MBCQ724D Project Management and Contract Adminstration PDF

UNIT 20: Case Study
MBCQ-724D
CE
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Project Management &
Contract Administration
ES
UP
(c)
Project Management and Contract Administration
Course Design
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Advisory Council
Chairman
Dr Parag Diwan
Members
Dr Kamal Bansal Dr Anirban Sengupta Dr Ashish Bhardwaj
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Dean Dean CIO
Dr S R Das Dr S P S Narang Dr Sanket Goyal

VP – Academic Affairs Associate Dean VP – Research & Development
SLM Development Team

Wg Cdr P K Gupta
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Dr Sunder Ganesh Raju
Mr T Bangar Raju
Dr K K Pandey
Print Production
Mr Kapil Mehra Mr A N Sinha

Sr Manager – Study Material Sr Manager – Printing
UP
Author
R Mishra
All rights reserved. No part of this work may be reproduced in any form, by mimeograph or any other means,
without permission in writing from MPower Applied Learning Enterprise.
(c)
Course Code: MBCQ-724D
Course Name: Project Management & Contract Administration
Version: July 2013
© MPower Applied Learning Enterprise

UNIT 20: Case Study
CE
Contents
Block-I
Unit 1 Project Feasibility – Econometric Model ....................................................................... 3

Unit 2 Project Cost – Contingency, Risk and Sensitivity Analysis ....................................... 19
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Unit 3 Initiating a Project – I .................................................................................................. 33
Unit 4 Initiating a Project – II................................................................................................. 43
Unit 5 Case Study .................................................................................................................... 53
Block-II
Unit 6 Project Execution – Developing a Project Schedule.................................................... 59

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Unit 7 PERT and CPM............................................................................................................. 77
Unit 8 Project Control – Checking Project Progress with Bell and “S” Curves .................... 87
Unit 9 Project Costs Control – I ............................................................................................ 103
Unit 10 Case Study .................................................................................................................. 113
Block-III
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Unit 11 Project Costs Control – II ........................................................................................... 117

Unit 12 Project Procurement – Evaluating Bids for Major Equipment ................................ 129
Unit 13 Attributes of a Good Project Manager ....................................................................... 143
Unit 14 Modern Trends............................................................................................................ 151
Unit 15 Case Study .................................................................................................................. 161
Block-IV
Unit 16 Contract Elements – Contract Formation................................................................. 169

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Unit 17 Key Business Drivers for Contract Management ..................................................... 177

Unit 18 The Need of Contract Management Solutions .......................................................... 183
Unit 19 Contract Management for Legal Department........................................................... 193
Unit 20 Case Study .................................................................................................................. 201
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Block-V
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Unit 21 The Five Cornerstones of a Contract Lifecycle Management Strategy ................... 207
Unit 22 Justifying Contract Management .............................................................................. 215
Unit 23 Five Myths of Contract Management........................................................................ 219
Unit 24 Understanding and Improving the Contracting Process.......................................... 229
Unit 25 Case Study .................................................................................................................. 235
Glossary ............................................................................................................................................ 237
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UNIT 1: Project Feasibility – Econometric Model
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Notes
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BLOCK-I
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Detailed Contents Project Management and Contract Administration
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Notes
UNIT 1: PROJECT FEASIBILITY – ECONOMETRIC
___________________ UNIT 3: INITIATING A PROJECT – I
MODEL
z Introduction
z ___________________
Introduction
z Manpower Build-up
z Developing a PC Econometric Model
___________________
z Major Initiation Steps
z The Econometric Model
___________________
___________________ UNIT 4: INITIATING A PROJECT – II

UNIT 2: PROJECT COST–CONTINGENCY, RISK
z Introduction
AND___________________
SENSITIVITY ANALYSIS
z Initiation Steps
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z Introduction
___________________
z Types of Project Estimates

___________________ UNIT 5: CASE STUDY
___________________
___________________
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Unit 1
3
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Notes
Activity
Project Feasibility – Econometric

Establish capital cost of a
___________________
project familiar to you. Select
the ___________________
most expensive
Model component of capital cost and
___________________
list out ways to minimize its
cost.___________________
Objectives ___________________
After completion of this unit, the students will be aware of the following
___________________
topics:
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___________________
\ Capital Costs
\ Working Capital ___________________
\ Operating Costs ___________________

\ The concept of Product Revenues and the interplay of economic ___________________
environmental factors impacting project feasibility
\ Determine Techno-economic Feasibility of a Project
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Introduction
The factors affecting the feasibility and the potential profitability
of a new project are of concern to marketers, developers and
investors (Table 1.1). Complex econometric models, which analyse
these variables, have been developed to run on large computers.
(Econometrics is the use of mathematical and statistical methods
to develop and verify economic theories). Econometric model that
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can be developed on a PC is described here.
Developing a PC Econometric Model

In developing a PC econometric model, six factors must be
considered.
Capital Costs
The capital cost of a new project can usually be determined with
reasonable accuracy (say within 15%). Capital cost is an extremely
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important number for two reasons: first, it is required "upfront".

The money has to be found and spent many years before there is a
payout. Second, the overall profitability of a project is usually
measured in terms of Return on Investment (ROI). Many operating
concerns and investors set their goals on ROI (say, a minimum of
20% per annum pre-tax). The average annual ROI is the total
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earnings divided by the specified project life times the total
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Notes investment. A 10% increase in capital cost will cause a
___________________ corresponding 10% decrease in ROI for a project with a
10-year life cycle. A 20% ROI on a project with a 10-year life means
___________________
that the project will earn 20% for 10 years, which is 200% on the
___________________ life of the project or 100% over 5 years. This is equivalent to a
___________________ payout period of 5 years.
___________________ Table 1.1: Major Factors Affecting Project Profitability
Probable
___________________ Possible Effect
Accuracy of
S.No. Factor on Project
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___________________ Estimate/
Profitability
Prediction
___________________ 1. Land & Site costs Good Minor
___________________ 2. Engineering costs Good Minor
3. Equipment & Material costs Good Major
___________________
4. Construction Cost Fair Major
5. Initial Start Up Costs Fair Intermediate
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6. Construction Duration Good Minor
7. Working Capital Fair Major
8. Operating Costs Fair Major
9. Plant Labour Rates Poor Major
10. Cost of Feedstocks Poor Major
11. Cost of Utilities Fair Major
12. Product Sale Volume Poor Major
13. Product Sale Price Poor Major
14. Residual Plant Value Poor Minor
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15. Taxation Rates Poor Major

16. Rates of Inflation Poor Major
17. Interest Rates Fair Major
18. Currency Exchange Rates Poor Major
19. General Economic Climate Poor Intermediate
20. Government Influences Poor Major
The need to maintain a high ROI to attract investors explains why

there is so much pressure to keep the initial capital investment to
a minimum. Frequently, desirable options and expansions are
deferred. Features that will improve yields or increase efficiency
are carefully examined if they add to the cost.
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Table 1.2 is the checklist of items that make the capital cost of
a new project. Major items that make up the capital cost are:
(1) Land and site development costs, (2) Engineering, procurement
and construction costs and (3) Start-up (commissioning) costs. The
land or the site costs should be noted separately since they will 5
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have residual value after the end of the project life. For all projects Notes
there should be a substantial sum set aside for start-up (say 15 to ___________________
20%). This sum may need to be higher for new unproven projects
___________________
and could be less for established projects. A suitable contingency or
management reserve needs to be included in the capital cost ___________________
estimates. ___________________
Table 1.2: General Checklist of Items in the Capital Cost Estimates ___________________
Major ___________________
S.No. Detail Items
Classification
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___________________
1. Site Property cost, Fees, Surveys, Clearing &
grading, Roads, Railways, Fences, Paved ___________________
areas, Landscaping
___________________
2. Buildings, Process, Auxiliary & administration buildings,
Foundations & Process structures, Pipe racks, Platforms, ___________________
Structures Ladders, Maintenance/Handling facilities &
foundations
3. Building Services Plumbing, HVAC, Fire protection, Lighting,
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Alarms & communication
4. Process An itemized process equipment list from
Equipment checked process flow sheets.
5. Non-Process Fire fighting, Maintenance, Storage & other
Equipment mobile equipment, Furniture, Lockers, Tools,
Office, Lab & housekeeping equipment
6. Process Process piping & supports, Instrumentation,
Auxiliaries Insulation, Cabling, Switchgear, Earthing &
Controls
7. Utilities Steam plant, Power generation & supply, Air
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Plant, Refrigeration, Water treatment &

supply, Effluent treatment & outfall, Sewage
& drains, Inert gas supply
8. Offsite Facilities Distribution pipelines for steam, Condensate,
Water, Air, Fuel, Electrical cabling, Feedstock
& finished product handling & storage, Tanks,
Spheres, Silos, Railway & truck loading
facilities, Blow down & flare systems
9. Engineering Costs Administration, Process, Project & design
engineering, Procurement expediting &
inspection, Reprography, Computers,
Communications
10. Construction Costs Construction labour, Supervision, Equipment,
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Tools, Consumables, Testing

11. Misc. Items Catalysts & chemicals, Spare parts,
Construction spares, Surplus equipment,
Taxes & insurance, Duties, Start-up expenses,
Management reserves, Errors & omissions
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Working Capital
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Notes
Table 1.3 is a typical checklist of items that are considered working
___________________ capital. Working capital is also needed "upfront". There must be
___________________ enough capital available to build up inventories, operate the plant
and continue to pay debtors bills before payments from clients and
___________________
creditors are received.
___________________
Table 1.3: Working Capital Items and Periods
___________________
S. No. Account Period Months
___________________
1. Feedstock Accounts Payable 0–1
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___________________
2. Feedstock Inventories 0.5 – 1
___________________
3. Staff & Labour Payroll 0.5 – 1
___________________
4. Utilities 1–2
___________________ 5. Manufacturing Consumables 1–2
6. Product Inventories 1–3
7. Products Account Receivables 1–2

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8. Taxes Payable 4–6
9. Freight Payable 0.5 – 1
A major component of working capital is the cost of maintaining

inventories of feed stocks, products and other consumables. Table
1.3 also shows typical inventory levels considered necessary.
Working capital although required "upfront", also has a residual
value at the end. Inventory can be sold off and cash value realized
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on completion of the plant life.
Operating Costs
Table 1.4 lists the typical items that go into the make-up of
operational costs. These are costs which, in general, are
proportional to the plant throughput. They are necessary to run
the plant.
The major operating costs of a process plant are the costs of
feedstock, raw materials, utilities and other consumables. It is not
unusual for the annual cost of feedstock and utilities for a process
plant to exceed the capital cost by a significant factor. This is often
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recognized by the fact that a major reason for considering a new

plant is the availability of feedstock, raw materials or a key utility
at an especially advantageous price. In many cases, the physical
location of the plant may be dictated by the location of available
feedstock or utility.
Table 1.4: Check List of Items for Operating Cost Estimates 7
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S. Major Notes
Detail Items
No. Classification
___________________
Feedstock materials, Processing chemicals &
1. Materials catalysts, Utilities, Maintenance materials, ___________________
Operating supplies & Consumables
Plant labour & supervision, Maintenance labour ___________________
2. Labour
& supervision, Payroll, Additives
___________________
Administration, Lab, Technical, Purchasing,
Inspection, Shipping, Personnel, Safety, ___________________
3. Plant Overheads
Accounting, Clerical, Shops & Repair Facilities,
Cafeteria, Communications, Taxes & Duties ___________________
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Salesmen's salaries & commissions, Publicity, ___________________
4. Marketing Samples, Travel & entertainment, Market
research ___________________
Containers & packages, Transportation &
5. Distribution ___________________
shipping, Terminals & warehouses
General, General management & central technical, ___________________
6. Overheads & Marketing & other activities, Legal & patent,
Administration Research & development, Public relations
Depreciation, Debt management, Maintenance of
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7. Financial working capital, Credit functions, Interest
payments.
Normally, an investor or developer will want to make sure that

there is a guaranteed source of feedstock and supplies of key
utilities at fixed prices. Long-time contracts may be signed, in
advance, for the supply of feedstock and utilities. Such a move may
go a long way in reducing the major part of the risk in a new
project venture.
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Product Revenues
The key objective of the project is to earn revenue from the sale of
the products. For the project to be successful there must be a
secure market. The main features that marketers will attempt to
establish are (1) Is there a demand for the products and will this
continue or preferentially increase over the life of the project? and
(2) Will the price of the products remain stable or increase over the
life of the project?
The total profitability of the project is set by the margin between
the cost of production and the selling price of products. The selling
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price must be competitive initially and as far as can be seen,

remain competitive over the life of the project. The potential
markets should be identified and the ability of the buyers to pay
must also be evaluated. Many a project has failed because
although there was a need for the product, the buyers did not have
8 the capacity to pay. Most astute developers will attempt to
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Notes negotiate long-term "base load" sales contracts at preferential
___________________ prices. They will find a financially sound buyer who will take a
substantial portion of the product at a rate that is attractive and
___________________
guaranteed over a period of five or more years. This establishes a
___________________
base operating level and a base income for the project.
___________________
The operating level is also a key to project success. Large plants
___________________ benefit from "economies of scale". A large throughput achieves
___________________ higher operating efficiencies and also allows many fixed or semi-
fixed costs to be distributed over higher volumes of product
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___________________
resulting in a lower unit cost. The theory of economy of scale is
___________________
admirable if there is demand for the volume of product produced.
___________________ Large plants can be big money losers if they are not run at full
___________________ capacity. In any feasibility study, the level of plant operation is a
major contributor to overall profitability.
Economic Factors
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Economic factors, in general, cannot be predicted over a long
period. These include the rate of inflation, interest levels, foreign
currency exchange rates, and the general business climate.
Interest, inflation and foreign currency exchange rates can be built
up in the econometric model to see the effect on profitability.
Different high/low rates may be selected over the life of the project
to determine the best and worst that could happen. From this, the
profitability risk can be established. In some cases it may be
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possible to hedge against adverse conditions by buying forward or

by incorporating adjustments or escalation clauses in contracts.
Government Influences
City, state and central governments can have a major impact on a
project. New taxes may be introduced or existing rates may be
changed. Regulations may be passed, particularly with regard to
environmental concerns that may require additional capital
expenditure and add to the operating cost. Tax incentives may be
made to competitors in another location.
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Nothing can be done about future government influences. The best

that can be done is to pick up an area where the government seems
stable. Look carefully at the history and check out all pending
legislation. Select backward areas offering tax concessions over the
life of the project.
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Check Your Progress
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Notes
Activity
State whether the following statements are True or False:
Prepare an econometric
___________________
1. Economic factors, in general, can be predicted over a model of a project.
___________________
long period.
___________________
2. The key objective of the project is development of the
___________________
country.
___________________
The Econometric Model ___________________
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The first step in preparing an econometric model is to set up the ___________________
columns and rows required. In the example given here, the ___________________
operating life of the plant will be 10 years, with a three year ___________________
construction period. A column of values will be required for each
___________________
year. An initial design value and a final value are also needed. A
reference column and a description column complete the picture
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resulting in 17 columns overall. These are labelled A through Q.
The rows under the columns now deal in sequence with the factors
already described to give the financial picture. Reference should be
made to the econometric model in Table 1.5. This model is an
example to illustrate method and technique. The actual values are
not necessarily in line with commercial practice.
Column Headings
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Columns are identified with their headings and year numbers.
General Factors
z Row 1 – Average Inflation Rate, per cent: This row shows the
predicted rate of annual inflation for the entire project life of
13 years.
z Row 2 – Compounded Escalation Factor (CEF): Row 2
converts row 1 into a compounded multiplier. CEF for year
N = (1+I1/100) × (1+I2/100)…..× (1+IN/2/100). For year N
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average inflation rate is taken at mid-year point, hence N/2.

z Row 3 – Plant Operating Rate (POR) per cent: The plant
operating rate is a key variable in the profitability study. A
60% operating rate is considered for year 1 rising to 100% over
the first five years.
10 Table 1.5: The Econometric Model
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Notes NO. YEAR NO. DESIGN 1 2 3 4 5 6 7 8 9 10 11 12 13 FINAL
YEAR VALUE 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 1013 VALUE
GENERAL
___________________ FACTORS
1 Avg. Inflation 6 6 7.5 8 8.5 9 9.5 10 10.5 11 10.5 10 9.5 9.5
Rate %
___________________ 2 Compounded 1 1.03 1.061 1.101 1.145 1.193 1.247 1.306 1.372 1.444 1.523 1.603 1.683 1.763 1.847
Escalation
Factor
___________________ 3 Plant 100 0 0 0 60 70 80 90 100 100 100 100 100 100
Operating
Rate %
___________________ CAPITAL
COST
___________________ 4 Land Cost $M 20 20.6 35.24
5 Plant Cost $M 250 51.5 79.57 110.07 28.62 44
6 Working 186.15 0 0 0 125.42 23.25 25.31 27.5 30.1 14.6 12.75 13.1 13.61 14.04 299.93
___________________ Capital $M
7 Total Capital 456.15 72.1 79.57 110.07 154.04 23.25 25.31 27.5 30.1 14.6 12.75 13.1 13.61 14.04 379.17
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Cost $M
___________________ OPERATING
COSTS
___________________ 8 Feed Unit 26 0 0 0 26 27.3 28.67 30.1 31.6 33.1 34.04 36.5 38.41 40.33 46.13
Cost $/BBL
9 Cost of Feed 455 0 0 0 455 477.75 501.44 526.72 553.06 580.71 609.74 640.23 672.24 705.05 706.86
___________________ $M
10 Utilities 2.52 0 0 0 2.12 2.43 2.75 3.09 3.46 3.64 3.84 4.04 4.24 4.44 4.44
Power $M
___________________ 11 Utilities 0.53 0 0 0 0.44 0.51 0.57 0.64 0.72 0.76 0.8 0.84 0.88 0.93 0.93
Water $M
12 Maintenance 10 0 0 0 8.43 9.63 10.91 12.26 13.72 14.44 15.23 16.03 16.83 17.63 17.63
$M
13 Misc. 15 0 0 0 12.64 14.45 1`6.36 18.39 20.57 21.65 22.85 24.04 25.25 26.45 26.45
Materials $M
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14 Plant Labour 3 0 0 0 2.28 2.69 3.13 3.6 4.11 4.33 4.57 4.81 5.05 5.29 5.29
$M
15 8 0 0 0 9.16 9.55 9.98 10.45 10.97 11.55 12.16 12.82 13.47 14.1 14.1
Administratio
n $M
16 Total 520.05 0 0 0 516.07 544.31 574 605.26 638.21 670.26 704.05 739.4 776.37 815.03 815.03
Operating
Cost $M
REVENUES
17 Product A 33.5 0 0 0 33.5 35.18 36.93 38.78 40.72 42.76 44.89 47.14 49.49 51.97 51.97
Base Price
$/BBL
18 Product A 30.15 0 0 0 30.15 31.43 32.85 34.41 36.13 38.02 40.11 42.22 44.33 46.44 46.44
Extra Price
$/BBL
19 Product A 345.89 0 0 0 207.53 250.67 297.37 348.1 403.44 440.65 463.02 486.34 510.4 6 536 536
Revenue $M
20 Product B 32 0 0 0 36.63 38.19 39.91 41.8 43.89 46.2 48.74 51.3 53.86 56.42 56.42
Price $/BBL
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21 Product B 196 0 0 0 134.62 163.73 195.54 230.43 268.84 292.95 298.51 314.18 329.89 345.56 345.56
Revenue $M
22 Excess Feed 0 0 0 0 163.8 129.99 90.29 47.4 0 0 0 0 0 0 0
Revenue $M
23 Total Revenue 637.54 0 0 0 606.23 648.19 692.89 740.93 793.01 850.57 895.27 941.18 988.24 1036.39 1036.39
$M
FINANCIAL
PICTURE
24 Cumulative -72.1 -151.67 -261.74 -325.61 -244.98 -151.4 -43.31 81.39 247.1 425.57 614.17 812.42 1019.74 1398.91
Cash Flow $M
25 Discounted -70 -142.96 -237.79 -284.45 -205.29 -121.41 -33.16 59.34 171.17 279.43 383.14 482.69 578.39 757.47
Cash Flow $M
26 Annual 22.5 0 0 0 22.5 22.5 22.5 22.5 22.5 22.5 22.5 22.5 22.5 22.5 0
Depreciation
$M
27 Depreciated 250 250 250 250 227.5 205 182.5 160 137.5 115 92.5 70 47.5 25 25
Book Value
$M
28 Actual Annual 94.99 0 0 0 67.66 81.3 96.39 113.16 132.3 157.82 168.72 179.28 168.36 198.86 1384.93
Profit $M
29 Discounted 94.99 0 0 0 59.11 68.2 77.29 86.63 96.46 109.32 110.78 111.84 112.51 112.79 944.92
Annual Profit
$M
30 Discounted 20.02 0 0 0 12.96 14.95 16.94 18.99 21.15 23.97 24.29 24.52 24.66 24.73 20.72
(c)
Annual ROI %
LOAN
ALTERNATIV
ES $M 125
CAPITAL +
250 LOAN
31 Loan 45 45 45 45 45 45 45 45 45 45 45 45 45 45 250
Interest/Repay
ment $M
32 Cumulative - -193.81 -79.89 -10.38 85.85 181.15 292.09 420.89 592.1 777.62 971.67 1172.87 1381.74 1760.91
Cash Flow $M 257.9
Contd…
33 Cash Retained 375 257.9 193.81 79.89 10.38 30 60 100 150 210 250 290 320 342.47 375
$M
11
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34 Interest on 15.47 11.63 5.99 0.03 2.55 5.4 9.5 15 22.05 27.5 30.43 32 32.53 210.91
Cash in Hand Notes
$M
35 Declared 0 0 0 0 55.85 65.3 70.94 78.8 111.21 143.32 154.05 171.2 184.4 1039.27
Annual Profit ___________________
$M
36 Discounted 0 0 0 0 46.8 52.36 54.3 57.45 77.94 95.55 96.1 101.72 105.73 687.05
Annual Profit ___________________
$M
37 Discounted 0 0 0 0 37.44 41.97 43.44 45.91 61.63 76.64 76.88 81.37 84.5 54.96
Annual ROI % ___________________
___________________
Capital Cost
___________________
z Row 4 – Land Cost, $M: The land cost of $20M is expended in
year 1 and also available as final recoverable sum. The initial ___________________
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and final values are both multiplied by the Compounded ___________________
Escalation Factor (CEF). ___________________
z Row 5 – Plant Cost $M: The plant cost is estimated at ___________________
$ 250M, which will be spent @ 20% in year 1, 30% in year 2,
___________________
40% in year 3 and last 10% in year 4. Expenditure in each year
is multiplied by CEF. The equation for the expenditure in year
3 (for example) is 250 × 0.4 × CEF. The final cost is the
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residual scrap value assumed as 10%. The final value is also
multiplied by CEF.
z Row 6 – Working Capital, $M: The working capital is
estimated at $20M plus 2 months of feedstock and product
inventories. The working capital is generated by an equation
which escalates the $20M and adds 2/12th of the designed
feedstock/product quantities times the operating rate times the
feedstock/product prices for the year in question. Additional
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working capital is needed each year to allow for escalation and

