, issue logs, project closure reports, and outputs from other
Knowledge Areas;
 Project presentations - These include presentations made by the project team
members to project stakeholders. They generally provide a record of the
information that was relevant to the needs of the audience;
 Feedback from stakeholders -Information received from stakeholders concerning
project operations can be distributed and used to modify or improve future
performance of the project; and
 Stakeholder notifications -These contain information provided to stakeholders
about resolved issues, approved changes, and general project status.
 P a g e | 729

Performance Reporting
Performance Reporting is a Monitoring and Controlling process. It involves data
collection, analysis, measurement, and reporting of work performance on a regular basis.
With Performance Reporting, the project manager can inform stakeholders about project
progress, status, and forecasts.

With Performance Reporting, the project manager can indicate to stakeholders:

 How resources are being used to achieve project objectives;

 What the project team has accomplished;
 Where the project currently stands; and
 Where project results will be in the future.

Components of Performance Reporting

Performance Reporting has three key components:

 Status reporting - This describes the current state of the resources being consumed
by the project, for example, status related to schedule and budget metrics;
 Progress reporting - This describes results such as the percentage of completion
that a deliverable has reached, or what is completed versus what is in process and
what is not yet started; and
 Forecasting - This predicts future project status and when planned events are
expected to occur.

Performance Reporting generally provides and integrates actual-to-date and forecasted

information about the following:

 Scope;
 Schedule;
 Cost; and
 Quality.

Although cost and schedule produce the questions most commonly encountered by project
managers, there are other aspects of the project that may interest stakeholders, for example,
risk management or procurement.

To ensure the availability of current performance information, the project manager may
schedule performance reports on a regular and frequent basis. Performance reporting can
also be done on an exception basis to fulfill specific information requests or to evaluate
performance in response to an event.
 P a g e | 730

Performance Reporting Objectives

Performance Reporting helps the project manager achieve project control objectives, such
as:

 Knowing where the project is in relation to established baselines (cost, schedule,

scope, quality, etc.); and
 Predicting how the completed project will relate to the project objectives.

Specific criteria should be met to ensure the effectiveness of Performance Reporting.

Performance Reporting should be:

 Timely - identifying problems in time for corrective action

 Accurate - measured against established baseline data
 Complete - providing all the data for decision-making
 Useful - warning of problems or trends in time to take corrective action
 Easy to understand - ensuring that the receiver comprehends the sender's message
 Balanced - benefits of reporting each type of information outweighing the costs of
collecting, analyzing, and presenting it

Timely, Accurate, and Complete Information

There is no question that project success depends on Performance Reporting that is timely,
accurate, and complete. The sooner a variance is detected, the easier it is to correct or to
compensate for its potential outcomes. Decisions based on late, inaccurate, or incomplete
information are extremely risky and can even harm the project further.

 Weekly status meetings can force information to be timely. As the project

progresses, status reporting may occur at different intervals as criticality and
timeliness require;
 Accuracy comes from correctly establishing baseline and performance
measurement techniques. The project manager must establish reporting standards
for data collection, analysis, and validation; and
 Completeness combines the right information with the level of detail required for
variance investigation and analysis, and ensures that no work performance
problems go unnoticed.

Useful Information

Data and information are not the same. Data is easy to generate with today's project
management tools, but may not provide insight about the real status of the project.

 Data must be converted into useful information;

 P a g e | 731

 In order for performance reporting to convey useful information, the project

manager must identify the needs in the planning stage; and
 The list can be modified later, but an initial identification of reportable data
elements begins to deal with the volume of available data.

Easy to Understand Information

Project managers should know their audience and deliver project status to them in an
appropriate format. The communications management plan should identify who receives
what information, as well as the format of the information delivered.

 The information presented must be useful and needed by that audience, based on
each member's function or role;
 Formatting the information in a concise and useful way is part of the reporting
process. Different stakeholders will need different types of information and
different levels of detail, as documented in the communications management plan;
 Presentations should illustrate status with an up-to-date snapshot of project
information tailored to the audience's needs; and
 Common status reporting tools include benefit/cost tables, Gantt charts, and earned
value indices.

Balancing Costs and Benefits

As with many aspects of project management, the benefits of reporting each type of
information should be greater than the costs of collecting, analyzing, and presenting it.

For example, the cost of implementing an integrated reporting system must be balanced
against the value of the efficiency gains it may offer in handling the information it
addresses.

Performance Reporting Process Inputs

The diagram on the previous page defined these inputs to the Performance Reporting
process:

 Work performance information;

 Performance measurements;
 Forecasted completion;
 Quality control measurements;
 Performance measurement baseline information from the project management plan;
 Approved change requests; and
 Deliverables.
 P a g e | 732

Minimum requirements for Performance Reporting demand only that workers report work
performance information.

For more useful and complete reporting, the project manager should look at metrics or
project elements that could have an impact on the project. Quality metrics, risk monitoring
and controlling elements, and technical performance measures are items that a project
manager should consider for meaningful, actionable performance reports.

Work Performance Information

The minimum requirement for performance reporting is work performance information.

Work performance information is compared to project baseline information from the

project management plan and other control documents (such as the quality management
plan) that specify metrics and standards for the associated project activity. By comparing
status to the project management plan and other standards, the project manager can
determine progress and project future outcomes.

Additional Inputs to Performance Reporting
The table below identifies additional Performance Reporting inputs beyond the minimum
requirement of work performance information.
Input
Performance measurements
Forecasted completion
Quality control measurements
Project management plan
(Performance measurement baseline)
Approved change requests
Deliverables
P a g e | 733
Description
Performance measurements may include the following:
Quality These may be run charts, statistical process control charts,
measurements and other Quality Planning outputs.
Risk monitoring
These include identified risks and risk mitigation elements
and controlling
that may affect performance, cost, or schedule.
elements
Technical Performance Measurements (TPMs) are used by
some industries to track how well the product is achieving
Technical critical performance parameters. Depending on the
performance product, the metric being tracked could be weight, power
measurements consumption, fuel consumption, power output, throughput,
production price, utilization percentage, capacity, or
operational use date.
Typical examples are:
Other planned  Lines of Code (LOC)
baselines  Labor hours
 Line of Balance (LOB)
This includes EAC (Estimate at Completion) values and ETC (Estimate to
Complete) values calculated or reported by the performing organization.
These are the results of QC activities related to quality standards and
processes of the performing organization.
The performance measurement baseline is a part of the project management
plan, and is an approved set of measurements and parameters used as a basis
for comparing project execution measurements. Typical baseline
measurements include scope, cost, and schedule parameters, and sometimes
technical and quality measures.
These are change requests that have been processed and approved through the
Integrated Change Control process.
Deliverables provide a verifiable measurement of project performance. Project
performance is easily measured by checking the production of key
deliverables against a predetermined project schedule.
 P a g e | 734

Inputs Affecting Performance Measurements

Approved change requests, deliverables, and quality control measurements are all factors
that can affect performance measurements.

 Change requests - When a baseline is changed through an accepted change request

process, the Performance Reporting mechanisms will also need to be adjusted and
aligned with the communications management plan;
 Deliverables - Deliverables are a verifiable measurement of project performance.
Project performance can easily be measured by checking the production of key
deliverables against a predetermined project schedule; and
 Quality control measurements - These are the results of quality inspections to
ensure compliance with the quality standards documented in the quality
management plan. Tracking completed deliverables may be an irrelevant progress
check if the deliverables are not consistently delivered to accepted quality
standards.

Performance Reporting Process Tools

Performance Reporting tools help the project manager gather, analyze, organize, and
present the reporting information required by stakeholders. The Performance Reporting
tools are displayed in the table below.

Tool Description

These include software applications with reporting capabilities,

Information presentation tools
Performance information gathering and
compilation
Status review meetings
Time reporting systems
Cost reporting systems
spreadsheet analysis, and graphic output, as well as other
automated and manual presentation tools.
These include manual filing systems, electronic databases,
project management software, and other storage and retrieval
systems for project documentation.
These are meetings that are scheduled to exchange information
about project developments.
These systems record the time expended on the project.
These are systems that record and track costs incurred on the
project.

A status review meeting is a popular technique for performance reporting. Details about
status review meetings are presented on the pages that follow.
 P a g e | 735

Status Review Meetings

Status review meetings, also known as status or progress meetings or status reviews, are
meant to determine and assess project status, and to evaluate progress against the baseline
plan. Status reporting also provides a wealth of historical data, which is useful when
closing a project and planning future projects.

Status reviews are typically used in conjunction with other Performance Reporting
techniques to assess progress and issues regarding:

 Scope;
 Schedule;
 Cost;
 Quality;
 Risk (if required); and
 Procurement (if required).

Frequency of Status Review Meetings

Various factors may affect the frequency of status reviews. Due to the progress of the
project, for example, a weekly meeting, which was appropriate in the beginning of the
project, may be inadequate later. Or, data that is unavailable until a monthly accounting
cycle ends or an important test or review has been conducted may force the review to occur
less frequently.

The critical nature of the parameter being measured will also influence or dictate how often
a parameter is sampled or measured. For example, the crew of an aircraft in flight may not
check the instruments often; however, the same crew frequently checks instruments during
takeoff and landing.

Projects will also go through phases in which data will need to be checked at intervals
different from those originally planned, and the required data will also be different at
various times in the project.

Required Data for Status Reviews

Status reviews should always give the project manager a clear understanding of current
project status.

Required data for status reviews includes:

 Scheduled and unscheduled work accomplished during the reporting period;

 Start and finish dates;
 Days expended/days remaining; and
 P a g e | 736

 In-process work
o Effort expended and remaining;
o Estimated effort to complete.

As a minimum, status information should clearly communicate work accomplishments and

the status of work in progress. Variances should be identified, if possible, including the
cause of the variance and the impact on the project. Any corrective actions to eliminate or
reduce the variance from the project management plan to acceptable limits should also be
noted.

Remember that data collection is not the result, but the beginning of numerical information
conveyed in the report. For data to be converted into meaningful information, it must be
analyzed and presented in terms that are clearly linked to project success criteria, and it
must set appropriate expectations.

Analysis Techniques
Two techniques commonly used to obtain work performance information from reported
data include:

 Variance analysis; and

 Trend analysis.

Variance Analysis

Variance analysis allows the project manager to identify differences between the work
results and the project management plan. It compares the differences between actual
project results to planned or expected results (baseline values and current or projected
results) and considers each performance measure of cost, schedule, scope, resource,
quality, and risk against stakeholder expectations and tolerance levels. The analysis can
cover the current period or a cumulative period, or can be used for status extrapolation
comparisons. Variance analysis can quickly detect deviations from desired baselines.

Trend Analysis

Trend analysis is a forecasting technique that looks at performance to date and identifies a
pattern of results that indicates a trend. The trend is used to forecast future results and to
determine whether performance is improving or deteriorating.
 P a g e | 737

Performance Reporting Process outputs

Performance Reporting organizes and summarizes information gathered; presents the

results of any analysis performed; and provides information at the level of detail required
by stakeholders. Performance Reporting should be done according to the schedule and
format outlined in the project communications management plan.

Performance Reporting outputs include:

 Performance reports;
 Forecasts;
 Requested changes;
 Recommended corrective actions; and
 Organizational process assets (updates) .

Performance Reports

Performance reports should give all stakeholders a clear understanding of any differences
between planned performance and actual performance (accomplishments) in executing the
project management plan. Performance reporting extends status reporting by distinguishing
how current project status differs from the project management plan.

In general, performance reports should be short documents (one to two pages for a monthly
report) that provide the relevant facts of project performance. Although formats can vary
significantly to address different stakeholder needs, most performance reports contain
these common elements:

 Reporting period;
 Work accomplished in reporting period;
 Schedule/cost status and performance;
 Problems experienced, or approaching;
 Corrective actions, or plans;
 Summary of accomplishments planned for the next reporting period; and
 Detailed quantitative reports attached.

Performance information should not only be accurate; it should also be presented in a

uniform manner. For example, if in one reporting period a project manager reports the
quality metric as the number of parts per thousand that were defective, then, in the next
reporting period, reports the metric as the percentage of defective parts produced, the
stakeholder group does not have a uniform measure for comparison.
 P a g e | 738

Best Practices for Performance Reports

For stakeholders, much of the information in performance reports is a review, or

confirmation, of events that occurred since the last review; not all information is new. A
rule of thumb is that technical data should be no more than one month old, and cost data,
three months old.

Other practices for optimal performance reports include:

 Ensuring that the report is simple, understandable, and accurate;

 Conveying information at an appropriate level of detail;
 Ensuring that the stakeholder understands how to read the report and how to use the
information; and
 Confirming that the report is necessary.

Common Performance Reporting Formats

Some common performance report formats include:

 Bar charts;
 S-curves;
 Histograms;
 Tables; and
 Milestone charts.
 P a g e | 739

Bar Charts
One type of bar chart that conveys status information by depicting actual vs. planned
activities is the Gantt chart.

A Gantt chart is a good management tool because it shows the original schedule (baseline),
completed or partially completed tasks, critical path, and duration estimates for the in-
process tasks. On larger projects, summary information should be used for the top-level
schedule, and intermediate, detailed schedules can further identify deviations.

For forecasting, it is important to update the schedule with actual start and finish dates. The
scheduling tool can then present the project up to the time-now line with actual data, and
then adjust the schedule assuming original duration estimates for the remaining tasks. In
this case, a slip to the completion date is indicated if the remaining tasks are performed as
planned.

It is also important to note that the Gantt chart, as well as other status reporting tools, does
not indicate what will happen on the project. It merely indicates what could happen
without the project manager's active intervention. The project baseline with status
information is the starting point for recovery plans.
 P a g e | 740

Bar Charts and Recovery Planning

If the project status shows a slippage, project managers must ask:

 What caused it?

 Has the cause been corrected or is it still influencing the schedule?

There are ways to recover lost time. One is called schedule compression.

The chart below shows that the project will be completed as originally scheduled, but the
durations of the remaining tasks are compressed from the original estimates. Although this
shows that the project will be completed on time, it does not necessarily mean that the
project will conclude accordingly.

The chart is reliable only if there is a reasonable recovery plan behind it, with action plans
above what was originally planned.

To enable stakeholders to understand the plan behind the new schedule, project managers
must be able to answer the following questions:

 What changed to allow for the compression in duration?

 Will more resources be applied?
 Will new methods be employed?
 Will new assets be purchased?
 Will outside consultants be used?
 P a g e | 741

S-Curve

Many project baselines are presented as an S-curve plot. The name comes from the shape
of the curve, which is derived from the initially slow expenditure of assets followed by a
period of rapid expenditure, and by the trailing off of expenditures as the project comes to
completion. This is a form of trend analysis because the S-curve is a predicted pattern for
most projects. However, it is important to note that the slope of the S-curve can differ
significantly between projects.

An S-Curve can also be used as a baseline against which to compare actual results, as
shown in the following cost reporting example.
 P a g e | 742

Histograms
The histogram is another format for displaying performance. A histogram is a type of bar
chart that depicts relative frequency of a collection of variables. It is usually drawn with
frequency on the y-axis and variables on the x-axis. The Pareto chart is a particular variant
of the histogram in which the variables are ranked according to relative frequency.

In many cases, the Pareto chart demonstrates an informal rule that 80% of the defects in
any product are a result of only 20% of the causes.
 P a g e | 743

Tables
Presenting performance information in table form is an easy-to-use approach, especially
for reporting a wide range of information. One key drawback of this method is that the
information and its ramifications may not be intuitively obvious to the reader.

WBS Planned Actual Planned Actual

Task
Identifier Start Start Finish Finish
Create communications
3.1.2 1/14/2005 1/14/2005 1/21/2005 1/25/2005
management plan
Submit to primary stakeholders for
3.1.2 1/21/2005 1/25/2005 1/25/2005 1/29/2005
confirmation
Revise with input from stakeholders 3.1.2 1/25/2005 1/29/2005 1/25/2005 1/30/2005
Begin plan execution 4.1 1/26/2005 2/1/2005 NA NA

Milestone Charts
A milestone chart is a variant of a table that maps completion of key deliverables against a
set of scheduled deadlines. One common example of a milestone chart is a childhood
development chart, which maps certain key physical or developmental abilities against an
age range. For example, by the age of eight months, infants should be able to sit up
straight, crawl, and partially feed themselves with their fingers.

WBS Planned Actual

Milestone Slippage
Identifier Finish Finish
Receive confirmation from
3.1.2 1/25/2005 1/30/2005 5 Days
stakeholders
Receive green light from
4.1 1/26/2005 2/1/2005 5 Days
Finance
Submit permit application 4.1.2 2/1/2005 2/2/2005 1 Day
Receive permit approval 4.1.3 2/102005 2/10/2005 0 Days
 P a g e | 744

Other Performance Reporting Outputs

In addition to performance reports, four other outputs for Performance Reporting have
been identified:

 Forecasts;
 Requested changes;
 Recommended corrective actions; and
 Organizational process assets (updates).

These outputs are explained on the pages that follow.

Forecasts

The project manager also uses Performance Reporting to forecast future project
performance. The project manager should make stakeholders aware of any upcoming
issues that can be predicted.

The project manager also uses forecasted performance measures to make adjustments to
the process, and to re-align future performance with the project management plan. Project
managers should be ready at any time to answer two stakeholder questions:

 How much will the project cost?

 When will the project be done?

Requested Changes

Project performance analysis often generates requests for change. Variances from planned
cost and schedule are often the triggers for implementing project changes. These changes
are handled by a change control system (CCS), which is a formally documented process
that includes paperwork, tracking systems, processes, and approval levels necessary for
authorizing changes.

Recommended Corrective Actions

Recommended corrective actions include interventions designed to re-align future

performance with stakeholder expectations.

Organizational Process Assets (updates)

Updates to organizational process assets resulting from Performance Reporting may

include lessons learned documentation and updates to historical knowledge bases.
 P a g e | 745

Tip: Stoplight Technique for Reports

Stoplight reporting is a special technique that can focus stakeholders on the most important
project issues and help them identify trends.

 A green light indicates activity progressing

according to the project management plan.

 A yellow light signifies that issues have been

identified and should be corrected with the
corrective actions in place.

 A red light means an activity is failing and requires

immediate intervention.

Stoplight reporting is a convenient way to lighten the reading workload of

senior managers. It reveals project status while making progress clearly
visible.

For example, clear progress is shown when an issue that was previously
yellow is now green. Conversely, if an intervention is not successful, the item
may show up red in a subsequent report. In any event, a yellow indicator
alerts stakeholders to a potential problem and focuses their attention on the issue in the
subsequent report.

Stoplight reporting is most effective when presented in statistical terms. For example:

Green = within 5% of plan

Yellow = within 15% of plan
Red = over 15% of plan

Project managers may attach supporting details to stoplight reporting, and can adapt the
technique to their own use. Some project managers add color-coded reports that serve as a
basis for weekly internal status meetings.
 P a g e | 746

REFERENCES

R. Mulcahy, "PMP EXAM PREPARATION", RMC Publications Inc. 2009

PMI, "PRACTICE STANDARD FOR EARNED VALUE MANAGEMENT", PMI 2005

S.J. Amos, "SKILLS & KNOWLEDGE OF COST ENGINEERING", AACEI, 2004

A.Damodaran, "STRATEGIC RISK TAKING", WHARTON School Publishing 2007

W.E. Deming, "OUT OF THE CRISIS", THE MIT PRESS, 1986

M. Imai, "THE KEY TO COMPETITIVE SUCCESS" McGRAW-HILL/Irwin 1986

A.H.Bell, "MANAGEMENT COMMUNICATION", WILEY, 2010

M.Crouhy, R. Mark, D. Galai, "RISK MANAGEMENT", McGRAW-HILL, 2001

M. Effron, M.Goldsmith, "HUMAN RESOURCES IN THE 21st CENTURY", John Wiley

& Sons 2003

J.Fitz-enz, "THE ROI OF HUMAN CAPITAL: MEASURING THE ECONOMIC

VALUE OF EMPLOYEE PERFORMANCE", AMACOM 2000

NDIA, "EARNED VALUE MANAGEMENT SYSTEMS INTENT GUIDE", NDIA, 2005

Manzanera, I, “Cost Engineering Tools & Techniques”, Contromet, 2013

Manzanera I., Bushait K.A., “Project Management References”, System

Consults, 2014
 P a g e | 747

PROJECT MANAGEMENT
MANUAL
PART 8

COST ESTIMATING, BUDGETING

AND CONTROL
2014
 P a g e | 748

Table of Contents

Subject Page

Cost Estimating 749

Cost Estimates over the Project Life Cycle 754
Common Estimating Errors 758
Bottom up Estimating 765
Outputs of Cost Estimating 768
General Estimating Techniques 772
Cost Budgeting Process Tools 777
Management Reserve 783
Cost Control 788
Project Management Software 792
Earned Value Management System (EVMS) 794
 P a g e | 749

Cost Management – Cost Estimating

The essence of project management is the management of human resources, material
assets, and other capital, toward the successful completion of a project's goal. Every
decision to initiate a project should be based at least in part on the expectation that an
important strategic goal will be accomplished by committing limited financial resources,
and that the project will deliver value to the sponsor that exceeds the planned cost by an
adequate margin.

Cost management processes, interacting with each other and with processes of other
project management areas, create accurate estimates and use objective, quantitative
methods, such as Earned Value Management (EVM), discussed later in the book, to help
monitor and control costs.

Cost Management Plan

The work involved in the Project Cost Management processes is preceded by a planning
effort by the project management team. The Develop Project Management Plan process
produces a cost management plan which sets out the format and establishes the criteria
for planning, structuring, estimating, budgeting, and controlling project costs.

Cost Management Plan Components

A cost management plan can establish the following:

 Precision level - Cost estimates for schedule activities will adhere to a rounding of the
data to a prescribed precision, for example, hundreds of dollars (00) or thousands of
dollars (000), based on the scope of the activities and the magnitude of the project, and
may include an amount for contingencies;
 Units of measure - Each unit of measurement, such as staff hours, staff days, staff
weeks, or lump sum, is defined for each resource;
 Links to organizational procedures - The work breakdown structure (WBS)
component used for project cost accounting is called a control account (CA). Each
control account is assigned a code or account number that is linked directly to the
performing organization's accounting system. If cost estimates for planning packages
are included in the control account, then the method for budgeting planning packages is
included;
 Control thresholds - Variance thresholds for costs or other indicators, for example,
person-days or volume of product at designated points in time during the project, can
be defined to indicate the agreed amount of variation allowed;
 Earned Value rules - These are the rules the project management team sets for
computing earned value, discussed in more detail later in the course:
 P a g e | 750

1. The formula for determining the estimate to complete are defined

2. The criteria by which earned value will be recognized according to the completion
status of the work package (0-100, 0-50-100, or other)
3. The WBS level at which earned value analysis will be carried out

 Reporting formats - Formats for the various cost reports are defined; and
 Process descriptions - Descriptions of each of the three Project Cost Management
processes are documented.

Defining the Value of a Project Using Total Cost of Ownership (TCO)

Of special interest when considering cost management is the difference between the cost of
the project life cycle and the cost of the product life cycle. As an illustration, consider the
example of an electric power plant. The product is the gas-powered electric plant. The
initial project is to build the plant. After this first project has been completed, the plant is
turned over to the operators, who now use the plant to produce electricity over the plant's
lifetime. At the end of the economic life of the plant, the plant will be shut down, and the
salvageable components disposed of. The Total Cost of Ownership (TCO) is a financial
estimate that reflects not only the cost of the project but also all aspects in the further use
and maintenance of the product produced by the project. The decision to initiate a project
to create a product, service, or result requires an understanding of the total life cycle cost of
the product in order to compare the total costs required to achieve this benefit to the
benefits that are expected. In other words, the value of the project, or in some business and
marketing contexts, the value proposition, may be stated as follows:

Annual VALUE = (BENEFITS - TCO - Tax) / (1 + R)T

Value = The total value of the product

Benefits = The gross return from the use of the product, in increased
revenues or reduced costs, or a combination of both
TCO = The total cost of all outlays for development, operation,
support, and maintenance of the product
Tax = Taxes paid by the organization on the gross benefits received
R= Discount rate applied to benefits received in later periods, to
reflect the cost of capital and the risk of not receiving the full
benefits
T= The number of periods during which the product generates
benefits
 P a g e | 751

Estimating the Benefits

The sponsor of the project or the user of the final product must determine the value of the
benefit of this new product, service, or result. The project sponsor must strive to express
the benefit in terms of revenue less costs, or cash flow, for each time period the product is
in service.

Estimating the Total Cost of Ownership (TCO)

The explicit methods for computing and analyzing the TCO exceed the scope of this
course, but the following highlights are presented in order to provide a general
understanding.

The TCO consists of a number of costs, specifically the development, operating, and
maintenance costs of the item over its lifetime. Disposal cost may also need to be
considered. According to some data, the initial cost of developing the item may comprise
only 3% to 5% of the Total Cost of Ownership.

Accounting for Tax

Assuming that this product is generating revenue, such revenue is subject to taxation. This
must be taken into consideration by diminishing the total benefit.

Discount Rate for Risk and Time

The risk that the product, service, or result will not actually deliver the intended result
should be factored into the denominator as a reduction in the overall benefit. In addition,
benefits received in the future are not as valuable as benefits received now. To reflect these
effects, a "discount rate" is applied to reduce all future benefits. The rate is applied once
for each year into the future the benefit accrues, so it applies three times for a benefit
received three years in the future.

The discount rate "R" is determined by financial analysts. For example, a relatively low
risk project might use a rate of 10% to 20%. For high-risk ventures, the opportunity might
be discounted at 50% or higher.

Furthermore, the number of time periods, "T", should be considered. Over how many
years is this product expected to be used?

The benefit is computed for each year over the total number of years in the forecasting
model. In the first year or so, it is likely that a negative cash flow will be realized, since
development costs overwhelm the initial benefits. To arrive at the total value of the
 P a g e | 752

business proposition, the annual benefit must be computed for each year of the product's
life cycle. The sum of all the years gives a total view of the profitability of the venture.

Cost Estimating and the Project Life Cycle

The previous section explored the importance of the differences between the product and
project life cycles. Understanding the total cost of the product life cycle is important in the
decision to initiate the project and in making design decisions. The project manager's main
focus, however, is on developing estimates of project life cycle cost, meaning all costs
related to producing the product, service, or result of the project. Estimates evolve and are
refined as the project proceeds through its phases.

Accuracy of Estimates

It is the project manager's responsibility to communicate to the project sponsor the degree
of accuracy in the estimates. A single point number cannot provide sufficient
understanding of the uncertainties at the beginning stages of the project. The accuracy of
estimates varies significantly based on the information available at the time the estimating
process is performed and the method used to generate the estimate.

Preparing cost estimates is an iterative process, performed throughout the project life cycle.
As more information is discovered, the cost estimate should be revised to reflect the most
current and accurate cost data available.

Each time a cost estimate is revised, the project manager should review and evaluate the
cost estimate to ensure that the proper technique was applied, based on the information
available.

The information presented below suggests the characteristics of estimates as the project
unfolds and the appropriate accuracy at that point. The subsequent sections further map
these characteristics of estimates to the project phases.
 P a g e | 753

Rough Order of Magnitude (ROM)

When done
Very early in the project life cycle, during initial planning

Why done
Provides estimate of cost for selection decisions

How accurate
-25% to +75%*
Very little information is available to the cost estimator
* The percentages of accuracy indicated for these types of estimates vary within industries
and application areas. The general theme is that the range of accuracy is quite broad for
ROM estimates, even up to -50% to +100% in the initiation phase as noted in the
PMBOK® Third Edition, and the accuracy range is tightened as one moves through the
project to develop budgetary and definitive estimates.

Budgetary

When done
Early, during the project definition phase as scope is defined and agreed upon

Why done
Puts dollars in the budget plans and establishes a baseline commitment to the project
sponsor

How accurate
-10% to +25%
More project information is available, but changes may still occur

Definitive
When done
Later in the project, during project development/execution

Why done
Provides details for purchases, estimates actual costs

How accurate
-5% to +10%
Estimates are done to predict revised project completion dates/costs
 P a g e | 754

Cost Estimates over the Project Life Cycle

Planning Estimates

Planning estimates are normally created for a proposed project before the conceptual
design is completed. Planning estimates are used to set cost estimates for early project
work involving scope determination and feasibility study efforts and for a preliminary
budget estimate of the total project costs.

Planning estimates are based on drawing analogies from past cost experience with similar
projects, where available. Rough Order of Magnitude estimates are planning estimates
used in the absence of previous cost experience.

Planning estimates are typically only approximations. It is imperative that the estimator
fully describe and document the basis of the estimate, including how the estimate was
prepared and any items specifically excluded from the estimate.

Budgetary or Conceptual Design Estimates

The fundamental purposes of a budgetary or conceptual design estimate are:

 Ensuring that the project offers sufficient benefit for the estimated cost;
 Developing a reliable project cost estimate consistent with the proposed schedule;
 At a minimum, establishing baseline project costs at the phase summary level; and
 Serving as the basis for project funding

In a software engineering project, the conceptual design estimate tells the customer
approximately what it will cost to complete the project within the scope defined in the
project scope statement. The conceptual estimate will be based on any available conceptual
design information, such as sketches and specifications.

Preliminary Design or System Design Estimates

The preliminary design and system design estimates are intermediate estimates created for
these purposes:

 Verifying that the newly available design details still support the conclusion that the
revised cost budget remains less than the total project funding; and
 Breaking down the cost budget to the work package level for the upcoming phase, to
facilitate more complete and accurate cost monitoring and control.

Preliminary design estimates are based on the specifications that have just been developed.
 P a g e | 755

Upon approval of system design and during subsequent execution phases, system design
estimates become definitive estimates. They are updated during project monitoring and
control to predict revised project completion dates and costs.

Life Cycle Costing

Rough order of magnitude, budgetary, and definitive estimates are calculated during the
project life cycle as the project proceeds through its phases. Life cycle cost estimates
evaluate costs estimated to be incurred over the product life cycle that includes the life of a
project and its product.

Types of costs estimated during the product life cycle include:

 Direct costs - Incurred directly by the project;

 Indirect costs - Incurred as part of the organization's cost of doing business and
shared among all current projects;
 Recurring costs - Repetitive elements of development and investment costs that
may vary with the quantity being produced during a product life cycle. Recurring
costs include items such as engineering required for redesign; maintenance,
modification, rework, and replacement; training personnel to operate and maintain
a product; and
 Non-recurring costs - Elements of development and investment costs that generally
occur only once during the product life cycle. Non-recurring costs include items
such as design, development, and testing activities through the first release of a
product.

Key issues for management when developing and refining product life cycle cost estimates
include:

 Ensuring that the project budget encompasses all development and production
costs;
 Adjusting the project's present value to reflect the future costs;
 Anticipating operations and maintenance costs that are frequently not considered in
the decision-making process;
 Understanding that the lowest bid is no longer an acceptable criterion if the lowest
bid is defined as the development and production cost, not the total life cost of the
product; and
 Ensuring that life cycle cost estimates reflect the time value of money (net present
value).
 P a g e | 756

Life cycle costing lets you see the big-picture view of the cost of a product throughout its
life cycle. Life cycle costing considers the total cost of ownership, including both the
operational and maintenance costs and the development costs of the product.

Project managers should perform a product life cycle cost estimate at the outset of every
project when evaluating the needs of the project. A life cycle cost estimate should be
required for all programs and projects at each point where a major decision/scope change
will affect life cycle cost.

Benefits of Life Cycle Costing

The benefits of life cycle costing include:

 Evaluating the competing options in purchasing;

 Improving the awareness of total costs;
 Providing accurate forecasting of cost profiles;
 Forecasting future resource needs; and
 Supporting strategic planning and budgeting.

Fundamentally, life cycle costing is important because it helps to ensure that the least
expensive alternative that will meet a project's functional requirements is selected. Initial
design and development costs may constitute only a fraction of a project's overall life cycle
costs.

Setting Expectations about Estimating

Estimating is challenging, especially in the early stages of planning a project. As noted,

cost estimating, like all of the planning processes, is iterative. Initial estimates for some
tasks may have to suffice until later in the project, when more specific information
becomes available. This new information allows a more detailed estimate to be generated.
The evolution of the estimate as the project unfolds mirrors the refinement of the work
breakdown structure; initially, WBS components are listed at a relatively high level, and
they are further decomposed as the scope is defined.

It is important for project managers to manage senior management and stakeholder

expectations regarding estimates. Far from commitments, early in the project estimates
may be little more than approximations, but these approximations will become more
precise as the team learns more about the details of future work from completing more
elements of the definition of the project's product or service.

Rolling Wave Planning

The evolution of estimates is one of the ways in which progressive elaboration takes place
on a project. In particular, the first time each phase is estimated, it may be at a very high
 P a g e | 757

level due to the lack of detailed information, and because no further detail is needed for the
decision-making at that point.

However, as the project phase approaches, it becomes necessary to create detailed schedule
and budget baselines in order to measure the performance effectively.

This results in the current phase having detailed estimates and all future phases having
coarse estimates, until the current phase nears completion. At that time, the next phase is
planned in detail. This cycle repeats each time the current phase nears closure. Because the
level of detail spreads into each phase separately, this is known as rolling wave planning.

What is an Estimate?

An estimate is not the same as a random guess or a bid, but is the derivation of an
approximate value based on one or more rational methods. An estimate uses available data
for comparable activities, components or events, and extrapolates or interpolates to the
current situation being estimated.

In contrast, a guess is a value arrived merely by intuition. A bid may contain one or more
estimates, but it is not an estimate and may vary because of factors independent of time,
cost, and quality.

Most activity duration and resource requirement values will be estimates. The very
definition of a project implies a unique initiative, one that has never been done before. In a
limited number of instances, duration or resource requirement values may be a given.

For example, a test procedure may be defined as always running for a set number of hours.
Another example is that concrete takes a known amount of time to cure before construction
can begin on it, based on the environmental temperature and the mixture used. In these
examples, the values are givens, not estimates. Estimates are approximations.

Who is Responsible for Cost Estimates?

In some organizations, the project manager is not responsible for developing the cost
estimates. A qualified cost-estimating department may develop these instead. In other
circumstances, the costs of certain types of resources, for example, in-house staff labor, are
not factored into the project costs.

Within the general practice of project management it remains the responsibility of the
project manager to understand and be able to justify the estimated project costs, whether or
not he actually developed them.

Prior to the completion of an activity, it is not possible to know what the exact cost,
duration, or resource effort will be. The project manager will not be able to account
 P a g e | 758

accurately for some factors, such as large changes in requirements that were not factored
into a project's original assumptions.

Estimate Accuracy

Estimates will have varying precision over the life of the project. The precision necessary
for an estimate depends on its context. For example, the earliest estimate for a project's
cost at the concept evaluation stage may be a rough order of magnitude estimate, which is
good enough to determine whether the project should be pursued or not. Additional
accuracy would not affect the decision, so making the effort to obtain it is not cost-
effective.

On the other hand, as an upcoming phase of a project is being planned, the phase's
activities are defined at sufficient levels of detail to ensure that estimates of duration will
have the necessary accuracy, and that the resulting project baselines will be effective in
measuring performance. Without this level of detail, the project management team would
not have the ability to detect and correct problems in a timely manner.

As estimates are refined further and at increasing levels of detail, the effect of diminishing
returns comes into play. The project management team must determine when the estimate's
accuracy is not improving sufficiently to justify further analysis.

Common Estimating Errors

Influence of scope on estimating errors

Perhaps the most significant factor contributing to errors in estimates is the failure to
encompass the entire technical scope. This comes primarily from two sources: failure to
elicit, analyze, and maintain the requirements properly, and incorrect decomposition of the
work breakdown structure. The first is the reason that poor requirements are cited so often
as a cause for poor project performance. The second leads to overlooked work, which often
appears later as a scope change request when it was actually an error, and the scope did not
change.

Influence of assumptions on estimating errors

The assumptions about the estimate must be documented. If significant assumptions are
not tested, the estimate may involve substantial error. For example, assumptions regarding
productivity, resource availability, vendor capabilities, and technical feasibility should be
reflected in the resource and duration estimates and spelled out in the basis of estimate
(BOE) for the activity. The BOE describes how the estimates were derived and the
information on which they were based.
 P a g e | 759

Influence of risk on estimating errors

When known risks are under- or overestimated, the amount of time or cost allocated to the
estimate will be wrong to some degree. Experience can reduce this kind of error, but it
cannot eliminate it completely.

Influence of time on estimating errors

Estimates must accommodate the budgeting and funding cycles of the performing
organization. When an estimate approaches or spans a boundary between two funding
cycles, there is the inherent risk that during the project the activity may slip at least
partially out of the cycle in which it was planned. This means the cost for the slipped
portion will be incurred in the wrong cycle, and the available funds in both cycles will no
longer match the revised cost forecast.

Other factors affecting estimating accuracy

Some other factors that contribute to the error of an estimate include:

 Novelty of the activity and lack of experience estimating it;

 Novelty of the technology used to carry out the activity;
 Unknown skills and productivity rates of the team;
 Unexpected impediments to the progress of the activity;
 Mistakes and/or misunderstandings in the inputs to the activity;
 Changes in the inputs to the activity, particularly in the requirements;
 Uncontrolled changes in working environment that impair productivity;
 Effects of geographic location of work;
 Locations of team members relative to the work;
 Available methods of team communication;
 Quality of support services;
 Availability of appropriate tools; and
 Availability of subject matter experts.

Cost Drivers

Cost drivers are project cost elements that heavily impact the overall project costs. They
will either inflate or moderate the base cost estimate that resulted from the measure of the
project's scope. Small changes in cost drivers result in large changes in the overall project
costs.

Parametric cost estimating, a technique of the Cost Estimating process discussed further in
the course, relies on an understanding of these cost drivers.
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They result in additional estimating measures that must be used to adjust the cost estimates
upward or downward to account for these factors.

Project managers should be concerned about cost drivers because they represent specific
elements of the project that could potentially become budget busters. Cost drivers are the
areas worth spending extra time on when developing the estimate in order to get more
accurate data on quantity required and unit costs.

When reviewing a cost estimate, recognizing and focusing on cost drivers is more
productive than trying to accurately forecast cost for all project elements.