increased operating rates. The final residual value is the
cumulative value of all the working capital spent.
z Row 7 – Total Capital Cost, $M: This is the sum of rows 4
through 6.
Operating Costs
z Row 8 – Feed Unit Cost, $/BBL: This is the contractual feed
for the 10 year period. The initial cost is $26/bbl subject to a
5% increase each year. The cost in year N is $26 × 1.05^N.
(c)
z Row 9 – Cost of Feed, $M: This value is the barrel

per day (50,000) times the number of operating days
in the year (350) times the feedstock unit cost. Since the
contract requires that the whole 50,000 barrels be taken, this
number is not multiplied by the operating rate.
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z Row 10 – Utilities Power, $M: Power requirements have been
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Notes
estimated at 1.8 kWh/bbl of feed at design throughput. At
___________________
lower plant operating rates, the power usage per barrel will
___________________ increase by the 0.6 power. Electricity rates are initially $0.08
___________________ per kWh and are subject to escalation. The equation for power
costs thus becomes 50,000 × 350 × 1.8 × 0.08 × CEF ×
___________________
(POR/100)^0.6.
___________________
z Row 11 – Utilities Water, $M: Water requirements have been
___________________ estimated at 15 gallons per barrel. Water costs at $2.0 per
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___________________ 1000 gallons initially are subject to escalation. As with power,
___________________
water consumption per barrel increases to the 0.6 power at
lower operating rates. The equation for water costs is similar
___________________
to the equation for power costs 50,000 × 350 × 15 × 2.0/1,000 ×
___________________ CEF × (POR/100)^0.6.
z Row 12 – Maintenance, $M: Annual maintenance has been
estimated at $10M. This value is subject to escalation.
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Maintenance costs are reduced at lower plant operating rates
and again the 0.6 power rule applies. The equation is 10 ×
CEF × (POR/100)^0.6.
z Row 13 – Miscellaneous Materials, $M: Miscellaneous
materials are estimated at $15M. The same equation applies
as for maintenance.
z Row 14 – Plant Labour, $M: Plant labour has been estimated
at 100 persons, over all, at an average cost of $30,000 per year.
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Plant labour is subject to escalation. At lower plant operating

rates, plant labour can be reduced slightly by the 0.8 power.
The equation is 100 × 30,000 × CEF × (POR/100)^0.8.
z Row 15 – Administration, $M: General administrative and
overhead costs have been estimated at $15M per year. This
value is subject to escalation and is not changed by plant
operating rates.
z Row 16 – Total Operating Cost, $M: This is the sum of rows 8
through 15.
(c)
Revenues
z Row 17 – Product A Base Price, $/BBL: This is the
contractual price to be agreed with ABC Co. (client). A value of
$33.5/bbl is selected for the base case. This price will be subject
to an increase of 5% per year by contract. The price in year N 13
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is 33.5 × 1.05^N. Notes
z Row 18 – Product A Extra Price, $/BBL: Any product ___________________

produced over and above that required to meet the ABC ___________________
contract level will be sold on the open market. It is assumed
___________________
that initially this extra product may be sold at 90% of ABC's
price but that this price will strengthen over the years in line ___________________
with the escalation rate. The price equation will therefore be ___________________
33.5 × 0.9 × CEF. ___________________
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z Row 19 – Product A Revenue, $M: This value is the total ___________________
product A multiplied with the above prices. For years 1 to 5 =
___________________
15,000 × ABC price + (30,000 × POR–15,000) × Extra price.
For years 6 to 10 = 25,000 × ABC price + (30,000 × POR- ___________________
25,000) × extra price. ___________________
z Row 20 – Product B Price, $/BBL: It is assumed that product

B can be sold on the open market. The initial market price is
ES
$30/bbl. This value will be increased annually in line with the
compounded escalation factor.
z Row 21 – Product B Revenue, $M: Product B revenue will be
production (17,500) times the POR times the price in Row 20.
z Row 22 – Excess Feed Revenue, $M: Since XYZ (producer) is
contractually required to buy 50,000 bbl of feed regardless of
the plant operating rate, the excess feed must be sold on the
open market. It is assumed that the excess feed can be sold at
UP
90% of the purchase price. The revenue will be 50,000 × (100-

POR)/100 × 0.9 × feed price.
z Row 23 – Total Revenue, $M: This is the sum of rows 17
through 22.
Financial Picture
z Row 24 – Cumulative Cash Flow, $M: This value is the
cumulative sum of the total revenues (row 23) minus the total
expenditures, i.e. total capital costs (row 7) and total operating
costs (row 16). Initially, the cash flow is negative due to initial
(c)
capital outlays.
z Row 25 – Discounted Cash Flow, $M: The discounted cash
flow is the actual cash flow in row 24 converted to present day
values. The annual values in row 24 are divided by the
compounded escalation factor (CEF).
14
z Row 26 – Annual Depreciation, $M: This value is the total
CE
Notes
capital cost minus the residual value divided by the plant life.
___________________
Since both land cost and working capital are residual, this
___________________ value equates to plant cost minus scrap value divided by plant
___________________ life. There are different methods of calculating depreciation.
This is the straight line method.
___________________
z Row 27 – Depreciated Book Value, $M: This is an accounting
___________________
Figure and is equal to the capital cost minus the residual
___________________ value minus the annual depreciation to date.
-C
___________________
z Row 28 – Actual Annual Profit, $M: This value is the total
___________________ annual revenues (Row 23) minus the total annual operating
___________________ costs (Row 16) and minus the annual depreciation (Row 26).
___________________ z Row 29 – Discounted Annual Profit, $M: This converts the

annual profit in row 28 to the present day value by dividing
the actual annual profit by the compounded escalation factor
ES
(Row 2).
z Row 30 – Discounted Annual ROI, %: This row gives the value
that is of prime interest to investors. The discounted annual
profit (Row 29) is divided by the total initial design capital cost
to give the ROI. The final value gives the average over the
plant life.
Loan Alternative
UP
The econometric model up until now has assumed that all the
capital needed will be provided by the XYZ company. An
alternative to this is to raise a loan with fixed interest rate over
the project life including the construction period. The loan
repayment will be fixed and can be considered as operating cost.
The balance of any profit and the residual cost are then available
to the company and can be related to a lower investment cost.
To check out the economics of this alternative, a case is assumed
such that $250M is taken as loan over a 13 year period. An
additional $125M is raised as capital by the XYZ shareholders.
(c)
z Row 31 – Loan/Interest Repayment, $M: This shows the

annual interest due on $250M loan at 18% simple interest.
z Row 32 – Cumulative Cash Flow, $M: This is the same as row
24 except the project starts with $375M in hand and $45M in
interest is paid out each year.
15
z Row 33 – Cash Retained, $M: Available cash initially exceeds
CE
Notes
requirements. Later excess cash is retained to build up capital
to pay off the loan. To compare the loan alternative with the ___________________
base case, the final cash retained equals the loan plus ___________________
investment capital, leaving the residual value the same as the ___________________
base case. ___________________
z Row 34 – Interest on Cash in Hand, $M: The excess cash in ___________________
hand will earn interest. It is assumed that interest will be
___________________
earned at the annual inflation rate in Row 1.
-C
___________________
z Row 35 – Declared Annual Profit, $M: In this case profit can
___________________
be declared at any level supported by the cash flow less the
___________________
cash retained.
___________________
z Row 36 – Discounted Annual Profit, $M: This is the present or
the discounted value of the annual profit. Row 35 is divided by
ES
CEF.
z Row 37 – Discounted Annual ROI, %: In the loan alternative,

the profit is divided by the shareholders' capital of $125M only
since this is the shareholders' total investment. As can be seen,
although the total profit earned is lower, the ROI is
considerably higher due to the reduced investment.
Analysing the Financial Picture

UP
Now that the econometric model is complete, it is possible to

examine the profitability of the venture. The base case yields an
average annual ROI of 20.72% over the 10 years which is at the
desired target level. Actually, the profitability may be higher than
shown, since not all the working capital is expended initially and
some interest could be earned on excess cash in hand. Also the
residual value plus the depreciated value exceeds the initial
investment. If desired, the econometric model could be adjusted to
show these details; however, the base case results shown are
probably close enough for analysis and decision making.
(c)
Modifying the Variables

Now that the econometric model has been set up, unlimited "What
if" simulations may be carried out to see the effect on the bottom
line. The inter-meshing equations on the spread sheet instantly
16 adjust all related values in the columns and rows to show the new
CE
Notes picture. To illustrate this, following five "what ifs" are simulated.
___________________
z Case A. Project capital cost overruns by 50%.
___________________
z Case B. Annual inflation rate runs 15% higher than predicted
___________________ rate.
___________________ z Case C. Operating rate runs 10% lower than hoped for in first
___________________ five years.
___________________ z Case D. Due to competitive market, proposed price of product
A to ABC company must be reduced by 10%.
-C
___________________
___________________ z Case E. Market for product B is less buoyant than anticipated,

cut by 20%.
___________________
All of these changes can be entered singly or in combination and
___________________
the spread sheet will instantly adjust. The spread sheet will show
the effect on the annual discounted ROI per cent of each of the
above "What ifs" and compares the changes against the base case.
ES
Simplicity and Flexibility
The personal computer with a spread sheet can be used to create a
tailor made econometric model that can be as complex as you want
it to be.
Check Your Progress

Fill in the blanks:
UP
1. The first step in preparing an econometric model is to

set up the ……………… and ……………… required.
2. The rows under the columns now deal in ……… with the
factors already described to give the financial picture.
Summary
This unit provides a simplified method of evaluating economic
feasibility of a project by preparing its econometric model on a PC.
It also offers insight into various factors that could affect project
(c)
feasibility. This provides good initial evaluation of a project.
Lesson End Activity

List the factors that could affect the product revenues and the
probability of their occurrence.
Keywords 17
CE
Notes
Capital Cost: One-time setup cost of a plant or project, after
___________________
which there will only be recurring operational or running costs.
___________________
Working Capital: The cash available for day-to-day operations of
___________________
an organization. Strictly speaking, one borrows cash (and not
working capital) to be able to buy assets or to pay for obligations. It ___________________
is also called current capital. ___________________
Operating Cost: It is the cost per unit of a product or service, or ___________________
-C
the annual cost incurred on a continuous process. Operating costs ___________________
do not include capital outlays or the costs incurred in design and ___________________
implementation phases of a new process.
___________________
Revenue: The income generated from sale of goods or services, or ___________________
any other use of capital or assets, associated with the main
operations of an organization before any costs or expenses are
ES
deducted. Revenue is shown usually as the top item in an income
(profit and loss) statement from which all charges, costs, and
expenses are subtracted to arrive at net income.
Questions for Discussion

1. Define most commonly used finance term involved in
developing a project.
UP
2. List factors used in structuring a project.
3. Describe economic factors affecting development of new

project.
4. Analyse effect of various economic factors in econometrics

model for a project.
5. Explain the significance of various cost components of a

project.
6. What are the main constituents of “Econometric Model” and

(c)
their significance?
7. What in your view is the next step in establishing project

feasibility? Give details of any such study required.
18
Further Readings
CE
Notes
___________________ Books
___________________ Newtown Square, A Guide to the Project Management Body of
___________________
Knowledge (PMBOK Guide), Project management Institute,
Pennsylvania, USA.
___________________
John H Zenger and Joseph Folkman, The Extraordinary Leader:
___________________
Turning Good Managers into Great Leaders, McGraw-Hill.
___________________
Harold Kerzner, Project Management – A System Approach to
-C
___________________
Planning, Scheduling and Controlling, CBS Publishers and
___________________ Distributors, Shahdara, Delhi.
___________________
Web Readings
___________________
www.acquisition.gov
project-management-knowledge.com
ES
www.aia.org
my.safaribooksonline.com
www.defence.gov.au
www.ncmahq.org
UP
(c)
UNIT 2: Project Cost – Contingency, Risk and Sensitivity Analysis
Unit 2
19
CE
Notes
Activity
Project Cost – Contingency, Risk

Write down the risk factors in
___________________
cost estimates of a project of
your___________________
choice.
and Sensitivity Analysis ___________________
___________________
Objectives ___________________
___________________
topics:
-C
___________________
\ Risk Components in Project Cost Estimates
\ Sensitivity of Cost Estimates to Various Risk Components ___________________
\ Appropriate Contingency in the Cost Estimates to Cover the Risk ___________________

Factors
___________________
Introduction
ES
The analysis of contingency, risk and sensitivity analysis is an
essential part of capital cost estimation. An estimate, by definition,
is an approximate computation of the probable cost. It is unusual
that the project final cost matches the initial estimate. Those who
are unfamiliar with estimating methods may expect more details
and more accuracy in an estimate than is achievable. There are so
many variables and unknowns at the time an estimate is prepared
that arriving at a reasonably close overall cost estimate is more art
than science. Skill and judgment is needed to identify and predict
UP
the unknown.
Those unfamiliar with estimating methods are more likely to
accept a contingency figure which can be supported by analysis
than a number which appears to be someone's best guess. Simple
systems, which can be readily applied to a variety of estimates for
the analysis of contingency and risk, are described hereunder.
Types of Project Estimates

Contingency, risk and sensitivity analysis can be applied to any
(c)
part of a project cost estimate such as:

z Fixed capital
z Working capital
z Operating cost
20
Here we will discuss the application of contingency, risk and
CE
Notes
sensitivity analysis to the fixed capital cost estimates. The concept
___________________
can equally apply to working capital and operating cost estimates.
___________________
Fixed Capital Cost Estimation
___________________
The first step in the preparation of fixed capital cost estimates is to
___________________
sub-divide the project into its units or areas. A typical refining or a
___________________ petrochemical complex may be sub-divided as shown in Table 2.1.
___________________ This is not intended to be a complete list. It merely illustrates the
first step in breaking down an overall complex into specific units,
-C
___________________
areas or categories to facilitate cost estimation.
___________________
The next step is to take each of these major subdivisions and apply
___________________
a common code of accounts which will apply to all project
___________________ subdivisions as shown in Table 2.2.
Table 2.1: Subdivision of a Typical Refining Complex

ES
S.No. Project Sub-divisions
00 Process Plants
01 Crude Unit
02 Reforming Unit
03 Desulfurising Unit
10 Utilities & Services
11 Water Facilities
12 Steam Facilities
13 Electrical Facilities
14 Fuel Facilities
UP
15 Flare & Blowdown Facilities

16 Waste Disposal Facilities
20 Storage & Transportation
21 Tankage
22 Distribution Systems
23 Loading & Unloading Facilities
24 Material Handling Facilities
25 Dock & Wharf Facilities
30 Civil Works
31 Fences, Roads, Railroads, Dykes
32 General Administration Buildings
40 Miscellaneous Accounts
(c)
41 Spare Parts
42 Catalyst, Chemicals & Consumables
43 Maintenance Equipment
44 Mobile & Transportation Equipment
45 Laboratory & Machine Shop Equipment
46 Office Furniture & Equipment
Table 2.2: A Code of Accounts Applied to all Project 21
CE
Sub-divisions
Notes
Code of Accounts
___________________
A Equipment
___________________
A1 Heaters
A2 Tanks & Vessels ___________________
A3 Heat Transfer Equipment ___________________
A4 Rotating Equipment
___________________
B Bulk Materials
B1 Civil Works ___________________
-C
B2 Buildings ___________________
B3 Piping
___________________
B4 Electricals
___________________
B5 Instrumentation
B6 Protective Coatings ___________________
C Services
C1 Home Office
ES
C2 Construction
C3 Miscellaneous
A cost estimate summary is then made up for each unit or area of

the total project by code of accounts, covering material, labour and
subcontracts, as shown in Table 2.3.
When each unit has been estimated in this way, then the estimate
for the total project is the sum of the unit cost estimates. This can
be assembled in a matrix as shown in Table 2.4.
UP
There is nothing new about this. This is the HPI's standard way of
building up estimates. Standardized methods and techniques and
the use of common codes of accounts assist with the build-up of
cost statistics and the transfer of cost data and ratios from one
project to another.
Table 2.3: Project Code of Accounts for Each Unit or Area of the Project
Sub-
Acct Description Material Labour Total
Contract
A Equipment
A1 Heaters
(c)
A2 Tanks & Vessels

Heat Transfer
A3 Equipment
A4 Rotating Equipment
Sub-Total
Contd…
22 B Bulk Materials
CE
Notes B1 Civil Works
___________________ B2 Buildings
B3 Piping
___________________
B4 Electricals
___________________
B5 Instrumentation
___________________ B6 Protective Coatings
___________________ Sub-Total
C Services
___________________
C1 Home Office
-C
___________________ C2 Construction
___________________ C3 Miscellaneous
Sub-Total
___________________
Total
___________________
Table 2.4: The Overall Project Estimates Matrix
TRANSPORT
UTILITIES
SERVICES
STORAGE
PROCESS
ES
WORKS
PLANT
TOTAL
MISC.
CIVIL
ACCT DESCRIPTION
&
&
01 02 03 04 11 12 13 14 21 22 23 24 31 32 33 41 42 43
ACCT DESCRIPTION
A EQUIPMENT
A1 HEATERS
A2 TANKS & VESSELS
A3 HEAT TRANSFER
EQUIPMENT
UP
A4 ROTATING
EQUIPMENT
SUB-TOTAL
B BULK MATERIALS
B1 CIVIL WORKS
B2 BUILDINGS
B3 PIPING
B4 ELECTRICALS
B5 INSTRUMENTATION
B6 PROTECTIVE
COATINGS
SUB-TOTAL
(c)
C SERVICES
C1 HOME OFFICE
C2 CONSTRUCTION
C3 MISCELLANEOUS
SUB-TOTAL
TOTAL
Estimate Accuracy 23
CE
Notes
Having prepared the unit and overall project estimates, the next
question is "What is the accuracy?" A higher level of accuracy may ___________________
be expected than is realistic. However, if the accuracy probability ___________________

is assessed by a formal analytical procedure, then it will be more
___________________
likely that a realistic contingency will be set.
___________________
The accuracy of an estimate depends upon the project definition
___________________
and also on the time and efforts spent on its preparation. Figure
2.1 indicates typically the probable accuracy of estimates at each ___________________
-C
project definition stage. Moving from left to right the accuracy ___________________
increases with project definition.
___________________
At stage 0, when the project is still in the initial conceptual phase, ___________________
an order of magnitude estimate may have an accuracy of between
___________________
30 to 50%.
At stage 1, when process design has been finalized, a preliminary
ES
or factored estimate from equipment costs may be prepared with
an accuracy of between 15 to 25%.
UP
Figure 2.1: Accuracy of Estimates Relating to Project Definition
At stage 2, when basic engineering is complete, i.e. piping and

instrumentation diagrams, plot plans, arrangement studies, etc.
have been completed, a definitive estimate can be prepared with an
accuracy of 10 to 15%.
(c)
At stage 3, on completion of engineering when final drawings and

bills of materials have been completed and all material has been
purchased, a detailed estimate can be prepared with an accuracy of
5 to 10%.
24
Stage 4, corresponds to mechanical completion of erection, but
CE
Notes
even at this time, the final actual cost of project is not known
___________________ precisely.
___________________ The last stage 5, at financial completion, is when the final actual
___________________ cost is known which is when all the bills have been settled. This
___________________
may be after several months of mechanical completion.
___________________ If the above ranges of accuracy are typical and has been proved by
experience from many projects, then if one can define the stage of
___________________
project definition, the likelihood is that the accuracy will fall
-C
___________________ somewhere in the shaded area indicated. It follows that an average
___________________ contingency within the range should be allowed, depending upon
the specific project.
___________________
Figure 2.1 also indicates that the accuracy is related to the
___________________
proximity to the completion date. An estimate is more likely to be
accurate if the time to completion is reduced. If there is a long
schedule period, the probability of inaccuracy increases.
ES
The Need for a Contingency
Regardless of the time and effort spent in preparation of an
estimate, there is always the possibility of errors due to:
z Engineering errors and omissions
z Cost and rate changes
z Construction problems
UP
z Schedule slippages
z Miscellaneous unforeseen
z Estimating inaccuracies
During the preparation of the estimate, each item is costed by
estimating the man-hours or material content and applying a cost
rate. At the preliminary estimate stage, the material content is not
completely defined. An allowance is thus required which recognizes
that the final material quantity will exceed the initial quantity.
This is covered by a design margin applied to the equipment and
(c)
bulk material categories and is an integral part of the estimate.

Design margins are not part of the contingency.
The contingency is required to cover those events which could
occur during progress of any normal project. Complete coverage to
cover worst possibilities could require a significant contingency for
each code of accounts. The sum of these contingencies will give a 25
CE
very large overall contingency for the total project. Notes
The probability that things will go wrong on all accounts is ___________________

unlikely. Therefore, the overall contingency does not need to be the ___________________
sum of the maximum individual contingencies. It is an average
___________________
contingency that should be adequate if it is assumed that not all
things will go wrong and some things may go better than planned. ___________________
The practice, therefore, is to determine average contingency for ___________________

each account. This is totalled and kept as a separate overall ___________________
contingency, available to the project as a whole.
-C
___________________
Method of Determining Contingency ___________________
The method of arriving at a reasonable contingency requires ___________________

judgment. So, it is desirable that a consistent logical procedure be ___________________
used in its development. The procedure should separate what may
be termed "average contingency" and the "maximum risk
ES
contingency," which would be the contingency required to cover the
worst case.
Average contingency is determined by examining the project
definition stage for each code of accounts and applying average
estimating accuracy factors appropriate for the specific project. The
maximum risk contingency (discussed later) is determined by
examining problem areas in each code of accounts.
Table 2.5: Basis for Average Contingency

UP
Accuracy
Typical
range
Stage accuracy
Project definition selected for
number range
specific
+or -
project
0 Initial concept prior to 25 to 50 30
finalization of process design
1 Process design finalized with 15 to 25 20
equipment but not quoted.
Bulk material factored but un-
priced
2 Completion of basic 10 to15 13
engineering, mechanical flow
(c)
sheets, P&Ids, plot plans

approved, equipment quoted
and preliminary take-offs for
bulk materials quoted
Contd…
26 3 Engineering and design 5 to 10 8
CE
Notes complete with final quantities
take off. Orders placed for
___________________ tools, equipment & materials
4 Mechanical erection complete 0 to 5 4
___________________
5 Financial completion 0 0
___________________
The average accuracy ranges are taken from the chart shown in
___________________
Figure 2.1 for each stage of definition. The probable accuracy
___________________ selected for a specific project will be within the ranges shown in
___________________ Figure 2.1 for each stage. Whether the Figure selected will be at
the top or bottom end of the range will be determined by the
-C
___________________
variables and unknowns for the specific project.
___________________
For example, a Gulf Coast project for a conventional process unit
___________________
would be at the lower end of the range, while a non-standard
___________________ process unit at an overseas site would be at the upper end of the
range. Process unknowns, sources of engineering, procurement and
construction, the schedule period, market and economic factors
ES
could all influence the selection of the probable accuracy for the
specific project. Following this evaluation, a chart as shown in
Table 2.5 is drawn up for the specific project being evaluated.
To evaluate the average contingency, a standard worksheet form is
used as shown in Table 2.6
Table 2.6: Contingency Worksheet Form
Contingency,
Contingency
Account No.
Description
% at stage 0
% at stage 1
% at stage 2
% at stage 3
% at stage 4
% at stage 5
% of Total
% Normal
Forecast
Value, $
UP
Normal
Cost
Columns 1 & 2 on the left hand side of the form list the
equipment and bulk materials by code of accounts. The form may
(c)
be subdivided under material, subcontracts and labour in a similar

manner to the way in which the unit estimate is built up.
Column 3 shows the current estimate value or most recent
forecast value in dollars.
27
Column 4 expresses the value in column 3 as a percentage of the
CE
Notes
estimate total. This is used for sensitivity analysis (discussed
later). ___________________
Column 5 indicates the percentage of column 3 that has been ___________________
defined through to the stage indicated. For example, if the project ___________________
is in the initial conceptual stage, then it will show 100% under
___________________
stage 0. If the account has passed through the definitive estimate
___________________
stage and 50% has been purchased, then 50% would be at stage 2
and 50% at stage 3. ___________________
-C
The object is to identify the degree of definition for the account by ___________________
allocating the total 100% in the appropriate columns from stage 0 ___________________
to stage 5. This allocation need not be too precise. It can be
___________________
performed on an approximate judgment basis. It is of particular
___________________
value if the project estimate is reviewed at periodic intervals and
contingency reevaluated as the project definition improves. In such
a case, the percentages will tend to move through from stage 0
ES
through to stage 5.
Column 11, the average contingency percentage for the account, is
evaluated using Table 2.5 which has established a probable
accuracy and hence, an average contingency, for each project
definition stage. The percent average contingency in column 11 for
the account number is a simple calculation of multiplying the
percentage in each stage by the average contingency for the stage:
UP
Percent Stage 0 × 0.30

Plus percent Stage 1 × 0.20
Equals percent average contingency
Column 12 is obtained by multiplying the value in column 3 by

the average per cent contingency evaluated in column 11 to give a
dollar value. The overall average contingency required for the
(c)
project is determined by totalling column 12 for all accounts.
Maximum Risk Contingency

After the evaluation of average contingency for each account, it is
necessary to carry out a further evaluation to determine the
28 maximum possible risk for each account and for total project. Each
CE
Notes individual account should be considered for any specific unknowns
___________________ or potential problems which might occur in this account. In this
evaluation, the percentage schedule completion of the project
___________________
should be considered. Particular areas of risk which might affect
___________________
the account are shown in Exhibit 2.1.
___________________
In each case the maximum risk contingency is evaluated by
___________________ identifying and evaluating the risk, firstly by each individual code
___________________ of account and then overall. Again it is unlikely that all the risks
will occur for all accounts. The normal procedure is to identify the
-C
___________________
major items of risk and to assess the maximum cost impact of the
___________________
risk. The next step is to attempt to assess the percentage
___________________ probability that this risk will occur. The net risk then becomes the
___________________ multiple of the maximum cost of the risk times the probability. The
sum of all the net risks for each of the risk possibilities gives the
total maximum risk contingency required (see Exhibit 2.1).
ES
Exhibit 2.1: Risk Areas
Risk - Areas
Labour Disputes & Shortages Equipment Failures
High Labour Wage Settlement Subcontractors Poor Performance
Inclement Weather Supplier's Claims
Low Productivity Damages and Losses
Late Deliveries Schedule Completion Formalities
Material Shortages Operating Performance Penalties
Item of Maximum Probability of Net risk to
UP
risk extra cost risk occurrence project

due to risk
Two separate analyses have now been performed – an average

contingency evaluation and a maximum risk contingency
evaluation. Again an overall contingency put into an estimate need
not necessarily be the sum of these two. It requires judgment to
(c)
assess which number is a reasonable contingency to apply against

the estimates. It may be policy to include the two contingencies as
separate items i.e. including the average contingency as part of the
estimates and maintain a maximum risk contingency as a separate
fund to offset any major risk items that have been identified.
Sensitivity 29
CE
Notes
Having carried out the contingency and risk analysis, the last step
is to do a sensitivity analysis. The term may be interpreted in ___________________
many ways. But in general, the requirement is to determine cost ___________________

areas which could change significantly and which, in turn, would
___________________
have the greatest impact on the overall project cost which will be
___________________
more sensitive to changes in some accounts than others. For
example, if one account represents 1% of the total cost; then a ___________________
100% overrun in this account will only affect the total by a ___________________
maximum of 1%. On the other hand, if another account represents
-C
___________________
20% of the total cost, then a 10% overrun on this account could
affect the total cost by 2%. Thus, the total cost has greater ___________________
sensitivity to this account than the first. ___________________
As the project proceeds, so sensitivities will change as some of the ___________________

accounts become firm and committed. Sensitive areas will be those
accounts which still have the largest dollar values yet
ES
uncommitted and which require the largest contingency.
The analysis of average and maximum risk contingency provides
an effective means of establishing sensitivity. A quick review of the
required average contingency and maximum risk contingency
against each of the account codes will indicate rapidly the potential
areas with high sensitivity, i.e. the cost accounts which may have
the maximum effect on the total cost forecast both in the areas of
overruns and potential cost savings. It is, therefore, a valuable
UP
exercise to identify the highly sensitive areas. Following on from

this, one may introduce some additional surveillance with checks
and balances in these areas to attempt to minimize the potential
overrun and maximize the potential for reducing the overall project
cost.
Having performed a review of each account for average and
maximum contingency to identify potential areas of high
sensitivity, the next step is to identify the impact of any specific
cost changes. For example, changes in labour productivity, changes
in wage rates or extension to the project schedule. For specific
risks of this type, sensitivity covers can be constructed to show the
(c)
impact of these cost changes.

Figure 2.2 illustrates two types of such curves. The first shows the
effect on labour cost of changing labour productivity combined with
the changes in the labour cost rates. As can be seen, the total
30 labour cost is extremely sensitive to reduction in labour
CE
Notes productivity, more so than increase in labour rate.
___________________
The second chart shows the effect of increased schedule time on
___________________ project cost. It shows, for example, that the effect on project costs
___________________ may be significantly increased due to changes in labour rates and
possible labour productivity due to running into winter (rainy)
___________________
working conditions, etc.
___________________
___________________
Judgment Factor
The areas of contingency, risk and sensitivity analysis are
-C
___________________
interrelated. The subject provides a fertile area for
___________________
mathematicians, statisticians and other analytical types with
___________________ computers. At the same time, it is also apparent that no matter
___________________ how refined a system is applied, both the basic input data and the
final assessment depends heavily upon judgment.
ES
UP
(c)
Figure 2.2: Sensitivity Curves

31
Check Your Progress
CE
Notes
Fill in the blanks:
___________________
1. The areas of contingency, risk and sensitivity analysis ___________________
are ………………… .
___________________
2. The analysis of average and maximum risk contingency
___________________
provides an effective means of establishing …………….
___________________
Summary ___________________
-C
___________________
This unit provides an insight into various risk factors affecting
project cost estimates. Concepts of average and maximum risk ___________________
contingency as well as sensitivity analysis have been elaborated ___________________
thus providing scientific basis for contingency in project cost
___________________
estimates.
ES
Lesson End Activity
Make a list of contingencies for a project of your choice.
Keywords
Fixed Capital: It is the capital employed in assets of durable
nature for repeated use over a long period. It is also called fixed
investment.
UP
Risk: A probability or threat of damage, injury, liability, loss, or

other negative occurrence that is caused by external or internal
vulnerabilities, and that may be neutralized through preemptive
action.
Project Risk: It is the exposure to a company that arises from
taking on a particular task. A project risk can be internal to the
business, it can involve external events or it can stem from any
other circumstances that can hamper the project’s overall success
and result in loss or embarrassment to the firm undertaking it.
Sensitivity Analysis: Simulation analysis in which key
quantitative assumptions and computations (underlying a decision,
(c)
estimate, or project) are changed systematically to assess their

effect on the final outcome. Employed commonly in evaluation of
the overall risk or in identification of critical factors, it attempts to
predict alternative outcomes of the same course of action. In
comparison, contingency analysis uses qualitative assumptions to
paint different scenarios. It is also called what-if analysis.
32
CE
Notes
1. What are various types of estimates involved in a project?
___________________
___________________
2. How to provide contingency in various categories of estimates?
___________________ 3. Describe meaning of sensitivity analysis and its applicability

for developing new projects.
___________________
___________________ 4. Explain why the accuracy of cost estimates changes with the
project stage at which these are made. List the factors that
___________________
will help in arriving at accurate project estimates right at the
-C
___________________
initiation stage.
___________________
5. Explain the concepts of contingency, risk and sensitivity
___________________ analysis in project cost estimates.
___________________
6. What are the factors that govern choice between average and
maximum risk contingency to be applied to a particular project
at a particular location?
ES
Further Readings
Books
Newtown Square, A Guide to the Project Management Body of
Pennsylvania, USA.
UP

Distributors, Shahdara, Delhi.
Web Readings
www.acquisition.gov
www.aia.org
(c)
www.defence.gov.au
www.ncmahq.org
UNIT 3: Initiating a Project – I
Unit 3
33
CE
Notes
Activity
Initiating a Project – I
List ___________________
out the functions
performed by the Engineering
& ___________________
Construction (E&C)
contractor.
___________________
Objectives
___________________
topics: ___________________
\ Manpower Build-up ___________________
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\ Major Initiation Steps ___________________
\ Organization Matrix
___________________
___________________
Introduction ___________________
A new project is "initiated" when owner and contractor enter into a

ES
contract or agree to start work with "letter of intent" while the
contract is being finalized. From the contractor's viewpoint, the
owner has now become the "client".
Manpower Build-up
In order to build a plant, an Engineering & Construction (E&C)
contractor must spend money at the proper rate to meet the
required completion schedule. Money translates to man-hours –
UP
whether it is home office engineering hours, manufacturing hours

or field construction hours. To achieve progress, man-hours must
be spent. On a project where short schedule is of prime importance,
calendar time can be saved by selecting designs already completed,
standard equipment already fabricated, or material in stock. Even
when these methods are used, there are still a large number of
hours in engineering, manufacturing and construction which must
be expended during the project execution.
Every man hour below the optimum curve during the early
engineering phase may add four to five times these hours to the
peak during the manufacturing and construction phases if the
(c)
scheduled end date is to be met. Conversely, overstaffing in the

early phases ahead of date development will also lead to inefficient
man hour utilization.
34
Check Your Progress
CE
Notes
Activity
Fill in the blanks:
Make a list of the major
___________________
initiation steps for a project of 1. In order to build a plant, an ………………… contractor
your___________________
choice.
must spend money at the proper rate to meet the
___________________
required completion schedule.
___________________
2. ………………… in the early phases ahead of date
___________________ development will lead to inefficient man hour
___________________ utilization.
-C
___________________
___________________
Major Initiation Steps
___________________ As soon as a project has been awarded, a Project Manager (PM)
begins a race against time as the leader of a team, when the team,
___________________
the rules and the course may yet have to be defined. The initiation
of a project puts great pressure on him to get the project moving.
Box 3.1 lists the steps in the initiation of a project. The list is not
ES
comprehensive but shows the more important activities of a project
manager.
These steps do not necessarily occur sequentially. Several may
occur in parallel. All of these activities should be undertaken
within the first few weeks of project award. Each of the above steps
is described in more detail below.
Box 3.1: Project Initiation Steps

UP
1. Review Pre-contract Documentation

2. Establish Client Communication Channels
3. Hold Client Kick-off Meeting
4. Establish Project Procedures
5. Prepare Project Plan
6. Establish Project Organization
7. Hold Project Kick-off Meeting
8. Issue Project Design Data
9. Initiate Process Design
10. Prepare Project Coordination Procedure
11. Analyse Preliminary Project Estimates
(c)
12. Issue Preliminary Project Schedule

13. Review Engineering Plan
14. Review Procurement Plan
15. Review Construction Plan
35
Out of these steps, the first seven have been explained in this unit
CE
Notes
and the others have been explained in the next unit.
___________________
Review Pre-contract Documents
___________________
Prior to the project award, the E&C would probably have
___________________
submitted technical and commercial proposals. PM's job of
___________________
initiating a project may be easier if the proposal period has been
fairly extensive and the E&C has spent a considerable time and ___________________
effort in preparing detailed technical and commercial proposals. ___________________
-C
At the time of award, the scope of the project may have changed ___________________
from the enquiry document. The proposal may have been modified,
___________________
added to or adjusted by a series of letters or clarification meetings
held prior to the award. It is essential that PM carefully check ___________________
through all of the proposal documentation and assemble a ___________________

complete file of proposal documents, letters, telexes, telephone and
meeting notes. He thus has a complete record of what was
ES
requested, what was offered and what was accepted in the award.
Following this, the PM will hold a meeting with the
sales/commercial manager to review the proposal documents and
to discuss any additional points discussed during the meetings
with the client. PM will particularly want to be informed of any
client concerns, preferences or priorities.
To ensure continuity and a smooth job start, the E&C will want to
involve the nominated PM and the key members of the proposed
UP
project team in the proposal activities and pre-award contract

discussions.
Establish Client Communication Channels

If a PM is to maintain control over the project, he must establish
with the client that he is the official communication channel
between the E&C and the client for all major aspects of the project.
During the proposal stage, contacts with the client may have been
many and varied from commercial, project and process engineering,
legal, financial and others. Client may have become used to dealing
(c)
with multiple people and expect to continue to do so.
PM has to take over the scene delicately but firmly both with the
client and within his own organization. This ensures that all future
communications are channelled through him so that he can
maintain control. He will recommend to the client that similar
36 arrangement is followed in client's organization. A client PM should
CE
Notes be appointed through whom all major communications are
___________________ channelled. This does not mean that there is no communication or
___________________ direct contact between other members of the client and contractor's
___________________
organization. It does mean that any such contacts/communications
are either in the presence of PM or with his prior knowledge and that
___________________
the subject matter is properly recorded and approved by the PM.
___________________
___________________ Client Kick-off Meeting
-C
___________________ As soon as possible, after project award, PM should hold a kick-off
meeting with the client and go through a check list to make sure
___________________
that there is total agreement between the contractor and client
___________________
with regard to the project requirements. If there has been a
___________________
detailed proposal, then it may be a simple matter of confirming
that data in the proposal stand unchanged for the project. It is
rare, however, that the proposal is totally definitive in all areas.
ES
Normally, the meeting agenda and check list covers:
z Scope of work and services
z Basis for process design
z Project design data
z Engineering
z Procurement
UP
z Construction
z Administration procedures (approvals, controls, reports,

documentation, distribution, commercial).
Establish Project Procedures

A comprehensive project procedure is necessary for effective project
management. This procedure makes it possible to organize and
control the project in a systematic manner using the instructions to
identify and refer technical, planning, reporting, accounting and
(c)
administrative documents produced throughout engineering,

procurement and construction.
An E&C company normally has standard procedures covering
equipment, materials and services which must then be adapted to
suit the specific project. The basic areas to which project 37
CE
numbering system and procedures are applied are: Notes
z Tagging and identification of equipment and materials ___________________
z Numbering of technical documents, specifications, data sheets, ___________________

drawings, requisitions and purchase orders ___________________
z Procurement commodity codes ___________________
z Scheduling activities in engineering, procurement and ___________________
construction
___________________
z Estimating equipment, materials and services
-C
___________________
z Recording man-hours on timesheets in the home office and
___________________
field
___________________
z Recording project scope changes
___________________
z Project accounting and invoicing
z Project cost and progress reporting
ES
z Project document management
In addition, a large project must be subdivided into its various
units, areas and plant elements to facilitate control and reporting.
Too great a degree of subdivision merely adds to work and
confusion. The best solution is to have the minimum number of
sub-project numbers which will give reasonable control. On a
major multi-unit project, the following breakdown is recommended:
z Overall project number for summary cost reports and
UP
common/bulk requirements
z Individual sub-project numbers for each major identifiable
process unit within the complex
z One or more sub-project numbers for off-site systems,
depending upon size and scale
z Separate sub-project numbers for geographically distinct
locations such as marine terminal, remote road or rail loading
or dispatching stations, etc.
Prepare Project Plan

(c)
On completion of the above steps, PM should prepare a project

plan. This plan defines the project objectives, priorities and
philosophies. Its preparation fulfils a number of functions:
z It requires that the PM, as leader of the project, takes the time
to access the project needs at an early date and present his
38 intended plan of execution. Individual communications or
CE
Notes meetings are no substitute for the written plan.
___________________
z It provides a basic reference and briefing document for those
___________________ who will ultimately be involved in project execution.
___________________ z It allows the E&C management to review the plan, provide
___________________ guidance and assistance and, thereafter, support the plan
___________________ throughout project execution.
___________________ The project plan will normally include background data; scope of
work and services by E&C and client; split of work with others
-C
___________________
(process licensors, other contractors); basis of contract (liabilities,
___________________
guarantees): regulatory and other approvals; project identification
___________________ and procedures; dimensions, units, language; client participation,
___________________ reviews and approvals; specific project needs and highlights;
project design philosophies; and project schedule criticalities,
project control procedures and reports. In addition, the project
ES
plan will contain separate sections dealing with engineering,
procurement, construction, operation and financial as appropriate.
Once project team members are assigned from their functional

departments, they become project oriented, reporting to the PM for
their project execution functions. They continue to report to their
department heads with regard to quality, standards and methods.
This ensures that there is a two-way control or a system of checks
and balances during project execution. The PM is totally concerned
UP
with and dedicated for the execution of the project. The

departmental managers are responsible for ensuring that quality
and methods are compatible with the schedule and cost objectives
established in the project plan.
Establish Project Organisation

To define an effective organization structure for conducting the
project, a single project office to coordinate the data conversion
effort and a steering committee to oversee the project.
(c)
Establish Project Office

Establish a Project Management Office (PMO) to manage the
project. The PMO holds enterprise-wide responsibility for the data
conversion and is led by an individual charged with attaining data
conversion compliance for the entire organization.
39
Typical responsibilities of the PMO include:
CE
Notes
z Overall project management and coordination of individual
___________________
data conversion sub-projects,
___________________
z Provision of project management advice, project plan
___________________
templates and estimating templates to individual assessment
and conversion sub-project teams, ___________________
z Data conversion awareness planning and services, ___________________
z Contract management, ___________________
-C
___________________
z Formal communication with customers and suppliers
regarding external interfaces, ___________________
z Data conversion compliance certification, ___________________
z Assuring the appropriate methods, processes and tools are in ___________________
place to conduct the project.

ES
Establish Project Organization Structure
Use the standard template to identify an effective and efficient
project organization structure that makes the delivery and
acceptance responsibilities visible to all parties. Put in place
a Steering Committee to maintain the involvement of customer
management in the project. After that, establish an effective
organization chart for the delivery team and define the roles and
responsibilities of the team members. Finally, make sure that the
UP
necessary work space and facilities are in place for project start-up.
Hold Project Kick-off Meeting

At an appropriate time, when the project scope has been properly
defined, the PM should call a kick-off meeting. This meeting
should be attended by E&C management, the commercial
manager, the functional department managers, and the key staff
selected for the project team.
The commercial manager presents the events leading to the project
award. He highlights the key points that were raised in the pre-
(c)
award discussions and contract negotiations and identifies

outstanding items requiring immediate attention. PM then reviews
the project plan, recapitulates the objectives, priorities and
philosophies and establishes the team spirit necessary for the
successful execution of the project.
40
Check Your Progress
CE
Notes
Fill in the blanks:
___________________
___________________
1. Once ………………. members are assigned from their
functional departments, they become project oriented,
___________________
reporting to the PM for their project execution functions.
___________________
2. The ………………. manager presents the events leading
___________________ to the project award.
___________________
Summary
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___________________
___________________ This unit lists out and details the important actions to be taken by
___________________ PM at the time of initiation of a project. The most important steps
to be taken are aimed at establishing communication channels and
___________________
procedures with the client, making estimates of man-power
deployment for achieving project completion within agreed
schedule, draw-up project master schedule and identify critical
ES
path activities and preparation and review of engineering,
procurement and construction schedules.
Lesson End Activity

Establish a procedure for communication with the client.
Keywords
UP
Procurement: The process of obtaining goods and services from

preparation and processing of a requisition through to receipt and
approval of the invoice for payment. It commonly involves: (1)
purchase planning, (2) standards determination, (3) specifications
development, (4) supplier research and selection, (5) value
analysis, (6) financing, (7) price negotiation, (8) making the
purchase, (9) supply contract administration, (10) inventory control
and stores, and (11) disposals and other related functions.
Project Plan: Each Project Plan component is essentially a work
product resulting from sub-tasks in the Make Plan Project
(c)
Management task, but can be revised during other project

management activities. It is important to document all parameters
that will have an impact on the project, its planning and execution.
Communication Channel: A medium through which a message
is transmitted to its intended audience, such as print media or
broadcast (electronic) media.
Questions for Discussion 41
CE
Notes
1. Describe the rate of resource built-up in various areas on
___________________
initiating a project.
___________________
2. List the major steps to be taken by project manager for
___________________
implementing new project.
___________________
3. What are the steps in preparing a Project Plan?
___________________
Further Readings ___________________
-C
___________________
Books ___________________
Newtown Square, A Guide to the Project Management Body of ___________________
___________________
Pennsylvania, USA.

ES

Web Readings
www.acquisition.gov
UP
www.aia.org
www.defence.gov.au
www.ncmahq.org
(c)
42
CE
Notes
___________________
___________________
___________________
___________________
___________________
___________________
-C
___________________
___________________
___________________
___________________
ES
UP
(c)
UNIT 4: Initiating a Project – II
Unit 4
43
CE
Notes
Activity
Initiating a Project – II
Using the Internet, find out
___________________
more about the contents of
___________________
process design package.
___________________
Objectives
___________________
topics: ___________________
\ Project Initiation Steps ___________________
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\ Project Design Data ___________________
\ Project Coordination Procedure
___________________
___________________
Introduction ___________________
In Unit 3, we looked at the first few steps of Project Initiation. In

ES
this unit, we will look at the other steps. These steps are: Issue of
Project design data, Initiation of Process Design, Preparation of
Coordination Procedure, Analysis of Preliminary Project estimate,
Issue of Preliminary Project schedule, Review of Engineering plan,
Review of Procurement plan and Review of Construction plan.
Initiation Steps
The next few steps under project initiation are as follows:
UP
Issue Project Design Data

PM arranges for the completion of project design data. The form
covers the subjects listed below and is developed by the project,
process and design engineers. The form, when completed, is
approved by the client and becomes the basis for engineering
specifications and engineering design work:
Feedstock and other data
Product data and specifications
Utility, auxiliary and chemical systems
(c)
Electrical systems
Waste disposal and environmental requirements
Climatic conditions
Site access and geographical data
44
Soil investigation data
CE
Notes
___________________
Water supply data
___________________ General project design data
___________________ Permits and approvals required
___________________ Applicable design codes and standards

___________________ Box 4.1 lists the typical items which should be included in the
___________________ project design data.
-C
___________________
Initiate Process Design
___________________ Before engineering, procurement and construction commences, it is
___________________ essential that process design is completed. The overall schedule is
___________________
very much dependent on the speed, accuracy and completeness of
the process design. Hence, this activity must be started as soon as
possible. Process design is normally started at the time of the
project award and proceeds in parallel with the other project
ES
initiating activities. The process design package consists of the
following:
Process flow diagrams
Process material balances
Process specifications and load sheets for equipment items
Utility system concept and balance diagrams
UP
Environmental system concepts and balance diagrams.