Some examples of cost drivers:

 Volume and cost of concrete when building a hydroelectric dam; and

 Effects of development tools and work environment factors on the productivity
rates of programmers in software development
 The Cost Estimating process requires the project management team to consider
the following enterprise environmental factors:
 Marketplace conditions - This involves the products, services, and results that
are available in the marketplace, their sources, and the terms and conditions of
their use. These conditions will affect the choice of resources, and their prices
will then serve to establish their cost estimates. In addition, if fluctuations in
these conditions are expected, prices may change during the project. These
price changes will also affect the cost estimates.
 Commercial databases - Resource cost rates are often available from
commercial databases that track skills and human resource costs and standard
costs for material and equipment. With adjustments for local variation, these
may serve as the base prices for the cost estimates.
 The organizational process assets include policies, procedures, and guidelines
about cost estimating. Other process assets include:
 Cost estimating policies - If the organization has established mandatory
approaches for cost estimating in various circumstances, the project
management team must comply with them;
 Cost estimating templates - Often the finance function or previous project
teams have developed templates that are based on previous projects. These
templates can be reused and tailored for use on new projects to suit their
characteristics;
 Historical information - Often the performing organization maintains a
repository of information about work that has been performed in the past that
was similar, or that used the same resources planned for the current project. In
this case, there may be available historical information that the project
management team can leverage in developing the cost estimates;
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 Project files -Records from prior projects that have performed similar work can
help with developing cost estimates;
 Team knowledge - Frequently the team members will have been selected
because of their previous experience with similar work. This usually provides a
base of knowledge about similar efforts that can be used to guide cost
estimates; and
 Lessons learned - If previous cost estimates are available from a previous
project that was similar in scope and size, there will often be lessons learned
about how to (and how not to) generate and tailor the estimates to be even more
accurate than those used on the previous project.

The project scope statement describes the business need, justification, requirements, and
boundaries for the project. It also documents constraints, specific factors that can limit cost
estimating options. On many projects, a common constraint is a limited project budget.
Other constraints can stem from required delivery dates and available resources.

Often the project approach, assumptions, and acceptance criteria that are described in the
project scope statement will require that the project team tailor their estimates. For
example, if the project is required to use inexperienced in-house resources in order to
bolster the development of a performing organization - competitive advantage, this will
cause the estimates to be different than if expert resources had been procured.

The work breakdown structure defines the relationship among the components of the
project and the project deliverables. In this manner, the work breakdown structure also
defines how the cost estimates will be rolled up for summary reporting and control
purposes.

The WBS dictionary is the companion document to the WBS. It contains all the details
for each component. Each component includes a code or account identifier, statement of
work, responsible organization, and a list of milestones. Other information can include a
list of associated schedule activities, resources required, and an estimate of cost of the
component.

The project management plan is a document that specifies how the project is executed,
monitored and controlled, and closed. The project management plan can be a summary
level or detailed document, and can contain one or more subsidiary plans or other
components.

Other planning outputs that may be used are:

 Schedule management plan - The type and quantity of resources and the amount
of time those resources are applied to complete the work of the project are major
parts of determining the project cost. The Activity Resource Estimating and
Activity Duration Estimating processes that contribute to the schedule management
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plan are closely coordinated with Cost Estimating. The schedule management plan
also defines how the schedule will be managed, and will influence how cost
estimates will treat the boundaries of fiscal cycles when the activities cannot be
funded within the funding cycle in which they were originally expected to occur;

 Staffing management plan - This describes the resources with which the project
team will be staffed and when they will be made available. These factors drive both
the size of project cost estimate (through the resource rates) and the timing of
planned outlays in the cost budget (through information about availability); and

 Risk register - This describes the risk response plans for identified project risks.
Each risk response plan has associated activities and may entail contingency
reserves. The costs of the activities and reserves are affected by the results of
ongoing risk assessment, which may change over the course of the project.

 Developing Cost Estimates

There are various methods used to develop cost estimates, including:

 Analogous estimating;
 Parametric modeling; and
 Bottom-up estimating.

Other tools and techniques used during the Cost Estimating process include:

 Project management software;

 Vendor bid analysis;
 Reserve analysis;
 Cost of quality; and
 Determine resource cost rates.

The project manager should be aware of the estimating methods that were used to develop
the cost estimates because the method chosen dictates the overall accuracy of the estimate,
known as the confidence level, and should meet these criteria:

 Consistency with the stage the project has reached and the quality and detail of the
available information; and
 Degree of accuracy needed at that stage of the project's life cycle.

It is sometimes possible (and appropriate) to employ a combination of Cost Estimating

techniques to produce a more reliable estimate. If two methods can be shown to produce
estimates that agree, the project management team can have more confidence that the
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underlying data was consistent, and of high quality, and that no errors were made in the
estimating process.

Analogous Estimating

An estimating technique that uses the values of parameters, such as scope, cost, budget,
and duration or measures of scale such as size, weight and complexity from a previous,
similar activity as the basis for estimating the same parameter or measure for a future
activity.

Analogous estimating requires historical data from completed projects. It predicts

estimates based on the experience from the previous projects. The accuracy of the estimate
depends on the degree to which the current project's characteristics match the historical
data.

Analogous estimating takes the previous project's actual results and adjusts them by a
multiplier based on a number of possible factors:

 Comparative complexity and design;

 Differences in the way portions of the work will be performed;
 Additions to or omissions from the work of the previous projects; and
 Geographical and economic data.

This estimating technique is suitable for early stage estimates, such as planning or
feasibility studies, initial project duration and cost estimates, and product life cycle costing.

Analogous estimates are used in these circumstances:

 The project's process is generally known but substantially undefined or subject to

change.
 There is very little engineering design information;
 Historical information or organizational process assets contain incomplete
information, for example, when published cost rates omit information about health
and safety requirements;
 There is very little technical data; and
 Special factors must be taken into account, such as specialized requirements related
to health, safety, or security.

The accuracy of analogous estimating is +100% to -50%.

Recall that for analogous estimates, a few similar projects are used as a base, and the
estimated costs are then produced by increasing (or decreasing) the historical project's
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costs by multipliers that depend on factors such as the differences between the projects in
comparative complexity, resource types, and optional elements of scope.

For example, if a 100,000-square-foot building was built at a cost of $110 per square foot,
and a similar 200,000-square-foot building had been built at a cost of $105 per square foot,
an analogous estimate may determine that a similar 150,000-square-foot building could be
built for approximately $107.50 per square foot.

Parametric Estimating

An estimating technique that uses a statistical relationship between historical data and
other variables (e.g., square footage in construction, lines of code in software development)
to calculate an estimate for activity parameters, such as scope, cost, budget, and duration.
This technique can produce higher levels of accuracy depending upon the sophistication
and the underlying data built into the model.

This method relies on the fact that the quantity of work to be performed is directly
proportional to some underlying measure of the deliverable. This is often the case for
construction projects involving conventional buildings, where the total cost and even the
costs of specific materials and labor can be gauged as a price per square foot of the final
building.

This method can be used in industries that use standard estimating units for work such as:

 Feet of pavement for a highway;

 Number of storyboards per person for computer-based instruction;
 Lines of code or function points for a software developer; and
 Square feet of roofing per roofer.

Parametric modeling requires historical data based on similar projects and reasonable
measurements of the quantities or elements of work to be performed.

Parametric modeling is suitable for conceptual or system design phase estimates, when
some of the final scope and the project approach have been defined.

Its accuracy is between +75% and -25%.

Examples of parametric cost estimating measures include:

 Cost per square foot of building floor space[ and

 Cost per function point of software code written in the Java language.
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Differences between Analogous and Parametric Estimating

The major difference between analogous estimates and parametric estimates is that the
parametric estimate uses estimating rules to approximate the likely final estimate of either
the entire project or several major components of a larger project.

The parametric estimating method is substantially more accurate when using a database of
many completed projects, while the analogous estimate can use data from only a few
completed projects.

Bottom-Up Estimating

A method of estimating a component of work. The work is decomposed into more detail.
An estimate is prepared of what is needed to meet the requirements of each of the lower,
more detailed pieces of work, and these estimates are then aggregated into a total quantity
for the component of work. The accuracy of bottom-up estimating is driven by the size and
complexity of the work identified at the lower levels. Generally smaller work scopes
increases the accuracy of the estimates.

Bottom-up estimates use a detailed project design to list all the materials and labor
required to complete the project. Costs for individual work packages or individual schedule
activities are estimated at the lowest level of detail available, and then summed up to
higher levels for reporting and tracking purposes. For example, activities associated with
installing material and equipment are estimated using detailed cost estimating relationships
for each lowest-level activity (e.g., the cost per linear foot to install twenty-four-inch-
diameter steel pipes), which are then summed up through higher levels. The schedule
activities that are estimated should be complete, measurable, and quantifiable lowest-level
activities.

Benefits and Disadvantages of Bottom-Up Estimating

The benefits of using the bottom-up estimating method are:

 It provides the most accurate estimates of all of the available techniques; and
 It establishes an accurate estimate for each activity or element of work, providing
the most detailed level of monitoring and control.

The disadvantages are:

 It is the most time-consuming method of estimating; and

 It requires the most kinds of information, and the most detailed data, of all of the
estimating methods. Specifically, it requires:
 A completed WBS for the portion of the project being estimated;
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 A list of the associated project activities;

 Historic actual data; and
 Productivity rates and pricing information.

The accuracy of bottom-up estimating is +/- 20%.

This method is appropriate for estimating construction, testing, and deployment work once
the detailed design has been completed.

When you use bottom-up estimating, the cost can be expressed as:

 Labor costs;
 Material costs;
 Equipment and software costs; and
 Subcontracting costs.

Supporting Tools and Techniques of Cost Estimating

Analogous, parametric, and bottom-up estimating are cost estimating techniques used to
develop cost estimates. Additional tools and techniques of the Cost Estimating process
include:

 Project management software;

 Vendor bid analysis;
 Reserve analysis;
 Cost of quality; and
 Determine resource cost rates.

Determining Resource Cost Rates

Regardless of the estimating technique used, the person determining the rates or the group
preparing the estimates must know the unit cost rates, such as staff cost per hour or bulk
material cost per cubic yard, in order to estimate schedule activity costs for each resource.

Fully Loaded Rates

A fully loaded rate considers not only the cost of a staff member's hourly rate but also
includes the costs of benefits and vacation time, facilities costs, and other costs associated
with employing an individual. These factors that contribute to resource cost rates are
classified as direct costs, indirect costs, and fixed overhead costs.
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Direct Costs

Organizations often calculate a rate for the project team labor that begins with the hourly
equivalent pay. Whether the team member is a contractor or an employee only the method
for determining this pay rate is affected; unlike a contractor, who is paid an hourly rate, a
salaried employee's hourly rate is calculated as his salary divided by the expected annual
hours he must work. This is the labor's direct cost per hour.

Indirect Costs

In addition, however, there are other costs that each hour of labor entails, including various
worker benefits, and telecommunications costs. These costs are considered indirect costs
and are added to each labor hour's rate in proportion to the direct cost of that labor rate. For
example, if the direct rate for a particular staff person is $100 / hour and the indirect costs
amount to 40% on top of salary, the indirect cost that must be added to the direct labor rate
per hour for this staff person will be $40. This additional cost is known as the indirect cost
burden.

Fixed Overhead Costs

Finally, many organizations that charge clients for their staff services also factor in a
portion of the organization's total fixed overhead costs. These costs include the facility
cost, utilities, and the cost of administrative staff support. These costs are called fixed
because the amount of work the organization performs does not affect the organization's
annual cost for these items.

Traditional cost accounting calculates an hourly rate per person for total fixed overhead
costs by dividing total overhead costs by the organization's total planned hours of work
(headcount x hours per person). The hourly rate for fixed costs can then be added to each
project team member's hourly rate, or it can be multiplied by the number of hours of work
planned for the project, and charged to the project as a lump sum.

For example, an organization calculates that its fixed overhead costs for the year are
$500,000 and the total number of hours worked by everyone in the organization that year
will be 100,000 (2000 hours per person multiplied by a headcount of 50).

The hourly charge per person for overhead is thus $5.00 per hour ($500,000 / 100,000),
regardless of the person's salary. The hourly cost for each member of the project team will
be increased by $5.00.

Since this cost is based solely on headcount, and not on the staff person's underlying direct
labor rate, it might be, for example, as much as $25 per hour even for a team member
making $18.00 an hour. This is the fixed overhead burden.
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Blended Resource Cost Rates

Many industries use a blended cost rate for all the resources that will be consumed for each
unit of scope. When the parametric cost estimating measure is expressed in terms of cost
per unit of scope (e.g., dollars per square foot of hotel space for construction cost), all the
resource cost rates are already factored in through this blended rate.

The advantage of this approach is that it eliminates the need to understand the impact of
the scope measure on all the types of resources. In hotel construction, these resources
would include labor, equipment, and materials. If no blended rate were available, each
resource's costs would need to be calculated separately and all their costs added together.

If the parametric cost estimating measure is expressed in terms of work effort, (e.g., labor
hours per square foot), the estimator must know the unit cost rates, including staff cost per
hour and the bulk material cost for each resource in order to estimate the schedule activity
costs.

Fully Burdened Labor Rate

The fully burdened labor rate is the sum of all these kinds of costs: the direct rate, indirect
cost burden, and the fixed overhead burden. In our example, the total hourly cost for the
staff person is $165 per hour ($100/hour direct rate, indirect cost burden of $40, and fixed
overhead burden of $25).

The outputs of Cost Estimating are:

 Activity cost estimates;

 Activity cost estimate supporting detail;
 Requested changes; and
 Cost management plan (updates).

Activity Cost Estimates

An activity cost estimate is a quantitative assessment of the likely costs of the resource
required to complete schedule activities. Costs are estimated for all resources applied,
including labor, materials, facilities, equipment, services, information technology, and
special categories such as inflation allowance or cost contingency reserve.
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Activity cost estimates should:

 Be traceable to the WBS work package items;

 Show all unit costs, pricing factors, and quantities of resources required for each
calculation;
 Include and distinguish between direct costs and indirect costs;
 Include methods for applying indirect costs to the project;
 Document all assumptions used during estimate development; and
 Be prepared in a clear, consistent, comprehensive format.

Activity Cost Estimate Supporting Detail

The information that describes the methods and information that were used to arrive at an
estimate is often referred to as the basis-of-estimate (BOE). It includes all the supporting
elements for a cost estimate that provide a justification for the resulting estimate,
including:

 A description of the logic behind the estimate;

 The method used to calculate the estimate;
 Assumptions and uncertainties associated with the estimate. Examples of assumptions
to be documented include specific exclusions, such as:

1. Equipment and management facilities are not part of project cost;

2. Research and development will not be required;
3. Work will not be performed during holidays; and
4. Only a total of five rain delays are assumed.

 Constraints associated with the estimate. Examples of constraints on project activity

that should be documented include specific exclusions, such as:

1. Security clearances and access restrictions will be necessary;

2. Daily storage and inventory of tools and materials will be required; and
3. Operations will be continuing while the project is underway, and must not be
disturbed.

 Any special conditions that are incorporated into the estimate;

 Identified risks that affect the estimate; and
 The range within the estimate falls, also known as a confidence level for the estimate.

The documentation for the estimate must include enough detail so that the estimate can be
reproduced, and it must include a way to identify which work package it originates from.
This is known as traceability. Traceability ensures that current project planning documents
were used as the basis for the cost estimates.
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Traceability is typically provided through codes or cost element structures. These include
the WBS, organizational breakdown structure, resource breakdown structures, and code of
accounts.

The basis-of-estimate, or cost basis:

 Helps reconcile funding with the project budget;

 Allows comparison to estimates for other similar projects;
 Allows for consistent application and revision of the estimate throughout the project
life cycle; and
 Ensures that any changes from an earlier phase of the project can be traced. As the
estimate evolves during the project life cycle, the basis should include the
reconciliation between the previous version and the current version to account for any
changes.

Managing Changes to Activity Cost Estimates

The two remaining outputs of the Cost Estimating process include requested changes and
updates to the cost management plan.

Requested Changes

When changes to the project cost estimates are needed, they are first recorded and
evaluated as requested changes. They are then passed to the Integrated Change Control
process within the Project Integration Management Knowledge Area, where they may be
approved, amended, or rejected. This process ensures that any other Project Management
deliverables that are affected will also reflect the necessary changes, in accordance with the
Triple Constraint principle.

Cost Management Plan (Updates)

The cost management plan describes how cost estimates will be managed. The cost
management plan may be simple or complex. It is a subsidiary of the project management
plan. Changes to the cost management plan can modify policies, procedures, and cost or
budgets, and they should be documented and authorized. The project team implements the
approved changes.

The approach to the Cost Estimating process may vary depending on specific project
requirements, the type of project life cycle chosen, and specific industry and company
requirements. The diagram below shows the steps of one approach to process cost
estimates.
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The diagram below is a representation of the whole estimating process.

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General Estimating Techniques

The ten-step estimating process presented is one approach used to develop detailed cost
estimates. Other general cost estimating techniques include expert judgment, alternatives
analysis, and published estimating data.

Expert Judgment

Subject matter experts (SMEs) can be used to select appropriate estimating techniques,
evaluate the appropriateness and quality of estimating inputs, and to select, locate, and
prepare other information that may be useful in comparing or tailoring the estimate.

The expert may be involved in creating the estimate or in reviewing it and recommending
adjustments. Experts should have specialized knowledge both in the application area being
estimated, whether cost or duration, and in estimating techniques. They may be available
within the organization, or their services may be procured as consultants to the
organization or the project.

Alternative Analysis

Alternatives analysis is a technique used to explore different options to carry out the work.
It is usually necessary to look at a number of factors to determine an estimate. When
evaluating the cost or duration of the activity, the project management team may have
more than one option for which kind of resource to use, and where to obtain it. They will
need to consider how long they will have to wait to secure the resource, factors that affect
the cost and speed of the resource (such as tools and expertise), and whether there are other
project objectives or organizational factors that drive the choice.

Published Estimated Data

Published estimating data can be used to determine estimates. For example, the
construction industry uses published rates to estimate the amounts and costs of required
materials and equipment based on certain factors. This data is often specified for different
regions. Another example is the productivity rate of software developers in various
software languages or using different software development productivity tools.
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Cost Management – Cost Budgeting

Introduction

Cost Budgeting involves aggregating the estimated costs of individual schedule activities
or work packages to establish a total cost baseline for measuring project performance. The
graphic below illustrates the procedure.

Although the project manager may be able to calculate a total budget based on assigned
resources early in the project, it is important for the project manager to determine when
money will be spent during the project life cycle. The timing of these planned costs will
require other parts of the organization to coordinate so that the costs can be properly
funded and paid for on a timely basis.
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Cost Budgeting occurs after Cost Estimating. Many projects start with a total budget
before the specifics of a project are defined, but in many cases, these preset budgets may
be reconsidered after cost estimation occurs. Cost budgets are also frequently adjusted in
response to other Project Management processes, illustrating the iterative nature of the
project management process.

On some projects of smaller scope, cost estimating and cost budgeting are so tightly linked
that they are viewed as a single process that can be performed by a single person over a
relatively short period of time. There are distinct processes being applied, however, as the
inputs, tools and techniques, and outputs for each are different. Early scope definition is
critical to both processes, as the ability to influence project cost is greatest at the early
stages of the project.

Cost Budgeting involves summing the estimated costs of the work activities at the work
package level or higher, depending on the needs of the project and the policies of the
performing organization. If bottom-up estimation was used to estimate activity costs, a
time-phased budget at the activity level can be produced by allocating the activities' costs
to the time periods in which the project schedule says the activities will take place. Rolling
activity costs up to the work package level is then straightforward.

Baseline Spend Curve

The baseline S-curve shows the total planned cumulative expenditure, period by period
throughout the duration of the project. At the planned end date of the project, the
cumulative cost reaches the full budget amount, known as budget at completion (BAC).

In the simplified example below, a project consisting of 6 tasks is shown. Tasks are labeled
A through F, and each is associated with a cost. The network diagram at the bottom
illustrates the dependencies among the tasks.

 At the end of time period 1, task A has completed, so the cost expended after
period 1 is $10.
 At the end of time period 2, tasks B and C have also completed, so the cost
expended after period 2 is ($10 + $25 + $20) = $55.
 At the end of period 3, tasks D and E have also completed, so the cost expended
after period 3 is ($55 + $15 + $45) = $115.
 At the end of period 4, task F has completed, so the cost expended after period 4,
the end of the project, is ($115 + $25) = $140. This is the budget at completion, as
it represents the planned cumulative costs to be expended on the project.
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As project performance information is periodically collected, the comparison of actual

costs to the planned budget baseline will provide vital information concerning the health of
the project. Summarizing both values using this cumulative cost graph technique provides
a quick visual indicator of any problems in managing project costs. This will be discussed
further in the context of the Cost Control process.

Inputs to the Cost Budgeting Process

Project Scope Statement

The project scope statement describes any funding constraints, such as required fiscal year
boundaries and other funding cycles that limit the acquisition and expenditure of funds.
Work Breakdown Structure
The WBS provides the relationship between project components and project deliverables.
This provides the structure for the aggregation of costs used for budgeting, monitoring, and
control.
WBS Dictionary
The WBS dictionary, the companion document to the WBS, contains the details for each
component, includes a code or account identifier, statement of work, responsible
organization, and a list of milestones. Other information can include a list of associated
schedule activities, resources required, and an estimate of cost.
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Activity Cost Estimates

The activity cost estimates represent the cost data that will form the basis of the amounts in
the cost budget.

Activity Cost Estimates Supporting Detail

The supporting detail for the activity cost estimate describes how the estimates were
formed and provides the basis for determining the accuracy of the estimates. The degree of
uncertainty in the estimates will be used to gauge how much additional funding may be
necessary to cover estimating errors.

Project Schedule

The project schedule includes the planned start and finish dates for the activities, work
packages, planning packages, and control accounts. These dates are used to allocate
estimated costs to the calendar periods in which they are planned to occur.

Resource Calendars

The resource calendar shows holidays and the availability of specific resources. It defines
calendar periods within an activity's duration during which costs can or cannot occur, due
to the availability of key resources. This prevents funding requests and cost expenditures
from being scheduled on holidays or during the absence of the authorizing stakeholder or
project manager.

Contract

A contract can be a complex document or a simple purchase order. Regardless of the

format, a contract is a binding legal agreement. The contract supplies information about
what products, services, or results have been purchased, along with their costs.

Cost Management Plan

The cost management plan, a component of the project management plan, defines how cost
budgeting will be carried out.
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Cost Budgeting Process Tools

Cost Aggregation

To make monitoring and controlling costs easier, schedule activity cost estimates are
aggregated by the work packages that comprise the WBS. The work package cost estimates
can then be aggregated at higher levels of the WBS, if needed, to reach the summary level
needed for the performing organization's financial control method.

The above example illustrates the concept of cost aggregation. The first column shows the
WBS number for the work package that the activity will produce. Here, the WBS
numbering system uses an outline scheme to indicate which components fit into others.

The names of the schedule activities and their summary elements appear in the second
column.

The use of the bottom-up estimating technique has resulted in a cost estimate for each
Level 4 (lowest-level) work package. In the example, only the work packages 1.2.5.1
through 1.2.5.3 are shown at this level.

The sum of these three Level 4 is work packages is $6,960. This total amount is considered
the aggregated cost for these work packages and is shown as the estimate for the Level 3
control account 1.2.5, "Technical Feasibility Analysis."
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The values of each Level 3 control account are also aggregated. In this case, only the
control accounts 1.2.1 through 1.2.5 are shown. They aggregate to $15,200, which is
shown as the Level 2 cost estimate for control account 1.2, "Preliminary Investigation
Stage."

Finally, while not explicitly illustrated on the diagram, the aggregated amounts for each
Level 2 control account are summed or aggregated to produce the total project estimate,
shown as the Level 1 Cost of $623,816 for the Product Development Project.

The process that the project management team and sponsor use for monitoring and
controlling the costs will generally specify a level of detail at which costs should be
budgeted and tracked, and variances reported. This makes it easier to locate where
significant variances are occurring without reviewing potentially large amounts of
insignificant detail, and provides the most control for the minimum effort.

The level of aggregation may also vary from one part of the project's work to another, if
some activities run more significant risks of cost overruns than others. In the example
above, the Technical Feasibility Analysis (WBS 1.2.5) costs are being budgeted at the
detail level of the work package, but the Initial Product Screening Stage (WBS 1.1) was
budgeted only at the highest ("stage") level. The risk of a significant overrun in the Initial
Product Screening Stage was deemed too low to break down the costs further.
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Cost Budgeting Process Techniques

Parametric Estimating

When specific schedule activities have not been defined and estimated, parametric
estimating can be applied to the planning components to provide a high-level budget for
the affected work. This will generally be necessary when the project is in the conceptual
stage of development and the details of the work are not known. It is also true in rolling
wave planning for later phases. In this case, the later phases are not planned in detail,
pending the availability of missing information. For the next phase, the necessary detail
will be produced only as an outcome of the current work.

In these situations, using parametric estimating at the phase or other planning component
level can set the budget. For parametric estimating to be most effective, the following
should be considered:

 The model that is used should be based on accurate historical information;

 The model should work for different sizes of projects (in other words, the model
should be scalable); and
 The parameters used in the model should be quantifiable.

Reserve analysis sets aside reserves to be used for unplanned changes. The changes might
be due to anticipated risks and thus involve the cost of the contingency plan, or they might
be due to an anticipated rate of errors and rework ("known unknowns", or contingency
reserves). On the other hand, they might be the result of unexpected events that require
workarounds, and for which no contingency plan exists ("unknown unknowns", or
management reserves).

Management reserves are not part of the project cost baseline, but they are included in the
budget for the project. Cost budget reserves are discussed in more detail in a subsequent
section.

Funding Limit Reconciliation

The timing of funds and planned costs for projects must solve two problems: solvency and
fiscal timing.

For a project to be solvent, funds must always be available to meet planned costs. This
means that, for any given period, the level of available funds will always be slightly higher
than the amount required by the total time-phased budget baseline. The principle is the
same as the funding requirement for a personal bank checking account.
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Funds must also match the timing of the planned costs within the organization's fiscal
cycles. This is the case even if the planned costs shift due to schedule changes. Funds are
authorized for disbursement to the project in cycles that are set by the customer or
organization to follow their fiscal cycles. The funds can then be spent only for work
performed in the same fiscal cycle.

Example: Funds for work in a company's fiscal year 2007 will be disbursed shortly before
the start of the fiscal year. They can then be used only to pay for invoices that relate to
work that was completed in the same fiscal year. Unused funds expire at the end of the
fiscal year, and, conversely, if there are overruns, they must be accommodated through
additional funds disbursed in the same fiscal year.

Because work may accelerate or slip across fiscal cycle boundaries, every time the
schedule changes, the funds made available must be reconciled with the actual budgeted
costs. When the disbursed funds cannot cover the additional costs, or when there will be
excess funds in one cycle and a shortage in the next, the usual technique is to shift other
portions of the work between the fiscal periods. This maneuver reduces the overrun or
consumes the excess. This is done by imposing date constraints on some work packages,
schedule milestones, or WBS components in the project schedule.

Reconciling the funding limit is normally performed by the finance function within the
organization. It is unusual to simply request changes in the fund disbursement schedule,
because the planned expenditures on a given project must be balanced with the total
available cash flow in the organization, taking into account the priorities of other projects
and business operations. If funding were constantly being shifted, managing the cash flow
would become extremely difficult.

The Cost Budgeting process produces the following outputs:

 Cost baseline;
 Project funding requirements;
 Updates to the cost management plan; and
 Requested changes.
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Cost Baseline

The primary goal of the Cost Budgeting process is to determine the cost baseline. Once the
cost budget is approved, it becomes the cost baseline. The cost baseline will be used to
measure and monitor cost performance on the project. As noted earlier, the cost baseline is
developed by summing estimated costs by period and is usually displayed in the form of an
S-curve.

Some projects may have multiple cost or resource baselines to measure different aspects of
project performance. For example, internal labor costs may be tracked separately from
external costs of contractors or from total labor hours.

Project Funding Requirements

Funding requirements are derived from the cost baseline and must exceed the cost baseline
in every period by an amount that will cover expenditures associated with both early
progress and cost overruns. Funding occurs in incremental amounts. Each increment must
be sufficient to cover all expenditures in every period between the posting of the first
increment and the posting of the next increment.

The diagram below shows the comparison of the funding levels to the cost baseline results.
The funding requirements are always higher than the project cost baseline's S-curve, as the
total funds include the cost baseline plus the management contingency reserve. Some
portion of the management contingency reserve can be included incrementally in each
funding increment or funded when needed, depending on organizational policies.
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Cost Management Plan (Updates)

The cost management plan is updated with approved change requests that resulted from the
Cost Budgeting process if those approved changes impact the management of costs.

Requested Changes

When budgets are allocated to fit within constraints, some control accounts may not have
funding that is sufficient to accomplish the required scope. A change request is then
necessary to request additional funding, reduce the scope, or perhaps adjust other planning
documentation such as the risk response plan. Requested changes are processed for review
and distribution through the Integrated Change Control process.

Cost Budget Reserves

As noted previously, reserves analysis is a Cost Budgeting technique used to identify the
areas in need of reserves. Typically, budget allocations provide challenges to individual
control accounts. In order to mitigate the risk of insufficient funds, it is appropriate to
establish a cost reserve.

Types of Reserves

Contingency Reserve
A contingency reserve is an amount set aside to account for known risks or uncertainties
identified in the estimates. For example, during the estimating process, an estimate for the
likely amount may have been established, but a more pessimistic or conservative amount
was considered plausible. The budgeting strategy in this case could be to set the budget at
the lower amount and to reserve the difference in a special contingency amount. The
project manager's strategy will be to actively monitor the planning component that the
reserve covers so that the costs are controlled within the lower amount. The reserve is
available as a safety net, but can be released if it is not required.

These contingency reserves are estimated costs to be used at the discretion of the project
manager to deal with estimating errors and with risk events that have been identified in the
risk register (the catalogue of identified project risks).

These risk events are called "known unknowns," because although their size cannot be
predicted with certainty and they may not occur at all, their causes are familiar, and their
impacts tend to follow similar patterns on similar projects. Their risk response plans and
associated contingency reserves are part of the project scope, schedule, and cost baselines.
 P a g e | 783

Management Reserve
In some cases large, unexpected risks that impact the project budget may materialize.
These risks are referred to as "unknown unknowns," because their size, cause, and
likelihood are all impossible to predict. An example might be a labor strike in the middle
of a long construction project.

In the case of these unknown unknowns, the project manager may need to draw on
additional funding that was not part of the budget. For this reason, the sponsor's
management may agree to set aside an additional reserve called the management reserve
that may be drawn upon to deal with unplanned events, but only with their specific
approval.

Since such events by definition cannot be foreseen, the project management team may
perform a reserve analysis based on the experiences of prior, similar projects. This
management reserve is excluded from the cost budget, but is part of the total funding
request.

Appropriate Use of Reserves

Reserves should not be used to accommodate scope changes. Any addition to project scope
must be formally initiated with a change request, and corresponding adjustments to budget
and schedule baselines must be negotiated.

Mature project management cultures understand the benefits of identifying uncertainties

and establishing a reserve mechanism to actively manage risks and uncertainties. Less
mature organizations may treat reserves with skepticism and may automatically disallow
any budget category identified as a contingency. Often these same organizations wonder
why they are constantly struggling with projects that cannot be completed within their
budgets.

The uncertainty of cost estimates and the occurrence of risk events are unavoidable.
Because they are not certain, they should not be factored into the base estimates for the
project work. To shield the project from the turbulence that would result when these
estimating errors and risk events surface, the project management team should put in place
the appropriate reserves, and carefully control their use to meet only the intended purposes.
 P a g e | 784

Reserve Analysis and Estimating Methods

To develop and establish the appropriate cost reserves, the project management team must
use the reserve analysis technique, defined earlier.The method that should be used to
establish cost reserves for a planning component or work package depends on the type of
estimating method that was originally used to establish the budget. Recall the estimating
methods previously discussed:

 Analogous (also known as Top-down);

 Parametric; and
 Bottom-up.

In addition, range estimating, also known as three-point estimating, may be used. Three-
point estimates for activity durations are based on three types of estimates:

 Most likely: The duration of the schedule activity, given the resources likely to be
assigned, realistic expectations of availability for the schedule activity,
dependencies on other participants, and interruptions;
 Optimistic: The activity duration is based on a best-case scenario of what is
described in the most likely estimate; and
 Pessimistic: The activity duration is based on a worst-case scenario of what is
described in the most likely estimate.

An activity duration estimate can be constructed by using an average of the three estimated
durations. That average will often provide a more accurate activity duration estimate than
the single-point, most likely estimate. In the diagram below, a weighted average has been
used to determine the estimate, as more weight has been given to the most likely estimate.
 P a g e | 785

The following table describes how one might establish the cost reserve based on the
estimating method applied.

Estimating Method Establishing the Reserve

Analogous/Top- Evaluate the degree to which the historical project(s)
Down Estimating used as the basis for the analogous estimate differ in
terms of complexity, resource types, and optional
elements of scope. Establish a general contingency
percentage based on the accuracy level predicted of the
estimate, e.g., 30%, and apply that percentage
contingency to each control account.
Parametric Evaluate the sensitivity of the parametric measures and
Estimating devise a contingency. For example, for material, if
measurements were accurate within 10%, use a 10%
contingency. Also, consider adding a contingency for
scrap or wasted material, or expected product defect
rates.
Bottom-Up Collect the contingencies estimated for specific activities
Estimating or work packages into a common contingency account.
Range, or Three- Establish a contingency based on the difference between
Point, Estimating the "Most Likely" estimate and three-point estimate, as
illustrated on the following page.
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The diagrams below illustrate the calculation of contingency for three-point estimates. It is
important to establish a reserve proportionate to the amount of uncertainly represented by
the range of the estimate.

In the diagram below, using statistical analysis one can determine that the confidence of
achieving M is about 30%, which is not high.

By adding a reserve represented by the difference between the three-point estimate and the
most-likely estimate (E M), the confidence of success is closer to 60%.

Confidence intervals are a statistical concept that is beyond the scope of this course.
However, given an estimate that was generated using the three-point estimating technique,
a project manager should be able to determine an appropriate contingency amount
proportionate to the amount of uncertainty represented by the range of the estimate.
 P a g e | 787

For example, if the supporting detail of a work package estimate noted that the Three-Point
Estimating technique was used with the optimistic estimate being $2,500, the most likely
estimate being $3,000, and the pessimistic estimate being $5,000, then the project manager
would calculate an estimate E = (O + 4M + P) / 6, or [$2,500 + (4 x $3,000) + $5,000] / 6
= $3,250. The project manager could then establish a reserve amount based upon the
formula of E - M, or $250 ($3,250 - $3,000).

Similarly if the supporting detail of a work package estimate noted that the Three-Point
Estimating technique was used with the optimistic estimate being $100, the most likely
estimate being $1,000, and the pessimistic estimate being $10,000, then the project
manager would calculate an estimate E = [$100 + (4 x $1,000) + $10,000] / 6 = $2,350.
The project manager could establish a reserve amount based upon the formula of E - M, or
$1,350 ($2,350 - $1,000).

Note that in the two examples above, the amount of the reserve changes to reflect the
amount of uncertainty represented by the range of the estimate. In the second example,
there is a greater variance between the optimistic, most likely, and pessimistic estimates, so
the reserve amount is greater to reflect this uncertainty.
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Cost Control
The primary purpose of the Cost Control process is to influence the factors that create cost
variances and to control changes to the project budget.

One of the most common problems in project management is overrunning the project
budget. There are a number of plausible explanations for this. People may be more focused
on the technology and making sure that the project requirements are met, literally at the
expense of the budget. In other situations, the need to define and observe a budget
constraint is not recognized; therefore cost performance is running "open loop," until the
sponsor or customer calls attention to the problem.

Project Cost Control includes:

 Influencing the factors that create changes to the cost baseline;

 Ensuring that requested changes are agreed upon;
 Managing the actual changes when they occur;
 Assuring that potential cost overruns do not exceed the authorized funding for a
particular phase and the total funding for the project;
 Monitoring cost performance to detect and understand variances from the cost
baseline
 Recording all appropriate changes accurately against the cost baseline;
 Preventing incorrect, inappropriate, or unapproved changes from being included in
the reported cost or resource usage;
 Informing appropriate stakeholders of approved changes; and
 Acting to bring expected cost overruns within acceptable limits.

What information you need to implement cost control?

Cost Baseline

The cost baseline, also described as the time-phased budget or S-curve, was created in the
Cost Budgeting process. Once established, the baseline serves as a constant reference for
measuring and monitoring cost performance on the project.

Project Funding Requirements

Funding requirements are derived from the cost baseline. Fund flow should be positive; it
should exceed the cost baseline in every period by an amount that will cover expenditures
associated with both early progress and cost overruns. Funding occurs in incremental
amounts. Each increment must be sufficient to cover all expenditures in every period
between the posting of the first increment and the posting of the next increment.
 P a g e | 789

Funding sources include payments from the customer, revenue from sales, loans from a
bank, or appropriations from the organization's financial authority.

Performance Reports

Performance reports organize and summarize information gathered; present the results of
any analysis performed; and provide information and the level of detail required by
stakeholders.

Common performance report formats include:

 Bar charts;
 S-curves;
 Histograms; and
 Tables.

Performance reports generally should be short documents (one to two pages for a monthly
report) that relate the relevant facts of the project performance. Although formats can vary
significantly to address different stakeholder needs, many common elements are included
in most performance reports; for example:

 Reporting period;
 Work accomplished in reporting period;
 Schedule and cost status and performance;
 Problems experienced or approaching;
 Corrective actions, or plans;
 Summary of accomplishments planned for the next reporting period; and
 Detailed quantitative reports, included as attachments (such as earned value
analysis data).

Work Performance Information

Work performance information provides data on the status of project activities, for
example, if project deliverables are not being completed on a timely basis and at or below
the planned cost. Information includes, but is not limited to:

 Costs authorized and incurred;

 Estimates to complete the schedule activities;
 Activities completed or incomplete, or percent complete of the schedule activities;
and
 Deliverables that have been completed and those not yet completed.
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Approved Change Requests

Approved change requests from the Integrated Change Control process are documented,
authorized changes that can modify terms of the contract, project scope, cost baseline, or
cost management plan. Changes are usually implemented by the project team once they
have been approved.

Project Management Plan

The project management plan is a document that specifies how the project is executed,
monitored and controlled, and closed. The project management plan can be a summary
level or detailed document and can contain one or more subsidiary plans or other
components. The cost management plan component and other subsidiary plans are
considered when performing the Cost Control process.

Cost Control Process

Cost Change Control System

A change control system is a formal documented process that describes when and how
project documents may change. It describes the people who are authorized to make the
changes and the paperwork needed to make the changes.

Assuming that a variance from the plan has been identified and a course of action has been
determined, the change control system is employed to coordinate an integrated change to
the project baseline.

Normally the change control system is a single, integrated mechanism for controlling
changes. The cost element of that change control system should be just one additional
aspect of the overall system. Details on controlling cost changes should be described in the
project's cost management plan.