The above will take two to five months for completion depending
upon the size and complexity of the project. Normally, preliminary
process flow diagrams are produced as a first step and reviewed
with the client. Following on from this, critical process system
equipment specifications and data sheets are issued for early
procurement. The utility and environmental concept and balance
diagrams follow.
Box 4.1: Items to be included in Project Design Data
Feedstock, intermediates, products

(c)
Utilities, catalysts, chemicals, consumables

Operating reliability and flexibility
Handling and storage facilities
Delivery and shipping logistics
Contd…
Spare equipment and parts 45
CE
Maintenance and operating needs Notes
Safety requirements
___________________
Economics for evaluation of alternatives
Energy conservation and cost criteria ___________________
Equipment design philosophy ___________________
Philosophy for isolation and decontamination
___________________
Environmental consideration
Electrical and instrumentation design ___________________
Philosophy for buildings, shelters and enclosures ___________________
Communication requirements
-C
Property protection and industrial hygiene ___________________
Equipment spacing and plant layout ___________________
___________________
Prepare Project Coordination Procedure
___________________
The project coordination procedure is prepared by the PM as early
as possible in the project and submitted to and approved by the
client. The following typical subjects are covered. Additional
ES
paragraphs may be added to suit the project.
Job titles and numbers
Contract data
Scope of work
Client's responsibilities
Correspondence, contacts and addresses
UP
Approvals
Engineering
Procurement
Construction
Operation and start-up
Accounting
Project controls, changes and reports
Job close out
(c)
The following additional documents are prepared as exhibits or

attachments to the project coordination procedure:
Project procedures
Distribution of documents and their approval
46
Standard drawing title blocks
CE
Notes
___________________
Organization charts
___________________ Project document control and management
___________________ Analyse Preliminary Project Estimate

___________________ When initiating a project, the PM requests a review of the project
___________________ estimate, no matter how preliminary. The detail and potential
___________________
accuracy of an early estimate prepared for job scooping can vary to
a great degree depending upon the extent of the work put into the
-C
___________________
proposal prior to contract award. It may vary from an order of
___________________ magnitude dollar value for the total installed cost to a fully defined
___________________ estimate.
___________________ A preliminary estimate can be subdivided into values for home

office services, equipment materials, bulk materials, construction
labour, construction supervision and field indirects. Having
ES
established the dollar values of these components, the home office
man hours, the field labour man hours and the construction
supervision man hours can also be determined. Even though these
methods may give approximate values, they do establish the
general magnitude and complexity of the work to be performed and
provide a basis for preliminary planning.
When the process design is approved, the project estimator
prepares the first control estimate. This estimate provides a firm
budget for equipment and home office costs and factored estimates
UP
for bulk materials, construction labour and field indirects. A

defined estimate is prepared on completion of the analytical
engineering phase, at which time bulk materials are taken off and
priced. The defined estimates provide the firm with a basis for cost
control for the ongoing project execution.
Each estimate, on completion, must be formally reviewed, a
contingency, risk and sensitivity analysis performed and an
appropriate contingency included as an integral part of the
estimate. Items to be considered are: escalation, import duties,
taxes, freight, insurance, changes in foreign currency exchange
(c)
rates and other miscellaneous costs.
Issue Preliminary Project Schedule

An important project initiation step is to issue a project schedule.
If the project definition has not been developed to the point where
firm equipment and material deliveries can be determined, a 47
CE
preliminary project master schedule should be issued: (1) to Notes
establish desired milestone and target dates, (2) to perform ___________________
preliminary planning and budgeting, (3) to identify and establish
___________________
schedule dates for critical project activities, and (4) to identify
critical equipment and material items. ___________________
To evaluate whether or not the preliminary schedule is achievable, ___________________
a preliminary estimate is also essential. This quantifies the work ___________________

to be performed within the project schedule time frame. PM should ___________________
review the preliminary project master schedule to ensure that any
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___________________
milestones or time delays which are specific to the project (such as
funding approvals, regulatory approvals, site access limitations, ___________________
manpower availability problems, weather problems, etc.) have ___________________
been taken into account. Manpower loading curves should also be
___________________
prepared to check that the proposed schedule does not create
unrealistic manpower peaks.
ES
To ensure that the project proceeds without delay, a starter
schedule is issued along with the preliminary project master
schedule. The starter schedule lists the important activities to be
performed during the first 30 to 90 days of the project while project
master schedule is being developed. The project master schedule is
issued together with detailed engineering and procurement
schedules, on completion of process design, when delivery times for
critical equipment and materials can be established. Detailed
construction schedules are developed during the engineering phase
UP
prior to start of work in the field.
Review Engineering Plan

The engineering plan prepared by the project engineering manager
expands the project plan in areas relating to engineering,
providing more specific information on the following topics:
Engineering work scope
Design basis for process units and offsites
Engineering and design evaluations
(c)
Maintenance, reliability and flexibility needs

Material selection criteria
Engineering economics and design philosophy
Design specifications and standards
48
Applicable codes and regulations
CE
Notes
___________________
Equipment layouts and plant arrangements
___________________ Use of models (now PDS system gives 3D models on

computers)
___________________
Engineering problems specific to the project
___________________
___________________
PM reviews the engineering plan prior to its release by the project
engineering manager.
___________________
-C
___________________ Review Procurement Plan
___________________ During the project initiation stage, the first task of the project
procurement manager is to prepare the procurement plan
___________________
amplifying the procurement aspects of the project plan. The
___________________
procurement plan establishes the procurement philosophy for the
project. It identifies the critical items of equipment and materials,
lists those items which will be provided "sole source", that is from a
ES
specified supplier; notes material which are "free issue," provided
by subcontractors or from other sources; establish quality and cost
philosophies; the number of competitive bids required; whether or
not the policy is to purchase locally, nationally or worldwide. The
procurement plan is reviewed by the PM and may be subject to
approval by the client before issue. Following on from the
procurement plan, detailed procurement procedures are drawn up
which specify the purchasing forms to be used, the approval levels,
UP
the routing and distribution of purchase documents and any

special referencing and numbering codes to be used.
Along with the above, an approved bidders list is prepared

reflecting the policies established in the procurement plan. The
approved bidders list is set up by using project procedures for each
category of equipment, material and service. All bidders on the
approved list will be suppliers who have performed satisfactorily in
the past and have proved themselves by their quality and
reliability. The project procurement manager also participates in
the preparation of sub-contracts, expediting and inspection plans.
(c)
Traffic surveys are initiated early for difficult site locations since
transport requirements may impact upon the engineering/
procurement effort and could require special marshalling yards,
landing facilities or customs arrangements.
Review Construction Plan 49
CE
Notes
The project construction manager prepares the construction plan
during the project initiation phase. The following points are ___________________
considered: ___________________
Site and local area survey ___________________
Site preparation, site access and weather restrictions
___________________
Temporary construction facilities
___________________
Heavy rigging studies
___________________
Construction equipment requirements
-C
___________________
Construction priorities and erection sequence
___________________
Construction methods and procedures
___________________
Material receiving requirements
___________________
Prefabricated modular sections
Site fabrication shop vs. field fabrication
ES
Site fabricated vessels and tanks
Construction staffing and organization
Field inspection and quality control
Field safety procedures
Labour availability and hiring plans
Labour relations
Labour housing camp
UP
Construction subcontract arrangements

Local codes and permits
Construction planning, scheduling and cost control.
The PM satisfies himself that the construction plan fulfils the
project needs. Early planning of all these aspects is essential for
smooth and effective construction mobilization at the appropriate
time.
At this stage, the project has been initiated. If the PM has directed
his efforts to ensure that the basic project initiation steps have
been properly completed, he will no longer be the leader of an
(c)
unfamiliar team in a race against time on an unknown course with

undefined rules. He will now have an organized integrated team,
all working to a common plan. The overall success of the project
can depend, to a great extent, upon how thoroughly the project
initiation steps have been carried out.
50
CE
Notes Check Your Progress
___________________ Fill in the blanks:
___________________ 1. The project construction manager prepares the
___________________ construction plan during the ………………. phase.
___________________ 2. An approved bidders list is prepared reflecting the

………………. established in the procurement plan.
___________________
___________________
Summary
-C
___________________
When initiating a project, the PM requests a review of the project
___________________
estimate, no matter how preliminary. The detail and potential
___________________ accuracy of an early estimate prepared for job scooping can vary to
___________________ a great degree depending upon the extent of the work put into the
proposal prior to contract award. During the project initiation
stage, the first task of the project procurement manager is to
ES
prepare the procurement plan amplifying the procurement aspects
of the project plan. The project construction manager prepares the
construction plan during the project initiation phase.
Lesson End Activity

Make a list of the project procedures required for the effective
control of the project.
UP
Keywords
Procurement Plan: The procurement plan establishes the
procurement philosophy for the project.
Engineering Plan: The engineering plan prepared by the project
engineering manager expands the project plan in areas relating to
engineering.
Feedstock: Raw material to supply or fuel a machine or industrial
process.
(c)

1. Describe Project coordinating procedure.
2. How preliminary project schedule is developed?
51
3. List out important steps to be taken when a project is
CE
Notes
initiated. Discuss their relevant importance and the pitfalls if
these steps are not taken properly. ___________________
___________________
___________________
Books
___________________
Turning Good Managers into Great Leaders, McGraw-Hill. ___________________
-C
Harold Kerzner, Project Management – A System Approach to ___________________
Planning, Scheduling and Controlling, CBS Publishers and ___________________

Distributors, Shahdara, Delhi. ___________________
Web Readings ___________________
www.acquisition.gov
ES
www.aia.org
www.defence.gov.au
www.ncmahq.org
UP
(c)
52
CE
Notes
___________________
___________________
___________________
___________________
___________________
___________________
-C
___________________
___________________
___________________
___________________
ES
UP
(c)
UNIT 5: Case Study
Unit 5
53
CE
Notes
Case Study
___________________
___________________
___________________
Objectives
___________________
After analysing this case, the student will have an appreciation of the
concept of topics studied in this Block. ___________________
___________________
-C
___________________
Case Study: Project Management Leads to Industry Leader in
Innovative Aviation ___________________
Part of NASA’s mission is to consistently develop innovative flight ___________________

technologies to help advance America’s prowess in aerospace and
___________________
aviation. NASA embarked on the Autonomous Rotorcraft Project
(ARP) as part of that mission. The project goal was to develop an
unmanned helicopter (rotorcraft) that would operate with the
ES
decision-making skill of a piloted aircraft. Facing technological
complexities, management challenges and the coordination of
multiple organizations, NASA used project management
competencies to meet its goals while staying on-time and on-
budget.
Background
The ARP posed several challenges. Representatives from the

Army/NASA Rotorcraft Division, the NASA Exploration
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Technology Directorate and the Flight Projects Office (FPO) made

up the ARP team, which was comprised of experts in
aeromechanics and flight control, autonomous executive software,
helicopter dynamics and vehicle health management. The ARP
team hired a project manager who was responsible for:
z developing schedules, budget and project progression reports
z communicating with stakeholders and upper management at

NASA for approval on all tasks
z overseeing hardware and software development
z crafting risk analysis documents

(c)
z producing data and evaluations
The two prototype autonomous rotorcrafts used for this project,

named Ariel and Caliban, were modified Yamaha RMAX radio-
controlled helicopters with additional planning software and
flight control components.
Contd…
54
NASA tasked the ARP team with developing, demonstrating and
CE
Notes
evaluating automated reasoning technologies for rotorcraft. This
___________________ would fulfil NASA’s mission to extend its technology expertise in
this field. Specifically, the team would create a flying laboratory
___________________
consisting of advanced flight controls, a reactive planner, all-
___________________ digital camera system with tracking and passive ranging
___________________ capabilities and real-time health management systems.
___________________ By completing the above tasks, the ARP team hoped to develop a
rotorcraft that could:
___________________
z manoeuvre around obstacles without human supervision,
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___________________
z accomplish top-level mission goals,
___________________
z conduct vehicle health management activities (i.e. diagnose
___________________
and fix problems on the rotorcraft automatically),
___________________
z Re-plan the mission should unforeseen circumstances occur.
Challenges
ES
Coordinating the ARP project team was one of the initial
challenges as it was comprised of people from various
organizations with different experience, backgrounds and working
styles.
The project manager also had to report to two supervisors—NASA

and the Computing, Information and Communications Technology
Program (CICT)—which sometimes had different priorities for the
project or ways they wanted information relayed to the team.
Solutions
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To keep team members informed and ensure stakeholder

expectations were met, the ARP manager used project
management to define the project scope. The team then presented
this project scope to stakeholders, who then discussed and
negotiated all points with team members. Team members could
then incorporate the changes and agree on responsibilities. This
allowed them to carry out their tasks in a more efficient manner
with a clearer picture of the end result.
The combined team used project management techniques to

establish motivational tools and near-term focus deadlines to
ensure success. The main technique was to schedule regular
(c)
demonstrations of the teams’ accomplishments, ensuring a specific

amount of the work was completed before it was presented.
Following these presentations, the ARP manager could determine

and provide the additional resources and supplemental
Contd…
UNIT 5: Case Study
information the team needed, and follow up to review the team’s 55
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progress and the challenges it faced in reaching its end goal. Notes
The team planned and maintained communication throughout the ___________________
project using project management techniques. The ARP project
___________________
manager housed both his team and the hanger team together for
easier communication; he could also receive instant updates of ___________________
project status.
___________________
An ARP Project website was created to keep NASA Computer,
___________________
Information and Communications Technology Program upper
management and stakeholders aware of the project’s progression. ___________________
-C
The team also provided project updates to potential customers of ___________________
the finished rotorcraft, including the Department of Homeland
___________________
Security, the National Technology Transfer Centre and other
NASA researchers. This offered the dual benefits of marketing the ___________________
rotorcraft and maintaining team morale by cultivating project
___________________
support. In addition, all material presented in the updates was
accessible to the team via the website, including flight plans,
authorized documents, scheduling, photographs and videos.
ES
The Safety of Flight Review Board was also active in the project
by making periodic approval checks throughout the process.
Having these approvals completed throughout the project meant
there would be no significant delays. Flight plans were also tested
and reviewed by peers to ensure the results were meeting NASA’s
goals. The ARP manager was able to select these reviewers from a
pool of highly qualified NASA researchers.
In order to combat risk, the project manager found potential
weaknesses in plans and prepared responses to any major delays
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or crises. All of these risk management strategies were shared

with the team in weekly meetings, and therefore, the entire team
knew how to respond to any incident that could occur.
Results
The project manager learned early to meet the needs of each team
member and communicate individual responsibilities; ensuring
deadlines were established and met. The manager also sought
each team members’ opinion to find the best possible solution;
team members felt they were truly a part of the team.
In addition, when the project manager learned the time spent
scheduling flight tests was more than he expected, he allotted
(c)
more time and energy into scheduling to ensure it would not

cause future delays.
The ARP team was able to assist the CICT Program in meeting
its goal of developing and testing the fundamental technologies of
automated reasoning. The ARP project also helped serve as a
Contd…
56 stepping stone to the 2005 fiscal year and future NASA projects.
CE
Notes Without the extremely disciplined project manager on the ARP
team, the project would not have given NASA the knowledge they
___________________
sought in the autonomous field.
___________________
Key Achievements
___________________
z The ARP satisfied all of NASA’s success factors, including
___________________ meeting or exceeding client needs, and meeting or improving
___________________ on budget.
___________________ z The ARP met all scheduling goals, completing each phase
with no scheduling delays.
-C
___________________
z NASA expressed a high level of satisfaction with the finished
___________________
project and supported the ARP team’s nomination for PMI’s
___________________ 2005 Project of the Year.
___________________ Questions:
1. What are the critical issues highlighted in this case?
2. Bring out the role and Benefits of proper Project Management

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based on this case study.
Source: http://www.pmi.org/BusinessSolutions/~/media/PDF/Case%20Study/NASA_Rotorcraft_Case_Study_New.
ashx
UP
(c)
UNIT 6: Project Execution – Developing a Project Schedule
57
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Notes
___________________
___________________
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
ES
BLOCK-II
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58
CE
Notes
UNIT 6: PROJECT EXECUTION – DEVELOPING A
___________________ UNIT 8: PROJECT CONTROL – CHECKING
PROJECT SCHEDULE PROJECT PROGRESS WITH BELL AND “S”
___________________ CURVES
z Introduction
z Introduction
z Major Elements
___________________
z The “S” Curve
z Master Schedule
___________________
___________________ UNIT 9: PROJECT COSTS CONTROL – I

UNIT 7: PERT AND CPM
___________________ z Introduction
z Introduction
Estimate
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z
___________________
z PERT And CPM Techniques
z Project Costs
z
___________________
Network Crashing
___________________ UNIT 10: CASE STUDY
___________________
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UP
(c)
Unit 6
59
CE
Notes
Activity
Project Execution – Developing a

Prepare a construction
___________________
schedule for a project of your
___________________
choice.
Project Schedule ___________________
___________________
Objectives ___________________
___________________
topics:
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___________________
\ Schedule Engineering
\ Schedule Procurement ___________________
\ Schedule Construction ___________________
___________________
Introduction
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Some basic information must be available before a project schedule
can be developed. Additional information may be useful. Far too
much information however may only confuse. It is possible to
create a schedule even when less information is available than
listed, because much information can be generated statistically or
by prorating.
Major Elements
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The major elements or activities in any schedule are engineering,

procurement and construction. The first step is to develop
independent sub-schedules for each of these major activities:
z Engineering – process design, conceptual/analytical
engineering, production design, specifications, requisitions and
drawings.
z Procurement – inquiries, bid evaluations, purchase orders,
expediting, inspection and delivery to project site.
z Construction – temporary facilities, material receipt and
(c)
erection (civil, structures, equipment, piping, instruments,

electrical, paint and insulation).
Schedule development can start with any of the above elements. A
start should be made with either procurement or construction.
Leave engineering until last. The reason is that engineering
60 activities are most flexible and adaptable. The engineering
CE
Notes approach may well be modified or governed by schedule constraints
___________________ arising in the procurement or construction areas. Construction
logic is governed by the required building sequence. Procurement
___________________
durations may be dictated by third parties.
___________________
___________________ A Sample Project

___________________ For illustration purposes, the following typical project is assumed:
___________________ z Total installed cost (engineering/procurement/construction) –

$100 million
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___________________
___________________ z Home office man-hours (at 10% at $35 per hour) – 3,00,000
hours
___________________
z Direct field labour hours (at 20% at $15 per hour) – 13,00,000
___________________
hours
z Ratio of field labour to home office hours – 4.3 to 1
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z Type of project – refinery hydro-desulfurizer for a major oil
company
z Operating conditions – maximum temperature 1,200 of,
maximum pressure 600 psig
z Number of equipment items – 250 (approximate hours per
piece – 1,200)
z Equipment types – exchangers, pressure vessels, compressors,
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furnaces, towers
z Long delivery items – furnace tubes, compressors and alloy
exchangers
z Material of construction – mainly carbon steel but some alloy
z Piping – large bore pipe and also alloy pipe
z Structural steel – major plant structures required
z Plant location – to be built on the US Gulf coast
z Site conditions – level and clear/approximate plot area – 400ft
× 440ft
(c)
z Field fabricated/erected items – furnace and main tower

z Procurement – worldwide purchase based on competitive price
and delivery
z Approvals – client approves all major drawings
61
z Schedule constraints:
CE
Notes
Process design completed as a package to be released to
___________________
engineering contractor three months after award.
___________________
Start of engineering in three months.
___________________
Release of funds to commit purchase in six months.
___________________
Construction job site available in nine months.
___________________
Procurement ___________________
-C
Procurement starts with enquiry requisition and when material is ___________________
received at site. The logic is simple. There are a large number of ___________________
similar, independent parallel activities. For each of these there are
___________________
a fixed number of sequential activities.
___________________
The procurement schedule is influenced mainly by outside sources.
Technical data and technical reviews are conducted by
engineering. Approvals are governed by the client and/or
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management. Quotation durations, drawings and material
deliveries are set by vendors. Inspection and transportation are
also set by others. The durations directly controlled by the
procurement group are a small part of the total time span.
Procurement Cycle
The first step in the development of the procurement schedule is to
establish a "procurement cycle". It lists the sub-activities which
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must be performed from the inquiry requisition to purchase order

placement and receipt of vendor drawings. All sub-activities must
be included even though each one may only take a few days.
Cumulatively, they can add to substantially to the procurement
schedule.
Table 6.1 illustrates a chart used to establish the procurement
cycle. The left hand column lists the major sequential activities.
The chart is completed by assessing the number of working days
required for each of the sub-activities. Working days are used in
place of weeks to allow for the effect of weekends. Overall calendar
(c)
weeks are determined by dividing the cumulative working days by

five.
Since durations differ for major complex equipment items,
standard equipment items and bulk materials, three columns are
included in the chart for three separate procurement cycles:
62 (1) major complex equipment, (2) standard equipment, and (3) bulk
CE
Notes materials (such as piping, electrical, instruments, structures and
___________________ civil).
___________________ When establishing activity durations, be realistic. Do not
___________________ unreasonably shorten vendor bid times. Bids will merely be late or
incomplete, which will require more rebid or follow-up time.
___________________
Having established the procurement cycle, which sets the time up
___________________
to the purchase order, add delivery and shipment times for each
___________________ material category.
-C
___________________
Table 6.1: Procurement Cycle Chart
___________________
Activities Durations
___________________ NOTE Complex Standard Bulk
REF Durations are working Equipment Equipment Material
___________________
days () are cumulative Item Item Item
working days A B C
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1. Requisition Ready for 0 0 0
Inquiry (0) (0) (0)
2. Client Approval Received 8 5 5
(8) (5) (5)
3. Issue Inquiry to Vendors 7 5 3
(15) (10) (8)
4. Receive Quotations 30 20 15
(45) (30) (23)
5. Complete Bid Evaluation 20 15 7
(65) (45) (30)
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6. Client Approval Received 10 10 5

(75) (55) (35)
7. Place Purchase Order 5 5 5
(80) (60) (40)
– Total Equivalent Weeks 16 12 8
8. Receive Preliminary 20 15 00
Vendor Prints (100) (75) (50)
9. Receive Final Vendor 20 15 10
Prints (90) (60)
– Added Equivalent Weeks 8 6 4
Equipment/Material List
(c)
The first step is to list the major equipment and material

categories required. Durations are then added from experience or
by telephone contact with lead vendors. Vendor's telephone quoted
deliveries are usually their best and most optimistic. Frequently, a
vendor's quoted delivery starts from receipt of approved drawings 63
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released for fabrication and not necessarily from purchase order. Notes
Also, promised delivery may be the day it is completed in shop ___________________
without allowance for inspection, witnessed performance test, or
___________________
transportation arrangements.
___________________
All these factors must be taken into account by noting the
___________________
procurement cycle type from Figure 6.1, the delivery promise in
weeks and the probable start point for the delivery promise which ___________________
may be purchase order or approved drawings. ___________________
-C
Transportation/shipment to site must also be recorded. Assessment ___________________
of this duration may be difficult if the source is unknown and ___________________

overseas. However it is best to be conservative. Shipment times ___________________
can be the most unpredictable, varying from a few days to several
___________________
weeks. If a conservative allowance is put in here, it can be a buffer
to cover inspection delays, rejection or other transportation hold-
up.
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Construction
Before construction can start, drawings and materials must arrive
at the job site. Thereafter, construction proceeds in sequence
governed by work's physical nature. Excavation precedes
foundations, which are followed by steel and equipment erection.
Piping, electrical and instrumentation then commence in sequence,
finishing with insulation and painting.
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Sequences
In general, construction activities follow a predetermined
sequence. They must follow one another in a set order like building
blocks. The field has little opportunity to be flexible or adaptable.
Drawings and material must be delivered to the job site in the
right sequence, ahead of the time when they will be installed.
If it can be assumed that drawing and material deliveries will not
present a problem, then how long should the construction work
take? It becomes a matter of resource. How large a labour force is
(c)
available and how many workers can be economically applied to

the job? Too few and the job will take too long. Too many may
mean lower productivity and inefficient working. There could also
be problems of inefficient use of construction equipment and costly
short-term supervisory peaks.
64 Man-hours
CE
Notes
Figure 6.1 shows a series of typical overall construction curves for
___________________
one million labour man-hours spread over a construction duration
___________________ of 6 to 36 months. Although the curve shapes are the same, the
___________________ peak manpower requirements, as shown by the dotted line,
increase exponentially as durations are shortened.
___________________
If manpower availability is not limiting, a method of determining
___________________
the economic construction manpower peak is to evaluate the
___________________
maximum manpower density per plot area. For a typical process
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___________________ plant, a construction worker requires an average working area
___________________ between 150 and 250 square feet. For preliminary planning
purposes, 200 square feet per man is a good number to use. This
___________________
does not apply to off-site areas or to areas where piping and
___________________ equipment are more spread out. In these areas, the amount of
work available may not support a labour density of one man per
200 square feet.
ES
UP
(c)
Figure 6.1: Effect of Duration on Manpower Peak

For the project under consideration, the plot area is 400 × 400 feet, 65
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which equals to 160,000 square feet. The economic peak manpower Notes
therefore is 160,000/200 = 800 men. ___________________
___________________
Field Labour
___________________
Figure 6.2 (top) shows a series of curves for a range of total field
___________________
labour man-hours in which the manpower peaks are plotted
against construction durations. For an economic construction peak ___________________
of 800 men and field labour hours of 1.3 million, the construction ___________________
duration is approximately 18 months.
-C
___________________
Figure 6.2 (bottom) shows a typical field labour curve. The
___________________
horizontal scale represents the construction duration shown in
10% increments. The vertical scale shows per cent progress ___________________
achieved for each 10% increment in construction duration. The ___________________

maximum or peak per cent achieved per 10% of calendar time is
18%. This curve can be used to compute manpower peaks for a
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known duration in the following manner:
Let economic manpower peak = P (unknown)
Total construction duration = M months
10% of construction duration = M × 0.1 months
Hours worked per week = H hours
Hours worked per month = H × 4.33 hours
UP
Total construction labour hours = T hours

Maximum percent achieved per 10% duration increment = C%
Hours used in peak 10% period for C% achievement = T × C/100
hours
Hours spent in peak 10% period for P men= P × H × 4.33 × M × 0.1
hours
Then T × C/100 = P × H × 4.33 × M × 0.1
Therefore, P = (T × C/100)/ (H × 4.33 × M × 0.1)
Substituting known values:
(c)
T = 13,00,000, M = 18, H = 40, C = 18

Then P = 750 which is close to the Figure shown in the chart. For P
= 800, M becomes 17 months.
66
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Notes
___________________
___________________
___________________
___________________
___________________
___________________
-C
___________________
___________________
___________________
___________________
ES
UP
Figure 6.2: A Typical Field Labour Curve

(c)
Labour Peaks
The next step is to look at the individual peaks for each labour
craft. Table 6.2 shows typical craft timing and distribution. This
chart shows the percentage of total hours for each craft, the start,
finish and duration time and the peak progress achieved for 10% of
the craft duration. The previous formula can also be used to 67
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calculate the craft peak. Notes
Taking the piping craft, Tp piping hours = T × 40% = 520,000 ___________________

hours ___________________
Mp piping duration = M × 0.8 = 14.4 months ___________________
Cp peak piping progress for 10% duration = 16% ___________________
Therefore, Pp = (520,000 × 16/100)/ (40 × 4.33 × 14.4 × 0.1) = 334 ___________________
This gives the peak piping labour force required for the project. ___________________
-C
Table 6.2: Craft Timing and Distribution ___________________
___________________
___________________
___________________
ES
UP
Material Deliveries
The final step is to determine the required material deliveries. All
materials are required ahead of the craft schedule periods shown
in Table 6.2. Table 6.3 plots the typical percentage progress
completion curves for each craft over their duration. Material
delivery requirements are added in ahead of these curves with
adequate lead times as shown. For smooth construction work, each
craft requires a minimum backlog of material.
(c)
Across the top of the curves the actual construction duration for
the project as determined previously is superimposed. This now
positively identifies material delivery requirements in relation to
the established construction duration.
68 Table 6.3: Construction Material Delivery Requirements
CE
Notes
___________________
___________________
___________________
___________________
___________________
___________________
-C
___________________
___________________
___________________
___________________
ES
UP
Engineering
Engineering has been last until left because it is the most difficult
to schedule. For many reasons, the sequence of engineering
activities may not follow typical logic. It comes down to priorities,
preferences and discipline. However, some sequence is applicable
(c)
as process engineering precedes detailed engineering; some

engineering is dependent upon the receipt of vendor drawings, etc.
If minimum schedule is the priority, many engineering shortcuts
can be taken based on conservative, empirical assumptions.
Equipment and material can be "sole sourced" to save time. The
result may be a less than optimum design, with some added costs. 69
CE
If design optimization and/or minimum cost are the priorities, then Notes
basic engineering may go through many recycles with consequent ___________________
effect on the schedule and man-hours.
___________________
Orderliness ___________________
Even though engineering activity sequences and durations may be ___________________

radically altered or re-arranged by priority dictate, engineering ___________________
development must proceed in an orderly progression. Secondary
___________________
engineering or detail design must not be permitted to start until
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primary decisions have been taken. Nothing is gained in the ___________________
schedule by out of sequence working, resource is wasted and time ___________________

is lost due to recycle. ___________________
The fundamental steps in engineering are: ___________________
z Process design: Process flow diagrams, heat and material

balances, temperature, pressure, physical, chemical and flow
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conditions; process equipment specifications and data sheets;
utility system balance diagrams and environmental systems
concepts and specifications.
z Basic engineering: Piping and instrumentation diagrams (P
& Ids) for process and utilities; general engineering
specifications; equipment mechanical specifications; data
sheets and requisitions; plot/site plans (block model); plant
arrangement studies (planning model) and electrical single
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line diagrams.
z Production engineering: Final site and plot plans;
production design model; civil and structural
fabrication/erection drawings; final certified vendor drawings;
piping key plans and isometrics; instrument and electrical
field installation drawings and bulk material lists and
requisitions.
In general, engineering development must proceed in the order of
the above steps. A certain amount of overlap may be permitted,
and on larger projects, specific areas or systems may be released
(c)
ahead of others.
Spread Charts
This fundamental staging of engineering work coupled with the
fact that there is a typical inter-relationship between the man-
70 hours and timing of each engineering discipline makes it possible
CE
Notes to develop prototype engineering discipline spread charts for
___________________ typical project conditions. Table 6.4 is a typical chart for an EPC
project initiated with a process design package, which is a good
___________________
starting point to develop an engineering schedule. This Table
___________________
shows typically: the distribution of hours between disciplines, the
___________________ start/finish point for each discipline relative to the overall project
___________________ duration and normal progress curve for each discipline.
___________________ A prototype chart of this type applies fairly consistently for the
majority of process units. The unknowns are the realistic durations
-C
___________________
for each discipline's time span.
___________________
Table 6.4: Prototype Engineering Discipline Spread Chart
___________________
___________________
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UP
Quantity
The next step is to come up with some quantitative estimates of
the work to be done by key disciplines, by statistical methods.
Total home office man-hours = 300,000
Total engineering man-hours at 75% = 225,000
Individual discipline man-hours may be determined from
(c)
Table 6.4.
Number of equipment items = 250
Number of P&ID lines = 250 × 6.5 = 1625
Number of P&ID's = 250/3 = 83
71
Number of model tables/planning areas = site area/10,000 =
CE
Notes
160,000/10,000 = 16 (10,000 square feet of site = a model table of
2½ × 4 ft @ 1/R in. = 1 ft) ___________________
Number of piping key plans = site area/4,000 = 40 (4,000 sq. ft of ___________________
site area = a drawing area of 19 in × 29 in @ 1/R in. = 1 ft) ___________________
Number of isometrics = number of lines = 1625 ___________________
Having quantified the major categories of work, the next question ___________________
is: how long should they take? The critical durations in basic ___________________
engineering are: P&ID development time to production release,
-C
___________________
equipment design time to requisition issue, receipt of proprietary
equipment vendor drawings and development of planning ___________________
arrangement studies to production release. ___________________
An analysis of the work scope, the manpower availability in each ___________________

discipline and matching these against the durations and progress
curves shown in Table 6.4 suggest a realistic time span of six to
ES
seven months for basic engineering.
Critical Durations
In production design, these are piping and instrument drawings. A
balancing of key piping manpower availability against the work
scope of the 16 piping areas/40 key plans suggest an overall
duration of piping drawings production in the range of nine
months. Coupling the two together gives an overall engineering
period in the region of 15 to 16 months.
UP
This time scale can now be added to Table 6.4 above the total
engineering duration, as shown. We now have the backbone of the
overall engineering bar chart which shows start and finish points
for each discipline and a typical progress curve. Dates for specific
activities can now be determined from the individual discipline
progress curves. Specific activity completion points can be related
to specific progress completion percentages for that discipline
which can now be related to a schedule date from Table 6.4.
The Total Project

(c)
The last stage in the development of the project schedule is to

integrate the three independent sub-schedules for engineering,
procurement and construction to produce an overall master project
schedule. This may require a series of iterations. Start with a
standard master project schedule layout and make a first
72 assumption of a realistic (not optimistic) project schedule duration.
CE
Notes There are two early indicators which can be used to make the first
___________________ project duration assumption.
___________________ Engineering (to the 90% point) normally should not exceed 65% of
___________________ the total project duration.
___________________ Therefore, if engineering = 15 to 16 months, then the total project

duration = say 15.5 × 100/65 = 23.8 months.
___________________
Project construction (excluding pre-project early site development
___________________
work) should normally never start earlier than 30% of total project
-C
___________________
duration.
___________________
Therefore, if construction = 17 to 18 months, then the total project
___________________ duration = say 17.5 × 100/70 = 25 months.
___________________
Check Your Progress
Fill in the blanks:
ES
1. The last stage in the development of the project
schedule is to integrate the three independent sub-
schedules to produce an overall ……………. schedule.
2. In production design, these are ……………. and
……………. drawings.
Master Schedule
UP
For a first pass, set up a master project schedule format assuming

project duration of 25 months from release of the process design
package to mechanical completion. Starting from the front, lay in
the engineering durations and requisition dates for equipment and
bulk material based upon the engineering schedule. Add on to
these the material delivery times from the procurement schedule
to give the equipment and material delivery dates.
Starting from the back end, lay in the construction craft durations
and the construction material required dates from the construction
schedule. Now look for "float" or "overlap". Float will show up if
material deliveries are ahead of the construction material required
(c)
dates. Overlap will show up if drawing or material deliveries are

later than the construction required dates. The overall schedule
may be compressed or elongated to eliminate float or accommodate
overlap. Usually, the second pass will achieve a reasonable fit and
produce a realistic balanced schedule.
Comparative Analysis 73
CE
Notes
One final check is to look at the relationship between the progress
curves generated from the master project schedule for engineering, ___________________
material delivery and construction. The relative positions and lead ___________________
times between these curves must always fall within certain limits
___________________
for all projects. If the progress curves for the project in question
differ to a marked degree from the typical curves, then something ___________________
is seriously wrong and we do not have a satisfactory preliminary ___________________

project master schedule. It will be necessary to take another look
___________________
at the points where the project progress curves deviate from the
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___________________
typical progress curves.
___________________
Make Adjustments
___________________
Finally, the "realistic" schedule produced by this method is not
___________________
necessarily the minimum schedule. If, after this exercise, the
durations produced are unacceptable, then compress the overall
duration to the desired point. Look at the overlap to determine
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what positive steps must be taken to shorten what would
otherwise be considered a normal duration. What are the extra
priorities in engineering to make earlier decisions? More pressure
in procurement for shorter cycle times and accelerated deliveries?
More manpower peaking in the field? These are all options that
can be considered.
The schedule format will show up "pinch" points at an early date so
that schedule critical areas can be identified. This means that specific
UP
action plans and priorities can be directed to these areas from the
project initiation if minimum schedule is an overriding priority.
Realistic Milestones
A master project schedule developed by this "top-down" method
provides realistic milestones. These can subsequently be used for
the development of detailed schedules and networks within each of
the engineering, procurement and construction disciplines.
Check Your Progress

(c)
Fill in the blanks:

1. A master project schedule developed by ……………..
method provides realistic milestones.
2. …………….. will show up if material deliveries are
ahead of the construction material required dates.
74
Summary
CE
Notes
This unit details the method for development of schedule for
___________________
important phase of the project viz. engineering, procurement and
___________________ construction. Important aspects to be considered for the
___________________ development of schedules for the three phases of the project are
___________________
described at length. Development of a realistic project schedule by
integrating the three individual schedules is also explained.
___________________
___________________
Lesson End Activity
-C
___________________
Prepare a master schedule for the project you have chosen in the
___________________
activity given in the unit.
___________________
___________________ Keywords
Project Execution: The third phase of the project management
process, in which the plans created in the prior phases (project
ES
initiation and planning) are put into action.
Project Scheduling is the discipline of organizing and time-
phasing the activities required to complete the objectives of an
effort.
Procurement Cycle: Series of steps that must take place to
supply a production line or to replenish stock in a distribution
centre. Identifying the items that must be procured and
UP
determining the necessary quantities is the first step. This

information is used to generate a requisition which is sent to the
purchasing department. The assigned buyer requests bids and
awards the purchase order to a vendor. When the ordered items
arrive, they are entered into the inventory system. The parameters
for a procurement cycle may be set by a known production schedule
or vary based on consumer demand or other factors.
Man Hour: Unit of work that represents the productive effort of
one person in one hour. It is also called labour hour.

(c)
1. List basic information required for developing project schedule

for a new project.
2. What are the main phases of projects and their manpower/cost
estimates?
75
3. List out the important factors governing the procurement
CE
schedule. What are the methods for reducing the procurement Notes
period? ___________________
4. State important aspects of the construction schedule. Draw ___________________

and describe a typical construction manpower deployment ___________________
schedule.
___________________
___________________
-C
Books ___________________
___________________
Pennsylvania, USA.
___________________
ES
Web Readings
www.acquisition.gov
www.aia.org
UP
www.defence.gov.au
www.ncmahq.org
(c)
76
CE
Notes
___________________
___________________
___________________
___________________
___________________
___________________
-C
___________________
___________________
___________________
___________________
ES
UP
(c)
UNIT 7: PERT and CPM
Unit 7
77
CE
Notes
Activity
PERT and CPM

Differentiate between PERT
___________________
and CPM and make a Chart
___________________
highlighting these differences.
___________________
Objectives
___________________
topics: ___________________
\ PERT ___________________
-C
\ CPM ___________________
\ Network Crashing
___________________
___________________
Introduction ___________________
Project Evaluation and Review Techniques (PERT) and Critical

ES
Path Method (CPM), are the other methods widely used for project
planning. It is worthwhile to include a brief description of this
important technique here.
PERT and CPM Techniques

Preparation of Project Schedule is based on the use of "Bar
Charts". This is a simple method and easy to understand.
However, it has its limitations, namely:
UP
z No way of knowing logical interdependence between activities;

z No way of knowing criticality of an activity;
z Effects of delay of an activity on overall project time not
known;
z No way of co-relating bar chart with cost.
The CPM was developed by Dupont Company of U.S.A. with a view
to reduce the time required to perform routine plant overhaul,
maintenance and construction work and hence to minimize the
total project cost.
(c)
PERT was developed as a management control system by a

research team for Polaris Atomic Submarine Project by U.S. Navy
in 1957–59.
Nowadays, both “PERT” & “CPM” are used and these techniques
can be generalized as Network Planning.
78
Formation of a Network
CE
Notes
A major project is cut down into a number of activities. All these
___________________ activities are arranged in a logical sequence of operation. There
___________________ may be activities which can be taken up simultaneously. All the
activities are represented in a graphical pattern which is called
___________________
network. This network consists of a number of arrows and each
___________________
arrow represents an activity. Each activity is assigned the time
___________________ required to complete the activity and also other parameters as
___________________ quantity, cost, manpower, etc. required for it.
-C
___________________ Network planning is used for:
___________________ z Computing project completion time with definite probability

___________________
of completion for a given allocation of resources. This was
previously a matter of guess work or "past experience".
___________________
z Computing different project completion periods with different
stages of allocation of resources, and thereby minimize the
ES
total project cost.
z Scheduling different activities.
z Computing the requirement of men, material, money, etc. at
different stages of project. Since this can be done before the
project starts, any unreasonable or peak demands can be
forecasted and levelled off by suitable rescheduling of
activities.
Measuring progress of the project at any time during the execution
UP
of the project and take corrective steps.
Benefits of Network Planning

Network planning is a unique tool for planning and control of
projects as it:
z Encourages a logical approach in the planning, scheduling and
control of project;
z Encourages more detailed and long-range planning of projects;
z Provides a standard method of documentation and
(c)
communication of project plans, schedules, time periods and

cost performance;
z Identifies the most critical elements in the plan, focusing
management attention on them;
79
z Provides a means of scheduling resources efficiently since
CE
Notes
slack is known;
___________________
z Provides means to simulate effect of management decisions;
___________________
z Provides means to simulate effect of management decisions.
___________________
Basic Terms ___________________
Basic terms used in network analysis are as follows: ___________________
1. Activity: An activity has a definite beginning and ___________________
-C
may involve any time or resource consuming element of the ___________________
project, such as labour, paperwork, negotiations, machine
___________________
operations, etc. and are graphically represented by arrows,
usually with description and time written along with arrow. ___________________
___________________
2. Dummy: An arrow indicating merely the interdependency of
one activity upon another is called dummy activity. A dummy
carries a zero time estimate and is represented by a broken-
ES
line arrow.
3. Event: The beginning and end points of activities are called
events. Theoretically, an event is an instantaneous point of
time and represents the moment of time when one activity
should end before the other subsequent activity can begin.
Events are represented by a circle or an ellipse containing the
number of that event, earliest and latest happening of the
event as calculated. If more than one activity ends at an event,
UP
it is called a merge event. If more than one activity emanates

from an event, it is called a burst event.
4. Network: A network is a graphical representation of a project
plan, showing the inter-relationship of the various activities.
Networks are also called arrow diagrams.
Basic Rules of Network Logic

Following are the basic rules followed in the preparation of
network. Before an activity may begin, all activities preceding it
must be completed:
(c)
z Arrows imply logical precedence only. Neither the length of the

arrow nor its 'compass' direction on the drawing has any
significance.
z Time flows from left to right of an arrow, therefore, an arrow
joins a lowered numbered event to a higher number event.
80
z Any two events may be directly connected by no more than one
CE
Notes
activity.
___________________
z Event numbers must not be duplicated in a network.
___________________
z In estimation of duration of an activity, a particular level of
___________________
allocation of resources and method of carrying it out is
___________________ assumed. The three time estimates are:
___________________
Optimistic Time: The unlikely but possible time, if
___________________ everything goes well, chance may be one in hundred.
-C
___________________ Most Likely Time: The value of time which is likely to
___________________ occur more often than any other value.
___________________ Pessimistic Time: The unlikely but possible time, if

everything goes wrong, chance may be one in hundred.
___________________
A statistical mean time is considered for network activities, which
is calculated as follows:
ES
Te = (O+4M+P)/6,
Where,
Te - Statistical mean time,
O - Optimistic time,
M - Most likely time
P - Pessimistic time
UP
Critical Path
It is the path which takes the longest duration of time to reach the
objective event. If the program is to be shortened, one or more of
the activities on this longest path must be shortened or eliminated.
The application of additional effort anywhere else in the network
will be useless.
Float/Slack
Since the critical path is defined as the longest path in time from
the starting event to the objective event, then all other activities in
(c)
the network must lie on paths which are shorter. That means
along these non-critical paths there is a slack or float i.e. time to
spare. These paths are referred to as slack paths and are the areas
where surplus resources of man, facilities, or time are to be found.
81
The difference between the earliest expected and the latest
CE
Notes
allowable time is called slack or float. Activity
Make a chart describing the
___________________
process of Crashing.
Monitoring of Network ___________________
PERT/CPM or network analysis is a dynamic system. The ___________________
effectiveness of this system depends on continuous feedback and
___________________
updating of the reports so that all the reports are based on the
latest information. This becomes a highly laborious and tedious ___________________
task to do manually. With computerization of the system, it can be ___________________

used effectively. Further it may be noted while the work
-C
___________________
progresses, actual time taken for the activities completed (say "T")
___________________
differs from expected time "te". By replacing te with T, you may get
entirely different critical path as well as changed completion time ___________________
of the project. ___________________
In case of delays, the management will like to take corrective
actions, i.e. "crashing" of the network.
ES
Check Your Progress
Fill in the blanks:
1. The effectiveness of this system depends on continuous
……………….. and updating of the ………………...
2. PERT/CPM or network analysis is a ………………..
system.
UP
Network Crashing
Crashing of a network is to find out means to complete the project
at an earlier time schedule than planned or reworked time while
updating.
This can be achieved only by reducing the time for activities yet to
be done by employing additional resources with inevitable
additional cost. This cost aspect is important for management
decisions. In case the delay in the project execution is due to
reasons not attributable to contractors, the company may accept
(c)
additional cost reimbursement for network crashing.