Performance Measurement Analysis

Performance measurement analysis is a mechanism for quantifying the current level of

accomplishment of the project management plan. Any deviations from the plan (i.e., over
or under budget) are to be reported as variances. Variances exceeding a prescribed
threshold must be clearly identified and managed to reduce the impact to an acceptable
level. The Earned Value Technique (EVT) is an example of a performance measurement
technique, discussed further in its own section.
 P a g e | 791

Forecasting

In assessing current project performance as well as the impact of known variances,

forecasting is a technique for extrapolating current performance data to an estimate of
future performance. In other words, will the project continue to operate at, under, or over
budget and by how wide a variance? Forecasting is one of the functions performed by the
EVMS.

Trend analysis is a forecasting technique that involves examining project results over time
to determine if performance is improving or deteriorating.

Key functions of trend analysis include:

 Evaluating a project's results over a period of time;

 Identifying a pattern of performance; and
 Showing improvement, stabilization, or decline.

Proper trend analysis requires:

 A controlled baseline;
 Correct and timely data; and
 Comparison of recent and long-term performance.

Trend analysis looks at performance to date and identifies a pattern of results that indicates
a trend. The trend is used to forecast future results.

Successful trend analysis depends on:

 Controlled Cost Baseline: The project manager must assess the actual spending
and schedule performance against the planned spending during the same schedule
period. Without a time-phased cost plan, the project manager cannot compare the
burn rate to any comparable baseline;
 Data and timing: If cost and schedule data are based on vague estimates, the trend
analysis will be equally vague. If performance reports are scheduled quarterly, they
may not be frequent enough to measure trends unless the project is very long-term
(several years); and
 Identified trend: The trend is the important element in trend analysis; it may
indicate a a pattern toward satisfactory or unsatisfactory performance. The focus is
on the long term. Often, project managers focus too much on the current data and
immediate needs.
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Project Performance Reviews

Project performance reviews are typically formal meetings held to assess the current status
of the project in terms of scope, schedule, and budget. The completion of work should be
reported with an assessment of the health of both the schedule and budget.

Performance reviews are usually used in conjunction with other performance reporting
techniques. For example, the need for corrective and preventive action may be identified in
the performance review through the review of the quantitative results from the EVMS.
Discrete issues should be identified as part of an issue management process and new risks
should also be identified.

Project Management Software

Project management software tools of various types are helpful in creating estimates,
assembling budgets, and controlling cost performance. They range from spreadsheets and
project scheduling tools to project management tool suites.

Project managers enter cost or labor rate data in the project management software, or into a
spreadsheet, to manipulate variables in order to see the results of different options. Other,
more advanced statistical analysis tools are also used in some cases.

Variance Management

The cost management plan as discussed previously should contain specific thresholds and
descriptions of appropriate corrective actions to be used in response to budget variances.

For example, a relatively minor variance, such as less than 5%, should be reported and
noted. The project manager should be aware of the reasons for the variance and should
form a strategy for how best to deal with it.

As variances grow to a larger percentage of budget (perhaps 10%), formal reporting using
the variance management system should be required. This will call for an analysis and a
written corrective action plan.

If the control account variance continues to expand and does not respond to corrective
action, it should be escalated to higher levels of attention in the organization. A formal
system such as this minimizes surprises to the customer or to senior management. Also, it
ensures that more senior management has the opportunity to assess the problem as early as
possible.
 P a g e | 793

Conducting a Performance Measurement Analysis

The first step in performance measurement analysis is to ensure the completion of a project
management plan and the establishment of a cost baseline. This baseline becomes known
as the planned value (PV) of the project (and is the same as the previously mentioned S-
curve). It is represented as a spending curve for each period of the project.

Periodically during execution of the project, usually monthly, but perhaps more frequently,
the following steps are performed.

1. Collect performance reports from each control account manager. These should state
which planned tasks for the reporting period have been completed.
2. Compute the value of these planned tasks. The total value of completed tasks is
known as earned value (EV). These amounts are summed and compared to the
planned value (PV).
3. Compute a schedule variance (SV) by subtracting PV from EV.
4. Collect actual cost performance from the finance team. They will calculate the
actual cost by summing all paid invoices and labor sheets during the reporting
period. This sum is called actual cost (AC).
5. Compute the cost variance (CV) by subtracting AC from EV.

The implementation of performance measurement analysis can generate some confusion,

but given a well-defined process and a commitment to the goal of simplicity, it is possible
to achieve a practical and quantitative method for measuring project performance.
 P a g e | 794

Earned Value Management System (EVMS)

An EVMS is the most commonly used performance measurement technique for managing
projects. An EVMS compares the schedule and cost information at a point in time and
avoids using the project manager's subjective interpretation of data.

Earned Value Analysis

The EVMS is based on the technique referred to as earned value analysis, which integrates
scope, cost (or resource), and schedule measurements to assess project performance.
Earned value provides a determination of whether or not work is being completed as
planned.

Earned value analysis is not new. The government has used it for decades in the formal
Cost/Schedule Control System (C/SCS). In its current form, the government method
describes thirty-five criteria to guide effective performance measurement, and requires
formal certification.

Earned value analysis is now broadly accepted as an efficient, quantitative method for
assessing project status. Current project management software tools include features that
incorporate earned value management techniques into project planning.

Benefits of Using an EVMS

Using an EVMS allows the project manager to integrate both schedule and cost
information to gain a more comprehensive understanding of project performance. This
gives the project manager a more complete view of project performance; schedule-only or
cost-only comparisons do not provide the same data. This missing data could lead to
misinterpretations of project performance.

An EVMS compares the scope, schedule, and cost information at a point in time. In a
sense, it provides a snapshot of the Triple Constraint triangle, showing the current status of
the project. This minimizes the errors and misrepresentations possible with a schedule-only
or cost-only comparison. Integrating schedule and cost status lets project managers forecast
project status from trend information. An EVMS requires the project management team to
correctly establish baselines and to learn earned value management terms.

For an EVMS to be effective, it is important for the project manager to ensure that the
project baseline is valid, otherwise the data resulting from the calculations cannot be
compared to a standard. An EVMS also allows the project manager to forecast future
project performance by identifying trends and calculating results if the trend continues.
 P a g e | 795

Earned Value Management System (EVMS) Terms

An EVMS uses a concept of "dollarizing" the schedule and performance data. A solid
understanding of earned value concepts and terms is a prerequisite for the effective use of
the associated methods.

Three fundamental EVMS terms include:

 Planned Value (PV): Agreed value of work to be accomplished in a given period;

 Earned Value (EV): Agreed value of work that was actually accomplished; and
 Actual Cost (AC): Real cost of the work performed.

Collecting and Analyzing Planned Value (PV)

Planned Value (PV), previously called budgeted cost of work scheduled (BCWS) in the
government system, is the value of work that was scheduled to be completed as of a certain
date. The PV is really a curve, or time-phased cost budget.

At the end of the project, the final PV equals the budget at completion (BAC). PV is
established by time-phasing the project's budgeted costs.

When the project plan is approved, the PV becomes a fixed standard of reference. When it
comes time each status reporting period to update the earned value analysis, the PV value
is obtained by consulting the project baseline information for the associated time period.
 P a g e | 796

Collecting and Analyzing Actual Cost (AC)

Actual Cost (AC) is another parameter that must be measured during each status reporting
period. This is typically information collected by the organization's cost accounting group,
using the company cost accounting system.

The cost accounting group collects all costs against the project work packages and control
accounts, including labor accounting sheets, materials invoices, and other direct costs such
as travel and contract labor. AC identifies what it really cost the project to operate during
the reporting period, independently of what work was actually accomplished.

The AC is reported as both the new costs for the current period and the cumulative cost for
the project since inception. The reporting of cost is independent of the project team and
represents the expenditure of real money, unlike the earned value discussed further in the
course. The only control the project manager has over AC is to ensure that work is
performed efficiently, as planned, using the appropriate resources. Inaccurate accounting
of labor is a common cause for cost variances.

AC is also referred to in older earned value management systems as the actual cost of
work performed (ACWP).
 P a g e | 797

Collecting and Analyzing Earned Value (EV)

EV, the central concept in this technique, is slightly difficult to grasp at first. In very basic
terms, every activity or item of work is associated with a dollar value. When you complete
a particular activity, you "earn," or receive credit for, that declared value.

A frequent point of confusion is that the actual cost of the job may be different from the
earned value. Earned value is the agreed value of the task, not what you actually spend on
it. If a contractor submits an invoice for an unforeseen additional amount, the actual cost of
the job will be the amount of the invoice, but the earned value remains the original
negotiated amount. The difference between the earned value and actual cost will be an
indication of cost variance.
 P a g e | 798

EVMS Diagram

The results of the EVM analysis are usually graphed to provide a powerful status report for
the project. Such a diagram can be tracked at the total project level, and also for each
control account. Project management software tools can help present this information.

The EVMS data in the diagram below depicts the values over time for the three key
parameters, PV, EV, and AC. The status reporting period during which these parameters
were calculated is shown via the Update Now vertical line. At that point in time, the
schedule and cost variances are depicted on the graph as the difference between EV and
PV (schedule variance) and between EV and AC (cost variance).

Another powerful feature of the diagram is its ability to show the trends in performance
from one reporting period to the next. An experienced eye can read these charts quickly
and draw conclusions about the project's performance, past, current, and future.

The EVMS diagram also illustrates how EV calculations provide more insight into the
overall project health than straight comparisons between the original baselines and actual
costs. If the actual costs are less than the original cost baseline, it may appear that the
project is under-spending. However, by comparing EV to AC, a project manager realizes
that, in reality, the project is paying too much for the work actually performed.

By comparing EV to PV, it is apparent that less work was accomplished than planned at
the point of determining the project's status; therefore, the project is behind schedule.

The key to understanding EV is that the cost or schedule is always compared to the value
of the work performed-EV or the earned value.
 P a g e | 799

PROJECT MANAGEMENT
MANUAL
PART 9

SCOPE & QUALITY MANAGEMENT

2014
 P a g e | 800

Table of Contents

Subject Page

Scope Management 801

Scope Planning 810
WBS 813
How to Decompose a Project 823
Gaining Stakeholder Acceptance 827
Scope Verification Process 829
Controlling Scope Creep 830
Quality Management 833
Standards for Project Quality Management 834
Kano Model for Quality and Customer Expectations 836
Quality throughout a Project Life Cycle 838
Purpose of the Quality Planning Process 839
Quality Standards Triad 840
Cost of Quality 845
Quality Management Plan 849
Overview of Six Sigma Technology 853
Perform Quality Assurance Process 857
Perform Quality Control 866
Creating a Cause-and-Effect Diagram 871
 P a g e | 801

Project Scope Management

Scope Definition is one of the most important processes in any project, because effective
Scope Definition provides a common understanding of the project scope among all project
stakeholders and describes the project's major objectives. It involves developing the project
scope statement that will be the source of future project decisions, including the criteria to
determine if the project is successful.

Scope Definition involves the expansion and further definition of project deliverables,
constraints, and assumptions that were initially documented in the preliminary project
scope statement during the Develop Preliminary Project Scope Statement process of the
Project Integration Management Knowledge Area. Scope Definition is one of the most
important processes in any project, because effective Scope Definition ensures an
understanding of the business case. It involves developing the project scope statement that
will be the source of future project decisions, including the criteria to determine if the
project is successful.

During Scope Definition the team will analyze the product, identify alternative methods for
performing the project work, and perform further stakeholder analysis to document their
needs, wants, and expectations. This will also result in a clearer definition of project
requirements, and might even lead to the discovery of new requirements that must then be
converted into requested changes.

The result of this analysis and discovery work is documented in the detailed project scope
statement.

Purpose of the Scope Definition Process

The purpose of the Scope Definition process is to define all project work in a written
document called the project scope statement.

This document is used to confirm a common understanding of the project scope among all
stakeholders, and to describe the major objectives of the project.

Inputs, Tools and Techniques, Outputs of the Scope Definition Process

This section introduces the inputs, tools and techniques, and outputs of the Scope
Definition process.

The following topic will cover:

 Inputs, Tools and Techniques, and Outputs

 P a g e | 802

 Inputs to the Scope Definition Process

 Tools and Techniques for the Scope Definition Process
 Outputs from the Scope Definition Process

The diagram below shows all of the inputs, tools and techniques, and outputs of Scope
Definition.

Scope Definition Process Outputs

Project Scope Statement

The project scope statement describes the project's deliverables and the work needed to
create those deliverables. The project scope statement guides the project team in making
decisions about which requirements from stakeholders are within the approved scope, and
which must be treated as change requests.

The project scope statement is a concise document describing the project and the value it
has for the company. The detail used in defining the project's requirements and
deliverables will exert tremendous leverage in controlling the project's scope and the
accuracy of the remaining project planning deliverables. However, excessive detail can
even be counterproductive as project participants become overwhelmed with the level of
work required to compare related and interdependent project requirements, and to maintain
them as changes are incorporated.

The project scope statement defines boundaries by answering the following questions
about the project:

 What does the project consist of and not consist of?

 Why is the project necessary?
 What business value will the project provide when it is done?

One of the greatest challenge project teams face is determining an accurate scope and budget.
Through progressive elaboration, project teams often develop progressively more sophisticated
versions of the project scope statement that are appropriate for the next stage of project work.

Requested Changes

The Scope Definition process may result in requested changes to the project scope
management plan or the project scope statement upon an iteration of this process. The
requested changes are directed to the Integrated Change Control process, where they are
approved, amended, or rejected.
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Project Scope Management Plan

There may be a need to update the project scope management plan during an iteration of
the Scope Definition process to incorporate any requested changes that were approved
from the Integrated Change Control process.

Project Scope Statement Contributors

Having a project scope statement ensures that the project manager, management, and
customers have the same understanding of the project. The project scope statement is also
valuable for briefing the project team.

A number of individuals (the project stakeholders) participate in the drafting and approval
of the project scope statement. These include the following:

 Project team members;

 Project manager;;
 Resource managers
 Functional managers;
 Customers; and
 Senior management.

Project Requirements

The project requirements define what standards and specifications the deliverables of the
project must satisfy, including how the work is performed. For example, the organization
may be governed by ISO9000 quality standards, in which case all processes used by the
project team must conform to strict process documentation, test, and audit requirements.

The specifics of the product's capabilities are also documented as requirements; these are
the minute elements of the project scope. Later, the deliverables will be evaluated to
determine whether they adequately address the defined requirements. Any requirements
that are not addressed by one or more deliverables are evaluated as "missing," and any
elements of the deliverables that do more than the requirements stipulate are assessed as
"extra," and must be eliminated. Those that were incorrectly implemented are defined as
"wrong," and must be corrected before the deliverable can be accepted.
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Project Objectives

The project objectives are specific, measurable criteria that help determine project success.
Common practice requires cost, schedule, and quality criteria to be explicitly identified and
agreed upon by the key stakeholders. Success criteria are defined as early as possible in the
project's life cycle. Failure to document complete project objectives often leads to scope
creep, and ultimately, project failure.

Project objectives must include at least these three items:

 Cost;
 Schedule; and
 Quality measures.

Project objectives should include:

 An attribute; e.g., cost;

 A metric; e.g., United States (US) dollars; and
 An absolute or relative value; e.g., less than 1.5 million.

The best type of objective clearly states the project's impact on the bottom line. This may
be expressed in terms such as:

 Increased margins;
 Higher net revenues;
 Reduced turnaround time; and
 Reduced cost of sales.

For a number of reasons, it may not always be possible for the objectives to impact the
bottom line. Other criteria to be considered include the impact the project will have on:

 Efficiency and effectiveness;

 Error rates;
 Reduced turnaround time to service a customer request;
 Reduced cost of providing service;
 Quality impact; and
 Improved customer satisfaction.

Objectives are stated in tangible, measurable terms that should leave no room for
disagreement as to whether or not the criteria have been met. Some project managers use
the SMART criteria to help define project objectives.
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These guidelines indicate that project objectives should be:

 Specific;
 Measurable;
 Assignable;
 Realistic; and
 Time-framed.

Product Scope Definition

The product of the project is the final deliverable or outcome of the project. This item must
be explicitly described so that all stakeholders know what is to be accomplished and what
the product will do. The form and substance of the product's characteristics may vary, but
the detail must be sufficient for effective planning.

For example, when a team develops a new satellite, they must deliver a product that meets
certain design limitations and performance capabilities. It will usually have to fit within a
defined volume, have a center of gravity within a small tolerance of a specified point above
the launch vehicle, and be able to tolerate a large range of operating temperatures as it
travels through the atmosphere and then orbits through arcs while alternatively exposed to
sunlight and then complete darkness.

Project Boundaries

The project scope statement must explicitly define what is included in the project. But, it
must also specifically state what will be excluded, so as to avoid future misunderstandings
or the risk of scope creep.

Major Project Deliverables

The project deliverables are a list of summary-level sub-products whose full and
satisfactory delivery marks the completion of the project. It lists the specific, tangible
deliverables the project produces. The project deliverables may be interim or final
deliverables.

For example, a design specification is an important interim deliverable for a software

development project, while the software product itself is the desired final deliverable.
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Product Acceptance Criteria

The product acceptance criteria stipulate how the final product will be evaluated for
acceptability. These criteria are of particular importance in subcontracted work, and are
valuable to ensure that projects close when their objectives have been met. Product
acceptance criteria are also important, to avoid the tendency to "declare victory" when, in
fact, major objectives have been missed.

Project Constraints

A constraint is an applicable restriction that will affect project options. This includes any
factor that affects when an activity can be scheduled, or how work must be performed.

For example, a constraint may specify that the project must not interfere with the progress
of another project that is competing for the same resources, or that it must await the
development of a component that another project will produce, and re-use it. Another
example of a constraint might be the stipulation that the project must complete within the
current fiscal year in so it will not require another round of funding. Contractual provisions
are also generally considered constraints in that they can limit the project team's options.

The number of constraints listed in the scope statement is typically greater than the number
of constraints identified in the project charter, as more information about relevant
constraints is uncovered through progressive elaboration.

Project Assumptions

Project assumptions are factors that, for planning purposes, are considered true, real, or
certain. Assumptions affect all aspects of the project planning and are part of the
progressive elaboration of the project. Project teams frequently identify, document, and
validate assumptions as part of their planning process. Assumptions generally involve a
degree of risk. The number of assumptions listed in the scope statement is typically greater
than the number of assumptions listed in the project charter, as more assumptions are
typically uncovered during the early stages of planning and progressive elaboration.

Initial Project Organization

The major players and participating organizations who will become (or are already part of)
the project team are now known. Documenting them here ensures that their allocation is
secure and cannot be easily undermined by competing initiatives.
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The project's stakeholders are also listed here. This ensures that they will not be
overlooked as the project progresses, particularly when tradeoffs must be negotiated to
cope with changing circumstances or new discoveries.

Initial Defined Risks

This section lists any risks that could impact the success of the project so that senior
management is aware of them. Items of interest to senior management include those that
they must directly address, or those that are out of their control but may result in project
failure and diminish the expected project's net value.

Several areas affect the project's success, including the following:

 Technology;
 Environment;
 Interpersonal relationships; and
 Cultural factors.

The project team should use a method of categorizing project risks to ensure that all
possible sources of risk are considered.

Schedule Milestones

Often the project must conform to externally imposed milestone dates. These may be the
result of constraints such as fiscal year-limited funding or interdependencies with other
projects. The team might identify key milestones events during planning.

Fund Limitation

Funding limitations are of major significance to the project sponsor and the supporting
accounting and budgeting functions. Projects are usually performed within the limits of a
total portfolio of projects whose total investment is capped for a specific period, so both
the individual projects and their related investment periods must be capped and tracked.

Cost Estimate

The initial cost estimate is a major factor in determining whether the project will proceed.
Management must always govern projects with an eye on their cost-effectiveness, and take
prompt action when the expenditure pattern of a project demonstrates that it will not meet
its initial estimate. All estimates provided at this stage should be preceded by a modifier
that provides an indication of the level of accuracy.
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Project Configuration Management Requirements

The project's deliverables and project management work products must be kept under
careful control if the project itself is to remain under control. The project configuration
management requirements will describe how the project's work products will be controlled.

Project Specifications

Project specifications identify any specification documents that the project must comply
with. These are particularly common in projects that belong to a program, where there may
be numerous interfaces that the project's product will be required to implement in order to
function with other products. Examples might be weapons systems for aircraft, where
carrying pods and arming and launching circuitry have already been specified, while the
munitions may be new and completely different from previous types. Another example
might be the branding requirements for packaging a new perfume, where bottle type, color,
label bordering, font, and background may already be part of a product family
specification.

Approval Requirements

Approval requirements describe how the project's deliverables will be accepted, and
include the participation of supporting organizations that must adopt and support the
product after its implementation, or interface with it.

Attachments to the Project Scope Statement

While the scope statement should, preferably, be as concise as possible, some

organizations require additional detailed information which should be included as an
attachment.

The most common project scope statement attachments are:

 Risk analyses;
 Feasibility studies;
 Financial analyses;
 Cost/benefit analyses;
 Break-even analyses; and
 Return on investment analyses.
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Project Scope Statement Approval Process

Approval of the project scope statement is a significant event that requires input from:

 Senior management: Stating that the project makes enough business sense to
move to the detailed planning stage;
 Customer: Concurrence that the project has been correctly described and that they
are in agreement with the solution being offered; and
 Project team: Indication that the project has been clearly defined at this high level
of detail.

Approval is not authorization for the project. Rather, it is a commitment of resources to

complete the detailed plan.

Project Sponsors Level of Commitment

Approval of the project scope statement is a significant action on the part of the project
sponsor, and reflects their commitment to the project. A project sponsor is likely to ask a
number of questions, such as:

1. Does the project solution relate directly to the business need?

2. Are the project deliverables clear representations of the solution?
3. Is there sufficient business value to warrant further expenditures on the project?
4. Is the relationship between project deliverables and project objectives clearly
established?
5. Are initial risks too high and business value too low?
6. Can senior management mitigate any identified risks?

The project manager should pay close attention to the questions most important to the
project sponsors. This helps the project manager understand the sponsors' criteria for
success.
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Scope Planning
Scope Planning involves deciding how the scope will be defined, verified, and controlled,
and how the WBS will be created. The project team creates a project scope management
plan as the main output of the Project Scope Planning process.

Successful project management begins with a plan to provide an effective approach for
managing the scope of work on a project. Scope Planning is the most important phase in
any project, because effective scope planning ensures an understanding of the business
case. It involves developing the project scope management plan that will be the source of
future business decisions, including the criteria to determine if the project is successful.

The purpose of the Scope Planning process is to document Scope Management decisions
such as the tools, data sources, methodologies, processes, and procedures that will be used
during the Scope Management processes to influence the outcome of the project. The
outcome of this process is the project scope management plan that determines how the
team will:

 Define the project scope;

 Develop the project scope statement;
 Define and develop the WBS;
 Formalize the completed project deliverables for Scope Verification;
 Determine and manage the monitoring and controlling processes; and
 Control and make refinements to the existing project management methodology for
controlling changes to the project scope.

Scope Planning Process Inputs

Enterprise Environmental Factors

The infrastructure and tools may support particular implementations of the Scope Planning
process through:

 Virtual team meetings;

 Electronic workflow; and
 Pre-existing change control boards with established processes to support an entire
program of projects.

The organizational culture might also affect Scope Planning by either encouraging or
discouraging certain Scope Management practices, such as formal sign-offs or structured
change control mechanisms.
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Organizational Process Assets

These may include specific policies and procedures regarding scope, such as how great the
impact of a scope change may be before approval to move forward must be obtained by the
project sponsor. They may also include templates and historical information from past
projects, including lessons learned.

Project Charter, Preliminary Project Scope Statement, and Project Management

Plan

These may all specify particular objectives, requirements, or standards that the processes
described in the project scope management plan must follow. An example might be the
creation and use of a new repository for controlling the project requirements. This will
later be extended for eventual use by the entire organization as another tool, with its own
new set of organizational process assets in the form of templates and procedures.

Expert Judgment

This is useful in setting up the project's Scope Management processes, and in reusing
practices and tools that have effectively supported similar projects in the past. It is
particularly important when determining how rigorously and formally to apply all project
management practices (which can overwhelm a small project or be overwhelmed by a
large one, if not sized and tailored properly).

Templates, Forms, and Standards

Templates, forms, and standards will often save large amounts of effort when setting up
and using Scope Management processes. They may also increase accuracy and even
compliance with usage policies if they are familiar to the participants. Reinventing the
wheel is a major cause of lost productivity and unnecessary errors in project management.

Existing templates, such as WBS, scope management plan templates, and project scope
change control forms existing within the performing organization may be used or modified
to meet the requirements of a project.
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Project Scope Management Plan

The project scope management plan is a document that provides guidance for the team in
specifying how the project scope will be defined, documented, verified, managed, and
controlled over the course of the project.

The project scope management plan clarifies change procedures and forecasts the stability
of the project scope. As a component of the project management plan, it describes how the
project scope will be managed, and how scope changes will be integrated into the project.
It is important to document all decisions the team makes in the project scope management
plan.

The project scope management plan typically includes:

 The process of preparing a detailed project scope statement (based on the

preliminary project scope statement);
 The process of creating the WBS from the detailed project scope statement and the
method for maintaining and approving the WBS;
 The process of specifying how formal verification and acceptance of the completed
project deliverables will be obtained;
 The process of controlling requests for changes, including a clear description of
how scope changes will be identified and classified; and
 An assessment of the expected stability of the scope.
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WORK BREAKDOWN STRUCTURE (WBS)

The WBS is a deliverable-oriented, hierarchical breakdown of the work to be executed by
the project team, and is used to accomplish the project objectives and create the required
deliverables. The WBS organizes and defines the total scope of the project.

In order to successfully direct and manage the work of a project, the project management
team must break the project deliverables down into manageable segments of work. Each
segment must be small enough to be accurately estimated for effort and cost, and must be
small enough to monitor and control effectively.

The decomposition technique is used for breaking down the work of the project for these
purposes. It can be performed using a number of techniques, and is used in conjunction
with other project management deliverables to fully define what will be produced, how it
will be produced, by whom, and for what investment of effort and cost.

In order to create a plan to accomplish project work, the work must first be defined and
organized in small elements that are:

 Manageable;
 Independent; and
 Measurable.

Work Breakdown Structure (WBS) Definition

Once the scope and deliverables have been identified, the project work can be successively
subdivided into smaller and smaller work elements. The outcome of this hierarchical
decomposition process is called the work breakdown structure (WBS). In effect, the WBS
is a map of the project's scope. A WBS helps project managers ensure that all products and
work elements are identified, and helps establish a basis for planning the work.

WBS as a Basis for Planning

The WBS is an essential element of a project because it defines all the work elements
which must be planned. It is important to give special attention to designing and
developing the WBS, because it will be used as a basis for:

 The activities which must be carried out to produce the deliverables;

 The sequence in which the activities must be performed;
 The project schedule for the activities;
 Budget and costing estimates;
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 The project team's organization structure;

 Work assignments;
 Risk management;
 Procurement; and
 Monitoring and controlling the project scope.

WBS Applications

There are two fundamental applications for the WBS:

1. It can used as a thought process tool; and

2. It can used as a tool for summarizing information.

Thought Process Tool

Similar to creating an outline for a paper or book, the work breakdown structure aids the
project manager and planning team in decomposing the project into manageable "chunks."
The phrase "structured decomposition" is sometimes used to describe the process. It is
structured in that the project is first broken down into major categories, known as
elements.

Each level of breakdown is numbered, with the project itself being level zero. The sum of
all the elements of level one must describe the project scope in its entirety. When level one
has been fully defined each of its elements is then broken down. Again, the sum of the sub-
elements must describe the entire project scope.

The process continues until sufficient detail has been achieved, so that the schedule
activities can be created with a reasonable degree of accuracy. In addition, the detail must
allow progress to be accurately measured, so that the project can be managed and
controlled.

This is a top down process that is intended to ensure that no element of work is
overlooked by starting with the top-level deliverables and progressively detailing the work
required to produce each one.

On occasion it may be tempting to try a bottom up "brainstorming" method. This involves

trying to think of all the detail level activities that would need to be performed to meet the
project goal, and then organizing those detailed activities into groups or categories for
reporting purposes.

This approach is used quite often in basic research environments but it is labor intensive
and usually requires formal facilitation. The majority of the time, a top down approach is
the time and cost effective approach to project decomposition. Still, after completing a top-
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down decomposition of the scope, a bottom up approach can be used to validate the
resulting WBS and test it for necessity and sufficiency.

Summarization Tool
The second of the two fundamental uses is summarizing information for performance
reporting. One of the more familiar formats for this is the Gantt Chart, which is easily
created in most project management software. The Gantt Chart can display a comparison
of the project plan versus the project actual performance. Other types of information, such
as resource work and cost, can also be summarized and reported in this manner, and the
WBS remains the principal device used for doing this.

Its principal use as a thought process tool and its use for performance reporting could
potentially be in conflict. Those creating the WBS must take this into account when
designing its hierarchical architecture. Organizing it to aid in thinking of all the
deliverables may not provide logical groupings of deliverables, so that various levels of
management can accurately assess and manage progress. Therefore, a compromise
between its two uses will sometimes be necessary.

WBS Hierarchy

Each descending level represents additional detail of the project deliverables. The
deliverables at the lowest level of the WBS are called work packages. Each item on the
WBS is assigned a unique identifier which can provide a structure for a hierarchical
summation of costs and resources.

There is no one correct approach to creating a WBS. The nature of the project work to be
performed, the preferences of the project manager, or even organizational policy will often
determine the approach taken. Additionally, subject matter experts will have input on WBS
preparation.

The project manager decides on the architecture of the WBS and the level of detail that
best meets the project's needs (since he is ultimately accountable for the success of the
project). In designing the WBS, the project manager considers both the need for managing
the work itself, and the best method for reporting information so that management can
receive it in the form that is the most useful to them.
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WBS Elements

The diagram below illustrates that the top level of the WBS, level zero, is the project itself.
At the first level below the project, it is divided into the necessary major deliverables.
When every deliverable is completed, the project is complete. If any deliverable at the first
level is still too large to be accurately estimated, it is further decomposed to become
several major components at the second level. This process continues until all deliverables
meet the completion criteria.

WBS Organization

A WBS can be organized in two ways, by product or process.

Product-Oriented WBS

In a WBS organized by product, the deliverables are at the first level below the project
goal. Deliverables are then broken into components and subcomponents. If all deliverables
are identified at the highest level, the project management team is less likely to omit work
required to successfully complete the project.

The product-oriented WBS places the deliverables related to subcomponents of the

project's product, or related to its multiple products, at the top of the WBS. The diagram
below is an example of a project with multiple deliverables. It is a software release, which
requires the software itself, documentation, and training for various groups. These
deliverables are then broken into components and subcomponents, but each component is
another portion of the product or sub-product above it.
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For example, in developing a prototype for a new light switch, this breakdown would be
completed down to the lowest level, which must be developed, such as the switch
faceplate, or purchased, such as a screw. This is a pure product-oriented work breakdown
structure, and it is rare.
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Process-Oriented WBS

In a WBS organized by process, the project phases are at the first level below the project
goal. These phases are then subdivided into more detailed processes.

In the diagram below, the Test phase shows the software being tested three times, in Build
1, then in Build 2, and finally as a complete system. However, it also shows the
documentation being "tested", which likely involves a desk-check of the key procedures it
describes against the tested system.

That is why some of this phase's work breakdown structure is process-oriented, while
another is product-oriented. This is the most common situation.

If the process method is preferred, it is suggested that first a WBS is created using the
product method. In this way, work is broken down from the deliverables stated in the
project scope statement, improving the chances of capturing all the work required. If all the
deliverables are identified, the project manager is less likely to miss work required to
successfully complete the project.

A WBS can be organized by phase, geography, subsystem, or by other criteria, as long as

the goal and objectives of the project are met. Once all the elements are identified, the
WBS can be rearranged in any number of ways to more efficiently organize or represent
the work of the project for a specific stakeholder group.
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WBS Formats

There are two widely used formats for depicting the work breakdown structure during the
Create WBS process - graphical and outline. The table below lists important characteristics
of each WBS format.

Graphical Outline
Familiar organizational chart format - some Easily created - most standard PM software will
software tools available create it
Requires more space to present Requires less space than graphical method
Best for visualizing structure - adequate for Good for facilitated team planning (in modified
facilitated team planning form)

Graphical Format

The graphical representation of the WBS is intuitive and easy to follow. It is very clear
which components are required for each deliverable and which subcomponents are
required for each component. The numbering system and placement in the tree facilitate
this ease of understanding. The lines in the WBS show the relationships between the
components. This makes errors in the development or reading of the WBS rare.

The graphical format has the advantage that it is very easy to scan and to locate
components. This makes it extremely efficient during the Create WBS process, as the
different components and subcomponents are identified and re-arranged to suit the project
manager's purposes. It is also the easiest and most efficient to use during review and
validation of the work breakdown structure.
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Many project managers and their project management teams simply use 3 x 5 cards or
sticky notes during the development of the WBS, rearranging them as necessary. They then
link them using a marker on a whiteboard background to facilitate frequent changes. Once
the teams are satisfied with the breakdown, organization, and placement, they can convert
the result to another format that is more efficient for random accessing and minor editing,
such as the outline format, which is discussed next.

Outline Format

The WBS outline format uses the same outline mechanism used for general
documentation, with headings and subheadings to reflect grouping of elements.

The advantage of the outline representation of a WBS is that it does not require a lot of
space or special software to create. Indenting each descending level of the WBS in the
outline method facilitates reading the document.

The disadvantage of the WBS outline format is that its primary orientation is at the lowest
element level. This can make it difficult to read top-down, which is the primary approach
to creating a WBS. Most project managers use one of the other methods to create and
validate the work breakdown structure, and then convert it to this format for readability
during project execution and for minor changes. If major restructuring is required later, for
example, due to a large-scale scope change, project managers may revert the affected
portions to another format first, make the changes, and then return to the outline format.
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Create WBS Process Inputs

Organizational Process Assets

The organization process assets include WBS templates that can be used to rapidly
assemble the project's final WBS.

Project Scope Statement

The project scope statement defines scope. Major project deliverables approved in the
project scope statement are used as a starting point for creating the WBS.

Project Scope Management Plan

The project scope management plan describes how the WBS will be constructed.

Approved Change Requests

Any approved requests involving changes to scope are reflected in the WBS as a result of
the Scope Control process.

Tools and Techniques to Create a WBS

WBS Templates

Many organizations perform projects in a specific application area. Therefore, the projects
are similar in nature, but have unique characteristics. For example, a pharmaceutical
company will typically not have a bridge construction project in their portfolio, and
likewise, a construction company typically will not have the development of a new drug in
their portfolio.

Because organizational projects are similar in nature, they will more than likely have
common areas, such as communications or procurement. This resemblance makes it
possible for projects to reuse part or all of a prior project's WBS. When a project's work
breakdown structure is determined to be valuable for reuse more than once, it usually
makes sense to create a standard WBS template.

In some cases a mandatory WBS structure or template may be provided by the contracting
organization or as part of an enterprise project management governance model. This is
done to promote consistency and commonality across projects. Many projects may be
managed or reviewed by the same oversight board or manager. This greatly improves
productivity and reduces errors during the Create WBS process.
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Benefits of Using WBS Templates

Using WBS templates provides many benefits, including:

 Helping to ensure that the same activities are performed each time the project
evolves;
 Giving the performing organization a consistent approach;
 Providing efficient use of subject matter experts' (SME) time:
o Only have to customize the template instead of starting from scratch to
develop the activities
o Project team can create project plans more quickly
o Cost and duration estimates do not need to be developed from scratch.

Decomposition

Decomposition is the technique used to create the work breakdown structure by analyzing
the project product(s). It involves partitioning the work into successively smaller units until
they can be reasonably:

 Estimated for work effort and cost;

 Monitored and controlled for progress; and
 Assigned to an individual for accountability.

Different deliverables have different levels of decomposition. The goal is to arrive at a

manageable work effort (i.e., work package). The work for some deliverables may need
only to be decomposed one level, while others may need to be broken down to many levels
of decomposition. The project team must have a keen sense of knowing when a deliverable
has been subdivided enough.

The purpose of decomposition is to subdivide the project deliverables into smaller, more
manageable components. Decomposing the WBS enhances the ability of the project
manager and team members to improve the planning, managing, and controlling of the
work. However, part of the "art" of project management is to balance the level of
decomposition in such a way that its detail does not decrease efficiency and productivity.
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How to Decompose a Project

The flowchart shown below can be a useful tool for decomposition.

Start: Project Goal

Start with the project goal stated on the project scope statement. The project goal may also
be referred to as the product description. Condense the goal into a three to five word
description of the project; for example, New Safety Program, Virtual Project Office,
Product X Launch. Place the description at the very top of the WBS.

Step 1: Identify Major Deliverables

 The major deliverables should also be stated on the project scope statement;
 Transfer these deliverables to the first level of the WBS below the project goal;
 There are two questions to ask at each level of decomposition:
1. Are all these items necessary for the item above them to be successful?

If the answer is no, then remove any unnecessary items and ask again.
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2. If only the items identified are successfully completed, can the item above
them be considered completed?

If the answer is no, then add any required item(s) and ask again.

 Once the two questions are satisfied, move on to the next step.

Step 2: Develop Adequate Estimates?

 Decide if adequate cost, duration, and resource estimates can be developed for each
item previously identified; and
 For each item that can be answered yes, move to Step 4. For each item that is
answered no, move to Step 3.

Step 3: Identify Constituent Components

 Subdivide each item from Step 2 into its constituent components. (Ask: What are
the necessary components that make up this item?);
 List each component below the item from Step 2;
 Ask the same two questions from Step 1 of each item entering Step 3. When
finished, carry all the appropriate components back into Step 2 and repeat Step 2 on
each component; and
 Repeat this process until all items entering Step 2 can be routed to Step 4.

Step 4: Correct and Complete?

 Verify completion of the decomposition with three questions:

1. Are all lower-level items necessary and sufficient for completion of the
decomposed item?
2. Is each item clearly and completely defined?
3. Can each item be appropriately scheduled, budgeted, and assigned to a
specific organizational unit (department, team, or person) who will accept
responsibility for the satisfactory completion of the item?
 If each of these questions cannot be answered yes, then the item must be moved
from Step 4, returned to Step 2, and decomposed further;
 Once these questions can all be answered yes, then the item is completed; and
 Continue this process for all items.
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Progressive Elaboration

It is normal for decomposition to be detailed only for the upcoming phase of work for
which management must approve detailed plans. Often, there is not sufficient information
about work later in the project to break that work down beyond only the highest levels.
Hence, the portions of project planning deliverables related to the immediately upcoming
work are detailed and specific.

Those related to later work may be more general, however, and may be presented with a
margin of variation within which the project management team expects the project to
perform.

As each phase of work concludes, the next phase's WBS will be further decomposed to the
necessary level of detail to offer management accurate enough estimates of cost to assure
them that the project's value still merits further investment, and to give them a standard
against which the project's actual performance during that phase can be compared. That
way, they know whether the project will hit its targets.