Example: Let us try an example to illustrate the above technique.
First, we will list out the activities of the project and write
durations for these activities. Then we will write predecessor and
successor activities.
82
Activity list is shown in Table 7.1. Now we know the total time
CE
Notes
required for our project. If this is not as per the requirements then
___________________
we must find out ways to reduce duration of some activities so as to
___________________ achieve the target completion. Now we write duration in reverse
___________________ order for backward pass. The earliest start and latest start
duration should be equal for start event or else our calculations are
___________________
wrong.
___________________
Table 7.1: Activity Table
___________________
-C
ACTIVITY DURATION PREDECESSOR SUCCESSOR
___________________ ACTIVITIES ACTIVITIES
A 7 - D ,E
___________________ B 5 - C
C 7 B F ,G
___________________ D 5 A H
E 5 A I ,J
F 6 C K
___________________ G 3 C L
H 4 D L
I 7 E M ,Q
J 6 E N
ES
K 5 F P
L 6 H,G S
M 2 I S
N 4 J R
P 4 K S
Q 3 I T
R 4 N T
S 4 L ,M ,P -
T 1 Q ,R U
U 2 T -
Now, we will mark the events having equal earliest and latest
start duration as critical events. The path of activities connecting
these critical events is the critical path. We are ready with the
UP
network for monitoring now. Original schedule PERT network is

shown in Figure 7.1.
(c)
Contd…
83
CE
Notes
___________________
___________________
___________________
___________________
___________________
___________________
-C
___________________
___________________
___________________
___________________
Figure 7.1: PERT Network
K
ES
18 18 23 23
F 5
C 6
B
5 5
7
12 12
4 P
G
5 3
A D H L S
0 0 7 9 12 17 16 21 27 27 31 31
7 5 4 6 4
E M
5 2
I U
12 14 19 25
2
7 Q
3
6 J
N R T
UP
18 20 22 24 26 28 27 29
4 4 1
Figure 7.2: PERT Network after 7 days
Activity E K
18 18 23 23
is not complete 5
F 6
and Cexpected
5to take 3 more
B
5
7days
12 12
4 P
G
5 3
A D H L S
0 0 7 9 12 17 16 21 27 27 31 31
7 5 4 The forward6 path will 4 32
E This alsoMchanges the
5 give revised durations
CRITICAL 2 PATH
I U
8
(c)
12 14
7
19 25
2
15
3 Q
6 J N R T
18 20 22 24 26 28 27 29
21
4 4 29
1 30
25
Figure 7.3: PERT after 14 days

84
Figure 7.2 and Figure 7.3 show the project progress after 7 and 14
CE
Notes
days respectively. We see that during the first 7 days, the project
___________________ proceeds as per schedule, but after 14 days, there is a delay in
___________________ activity E by 3 days. This affects the total schedule and also
changes the critical path. If the original project schedule of 31 days
___________________
is to be maintained, then one of the activities in this new critical
___________________ path is required to be crashed by one day through deployment of
___________________ additional resources. If the activity was delayed within the float
___________________
period, then it will not change the critical path and the original
project schedule is maintained.
-C
___________________
This example illustrates various methods to monitor the project
___________________
schedule, taking corrective action wherever required, by using this
___________________ network technique. These networks are prepared at the micro level
___________________ to monitor day to day activities and take timely corrective actions.
Check Your Progress

ES
Fill in the blanks:
1. …………….. of a network is to find out means to
complete the project at an earlier time schedule than
planned or reworked time while updating.
2. Crashing can be achieved only by …………….. the time
for activities yet to be done by employing additional
resources with inevitable additional cost.
UP
Summary
Preparation of Project Schedule is based on the use of "Bar
Charts". This is a simple method and easy to understand.
The CPM was developed by Dupont Company of U.S.A. with a view
to reduce the time required to perform routine plant overhaul,
maintenance and construction work and hence to minimize the
total project cost.
PERT was developed as a management control system by a
research team for Polaris Atomic Submarine Project by U.S. Navy
(c)
in 1957–59.
Lesson End Activity

Make a presentation on PERT and CPM.
Keywords 85
CE
Notes
Program Evaluation and Review Technique (PERT): Project ___________________
management technique that shows the time taken by each
___________________
component of a project, and the total time required for its
completion. ___________________
___________________
Critical Path Method: Network analysis technique used in
complex project plans with a large number of activities. CPM ___________________
diagrams: (1) all activities, (2) time required for their completion, ___________________
(3) and how each activity is related to the previous and next
-C
___________________
activity.
___________________
Crashing: Crashing of a network is to find out the means to
___________________
complete the project at an earlier time schedule than planned or
___________________
reworked time while updating.

ES
1. What is the network plan and how it is developed considering
dependencies and activity duration?
2. What is critical path for a project and how do the activities on
critical path influence the project?
3. Describe the important elements of a project for which
individual schedules are drawn. Why preparation of
engineering schedule can be taken up last of the three
UP
schedules?
Further Readings
Books
Pennsylvania, USA.
(c)

86
Web Readings
CE
Notes
www.acquisition.gov
___________________
___________________
www.aia.org
___________________
___________________
www.defence.gov.au
___________________
___________________
www.ncmahq.org
-C
___________________
___________________
___________________
___________________
ES
UP
(c)
UNIT 8: Project Control – Checking Project Progress with Bell and “S” Curves
Unit 8
87
CE
Notes
Activity
Project Control – Checking Project

Differentiate between
___________________ “S”
shaped curve and Bell curve
and ___________________
list down these
Progress with Bell and “S” Curves differences.
___________________
___________________
Objectives ___________________
___________________
topics:
-C
___________________
\ Concept of “Bell” and “S” Curves
\ Bell and S Curves for a Project ___________________
\ Utilization of Bell and S Curves for Project Monitoring and Control ___________________
___________________
Introduction
ES
In a project, many planning and scheduling problems are
quantitative. For example, 8000 isometrics must be produced in 5
months or 50,000 tons of fabricated piping must be erected over the
same period. In these cases, it does not really matter which
isometrics are produced or which piping is erected during a specific
period. The important thing is to know that the job is being
handled quantitatively at a rate appropriate for the time span in
order to achieve overall project schedule. This is where "S" and Bell
UP
curves can be valuable tools to the more complex systems of

evaluation. They can be developed rapidly and have great
flexibility in their application.
The “S” Curve

A basic "S" curve is drawn on a grid with a horizontal axis showing
percentage calendar time from 0 to 100% and a vertical axis
showing percentage completion from 0 to 100%. Any activity, group
of activities, or overall project expressed in the form of "S" curve
must start at 0, 0 in the bottom left hand corner and to be
(c)
complete, must end at top right hand corner at 100,100. The shape
of the curve between 0 and 100% can be an indicator of
comparative performance and efficiency.
The simplest "S" curve can be a straight line as shown in Figure
8.1, curve A. An "S" curve shows cumulative values from 0 to 100
88 and its slope shows the rate of progress or loading at each point of
CE
Notes time. In reality, it is rarely feasible to apply full loading instantly
___________________ and to maintain a constant load throughout the time span.
Usually, there must be an initial lead-in period for initial
___________________
mobilization before peak effort can be applied and a tail-off period
___________________
towards the end. Curve B in Figure 8.1 shows a typical,
___________________ symmetrical "S" curve which has an equal build-up and tail-off. "S"
___________________ curves are not usually symmetrical. They may be front end loaded
or back end loaded as illustrated in curves C and D in Figure 8.1.
___________________
An actual "S" curve might follow any shape within the
-C
___________________ grid but will probably fall between the extremes of the two curves
___________________ shown. The closer the "S" curve is to the 45 degree straight line,
___________________
the greater is the degree of resource levelling that has been
achieved and greater the theoretical efficiency.
___________________
The Bell curve is derived from the "S" curve and shows the amount
of vertical movement of the "S" curve (the rate of progress or
loading) for a finite time. In the case of the straight line "S" curve,
ES
the slope or loading is constant indicating a constant effort
throughout the total period. Thus, the derived Bell curve is also a
straight line. This shape of the curve is normally the most efficient
and hence the most desirable when related to manpower loading. It
may not necessarily be so for dollar expenditures where it may be
more desirable to defer expenditure to the latest possible date. The
loading curve developed from a symmetrical "S" curve shows the
conventional Bell shape with a symmetrical peak considerably
UP
higher than the average. This indicates a lower rate at the

beginning and end with the maximum rate during the central
period.
(c)
Figure 8.1: Basic Bell-shaped Curve

"S" Curve Applications 89
CE
Notes
"S" curves are generally applied to the following areas of the
project: ___________________
z Engineering by man-hour or by physical completion ___________________
___________________
z Drawings by number or weighted values
___________________
z Requisitions by number or dollar value
___________________
z Purchase orders by number or dollar value
___________________
-C
z Construction by man-hour, by units of work activity, or by ___________________
physical completion
___________________
z Expenditure or cash flows in dollars. ___________________
These curves can be applied equally effectively to a variety of ___________________

miscellaneous activities or items such as:
z Material take-off quantities

ES
z Isometrics drawn and checked
z Cubic meter of earth excavated
z Cubic meter of concrete placed
z Meter of pipe erected
z Meter of cable laid.

UP
The most common "S" curves used for overall project review are for
engineering, procurement, material delivery and construction.
Engineering Curves — Engineering Progress Control

In a normal project, the work flows through process, equipment
groups (stationary and rotary), civil & structural, plant design and
finally, instruments and electrical. This typical relationship
between the "S" curves for the various engineering disciplines
holds for most projects. If the progress for any one discipline runs
late, then all the succeeding disciplines must be affected and will
also be forced to run late. If planned man-hour and progress curves
(c)
are prepared at the start of a project and actual man-hour

expenditure and progress recorded at each reporting date, any
deviation from plan is immediately visible. Even more important,
schedule slippages in one area can be easily trended to evaluate
the potential impact on the schedule of other areas.
90
CE
Notes
___________________
___________________
___________________
___________________
___________________
___________________
-C
___________________
___________________
___________________ Figure 8.2: Basic “S” Shaped curve
___________________
Individual Discipline Curves
Figure 8.3 shows individual discipline curves plotted over the
ES
scheduled completion time for the discipline. In these curves, 100%
completion refers to completion of schedulable activities within the
scheduled completion time for the discipline. For engineering
disciplines, this is normally at a point when 90 to 95% man-hours
have been spent. The final 5 to 10% of the man-hours are required
for engineering closeout and follow-up of vendor and field queries.
Basically, three typical curve shapes cover all engineering
disciplines. Figure 8.2, curve 1, shows a fast build-up, early peak
which applies for process, mechanical and equipment disciplines.
UP
Figure 8.3, curve 2, shows a normal build-up with a long even peak
which applies for project and support engineering disciplines.
Figure 8.3, curve 3 shows a slow build-up and late peak which
applies to the major drafting disciplines.
Generally speaking, a planned "S" curve for any engineering and
drafting disciplines will fall somewhere within this envelope. For
preliminary planning purposes, this typical shape of "S" curve can
be assumed for man-hour, manpower and progress planning. Note
that the "S" curves produce the corresponding Bell curves where
the peak is about 1.5 times the average.
(c)
91
CE
Notes
___________________
___________________
___________________
___________________
___________________
___________________
-C
___________________
___________________
___________________
___________________
ES
Figure 8.3: Contrast in Normal and Unacceptable
Engineering Curve Shapes
Unsuitable Curves
UP
Figure 8.3 also includes curve shapes that are unacceptable for
engineering disciplines. Curve A in Figure 8.3 is too steep and too
early. It shows an unrealistic peak of 2.5 times the average with a
long slow tail-off. Curve B shows two steep portions with a central
flat area. The derived Bell curve shows two short term peaks with
low progress achievement over the central portion of the project.
These curve shapes show inefficient manpower loading. If they
were produced, either planned or actual, there is something
seriously wrong with project planning or performance.
(c)
Plan, Measure and Report

Figure 8.4 illustrates the method of preparing a planned, weighted
progress "S" curve for an engineering discipline for comparison
against physical achievement and man-hour expenditure. First list
the activities and estimate the man-hours for these activities. The
92 "weight" of an activity is the ratio of activity man-hours to the total
CE
Notes discipline man-hours expressed as a percentage. Next prepare a
___________________ bar chart schedule showing the planned periods for the activities.
The planned percentage completion for each activity at each
___________________
reporting period is marked above the bar. The planned weighted
___________________
percentage completion is the multiple of the activity percent
___________________ complete times the activity weighting. The vertical totals of each
___________________ reporting period generate a weight per cent planned progress "S"
curve as illustrated. At the time when the planned "S" curve is
___________________
prepared, the Bell curve generated should also be examined. This
-C
___________________ will show the planned man-hour and manpower expenditure for
___________________ each reporting period. Any excessive peaks or fluctuations should
___________________
be corrected by adjusting the bar chart schedule to achieve more
even loading.
___________________
ES
UP
Figure 8.4: Developing planned progress "S" curves is a basic method
Periodic Recording
At each reporting period, physical completion for each activity is
recorded. This physical per cent completion is multiplied by the
activity weighting. The sum of these multiples gives the total
physical percentage completion for the overall discipline. Physical
completion and man-hour expenditure are plotted on the same
(c)
form with the planned progress curve. A comparison between the

planned per cent completion, the physical per cent completion and
the per cent man-hour expenditure will quickly show the
productivity and performance trend. It is then possible to forecast
overall completion and overall man-hour expenditure. This method
of developing planned progress "S" curves is a basic method. Many
variations can be done manually or by computers with networks 93
CE
and/or bar-charts. Notes
___________________
Manpower Forecasting
___________________
Figure 8.5 shows how curves can be used to forecast manpower
___________________
requirements. Normally, the planned progress curve is prepared
after the manpower requirements have been determined and ___________________
levelled to even out peaks. However, sometimes during the ___________________

progress of a job, when the end date has been fixed, and the ___________________
progress and man-hour expenditure have varied from the initial
-C
___________________
plan, it is necessary to redetermine the manpower requirements to
meet the original schedule. The steps are as follows: ___________________
___________________
1. The current position is the end of the actual progress curve,
assuming the method of measuring physical per cent ___________________
completion is realistic.
ES
2. From this point, extend a revised planned progress curve
approximating to the shape of the previous planned "S" curve
and meeting the required completion point.
3. Note the cumulative per cent completion required at the end of

each month on the revised planned progress curve.
4. Tabulate for each reporting monthly period the required per

cent to be completed per month which is the difference
between cumulative numbers noted under 3.
UP
5. To predict the number of men required per month, take the

total forecast hours based upon productivity and performance
to date. Multiply the total hour by the per cent to be completed
per month and divide it by the hours worked per month. This
will give the number of men required per month.
6. Review the number of men required thus calculated and even

out the numbers if there are large differences on a month to
month basis.
7. Confirm that the number of men indicated can be realistically

(c)
applied to the job. If the number indicated is greater than can

be obtained or realistically applied to the job, then the
schedule will have to be extended. Alternatively, if more men
are available and can be applied to the job than is required, it
may be possible to reduce the schedule.
94
CE
Notes
___________________
___________________
___________________
___________________
___________________
___________________
-C
___________________
___________________
___________________
___________________
ES
Figure 8.5: Manpower Forecasting from Curves
Master Project Schedule

UP
Figure 8.6 shows a typical bar chart master project schedule.

Start/complete dates and relationships between the various major
activities are expressed as a percentage of calendar time to
mechanical completion.
Superimposed on the bar chart are "S" curves for procurement,
engineering, material delivery and construction, which are
normally considered the key progress measurement curves for an
overall project. The relationship between the "S" curves matches
the relationship between the corresponding activities in the bar
chart. Whereas the bar chart shows the specific start and finish
(c)
dates for the activities, the "S" curves show required rate of
progress and cumulative completions at various stages of the
project.
95
CE
Notes
___________________
___________________
___________________
___________________
___________________
___________________
-C
___________________
___________________
___________________
___________________
ES
Figure 8.6: Typical Master Project Schedule and Curves
A Narrow Band
The shape of the "S" curves, their relationship to each other and
their position with regard to overall project completion fall within
UP
a fairly narrow band for all projects. For example, procurement,

engineering and material delivery all should be complete at the
50%, 70% and 80% points, respectively. Little is to be gained by
starting construction much earlier than the 30% point. If any one
of these curves moves significantly out of its place, then the overall
schedule will be affected. The typical relationship between these
"S" curves and their position in the overall project completion
provide excellent data for preliminary planning. Also the curves
help to check the realism of any detailed plans developed for a
specific project.
(c)
Drawing Summary Schedule

Figure 8.7 shows the preparation of drawing summary schedule
curves showing the drawings started and drawings issued for
"Approved for Construction" (AFC). The major categories of
drawings and their numbers are listed on the left hand side. The
96 numbers of drawings to be started and issued AFC are spread out
CE
Notes across the form corresponding to the activity periods established in
___________________ the project schedule. The column totals are the total numbers to be
started and issued AFC in each period. From these, the "S" curves
___________________
can be generated as illustrated.
___________________
___________________
___________________
___________________
-C
___________________
___________________
___________________
___________________
ES
UP
Figure 8.7: Drawing Summary Schedule
As the project proceeds, the actual number of starts and AFC

issues can be entered and compared against the plan. This simple
but effective method helps assure that overall drawing progress is
maintained to meet the requirements of the project schedule.
Figure 8.8 shows the drawing summary schedules (in heavy solid
line) superimposed on the engineering curves for the drafting
disciplines. Note that the engineering discipline progress curves
fall right between the drawing start and drawing AFC "S" curves.
This is where these should be.
(c)
97
CE
Notes
___________________
___________________
___________________
___________________
___________________
___________________
-C
___________________
___________________
Figure 8.8: Curves Showing Relationship between Drawing Start/AFC ___________________

and Engineering Progress
___________________
Unacceptable Curves
ES
Figure 8.8 also shows unacceptable drawing curves (in
heavy dotted line) in relation to the drafting discipline progress
curves. The following points are unacceptable:
1. The drawing start curve is too optimistic. Drawing starts
should not be made too early and too fast. Progress cannot be
maintained since it runs well ahead of the engineering
development.
2. The drawing AFC curve is too late. This is running too far
UP
behind the planned progress.

3. There is too wide a gap between the drawing start and the
drawing AFC curve in the early phases. This means the
drawings are started and left incomplete for too long. This
usually reflects inefficient operation.
4. The end portions of the curves are too close showing an
unrealistic expectation. Drawings cannot be started and issued
AFC without adequate time in between for the actual drawing,
checking, review and finalizing before issue.
5. The average slope of the drawing curves from start to finish is
(c)
offset from the required engineering discipline progress curves.

In general, the rate of progress of the drawing production has
to be equal to or greater than the overall engineering progress
curves.
The correct relationship between an engineering discipline
progress curve and its drawing start and drawing AFC curves is
98 illustrated in the insert. Entirely similar type of curves can be
CE
Notes generated for equipment requisitions, purchase orders and
___________________ deliveries. Again, the requisitions and purchase order curves must
have a fixed relationship, one to the other and also to the progress
___________________
of the engineering discipline.
___________________
___________________
Construction Curves – Construction Progress Control
Figure 8.9 shows typical construction craft "S" and bell curves. The
___________________
actual shape of construction "S" and Bell curves differs from those
___________________
of the engineering disciplines. Nevertheless, the overall concept for
-C
___________________ their preparation and application is entirely similar. In a normal
___________________ project, construction work flows through concrete, steel,
equipment, piping and electrical as shown.
___________________
___________________
ES
UP
(c)
Figure 8.9: Construction Craft Curves
This typical relationship between the "S" curves for various

construction crafts holds for most projects. If progress for any craft
runs late, then all succeeding crafts will be affected and will also
be forced to run late. Planned man-hour and progress curves may
be prepared at the start of the project against which actual man- 99
CE
hour expenditure and progress achieved can be recorded for Notes
schedule control and forecasting. ___________________
Plan and Track ___________________
___________________
In just the same way as there is a relationship between the
equipment and drawing curves and engineering progress curves, ___________________
there is a similar relationship between the construction progress ___________________
curves. Construction cannot proceed until the AFC drawings and
___________________
materials are received.
-C
___________________
A good way of planning and monitoring construction schedule is to
___________________
plot the AFC drawing release and equipment delivery "S" curves
with the corresponding construction craft curve. Good planning ___________________
allows an adequate lead time between receipt of AFC drawings and ___________________
material and planned construction progress. Therefore, if a record
is maintained of the actual AFC drawing releases and actual
ES
material deliveries, it is possible to determine ahead of time
whether or not construction progress can be maintained.
But it is an exceptionally effective and easily followed method of
tracking construction progress. A full set of these curves set out on
one wall of a field planning office can be updated frequently. Any
deviation from plan immediately shows up the potential effect on
the subsequent activities.
Simple but Useful

UP
The difficulties of plant construction today demand that the most

appropriate of the available comprehensive specialized control
systems be used. However, simple Bell and "S" curves can be
applied in conjunction with such systems. These are effective tools
for top management to junior supervisors.
Check Your Progress

Fill in the blanks:
1. The ………………. number of starts and AFC issues can
be entered and compared against the plan.
(c)
2. ………………. is a symmetrical bell shaped curve traced

by normal distribution.
100
Summary
CE
Notes
This unit highlights the use of “Bell” and “S’ curves in project
___________________
progress monitoring. Sufficient information is given for the
___________________ preparation, analysis and use of these curves. Unacceptable shape
___________________ of these curves with reasons for their unacceptability has been
___________________
discussed. Midstream corrections for change in manpower
deployment in order to achieve the desired project schedule have
___________________
also been described.
___________________
Lesson End Activity
-C
___________________
___________________ Make a chart showing the “S” Curve and the Bell shaped curve.
___________________
Keywords
___________________
Manpower Forecasting: The prediction of future levels of
demand for, and supply of, workers and skills at organizational,
ES
regional, or national level.
Bell Curve: Symmetrical bell shaped curve traced by normal
distribution.
“S” curve: A type of curve that shows the growth of a variable in
terms of another variable, often expressed as units of time.

1. What is 'S' curve and in which area of project this is mostly
UP
used?
2. What are individual discipline 'S' and Bell curves?
3. How these curves help in monitoring and control of major
activities/area of work?
4. Describe various types of “Bell” and “S” curves and their
significance. How can these curves be used for project progress
monitoring?
5. Describe various types of ‘S’ curves as applicable to
engineering disciplines. What types of curves are unacceptable
(c)
and why?
6. Describe how manpower redeployment can be calculated using
the “S” curves when the actual progress does not match the
planned progress.
Further Readings 101
CE
Notes
Books ___________________
___________________
Pennsylvania, USA.
___________________
___________________
Turning Good Managers into Great Leaders, McGraw-Hill
___________________
-C
Distributors, Shahdara, Delhi ___________________
___________________
Web Readings
___________________
www.acquisition.gov
ES
www.aia.org
www.defence.gov.au
www.ncmahq.org
UP
(c)
102
CE
Notes
___________________
___________________
___________________
___________________
___________________
___________________
-C
___________________
___________________
___________________
___________________
ES
UP
(c)
UNIT 9: Project Costs Control – I
Unit 9
103
CE
Notes
Activity
Project Costs Control – I

Prepare a preliminary control
___________________
estimate, a definitive estimate,
and ___________________
a check estimate for the
data from any project of your
___________________
Objectives choice.
___________________
topics: ___________________
\ Project Engineering Cost ___________________
-C
\ Equipment Cost ___________________
\ Commodities Cost
___________________
___________________
Introduction ___________________
The first step in cost control is to prepare a good cost estimate.

ES
Cost cannot be controlled if there is an inadequate, incomplete or
unrealistic estimate. Figure 9.1 illustrates the increasing
probability of increased accuracy as estimates are made at
progressive stages of project execution.
Estimate
Order of magnitude estimates is derived from curves or return
costs from previous projects and is prepared in the conceptual
UP
stage.
A preliminary control estimate is prepared when the process
design is complete and equipment data and sizes are available.
A definitive estimate is prepared when basic engineering is
complete and preliminary bulk material take-offs have been
prepared.
A detailed or check estimate is prepared on completion of design
engineering when production drawings, final material quantities
and prices are known.
(c)
Variations
The final cost of a project is not known until financial completion,
when all commitments and invoices have been paid. Prior to that
there is always the possibility of variation from an estimate no
104 matter how detailed. Normally, three levels of estimates are
CE
Notes prepared during project execution:
___________________
z Order of magnitude
___________________
z Preliminary control
___________________
z Definitive
___________________
Cost control can only be applied at a level corresponding to the
___________________
quality and detail of the estimate available.
___________________
Project cost control starts on a wrong base if there is a poor
-C
___________________ estimate. Estimates may be arbitrarily reduced or an estimating
___________________ accuracy may be claimed which is not supported by the project
scope definition available. Poor project execution may be blamed
___________________
for cost overrun when an unrealistic or overoptimistic project
___________________ estimate is the problem.
Procedures
ES
An essential requirement for the production of quality estimates
is the use of good estimating procedures. Detailed formalized
procedures, consistency of method, feedback of previous cost data
and a standard code of accounts are the prime requisites for project
estimating. Project costs must be reported under the same code of
accounts to match the estimate to ensure good feedback for
comparison.
Table 9.1 shows the major elements of capital cost in a project.
UP
Although cost control procedures should be applied to all areas of

cost, knowledge of cost elements will allow additional vigilance to
be applied to cost sensitive areas. No matter how thorough the
estimate, there may be errors, omissions and unforeseen events. A
contingency and risk analysis (as described above) of the estimates
takes care of these situations. An appropriate contingency is
included as an integral part of the estimates.
Table 9.1: Elements of Capital
Cost in a Project________________
% of total
(c)
Low Typical High

Home office Equipment 8 10 12
Commodities 20 30 40
Direct labour 25 31 40
Contd…
Construction 15 20 25 105
CE
Indirects 6 9 12 Notes
Activity
Total 100 List___________________
out the methods of
controlling engineering cost.
___________________
Check Your Progress
___________________
Fill in the blanks:
___________________
1. Project cost control starts on a wrong base if there is a
___________________
…………………. estimate.
___________________
2. Cost control can only be applied at a level corresponding
-C
to the quality and detail of the …………………. ___________________
available. ___________________
___________________
Project Costs ___________________
There are different types of costs incurred in any project
undertaken by the firm. These costs are explained here. Basic
ES
Engineering Cost, Equipment Cost and Commodities Cost are
explained in this Unit. Home Office Cost, Construction Cost and
Field Subcontracts Cost are explained in the next unit.
Basic Engineering Cost Control

The intrinsic cost of a project is set in the basic engineering phase,
during which the following major project definition documents are
produced:
UP
z Project scope definition and coordination procedures

z Process design package
z General engineering specifications
z Equipment list and equipment data
z Piping and instrument diagrams (process and utility)
z Site and plot plans
z Electrical single line diagrams
z Construction plan
(c)
z Master project schedule
Cost Influence
Basic engineering fixes the quality and content of the project which
in turn, fixes the basic cost. Such things are the equipment, the
106 material and design specifications, philosophies regarding
CE
Notes reliability, spares, safety, environmental protection, automation
___________________ and controls, extent of buildings and structures, etc., which are
___________________ fixed. After basic engineering has been fixed, the only
opportunities for cost savings are by improved project execution
___________________
efficiency and productivity in engineering and construction or by
___________________
more competitive equipment and material purchasing. These are
___________________ called Economic Value Addition (EVA) methods.
___________________ Significant costs are saved only by reducing the scope of the project
-C
___________________ by removing equipment items or using less stringent design and
___________________ material specifications. Because the project costs are committed
after basic engineering has been approved, there should be a
___________________
thorough cost review prior to approval. It should be a separate
___________________
exercise from the technical review, to ensure that extra cost has
not been built in unnecessarily.
ES
Equipment Cost Control
Equipment items are normally estimated with close accuracy;
provided the basic capacity, duty, materials, and type have been
defined. Often there may be large price differences between bids.
Careful commercial and technical analysis must be made to ensure
that acceptable quality is selected at the lowest price to take
advantage of specific market conditions. A major problem in
controlling equipment costs is to stop price additions after the
UP
purchase order has been placed. Changes, such as nozzle sizes,

ratings, orientations, attachments, instrument and electrical
connections, etc. provide the vendor with an opportunity to
increase his price unless fixed unit prices for additions have been
established during the competitive bidding stage.
Control Equipment Costs

The following general rules should be part of the project
procedures to control equipment costs:
z Do not issue enquiries prematurely. Wait until equipment
(c)
definition is firm so that vendors can bid on information which

will not change.
z Obtain competitive bids from at least three vendors. Search
the market ahead of time to determine which vendor shops are
hungry for work.
107
z Obtain firm price quotations. If escalation clauses
CE
are unavoidable, specify an escalation formula which Notes
can be monitored and also relates to the required delivery. ___________________
z If nozzles or attachments may be added or changed, obtain ___________________

fixed unit prices for these additions prior to the placement of ___________________
purchase order.
___________________
z If spares are required, obtain firm price quotations with the
___________________
bid or before placement of purchase order.
___________________
Commodities Cost Control
-C
___________________
Commodities or bulk materials include:
___________________
z Civil, structural and building materials;
___________________
z Piping, valves, fittings, supports and associated materials; ___________________
z Electrical equipment and materials;
Instruments and instrument materials;
ES
z
z Insulation, fireproofing and painting.

The cost of commodities is set by quality and quantity. Quality is
set by specifications developed during basic engineering by the
size, type and number of pieces of equipment, piping and
instrument diagrams, plot plan and plant general arrangement.
When engineering is complete, the base cost of commodities has
also been established, even though at that point in the project
UP
execution the exact commodity quantities may not be known.

Thereafter it is only possible to reduce wastage, excesses or
inefficiencies by good control during design engineering,
procurement and construction.
Document Review
In order to reduce the base cost of commodities, it is necessary to
review the basic engineering documents so as to reduce quality of
specifications, remove unwanted equipment, or remove extra
piping and instruments. This reinforces the importance of a
specific cost review of the key basic engineering documents prior to
(c)
the start of production design. Economic value addition is done

through this review and could lead to substantial cost saving of the
project. Approval of basic design is a commitment for the quality
and quantity of commodities required by the approved basic
engineering documents.
108 Control Commodity Quantities
CE
Notes
The following general rules should be observed to achieve effective
___________________
control of commodity quantities:
___________________
z Prepare a detailed commodity material estimate and make
___________________ this available to those responsible for final design drawings
___________________ and bills of material.
___________________ z Estimate take-off quantities must be referenced to specific

equipment items, P & Ids, pipeline numbers, plot plan area
___________________
numbers, or other suitable identification so that it is possible
-C
___________________ to make comparisons during the progress of design
___________________ engineering. The drawings used for take-off should be
retained.
___________________
z Since the estimate take-offs are based upon designs which are
___________________
not final, appropriate allowances must be added to the
estimate take-off to cover final design, construction and
maintenance spares. Allowances must be identified. Unit
ES
prices used in the estimates must also be recorded.
As design proceeds, final take-off quantities by area or system
should be compared against the take-off quantities of the same
area or system in the estimate.
Figure 9.1 illustrates a typical trend curve which should be
maintained for each major commodity material category.
UP
(c)
Figure 9.1: Commodity Material Trend Curve

Commodity Price Control 109
CE
Notes
Commodity price control can be achieved by the following:
___________________
z Obtain at least three competitive quotes. Review the market
ahead of time to determine which suppliers need work. ___________________
z Do not issue enquiries until specifications and quantities are ___________________
firm so that there is no chance for the bidder to change his ___________________
price after the purchase order has been placed.
___________________
z Attempt to obtain fixed price quotes or fixed unit prices. Do ___________________
not accept escalation clauses or other price adjustment
-C
___________________
clauses, which cannot be easily monitored.
___________________
z Do not place orders which are open ended or where the
fabricator can invoice according to his measurements. This ___________________
particularly applies to pipe fabrication. ___________________
Check Your Progress

ES
Fill in the blanks:
1. The cost of commodities is set by …………….. and
…………….. .
2. …………….. addition is done through review and could
lead to substantial cost saving of the project.
Summary
UP
This unit provides the basic concepts for project cost control at
Engineering, Procurement and Construction stages. Cost control at
engineering stage is carried out by correct estimates of bulk
materials (commodities) and avoiding over design of equipment.
Lesson End Activity

For effective cost control, establish the stage of engineering
completion at which the Bill of Quantities (BOQ) should be
available more or less precisely for the following commodities:
(a) Foundation for steel/rebars
(c)
(b) Structural steel

(c) Piping and piping specialities
(d) Instruments
(e) Electrical cables
110
Keywords
CE
Notes
___________________ Construction Cost: Expense incurred by a contractor for labour,

material, equipment, financing, services, utilities, etc. plus
___________________
overheads and contractor’s profit.
___________________
Engineering Cost Estimate: Detailed cost estimate for a project,
___________________
computed by estimating the cost of every activity in a work
___________________
breakdown structure, summing these estimates, and adding
___________________
appropriate overheads.
-C
___________________
Project Cost Estimation: An approximation of the probable cost
___________________
of a product, program, or project, computed on the basis of
___________________ available information.
___________________
1. ‘Project success depends upon accuracy of cost estimate’.
ES
Substantiate this by suitable example.
2. How can project cost control be exercised through:
(a) Engineering of project?
(b) Procurement of materials and equipment?
(c) Planned optimized construction?
3. Explain Project monitoring and control.

UP
Further Readings
Books
Pennsylvania, USA.

(c)

Web Readings 111
CE
Notes
www.acquisition.gov
___________________
___________________
www.aia.org
___________________
___________________
www.defence.gov.au
___________________
www.ncmahq.org
___________________
-C
___________________
___________________
___________________
___________________
ES
UP
(c)
112
CE
Notes
___________________
___________________
___________________
___________________
___________________
___________________
-C
___________________
___________________
___________________
___________________
ES
UP
(c)
UNIT 10: Case Study
Unit 10
113
CE
Notes
Case Study
___________________
___________________
___________________
Objectives
___________________
___________________
-C
___________________
Case Study: Wireless Warehouse Initiative Improves Delivery
Speed by 66% ___________________
The company is a provider of highly efficient turbine-driven gas ___________________

compression, oil pumping and power generation packages for on-
___________________
and off-shore applications worldwide.
Challenge
ES
With increasing logistics and labour costs threatening to seriously
impact profit margins, the company’s supply chain sectors in
North America saw a need for improved material management to
meet rising demands for order accuracy while increasing
productivity and reducing costs. The major challenges they faced
were overhead control issues such as inaccurate inventory counts,
shipping errors, receiving errors, and a need to improve delivery
speeds.
Analysis concluded that improvements would best be achieved by

UP
substituting technology for potentially error-prone human

activities such as receiving, put away, picking, shipping and
inventory counting. Providing an automated means for data to be
conveyed directly from the warehouse floor into SAP’s Supply
Chain Management (SCM) software rather than via a manual
counting and recording process would improve accuracy, reduce
overhead costs, and provide real-time supply chain visibility.
Solution
The organization decided to take advantage of radio frequency

(RF) automation and SAP integration within the warehouse to
(c)
achieve optimum supply chain efficiency and productivity.

Midway through the project, it became apparent to the company
that they did not have the appropriate level of project
management capacity available in-house. They called upon PM
Solutions to provide a senior-level project manager to lead the
“North America Program Team” in the implementation of a
Contd…
114 warehouse RF solution for the final third of the project duration.
CE
Notes PM Solutions’ project manager immediately assumed
___________________
responsibility for developing and managing the overall project
plan, which consisted of three distinct components:
___________________
z Install shop floor wireless network
___________________
z Build, configure, and connect Radio Frequency devices
___________________
z Incorporate RF-associated SAP changes
___________________
PM Solutions’ project manager performed the roles of project
___________________
manager and system integrator, being responsible for overseeing
-C
___________________ requirements gathering, systems design, procurement and
installation of the necessary hardware and software, and
___________________
coordinating user acceptance testing.
___________________
Results
___________________
The new RF solution was delivered on schedule and more than
18% under budget. The biggest gains from this implementation
were improved inventory accuracy and increased productivity.
ES
The expected delivery speed of parts from the warehouse was
reduced by 66% (from 24 hours to 8 hours), producing a
significant improvement in overall time to market. This
successful project laid the groundwork for subsequent operational
improvement initiatives now underway at the client’s locations in
the US and Europe.
Questions:
1. Bring out the critical issues that have been highlighted in this
case study.
UP
2. What is the role of Project Management in resolving these

issues? Elaborate.
Source: http://www.pmsolutions.com/case-studies/view/wireless-warehouse-initiative-transforms-
materials-management-operations-an
(c)
UNIT 11: Project Costs Control – II
115
CE
Notes
___________________
___________________
___________________
___________________
___________________
___________________
-C
___________________
___________________
___________________
___________________
ES
BLOCK-III
UP
(c)
116
CE
Notes
UNIT 11: PROJECT COSTS CONTROL – II
___________________ UNIT 13: ATTRIBUTES OF A GOOD PROJECT
MANAGER
z Introduction
___________________ z Introduction
z Other Project Costs
___________________ z Why a Manager
z Schedule
___________________
UNIT 14: MODERN TRENDS
UNIT 12: PROJECT PROCUREMENT –
___________________
EVALUATING BIDS FOR MAJOR EQUIPMENT z Introduction
___________________
z Introduction z Project Management Software
-C
___________________ z Project Software Evaluation
z Equipment Bid Evaluation Process
___________________ z Project Engineering and Construction
___________________
UNIT 15: CASE STUDY
___________________
ES
UP
(c)
Unit 11
117
CE
Notes
Activity
Project Costs Control – II

Give___________________
one example each of the
three types of costs discussed
___________________
in this unit.
___________________
Objectives
___________________
topics: ___________________
\ Home Office Cost ___________________
-C
\ Construction Cost ___________________
\ Field sub-contracts Cost
___________________
\ Difference between Project Schedule and Project Changes
___________________
___________________
Introduction
ES
The earlier unit talked about project engineering cost, equipment
cost and commodity cost. This unit will take care of the three other
costs incurred in a project, i.e. Home Office Cost, Construction Cost
and Field Sub-contracts Cost.
Other Project Costs

The other project costs are given below:
Home Office Costs

UP
Home Office costs include the following:

z Salaries and benefits of home office personnel (engineering,
procurement and support services).
z Home office overheads for accommodation, facilities and non-
chargeable support staff.
z Home office expenses such as documentation costs (stationary,
reproduction, etc.), communications, travel, business expenses
and computer time.
Of the above, major cost is the salaries of the home office
personnel. This cost can be controlled if the hours chargeable to the
(c)
project can be controlled.
Home Office Cost Control

The first step towards cost control is to prepare a man-hour
estimate for each discipline. These man-hour estimates must
118 identify the number of activities to be performed in terms of
CE
Notes number of equipment items, requisitions, drawings, bill of
___________________ quantities, etc. The better the quality of man-hour estimates, the
better the opportunity for comparing physical progress and man-
___________________
hour spent against the original plan and budget. During project
___________________
execution, there should be continuous monitoring of man-hour
___________________ expenditure, relating this to the progress achieved and the budget.
___________________ A particular problem is the "90% syndrome" where progress and
expenditure reports are favourable until 90% completion is
___________________
reached, at which time the last 10% creates a considerable overrun
-C
___________________ in man-hours and schedule time.
___________________
___________________
___________________
ES
UP
Figure 11.1: Engineering Discipline Trend Curves

(c)
Avoid 90% Syndrome: The likelihood of 90% syndrome occurring

can be avoided by the following actions:
z Use realistic man-hour budgets and realistic schedule periods.
Unrealistic schedules and budgets tend to create unrealistic
and distorted reports.
119
z Ensure that methods of measuring physical progress are
CE
Notes
factual. This requires that the schedule activities are given
weightage by proper allocation of the man-hour budget and ___________________
that progress is measured against fixed yardsticks and does ___________________
not reflect inexperience or optimism.
___________________
z Recognize that meeting of a schedule date does not mean that
___________________
no further hours shall be charged. There is always follow-up
___________________
work, removal of "holds", replies to queries, and other liaison
and finalization work which carries on in engineering even ___________________
-C
though purchase orders may be placed and drawings issued for ___________________
construction.
___________________
An effective way of controlling engineering man-hours vis-a-vis
___________________
progress achieved is to use in-house developed software
___________________
programmes and PCs. These programmes allow continuous
monitoring of progress along with milestone achievements and
man-hour expenditure.
ES
Reduce HO Man-hours: The following are some general
guidelines for controlling or reducing home office man-hours:
z Do not allow to start work in the office until all the
information required is available. An early start without
necessary information does not gain schedule time and merely
consumes extra hours as the work must eventually be done
again.
UP
z Complete each stage of the progress work with reviews and

approvals before the next stage starts. Examples are:
Process design
Basic engineering
Engineering design model
In each case, subsequent activities should not be started until
the preceding activity has been finalized, approved and frozen.
z Control review and approval procedures. Do not submit the
documents for approval until they are complete and do not
(c)
release them for further action until formal approval has been
received. Do not accept comments or second thoughts after
formal approval has been given. Do not submit documents for
approval in a piecemeal manner and ensure that approvals are
complete or that approvals with qualifications are clear.
120
z Make every effort to minimize the products of engineering
CE
Notes
(specifications, requisitions and drawings). Do not do more
___________________
than is required by the procurement and construction
___________________ departments. Every item deleted is a reduction in man-hours.
___________________ Use standard drawings and drawing/requisition forms to the
maximum extent.
___________________
z Do not do work out of sequence and avoid recycle. Aggressively
___________________
oppose project changes that are matters of opinion or
___________________ improvements which are only marginal.
-C
___________________
z Maintain individual trend curves as illustrated in Figure 11.2
___________________ for each of the major disciplines showing man-hour
___________________ expenditure and progress achieved against the plan.
___________________ z When work within a discipline has been completed, close the
job out for that discipline. Consider the formation of a small
general purpose task force to finish off the project.
ES
In addition to home office man-hour costs, there are non-payroll
costs such as computer charges, travel, communications and
documentation. Continual vigilance is required to cut unnecessary
expenditure in these areas.
UP
(c)
Figure 11.2: Construction Trade Trend Curves

Construction Cost Control 121
CE
Notes
Construction costs include the following:
___________________
z Wages and benefits of the direct hire construction labour.
___________________
z Salaries, benefits and expenses of construction supervisors.
___________________
z Rental, purchase and maintenance of construction tools and
___________________
equipment.
___________________
z Provision of temporary construction facilities, buildings,
utilities, construction supplies and protection materials. ___________________
-C
Of the above, major cost is the wages of the construction labour ___________________
which can be controlled if labour hours can be controlled. ___________________
___________________
Detailed Estimate
___________________
As with engineering, the first step towards control is to prepare
detailed labour man-hour estimates for each trade. These man-
hour estimates must identify specific activities to be performed by
ES
code of accounts such as equipment items to be erected, cubic
meter of concrete to be placed, meter of pipe to be laid, etc. The
better the quality of the labour man-hour estimate, the better is
the opportunity for comparing physical progress and man-hour
expenditure against the original plan and budget.
Normally, the initial field labour man-hour estimate is prepared in
"standard" labour man-hours and then converted to the project
labour man-hours by dividing the anticipated productivity factor.
UP
For example, if the "standard" man-hour estimate is 100 and the

productivity factor is 0.8, then the project man-hour estimate
becomes 100 divided by 0.8 equalling 125 man-hours or an increase
of 25%. Because labour productivity is a reciprocal factor, a
relatively small drop in the factor creates a large percentage
increase in the man-hours. This increase is exponential as the
productivity drops. Therefore the assessment and subsequent
control of labour productivity is of overriding importance to achieve
control of construction costs.
Control Field Man-hours

(c)
The following are some general guidelines for controlling or

reducing field labour man-hours.
z Ensure that the construction management team is strong with
experienced construction planners, estimators and cost
122 engineers. It is important that detailed construction planning
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Notes is performed at the jobsite and is responsive to the day-to-day
___________________ needs.
___________________ z Do not allow the work to start in the field until all necessary
___________________ information and materials are available. An early start which
cannot be sustained will only waste labour man-hours.
___________________
z Pay proper attention to material receipt, identification, storage
___________________
and protection. Ensure that the material is controlled and
___________________ used only.
-C
___________________
z For the intended application. Maintain material usage trend
___________________ curves against design quantities to give early warning of
___________________ potential shortages.
___________________ z Plan the logistics of man and material movement. Many man-
hours can be wasted moving men and materials around the
jobsite.
ES
z Ensure that methods of measuring physical progress are
factual. Weigh construction activities by proper allocation of
the labour man-hour estimate and measure progress by means
of predetermined physical units or yardsticks such as piping
inch dia/inch meter welding completion, meters of cable laid,
etc.
z Maintain individual trend curves, as shown in Figure 11.2, for
each of the major trades showing productivity, man-hour
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expenditure and progress achieved.