WBS Dictionary
This is a catalog of all the entries in the WBS which provides descriptive information for
each work package, such as:

 A statement of work (SOW) describing the work content;

 Schedule or milestone data;
 Budget estimates and how the estimate was derived; and
 Team member who is responsible for the work package or deliverable.

Scope Baseline

Scope baseline is simply the aggregate of the:

 Project scope statement;

 WBS; and
 WBS Dictionary.

Updates to the Project Scope Management Plan

This process involves any changes to the processes for creating and updating the project
scope statement or WBS that have been approved through the Integrated Change Control
process.
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Requested Changes

Requested changes to the project scope statement and its components may arise from the
Create WBS process. These changes are processed for review and approval through the
Integrated Change Control process.

Scope Verification

Scope Verification is the process of obtaining the stakeholders' formal acceptance of the
completed project scope and associated deliverables. Verifying the project scope includes
reviewing deliverables to ensure that each is completed satisfactorily.

Scope Verification requires the team to review deliverables and work results to ensure that
all were completed correctly. As the deliverables reach completion, it is just as important
that the stakeholders agree that these products fulfill the expectations defined at the start of
the project. During the Scope Verification, key stakeholders confirm that these
expectations have been met. If the project is terminated early, the Scope Verification
process should establish and document the level and extent of completion.

Quality Control vs. Scope Verification

Quality Control may require that, before external release of the product to the customer for
acceptance, certain procedures/processes relating to quality management for both the
product and project, such as Quality Planning, Quality Assurance, and Quality Control, are
included as part of the project scope statement.

Scope Verification differs from Quality Control in that it is primarily concerned with
acceptance of the work results, while Quality Control is primarily concerned with the
correctness of the work results (validation). These processes are often performed in parallel
to ensure both correctness and acceptance.
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Gaining Stakeholder Acceptance

Once the project is defined, the project manager should seek validation that it has been
defined properly, i.e., that the deliverables will meet stakeholder expectations. When the
project is complete or when particular deliverables are complete, then the project manager
will seek formal acceptance of the deliverables. Formal acceptance is obtained from the
project sponsor, customers, and other key stakeholders through the Scope Verification
process. This process, including inspection procedures and identification of the approval
authorities, is defined in the scope management plan. Verifying the project scope entails
reviewing deliverables to ensure that each is completed satisfactorily.

Some of the stakeholders who do not have this level of approval authority must still be
engaged by the project manager to ensure their continued commitment to the project, and
to minimize the risk that they will object to some aspect of a key deliverable at a later date.
These stakeholders and their interests are initially identified in the project charter, and are
subsequently analyzed through ongoing stakeholder analysis. They may have the ability to
influence the project outcome, and their support (or, at least, neutrality) is essential to the
project's success.
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An Acceptance Process

The graphic below illustrates a sample product and deliverable acceptance process. The
process begins by identifying the high-level Scope Verification process and approval
authorities in the project scope management plan, as well as the product acceptance criteria
in the project scope statement. If these elements require refinement (based on changes that
occurred during project execution), those refinements to the scope management plan
should be processed through Integrated Change Control.
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Tools and Techniques for the Scope Verification Process

Inspection

Inspection is the general term used in the PMBOK® Guide, Third Edition, to refer to
verifying whether a project deliverable meets the allocated requirements and related
product acceptance criteria.

It can include any or several of the following techniques:

 Measurement;
 Testing;
 Review;
 Walk-through;
 Desk-check; and
 Audit.

It is important to note that practice varies widely between application areas regarding the
meaning and details of implementation of each of these techniques.

In manufacturing, however, an inspection is usually a quality control check of a

subcomponent, usually involving test equipment and measurement of the component
against a specified target with limited tolerances for variation.

The intended result of the Scope Verification is to get a documented acceptance of the
deliverable. As a result, all inspection techniques must result in the documented approval
of the deliverable by the affected stakeholders, or their designated reviewers.
 P a g e | 830

Scope Control

Project Scope Control is concerned with influencing the factors that create project scope
changes, and controlling the impact of those changes.

The Scope Control process includes activities to review the project team's progress against
the schedule of deliverables. The biggest challenge to the project manager/team is to resist
adding changes to project deliverables after they have been formally approved in the
project scope statement.

Controlling Scope Creep

Scope Control is the process used to prevent scope creep by:

 Formalizing how modifications are managed;

 Regulating and managing the impact of changes to project scope;
 Assuring all proposed changes, approved changes, and recommended corrective
actions are processed using integrated change control; ans
 Minimizing, detecting, and correcting unauthorized changes to scope.

The Scope Control process includes activities to review the project team's progress against
the schedule of deliverables. The biggest challenge to the project manager/team is to resist
adding changes to the list of project deliverables after they have been formally approved in
the project scope statement.

Scope Control also manages the actual changes when they occur, and ensures that they are
integrated with changes to other project management deliverables. It must be recognized
that changes to project scope are almost inevitable, both because business domains
undergo continuous change themselves, and because new and more effective means for
performing business operations are continuously being developed and introduced. Neither
of these dynamics can be ignored during the project; they must be continuously evaluated
for their potential impact, both positive and negative, on the project scope.

Scope Change Impacts

Allowing the project's scope to change mid-course usually means added costs, quality,
greater risks, and longer duration. Many projects fail due to poor scope management. Very
often it is a large number of small scope changes that do the damage, rather than the big,
obvious ones. The successful project manager has learned that rigorous scope control is
essential to delivering projects on time, on budget and with expected quality.
 P a g e | 831

Standard IT development models are requirements-driven. They assume that the project
team will be delivering a final product with characteristics that can be clearly defined up
front. These methodologies provide a disciplined, sequential process for defining the
schedule, budget, resources, risks, quality and scope. This process assures all requested
changes and recommended corrective actions are included as part of the process.

An important rule of thumb to remember is:

The later a change is addressed, the greater the cost, risk, and duration of the project.

Scope Control occurs throughout the life of the project (the processes are iterative) and the
inputs change based on the phase of the project.

How Stakeholders May Think About Scope Changes

Project team members should be alert to how stakeholders and team members think about
scope change. For example, during reviews and other audits and walkthroughs, listen for
and watch out for the use of scope change as defensive or aggressive behavior.

Performance Reports

The performance reports indicate how the project is progressing, and specifically, which
deliverables have been completed and specifically whether project performance is adequate
within ongoing activities.

Approved Change Requests

The approved change requests are received from the Integrated Change Control process in
Integrated Change Management, and must be accommodated in the project scope baseline.

Work performance information

Work performance information indicates the extent to which quality standards are being
met, estimates to complete on the schedule activities that have started, and documented
lessons learned.
 P a g e | 832

REFERENCES

PMI, "THE STANDARD FOR PROGRAM MANAGEMENT", PMI, 2008

PMI, "A GUIDE TO THE PROJECT MANAGEMENT BODY OF KNOWLEDGE", 4th

Edition, PMI 2008

R. Mulcahy, "PMP EXAM PREPARATION", RMC Publications Inc. 2009

PMI, "PRACTICE STANDARD FOR EARNED VALUE MANAGEMENT", PMI 2005

S.J. Amos, "SKILLS & KNOWLEDGE OF COST ENGINEERING", AACEI, 2004

A.Damodaran, "STRATEGIC RISK TAKING", WHARTON School Publishing 2007

W.E. Deming, "OUT OF THE CRISIS", THE MIT PRESS, 1986

M. Imai, "THE KEY TO COMPETITIVE SUCCESS" McGRAW-HILL/Irwin 1986

A.H.Bell, "MANAGEMENT COMMUNICATION", WILEY, 2010

M.Crouhy, R. Mark, D. Galai, "RISK MANAGEMENT", McGRAW-HILL, 2001

M. Effron, M.Goldsmith, "HUMAN RESOURCES IN THE 21st CENTURY", John Wiley

& Sons 2003
 P a g e | 833

Why Quality Is Important

At first glance, it may seem that a product or service that works as designed 99%
of the time would be considered a great success. However, that figure does not
consider the resulting effects of errors. For example, imagine the consequences if
the following services and products were 99% defect-free:

• 30,000 babies would be dropped in delivery rooms every year.

• 17,000 pieces of mail would be lost every hour.
• 15,000,000 incorrect drug prescriptions would be issued annually.
• 4 wrong numbers would be printed on every page of the telephone book.
• 3 ½ days unplanned server downtime would occur annually.

Project Quality Management Processes

Project Quality Management is a series of processes, not a program. These
processes define, sample, monitor, and refine products and processes during the
project life cycle. Project Quality Management implements accepted quality
standards through the following processes of:

Quality Planning – Identifying which quality standards are relevant to the

project, and determining how to satisfy them
Perform Quality Assurance – Applying planned, systematic quality activities
to ensure that the project employs all processes needed to meet the
requirements
Perform Quality Control – Monitoring specific project results to determine
whether they comply with relevant quality standards, and identifying ways to
eliminate the causes of unsatisfactory performance

Successful Project Quality Management

Project Quality Management answers the following questions:

What customer needs caused the project to be undertaken in the first place?
How do quality processes ensure that these needs are being met?

A critical factor in the success or failure of quality initiatives is support from

senior management. Successful initiatives are directly associated with strong
management support. Management support provides a firm commitment to
implementing the changes needed to make quality part of a company’s culture.
These changes may require significant levels of resources, and may affect
compensation practices, procurement policies, and customer relations.
 P a g e | 834

The temporary nature of projects often means that investments made in quality
improvements, especially defect prevention and appraisal, must often be borne by
the acquiring organization rather than by the project.

Standards for Project Quality Management

Project Quality Management is based on industry standards and known quality

principles from quality experts. It uses industry standards as guidelines, and
proprietary quality theories to support best practices for Project Quality
Management.

Project Quality Management is intended to be compatible with that of:

 The International Organization for Standards (ISO), as detailed in the

ISO 9000 and 14000 series of standards and guidelines
 Proprietary approaches to Quality Management, such as those
recommended by Deming, Juran, Crosby, and others, described in
“Approaches to Quality Management” later in this section of the course
 Non-proprietary approaches, such as Total Quality Management
(TQM), Six Sigma, Continuous Improvement, and other approaches

Approaches to Quality Management

Thinking about quality has evolved over time; it is not a revolutionary idea. When
mass production was instituted, it became necessary to check the consistency of
the quality of the product. After WWII there was a huge demand for goods, and an
explicit quality movement took place. Many of the concepts and tools developed
years ago are still in use today.

Quality Initiative

Deming believed that management is 85% responsible for quality, and employees
are 15% responsible.

The Juran Trilogy consists of quality planning, quality control, and quality
improvement.

Ishikawa introduced the cause and effect diagram, which is a tool for tracing the
potential causes of a problem back as far as possible to their roots.

Feigenbaum focused attention on the cost of nonconformance.

 P a g e | 835

Crosby brought quality to the American boardroom, and believes it is possible to

achieve zero defects through prevention (Do It Right the First Time). His motto
was “Quality Is Free.”

The Taguchi Loss Function is a formula that demonstrates the cost of lack of
quality.

ISO is responsible for a worldwide standards initiative.

Quality and Customer Expectations

Customer satisfaction is the ultimate goal of a project, but how do you measure or
achieve it? There are many levels of customer expectations that must be managed.
A project quality plan will document, measure, monitor, and adjust expectations to
meet the requirements, including those that are implied, or unstated.

Must-be quality or an unstated requirement is something that the customer

expects such as a bed in a hotel room.

One-dimensional quality has a direct correlation to customer satisfaction. The

degree to which this stated requirement is fulfilled is the degree of satisfaction that
will be experienced by the customer. An example of one-dimensional quality is the
size of the bed or the price of the room.

Attractive or customer delight quality is a whirlpool tub in the hotel room. This
is usually unexpected and, if absent, will not cause dissatisfaction.

Over time, unexpected quality may become a stated requirement. Eventually, it

may be unstated but remains expected.

There is a theory that if you delight your customers as well as meet their
requirements, they will forgive you if you miss something. However, if you miss
something stated or unstated, they will begin to examine you more closely.

There is also a theory that recommends adding one customer delight quality to
each project or deliverable when possible to enhance the entire customer
experience.
 P a g e | 836

One of the keys to achieving customer satisfaction is to use a process that delivers
quality that focuses on the customer. This will allow you to deliver quality
dependably and profitably.

Kano Model for

Quality and
Customer

Expectations

The Kano model, shown below, can be used to guide your response to customer
needs.

The general rule illustrated by the model is that customer satisfaction is directly
related to the degree to which you meet stated needs (the blue diagonal line).

In the Kano model, the unstated needs (the green bottom curve) are expected but
not spoken aloud. Customer delight is achieved when you deliver things that the
customer values but did not request (the purple upper curve).

Comparing Quality Management and Project Management

The disciplines of Project Quality Management and Project Management are
similar in that they both recognize the importance of these factors:

 Customer satisfaction
 Prevention of defects during production rather than inspection after
production “Prevention over Inspection”
 Management responsibility
 P a g e | 837

 Continuous improvement

Project Constraints

Key project constraints are schedule, cost, scope, and quality. If one is affected, all
may be affected to varying degrees. The Triple Constraint Model can be used to
visualize how quality can affect and be affected by other objectives for the project.

Typically, the customer specifies what, when, and how much as part of a project
request, defining the three sides of the model:

• What the customer wants (scope and quality)

• When the customer wants it (time)
• A price the customer is willing to pay (cost)

The project manager uses knowledge, skills, and tools and techniques to plan and
manage the project in order to satisfy the customer’s requirements, recognizing
that a change to one side of the triangle cannot be made without affecting at least
one of the other two sides.

Triple Constraint Model

The project manager must adhere to the constraints until the customer formally or
contractually changes them. Understanding the constraints that are most flexible to
the stakeholders can help the project manager achieve success.
 P a g e | 838

Quality throughout a Project Life Cycle

Quality planning is an iterative process. Therefore, the evaluation of quality

assurance and quality control is also iterative. This course explores the strategy for
building quality into the entire project life cycle.

This philosophy is one of the critical factors for the successful implementation of
Project Quality Management.

If quality does not cover the entire project life cycle, quality issues will be
addressed only when they become problems.

Planning quality across all phases of a project life cycle is a proactive approach for
maintaining quality metrics within tolerance levels, thereby preventing quality
issues from becoming problems.

All Project Management processes interact with each other. During the Executing
processes, work is performed and results are recorded. The recorded results may
trigger a change request if a potential risk, such as an unexpected level of defects,
is identified.

This may require an adjustment to the project schedule, budget, quality, or scope:
time or money may be added, some features of the product may be dropped – or
the defects may be deemed acceptable.

Therefore, the outputs of the Executing processes trigger activities in the

Monitoring and Controlling processes that cover these objectives.

A change request may result in the project plan being reconsidered, impacting the
Planning processes of Project Management, whose outputs may need to be revised.
 P a g e | 839

Purpose of the Quality Planning Process

The initial contribution of Quality Planning in the life of a project is to translate

implied or assumed needs into clearly stated requirements. To achieve quality it is
essential to help project stakeholders articulate and document their requirements
and expectations.

Simply put, Quality Planning is the process of answering these questions:

• What quality standards exist?

• What quality standards are relevant to the project?
• What are the key critical areas of the project to be measured?
• How will interim products and processes be evaluated and by whom?
• What will be done with the results?

The diagram below shows the inputs, tools and techniques, and outputs of the
Quality Planning process.

Inputs, Tools and Techniques, and Outputs of Quality Planning

 P a g e | 840

Quality Standards Triad

An organization will often develop or adopt enterprise-wide standards related to

many of its functions. For example, it may have standards related to its quality,
financial, and environmental management systems.

Some organizations develop their own standards, while others prefer to adopt
existing documented standards.

It is important for the project team to be aware of these standards and to

incorporate them into their project planning.

The quality standards triad diagram below shows levels of compliance from self-
imposed standards to mandatory quality standards.

Quality Standards Triad

Examples of standards for entire industries or functions include those published by

the following organizations:
• ISO standards
• National Institute for Standards and Technology (NIST) standards
• Institute of Electrical and Electronics Engineers (IEEE), Internet
Engineering Task Force (IETF), Project Management Institute (PMI)
 P a g e | 841

ISO Standards

The ISO standards cover the following key aspects of developing products and
services:
• Customer satisfaction
• Documenting processes
• Continuous improvement
• Management commitment

ISO seeks to enhance quality in the following ways:

 Enhanced product quality and reliability at a reasonable price;

 Improved health, safety and environmental protection, and reduction of
waste;
 Greater compatibility and interoperability of goods and services;
 Simplification for improved usability;
 Reduction in the number of models, and thus reduction in costs; and
 Increased distribution efficiency and ease of maintenance.

National Institute for Standards and Technology (NIST)

The National Institute for Standards and Technology (NIST) sponsors an award
that provides an opportunity for organizations to assess themselves and receive
feedback from NIST. This award is called the Malcolm Baldrige National
Quality Award.

In addition to sponsoring the award, the National Institute for Standards and
Technology lists three key roles for the award in strengthening U.S.
competitiveness:
 Improving organizational performance practices and capabilities
 Facilitating communication and sharing of best practices information
among U.S. organizations of all types
 Serving as a working tool for understanding and managing
performance, and guiding planning and training
 P a g e | 842

The 2004 Malcolm Baldrige National Quality Award recipients were selected from
among 60 applicants.

The evaluation process included 1,000 hours of review and an on-site visit by
teams of examiners to clarify questions and verify information in the applications.
The four recipients were evaluated by an independent board of examiners in the
following areas:

• Leadership
• Strategic planning
• Customer and market focus
• Process management
• Measurement, analysis, and knowledge management
• Human resource focus
• Results
For more information, refer to the www.quality.nist.gov website.

Tools and Techniques for the Quality Planning Process

The tools and techniques for Quality Planning can be applied to both the product
or service produced by a project and to the process used to develop the product or
service. In some cases, a tool or technique may be more relevant to either the
process or the product, but generally it can be used for either. Some common tools
and techniques for Quality Planning include:
• Cost–benefit analysis;
• Benchmarking;
• Design of experiments;
• Cost of quality (COQ); and
• Additional Quality Planning tools, such as flowcharts.
 P a g e | 843

Cost–Benefit Analysis

Determining whether a project is a good strategic fit for the company includes
assessing whether the project adds value for the stakeholders. Preparing an analysis
of the relationship between quality and costs remains a crucial part of the business
case, because a project will not be approved if it does not meet the company’s
criteria for acceptable financial performance.

A cost–benefit analysis weighs the benefits and costs associated with quality.
Benefits include less rework, less waste, lower labor and materials costs, fewer
product returns, and improved customer satisfaction. Costs include the time and
expertise needed to establish, monitor, and maintain quality processes.

Some project teams will use experienced financial analysts to prepare the cost
justification, but many do not. For this reason, the finance department of an
organization may provide a structure to follow for analyzing projects and preparing
business cases.

Cost–benefit analysis involves considering:

• Alternatives
• Cost–benefit ratios of the ROI, payback period, and break-even analysis

Return on investment (ROI) is not just limited to considerations of financial

returns. It includes several non-financial elements as well. Projects often yield non-
financial returns, such as improved teamwork, enhanced communication, and
higher morale. Although difficult to quantify, these intangible returns are generally
acknowledged to lead to greater efficiency and higher profits for the organization.
 P a g e | 844

Benchmarking

When no data is available within an organization on a particular metric, project

managers may choose to look to other organizations for the best performance on
that metric. Surveying other organizations is called benchmarking.

Other reasons for benchmarking include the effort to understand the current best
performance achieved in the industry or project area and the desire to compare the
organization or project’s performance with competitors.

Design of Experiments

Design of experiments (DOE) is statistical method used to identify the variables

that have the greatest influence on an outcome. This technique systematically
changes all the important factors rather than changing each one independently.

By applying statistics to the experimental process, more variables and their

interactions can be studied in a few runs to provide data for the optimal conditions.
Careful analysis of the data can provide valuable information about how the input
variables affect the responses (quality characteristics). This can result in significant
improvements to products and processes, including:
• Shorter development cycles;
• More robust products;
• Variation reduction;
• Improved customer satisfaction; and
• Cost reductions.

A simple DOE example is outlined below.

If you worked in a test kitchen and needed to adapt a recipe for baking a cake, you
would need to consider several factors, or variables, and decide which ones would
have the greatest influence on the outcome.

These variables could include:

• Cooking time;
• Oven temperature;
• Ingredients;
• Shape of pan; and
• Position of pan in the oven.
 P a g e | 845

Cost of Quality

The cost of quality always exists, whether products conform to requirements or

not. Ideally, processes should be designed and maintained with the goal of zero
defects, and the only quality costs should be for conforming work to standards.

Categorizing Quality Costs

The costs of quality fall into the following categories:

Prevention costs – Aimed at preventing defects through planning and design.

These costs are associated with:

 Detailed project planning to effectively manage resources and meet

customer needs
 Training so that team members have the necessary skills to manage
project quality effectively
 Process validation studies to ensure that processes are adequate
 Quality program implementations and audits

Appraisal costs – Involve evaluating the process and the product. These costs are
associated with:

 Equipment testing and inspection

 Performing inspections and reviewing and reporting the results

Failure costs – Include the following:

 Internal failure costs – Correcting defects before the product reaches
the customer. These costs include rework, scrap, and additional
materials.
 External failure costs – Defects in products that reach the customer.
These costs include repairing or replacing goods, product liability, lost
sales, and loss of reputation.
 P a g e | 846

Actual Cost vs. Should Costs

The following chart illustrates the breakdown for each cost category using both
actual cost and should cost.

A
ctual Cost vs. Should Cost, Adapted from Ireland, Quality Management for Projects and Programs

The actual cost of quality is 20% of each sales dollar (bar on left). Only 2% of the
cost of quality, or 10% of the cost-of-quality dollar is spent on prevention (purple
segment of bar).

Combining the internal failure (yellow section of bar) at 9.6% with the appraisal
(green section of bar) at 7% (for a total cost of quality of 16.6%), equates to 83%
of cost-of-quality dollars being spent inspecting and correcting before products are
sent to the customer.

In the should cost analysis the cost of prevention (3.5%) is 57% higher than the
actual cost of prevention; however, note that the ratio of cost of quality per sales
dollar is radically reduced. Only 5.1% of each dollar of sales is related to the cost
of quality. Of this, only 31% is spent on internal failure and appraisal.
 P a g e | 847

From this analysis, the benefits of doing quality planning and designing quality in,
rather than inspecting it out, are clearly demonstrated. Thus, the bulk of costs
should be spent on prevention.

Flowcharts

A process flow diagram or flowchart is defined as a pictorial representation of a

process. Flowcharts are also used to plan the stages of a project. They tend to
provide a common language or reference point when dealing with a project or a
process. They also provide an excellent form of documentation for a process, and
can be useful tools for examining how various steps in a process work together.

Flowcharts allow the project team to:

• Identify problems in the project processes

• Make project processes visible
• Standardize how project processes are performed
• Support organizational learning by documenting processes that work
• Create a picture of an ideal process
• Document a new process
• Illustrate relationships between various elements of a system/process

Flowcharting Symbols

Symbols indicate the order and relationship of steps in a process, noting decision
points. There are several software packages that help project managers use the
symbols consistently and properly.

There is merit, however, in keeping the charts as simple as possible. The clearer
and more simple the chart is, the easier and more inviting it will be for project
team members and others to follow.
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Types of Flowcharts

Since the practice of diagramming projects has proven to be so useful, several

flowcharting techniques have been developed.

The two most common types are:

• Process flowcharts
• Cause-and-effect diagrams

More recent models have also emerged, including inference diagrams and mind
maps.
A process or system flowchart illustrates the relationships among various elements
of a system. A sample process flowchart is shown next page.
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Quality Management Plan

A quality management plan should document the agreements resulting from the
discussions and the project team’s considerations of the process inputs. Interested
parties should be able to refer to the plan, and find an answer to any question about
the project related to quality.

The quality management plan addresses quality assurance, quality control, and
quality improvement for the project. The format, length, and complexity of the
plan will vary according to the complexity of the project and the product being
developed.

The degree to which organization-wide quality policies and processes are

documented and understood can directly impact the level of success in
implementing the plan. If the organization’s quality policies are well documented
and understood, they may be referenced rather than included in the plan.
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Quality Metrics

Metrics are specific, tangible, measurable items related to project deliverables and
project processes that can serve as numeric indicators of quality. They are used to
measure processes that are key to the success of an organization.

Measuring process inputs and outputs consistently over time helps project
managers determine:
• When processes need adjustment
• The impact of changes on a process
• Favorable or unfavorable trends
• Root causes of problems and the best methods for resolving them

Metrics and Performance Measurement

As with most business initiatives, when a performance measurement system is

implemented, it is helpful to have a plan in place. The plan should answer the
following questions.
• What will be measured?
• How will it be measured?
• What will be done with the data collected?

A performance measurement system does not have to be perfect or all

encompassing from the start. Like everything else about the project, the system
will undergo continuous improvement efforts.

It is important to be practical and choose an obvious place to begin, based on

information about complaints or about the significance of an activity to the
organization’s strategic advantages. A best practice is to implement a pilot
program, learn as it progresses, and expand the system.
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Benefits of Using Metrics

When used properly, metrics provide the following benefits

M
Measuring Metrics
It is necessary to prioritize efforts because an organization cannot focus on
everything at once. There are many considerations when determining the most
important metrics to collect and analyze.

The first consideration is what is most important to the customer. It may be

product reliability, customer service response time, or a host of other concerns.
Therefore, it is important to find a way to survey customers rather than presuming
to know their needs. Much time can be wasted on improvements that have little
impact on customer satisfaction.
 P a g e | 852

It is also imperative that the project manager understand the organization’s business
processes, including their inputs and outputs. Tools such as flowcharts and cause-and-
effect diagrams can help. By breaking down processes into their components, it is easier to
determine the root cause of any problem.

Additionally, accurate analysis will help project managers determine what should be
measured. Critical success factors for a business, especially those related to the business’
competitive advantages, should be measured.

When prioritizing metrics, the factors that have the greatest impact on reducing costs or
improving productivity should be considered. The further along in a process a problem
occurs, the more expensive it is to repair.

Finally, it is important to assign responsibility for processes to individuals, and to give

them the metrics required to control the processes.

Quality Checklists

A checklist is a structured tool that can be used to help ensure that:

• A process is performed consistently.

• All steps in a process are followed.
• All items relevant to an activity are considered.

Checklists may be simple or complex. Since they provide a way for a user to check
off items as they are completed, they can ensure that the user follows steps,
includes items, or considers things required to complete a process. They can also
help guarantee effective performance, particularly in situations in which missing a
task would severely impact a process.
 P a g e | 853

Checklists may also be used to rate how well an activity was performed, (e.g.,
whether it was complete and performed on time).

Checklists not only help ensure consistency; they can save time in developing
process instructions, as existing checklists can be used as baselines to create new
ones for similar processes. Standardized checklists ensure consistency for
frequently performed tasks.

Overview of Six Sigma Technology

Six Sigma is an analytical method designed to help companies eliminate defects in

their products, and is used in many of the world’s top organizations. It can help the
project team design a quality improvement plan. The Six Sigma method consists of
the following steps in eliminating needless defects from processes (known by the
acronym DMAIC):

 Define the goals of the implementation activity

 Measure the existing system after establishing valid and reliable
metrics to monitor progress towards the goals defined in the
previous step
 Analyze the system to identify ways to eliminate the gap between
the current performance of the system or process and the desired
goal
 Improve the system by creating ways to do things faster, cheaper, or
better, using project management tools and techniques
 Control the new system, institutionalizing the improved system by
modernizing policies, procedures, and management systems

By implementing the tools and techniques from the Six Sigma method, many
companies have experienced dramatic decreases in their products’ defects. To
achieve Six Sigma, a process must not produce more than 3.4 defects per million
(DPM) opportunities. A Six Sigma defect is defined as anything outside of
customer specifications. A Six Sigma opportunity is then the total quantity of
chances for a defect.
 P a g e | 854

Six Sigma Methodology and Process Control

Processes can be characterized by average performance (expected level) and a

variation from the average performance. Optimal performance of processes is
performance at the expected level.

A process control system can help identify and eliminate defects in the processes
used to create the final product. Using a process control system not only helps
companies produce high quality products, but can also save money and prevent
waste. Process control systems can also help improve decision-making about the
actions that affect a process.

The two most common decision-making errors are:

• Taking action when it is not necessary (Type I error)
o For example, rejecting a good part
• Failing to take action when it is necessary (Type II error)
o For example, accepting and shipping bad parts

These errors are caused by two sources of variation – special causes and common
causes. The two types of causes for variation are:
 Random causes – Also called common or normal causes; account for
approximately 85% of quality problems. These are daily occurrences
that cannot be eliminated from project work. These sources of quality
failure are always present as part of the random variation inherent in the
process itself. The less well-defined a process is, the more it is subject
to random variation, resulting in a higher level of quality failures
(bugs).
 Special or assignable causes – Results of unusual or unexpected
circumstance.

These sources of quality failure lie outside the process, and so are intermittent,
unpredictable, unstable.
 P a g e | 855

A process is said to be in a state of statistical control when the only source of

deviation is a random cause. For example, a commuter train travels from Boston to
Portland daily. A log recording the arrival times for a month shows small daily
fluctuations between +10 minutes late and – 5 minutes early. This is random
or common variation. If the train failed to arrive at all one day and was an hour late
on another day, special causes are indicated and the situations should be addressed
through analysis.

The process control system is designed to provide a signal when a process is

experiencing deviations due to special causes. The special causes can then be
identified, eliminated, and prevented from occurring again.

Process adjustments may involve immediate corrective or preventive action that

results from quality control measurements. It is important to understand the impact
of each step (i.e., review the process flowcharts) to ensure that changes made to
one part of the process do not negatively impact other processes or process steps.
In most organizations, process adjustments are handled according to the
procedures for Integrated Change Control to avoid negative repercussions.

Six Sigma Methodology for Process Capability

Process capability is a measure of how well the process currently produces output
that meets the specifications requirements while in a state of statistical control. It is
measured by the total variation from specifications due to common causes after all
special causes have been removed.

High capability means that the process can readily produce a product within the
tolerance specifications. Low capability means that the process will likely produce
products outside the tolerance specifications (i.e., defective products
or defects).
 P a g e | 856

Process capability and control are often confused. The term process control refers
to the data from the process, which determines if a process is in control. A process
is in control if the performance measure being tracked forms a stable distribution
over time.

A distribution is stable if the mean and standard deviations are not shifting. This
will happen if special causes have been eliminated so that only common causes
remain. It is possible for a process to be in control regarding one performance
measure and not be in control regarding to another. Control charts are used to
determine if a process is in control.

Two of the most commonly used measures of process performance are:

 dpm (or DPM) = Defects per million – proportion of observations that do
not meet specifications (“out of spec”) x 1 million
 sigma level = Number of standard deviations (sigmas) between the mean of
the process’s output of defects and the closest quality specification.
Determining sigma levels of processes allows process performance to be
compared throughout an entire organization.

Quality Baseline

The quality baseline records the quality objectives of the project. It is the basis for
measuring and reporting quality performance.

In a project quality plan, a baseline metric is a number that represents the planned
performance according to a metric that the project manager has chosen for the
project.

For example, if one of the project’s metrics is the goal of having 95% of project
reports submitted on time, it may be helpful to find out how well the organization
is currently performing in this area.
 P a g e | 857

If all other projects in the organization have performed at 80% or lower on this
metric, the project team is making an effort to perform at a higher level than
previously achieved in the organization.

This could have implications for how the project manager sets expectations with
project customers, what resources are requested, what quality management
processes are put in place at the beginning of the project, as well
as other operational considerations.

Perform Quality Assurance Process

Planning quality and assuring quality are in two different Process Groups, but
these separate tasks have similar inputs, tools and techniques, and outputs. Perform
Quality Assurance tracks and maintains quality during project execution. It is a
proactive Project Quality Management strategy.

Who Performs Quality Assurance?

An internal Quality Assurance (QA) group or similar organization often oversees
quality assurance activities.

Typically, quality assurance support is available to the following groups:

 The project team
 The management of the performing organization
 The customer or sponsor
 Other project stakeholders
 P a g e | 858

Inputs, Tools and Techniques, and Outputs

Because quality is integral to the processes and products developed during the
project life cycle, many of the Project Quality Management process inputs and
outputs are cyclical. While the focus of Quality Planning is to build quality into the
entire project life cycle, the focus of Perform Quality Assurance is to respond to or
prevent problems with quality during project execution.

Many of the Perform Quality Assurance tools and techniques can also be used for
Perform Quality Control.

The diagram below shows the inputs, tools and techniques, and outputs of the
Perform Quality Assurance process.
 P a g e | 859

Inputs to the Perform Quality Assurance Process

The inputs to Perform Quality Assurance include some of the outputs from the
Quality Planning process as well as some of the outputs from the Perform Quality
Assurance process itself. Outputs from the Perform Quality Control process also
provide inputs to this process.
 P a g e | 860

Quality Audits

Quality audits examine the effectiveness of quality activities. They can be

scheduled or performed at random.

Components of an Audit
Quality audits consist of the following components.
Name of auditor, audit firm or person conducting the audit – Participants
who provided sample data and those who will review the results and take
action

Date – The date and the possible timeframe of the audit

Scope of audit – Departments that are involved and processes or products that
will be examined
Presentation of findings – How the findings will be presented, including a
forum for discussing the validity of the findings
Standard used to determine the basis for findings – Whether all
organizational policies,
procedures, and standards were followed, with any discrepancies noted
Formal readout of audit findings:
 Review of the escalation process – The escalation process and the
resolution timeframe
 Preventive actions for repairs – Preventive actions for any defect
repairs
 Preventive actions – Preventive actions suggested to eliminate
further defects
 Follow up meeting – To verify the status of action items resulting
from the audit
 P a g e | 861

Hands-on Quality Assessment

Throughout a project, project managers and team members must personally

monitor quality in order to make necessary adjustments to processes and plans and
to manage change.

Observing the day-to-day functioning of the project enables project managers to

interpret the meaning of the project performance data they gather and analyze.

Meetings are held throughout the life of the project to remind the project team
members of the quality objectives, the processes that have been put in place to
achieve those objectives, and the performance measurements for those objectives.

During the execution phase of the project, project managers and team members
personally review quality to understand the meaning of the quantifiable project
data. This review involves:

• Physical examination
• Bench testing
• Project team member interviews
• Data verification
• Reinforcement of project objectives and measures of success
• Process analysis and reviews
 P a g e | 862

Process Analysis

It is important to have process reviews, because if processes are poorly executed,

the quality of the product will probably be affected. Process analysis includes root
cause analysis that will identify underlying causes and enable the team to correct
them.

Typical repetitive processes in a project that impact quality and should be reviewed
and analyzed are:

• Scheduling and holding meetings

• Conducting quality audits
• Conducting pilot tests
• Surveying project customers

It is essential that everyone involved with the project have the ability and resources
needed to perform the project tasks, and that each person be able to manage
process quality. This kind of readiness is ensured at the beginning of the project,
then checked regularly throughout the project.
 P a g e | 863

Continuous Quality Improvement (CQI) Management Model

The CQI management model is a procedure a company can use to improve

business processes by doing the following:
 Defining the future vision for the company;
 Identifying mission-critical success factors and prioritizing business
processes for improvement; and
 Performing gap analysis to determine processes and steps within a
process that can be improved.
All project participants should be aware of and want to improve quality,
timeliness, and safety by eliminating waste, rework, non-value-added time,
unnecessary paperwork, bureaucratic rules and procedures, interruptions, etc. It is a
never-ending process.

Plan-Do-Check-Act (Shewhart Cycle) in Project Quality Management

Continuous quality improvement is concerned with reaching new levels of

performance that are significantly higher than those previously achieved. The
concept of continuous quality improvement, popularized by Shewhart and Deming,
is that quality must be managed with continuous process improvement.

One perspective on continuous quality improvement is the Plan-Do-Check-Act

(PDCA) cycle, created by Shewhart and briefly described in the introduction to
this course, “Project Framework and Integration Management.”
 Creating a plan to improve quality (Plan)
 Executing the plan (Do)
 Using data to determine whether the plan was successful (Check)
 Taking action to either standardize the improvement or use the lessons
from it to try something else (Act)
This cycle is continuous in a project, but it is particularly useful in focusing on
quality. Every project should end with a thorough review (check) of what worked
and what did not work during the life of the project.
 P a g e | 864

Plan-Do-Check-Act (PDCA) Steps

The following table presents the details of the activities for the PDCA cycle
 P a g e | 865

CQI Principles and Benefits

ISO 9000 claims the following principles and benefits for continuous quality
improvement:

Principles
 Employing a consistent organization-wide approach targeting the
organization’s performance;
 Training personnel in the methods and tools of continual improvement;
 Making continual improvement of products, processes, and systems an
objective for every individual in the organization; and
 Establishing goals to guide and measures to track continual
improvement
 Recognizing and acknowledging improvements.

Benefits
 Performance advantage through improved organizational
capabilities;
 Alignment of improvement activities at all levels to an
organization’s strategic intent; and
 Flexibility to react quickly to opportunities.
 P a g e | 866

Perform Quality Control

The Perform Quality Control process involves monitoring specific project results
to verify that the product complies with established quality standards, and
identifying ways to remedy unsatisfactory results. Perform Quality Control should
be implemented throughout the project.

Perform Quality Control and Integrated Change Control

Any change to the time, cost, or scope specified for the project will affect the
quality management plan. Therefore, it is important to have the Integrated Change
Control process in place to handle any modifications that arise during the project
life cycle. Integrated Change Control is a formal process that defines how project
documentation and deliverables are controlled, changed, and approved.

Some of the common tasks addressed by an Integrated Change Control system

include:
 Reviewing and approving requested changes;
 Determining that a change needs to occur;
 Determining that a change did occur;
 Controlling and updating time, cost, scope, and quality requirements,
based on approved changes;
 Reviewing and approving all recommended corrective and preventive
actions;
 Validating a defect repair;
 Maintaining the integrity of baselines;
 Controlling project quality standards based on quality reports;
 Maintaining the integrity of the performance measurement baseline;
 Ensuring that changes to the product scope are reflected in the project
scope definition; and
 Coordinating changes across Knowledge Areas.

Perform Quality Control should be used throughout the project, and should be
incorporated with the procedures detailed in an Integrated Change Control process.
 P a g e | 867

Perform Quality Control Responsibility

Perform Quality Control uses many of the same inputs and tools and techniques as
the Quality Planning and Perform Quality Assurance processes. Many of the tools
involve gathering and analyzing statistical data and making recommendations or
corrections to a process.

Many organizations have a quality control group that performs quality control
activities. The quality control group is also responsible for reducing defects, loss,
and inferior products through inspection and sampling.

If a quality control group does not exist, project team members may assume this
responsibility. In either case, all project team members should be familiar with the
inputs and tools and techniques used to monitor and improve quality throughout
the project life cycle.
 P a g e | 868

The diagram below shows the inputs, tools and techniques, and outputs of the Perform
Quality Control process.

Tools and Techniques for the Perform Quality Control Process

Metrics, which define the standards used to measure and track performance and
quality results are captured with tools and techniques such as:
• Cause-and-effect diagrams
• Control charts
• Other charts
• Statistical sampling
• Inspections
• Defect repair reviews
 P a g e | 869

Common Terms in Statistical Analysis

Because Perform Quality Control deals with compiling and analyzing statistical
data, it is helpful to have a working knowledge of the following terms:
 Prevention involves keeping errors out of the process;
 Inspection focuses on keeping errors out of the hands of the
customer;
 Attribute sampling identifies whether the result conforms or does
not;
 Variable sampling means the result is rated on a continuous scale
that measures the degree of conformance;
 Special causes are unusual events;
 Common causes indicate normal process variation. Common causes
are also referred to as random causes; and
 Tolerances indicate that the result is acceptable if it falls within the
range specified by the tolerance.

Cause-and-Effect Diagrams

A cause-and-effect diagram, also known as a fishbone diagram or an Ishikawa

diagram, is a tool for visualizing and organizing knowledge. Systematically
collecting a group’s ideas makes it easier to understand and ultimately diagnose
the problem. These diagrams have been used successfully by industries that
include both manufacturing and services.

A problem-solving team uses cause-and-effect diagrams during brainstorming to

trace back and logically list and display the known and potential causes of a
problem. The listed causes are analyzed to identify root causes. Several computer
tools have been created to help create cause-and-effect diagrams. When creating a
cause-and-effect or fishbone diagram, a defect is identified at the head of the
diagram and the causes are the inputs to the process, creating the “bones” of the
fish.
 P a g e | 870

Typically, these inputs can be categorized as machinery, methods, material, and

manpower. However, additional categories can be used, such as surroundings,
suppliers, systems, policies, processes, and skills.

On each fishbone, a possible cause of the problem is identified. Each cause is

further examined to see if it is the result of one or more underlying causes. The
underlying causes are depicted on smaller bones. This process is continued until
causes that cannot be further decomposed – the root causes – are identified.

The following cause-and-effect diagram illustrates the causes for needing to

escalate customers’ complaints.
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Creating a Cause-and-Effect Diagram

Use the following steps to create and use a cause-and-effect diagram.
 P a g e | 872

Development Guidelines for Cause-and-Effect Diagrams

The following guidelines may be useful as you develop a cause-and-effect

diagram:

 Make arrow points clear;

 Identify causes rather than symptoms;
 Post diagrams to stimulate thinking, and get input from other staff;
 Use self-adhesive notes when constructing the diagram so that it
takes minimal rework to rearrange the categories, causes, and sub-
causes;
 Use ideas that are variables and integral parts of the process itself,
not special cases, tampering, etc. ; and
 If ideas for quick fixes are identified (e.g., train personnel), rephrase
them, if possible, so that they are process variables. The completed
diagram with prioritized root causes will be used as input to
brainstorming sessions to identify methods to remove the causes of
the problem.

Control Charts

Control charts are often used to monitor and assess process performance. They can be used
for processes in both project and product life cycle. They provide a graphic display
of the results over time and can be a powerful tool for identifying variances.

Control charts are particularly useful for distinguishing between random variations
and unusual events. This distinction helps in determining whether the project
management process is in control or needs correction.

Charts that plot results over a period of time are also useful for trend analysis,
another technique of Perform Quality Control. Trend analysis can help determine
technical performance.
 P a g e | 873

Control charts can be used to monitor:

• Any type of output variable;

• Cost and schedule variance;
• Volume and frequency of scope changes; and
• Errors in project documents.

Sample Control Chart

The following sample control chart displays a process that is tracking water usage
for a town suffering from a drought. The town pays usage fees based on the water
used, and needs to ensure that it uses the least amount of water while getting the
best results.

Based on sample data collected over a period of time, the mean of the samples can
be determined. The upper control limit (UCL) and lower control limit (LCL) are
three standard deviations above and below the mean, respectively, and these limits
set the acceptable variance in the amount of water used.

Sample data is then plotted on the control chart, and the chart is analyzed to see
whether the process is in control. If data points fall above the UCL or below the
LCL, the process is out of control and must be examined for corrective action. In
the sample diagram below, the data points fall within an acceptable range as they
are between the UCL and the LCL.
 P a g e | 874

Other Charts

Flowcharting
Flowcharting is a useful tool for determining the cause of variances. All
flowcharting styles show the relationships between activities, decision points, and
the order of processing.
Flowcharting a process is an excellent way to discover:
• Any missing steps within the process
• Why the process is not functioning properly

Histogram
This is a bar chart that shows the distribution of variables. Each column denotes a
potential cause of a problem. The height of each column correlates to the measured
frequency of that cause.
 P a g e | 875

Run Chart
A run chart is used to track historical data and variances. Using mathematical
formulas, this chart can be extrapolated to predict future outcomes. As previously
mentioned, a run is also considered a trend when multiple consecutive points fall
on one side of the mean.

Scatter Diagram
The scatter diagram plots two variables, one on the y-axis and the other on the x-
axis. When the data is mapped, the relationship between the variables is revealed.
The closer the points are to a diagonal line, the more dependent they are on one
another.
When the points in a scatter diagram run along an imaginary straight line (i.e.,
either positive or negative slope), a strong relationship exists between the two
variables. When the points are randomly scattered, there is no relationship between
the variables.

A high correlation between two variables does not necessarily mean that a cause-
and-effect relationship exists, as both relationships may be caused by a number of
other factors. However, we can evaluate the strength and direction (positive or
negative) of the relationship between the two variables and use it to confirm
“hunches” of direct cause-and-effect relationships that have been observed.

Pareto Chart
Pareto charts are histograms that depict the frequency of each problem or defect.
Problems are grouped by cause, and the causes are ranked by the number of
problems for which they are responsible.

Pareto diagrams are related to Pareto’s Law, which states that a relatively small
number of causes will typically produce a large number of defects. This is
commonly referred to as the 80/20 rule, where 80% of the problems are due to
20% of the causes.
 P a g e | 876

The following Pareto chart ranks the reasons for escalating customer issues.

Rank ordering is used to guide corrective actions. The project team should focus
initial efforts on resolving the problems that are causing the greatest number of
defects.

When corrective actions remove the predominating causes of defects, the next
level of cause moves up in priority and these causes are addressed – supporting
continuous process improvement.
 P a g e | 877

PROJECT MANAGEMENT
MANUAL
PART 10

HUMAN RESOURCES
MANAGEMENT & GOVERNANCE
2014
 P a g e | 878

Table of Contents
Subject Page

Human Resources Mangement 879

Human Resource Theories 880
Maslow's Hierarchy of Needs Theory 881
Herzberg’s Motivation-Hygiene Theory 882
McClelland’s Acquired-Needs Theory 883
McGregor’s X and Y Theories 884
Ouchi’s Theory Z 885
Thamhain and Wilemon’s Influence on Projects 885
Covey’s Approach to Improving Personal Effectiveness 886
Human Resource Planning Interactions with Other Processes 888
Developing a Team 898
Five-Step Model for Team Development 900
Team-Building Activities 904
®
Myers Briggs Type Indicator (MBTI ) 905
Conflict Management 913
Governance 916
Program Management and effective governance 920
The role of IT Systems in Program Management Governance 923
Knowledge Management 924
Roles and Responsibilities 926
Program Reporting and Control 928

Standards and Documentation Governance 931

 P a g e | 879

Human Resources Management

Project Human Resource Management includes the processes that organize and manage the
project team. The project team consists of all project team members, including the project
management team, the project manager, and for most projects, the project sponsor. The
project sponsor is the person or group that provides the financial resources for the project.

The project team comprises the individuals who have been assigned roles and
responsibilities for completing the project. The type and number of project team members
can often change as the project progresses; stakeholders on a typical team include:

 Sponsor;
 Project manager;
 Project management team;
 Project team members;
 Support staff; and
 Contractors or other procured staff.

The project management team is a subset of the project team and is responsible for project
management activities such as such as planning, executing, monitoring and controlling
work, and closing the project.

This group can be called the core, executive, or leadership team. The project sponsor
works with the project management team, typically assisting with matters such as project
funding, clarifying scope, and influencing others to the benefit of the project.

In some instances, project management responsibilities may be shared among the entire
team. In all cases, it is important for team members to take an active role in planning and
decision-making. Early involvement of team members adds expertise during the planning
process and strengthens the commitment to the project.
 P a g e | 880

Human Resource Theories

Merely identifying groups of people who will perform work on a project does not create
the team synergy that is required to make the project a success. Over the years, much effort
has been undertaken to understand how to manage people at work so that employers can
achieve the best results possible. This effort has resulted in many theories about how to
optimize investment in human capital.

Industrial-organizational psychologists and management theorists have attempted to

understand and measure human behavior in order to improve both employee satisfaction
and employers' ability to select and promote the best people. Psychological studies have
been conducted to analyze the issues that affect how people work and how well they work.
These studies typically focus on:

 Motivation
 Influence and power
 Effectiveness

Motivation
Many psychologists, supervisors, and managers struggle to understand what motivates
people. Theorists feel there are two types of motivation:

 Intrinsic motivation – Related to personal enjoyment (the carrot approach)

 Extrinsic motivation – Stemming from the desire to avoid punishment (the stick
approach)

It is interesting to consider why some people need no external motivation to produce high-
quality work, while others require significant motivation to perform at all. Motivational
theories developed by well-known behavioral theorists are:

 Maslow's Hierarchy of Needs Theory;

 Herzberg’s Motivation-Hygiene Theory;
 McClelland’s Acquired-Needs Theory;
 McGregor’s X and Y Theories; and
 Ouchi’s Theory Z.
 P a g e | 881

Maslow's Hierarchy of Needs Theory

According to Abraham Maslow, human behavior is motivated by a sequence of needs as
shown in the following diagram.

 Physiological needs are biological needs, such as the need for air, food, and water;
 When physiological needs are met, the need for safety will emerge. Safety and
security rank above all other non-physiological needs;
 After physiological and safety needs are met, the need for social interaction
emerges. This involves relationships based on emotion, such as friendship;
 Esteem needs include the need for the respect of and recognition by others, and the
need for self-respect.; and
 Self-actualization is the instinctual need of a human to make the most of his or her
unique abilities.

Few people ever reach self-actualization, and most do not move above safety or social
motivators. Successful project managers recognize the importance of identifying the
individual motivational needs of all team members.
 P a g e | 882

Herzberg’s Motivation-Hygiene Theory

To better understand employee attitudes and motivation, Frederick Herzberg performed

studies to determine which factors in an employee's work environment caused satisfaction
or dissatisfaction. He published his findings in the 1959 book The Motivation to Work.

Herzberg’s studies included interviews in which employees were asked what pleased and
displeased them about their work. He found that the factors that contributed to job
satisfaction (and presumably motivation) were different from those that created job
dissatisfaction. The result of this study produced the motivation-hygiene theory. He called
the job satisfiers “motivators” and used the term “hygiene” to describe maintenance
factors that are necessary to avoid dissatisfaction.

Herzberg concluded that motivating factors for job satisfaction include:

 Achievement;
 Recognition;
 Responsibility; and
 Advancement.

Factors that contribute to job dissatisfaction include:

 Company policy;
 Quality and amount of supervision;
 Relationship with manager;
 Work conditions; and
 Salary.

Herzberg reasoned that because the factors causing satisfaction are different from those
causing dissatisfaction, the two feelings cannot simply be treated as opposites of one
another. The opposite of satisfaction is not dissatisfaction, but rather, no satisfaction.
Similarly, the opposite of dissatisfaction is no dissatisfaction. Herzberg’s theory explained
why attempts to use positive factors such as reducing time spent at work, increasing wages,
offering fringe benefits, and providing training in human relations and sensitivity do not
instill motivation.
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He argued that people want to self-actualize and therefore need stimuli for their own
growth and advancement needs. Management must not only provide hygiene factors to
avoid employee dissatisfaction, but must provide factors intrinsic to the work itself to
ensure that employees are satisfied with their jobs. He also believed that job enrichment is
a continuous management process.

McClelland’s Acquired-Needs Theory

David McClelland is best known for his acquired-needs theory, which is based on the
concept that a person's needs are acquired over time and are shaped by experience.

McClelland believed that most personal needs as well as individual motivation and job
effectiveness are directly linked to one of three needs: achievement, affiliation, or power.
His theory emphasizes the following needs:

 People with a high need for achievement are motivated to excel and tend to avoid
both low and high-risk situations. Achievers need regular feedback to monitor the
progress of their achievements. They prefer either to work alone or with other high
achievers;
 Those with a high need for affiliation require harmonious relationships and need to
feel accepted by others. They tend to conform to the norms of their work group and
prefer work that provides significant personal interaction; and
 People may need power in one of two forms: personal power, the desire to direct
others, or institutional power (also known as social power) the desire to organize
the efforts of others to further the goals of the organization. The need for personal
power is often perceived as undesirable. Managers with a high need for institutional
power tend to be more effective than those with a high need for personal power.

McClelland's theory is sometimes referred to as the three needs theory or as the learned
needs theory.
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Project managers should recognize that people with different needs are motivated
differently:
 High achievers should be given challenging projects with reachable goals. They
should be provided frequent feedback. While money is not an important motivator,
it is an effective form of feedback;
 Employees with a high need for affiliation perform best in a cooperative
environment; and
 Management should give power seekers the opportunity to manage others.

McGregor’s X and Y Theories

Douglas McGregor examined the behavior of individuals at work and formulated two
models, which he called Theory X and Theory Y. McGregor discussed these theories in
his book, The Human Side of Enterprise, published in 1960. He found that although many
managers expressed the “right” ideas, they actually followed a very different set of
assumptions about worker motivation.

 Theory X Assumptions: Most people dislike work and will avoid it if they can.
People want direction, dislike responsibility, and desire security above everything.
This theory is also referred to as the classical systems theory; and
 Theory Y Assumptions: Expenditure of physical and mental effort in work is as
natural as play or rest. People will direct themselves if they are committed to the
aims of the organization, and the average person learns, under proper conditions,
not only to accept but to seek responsibility.

McGregor theorized that most managers tend toward Theory X, although he views Theory
Y as the preferable model and management method, as it produces better results and allows
people to grow and develop.
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Ouchi’s Theory Z

In 1981, William Ouchi published his best-selling book, Theory Z: How Americans Can
Meet the Japanese Challenge. Theory Z combined American and Japanese motivational
approaches that emphasized trust, quality, collective decision-making, and cultural values.
Ouchi’s Theory Z is more holistic than McGregor’s theories in that it not only emphasizes
the way in which management views its workers but also includes the workers’ perception
of management. One of the main characteristics of the Theory Z approach is trust. Theory
Z assumes that employees can be trusted to perform their jobs well as long as management
considers their personal satisfaction and welfare.

Theory Z also promotes:

 Long-term employment;
 Collective decision-making;
 Individual responsibility;
 Slow evaluation and promotion;
 Implicit, informal control with explicit, formalized measures;
 Moderately specialized career paths;
 Job rotation; and
 Broadening of skills providing generalization rather than specialization.

Thamhain and Wilemon’s Influence on Projects

Thamhain and Wilemon researched the various approaches that project managers have
used to influence workers, and examined how these approaches affected project success.
Nine bases of influence are available for project managers:
 Authority — The legitimate hierarchical right to issue orders
 Assignments — The project manager’s perceived ability to influence a worker’s
future work assignments
 Budget — The project manager’s perceived ability to authorize others’ use of
discretionary funds
 Promotion — The project manager’s ability to improve a worker’s position
 Money — The ability to increase salaries and benefits
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 Penalty — The project manager’s perceived ability to dispense or cause

punishment
 Work Challenge — The ability to assign work that capitalizes on a worker’s
enjoyment of doing a particular task or job, tapping into an intrinsic motivational
factor
 Expertise — The project manager’s perceived special knowledge that others deem
mportant
 Friendship — The ability to establish friendly personal relationships between the
project manager and others

Thamhain and Wilemon observed that projects were more likely to fail when project
managers relied too heavily on using authority, money, or penalty to influence people.
Instead, they recommend using challenging work and expertise to influence people. This
approach validates the studies of motivation by Maslow and Herzberg.

Covey’s Approach to Improving Personal Effectiveness

Dr. Steven Covey is a leadership and time management expert teacher, and organizational
strategy consultant. His work is an extension of the research completed by Maslow,
Herzberg, and other industrial-organizational psychologists.

Covey's behavioral theories embrace integrity and humanity, and contrast strongly with the
process-based ideologies that characterized management thinking in earlier times. His
book, The 7 Habits of Highly Effective People, became a blueprint for personal and
organizational development when it was published in 1990.
 Be proactive – This is the ability to control your own environment, rather than
have it control you. This habit promotes self-determination, choice, and the power
to control responses to external stimuli and circumstances;
 Begin with the end in mind – This habit focuses on personal leadership. It focuses
on relevant activities, allowing people to avoid distractions and increase their
productivity;
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 Put first things first – This habit focuses on personal management, since it relates
to organizing and implementing activities that support the second habit;
 Think win-win – This habit focuses on interpersonal leadership. It is based on the
assumption that success follows a cooperative approach more naturally than the
confrontation of win-or-lose;
 Seek first to understand and then to be understood – This habit focuses on
communication, and involves the practice of empathic listening, which is listening
with the intention of understanding;
 Synergize – This habit focuses on creative cooperation, which is based on the
principle that the whole is greater than the sum of its parts. It promotes the
importance of recognizing the value of others’ contributions; and
 Sharpen the saw – This habit focuses on self-renewal, and it enables and
encourages the other six habits to happen and grow.

In his more recent book, “The 8th Habit”, Stephen Covey introduced an eighth habit,
which focuses on personal fulfillment and helping others to achieve fulfillment.

Leadership, Collaboration, and Personal Skills

The graphic below illustrates the need for project managers to have a variety of
interpersonal and general management skills to manage the project team. In addition,
strong communications skills are critical to the project manager’s ability to effectively
negotiate, share information, and manage conflict.
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Leadership Responsibilities
Working as a team involves a delicate balance of personality, expertise, and cooperation.
For a team to function, everyone must keep the best interests of the project, the company,
and the team in mind. It is the responsibility of the project manager to develop and manage
an effective project team. This can best be accomplished by:

 Believing in the value of teamwork;

 Choosing and reassessing the most productive model for team leadership;
 Communicating expectations about how the team will operate;
 Nurturing all team members by delegating, coaching, and providing formal training
appropriate to their needs Rewarding and discouraging behavior in accordance with
the chosen model for team leadership and the expectations communicated; and
 Setting aside time in team meetings and in one-on-one sessions with team members
to focus on the team’s performance and development.

Human Resources Planning

Human Resource Planning ensures that assigned roles, responsibilities, and reporting
relationships are clearly defined and documented so that all project participants understand
their roles and responsibilities in relation to other participants. The individuals and groups
involved can be part of the organization performing the project, or they can be external to
it.
Ineffective Human Resource Planning can lead to underutilized staff, perhaps leading to
layoffs.

Conversely, it may also lead to overstretched team members who then become difficult to
retain. Effective Human Resource Planning helps organizations meet production and
service deadlines at the expected quality level, while ensuring effective utilization of all
staff members. It can also:

 Clearly define effective workforce requirements;

 Establish flexible work arrangements; and
 Improve output by developing a better understanding of the relationships among
productivity, organization, and technology.
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Human Resource Planning Interactions with Other Processes

Human Resource Planning occurs throughout different stages of project planning and often
interacts with many processes at one time. Typically, the Human Resource Planning
process interacts with the following processes:
 Create a WBS;
 Plan Purchases and Acquisitions;
 Activity Definition;
 Activity Resource Estimating;
 Activity Duration Estimating; and
 Schedule Development.

Examples of Human Resource Planning Process Interactions

Examples of the Human Resource Planning process interactions include:

 Create WBS: The WBS dictionary developed by this process defines each resource
requirement for the WBS work packages. After initial team members create a
WBS, the team may need to acquire additional members;
 Plan Purchases and Acquisition: The outcome of a make-or-buy analysis may
reveal that purchasing an item is more cost-effective than renting it. Such
considerations can affect the long-range strategy of the project team’s organization
by identifying a new skill or competency level absent from the organization’s
existing resource pool;
 Activity Definition: The activity attributes developed during this process provide
the primary data used to estimate the resources required for each schedule activity;
 Activity Duration Estimating: When activity durations are estimated before all
team members have been assigned, the actual competency levels of new team
members can cause activity durations to change. For example, during early
planning of a technical project, the project manager may decide that many senior
and junior software engineers are needed. However, as resource needs are refined,
the pool may be reduced to include only engineers with expertise in a particular
programming language;
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 Activity Resource Estimating: Activity resource estimating is dependent on the

output of Human Resource Planning that provides information on which resources are
potentially available; and
 Schedule Development: Schedule Development can require that resource
estimates be reviewed and revised. If Human Resource Planning is done at an early
stage, the project schedule will remain preliminary until the assignments of the
resources have been confirmed.

Together, these interrelated planning processes gather information of different degrees of

completeness and certainty from many sources. As new information is revealed, additional
dependencies, requirements, risks and opportunities, assumptions, and constraints will be
identified and resolved.

Project management is multidimensional and causes repeated loops and feedback that can
continue indefinitely. Procedures set by the performing organization determine when the
planning efforts are complete.

Human Resource Planning Process inputs

Enterprise Environmental Factors

It is important to understand the culture and structure before planning which human
resources will be required for a project. The definition of project roles and responsibilities
is developed by analyzing the types of skills and skill levels required for the project, the
anticipated team member interactions, and the existing reporting relationships.

Relevant enterprise environmental factors involving organizational culture and structure

include:
Organizational Factors
 Organizations, departments, and groups involved in the project; and
 How these organizations, departments, and groups interact, both formally and
informally.
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Technical Factors
 Disciplines and specialties that will be needed to complete the project work;
 Different disciplines, equipment, or methodologies required for the project; and
 Unique challenges associated with the transitions from one life cycle phase of the
project to the next.
Interpersonal Factors
 Formal and informal reporting relationships among project team candidates;
 Existing job descriptions;
 Supervisor-subordinate relationships;
 Prior relationships between team members and clients or vendors;
 Cultural or language differences among prospective team members that may affect
working relationships; and
 Levels of trust and respect that exist between prospective team members.
Logistical Factors
 Distance that separates the people and groups that will be working on the project;
 Time zones that affect the collaboration of geographically dispersed team members;
 Feasibility of virtual teams; and
 Tool and telecommunications support requirements.

Political Factors
Organizational goals and tensions that may drive stakeholders;
Existing alliances that may affect the ability to successfully manage the project; and
Groups and people that have informal power in areas important to the project.

Project Constraints
Constraints in the enterprise’s environment limit the project team options when defining
roles and responsibilities.

Examples of constraints that can limit flexibility in the Human Resource Planning process
include:
Organizational structure/policies of the performing organization — An organization
whose basic structure is a weak matrix means a relatively weaker role for the project
manager.
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Collective bargaining agreements — Contractual agreements with unions or other

employee groups may require certain roles or reporting relationships.
Economic conditions — Hiring freezes, reduced training funds, or a lack of travel budget
are examples of economic conditions that can restrict staffing options. In general, the
financial situation of the performing organization will affect the project ability to purchase
or otherwise acquire labor.
Preferences of the project management team — If members of the project management
team have had success with certain structures in the past, they are likely to advocate similar
structures in the future.
Expected staff assignments — The way the project is organized is often influenced by the
skills and capabilities of specific individuals.

Organizational Process Assets

Organizations with mature project management methodologies often have a repository of

lessons learned from completed projects, allowing the project manager to draw on past
Human Resource Planning experiences to plan the current project.

Organizational process assets can help reduce the amount of time needed for Human
Resource Planning at the beginning of the project and reduce the likelihood of missing
important responsibilities. These assets include:
Templates
 Role and responsibility definitions or reporting relationships for a similar project;
 Project organization charts;
 Position descriptions;
 Performance appraisals; and
 A standard conflict management approach.
Checklists
 Common roles and responsibilities;
 Typical competencies for particular skill levels;
 Applicable training programs;
 Team ground rules;
 Safety considerations;
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 Compliance issues; and

 Reward ideas.

Human Resource Planning Process tools

The tools and techniques used for Human Resource Planning are often readily available
within the performing organization. These items may include the established human
resources practices, policies, and procedures of the organization, as well as pre-existing
templates from similar projects that can be used as is or modified.

The Human Resource Planning tools and techniques fall into three categories:
 Organization Charts and Position Descriptions;
 Networking; and
 Organizational Theory.

Acquire Project Team Process

Adding the right players to the team will increase the probability that project goals will be
met, potentially bringing competitive advantage to the organization. The ability to attract,
hire, and retain the right resources is challenging but critical to the success of the project
manager and the organization.

Lack of Project Manager Control

The project manager may or may not have control over the selection of project team
members. The size of the organization, the relative priority of the project within the
organization’s portfolio, and other organizational or political factors my leave the project
manager with little authority for resource selection.
The Economy and Competition
The health of the economy impacts all industries. When the economy is good,
organizations compete for resources and may have difficulty recruiting and retaining good
employees.
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Employee Demographics
Pools of available talent in the labor market fluctuate by industry. Shifting population
demographics may cause a flood of available resources in some industries and labor
shortages in others. When there is a surplus of talent in the market, organizations should
take proactive steps to attract strong resources and thereby fuel their organization's growth.

Recruiting Practices
Today’s organizations have a wealth of options to recruit potential employees, such as
web-based job search engines, advertisements in various media, job fairs, employee
referral programs, and incentive programs. Recruiting the right resources to satisfy both
long-term and short-term needs involves significant time and cost investments. Effective
screening and assessment methods become critical processes for the organization.
Companies without an internal recruiting infrastructure may outsource employee
recruitment to an external firm.

Acquisition from Outside Sources

When the performing organization lacks the in-house staff needed to complete the project,
the project management team may hire consultants or subcontract some of the work to
another organization.

Techniques for planning such acquisitions and selecting consultants and contractors are
related to the processes of the Project Procurement Management Knowledge Area, such as
Request Seller Responses and Select Sellers.

Virtual Teams
The use of virtual teams creates new possibilities when acquiring project team members.
Virtual teams can be defined as groups of people with a shared goal who fulfill their roles
with little or no time spent meeting face to face. They interact primarily through electronic
means such as e-mail and conference calls, although they may occasionally meet in person.
Examples of virtual teams include people working at different geographic sites and a
project team whose members telecommute.

Team membership may be relatively stable or change on a regular basis. Members may be
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drawn from the same organization or from several different organizations (e.g., if a project
involves consultants or other external resources).

Many organizations establish virtual teams because of differences in time and space for
team members.

Specifically, teams may be distributed because of the new realities facing organizations
such as:
 Organization-wide projects or initiatives;
 Alliances with different organizations, some of which may be in other countries;
 Mergers and acquisitions;
 Emerging markets in different geographic locations;
 The desire of many people to telecommute;
 The continuing need for business travel, information, and communications
technologies available to support this travel;
 A need to reduce costs; and
 A need to reduce time-to-market or cycle time in general (the increasing velocity in
business).
Virtual teams are supported by both hardware and software. General hardware
requirements include telephones, PCs, modems (or equivalent), and communications links
such as the telephone system and local area networks. Software requirements include
groupware products such as electronic mail, meeting facilitation software, and group time
management systems.

Virtual Team Benefits and Challenges

The virtual team format provides many benefits:

 Teams can be formed of people recruited for their competencies and expertise,
regardless of whether they live in widespread geographic areas;
 Employees can work from home offices and during different hours and
 Projects that may have been neglected due to travel expenses can move forward, as
related expenses can be reduced and sometimes eliminated.
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The virtual team format also presents many challenges, not all of which are directly related
to technology.

Many challenges of managing a virtual team are related to:

 Time and location;
 Culture and diversity; and
 Communications.

Time and Location

When teams work in times zones that are two or more hours apart, this can translate to
significantly different work hours. Project management teams can work to overcome this
challenge by creating ground rules to accommodate all work schedules and specifying core
hours of operation within a normal workday.

Culture and Diversity

Technology may create diversity among team members, especially if part of the team is
together in one location and other members are dispersed. Some team members may feel
isolated. An additional consideration is that virtual team members may come from
multicultural backgrounds. In this situation, the team should be made aware of customs,
phrases, and gestures that differ from country to country.

Guidelines for Acquiring Virtual Team Members

When acquiring virtual team members, project managers are not constrained to a particular
geography. However, the skills required to work on a virtual project team differ from those
required of a worker on a more traditional team. The skills listed below may assist project
managers in the recruitment, assessment, and selection of effective virtual team members.

 Use technical tools proficiently, such as email, collaborative software systems, the
Internet, desktop videoconferencing systems, and teleconferencing;
 Form team relationships quickly and effectively by asking questions, showing
interest in others, adapting to the working styles of other team members, and being
aware of one’s interpersonal style;
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 Communicate effectively in a virtual environment, with strong written and oral

communication skills and a sensitivity to the cultural differences among team
members;
 Plan and organize individual work to correspond with team schedules;
 Participate effectively in group problem-solving, cooperating with others; and
 Prioritize work and establish personal and professional goals.

Guidelines for Ensuring Effective Virtual Team Communications

Miscommunication is more likely to occur when team members do not meet in person and
there is no nonverbal communication. Nonverbal communication includes facial
expressions, tones of voice, gestures, eye contact, spatial arrangements, patterns of touch,
expressive movement, cultural differences, and other "nonverbal" acts.

Research suggests that nonverbal communication is more important in understanding

human behavior than words alone; the nonverbal "channels" seem to be more powerful
than what people say. Miscommunication leads to distrust. The issue of trust is at the
center of successful virtual team management. Old-style command and control
management, based on constant scrutiny, is simply impossible in a virtual environment.

Communications planning becomes much more important in a virtual team environment.

Potential communication issues can be reduced or eliminated by using the following
approaches when establishing a virtual team.

Include Face-to-Face Time if Possible

Include periodic face-to-face meetings throughout the life of the project. These meetings
will help establish relationships among the team members and create an effective working
environment where the team members work interdependently.

Provide a Big Picture of the Overall Flow of the Project

Always send team members copies of the updated project schedule, or provide an
electronic view of the project schedule online using the Internet. Team members need to
know where they fit in the big picture and the expected direction of the project.
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Establish Information Distribution Guidelines

Include a policy of acknowledging a request for information within 24 or 48 hours. A
complete response to a request may require more time, but at least the person requesting
the information will know that the request is being addressed. Establish a communications
management plan for transferring information among project team members, helping to
ensure that project information is distributed on time and to the right people.
Expand Text-Only Communication
Use the Internet to store charts, pictures, or diagrams so that everyone has access to them,
or use the fax machine to disseminate this information.

Developing a Team
A group of people is not necessarily a team. It is through the effective merging of group
skills and talents that new possibilities are created, including collective intelligence,
increased creativity, broader experiences, and cultural richness.

A team is a group of people with a high degree of interdependence geared toward

achieving a common goal or completing a task. A team outperforms a group and can
sometimes outperform what is expected of the individual participants.”

A team provides three major benefits for the organization:

 Maximizes the organization's human resources — Each member of the team is
coached, helped, and led by all the other members of the team. All members, not
just the individual, feel a success or failure;
 Produces superior outputs against all odds — The synergistic effect of a team can
normally outperform a group of individuals; and
 Demonstrates continuous improvement — When they pull together as a team,
members will not be afraid to take risks to show what they can do. Personal
motives will be pushed to the side to allow the team motive to succeed.

When nurtured and developed, teams can be very powerful. The combined strength and
collective wisdom of a team can help the team achieve success in meeting and exceeding
project goals. Teams offer advantages in other key areas such as:
 Distributing the workload;
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 Reinforcing individual capabilities;

 Creating participation and involvement;
 Making better decisions;
 Making a commitment to the work; and
 Generating and respecting diversity of ideas.

Project Team Tasks and Characteristics

Team members cooperate in all aspects of their tasks and goals, and they typically share in
tasks such as planning, organizing, setting performance goals, scheduling, assessing the
team’s performance, identifying and solving problems, and tracking progress.

Teams learn and demonstrate behaviors that are not exhibited by mere groups. Members of
a team typically move through four levels of participation as the team develops:
1. Contributing data and knowledge.
2. Sharing in the decision-making process and reaching consensus.
3. Making a decision as a team.
4. Making an imposed decision work as a team.

Characteristics of effective teams include:

 Communication — open, honest, and effective exchange of information between
members;
 Trust — openness in critiquing and trusting others;
 Belonging — cohesiveness by being committed to an understood goal and team
identity;
 Valuing diversity — creating synergy by respecting all individuals;
 Creativity and risk-taking — allowing success and failure to be attributed to the
team rather than to the individual;
 Flexibility — openness to assimilating change; and
 Participatory leadership — allowing everyone to lead to some degree.

The potential benefits of teams make them valuable tools. However, teams will not
typically form by themselves. The project manager must be the catalyst for bringing the
team together.
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Five-Step Model for Team Development

Dr. Bruce Tuckman published his four-stage model of team development in 1965 and
modified it to include an additional stage in the 1970s. According to Tuckman, all teams
progress through five stages of development:
1. Forming;
2. Storming;
3. Norming;
4. Performing; and
5. Adjourning.
Teams move in and out of these stages, and certain events may precipitate this movement.
Each stage is characterized by unique attributes. Project managers, who are responsible for
team-building, should develop the skills necessary to take their team members through all
stages of team development.

Forming
The forming stage begins when the group assembles and is identified as a team unit. This
stage normally occurs during the initiation of a team, or when new members join the team.
This is a stage of transition from a group of individuals to a team. This stage is necessary,
but little work is produced. Typically, everyone is polite and there is a feeling of
anticipation and excitement. Roles are unclear, so there is usually a greater dependency on
some form of leadership or control.

Management Skills Needed During the Forming Stage

In this stage of team development, the project manager needs to provide directive
leadership. Efforts should be focused on defining goals, roles, and standards for the team.
The project manager organizes and directs the team members in meeting the project goals.

Management skills needed in the forming stage include:

 Organizing;
 Teaching;
 Setting standards and accountability; and
 Determining goals for the team.
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Storming
During the storming stage, morale may begin to decrease as conflict, confusion, and
frustration arise. This is a normal progression, as team members have different opinions
about how the team should operate.

How much and how long a team storms depends on many variables such as team maturity,
experience, leadership, and purpose. As roles become more defined, individuals begin to
defend their own tasks and accountabilities.

Conflicts may arise between those who prefer to dive right into tasks and those who want
to spend more time planning. Team members will look for structural clarity and rules to
resolve these conflicts.

Storming is typically the most difficult stage for teams to traverse. It can make or break the
team. It is also the stage where members learn the critical skills and processes needed to
resolve issues. Resolving issues in the storming stage of team development enables the
group to begin the next stage, norming.

Management Skills Needed During the Storming Stage

During the storming stage, the project manager must help the team resolve conflicts, using
both leadership and management skills to provide a high level of support and direction to
the team.

The project manager must resolve conflicts by being assertive, openly communicating, and
using active listening. In addition, the project manager must be able to make decisions
regarding the direction of the team and justify the decisions, providing opportunities for
feedback.

During the storming stage, leadership and management skills are needed to:
 Help the team resolve conflicts;
 Provide a high level of support and direction;
 Explain decisions;
 Provide opportunities for clarification;
 Define roles and responsibilities; and
 Clarify performance expectations.
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Norming
Norming is achieved when team members move from their personal agendas and begin
to focus on the group purpose. During this stage, the team develops a common working
method. Cooperation and collaboration replace the conflict and mistrust of the previous
stage of team development. Morale increases, and any subgroups that may have formed
disband.

Leadership may be shared more within the team, and there is less dependency on outside
leadership. Talents and skills are explored and used to make the team more effective and
unique.

Management Skills Needed During the Norming Stage

Norming marks a change in the team dynamics from dependence on the project manager
for direction toward greater self-direction. The project manager moves into a coaching
role, forming a more collaborative relationship with the team members and providing
constructive feedback.

Management skills in the norming stage include:

 Communicating effectively with team members;
 Providing constructive feedback; and
 Coaching team members and affirming roles of each within the team.

Performing
Performing occurs when the emphasis is on reaching team goals, rather than on team
process. Disagreements may occur, but they are resolved within the team, and necessary
changes to processes and structure are made by the team. Relationships are settled, and the
team members are likely to have built loyalty to one another. Skills and talents have been
applied effectively to produce optimum performance.

The team is challenged to do things better, faster, and more effectively. The team begins to
push itself and explore more creative ways of working.

During the performing stage, the team is more strategically aware and shares the same
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vision for success. Although the team requires delegated tasks from the leader, team
members do not require instruction or assistance. Team members can now focus on
achieving goals, and they have a high degree of autonomy.

Management Skills Needed During the Performing Stage

Management skills required during this stage include:
 Building a consensus among team members;
 Problem-solving ;
 Rewarding team members when appropriate; and
 Decision-making.

Adjourning
The adjourning stage occurs when the team is ready to complete the project, or as some
team members are released from the project. They need to recognize what they have done,
and consciously move on.

Adjourning or closing a team is more of an adjunct to the original four-stage model rather
than an extension. This stage views the team from a perspective beyond the purpose of the
first four stages.

The adjourning stage is relevant to all team members, but not to the main task of managing
and developing a team, which is clearly central to the original four stages.

Management Skills Needed During the Adjourning Stage

From an organizational perspective, recognition of and sensitivity to people's
vulnerabilities in Tuckman's fifth stage is beneficial, particularly if team members share a
close bond. In addition, it is important for project managers to acknowledge individual
performance as well as team success.

Stages, Attributes, and Roles

It is important for the core project team to understand the team development stages and to
recognize the team behaviors that signal each stage. By using this knowledge, they can
understand how to help the project team move to the next stage.
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Depending on where the team is in their development, the project manager will have to
change management roles to facilitate the team-building process.

Team-Building Activities
Team-building activities are designed to help teams bond and build a team vision. Team-
building activities can help team members:
 Build relationships among co-workers working in the same office or at remote
sites;
 Increase communication, learn new strengths, and gain insights about each other
and project needs;
 Build trust;
 Feel valued and rewarded;
 Understand the importance of planning and communicating ideas; and
 Understand their roles in relationship to the rest of the group.

Team-building activities can range from a five-minute agenda item in a status meeting to
an off-site, professionally facilitated session designed to improve interpersonal
relationships. Team-building activities help teams learn about themselves, each other, and
how to work together efficiently.

Understanding behavioral and social profiles of individuals can help project managers
improve working relationships with team members. Management styles can be adjusted
®
according to individual team member needs. The Myers-Briggs Type Indicator (MBTI )
and the Wilson Social Styles Profile are examples of personality and social profiles
through which the project manager can better understand the motivations and preferences
of individuals on their teams.
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®
Myers Briggs Type Indicator (MBTI )
®
The MBTI is an instrument used to measure a person’s preferences, using four basic
scales with opposite poles. It is based on the theories of C. G. Jung and was developed by
the mother-daughter team of Katherine Briggs and Isabel Briggs-Myers. They expanded on
and organized the work of Jung to create a system for measuring psychological type
preferences.
®
The four dimensions of psychological type in the MBTI scale include:

 Extraversion/introversion (E/I): The first dimension determines whether

someone is generally extraverted, drawing energy from the outside world and
activity, or introverted, drawing energy from the inner world of thoughts and
emotions;

 Sensate/intuitive (S/N): The second dimension relates to how people process

information. Sensating (or sensing) people are typically concerned with facts and
familiar terms, and often describe themselves as practical. Intuitive people give
greater emphasis to insight and to the future, and often describe themselves as
imaginative, ingenious, and attentive to hunches or intuition;

 Thinking/feeling (T/F): The third dimension represents how people prefer to make
decisions. Thinking judgment is based on objective and logical considerations,
while feeling judgment is based on subjective and personal values; and

 Judging/perceiving (J/P): The fourth dimension represents how people prefer to

organize their lives. Judging people make decisions in a structured way, and they
tend to like closure and task completion. They like to establish deadlines that they
take seriously, expecting others to do the same. Perceiving people organize their
lives in a flexible way. They regard deadlines as a signal to start rather than finish a
project. They do not feel work must be done before play or rest begins.

The various combinations of these 4 dimensions result in 16 personality types. Knowing

the personality profiles of team members can help project managers adjust their
management style to improve working relationships with each project team member.

Individual team members can also benefit from an understanding of personality types as
they pertain to team dynamics. For example, when a team meets to resolve a team problem,
each team member contributes a different perspective to the discussion.
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One person may want to clarify the problem being discussed; another may suggest
structured ideas for resolution; a third may try to analyze the situation and produce an
explanation of how the problem came about. The personality types of the team members
contribute to the effectiveness of the team process.

Wilson Learning Social Styles Profile

Based on the Social Styles Model developed by Dr. David Merrill, an industrial
psychologist, Wilson Learning Corporation developed the Social Style Profile, a tool that
provides a profile of an individual’s interpersonal business style, based on how other
people perceive the individual in the workplace. The Wilson Learning Social Style Profile
categorizes people as having one of four behavioral profiles, or zones, based on their
assertiveness and responsiveness.

The four behavioral zones include:

 Drivers – Proactive and task oriented. The Driver style works best when the
environment is not constrained;
 Expressives – Proactive and people-oriented. The Expressive style works best in an
open environment in which interactions with others are important;
 Analyticals – Reactive and task-oriented. The Analytical style works best when the
elements of a situation are organized and directions for implementing are provided
by others; and
 Amiables – Reactive and people-oriented. The Amiable style works best when the
environment is free of time constraints and pressure.

The following figure shows the four social styles and how they relate to assertiveness and
responsiveness.
 P a g e | 907

Each of the styles is expected to work best in a particular set of circumstances.

Understanding social styles will help project managers understand why two individuals
don't respond in the same way to the same set of circumstances. Gaining support and
commitment from different people takes different tactics.

Ground Rules

Ground rules are statements of values and guidelines that teams establish to help individual
members decide how to act. Ground rules establish clear expectations regarding acceptable
behavior by project team members. They should honor free speech and the dignity, respect,
and worth of everyone on the project team. To be effective, ground rules must be clear,
consistent, agreed-to, and followed.

The following examples of team ground rules demonstrate a behavioral model that
addresses how individuals communicate, participate, cooperate, and support each other.

Attitude and culture

 Treat each other with respect;
 Recognize and celebrate individual and team accomplishments; and
 Help where necessary to help solve problems and keep work on schedule.
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Team meetings
 Hold regularly scheduled team meetings;
 Start meetings on time and expect everyone to be prompt;
 Establish expectations that all will attend unless they are out of town, on vacation,
or sick;
 Cancel meetings only when there are not enough team members to maintain a
quorum or there is insufficient subject matter to discuss; and
 Create and distribute an action item list with assigned responsibilities.
Communication
 Speak one at a time, allowing no side discussions;
 Do not personalize discussion of issues, avoiding personal attacks;
 Respect the group's time and the meeting timetables; be brief and focus on facts,
not opinions;
 Accept responsibility and accountability with the authority given; and
 Listen, be nonjudgmental, and keep an open mind on issues until it is time to make
a decision.

Co-Location
Co-location is a strategy that involves placing project team members in the same location
to enhance their ability to perform as a team. Co-location can be temporary at strategically
important times during the project, or it can span the entire project.

Co-location strategy can include the use of a meeting room, sometimes called a war room,
which has electronic communication devices, areas to post schedules, and other
conveniences that optimize communication and create a sense of community.

Recognition and Rewards

Part of the team development process involves recognizing and rewarding desirable
behavior to encourage team development. Examples of rewards and recognition include
offering bonuses, trips, or other incentives to recognize accomplishments made by the
project team. Rewards that only a limited number of project team members can achieve,
such as team member of the month awards, can hurt team cohesiveness. Rewarding
positive behavior that everyone can achieve tends to increase support among team
members.
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Decisions about how teams should be rewarded and recognized are established during the
Human Resource Planning process, and award decisions are made through performance
appraisals during the Manage Project Team process.

Managing a Project Team

The Manage Project Team process involves tracking team performance, providing
feedback, resolving issues, and coordinating changes to enhance project performance.
Results of the process include an updated staffing management plan, input to performance
appraisals, and documentation of lessons learned.

The Manage Project Team process can become complicated when there is more than one
performance review path for team members. In functional and matrix organizations, team
members are accountable to both a functional manager and the project manager.
Sometimes another management layer is added when a team leader manages the team.
Often the project manager is responsible for managing these dual reporting relationships.
In a balanced matrix, the project manager and the functional or area manager jointly
evaluate team performance.

Inputs to the Manage Project Team process

 Organizational process assets: Include information about the organization’s

policies, procedures, and systems for rewarding team members during the course of
the project. The team should look for innovative ideas to reward people, such as
desirable job assignments, flexible hours, gift certificates, additional vacation days,
and corporate or project-related apparel. Typical rewards include bonuses, letters of
commendation, and recognition dinners;
 Project staff assignments: Provide a list of the project team members to be
evaluated during this monitoring and controlling process;
 Roles and responsibilities: Provide a list of team roles, associated levels of
authority and competency, and the work that each project team member is expected
to perform in order to complete the project’s activities. This information is used to
monitor and evaluate performance;
 P a g e | 910

 Project organization charts: Provide a picture of the reporting relationships

among project team members;
 Staffing management plan: Lists the time periods that team members are expected
to work on the project, along with training plans, certification requirements, and
compliance issues;
 Team performance assessment: Allows project managers to formally and
informally observe team performance. Continuous assessment of team performance
enables the project manager to resolve issues as they occur, modify
communication, address conflict, and assess team development needs to improve
team interaction;
 Work performance information: Includes observations of team member
performance as it occurs. Direct observation of areas such as a team member’s
meeting participation, ability to follow up on action items, and communication skill
are considered and can assist in assessing training needs to improve individual
contributions; and
 Performance reports: Provide documentation about team member performance as
it relates to the project management plan. Examples of key performance areas
include schedule control, cost control, quality control, scope verification, and
procurement audits. Performance report information helps project managers
determine future human resource needs, recognition and rewards, and updates to
the staffing management plan.

Manage Project Team Process Tools

The tools and techniques used during the Manage Project Team process include:
 Observation and conversation;
 Project performance appraisals;
 Conflict management; and
 Issue logs.
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Observation and Conversation

Observation and conversation are valuable techniques for monitoring the attitudes and
performance of project team members. The project management team monitors indicators
such as progress toward deliverables, accomplishments that are a source of pride for team
members, and interpersonal issues.

Observation and conversation allow project managers to provide encouragement when

morale is low and reinforce the objectives and vision of the project as needed. Project
managers who have good observation skills can intervene early to prevent conflict from
escalating.

Management by Walking Around (also known as MBWA, or Management by Wandering

Around) is a management style that is as valid today as it was in 1982, when Tom Peters
and Bob Waterman popularized Hewlett-Packard's mantra in their bestselling book, In
Search of Excellence: Lessons from America's Best-Run Companies. This term refers to
managers who spend a great deal of time away from
their offices, observing and communicating with their team members to stay in touch with
what is really going on with the project.

Project Performance Appraisals

Evaluation and feedback are key methods for encouraging team members to achieve a high
level of performance. Feedback about the performance of project team members is
important, regardless of the size of the project. However, the size, length, and complexity
of the project as well as organizational policies and labor contracts will influence whether
the feedback is formal or informal.

The amount and quality of communications are also major influences in determining the
type of feedback mechanism. Typically, project team members receive feedback from the
people who supervise their project work.

Evaluation information can also be gathered by using 360-degree feedback principles. 360-
degree feedback gives each employee the opportunity to receive performance feedback
 P a g e | 912

from all the people who surround him or her at work: supervisor, peers, reporting staff
members, co-workers and customers. Most
360-degree feedback tools also involve self-assessments. 360-degree feedback allows
individuals to understand how their effectiveness as an employee, co-worker, or staff
member is viewed by others.

Objectives for conducting performance appraisals during the course of a project can
include:
 Clarification of roles and responsibilities;
 Opportunity to provide positive feedback in a structured context;
 Discovery of unknown or unresolved issues;
 Development of training plans; and
 Establishment of future development goals.
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Conflict Management

Conflict can be defined as a pattern of opposition between people (or groups of people)
that positively or negatively affects something important. Conflict is often caused by
scarce resources, scheduling priorities, and differing personal work styles.
Project managers can attempt to proactively reduce the likelihood of conflict by
introducing team ground rules and solid project management practices such as
communications management planning and role definition.

It is common to experience some level of conflict among the project team, stakeholders,
and contractors during the life cycle of the project. In fact, conflict is not necessarily
negative when properly managed.

Differences of opinion are healthy and can lead to increased creativity and better decision-
making. The challenge for project managers is to maintain the right balance and intensity
of conflict. Successful conflict management results in greater productivity and positive
working relationships.

Harold Kerzner’s book, Project Management: A Systems Approach to Planning,

Scheduling, and Controlling, describes five approaches to conflict resolution. These
approaches include Confronting, Compromising, Smoothing, Forcing, and Avoiding.
Confronting – Problem-solving, integrating, collaborating, or win-win style. It involves
meeting face to face and collaborating to reach an agreement that satisfies the concerns of
all parties. This style relies on open and direct communication, with a focus on problem-
solving. It typically provides the best resolution, although it may not be appropriate in all
circumstances, especially for time-critical decisions.
Compromising – "Give and take" style. It involves bargaining to reach a mutually
acceptable solution. It is helpful for maintaining relationships among the involved parties.
Smoothing – Accommodating or obliging style. This approach emphasizes the areas of
agreement and attempts to minimize the areas of disagreement. Unfortunately, conflicts are
not always resolved by the smoothing mode. This approach is beneficial for maintaining
harmony when time is limited and the stakes are low. It will provide a temporary solution,
placing the situation in perspective to control the magnitude of the conflict and establish an
obligation for future negotiations.
 P a g e | 914

Forcing – Competing, controlling, or dominating style. Forcing occurs when one party
forces its position on another, ignoring the needs and concerns of the other party. This
approach results in a win-lose resolution, where one party wins at the expense of the other.
Forcing should be reserved for situations when the stakes are high or the relationship
between the parties is not important, as conflict may later increase and relationships may
break down.
Avoiding – Withdrawal style. This approach is viewed as postponing an issue for later or
withdrawing from the situation altogether. It is regarded as a temporary solution because
the problem and conflict continue to recur. It may be effective when there is not enough
time to resolve the issue, or when stakes are low.
Project team members are initially responsible for resolving their own conflicts. If conflict
escalates, the project manager should help facilitate a satisfactory resolution. In early
conflict stages, a direct collaborative approach is used. If a disruptive conflict continues,
formal procedures such as possible disciplinary actions may be necessary.

Issue Log
Issues will arise in the course of managing the project team. An issue log is used to
document obstacles that can interfere with the team’s ability to achieve project goals.
Issues can stem from differences of opinion, situations to be investigated, and emerging or
unanticipated responsibilities that need to be assigned to a team member.

An issue log is a central repository of human resource issues that have been raised
throughout the course of a project. Typically, the issue log is a table or database, listing
each issue, when it was opened, who the “owner” is, and a target date for resolution.

The log helps the team monitor issues until closure. At project closure, the issue log
becomes part of the project archive and is a critical input to the lessons learned
documentation.
 P a g e | 915

An issue log can take the form of a spreadsheet and may contain the following fields:
 Issue description;
 Person or people involved;
 Resolution strategy;
 Status (Open, In Progress, Corrected, Verified);
 Issue owner, responsible for the resolution;
 Date logged;
 Target date for resolution; and
 Date closed.

REFERENCES

M. Effron, M.Goldsmith, "HUMAN RESOURCES IN THE 21st CENTURY", John Wiley

& Sons 2003

J.Fitz-enz, "THE ROI OF HUMAN CAPITAL: MEASURING THE ECONOMIC

VALUE OF EMPLOYEE PERFORMANCE", AMACOM 2000

NDIA, "EARNED VALUE MANAGEMENT SYSTEMS INTENT GUIDE", NDIA, 2005

A.Damodaran, "STRATEGIC RISK TAKING", WHARTON School Publishing 2007

W.E. Deming, "OUT OF THE CRISIS", THE MIT PRESS, 1986

M. Imai, "THE KEY TO COMPETITIVE SUCCESS" McGRAW-HILL/Irwin 1986

A.H.Bell, "MANAGEMENT COMMUNICATION", WILEY, 2010

M.Crouhy, R. Mark, D. Galai, "RISK MANAGEMENT", McGRAW-HILL, 2001

 P a g e | 916

Governance

Corporate governance is a term that refers broadly to the rules, processes, or laws by which
businesses are operated, regulated, and controlled. The term can refer to internal factors
defined by the officers, stockholders or constitution of a corporation, as well as to external
forces such as consumer groups, clients, and government regulations.

A well-defined and enforced corporate governance provides a structure that, at least in

theory, works for the benefit of everyone concerned by ensuring that the enterprise adheres
to accepted ethical standards and best practices as well as to formal laws. To that end,
organizations have been formed at the regional, national, and global levels.

In recent years, corporate governance has received increased attention because of high-
profile scandals involving abuse of corporate power and, in some cases, alleged criminal
activity by corporate officers. An integral part of an effective corporate governance regime
includes provisions for civil or criminal prosecution of individuals who conduct unethical
or illegal acts in the name of the enterprise.
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When it comes to how to run business and managing the funds needed for investments,
many countries and companies have already issued governance, transparency and
accountability procedures to prevent projects to go astray from their planned goals.

The USA’s Sarbanes-Oxley Act (SOX) and UK Companies Act 2004 are just few
examples of such legislations which were issued to protect investors by placing controls to
inhibit and deter financial misconduct and ensure transparency on how project funds are
being spent as well as if promised benefits were attained.

The United Arab Emirates (UAE) is no different. In November 2011, a decree was issued
to strengthen transparency and corporate governance in the UAE. The decree, issued by
His Highness Shaikh Mohammad Bin Rashid Al Maktoum, Vice-President and Prime
Minister of the UAE and Ruler of Dubai, tightens the regulation and constitution of boards
of directors of profit and non-profit institutions as well as corporations owned by the UAE
federal government.

This follows the July 2011 decree that assigned the UAE Audit Bureau besides its financial
supervision task, the fighting of corruption in the entities under its control to ensure proper
management and use of public funds.

Organizations whose growth and success is driven by investing in or delivering projects,

regardless of the project type, size or nature, are required more than ever to adopt
governance practices when it comes to managing their projects. Projects can include
engineering and construction of buildings, infrastructure, plants, refineries and other type
of capital asset projects.

Project failure is analogous to an investment failure where an organization’s loss is not

only limited to the loss of the invested funds but the lost opportunity of having other much
needed benefits if those funds where invested in another project. An organization that is
faced with continuous project failure will soon find out that its business continuity is at
stake.

Although many can argue on what will determine if a project was a success or a failure,
very few could argue that for a project to be successful, the project must deliver the
outcomes and benefits required by the project owner, create the project deliverables that
were defined in the project scope, meet the project milestone dates and stay within the
approved project budget.

The causes of failing to achieve those objectives can be attributed to many reasons
including the lack of strategic alignment, lack of senior effective usage of project and risk
management practices, scope changes, and ineffective project delivery team among others.
 P a g e | 918

Projects have their own particulars which require having their own governance framework
aligned with the corporate governance framework.

Similar to corporate governance, project governance should address the areas that relate to
roles and responsibilities, accountability, disclosure and transparency, risk management
and control, decision making, code of ethics, performance and effectiveness and
implementation of strategy.

Most of those areas of governance need to be coordinated with the corporate governance.
For example, the project risk management policy needs to be coordinated and aligned with
the corporate enterprise risk management policy.

The same will apply to the corporate human resources and ethical policies.
 P a g e | 919

Implementation of a comprehensive Project Governance Framework is recommended

along the following strategy in developing its framework:

 Conduct a formal organizational project management maturity assessment using

OPM3 to determine the areas of improvement needed to achieve project
governance framework.
 Develop and implement standard operating procedures (SOP) that will ensure that
roles, responsibilities and performance criteria is clearly defined as well as a
mechanism of separation between project stakeholder management and project
decision making
 Implement an enterprise wide professional development and training program that
will ensure competence, authority and resources for delegated members
 Implement an enterprise project management information system (EPMIS) that wil
promote the alignment between the overall business strategy and projects delivered
and encourage a culture of improvement, transparency and internal sharing of
project information
 Create a Project Management Office (PMO) that will ensure the separation of
project governance from organizational governance structures to minimize the
project decision layers.
 P a g e | 920

Program Management and effective governance

Programs are management frameworks for the delivery of benefits from cross-functional
and temporary teams. These teams have resources invested in them in the expectation of
greater returns.

Note that the returns need not be purely financial and so governance is the way in which
management exercises control over the effectiveness of these resources and the associated
risks.

The fact that program teams are normally temporary indicates that controls, system and
governance processes may be new to the elected team and, in some cases, new to the whole
organization.

By their nature, programs are often less governed than normal ‘Business As Usual’.

This emphasis on both control and accountability is also very important. The creation of
program teams, especially where a substantial investment is involved, implies a great deal
of delegated authority to the program manager or director. Running multi-project teams to
either deliver technology for change or to transform the capability of the organization often
means that day to day control is taken from the line managers who nominally “own” the
resources.

In fact, where this does not happen the imbalance which results between authority and
accountability can lead to significant organizational stresses, with subsequent impacts upon
morale and staff turnover.

The challenge for senior managers, therefore, is to delegate enough control to empower the
teams (and to encourage further devolution of responsibility) while holding people
accountable for the effectiveness of the effort expended.

More than this, the real issue is to be seen as empowering the program teams, by providing
guidance, seeing opportunities and resolving conflicts between functional interests through
stakeholder representation.

This leads us to two important conclusions: first that program and project governance is
inextricably linked with corporate governance, in that the policy on risks, direction and
accountability must be set by the Board.

Second that the balance of investment in the short, medium and long term aims of
the organization are ultimately the responsibility of the Board and should be overseen
through program governance.
 P a g e | 921

The design of program governance is highly specific and is both organization and situation
dependant. Best practices can help us to consider the factors to be taken into account when
putting in place or reviewing governance, but what it cannot do is to tell us the right
answer for all cases.

Program governance does, however, need to be fit for purpose and some of the
considerations are as follows:

 Are projects of sufficient scale and risk to warrant their own Change Control
Boards or Project Boards? If so, what should their terms of reference be? In effect,
where organizations operate programs of change the Project Board may have
delegated authority from,,,

 Program Boards or Steering Committees. These too, must have clear terms of
reference, delegated authority from the Board and cross-functional membership to
reflect the stakeholders in the program.

 Does the program involve complex technology or highly specialist knowledge? If

so, a Technical or Design Authority may be needed to agree scope changes, which
affect the technical characteristics of the product or capability produced or
configuration management changes which impact the target benefits.

 Lastly, and most contentiously, the Program Team is another form of governance
depending on the skills of the program manager and the degree of delegated
authority from the Program Sponsor and Program Board to the Program Manager.

In fact, it is very important that the Program Manager feels empowered and accountable
for the management of risks and issues through his or her team. In a large program of, say,
30+ projects, dozens of decisions are being made each week and it is simply impossible for
senior management to be involved in them all.

A further consideration, but beyond the scope of this paper, is the role of the Enterprise
Program Management Office (EPMO). This can be a very effective way to exercise
governance across the portfolio of programs by having a dedicated team with functional
responsibility for the investment and reporting.
 P a g e | 922

This works well because it allows a senior management focus on program effectiveness
without the obligation to manage a functional organization at the same time.

Members of the EPMO also understand the special nature of program direction. As
custodians of best practice (really shorthand for a consistent methodology, role definitions
and processes) the EPMO can understand the need for effective translation of business
strategy or public sector policy initiatives into program goals and vice versa.

Perhaps the over-riding arena where directors and non-executives may be called upon to
demonstrate their application of good governance practice is in the process for selecting
and prioritizing programs.

A very large part of an organization’s investment will be made through programs of work
and it is therefore essential that the organization is able to show that a logical, rational
process for program selection and prioritization has been followed in all cases.
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The role of IT Systems in Program Management Governance

Portfolio Management

It is virtually impossible to track the resources, costs and planned returns from a portfolio
of programs without IT systems. Keeping such information updated and pro-active
scenario planning at the project and program level demands it.

The most effective way to model and track the activity of a complex series of projects is on
an end-to-end process basis in near-real time (i.e. with programmed updates).

This allows expert staff and managers to understand what effort is planned for what
duration and to what effect. Since in real life, projects are subject to constant change, it
also enables decision making based on a “whole picture” view.

Decision Support tools will make possible a process of modeling proposed programs in
terms of the required investment, resource requirements, and planned benefits in such a
way that they may be cumulated.

Only when existing and proposed programs have been modeled collectively can the most
beneficial group of programs that lie within the organization’s ability to deliver change be
selected and prioritized.

Important considerations in the choice of an IT system for this purpose are to be able to:

 Define the organization’s strategy in balanced score card terms so as to see the
dimensions which are targeted for change and how they will be measured;
 Define contender program business cases in terms of investment, financial and non-
financial return and to review ongoing investments against target;
 Select the optimal mixture of programs in terms of a number of criteria such as
return on investment, short versus long term and sell-side versus buy-side;
 Monitor actual performance against baselines and understand the risk to the target
cost-benefit ratio; and
 Base-line those expectations and track variances, even after the program is
delivered.
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Knowledge Management

An important consideration in effective governance is the management of knowledge

alongside the management of risks and issues and the management of costs.

Knowledge Management has two main aspects, first the management of knowledge and
information inside the program team and its stakeholders and second the organizational
learning which comes from capturing experience and insights. It is vital that lessons
learned are applied to subsequent programs and project portfolios.

Modern IT systems facilitate both types of knowledge management through sophisticated

document control services, web access, authentication and access control. This enables, for
example, the program team to share and update their stakeholder contact plans without this
sensitive information being available to those outside the team and for program reporting
to be as simple as sending a URL link in an electronic mail message.

It does, however, like so many aspects of effective program management, need processes
and discipline. The Program Team needs to meet (at least the core team) at the outset of the
program to plan how they will approach the task.

At this meeting a review of lessons to be learned from previous, similar programs can
avoid repeating mistakes. Of course, knowledge should be gained from historic successes
as well as failures.

This is particularly useful in terms of the culture of the organization, where a very
important insight is how the considerable theory on the subject is best applied in this
context. Innovations in programs often happen more frequently than we imagine but are
lost to the organization unless actively captured.
Some key questions:

What worked last time?

What didn’t work so well?

What could we have been better prepared for?

What can we re-use from our old plans and templates?

Which roles do we need to strengthen?

 P a g e | 925

This is important to the team, increases the probability of success and is therefore
something that the governance bodies should check for. A similar review by the
governance bodies of what they can learn from previous programs would be not only
leading by example but good practice to boot.
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Roles and Responsibilities

All programs need a number of basic things to be in place. Like an

Architect’s drawings, a Quantity Surveyor’s Bill of Materials and the Project
Manager’s Plans are essential for a building construction, so a program needs basic
Policies, Processes, Structures and Methodology to work as a coherent whole.

In particular, roles and responsibilities are contained in the methodology used for the
program, and Program Management Group provides the framework for this purpose.

It can help organizations apply the project and program management methodology
consistently (rather than every Project Manager simplifying Primavera their own way) and
to make appropriate decisions on the level of management focus required.

The Primavera Framework is structured in layers to provide appropriate access to the

program management community dependant on need and role. It also contains Hypertext
links to documents and forms in the solution or other applications used for source
documents.

This sets out the lifecycle of projects and programs with which roles are needed at each
stage, how work progresses between stages, is approved or not and how delivery is agreed.

The key roles in a Program Management Team should be agreed by the Senior Sponsor
and the Governance Body which he or she chairs. This needs to contain enough specialism
to provide focus and to reflect the scope of the program but not so much that it creates
management interference, or leaves the team open to accusations of being “an overhead”,
although, of course, they are in an accounting sense.
P a g e | 927
 P a g e | 928

Program Reporting and Control

All program teams rely on information as their lifeblood. Governance without accurate,
timely and relevant information (not just data) is like flying an airplane without
instruments – fine when everything is going well.

Once a program is under way it quickly starts to generate a lot of information and much of
it is only relevant to the layer of the program structure which generated it. (See diagram
above on levels of governance).

Exercising effective control is therefore about both managing by exception look only at
what is off-plan, not at what is going to plan – and by understanding the linkages between
events.

An example of symptom and linked factors is shown below and refers, for purposes of
illustration, to a typical software delivery program
 P a g e | 929

Program reporting is often the responsibility of the Program Management Office or

Centre of Excellence in the Public Sector. It needs to show the information (what is
happening?), the effect on future plans (what this implies?) and what the magnitude of
corrective action needs to be.

Only by seeing the linkages between events and risks can the governance bodies exercise
effective control and really add value by drawing out insights for all key stakeholders.

Effective control is a subtle and intricate thing.

Senior Management must be fully represented on governance bodies where they are
significant stakeholders in the outcome which is planned for the program but must resist
the urge to interfere when the pressure is on.

Concerted action is essential and managers and directors need to understand that it takes
times for interventions to take effect. Too many interventions lead to the outcome of one
decision not being clear before another decision is taken which impacts the same resources,
leading to overload.

A further risk for governance bodies is of dis-empowering the Program Manager or

Program Director by resorting to micro-management when the pressure is on. This should
be resisted as it not only is likely to demoralize the leader and his or her team but takes the
person who is closest to the tactic knowledge about the program out of the decision making
loop.

It is better to replace the Program Leader if the governance body do not have faith in
the way that the program is being run or its ability to manage risks, although
they should first look at the way they are working in facilitating change.
 P a g e | 930

Program Communications

Program communications has a major role of program governance. The governance bodies
must take responsibility for the messages received by all stakeholders and the timeliness
and relevance of what is reported.

Not only must the whole range of stakeholders be considered in program communications,
the use of media is too and it is vital that all communications to external stakeholders is
under the supervision of the appropriate governance body.

Specialist help, perhaps on an invitation basis, may be needed for announcements which
could be share price-affecting or which could affect contracts in place with either suppliers
or customers.
 P a g e | 931

Standards and Documentation Governance

It has already been stated that setting clear policies is the role of the Program
Board or Steering Committee and these policies will include standards of documentation
to be used and any standard formats or pro-forms.

Additionally, the governance body must approve the quality assurance strategy to be used
at both program and project or work-stream level.

A Quality Strategy must encompass a number of key aspects of the program:

 Level of documentation required;

 How configuration management is to be carried out;
 Management of requirements and technical standards; and
 What tests of quality will be applied to the outputs of the projects.

Hydra Framework can assist in this by setting out both documentation standards at the
outset of a project or program and by advising on the level of governance required, based
on the complexity, cost and risk profile of the program.

Specifically, it includes the following:

 How to start the new project?;

 What documentation will be required?;
 Who should approve the proposal through the governance process?;
 Who should be informed about the proposal at each stage?;
 A template and/or sample of the project initiation document itself; and
 The flow-control for the selection and gateway reviews of projects.

The architecture of Primavera Framework has the following levels: Key is the
level of strategic programme planning. Major represents a very significant
program investment, Detailed is the project plans behind the program
plan and Individual is the plans of the people concerned with the project. Finally,
Templates is a database of forms, report formats and plans used throughout
the programme and project life-cycle.
 P a g e | 932

The types of measures that will be the basis of documentation and therefore, reporting are:

 What documentation is needed for each of the stage gates?

 What are the project program financial approvals?

 What is the business case format and which benefits apply?

 What is the level at which risks and issues are to be tracked?

 P a g e | 933

ATTACHMENT I

SPECIAL SCHEDULING
TOOLS & TECHNIQUES
 P a g e | 934

Excusability and Compensability of Delay

General Rules

Excusability exists where there is contractual or equitable justification in a

claimant’s request for a contract time extension for relief from the potential claim for
liquidated or actual delay damages by the owner. The showing of excusability does
not necessarily mean that the claimant is also entitled to compensation for the delay.
Conversely, delay is non-excusable when such justification does not exist.

Compensability or compensable delay exists where the claimant is entitled to

recover not only a time extension but compensation for expenses associated with the
extension of completion date or the prolongation of the duration of work.
Excusability is a prerequisite to compensability. Therefore where compensability
can be established, excusability is assumed.

B. Accounting for Concurrent Delay

In the absence of any contractual language or other agreements, the conventional

rule governing compensability is that the claimant must first account for
concurrent delays in quantifying the delay duration to which compensation
applies. That is, the contractor is barred from recovering delay damages to the
extent that concurrent contractor-caused delays offset owner- caused delays, and
the owner is barred from recovery liquidated or actual delay damages to the extent
that concurrent owner-caused delays offset contractor-caused delays.

The evaluation proceeds in two distinct steps.

First, the liability for each delay event is individually analyzed. The classification
is made primarily according to the responsibility for the cause of the delay, but
may also consider the contractual risk allocation of the delay event regardless of
the party who caused such delay.

The second step consists of evaluating whether each delay event is concurrent with
other types of delays to arrive at the final conclusion of compensability,
excusability or non-excusability.

As evident from the list of existing definitions, the current, common usage of the
terms compensable, excusable and non-excusable is confusing because it often uses
those terms to characterize the assignment of liability performed in the first step.
For this reason delays identified in the first step should be classified as: contractor-
delay, owner-delay or force majeure delay.
 P a g e | 935

A contractor-delay is any delay event caused by the contractor, or the risk of

which has been assigned solely to the contractor. If the contractor-delay is on the
critical path, in absence of other types of concurrent delays, contractor is granted
neither an extension of contract time nor additional compensation for delay related
damages.

An owner-delay is any delay event caused by the owner, or the risk of which
has been assigned solely to the owner. If the owner-delay is on the critical path,
in absence of other types of concurrent delays, the contractor is granted both an
extension of contract time and additional compensation for delay related
damages.

A force majeure delay is any delay event caused by something or someone other than
the owner (including its agents) or the contractor (or its agents), or the risk of which
has not been assigned solely to the owner or the contractor. If the force majeure delay
is on the critical path, in absence of other types of concurrent delays, the contractor is
granted an extension of contract time, but does not receive additional compensation
for delay related damages.

After liability is determined in the first step the second step calls for the
determination of concurrency in accordance with subsection 4.2. The various
permutations of concurrency scenarios are summarized as follows:

Delay Event Concurrent with Net Effect

Another Owner Delay or Compensable to Contractor, Non-

Owner Delay Nothing
Another Contractor Delay
Contractor Delay or Nothing
Another Force Majeure
Force Majeure Delay Delay or Nothing
Owner Delay Contractor Delay
Owner Delay Force Majeure Delay
Contractor Delay Force Majeure Delay
Excusable to Owner
Non-Excusable to Contractor,
Compensable to Owner
Excusable but Not Compensable to
Either Party
Excusable but Not Compensable to
Either Party
Excusable but Not Compensable to
Either Party
Excusable but Not Compensable to
Either Party
 P a g e | 936

If there are more than two parties among which the delay must be apportioned,
first determine whether the additional parties are distinct signatories to the
subject contract or parties subsumed under the two primary parties.

Under the first case, there would be another factor added to the above matrix. But
the principle used to derive the net effect would be the same. Namely, in order to be
entitled to compensation, the party must not have caused or otherwise be held
accountable for any concurrent delay and concurrent force majeure delays.

Under the second scenario involving agents to the two primary parties such as
subcontractors, suppliers, architects and construction management firms, the net
effect equation should be solved first between the two primary parties. This is
followed by a subsidiary analysis apportioning the quantified delay allocation
established by the first analysis.

Equitable Symmetry of the Concept

Note that the terms, compensable, excusable and non-excusable in current industry
usage, are from the viewpoint of the contractor. That is, a delay that is deemed
compensable is compensable to the contractor, but non-excusable to the owner.
Conversely, a non-excusable delay is a compensable delay to the owner since it
results in the collection of liquidated damages.

A neutral perspective on the usage of the terms often aids understanding of the
parity and symmetry of the concepts. Thus entitlement to compensability, whether
it applies to the contractor or the owner, requires that the party seeking
compensation show a lack of concurrency. But for entitlement to excusability
without compensation, whether it applies to the contractor or the owner, it only
requires that the party seeking excusability show that a delay by the other party
impacted the critical path.

Based on the symmetry of the concept, one can say that entitlement to a time
extension does not automatically entitle the contractor to delay compensation. In
addition to showing that an owner-delay impacted the critical path, the contractor
would have to show the absence of concurrent delays caused by a contractor-delay
or a force majeure delay in order to be entitled to compensation.

One can also say that the existence of concurrent contractor-delay does not
automatically negate the contractor’s entitlement to a time extension. In fact, if a
party is not seeking compensation for the delay, be it the contractor forgoing delay
damages and seeking only a time extension, or the owner forgoing liquidated
damages and only defending the contractor’s compensable delay claim, that party
need not concern itself with its own concurrent delays.
 P a g e | 937

This means that a single contractor-delay concurrent with many owner-delays

would negate the contractor’s entitlement to delay compensation. Similarly, one
owner-delay concurrent with many contractor-delays would negate the owner’s
entitlement to delay compensation, including liquidated damages. While, in such
extreme cases, the rule seems draconian, it is a symmetrical rule that applies to
both the owner and the contractor and hence ultimately equitable.

Delay Mitigation and Constructive Acceleration

Definitions

Acceleration: Work by the contractor that is required to complete all or a portion of

the contracted scope earlier than scheduled. The accelerated work may be required
as a result of:

1. Direction of the owner or its agents (directed acceleration);

2. Conduct of the owner or its agents without explicit direction (constructive

acceleration); or

3. Events within the responsibility of the contractor resulting in possible delay

that the contractor decides to mitigate.

Directed Acceleration: Formal instruction by the owner directing the contractor to:

1. Complete all or a portion of the work earlier than scheduled.

2. Which directs the contractor to undertake additional work. or,

3. Perform other actions so as to complete all, or a portion, of the contract

scope of work in the previously scheduled timeframe. This could include
mitigation efforts that usually have no costs associated with them.

Constructive Acceleration:

1) A contractor’s acceleration efforts to maintain scheduled completion date(s)

undertaken as a result of an owner’s action or inaction and failure to make a specific
direction to accelerate.

2) Constructive acceleration generally occurs when five criteria are met:

1. Contractor is entitled to an excusable delay.

 P a g e | 938

2. Contractor requests and establishes entitlement to a time extension.

3. Owner fails to grant a timely time extension.

4. Owner or its agent specifically orders or clearly implies completion within a

shorter time period than is associated with the requested time extension. and,
5. Contractor provides notice to the owner or its agent that the contractor
considers this action an acceleration order.

Acceleration is said to have been constructive when the contractor claims a time
extension but the owner denies the request and affirmatively requires completion
within the original contract duration, and it is later determined that the contractor
was entitled to the extension.

The time extension can be for either additional work or delayed original work.

Constructive acceleration occurs when the contractor is forced by the owner to

complete all or a portion of its work ahead of a properly adjusted progress
schedule. This may mean the contractor suffers an excusable delay but is not
granted a time extension for the delay.

If ordered to complete performance within the originally specified completion

period, the contractor is forced to complete the work in a shorter period either
than required or to which he is entitled. Thus, the contractor is forced to
accelerate the work.

Acceleration following failure by the employer to recognize that the contractor has
encountered employer delay for which it is entitled to an EOT (extension of time)
and it is requiring the contractor to accelerate its progress in order to complete the
works by the prevailing contract completion date. This situation may be brought
about by the employer’s denial of a valid request for an EOT or by the employer’s
late granting of an EOT.

Constructive acceleration is caused by an owner failing to promptly grant a time

extension for excusable delay and the contractor accelerating to avoid liquidated
damages.

Disruption: An interference (action or event) with the orderly progress of a project

or activity(ies). Disruption has been described as the effect of change on
unchanged work which manifests itself primarily as adverse labor productivity
impacts. Schedule disruption is also any unfavorable change to the schedule that
 P a g e | 939

may, but does not necessarily, involve delays to the critical path or delayed project
completion.

Disruption may include, but is not limited to, duration compression, out-of-
sequence work, concurrent operations, stacking of trades and other acceleration
measures.

Out-of-Sequence Progress: Work completed for an activity before it is

scheduled to occur. In a conventional relationship, an activity that starts before
its predecessor completes shows out-of- sequence progress.

Delay Mitigation: A contractor’s or owner’s efforts to reduce the effect of delays

already incurred or anticipated to occur to activities or groups of activities.
Mitigation often includes revising the project's scope, budget, schedule or quality,
usually without material impact on the project's objectives, in order to reduce
possible delay. Mitigation usually has no associated costs.

Recovery Schedule: A special schedule showing special efforts to recover time

lost for delays already incurred or anticipated to occur when compared to a
previous schedule. Often a recovery schedule is a contract requirement when the
projected finish date no longer indicates timely completion.

General Considerations
Differences between Acceleration, Constructive Acceleration and Delay
Mitigation.

In practice there are subtle distinctions between acceleration, constructive

acceleration and delay mitigation. For example, acceleration cost implies additional
expenditure or money for recovery for an incurred or projected delay, and efforts to
complete early. The term constructive acceleration applies to expenditure of money
for efforts to recover either incurred or projected delay. Delay mitigation, refers to
no-cost recovery efforts for incurred or projected delay.

In the case of acceleration, constructive acceleration, and delay mitigation, affected

activities are usually on the projected critical path, thus the objective of most
acceleration or mitigation is to recover for anticipated delay to project completion.

However, acceleration, constructive acceleration and mitigation can occur with

regard to activities that are not on the critical path. For example, an owner might
insist that a certain portion of the work be made available prior to the scheduled date
for completion of that activity. The contractor may mitigate non-critical delay by
resequencing a series of non-critical activities to increase the available float.
 P a g e | 940

There are circumstances in which acceleration measures are used in an attempt to

complete the project earlier than planned. Those circumstances are usually
classified as:

(1) directed acceleration where the owner directs such acceleration and usually pays
for the associated additional cost; or

(2) voluntary acceleration in which the contractor implements the plan on its own
initiative in the hope of earning an early completion bonus. Contractor efforts
undertaken during the course of the project to recover from its own delays to
activities are generally not considered acceleration.

The causative link between a delay event and cost associated with constructive
acceleration is diagrammed next page . The root cause of the impact results in a
construction delay or projects a construction delay. This, in turn, results in the
contractor identifying that it needs a time extension and requesting a time extension.

The owner denies the time extension request but the need for recovery from the
delay remains.

The contractor then undertakes acceleration measures that could include increased
labor. Increased labor, without a time extension can result in loss of productivity.
 P a g e | 941

A contractor’s cost for acceleration, whether directed or constructive, is

generally associated with its effort to engage more resources to perform the
work during a unit of time than it had planned. These increased resources fall
into the following major categories:

(1) increased management resources;

(2) increased equipment usage;

(3) increased material supply; and

(4) increased labor.

The greatest cost associated with acceleration is usually labor. Since the amount
of actual work remains unchanged in most acceleration efforts (the planned
scope of work has not increased), the increase in labor cost is a result of a
decrease in labor productivity.

Decreased labor productivity is caused by disruption to the planned sequence

and pace of the labor. The greater the disruption to the work is, the greater the
inefficiency.

Disruption is the result of having more men working in the planned area during
a specific time, or loss of productivity associated with individual workers
working more hours than planned.

Acceleration and Compensability

Directed acceleration is always compensable to the contractor, although the

parties may disagree on quantum. This is true regardless of whether the
contractor is accelerating to overcome an owner-caused delay, or to recover from
a force majeure event.

Constructive acceleration follows this same pattern. If entitlement to

constructive acceleration is established, the contractor may recover for a delay
caused by the owner that the owner has refused to acknowledge and also for a
force majeure event.

This is different than the normal rule concerning damages associated with force
majeure events. Typically, force majeure events entitle the contractor to time
but no money. In a constructive acceleration situation, however, the owner has
refused to acknowledge a delay, so the contractor has no choice but to accelerate
so as to avoid the delay. As a result, the contactor is entitled to recover its cost
for that constructive acceleration.
 P a g e | 942

Delay Mitigation and Compensability

Delay mitigation is generally achieved through non-compensable efforts. These

efforts are usually associated with changes in preferential logic so as to perform
the work in a shorter timeframe.

Mitigation applies to either incurred or predicted delays. There is no mitigation

associated with efforts to complete early. Delay mitigation does have a small
cost that is usually ignored. This cost is associated with the contractor’s
management of the schedule and the overall project and is generally considered
minimal and, therefore, not compensable.

Elements of Constructive Acceleration

1. Contractor Entitlement to an Excusable Delay

The contractor
acceleration occurs after the owner has denied a time extension, it is almost
always resolved after must establish entitlement to an excusable delay. The
delay can be caused by an action or inaction on the part of the owner that results
in delay and would be considered compensable, or if can be a force majeure
event.

Generally, is the contemporaneous development of a schedule that reasonably

shows the basis for the entitlement to the delay. In theory, a contractor can
recover for constructive acceleration for work yet-to-be done. In this situation
the owner takes some action that will result in the contractor expending
acceleration costs to recover from the delay.

The contractor could assert its entitlement even though the actual acceleration
has yet-to occur and the actual acceleration costs have yet-to occur.

In practice, since constructive the acceleration is complete and the contactor

usually is arguing that it was actually accelerated.
 P a g e | 943

Contractor Requests and Establishes Entitlement to a Time

Extension

The contractor must ask for a time extension associated with the owner’s action
or the force majeure event. In that request, or associated with that request, the
contractor must establish that it is entitled to a time extension. The owner must
have the opportunity to review the contractor’s request and act upon it.

If the contractor fails to submit proof of its entitlement to a time extension, the
owner is able to argue that it was never given the opportunity to properly decide
between granting a time extension or ordering acceleration. The level of proof
required to be submitted must be sufficient to convince the owner that the
contractor “established” its entitlement.

In certain situations, it is possible that actions of the owner may negate the
requirement for the contractor to request a time extension or establish its
entitlement. In this situation, the theory is that the owner has made clear through
its actions that it will absolutely not grant a time extension.

Owner Failure to Grant a Timely Time Extension

The owner must unreasonably fail to grant a time extension. This is closely
related to the requirement that the contractor establish its entitlement to a time
extension. If the owner reasonably denies a request for time, as eventually
decided by the trier of fact, then by definition the contractor has failed to prove
entitlement. Therefore, the owner’s decision not to grant a time extension might
be unreasonable.

Implied Order by the Owner to Complete More Quickly

The owner must also, by implication or direction, require the contractor to

accelerate. There are several different factual alternatives possible . First, a
simple denial of a legitimate time extension, by implication, requires timely
completion and thus acceleration.

If this denial is timely given, the contractor can proceed. However, the best proof
for the contractor is a statement or action by the owner that specifically orders
the contactor meet a date that requires acceleration.

Second, the owner could deny the time extension request and remind the
contractor that he needs to complete on time. This is better than the alternative
mentioned above, but not as strong as the next alternative.
 P a g e | 944

Third, the owner could deny the time extension request and advise the contractor
that any acceleration is the contractor’s responsibility. This is probably the best
proof for this aspect of constructive acceleration. All three of these alternatives
meet the test for an owner having instructed acceleration.

Examples of owner actions that meet this requirement include:

1. A letter from the owner informing the contractor that he must meet a
completion date that is accelerated;

2. An owner demand for a schedule that recovers the delay; or

3. The owner threatening to access liquidated damages unless the

completion date is maintained.

A fourth alternative arises when the owner is presented with a request for a time
extension but fails to respond. The contractor is faced with either assuming it
will be granted a time extension, or accelerating. Under this alternative, the
owner’s failure to timely decide, functions as a denial which might be
detrimental.

Contractor Notice of Acceleration

The contractor must provide notice of acceleration. As with any contract claim
for damages, the owner must be provided notice of the claim. Even though the
contractor has requested and supported its application for a time extension, the
contractor must still notify the owner of its intent to accelerate or is actually
experiencing ongoing acceleration. This is so the owner can decide if it actually
desired acceleration to occur or instead the owner may decide to grant a time
extension.

Proof of Damages

The contractor must establish its damages. For loss of productivity claims, the
contractor is faced with developing convincing proof of decreased productivity.
Actual acceleration is not required. A valid contractor effort to accelerate,
supported by contemporaneous records, is sufficient to establish constructive
acceleration. It is quite common that contractors accelerate to overcome delays
but continue to be impacted and delayed by additional events and impacts that
actually result in further delay to the project.
 P a g e | 945

Pacing
Concurrent delay occurs where another activity independent of the subject delay is
also delaying the ultimate completion of the chain of activities. Pacing delay occurs
when the delay in the independent activity is the result of a conscious and
contemporaneous decision to pace progress against the subject delay.

The quality that distinguishes pacing from concurrent delay is the fact that while
the former is a result of conscious choice by the performing party to pace the work,
in the latter case, the work is involuntarily delayed by factors independent of any
problems arising from the subject delay.

Pacing delay is a real-life manifestation of the principle that work durations expand
to fill the time available to perform them. It can take many forms. Work can be
slowed down, resulting in extended work durations, or temporarily suspended, or
performed on an intermittent basis.

Whatever form it takes, the key is that it results from the performing party’s
reasoned decision to keep pace with another activity, which is called the parent
delay, experiencing a delay.

By pacing the work, the performing party is exercising its option to reallocate its
resources in a more cost effective manner in response to the changes in the schedule
caused by the parent delay and thereby mitigating or avoiding the cost associated
with the resource demands if one were to ‘hurry up and wait’.

In other words it is consumption of float created by the occurrence of the parent

delay.

The term ‘creation’ should not be interpreted to mean that total float is increased. In
fact, the opposite is true. The parent delay adversely impacts the overall critical path
of the project, thereby decreasing total float. What it creates (increases) is relative
total float on the path of the paced activity relative to the total float on the path
carrying the parent delay.

Pacing is seen by most contractors as an integral part of the detailed

implementation of their means and methods. Pacing is done because it is believed
that it will result in savings of money or effort to the pacing party without any
penalty of net loss of time.

According to the Authority for Total Cost Management (AACE), forensic

engineering recommended practice there are two distinct circumstances to which
the term, pacing delay, is often applied.
 P a g e | 946

The first circumstance, often referred to as direct pacing, occurs where the duration
of a schedule activity is extended due to a delay in a predecessor activity on which
the progress of the subject activity is directly dependent.

An example would be the pacing of electrical conduit rough-in when the duration
of metal stud installation is extended by delays. In such a case, because there is not
enough work to sustain the continuous utilization of a full crew, the electrical
subcontractor may order a crew size reduction, by temporarily reassigning some
workers to other areas, slowing the progress.

In either case it extends the overall duration of electrical rough-in. Although this is
definitely pacing, it is not considered a pacing delay because it is usually not seen
as concurrent delay.

Pacing delay is the second type where the paced activity has no direct dependency
on the parent delay activity, often called indirect pacing.

The fact that it shares the same time frame is a function of schedule timing as
opposed to construction logic. An example of this type of pacing would be the
landscaping subcontractor who demobilizes its crew and returns at a later time
because critical-path work in the building has been delayed.

In this type of pacing, the sole relationship of the paced activity to the parent delay
is the fact that the parent delay creates additional relative total float available for
consumption by the paced activity.

The deceleration is achieved typically by reassignment or reduction of resources or

entirely rescheduling the procurement of resources that would have been otherwise
necessary.

It should be clear that where the pacing defense is raised in answer to the
identification of a potential concurrent delay, the pacing delay is not a distinct delay
event but an alternate characterization or ‘label’ to describe and explain the
concurrent delay event.

Therefore, the pacing issue is relevant only to the extent that concurrency of delays
is an issue. If there has been no potential concurrently delays identified, pacing is
irrelevant.

In some common law jurisdictions, the contractor’s right to pace its work in
reaction to a critical path delay is a generally accepted concept. Thus, the contractor
will not be penalized for pacing its work. This is consistent with the globally
accepted view that float, a shared commodity, is available for consumption on a
‘first come first served’ basis.
 P a g e | 947

What has not been explicitly settled by case law is the issue of compensability.
The courts’ recognition of the contractors’ right to pace failed to directly address
the question of whether that recognition should lead to the compensability of the
parent delay.

But since pacing is irrelevant without the initial assertion of concurrent delay, and
since concurrent delay is irrelevant where compensability is not at issue, the
general acceptance of pacing strongly suggests that the contractor’s right to pace
would remove the owner’s defense of concurrent delay, and thereby make an
otherwise non-compensable parent delay a compensable one.

Viewed in the context of the delay net effect matrix, pacing has the following effect:

Using analogous logic, the same could be said on the owner’s side. If pacing is a
practical use of shared float, the owner can also pace. The owner’s legitimate
pacing would remove the contractor’s defense of concurrent delay, and thereby
make an otherwise excusable contractor delay a non- excusable one.

In this case the delay net effect matrix would look like the one next page.
 P a g e | 948

Demonstrating Pacing

In the absence of clear legal precedence and prevailing contractual language, the
community of forensic professionals developed some common-sense guidelines
for determining the legitimacy of pacing delays where compensable delays are at
issue in a claim. Listed in descending order of importance, they are:

1. Existence of the Parent Delay

By definition, pacing delay cannot exist by itself. It exists only in reaction to

another delay which is equally or more critical or is determined to become more
critical than the paced activity. This calls for the calculation of relative total float
between the parent delay and the pacing delay.

Also, in cases where many different activities are being performed at the same time,
it is unclear who is pacing whom. But one thing is clear: the parent delay must
always precede the pacing delay. The existence of a parent delay should be a
mandatory requirement in legitimizing a pacing delay.

Quantitatively, the near-critical threshold can serve as a benchmark for the need
to analyze for pacing delays, just like it serves to identify concurrent delays.
 P a g e | 949

2. Showing of Contemporaneous Ability to Resume Normal Pace

Pacing is not realistic unless the contractor can show that it had the ability to
resume progress at a normal, ‘un-paced rate’.

Implicit in the contractor’s ability to show that it could have completed the
schedule activity on-time if necessary is the fact that the contractor was able to
reasonably determine or reliably approximate when the parent delay would end.

Considering the typical realities of the types of projects in which delay issues
arise, an exact determination is difficult. Therefore, while this should also be a
required element of proof, realistically, the format and content of the analysis
should not be held to the same rigorous test as the first one.

3. Evidence of Contemporaneous Intent

The case can be further strengthened by showing that the pacing was a conscious
and deliberate decision that was made at the time of pacing.

Without a notice signifying contemporaneous intent to pace, the claimant can use
pacing as a hindsight excuse for concurrent delay by offering after- the-fact
testimony. Currently, contemporaneous notices are rare in any form, let alone
specific, written notices. Therefore this should not be a strict requirement of
proof.
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Critical Path Manipulation Techniques

There are various ways of creating, erasing, decreasing, inflating or hiding float and
manipulating the critical path of a CPM network.

These manipulation techniques can be used prospectively during the preparation of

the baseline and the project updates as well as in the process of preparing the
forensic models. This does not mean that the observational methods are immune
from manipulation.

Since they rely on the baseline and the updates, the source schedules must be
checked for manipulation prior to use in the forensic process. During the forensic
process, the dynamic methods are also subjected to manipulation through the
frequency, duration and placement of analysis intervals and through subjective
assignment of progress data in reconstructing updates.

The use of these techniques per se is not evidence of intentional manipulation. It

must be stressed that there are legitimate uses and good reasons, even if limited, for
these features; otherwise they would have never found their way into the software.
Even in the absence of ‘good reason’, the feature could have resulted from laziness
or even misguided attempts to improve the schedule. At any rate, schedules used for
forensic schedule analysis must minimize the use of these techniques.

Two major software products, Primavera Project Planner P3 & P6 and Microsoft
Project (MSP), representing a significant market share of the scheduling trade are
used as references.

Resource Leveling & Smoothing

This technique uses available float to balance the resources necessary for
executing the schedule. Some analysts maintain that resource leveling is the
technical embodiment of pacing.

Software Definitions

• Resource levelling is the process of determining and minimizing the effect of

low resource availability on the schedule. Use resource leveling to resolve
resource conflicts by rescheduling activities to times when sufficient
resources are available. Split activities to work around times when resources
are not available; stretch activity durations to reduce their resource per time
period requirements; or compress activity durations to take advantage of
ample resource supplies.
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Resource levelling uses the normal and maximum limits established in the
resource dictionary. The normal limit is used during resource-constrained
levelling to take advantage of positive float within the network.

During forward levelling, activities may be shifted to a later date (the leveled
date). In backward levelling, activities may be moved earlier in time.

If an activity cannot be scheduled without exceeding the normal limit and

without exhausting all positive float, P3 increases the resource availability
limit to the maximum level.

A resource levelling analysis report details the reasons why activities are
rescheduled.

• Resource smoothing is an optional resource levelling method that resolves

resource conflicts by delaying activities that have positive float. Resource
smoothing uses the available positive float and incrementally increases the
availability limits in ten equal steps from normal to maximum. P3 & P6
smooth only those activities that will be delayed beyond their calculated
early start date due to insufficient resources. This method minimizes peaks
and valleys in the resource usage profile.

Multiple Calendars

Float values are displayed using workday units defined in the underlying work-
day calendar assigned to the activity instead of in calendar-day units so that
activities on a chain with identical network tension may display different float
values.

All things being equal, activities using a more restrictive work-day calendar,
such as one that excludes the winter months for work, carry less float than if
those activities used a less restrictive work-day calendar. Thus by building in or
removing a few holidays in the calendar, float can be manipulated.

While highly impractical, the only way to avoid gaps, discontinuities and work-
day conversions is to use only one calendar consisting of a seven-day week.

• The work periods and holidays defined for the project determine when P3
& P6 can schedule activities and resources. Primavera allows up to 31
base (activity) calendars per project. Once you add and define project base
calendars, use the calendar ID to assign the appropriate calendar to each
activity. Define calendars in planning units of hours, days, weeks, or
 P a g e | 952

months. Define an unlimited number of resource calendars, using any base

calendar as a template for each one.

• Microsoft Project uses four types of calendars: base calendar, project

calendar, resource calendar & task calendar.

Precedence Logic / Lead & Lag

Simple logic is finish-to-start with a lag value of zero, denoted as FS0. Other
known types of logic are start-to-start (SS), finish-to-finish (FF) and start-to-
finish (SF). Most software allows the use of these logic types along with the use
of lead and lag values other than zero, including negative values.

The use of lag values greater than zero with FS-type of logic absorbs otherwise
available float. It is possible to assign lag values that are less than zero, called
negative lags. Negative lags associated with the FS-type of logic have the effect
of overlapping the associated schedule activities, thereby increasing float.

• Lag: An offset or delay from an activity to its successor. Lag can be

positive or negative; it is measured in the planning unit for the project and
based on the calendar of the predecessor activity. Lag cannot exceed 32,000
time periods or be less than -9999 time periods. Lag decreases as you record
progress (actual start). When Primavera or MS project calculates a
schedule, it subtracts from the lag value the number of work periods
between the project data date and the actual start date of the predecessor
activity.

• Lead Time: An overlap between tasks that have a dependency. For example,
if a task can start when its predecessor is half finished, you can specify a
finish-to-start dependency with a lead time of 50 percent for the successor
task. You enter lead time as a negative lag value.

• Lag Time: A delay between tasks that have a dependency. For example, if
you need a two- day delay between the finish of one task and the start of
another, you can establish a finish- to-start dependency and specify a two-
day lag time. You enter lag time as a positive value.
 P a g e | 953

Start & Finish Constraints

Setting a start constraint to a date that is later than what would be allowed by a
controlling predecessor would decrease the float on the schedule activity.
Similarly, setting a finish constraint to a date that is earlier than what would be
allowed by a controlling predecessor would also decrease float on the schedule
activity. Both techniques can be used to force activity paths to carry negative
float.

There are also features that force the schedule activity to carry no total float or
no free float. Also certain types constraints force the assignment of zero float
value by fixing dates on which the activity will be performed, overriding
associated precedence logic.

• A scheduling restriction you impose on the start or finish of an activity. Use

constraints to reflect real project requirements; for example, all outdoor
activities must be completed by the beginning of winter.

• A restriction or limitation that you or Microsoft Project set on the start or

finish date of a task. For example, you can specify that a task must start on a
particular date or finish no later than a particular date. When you add a new
task to a project that is scheduled from the start date, Microsoft Project
automatically assigns the “as soon as possible” constraint. Conversely, when
you add a new task to a project that is scheduled from the finish date,
Microsoft Project automatically assigns the “as late as possible” constraint.

Various Calculation Modes

Fundamental schedule and float calculation methods can be selected by the

user, further complicating the effort to identify the critical path and quantify
float. Below are examples related to various methods of schedule calculation,
duration calculation, and float calculation.

Schedule Calculation

Retained Logic:

1) One out of two types of logic used to calculate a schedule in Primavera. If you
select retained logic in the schedule/level calculation options dialog box,
Primavera schedules an activity with out-of-sequence progress according to the
network logic. Primavera allows the activity to begin out of sequence, but the
remaining duration for the activity cannot be completed until all its predecessors
 P a g e | 954

complete. 2) One out of two types of logic used to handle activities that occur out
of sequence. When used, scheduling software programs the remaining duration of
an out-of-sequence activity according to current network logic - after its
predecessors.

Progress Override:

1) One out of two types of logic used by primavera. Progress override ignores
logic and affects the schedule only if out-of-sequence progress occurs. If you
select progress override in the schedule/level calculation options dialog box, P3
treats an activity with out-of-sequence progress as though it has no predecessors
and can progress without delay. [This is the alternate setting] 2) One out of two
types of scheduling software logic used to handle activities that occur out of
sequence. When specified, it treats an activity with out-of-sequence progress as
though it has no predecessor constraints; its remaining duration is scheduled to
start immediately, rather than wait for the activities predecessors to complete.

Duration Calculation

• Continuous Activity Duration: One out of two types of activity-duration logic

used by Primavera to calculate schedules. Contiguous activity duration requires
that work on an activity occur without interruption. For early dates, this type of
logic affects how Primavera schedules the start dates for an activity when the
finish dates are delayed by a finish relationship from a preceding activity or by a
finish constraint. If you select contiguous logic, and finish dates of an activity
are delayed, the start dates are delayed also. [This is the default setting]

• Interruptible Activity Duration: One out of two types of activity duration logic
Primavera and MSP use to process a schedule. For early dates, interruptible
scheduling affects how schedules start dates of an activity when the finish dates
are delayed by a finish relationship from a preceding activity or by a finish
constraint. If you select interruptible scheduling, and the finish dates of an
activity are delayed, the start dates are not delayed. The software stretches the
duration of the activity, allowing the work to be interrupted along the way. [This
is the alternate setting]

Float Calculation

• Show Open Ends As: Choose “critical” to show open-ended activities as critical;
choose “non-critical” if you do not want activities with open ends to be considered
critical.

• Calculate Total Float As: Choose the method Primavera uses to

calculate total float for all activities. “Start float” is the difference
 P a g e | 955

between the early and late start dates; “finish float” is the difference
between the early and late finish dates; and “most critical float” is the
least (most critical) of the start or finish floats.

Use of Data Date

Reliable calculation of schedule updates requires the use of the concept of data
date. Some software ships with the feature turned off and require that the
featured be manually activated as an option.

• The date Primavera uses as the starting point for schedule calculations.
Change the data date to the current date when you record progress. [In
Primavera, data date is a built-in default feature that cannot be deactivated.]

Judgment Calls during the Forensic Process

Any of the above techniques can be abused to affect discretionary decisions by

the forensic analyst to influence the analysis in favor of his client. There are
two instances in the forensic process that are especially sensitive to such
influence because they directly affect the schedule variables at the data line.
They are:

• Frequency, duration, and placement of analysis Intervals; and

• Hindsight vs. blind-sight up-date reconstruction.

Ownership of Float

In the absence of contrary contractual language, network float is a shared

commodity between the owner and the contractor. Conventional interpretation of
the principle of shared float allows the use of float on a first-come-first-serve
basis, thereby allowing the owner to delay activities on that path up to the point
where float is consumed. Therefore, as a corollary, if pacing is defined as the
consumption of float, it follows that both owners and contractors are allowed to
pace non-critical work.

Project float is the time between the last schedule activity on the baseline schedule
and the contractual completion date where the contractual completion date is later
than the scheduled completion date. In this case, in the absence of contrary
contractual language, project float is owned solely by the contractor.
 P a g e | 956

ATTACHMENT II

LINEAR PROGRAMMING
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Linear Programming
Cost and engineering decisions usually are optimization of resource allocations and there
are several techniques to provide the needed solutions.

Linear Programming (LP), the Transportation Problem (TP) and the Assignment Problem
(AP) are the techniques usually utilized by the Cost Engineer.

This chapter will introduce Linear Programming, its formulation and its solution by
graphical and other means.

Definition

LP is a mathematical method utilized to optimize an objective function when its elements

are subject to some constraints.

As an example, one may want to maximize a function defined by 8x +2y, subject to

constraints x<=40 (less or equal) and y<=2,000.

Restrictions

LP can only be used if the problem at hand complies with the following characteristics:

 Relationship between the elements involved in the problem must be linear;

 Formulation in numeric terms is possible; and

 There are one or more restrictions.

The term programming is not related to computer programming, but to the development of
the optimum schedule by means of an iterating method whereby the user moves from one
solution to a better solution each time a repetition is carried out until it is find out that not
better solution can be achieved.

LP users should be able to follow a procedure to properly organize the information given
by the problem and to this objective the following steps are recommended:

1. Formulate the objective function (decide what result is desired and set it up in numeric
terms) For instance: A machine can produce 2 gadgets X and Y. Profits achieved by sales
of the two gadgets are defined by: 20X + 40Y, where 20 is given in dollars as the profit for
each X gadget produced and similarly 40 dollars as the profit for each Y gadget produced.
 P a g e | 958

2. Formulate the constraints. All the circumstances named by the problem statement and
limiting the optimum achievement of the objective function are called constraints and they
have to be expressed mathematically.

For instance: Product X requires 2 machine-hours and product Y requires 4 machine-hours

while the machine availability is only 4,000 hours. This limitation or constraint may be
formulated as follows:

2X + 4Y <= 4,000

There is one additional general limitation to each optimizing problem and it is that the
decision variables cannot be negative. This fact will be expressed as follows: X>=0 and
Y>=0.

Types of Constraints

Constraints may be of two types:

Less than or equal to (<=)

Greater than or equal to (>=)

The first type is usually found in maximizing problems, the second type is mostly found in
minimizing problems.

Graphical Solutions

Graphical Solutions are only feasible when you are dealing with 2 decision variables. The
following example illustrates the technique:

A factory produces two types of computers X and Y. Each computer must pass through
assembly lines 1 and 2 successively. Passing through assembly line 1 computers type X
and Y take 6 and 2 hours respectively.

Going through line 2 they take 2 and 7 hours respectively.

Assembly line 1 is available 60,000 hour a month and assembly line 2 is available 70,000
hours a month.

The net profit from computer sales is $100 per unit X and $200 per unit Y.

Find the optimal production plan that maximizes monthly profits.

 P a g e | 959

LP model formulation:

Objective Function:

Maximize 100X + 200Y

Subject to constraints:

6X + 2Y <= 60,000 (assembly line 1)

2X + 7Y <= 70,000 (assembly line 2)
X>=0 and Y>=0

Drawing development

Draw the axes of the graph which represent the decision variables and each limitation as a
separate line.
 P a g e | 960

Locate the point of maximum or minimum profit within the feasible solution area. Solve
the system of constraints equations for any value (ignoring the <) and then move the
solution to maximum profit.
 P a g e | 961

THE SIMPLEX METHOD

Linear programming problems with more than 2 decision variables cannot be solved by
graphical means. G.B. Dantzig developed a procedure known as the simplex method based
upon the manipulation of variables when all but two are set to zero.

A flowchart describing step by step the simplex method is shown below.

 P a g e | 962

So let us solve the same problem with the simplex method.

Include the slack variables

Since constraints do not have the linear equation form, they must be transformed by means
of slack variables in the following fashion:

6X + 2Y + A = 60,000
2X + 7Y + B = 70,000

Where, A and B are the slack variables that will compensate for the change of the original
unequal form of the constraints.

Formulate the first tableau

Are there any positive values on the Z row?

For the first tableau there always will be a yes answer. For the subsequent tableaus, if there
are no positive values in the Z row it does mean that the solution quantities column will be
the optimum solution.

Select the highest positive value on the Z row

In this case it is 200 in column Y.

Select the pivot element

This is achieved by dividing all the elements on the solution quantities column by the
corresponding row element on the selected column (Y) and choosing the lowest result.

60,000/2 = 30,000
70,000/7 = 10,000 ( B pivot row and 7 pivot element are chosen)
 P a g e | 963

The selection of the pivot element is very important since it gives the clue of which
variable enters the solution variables in replacement of the originally entered variable.
In this case variable Y enters the solution variable column and the slack variable B leaves
it.

Calculate the row replacing the pivot row for the second tableau

Divide each element on the pivot row by the pivot element to get the new elements of that
row on the second tableau.

The new row is: Y 2/7 1 0 1/7 10,000

Manipulate the other rows on the tableau utilizing the already calculated Y row.

Set up a new tableau

There is still a positive element in the Z row. More iterations are necessary to reach the
final tableau:
 P a g e | 964

Since there are no positive values on the Z row, this is the final tableau and no
improvement could be achieved by further iterations.

Final Tableau Interpretation

Checking

Substitution of the decision variables, on the objective function, by the solution quantities
obtained in the final tableau should give the same profit as the one obtained by the final
tableau.

100X + 200Y = 100(7,368,.42) + 200(7,894.73) = 2,315,789

Showing the effect of a change in assembly line 1 availability

Let the assembly line 1 hours availability be increased by 1,000 so the constraint involved
becomes:
6X + 2Y <= 61,000

Extracting the A column and the solution column from the final tableau:
 P a g e | 965

It is important to observe that column A has been selected because it is the slack variable
introduced by the assembly line 1 availability constraint.

With the 1,000 hours availability increase the solution becomes:

The difference between the original solutions and the above solution indicates the increase
or decrease of profit with the increase of line 1 availability.

2,323,679 – 2,315,789 = 7,890

Which means, each additional 1,000 hours available for line 1, will increase the total profit
by $7,890. A similar exercise may be performed for all the variables involved in the
problem and the final product will be a sensitivity analysis for the problem at hand thus
allowing the user to estimate ranges and probabilities at will.

The simplex method for minimizing

When utilizing the simplex method for resolving linear programming minimizing
problems, the best procedure is to transform the minimizing problem into a maximizing
one, called the dual, and solve it utilizing the techniques already explained taking care of
making the correct interpretation of the final tableau.

The following example illustrates the procedure.

A company manufactures three products A, B, and C each of which is made out of two raw
materials X1 and X2 with costs at $10 and $20 per kilo respectively.

The company wishes to minimize its raw material production costs subject to the following
limitations:

Production should be at least:

100 units of product A
200 units of product B
50 units of product C
 P a g e | 966

From each kilo of X1 the company can get 2 units of A, 4 units of B and 3 units of C.
From each kilo of X2 the company can get 3 units of A, 3 units of B and 2 units of C.

Formulate the problem:

Objective function: Minimize 10X1 + 20X2 – Where, X1 and X2 are the number of kilos
of raw material.

Constraints:
2X1 + 3X2 >= 100
4X1 + 3X2 >= 200
3X1 + 2X2 >=50

Formulate the Dual Problem

This is achieved by taking all the constraints inequalities right hand side values and
utilizing them to create a new objective function with newly introduced variables as
follows:

100W + 200Y + 50Z

New constraints are created by utilizing the coefficients of each variable on the original
constraints and the coefficients of the objective function as inequality right hand side
values as follows:

2W + 4Y + 3Z <= 10
3W + 3Y + 2Z <= 20

Proceed to maximize the new objective function subject to the new constraints.
 P a g e | 967

Following the maximizing simplex procedure:

There are no positive values on the Z row and therefore, the optimum answer has been
reached.

Different from the maximizing procedure, the results are taken from the Z row for values A
and B.

In this case: A = 50(ignore the sign) and B = 0

Since A is the slack variable related to X1 and B the slack value related to X2:

X1 = 50 and X2 = 0

The following pages show basic computer code to solve linear problems automatically.
P a g e | 968
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 P a g e | 976

THE TRANSPORTATION PROBLEM

The transportation problem is a linear programming technique in which a number of

origins and a number of destinations are given and the objective is to optimize the
transportation cost or contribution obtained by supplying goods from origins to
destinations.

The following example will introduce the technique.

A computer company has the following client requests and transportation costs situation:

The company wants to minimize delivery costs by dispatching computers in the optimum
cost efficient manner.

The graphic below shows an outline of the transportation method.

 P a g e | 977

The number of available and the number of requested computers is equal so there is no
need for a dummy.

Proceed with the initial allocation of deliveries following the lowest distribution cost.

Check for degeneracy

Degeneracy is a situation whereby this transportation technique is repeated indefinitely

without finding the optimal solution.

Degeneracy occurs if the allocations made are less than the result of the following
calculation:

Matrix rows + Matrix columns -1

In this example: 3 + 3 – 1 = 5

If the allocations are less than expected, a zero allocation has to be made in order to be able
to follow the technique.

Calculate the cost of the original allocation

3*8 + 4*7 + 5*6 + 5*4 + 3*4 = $114

Check the solution to see if it is the optimum possible.

The checking procedure consists of calculating the shadow costs for the cells where no
allocation was made and subtract it from its actual cost. If all the results from this
operation are positive values, the allocation is said to be the optimum otherwise, further
improvement can be achieved.
 P a g e | 978

Calculations

Assume that the transportation costs for the cells where allocation was mad can be divided
into dispatch and reception costs as follows:

Assume D1 = 0 and calculate the other costs:

Now the shadow cost calculations for the unoccupied cells can be performed:

Then the difference between the actual cost and the shadow cost for the unoccupied cells
can be calculated:
 P a g e | 979

The negative value for cell 3:X means the total transportation cost of the first allocation
can be reduced by $1 for every unit that can be transferred to that cell.

Allocate as much as possible to the cell with highest negative value in the precedent step.
Proceed as follows:

Insert a plus sign on the selected cell 3:X

Following the row with a plus sigh on it, locate a cell in that row with allocation in its
column.

Insert a minus sign on that cell.

Following the selected cell column on the step before, locate a cell with allocation on its
row and insert a plus sign.
 P a g e | 980

Do as described on the steps before until you return to the cell with a first plus sign.

Now, select the lowest number out of the cells with a minus sign allocation on the
precedent step.

For this example it will be 3 and it does mean that 3 units must be added to the cells with a
plus sign and subtracted from the cell with a minus sign.

The resulting matrix is:

With a transportation cost of: 7*7 + 5*6 + 4*5 + 3*4 = $111, or $3 less expensive than the
initial allocation.

Then, check that no further improvement can be achieved repeating the procedure from the
check for degeneracy.

Only one table is required for all the calculations, but for the purpose of explaining the
method, several tables will be shown.

Check for degeneracy: Allocations = 4, Matrix rows + Matrix columns -1 = 5

This time the condition for degeneracy exists so a zero allocation has to be made for an
independent cell.
 P a g e | 981

Organize the table as follows:

The required zero allocation to overcome degeneracy is input on cell 1:X. The next step is
to calculate the dispatch and reception cost for each origin and each destination for the
allocated cells.

The table next page shows how to do it for origin 1 to destination X, Y and Z.

Since dispatch from origin 1 is assumed to be zero , the reception cost for X, Y and Z are
easily calculated.
 P a g e | 982

The following table shows the calculation of dispatch and reception costs for the rest of the
origins and destinations and the calculation of the shadow costs for the unoccupied cells
with figures in parenthesis, which are directly subtracted from the actual cost and the
results are immediately obvious: the previous allocation is the optimum solution since no
negative values are found.
 P a g e | 983

THE ASSIGNMENT PROBLEM

The assignment problem is a technique utilized to allocate resources in an optimum

manner when the availability at the sources and the requirements at the various
destinations is only one item.

The following example will show the technique.

A telephone company has four service stations located in different parts of a city and the
city has been divided in four asymmetrical sections.

Distances from service stations to different sections are given by the table below.

All distances in kilometers

The company’s goal is to assign service calls to service stations in such a way as to
minimize the distances covered by service men.

Assignment Problem Procedure

 P a g e | 984

Reduce each column member by the smallest member figure in that column.

Reduce each row member by the smallest member figure in that row.

Cover all the zeros with the minimum number of lines.

Compare the number of lines with the number of assignments to be made. If the number of
assignments is equal to the number of lines, go to step 6 otherwise, find the smallest matrix
element that is not covered by a line and subtract it from every matrix element and then
add it back to every element covered by a line.

If an element is covered by two lines as 10 and 23 in this example, add it twice.

 P a g e | 985

Repeat step 3 and 4 until the number of lines covering zeros is equal to the number of
assignments to be made.

Assignment Rules

1. Assign source to destination where a zero is unique to both a column and a row.

2. Assign source to destination where a zero is unique to a column or a row.

3. Ignore assignments already made and repeat the assignment above.

As a result: assign SS2 TO B and SS1 to D

The remaining matrix is:

So assign SS4 to C and SS3 to A.

Maximizing with the assignment method

Instead of minimizing costs of distances, the problem can be formulated as maximizing

contributions.

The procedure only changes on step 1 where the column members must be reduced by the
largest member on each column instead of the smallest one.

Number of Destination Different form Number of Sources

When the number of destinations differs from the number of sources, the matrix will not be
squared and the procedure previously described only works for a square matrix.

To overcome this situation a dummy column or row can be introduced with zero value for
all its members and the normal procedure can be followed.
 P a g e | 986

ATTACHMENT III

EPC CONTRACTS
BOT – ICE – SCL – FIDIC - AIA
 P a g e | 987

EPC CONTRACTS

Basic features of an EPC contract

The key clauses in any construction contract are those which impact on:

 Time;
 Scope;
 Cost;
 Risk; and
 Quality.

The same is true of EPC Contracts. Engineering, Procurement & Construction (EPC).

Contracts are in the nature of Turn-Key Projects, having a combined scope of work
involving services & supplies. However, EPC Contracts tend to deal with issues with
greater sophistication than other types of construction contracts. This is because an EPC
Contract is designed to satisfy the lenders’ requirements for bankability.

Brief description of Engineering, Procurement and Construction

 P a g e | 988

EPC Contracts provide for:

1. A single point of responsibility.

The contractor is responsible for all design, engineering, procurement, construction,

commissioning and testing activities. Therefore, if any problems occur the project
company need only look to one party - the contractor - to both fix the problem and provide
compensation. As a result, if the contractor is a consortium comprising several entities the
EPC Contract must state that those entities are jointly and severally liable to the project
company.

2. A fixed contract price.

Risk of cost overruns and the benefit of any cost savings are to the contractor’s account.
The contractor usually has a limited ability to claim additional money which is limited to
circumstances where the project company has delayed the contractor or has ordered
variations to the works.

3. A fixed completion date.

EPC Contracts include a guaranteed completion date that is either a fixed date or a fixed
period after the commencement of the EPC Contract. If this date is not met the contractor
is liable for delay liquidated damages (“DLDs”). DLDs are designed to compensate the
project company for loss and damage suffered as a result of late completion of the facility.

To be enforceable in common law jurisdictions, DLDs must be a genuine pre-estimate of

the loss or damage that the project company will suffer if the facility is not completed by
the target completion date. The genuine pre-estimate is determined by reference to the time
the contract was entered into.

DLDs are usually expressed as a rate per day which represents the estimated extra costs
incurred (such as extra insurance, supervision fees and financing charges) and losses
suffered (revenue forgone) for each day of delay.

In addition, the EPC Contract must provide for the contractor to be granted an extension of
time when it is delayed by the acts or omissions of the project company. The extension of
time mechanism and reasons why it must be included are discussed below.
 P a g e | 989

4. Performance guarantees.

The project company’s revenue will be earned by operating the facility. Therefore, it is
vital that the facility performs as required in term of output, efficiency and reliability.
Therefore, EPC Contracts contain performance guarantees backed by performance
liquidated damages (“PLDs”) payable by the contractor if it fails to meet the performance
guarantees. The performance guarantees usually comprise a guaranteed production
capacity, quality and efficiency.

PLDs must also be a genuine pre-estimate of the loss and damage that the project company
will suffer over the life of the project if the facility does not achieve the specified
performance guarantees.

As with DLDs, the genuine pre-estimate is determined by reference to the time the contract
was signed.

PLDs are usually a net present value (NPV) (less expense) calculation of the revenue
forgone over the life of the project. For example, for an ammonia and urea plant if the
production rate of urea is 50 tonnes less than the specification, the PLDs are designed to
compensate the project company for the revenue forgone over the life of the project by
being unable to sell that 50 tonnes of urea.

It is possible to have a separate contract that sets out the performance requirements, testing
regime and remedies. However, this can create problems where the EPC and the
performance guarantees do not match. The preferred option is to have the performance
guarantees in the EPC contract itself.

PLDs and the performance guarantee regime and its interface with the DLDs and the delay
regime is discussed in more detail below.

5. Caps on liability.

As mentioned above most EPC contractors will not, as a matter of company policy, enter
into contracts with unlimited liability. Therefore, EPC Contracts for process plant projects
cap the contractor’s liability at a percentage of the contract price. There are normally sub-
caps on the contractor’s liquidated damages liability. For example, DLDs and PLDs might
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each be capped at 20% of the contract price with an overall cap on both types of liquidated
damages of 30% of the contract price.

There will also likely be a prohibition on the claiming of consequential damages. Put
simply consequential damages are those damages which do not flow directly from a breach
of contract, but which may have been in the reasonable contemplation of the parties at the
time the contract was entered into.

This used to mean heads of damage like loss of profit. However, loss of profit is now
usually recognized as a direct loss on financed projects and therefore, would be
recoverable under a contract containing a standard exclusion of consequential loss clause.
Nonetheless, care should be taken to state explicitly that liquidated damages can include
elements of consequential damages.

Given the rate of liquidated damages is pre-agreed most contractors will not object to this
exception.

In relation to both caps on liability and exclusion of liability it is common for there to be
some exceptions. The exceptions may apply to either or both the cap on liability and the
prohibition on claiming consequential losses.

The exceptions themselves are often project specific, however, some common examples
include in cases of fraud or willful misconduct, in situations where the minimum
performance guarantees have not been met and the cap on delay liquidated damages has
been reached and breaches of the intellectual property warranties.

6. Security.

It is standard for the contractor to provide performance security to protect the project
company if the contractor does not comply with its obligations under the EPC Contract.
The security takes a number of forms including:

§ bank guarantee or bond for a percentage, normally in the range of 5-15%, of the
contract price. The actual percentage will depend on a number of factors including the
other security available to the project company, the payment schedule (because the greater
the percentage of the contract price unpaid by the project company at the time it is most
 P a g e | 991

likely to draw on security ie: to satisfy DLD and PLD obligations the smaller the bank
guarantee can be), the identity of the contractor and the risk of it not properly performing
its obligations, the price of the bank guarantee and the extent of the technology risk

§ advance payment guarantee, if an advance payment is made, and a parent company

guarantee - this is a guarantee from the ultimate parent (or other suitable related entity) of
the contractor which provides that it will perform the contractor’s obligations if, for
whatever reason, the contractor does not perform.

7. Variations.

The project company has the right to order variations and agree to variations suggested by
the contractor. If the project company wants the right to omit works either in their entirety
or to be able to engage a different contractor this must be stated specifically. In addition, a
properly drafted variations clause should make provision for how the price of a variation is
to be determined. In the event the parties do not reach agreement on the price of a variation
the project company or its representative should be able to determine the price.

This determination is subject to the dispute resolution provisions. In addition, the

variations clause should detail how the impact, if any, on the performance guarantees is to
be treated.

For some larger variations the project company may also wish to receive additional
security. If so, this must also be dealt with in the variations clause.

8. Defects liability.

The contractor is usually obliged to repair defects that occur in the 12 to 24 months
following completion of the performance testing. Defects liability clauses can be tiered.
That is, the clause can provide for one period for the entire facility and a second, extended
period, for more critical items.

9. Intellectual property.

The contractor warrants that it has rights to all the intellectual property used in the
execution of the works and indemnifies the project company if any third parties’
intellectual property rights are infringed.
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10. Force majeure.

The parties are excused from performing their obligations if a force majeure event occurs.
(Excusable, non compensable)

“Force Majeure” shall mean any event beyond the control of the Employer or of the
Contractor, as the case may be, and which is unavoidable notwithstanding the reasonable
care of the party affected, and shall include, without limitation, the following:

a) War, hostilities or warlike operations (whether a state of war be declared or not),

invasion, act of foreign enemy and civil war.
b) Rebellion, revolution, insurrection, mutiny, usurpation of civil or military
government, conspiracy, riot, civil commotion and terrorist acts.
c) Strike, sabotage, unlawful lockout, epidemics, quarantine and plague.
d) Earthquake, fire, flood or cyclone, or other natural or physical disaster

11. Suspension.

The project company usually has right to suspend the works.

12. Termination.

This sets out the contractual termination rights of both parties. The contractor usually has
very limited contractual termination rights. These rights are limited to the right to
terminate for non-payment or for prolonged suspension or prolonged force majeure and
will be further limited by the tripartite or direct agreement between the project company,
the lenders and the contractor.

The project company will have more extensive contractual termination rights. They will
usually include the ability to terminate immediately for certain major breaches or if the
contractor becomes insolvent and the right to terminate after a cure period for other
breaches. In addition, the project company may have a right to terminate for convenience.
It is likely the project company’s ability to exercise its termination rights will also be
limited by the terms of the financing agreements.

13. Performance specification.

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Unlike a traditional construction contract, an EPC Contract usually contains a performance

specification. The performance specification details the performance criteria that the
contractor must meet. However, it does not dictate how they must be met. This is left to the
contractor to determine.

A delicate balance must be maintained. The specification must be detailed enough to

ensure the project company knows what it is contracting to receive but not so detailed that
if problems arise the contractor can argue they are not its responsibility.
Whilst there are, as described above, numerous advantages to using an EPC Contract, there
are some disadvantages.

These include the fact that it can result in a higher contract price than alternative
contractual structures. This higher price is a result of a number for factors not least of
which is the allocation of almost all the construction risk to the contractor. This has a
number of consequences, one of which is that the contractor will have to factor into its
price the cost of absorbing those risks. This will result in the contractor building
contingencies or reserves into the contract price for events that are unforeseeable and/or
unlikely to occur.

If those contingencies or reserves were not included the contract price would be lower.
However, the project company would bear more of the risk of those unlikely or
unforeseeable events. Sponsors have to determine, in the context of their particular project,
whether the increased price is worth paying.

As a result, sponsors and their advisers must critically examine the risk allocation on every
project. Risk allocation should not be an automatic process. Instead, the project
company should allocate risk in a sophisticated way that delivers the most efficient
result.

For example, if a project is being undertaken in an area with unknown geology and
without the time to undertake a proper geotechnical survey, the project company may be
best served by bearing the site condition risk itself as it will mean the contractor does not
have to price a contingency it has no way of quantifying.

This approach can lower the risk premium paid by the project company. Alternatively, the
opposite may be true. The project company may wish to pay for the contingency in return
for passing off the risk which quantifies and caps its exposure. This type of analysis must
be undertaken on all major risks prior to going out to tender.
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Another consequence of the risk allocation is the fact that there are relatively few
engineering and construction companies that can and are willing to enter into EPC
Contracts. As mentioned in the Introduction some bad publicity and a tightening insurance
market have further reduced the pool of potential EPC Contractors. The scarcity of EPC
Contractors can also result in relatively high contract prices.

Another major disadvantage of an EPC Contract becomes evident when problems occur
during construction. In return for receiving a guaranteed price and a guaranteed
completion date, the project company cedes most of the day-to-day control over the
construction.

Therefore, project companies have limited ability to intervene when problems occur during
construction. The more a project company interferes the greater the likelihood of the
contractor claiming additional time and costs. In addition, interference by the project
company will make it substantially easier for contractors to defeat claims for liquidated
damages and defective works.

Obviously, ensuring the project is completed satisfactorily is usually more important than
protecting the integrity of the contractual structure. However, if a project company
interferes with the execution of the works they will, in most circumstances, have the worst
of both worlds. They will have a contract that exposes them to liability for time and costs
incurred as a result of their interference without any corresponding ability to hold the
contractor liable for delays in completion or defective performance.

The same problems occur even where the EPC Contract is drafted to give the project
company the ability to intervene. In many circumstances, regardless of the actual drafting,
if the project company becomes involved in determining how the contractor executes the
works then the contractor will be able to argue that it is not liable for either delayed or
defective performance.

As a result, it is vitally important that great care is taken in selecting the contractor and in
ensuring the contractor has sufficient knowledge and expertise to execute the works. Given
the significant monetary value of EPC Contracts, and the potential adverse consequences if
problems occur during construction, the lowest price should not be the only factor used
when selecting contractors.
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14. Risk Management:

The risk management plan typically includes the following ten components:
11. Methodology
12. Roles and responsibilities
13. Budgeting
14. Timing
15. Risk categories
16. Definitions of risk probability and impact
17. Probability and impact matrix
18. Revised stakeholders' tolerances for risk
19. Reporting formats
20. Tracking information
1. Methodology
Methodology describes:
 The tools, methods, and sources of information that will be used to perform
risk management, including how risks will be identified, analyzed, and
categorized;
 How risk response plans will be prepared, implemented, and monitored; and
 How risk triggers will be monitored.
2. Roles and Responsibilities
The roles and responsibilities section defines who does what during all risk management
activities. In particular, it specifies who will direct and manage risk management activities,
this person may be the project manager or a designated risk manager for the project.
3. Budgeting
The budget establishes the anticipated cost of the risk management activities and the
associated risk response plans, including contingency reserves.
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4. Timing
The timing describes how often risk management activities will be performed, and when
they will take place within the project schedule.
5. Risk Categories
Risk management deals with eventualities that might affect the project but are not
documented in the project management plan. This means thinking not only of problems
that have occurred with this kind of work, organization, or project approach, but also
imagining problems that have never occurred before, but may occur during the project.
The basic purpose of the Risk Identification process (presented in a subsequent section of
the course) is to ensure that as many of these eventualities as possible are considered. To
do this, it is helpful to have a list of risk categories that the project team will address, so
that the process is as comprehensive as possible. The risk categories generated during the
Risk Management Planning process will be an input to the Risk Identification process.
There is no single, standard list, but there are good starting points from which the team can
build. Agreeing on the categories and making the list complete and practical is one of the
first steps in identifying the risks themselves. Considering each risk category should help
the team generate ideas on risk events specific to those categories.
Most risks fall into one of several broad categories; however, any project may run unique
risks.

Risk categories are tools that:

 Enable the project team to more efficiently analyze and respond to risks with
common characteristics; and
 Ensure that no potential sources of risk will be overlooked during the
subsequent Risk Identification process.
Risk categories can be structured to provide different levels of groups for different risk
management purposes or to provide greater scope or more focus as needed during risk
analysis and response planning.
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Typical Risk Categories Description

Technology or technical approach chosen to achieve the

Technology
project objectives
Schedule, project completion objectives, other project
Time
time-related issues
Ability of contractors or other vendors to achieve
Contractor capabilities
project objectives
Work in a multi-project environment, or interfaces with
Interfaces
existing operational activities
Occupational safety, industrial safety, and potential for
Safety
contamination
Environmental Environmental laws, licenses, and permits
Involvement of any regulatory agency such as EPA or
Regulatory involvement
DHEC, or by local, state, and national governments
Significance or visibility to local, state, or national
Political visibility
governments
Availability and cost of using key technologies and
Intellectual property
techniques for critical project activities
Involvement by someone other than a primary owner
Involvement of key stakeholders
for decision-making and management
Issues with design criteria, functional requirements,
Product and project complexity complex design features, or the condition of existing
documentation

Labor skills availability and Adequate resources, specialty resources, rapid labor
productivity force build-up, exposure to environmental extremes

Number of locations/site Site ownership and access issues

access/site ownership
Funding/cost sharing
Magnitude and type of
contamination
Quality requirements
Public involvement
Project duration and involvement/funding by other
parties
Presence of hazardous or mixed waste
Requirement for precision work or other QA
requirements
Citizen interest or involvement
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Risk Breakdown Structure (RBS)

Risk Breakdown Structures

A risk breakdown structure (RBS) is a hierarchical, multi-tiered organization of the risk

categories. When risks are being analyzed, grouping them this way makes it possible to
gather and review together risks with a common characteristic, such as their cause, or the
phase or activity in which they occur.

This approach to reviewing risks that appear together in the risk breakdown structure
increases the efficiency of investigating their causes, and may also increase leverage when
risk response plans are developed. For example, risks with similar or a shared cause in a
particular process step may be mitigated by the same process change.
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Liquidated Damages under EPC Contracts

By its very nature, an engineering, procurement and construction contract (an "EPC
Contract") is a sophisticated form of construction agreement commonly used for realizing
large scale infrastructure projects in complex sectors such as energy, transportation,
irrigation, and so forth.

Not only do the guarantees provided by the contractor under an EPC Contract make it
attractive for the employer, but its "compact" and "safe" nature is also a key trait.

In short, what we call an EPC Contract today is a contract in which the contractor assumes
the design, engineering, procurement, construction and turn-key hand-over of a facility for
a price; whereas, the main undertaking of the employer is to pay the contact price.

Different from other forms of construction agreements, EPC Contracts provide broad
undertakings for the contractor to facilitate the employer's life.

Thus, EPC Contracts became a sine qua non in the Build-Operate-Transfer ("BOT") or
Public Private Partnership ("PPP") projects that are project financed (i.e. where there is no,
or limited, recourse to sponsors for repayment of financing), where multiple parties are
involved, such as sponsors, investors, and public authorities, they rely on EPC Contracts in
order to mitigate a projects' construction risks.

An "EPC Contract" itself is not specifically provided for under local laws. Being classified
as a "hybrid" contract, combining elements of several different contract types, several
characteristics of EPC Contracts fall within the scope of agreements for work, where one
party (the contractor) assumes the obligation to complete a project, and the other party (the
employer) undertakes to pay the contract price.

In a PPP or BOT project, multiple parties assume various risks of diverse nature, such as
political risk, currency risk, force majeure risk, commercial risk and, finally, construction
risk, and distribute these amongst themselves, usually to the party who is best able to
manage and absorb that risk. Although the parties' control over the former four risks is
relatively low, the latter may still be managed through EPC Contracts.

The contractor's failure to complete the works within the pre-estimated timeframes and
milestones constitutes one of the most important factors in construction risk. As noted
above, EPC Contracts are preferred mainly in multi-party projects, where any delay of the
contractor results in the employer's delay vis-à-vis another party at the horizontal level, and
the project not being completed on time and in accordance with the financial model.

Furthermore, as delays impose unanticipated financial burden on the projects, the funders
will also be concerned about how these are dealt with under EPC Contracts. Among many
others, another noteworthy concern is that continuous delays towards completion of the
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construction works will result in delays in the commencement of the operations of the
facility and in the generation of cash flow.

In order to cope with these problems, liquidated damages provisions are used in EPC
Contracts. Further, in general, the parties also tend to determine liability caps, i.e. the
highest limits for which a contractor (or an employer) can be held liable.

Nevertheless, labeling liquidated damages provisions as "employer-friendly" clauses are

not appropriate. These provisions, in fact, serve both the employer and the contractor at the
same time. Having these provisions in the EPC Contract, the employer can gauge exposure
to any possible damage in the event of the contractor's delay in completing the works on
time.

In addition, in the event of a dispute, the employer will not be obligated to prove any actual
damage or loss for indemnification.

The contractor, on the other side, can foresee the furthermost limits of the liability that he
assumes under the contract. However, generally speaking, several circumstances, such as
the contractor's gross negligence, willful misconduct, claims that the contractor can recover
compensation from his insurance companies, etc. are carved out from this limit and from
the liability cap.

Most EPC contract templates set forth similar provisions for a delay event. The main
principle, which may be problematical for both parties, is that in the event of a delay, the
employer can terminate the agreement prior to the determined expiry date or upon
completion of the works. However, although it looks like a protective provision for the
employer, terminating the agreement prior to the completion of the works may not be
beneficial at all times.

Although a common EPC contract entitles the employer to terminate the contract in the
event it is clearly understood that the completion will be delayed, both parties of an EPC
Contract would, most likely, not seek to break the deal at the first instance of distress.

As we see in many cases, in a BOT or PPP project, the employer is under an obligation
towards other parties (e.g., the public authority procuring the works, the institutions
funding the project, etc.) to have the construction works performed and completed by a
specific date and take the facility into operation status.

Even in some cases, temporary underperformance of the works may also be preferable in
order to achieve the milestones, rather than to terminate the contract. In addition, when the
complexity of the projects and the number of different parties are taken into consideration,
finding another contractor, and negotiating a new contract once again would be very time-
consuming and cost-prohibitive.
 P a g e | 1001

Accordingly, in the event a penalty is imposed for the contractor's failure to fulfil an
obligation at a specific location, or by a particular date, the employer may require the
contractor to pay the penalty even though he did not suffer any damages due to the
contractor's delay, together with full performance of the uncompleted works.

It is observed that, in general, the parties determine a fixed monetary amount as the
contractual penalty. On the other hand, any formulation other than a monetary amount can
also be stipulated in the contract; the amount of the penalty is not required to be explicitly
set forth in the contract.

Most contract forms allow the parties to a contract to freely determine the amount of the
contractual penalty. In principle, in the event of a dispute, the court may decrease the
amount of the contractual penalty.

In the event the employer incurs any damage higher than the penalty amount, the
contractor will not be obligated to compensate such exceeding amount, unless the
employer proves the contractor's fault as well as the damages amount that exceed the
penalty amount.

Risk Management Plan Checklist

The risk management checklist should be completed as the risk management plan is
developed, and should be referred to at each planning meeting or review of the risk
management plan.

CHECKLIST

A. Methodology
 Does the plan describe how it was developed, and how it will be
maintained?
 Does the plan describe how Risk Identification will be carried out?
 Does the plan describe how Qualitative Risk Analysis will be carried out?
 Does the plan describe how Quantitative Risk Analysis will be carried out?
 Does the plan describe how Risk Response Planning will be carried out?
 Does the plan describe how Risk Monitoring and Control will be carried
out?

B. Roles and Responsibilities

o Who will direct all risk management activities?
o Who has been designated to participate in the risk management group’s
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work sessions for risk assessment and Risk Response Planning?

o What are the duties of the participants in the risk management group’s work
sessions, including preparation, outside research, and documentation?
o What governing body will oversee the execution of risk management
activities?
o Who represents internal stakeholders in risk management activities?
o Who represents external stakeholders in risk management activities?

C. Budgeting
 Have all risk management activities been budgeted?
 Have contingency reserves for cost been set aside to accommodate
residual and secondary risks?

D. Timing
 Has frequency been determined for all regularly occurring risk management
activities, such as risk review sessions?
 Have all risk management activities been incorporated into the project
schedule?

E. Risk Categories
 If a set of standard risk categories is available in the organization, was it
adopted for use on the current project?
 Has the set of risk categories been tailored to suit the characteristics of the
current project?
 If a risk breakdown structure (RBS) will be used, has it been developed yet?

F. Definitions of Risk Probability and Impact

 Has a scale of terms been defined for different levels of risk probability?
 Has a scale of terms been defined for different levels of risk impact?

G. Probability and Impact Matrix

 Has a matrix been constructed reflecting all possible combinations of risk
impact and probability levels?
 Have the entries in the probability and impact matrix been stratified into a
small number of overall risk levels?
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H. Revised Stakeholder Tolerances

 Have the normal risk tolerances of all stakeholders been reviewed and
determined?
 Have any of the stakeholders’ risk tolerances been temporarily relaxed or
tightened for this particular project?

I. Reporting Formats
 Has a standard entry form for the various sections of the risk register been
developed, including the probabilistic project analysis and the revised
project objectives, as well as the risk response plans?
 Have report layouts been defined for the periodic reporting of risks to the
stakeholders?
 Has a form been designed for stakeholders to report the results of
implementing their risk response plans?
 Has a form been designed for identifying new risks?

J. Tracking
 Has a repository been set up to collect risk management work products?
 Are the minutes of risk review meetings being collected and stored in the
repository?
 Are the start and stop dates of risk management activities being reported?
 Are all the significant data concerning risk management (reports,
notifications, memos) that are reported to stakeholders being recorded in the
repository?
 How are the audits of the risk management activities going to be carried
out?

Being Proactive in Risk Identification

Using a proactive approach to identify risks is far better than waiting for the problems to
arise on their own. Being proactive has the following benefits:

 Anticipating risks allows the participants to become more comfortable discussing

and analyzing circumstances and events that would normally cause anxiety. By
handling the topics in a methodical way, participants are reassured that the risks
will be successfully managed; and
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 Analyzing the potential for risk helps ensure that all areas of potential risk will be
fully explored and that identified risks will receive balanced treatment, regardless
of personal biases and influences.

One aspect of the methodical approach involves separating the identification of positive
risks from the identification of negative risks. It is usually best to provide separate agenda
time or even to set up separate risk assessment sessions for these two kinds of risks.

The reason for this is that thinking about negative risks tends to dominate the participant's
attention since anxiety is such a powerful emotion. If the two types of risk are considered
in the same period, the positive risks will tend to get overlooked or only reviewed in a
cursory manner.

Some risks will be seen to have both positive and negative impacts, depending on the
actions taken. For example, a risk that a task will take longer than expected may also
present an opportunity to finish sooner than expected.

Checklist Analysis Advantages and Disadvantages

Advantages of Checklist Analysis

The advantages of using checklist analysis to identify risks are:

 Checklists are helpful when they reflect lessons learned from previous projects; and
 Checklists are simple and efficient.

Disadvantages of Checklist Analysis

The disadvantages of using checklist analysis to identify risks are:

 Checklists can be limiting if the team automatically assumes that the checklists are
comprehensive and complete, which is rarely the case; and
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 A large project is likely to require a lengthy checklist and no checklist can be

wholly adequate without being tailored to the current project.

EPCI Contracts
EPCI stands for Engineering, Procurement, Construction and Installation.

It is a common form of contracting arrangement within Offshore construction. Under an

EPCI contract, the contractor will design the structure(s), procure the necessary
materials, undertake construction and transportation, and set it up at the offshore site.

The contractor does this either through own labour or by subcontracting part of
the work.

The contractor carries the project risk for schedule as well as budget in return for a fixed
price, called Lump sum or LSTK depending on the agreed scope of work.

In EPCI contracts, the contractor rarely carries the project risk unconditionally. Rather,
contractor and customer have detailed discussions on the division of the risk.
 P a g e | 1006

Risk of delays and cost overruns due to lacking Weather windows is an example of a
typical risk that may be borne by the customer rather than the contractor.
P a g e | 1007
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BOT CONTRACTS

BOT- like Contractual arrangements - refer to any of the following contractual

arrangements or schemes as well as other variations.

o Build-and-transfer (BT) - a contractual arrangement whereby the project

proponent undertake the financing and construction of a given infrastructure or
development facility and after its completion turns it over to the government agency or
local government unit concerned, which shall pay the proponent on an agreed schedule its
total investment expended on the project, plus a reasonable rate of return thereon. This
arrangement may be employed in the construction of any infrastructure or development
project, including critical facilities which, for security or strategic reasons, must be
operated directly by the government.

o Build-lease-and-transfer (BLT) - a contractual arrangement whereby a project

proponent is authorized to finance and contract an infrastructure or development facility
and upon its completion turns it over to the government agency or local government unit
concerned on a lease agreement for a fixed period after which ownership of the facility is
automatically transferred to the government agency or local government unit concerned.

o Build-operate-and-transfer (BOT) - a contractual arrangement whereby the

project proponent undertakes the construction, including financing, of a given
infrastructure facility, and the operation and maintenance thereof. The project proponent
operates the facility over a fixed term during which it is allowed to charge facility users
appropriate tolls, fees, rentals, and charges not exceeding those proposed on its bid or as
negotiated and incorporated in the contract to enable the project proponent to recover its
investment and operating and maintenance expenses in the project. The project proponent
transfers the facility to the government agency or local government unit concerned at the
end of the fixed terms which shall not exceed fifty (50) years. This shall include a supply
and operated situation which a contractual arrangement whereby the supplier of equipment
and machinery for a given infrastructure facility, if the interest of the government so
requires, operates the facility providing in the process technology transfer and training to
Filipino nationals.
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o Build-own-and-operate (BOO) - a contractual arrangement whereby a project

proponent is authorized to finance, construct, own, operate and maintain an infrastructure
or development facility in which the proponent is allowed to recover its total investment,
operating and maintenance costs plus a reasonable return by collecting tolls, fees, rentals or
other charges from facility users. Under this project, the proponent which owns the assets
of the facility may assign its operation and maintenance to a facility operator. One
supplementary variation of this is the BOOT which make the project transferable after it
has been owned.

o Build-transfer-and-operate (BTO) - a contractual arrangement whereby an

agency/LGU contracts out the building of an infrastructure facility to a private entity such
that the contractor builds the facility on a turn-key basis, assuming cost overruns, delays
and specified performance risks. Once the facility is commissioned satisfactorily, title is
transferred to the implementing agency. The private entity, however, operates the facility
on behalf of the implementing agency under an agreement.

o Contract-add-and-operate (CAO) - a contractual arrangement whereby the project

proponent adds to an existing infrastructure facility which it is renting from the
government and operates the expanded project over an agreed franchise period. There may
or may not be a transfer arrangement as regards the added facility provided by the project
proponent.

o Develop-operate-and-transfer (DOT) - a contractual arrangement whereby

favorable conditions external to a new infrastructure project to be built by the project
proponent are integrated into the arrangement by giving the same the right to develop
adjoining property, and thus, enjoy some of the benefits the investment creates such as
higher property or rent values.

o Rehabilitate-operate-and-transfer (ROT) - a contractual arrangement whereby an

existing facility is turned-over to the private sector to refurbish, operate and maintain for a
franchise period, at the expiry of which the facility is turned-over to the government. The
term is also used to describe the purchase of an existing facility from abroad, importing,
refurbishing, erecting and consuming it within the host country.
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o Rehabilitate-own-and-operate (ROO) - a contractual arrangement whereby an

existing facility is turned over to the private sector to refurbish and operate with no time
limitation imposed on ownership. As long as the operator is not in violation of its
franchise, it can continue to operate the facility in perpetuity.

NEC Engineering and Construction Contract

The New Engineering Contract (NEC), or NEC Engineering and Construction

Contract is a formalized system created by the Institution of Civil Engineers that guides
the drafting of documents on civil engineering and construction projects for the purpose of
obtaining tenders, awarding and administering contracts. As such they legally define the
responsibilies and duties of Employers (who commission work) and Contractors (who
carry out work) in the Works Information.
The Works Information consists of the Contract Data part one (Data provided by the
Employer) and Contract Data part two (Data provided by the Contractor). Several
approaches are included making it a family of options. It is used in the UK and
internationally in countries including New Zealand, Australia, Hong Kong and South Africa.
There have been three editions, the first in 1993, the second in 1995, and the most recent in
2005. The June 2005 edition of the NEC3 was amended in June 2006, and again in April
2013.

Characteristics
The NEC is a family of standard contracts, each of which has these characteristics:

 Its use stimulates good management of the relationship between the two parties to the
contract and, hence, of the work included in the contract.
 It can be used in a wide variety of commercial situations, for a wide variety of types of
work and in any location.
 It is a clear and simple document - using language and a structure which are
straightforward and easily understood.
The NEC complies fully with the Achieving Excellence in Construction (AEC)
principles. The Efficiency & Reform Group of The UK Cabinet Office recommends the
use of NEC3 by public sector construction procurers on their construction projects.
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Options

The NEC contracts now form a suite of contracts, with NEC being the brand name for the
"umbrella" of contracts. When it was first launched in 1993, it was simply the "New
Engineering Contract". This specific contract has been renamed the "Engineering and
Construction Contract" which is the main contract used for any construction based project.
It now sits alongside a number of other contracts that together should mean that the NEC
suite is suitable for what ever stage of a lifecycle the project is at and for any party within a
project. The contracts available within the suite are:

Engineering and Construction Contract (ECC):

Suitable for any construction based contract between an Employer and a Contractor. It is
intended to be suitable for any sector of the industry, including civil, building, nuclear, oil
& gas, etc.
Within the ECC contract there are six family level options of which the Employer will
choose what he deems to be the most suitable and give him the best option/value for
money on that project:

 Option A: Priced contract with activity schedule

 Option B: Priced contract with bill of quantities
 Option C: Target contract with activity schedule
 Option D: Target contract with bill of quantities
 Option E: Cost-reimbursable contract
 Option F: Management contract
These options offer a framework for tender and contract clauses that differ primarily in
regard to the mechanisms by which the contractor is reimbursed and how risk is
allocated/motivated to control costs.
The core clauses (of the main option listed above) are used in conjunction with the
secondary options and the additional conditions of contract. The Efficiency and Reform
group of The Cabinet Office in the UK (formerly the OGC) has published generic public
sector Z-clauses for the use with NEC3 contracts.
The clauses of these options can be adapted by tenders for sub-contractors and designers
by choosing one of the contracts below.
The Engineering and Construction Subcontract Contract (ECS)
Very similar in detail and complexity of contractual requirements to the ECC contract
above, but allows the contractor to sub-let the project to a subcontractor imposing most of
the clauses that he has within his headline contract. There is very little difference between
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the ECC and the ECS, other than the names of the parties are changed (contractor and
subcontractor)and some of the timescales for contractual responses are altered to take into
account the timescales required in the ECC contract.
The Engineering and Construction Short Contract (ECSC)
This is an abbreviated version of the ECC contract and most suitable when there is
considered "low risk" (not necessarily low value) on a project with little change expected.
This contract is still between the employer and contractor but does not use all of the
processes of the ECC making it simpler and easier to manage and administer.
The Engineering and Construction Short Subcontract (ECSS)
Allows the contractor to sub-let a contract down the line to a subcontractor on a low risk
project when his contract with the employer is an ECSC.

The Professional Services Contract (PSC)

This contract is for anyone providing a service, rather than doing any physical construction
works. Designers are the most obvious party that fit into this category. Whilst they are
producing a design for an employer or contractor, they would sign up and follow the
clauses within the PSC.
Most of the clauses within this contract are the same as that in the main ECC contract, so
that all contractors, designers and subcontractors have pretty much the same obligations
and processes to follow as each other.
Framework Contract (FC)
Parties enter into a "framework" of which work packages will then be let during the life of
that framework. Any individual projects will then be awarded using one of the other
contracts within the suite, meaning that the parties follow the headline clauses within the
framework contract (which is a fairly slim contract) and then the individual clauses within
the chosen contract for that package. Different work packages can be let using different
contracts during the life of the framework.
Term Service Contract (TSC)
For parties on a project that is operational or maintenance based, e.g. maintaining highway
signage, where the contract is to ensure that a certain standard is maintained. This contract
is not generally used for constructing new works, but can include some amount of
betterment. There is also a "Term Service Short Contract" where the project is a relatively
low risk project and is an abbreviated version of the main TSC.
Supply Contract/Short Supply Contract (SC/SSC)
This is the Newest addition of contracts to the NEC family, being launched in 2010. This is
for a supplier of supplies or goods to a project, and puts extra contractual requirements on
them during their procurement/manufacture period. The Supply Contract is for big items of
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procurement, with the Short Supply Contract potentially being for more run of the mill
procurement items on a project.
Adjudicator's Contract (AC)
If there is a dispute between the parties on a project then the Adjudicator will follow the
clauses within this contract in order to come to a decision.
Guidance Notes and Flowcharts
For each of the different contracts listed above each comes with its own set of guidance
notes and flowcharts which should aid understanding of the intent of the drafted clauses.
The guidance notes expand on each clause to give extra substance and intent of the original
drafters as to how a clause should be understood and interpreted. The flowcharts then map
out each of the main processes within each contract and demonstrate how it should operate
and what to do next if a party has or has not carried out the next contractual action.

History
Originally contracts in the civil engineering and construction industries were bespoke and
drafted by Chancery pleaders using their knowledge of leases rather than building
processes. In 1879, Royal Institute of British Architects for construction projects created
RIBA forms which lead to the Joint Contracts Tribunal, JCT forms.
For civil engineering the need for a formalized approach to contracts led the Institution of
Civil Engineers to produce the ICE formalized set of conditions of contract. In 1986, the
ICE commissioned the development of new form of contract as it was felt that there was a
need for a form that had clearer language, clearer allocation of responsibilities and reduced
opportunities for contractual “gamesmanship”. In 1991, this resulted in a consultative form
of the New Engineering Contract form of contract. The first edition was published in
1993.[5]Wider use of the NEC was recommended by the Latham Report in 1994.

Comparison
The following demonstrates the differing approaches to drafting in the NEC and ICE forms
of contract using the illustration of circumstances when the contractor is entitled to
additional time and cost for physical conditions.

NEC Engineering and Construction Contract Second Edition

Clause 60.1 (12)
 are within the site.
 are not weather conditions and
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 which an experienced contractor would have judged at the Contract Date to have such
a small chance of occurring that it would have been unreasonable for him to have
allowed for them.

ICE Conditions of Contract Sixth Edition Clause 12(1)

If during the execution of the Works the Contractor shall encounter physical conditions
(other than weather conditions or conditions due to weather conditions) or artificial
obstructions which conditions or obstructions could not in his opinion reasonably have
been foreseen by an experienced contractor the Contractor shall as early as practicable give
written notice thereof to the Engineer.

Guidance Notes
Guidance Notes and Flow Charts are published by the ICE. These notes are supplemented
by the Frequently Asked Questions sections of the NEC website.[ Prospective users of the
NEC3 contract are encouraged to study the FAQ's in order to avoid unintended contract
provisions. The often unintended Option C scenario where a Contractor is paid monies in
excess of the Target Cost plus maximum share provisions is specifically not addressed in
the guidance notes / Frequently Asked Questions.

Other common misinterpretations are minutes of meetings as communications, deleted

work and paying for correcting defects. Employers often utilise the additional conditions of
contract (Z-clauses) to amend or delete contract provisions relating to these items.

Footnotes

1. ^ R Gerard (2005). Relational contracts—NEC in perspective. Lean Construction

Journal, 2, 80-86.
2. ^ Brook M. (2004). Estimating and Tendering for Construction Work Butterworth-
Heinemann ISBN 978-0-7506-5864-5
3. ^ Patterson R (2007) Introducing NEC Wellington Seminar
4. ^ NEC (2005) NEC3 Engineering and Construction Contract Thomas Telford
Ltd ISBN 978-0-7277-3359-7
5. ^ Broome JC, Hayes RW. (1997). A comparison of the clarity of traditional
construction contracts and of the New Engineering Contract. International Journal
of Project Management, 15, 255-261. doi:10.1016/S0263-7863(96)00078-6
6. ^ www.neccontract.com
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ATTACHMENT IV

USEFUL INTERNET LINKS

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Internet Links to useful Project Management

information

Organizational Project Management Maturity model (OPM3)

https://www.dropbox.com/s/azkjs6nar65zqzt/OPM3_Pr.pdf

Planning& Scheduling Excellence Guidelines （PASEG)

https://www.dropbox.com/s/132mlkdl09ujhmm/PASEG.pdf

Check List for Capital Projects

https://www.dropbox.com/s/ukcoyn2jujy3yke/CHECKLIST%20FOR%20CAPITAL
%20PROJECTS%202011.xlsx

Project Management Workbook

https://www.dropbox.com/s/vxf2gd08v40xoti/PROJECT%20MANAGEMENT%20
WORK%20BOOK%202012.xlsx

Systems Engineering
https://www.dropbox.com/s/0lrvn4lig8937n4/SYSTEMS%20ENGINEERING.xlsx

Construction Claims Library (1)

https://www.dropbox.com/s/trkyydr81rhx3x1/CONSTRUCTION%20CLAIMS%20
ARTICLES%20LIBRARY.pdf

Construction Claims Library (2)

https://www.dropbox.com/s/hzjnujjaiyzczst/CONSTRUCTION%20CLAIMS%20C
ASE%20LIBRARY.pdf

Cost and Schedule Control System Criteria (CSCSC)

https://www.dropbox.com/s/fizmscwr2tulxnt/COST%20AND%20SCHEDULE%20
CONTROL%20SYSTEMS%20CRITERIA%202008.pdf

Partnering Agreement Guidelines

https://www.dropbox.com/s/wmfnj1ia4q8eh7k/PARTNERING%20AGREEMENT%
20GUIDELINES%201.docx

Sustainable project guide

https://app.box.com/s/2pp8dnz6kbcilp2ksiir
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Standard form of agreement between owner and Program Manager

https://app.box.com/s/zwcqxmzkemh1dz3a8ige

Standard form of agreement between owner and Design Manager

https://app.box.com/s/hfbj4v359spta1i2z4sx

Mediator Qualification Criteria

https://app.box.com/s/av8ekl7hmnz773yv2sdu

International Conflict Management Strategy

https://app.box.com/s/xfv66gtzkzpiublhuumf

Guide for drafting international Dispute Resolution Clauses

https://app.box.com/s/rp3nm4jueybhed86030o

Construction Law Primer

https://app.box.com/s/ljvseijd07zbxxm1mqvt

Complex Construction Arbitrator Criteria

https://app.box.com/s/ldfkjc8wl35h8htotm1u

120 minutes crash course on projects construction law and others

https://app.box.com/s/g7q8q629ld7t0kpbrs94

Minitrial
https://app.box.com/s/r82wavwv9ub7x9epslfh

Principles for ADR provider organizations

https://app.box.com/s/li9nwtxefc0etpkqtamz

CPR Construction Partnering Briefing

https://app.box.com/s/20ydlqbzi9o4mohe27se

CPR Protocol on determination of Damages in Arbitration

https://app.box.com/s/ji3lzd0dm76ybeojk0xs

Global Rules for Accelerated Commercial Arbitration

https://app.box.com/s/09zzqtpt4xw6b9p2gpam
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Mediation Procedure
https://app.box.com/s/jxeeynxsjdj0mfbrp3ih

Mediators, Arbitrators and everything ADR

http://www.mediate.com

International Center for Dispute Resolution

http://www.icdr.org

Singapore International Arbitration Center

http://www.siac.org.sg/