z Do not work out of sequence. Plan the work from ground up
and inside out. Maintain a clean and tidy site with clear and
well maintained access roads and drainage ditches.
z Provide optimum working conditions for labour. Consider early
erection of plant buildings to provide pre-fabrication and
assembly areas under cover.
Construction Supervision
It should be scaled to the size of the project and the estimated
(c)
number of labour man-hours. A low labour productivity requiring a

larger labour force will require a greater number of supervisors.
The quality of supervision is important for the control of labour
productivity which, in turn, has major influence on field costs.
Review periodically that there is a proper level of supervision.
123
Adequate construction equipment, tools and supporting facilities
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Notes
will help improve labour productivity. However, excessive
construction equipment, which is available but not used, is merely ___________________
an added expense to the job. When construction work is ___________________
approaching completion, it is sometimes difficult to run down and
___________________
reduce supervisory staff and labour. A formal construction close
out plan is required which is implemented towards the final phases ___________________
of construction. Any field purchases of commodities and ___________________

construction consumables should be controlled in the same way as ___________________
for commodities purchased from the home office.
-C
___________________
Field Subcontracts Cost Control ___________________
The organization and planning of field subcontracts must occur ___________________

during the engineering and procurement phase prior to start of
___________________
work in field. The following are some general guidelines for
controlling or reducing subcontract costs:
ES
z Pre-select subcontractors to whom enquiries will be issued on
the basis of their past performance, work experience and
capability.
z Do not issue subcontract inquiries prematurely. Be sure that
the inquiry documents are complete and final, cover the scope
of work, and fully define the subcontractor's responsibilities.
z Check that the inquiry puts the responsibility on the
subcontractor to familiarize himself with site conditions and
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for movement and removal of materials and labour.

z Do not impose schedule start and completion dates on
subcontractor which are dependent upon completion of work
by others without provision for adjustment prior to the start of
work without cost penalty.
z Attempt to obtain lump-sum quotations when scope definition
is firm. Do not attempt to obtain lump-sum quotations with an
inadequate definition or if the work may be changed. In either
case obtain a full scale of unit rates to allow for additions and
extension.
(c)
z After receipt of bids, have meeting with recommended

subcontractor and review with him the total scope of work to
be sure that he understands and accepts it before the contract
is awarded.
124
z Do not allow the subcontractor to start in field until such time
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Notes
Activity
as his work can proceed without interruption.
In groups, discuss the benefits
___________________
of an optimum project z If changes are required, ensure that there is a proper
___________________
schedule. definition and that the subcontractor provides a fixed price
___________________ quotation before the work is started.
___________________ z On reimbursable type contracts, make the subcontractor
___________________ provide work schedules, progress measurements and progress
reports in a manner which can be monitored. Make sure that
___________________
subcontractor's method of costing and invoicing is subject to
-C
___________________
audit.
___________________
Check Your Progress
___________________
Fill in the blanks:
___________________
1. The first step towards cost control is to prepare a
……………. estimate for each discipline.
ES
2. The initial field labour man-hour estimate is prepared
in ……………. labour man-hours and then converted to
the project labour man-hours.
Schedule
There is an optimum project schedule which is the most efficient
and which will yield the lowest cost. Any period below this
optimum period may result in cost increase due to the following:
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z Equipment and materials purchased for shortest delivery and

not lowest cost.
z Extra men employed in engineering and/or construction to
reduce time at the expense of efficiency.
z Overtime hours worked requiring overtime premium.
z Arbitrary decisions made in the interest of speed without
proper analysis of the cost impact on engineering and
construction.
Although a reduction in the project schedule below the optimum
(c)
may increase the capital cost, it may not increase the total cost to
the owner. The increase in cost to reduce the construction period
may be more than recovered by the reduced interest on capital and
the earlier earnings generated.
125
An increase in the project schedule over the optimum also adds to
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Notes
the project cost due to the following:
___________________
z All costs related to calendar time are extended such as:
___________________
Supervision in the home office and field.
___________________
Use of facilities, equipment and tool rental.
z The impact of escalation may be significant. Escalations like ___________________
interest, compound upon itself so that its impact is increased ___________________

when the project schedule is extended. ___________________
-C
z An over extended schedule tends to allow for more man-hours ___________________
to be spent unproductively with consequential loss of
___________________
efficiency.
___________________
z Interest costs and other financial charges are extended.
___________________
Optimize Schedule: The above re-establishes the importance of
developing an optimum schedule period at the start of the project
execution and thereafter making every effort to hold to this
ES
schedule. Every member of the project team is jointly responsible
for scheduling the activities within his control. This responsibility
is better appreciated if all members of the project team have an
awareness of the impact that schedule delays have on project cost.
Project Changes
Project changes are the chief cause of late schedules and cost
overruns. There is an appropriate time in the project schedule
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allocated for review and approval when minor comments and

changes can be accommodated. Changes introduced after approval
become extremely costly. Changes must be controlled by a
formalized procedure, which requires that all changes be recorded
with an estimate of effect on schedule and cost.
The cost estimate should take full account of the disruption and
rework. In most cases there is inadequate allowance for the cost of
schedule slippage, the cost of rework, and the potential for
increased error. Project management should resist changes at all
times and only allow them if:
It can be proved that the project will not work without the
(c)
z
change.
z The change has been fully recorded and has been authorized
by the owner who has accepted the impact on cost and
schedule.
126
The resistance to change must be applied equally firmly by all
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Notes
members of the project team.
___________________
Use the Basics: Project costs can be controlled if there is proper
___________________
cost control and cost reporting supported by a cost conscious
___________________ project team applying the basic rules of cost control. Every project
___________________ has its unforeseens for which there must be a contingency.
___________________
Check Your Progress
___________________
Fill in the blanks:
-C
___________________
1. Every project has its unforeseens for which there must
___________________ be a ……………….. .
___________________ 2. The ……………….. to change must be applied equally
___________________ firmly by all members of the project team.
Summary
ES
In this unit, methods of cost control during construction and cost
control of sub-contracts have been emphasized. The role of project
changes in cost overruns has been described and a control
suggested.
Lesson End Activity

Determine an optimum project schedule for any particular project.
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Keywords
Man-Hour: It is an industrial unit of production equal to the work
one person can produce in an hour.
Optimum: The most favourable conditions or level for growth,
reproduction, or success.
Overtime: It is time in addition to what is normal, especially time
worked beyond one's scheduled working hours.
(c)

1. From your experience, list out the reasons of cost overruns.
What should have been done to avoid these cost overruns?
2. What innovative methods you would like to suggest for
Construction cost control? Give reasons.
127
3. “Project changes are the chief cause of late schedules and cost
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Notes
overruns”. Elaborate.
___________________
___________________
Books
___________________
___________________
Pennsylvania, USA. ___________________
-C
John H Zenger and Joseph Folkman, The Extraordinary Leader: ___________________
Turning Good Managers into Great Leaders, McGraw-Hill ___________________
Harold Kerzner, Project Management – A System Approach to ___________________

Distributors, Shahdara, Delhi
Web Readings
ES
www.acquisition.gov
www.aia.org
www.defence.gov.au
www.ncmahq.org
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(c)
128
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Notes
___________________
___________________
___________________
___________________
___________________
___________________
-C
___________________
___________________
___________________
___________________
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(c)
UNIT 12: Project Procurement – Evaluating Bids for Major Equipment
Unit 12
129
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Notes
Activity
Project Procurement – Evaluating

Prepare a list of documents
___________________
to be issued with purchase
___________________
order.
Bids for Major Equipment ___________________
___________________
Objectives ___________________
___________________
topics:
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___________________
\ Pre-selection of Vendors
\ Preparation of Enquiry ___________________
\ Receipt and Preliminary Evaluation of Bids ___________________

\ Differentiation between Technical and Commercial Evaluation of Bids ___________________
\ Meetings and Selection of Vendors
\ Contract Award
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Introduction
The analysis of the investment and return on a major piece of
equipment has the same ingredients as the analysis of a complete
process plant. It is only a matter of scale. In order to do this job
properly, an engineer must be able to do more than check the bid
technically. A combined technical and commercial evaluation must
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be performed with many non-technical factors taken into

consideration.
Equipment Bid Evaluation Process

There are eleven phases to the major equipment bid evaluation
process. These are:
1. Pre-select vendors
2. Prepare enquiry
3. Receive bids
(c)
4. Make preliminary evaluation

5. Make technical evaluation
6. Make commercial evaluation
7. Conduct pre-award meeting
130
8. Condition bids
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Notes
___________________
9. Select vendors
___________________ 10. Conduct pre-commitment meeting
___________________ 11. Award order.
___________________ Let us consider these one by one.

___________________
Pre-select Vendors
___________________
Before inquiries are issued, potential bidders should be
-C
___________________ pre-selected from the ones who have the experience and who have
___________________ performed satisfactorily in the recent past. Before sending an
enquiry to a new vendor, pre-qualify him by asking for a
___________________
presentation of his qualifications, his prior and similar experience,
___________________
and a list of references. Take a feedback from the references,
especially those who have similar equipment installed from the
same vendor. Visit his manufacturing plant, look at his
ES
organization especially with regard to quality assurance aspects,
meet some of the key people and test their calibre. Look at the
equipment and facilities and do a good evaluation of their overall
competence.
Another point to look for is the current shop load.
A manufacturer that is too busy may cause late delivery. On the
other hand, a manufacturer whose workload is too little may be in
difficulty. He may go out of business before he can complete your
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order. Don't select a vendor who is too hungry. The management

may be spending more time worrying about keeping the company
solvent than attending to your order.
Don't let anyone bid just because they ask. If the vendor is
persistent, let him give you a pre-qualification presentation. If he
does not meet your criteria, tell him why.
You may think it costs you nothing to let him bid if he wants to,
but it will waste your time to review bids which are not acceptable.
Don't ask a vendor to bid to just get an extra quote to keep your
favourite vendor competitive. Also, don't send an enquiry to a
(c)
vendor if you are not prepared to give him an order should his bid
be technically and commercially acceptable. Apart from wasting
your own time, it is unfair to ask a vendor to prepare a bid if you
have no intention of placing an order. Whenever you ask anyone to
bid, he must have a reasonable chance of getting an order.
131
Finally, don't send out too many inquiries. Four to five bidders are
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Notes
enough to get a competitive price. Six is normally the maximum
number of bidders to whom inquiries should be sent so as not to ___________________
use up too much of your time and also the time of a large number ___________________
of vendors.
___________________
Normally, organizations maintain a list of approved vendors for
___________________
each type of equipment and the enquiry is sent to these vendors
___________________
only. This list must be periodically reviewed and updated on the
basis of experience with particular vendors. ___________________
-C
___________________
Prepare Enquiry
___________________
Provide the vendor with all the information he needs to make a
specific bid. Tell him exactly what you want. To help the vendor, ___________________
give him a set of documents, with an index, assembled in a logical ___________________

order. Make it easy for him to find the important requirements. It
does not help you or the vendor if critical points are hidden away
ES
in some obscure part of the documentation. If the vendor fails to
allow for these in his quotation and you subsequently insist upon
them being supplied, it merely creates ill feeling and friction.
There may be claims for extras which could hurt the overall
quality of the job. In general, the enquiry document should be
divided into clear-cut sub-sections as follows:
z Technical (1) Data sheets giving process requirements,
material of construction, mechanical and special design
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features, quality and testing requirements, scope of supply

with regard to instruments/electrical and other ancillary
equipment, electrical and utility data, applicable design codes,
standards, etc. (2) Related specifications giving general design
data and other requirements. (3) Sketch/drawing giving out
line details wherever required.
z Documents (1) Number of drawings/documents required at
various stages, (2) Drawing/document approvals,
(3) Quality of drawings/datasheets, (4) Definition of drawing
needs (foundation, arrangement, cross-sectional and parts,
terminal connection details, etc.), (5) Number and contents of
(c)
operation/maintenance manuals, (6) Number and contents of

manufacturing record books (contents should include test
certificates of various stages of inspection, performance
data/curves, SPIL, spare parts interchangeability list, etc.)
132
z Commercial (1) Commercial terms, (2) Required delivery date
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Notes
and location, (3) Expediting and progress reporting, (4)
___________________
Inspection requirements, (5) painting, finishing and packing,
___________________ (6) Invoicing and payment terms, (7) Names and addresses of
___________________ contacts, (8) Warranties and guarantees, (9) Penalty clause for
late delivery/deficient performance, (10) Bid due date,
___________________
(11) Sealed bid instructions (if applicable), (12) Service
___________________ representatives at site, and (13) Unit rates and extensions.
___________________ On major projects, it is desirable to use the sealed bid procedure.
-C
___________________ Vendors are required to submit their proposals in sealed envelopes
___________________
provided by the inquirer. This ensures confidentiality until all bids
have been received. Bidders should be asked to separate the
___________________
technical and commercial portions of their bids so that these can be
___________________ processed independently. Commercial bids may be allowed to be
revised after evaluation of technical bids has been completed and
necessary clarifications/additions/deletions provided to the bidder.
ES
A common fault is to issue an enquiry with a complete volume of
the project job specifications appended. This leaves it up to the
vendor to find out for himself to what extent the specifications
apply to the equipment under consideration. You may think this
practice provides you with cover, saves your time and puts the
onus on the bidder. But this is not the case. In due course, you will
have to review bidder's specifications and drawings to check that
requirements of the specifications have been met. You have much
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better chance of getting a bid which meets the specification

requirements if you extract relevant parts of the specifications and
include these in the specific enquiry documents.
An enquiry should be as specific as possible to ensure that all
bidders respond on a common basis. But enquiry documents should
not be so restrictive that they exclude alternative proposals. The
enquiry document should instruct the bidder to provide his base
bid exactly in line with enquiry specifications. However, he should
be permitted to offer alternative designs which will meet the
requirements so long as deviations or alternatives to the base
specifications are clearly defined. In this way you allow the bidders
(c)
to show their initiative and to introduce new designs and concepts.

It also helps you to keep up to date with the market.
A final point. Before the inquiries are issued, check with each
vendor to ensure that he is interested in receiving the enquiry and
will provide you with a bid by the due date. It can be frustrating to
issue inquiries and then receive decline to bid letters just prior to 133
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the due date. This will mean lost time if a second round of Notes
inquiries has to be initiated with new vendors. ___________________
Receive Bids ___________________
As soon as the inquiries have been issued, phone the vendors to ___________________
check that they have received the bid documents. Midway through ___________________
the bidding period, make another call to check that the vendor is
___________________
working on the bid and intends to submit the bid by the required
___________________
date. Finally, a week prior to the bid due date, remind the vendor
-C
that the bids are due on the date specified. This continued contact ___________________
during the bidding period is well worthwhile for major equipment. ___________________
It lets you know how active and responsive the individual vendors
___________________
are to your enquiry. And you get an early warning if a vendor is
going to decline to bid or be late with his submission. ___________________
If the vendor is going to be late, he should advise you sometime

ES
before the bid due date to request for an extension. You can then
check with the other vendors to find out whether they also need an
extension. If so, you might agree that an extension will be
worthwhile overall to get more complete and better quality bids. If,
however, one vendor alone asks for an extension or fails to ask for
an extension and submits a bid late (whereas all other bidders
have met the bid due date) then his bid should be disqualified. The
fact that he cannot get his bid in on time shows he may be equally
late with his drawings and material deliveries.
UP
During the bidding period, all vendors should be given an equal

opportunity to bid and have access to any information available to
help them prepare their bids. Clarifications and answers to
questions raised by one bidder should be disseminated to the other
vendors.
If the sealed bid procedure is used, any bids received prior to the
bid closing date should be kept in sealed condition only until the
official opening on the bid due date. Vendors should submit their
bids in the envelopes provided and the envelopes should be
properly sealed according to the instructions. Sealed bids should be
(c)
opened in the presence of two or more nominated persons who will

witness that at the time of opening, the seals were intact. The
individuals attending the opening of sealed bids shall sign the
envelopes and the cover sheet of each bid to witness the fact that
the bids were sealed until the time noted. Any bids received after
134 the bid due date should be disqualified and returned to the vendor
CE
Notes unopened.
___________________
Where separate technical and commercial bids are required to be
___________________ submitted, this will allow a wider distribution of the technical
___________________ portion of the bids and a more restricted distribution of the
confidential commercial information. If the sealed bid procedure is
___________________
not used, it is still better to hold all bids in a secure place until the
___________________ bid due date and open them simultaneously. This ensures that
___________________ there is no early access to confidential pricing information, leading
to the possibility of unethical disclosure.
-C
___________________
___________________ Preliminary Evaluation

___________________ Once the bids have been received and opened, simply check that
___________________ the bids are complete. Have the bidders responded fully? Do you
have all you need to make a proper evaluation?
For the preliminary evaluation, prepare a checklist of the known
ES
components required, the drawings, datasheets and the documents
that should have been provided and the key points in the
commercial terms. A simple check is entered against each item
under a column for each bidder. In case the commercial bid has
also been opened, then at the bottom of preliminary evaluation,
enter the quoted cost plus any extras or adjustments, which might
apply for items omitted. Also note the promised delivery date for
the equipment and for the drawings.
UP
In the case of single bid procedure where technical and commercial

bid is common, it is worthwhile to list the bidders in ascending
order of quoted price and eliminate those whose bids are far
beyond the budgeted cost, for further evaluation. Time need not be
spent on bids where the price is obviously high, the bid is
incomplete, or the delivery and other aspects are unacceptable.
Another advantage of preliminary evaluation is that it brings to
light areas where required information is missing or bid data need
clarifications. In these cases vendors can be immediately contacted
for providing additional information needed.
(c)
Technical Evaluation
Once the bids have been initially checked out for completeness or
additional information received for making the bid complete,
perform a complete technical evaluation from the short list of the
most promising bids.
135
Normally, it is necessary to make up a bid tabulation form for the
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Notes
specific equipment using the past bid evaluation forms for similar
equipment from other projects. Time can be saved if this bid ___________________
evaluation form is prepared during the preparation of enquiry ___________________
document itself. This has double advantage (1) it ensures that all
___________________
information required for bid evaluation is included in the enquiry
document and (2) it allows you to proceed with the technical ___________________
evaluation immediately. ___________________
If the enquiry documents have been assembled consistently and ___________________
logically, the same format may be used for bid tabulation form.
-C
___________________
Once a basic check has been made that the equipment is
technically acceptable and meets the enquiry specification, then ___________________
look for additional benefits like efficiency, utility consumptions, ___________________
superior quality of materials, redundant/spare capacity, and other
___________________
design benefits that are specific to the bidder. Wherever possible,
make a cost estimate of these benefits to be considered during price
evaluation/negotiations.
ES
Look for hidden additional costs or cost savings. A smaller, lighter
piece of equipment will require smaller foundations, smaller
structures and less permanently installed handling and
maintenance equipment. A well laid out modular piece of
equipment may require fewer piping connections and better access
for installation and maintenance. A simpler, more positive design
may require less external instrumentation and control for
operation.
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Look also at the availability of vendor support. Has he got a local

representative and service facilities? What is the quality of
drawings and documents provided with the bid? When does he
promise final certified drawings? What warranties and guarantees
does he provide?
Evaluate the operating cost over the required payout period.
Typical items to be considered for operating cost are:
z Feedstock required and products produced.
z Utilities, catalyst and chemicals consumed.
(c)
z Spare parts cost and replacement periods.

z Maintenance/service frequency and manpower.
z Operating manpower levels.
136 Exhibit 12.1: Evaluating Operating Costs
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Notes
___________________
___________________
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
ES
To evaluate operating costs, establish a present day unit rate for
labour and utilities together with a compounded escalation index
for these unit rates for the future years to be evaluated. With these
factors, the expenditure for utilities, maintenance, etc. can be
determined in future years as illustrated in Exhibit 12.1.
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Commercial Evaluation
A preliminary commercial evaluation is performed when the bid is
received and opened. The main purpose is to establish a short list
of bidders requiring serious consideration. The detailed commercial
evaluation should be performed after the technical evaluation is
completed.
The first thing to check is that everything required as per
specifications has been included in the quoted price. Some things
to look for are: drawings, documents, maintenance and operating
(c)
manuals, test facilities and test certificates, painting and

insulation, shop assembly, packing and crating, field service
representatives, freight to specified delivery point, and insurance
cover until ownership transfer. Then add any commercial loading
due to technical deficiencies pointed out in technical bid 137
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evaluation. Notes
Having checked the basic items, which could affect the cost, ___________________
examine the commercial terms. Is a down payment required with ___________________
intermediate progress payment? What warranties and guarantees
___________________
are offered? What delivery date is promised?
___________________
Check that unit rates or per diem rates have been quoted for
___________________
possible additions or extensions of service personnel. If the price
is not fixed, but subject to escalation, check that the escalation ___________________
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formula clearly defines the material, labour or other components ___________________
and the national indices used. Exhibit 12.2 shows a typical
___________________
commercial bid evaluation form, which enumerates the above
points. ___________________
___________________
Exhibit 12.2: Typical Commercial Bid Evaluation Form
COMMERCIAL BIO TABULATION

Client ABC Co Date: 8 Aug 83
ES
Project Multi-unit Job No.: 1234
Location Any town Reg. No.: 001
Item Description Typical Item No.: T-1
Sheet No.: 2
Rey. No.: 0
By AEK Checked AAA Approved BBC
Vendor Vendor Vendor Vendor

Item
A B C D
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Miscellaneous
Recommended spare parts
Mandatory spare parts
Name plates & permanent tags
Shop assembly
Shop painting
Shop testing
Packing & crating
Catalyst/chemicals
Lubricants
Drawings/manuals
(c)
Engineering service
Warranties/guarantees
Insurance
Test certificates
Contd…
138 Import duties
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Notes Agent fees
___________________ Currency exchange
Inspection fees
___________________
Cost Adjustments
___________________
Adjusted base cost
___________________ Extra engineer/expedite/
inspect cost
___________________
Freight cost estimate
___________________ Operating cost estimate
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___________________ Field service estimate
Allowance for estimated extras
___________________
See worksheets for back-up
___________________
Total estimated present cost
___________________
Once the basic prices have been checked, the next step is to apply
adjustments and corrections. Add allowances for differential
freight costs, import costs, currency exchange, agents or any other
ES
additional services, which may be required.
Take into account the cost of money. The simplest method is to
adjust all costs to a present day value. Allow a discount equal to
the prevailing interest rates for money, which will be paid in
future. This will penalize vendors requiring a high down payment
and large interim progress payments and favour those vendors
who do not require payment until job completion. If you can defer
payment of money, you have the benefit of "float" – interest the
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money can earn while in your possession. Paradoxically, this

approach may realize a vendor offering a delivery date much
earlier than that is required. Too early a delivery date will cost
money. It may also invalidate warranties if the equipment is not
put into service for some months after it has been received.
The best plan is to insist upon a delivery date that meets your
erection plan. The conversion of quoted cost to present day values
applies to down payments, progress payments, final payments,
operating costs, field service costs and other costs.
Pre-award Meetings
(c)
Pre-award meetings should be held with short listed bidders prior

to selection. At the pre-award meetings, review any questions
which have arisen during the technical and commercial
evaluations. Give the bidder a final chance to confirm or clarify
points contained in his bid.
139
Prior to the meeting, prepare an agenda. List down all the
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Notes
questions and points of concern. Request that the bidder come to
the meeting prepared to answer all points on the agenda. ___________________
Following the meeting, bidder may be given a short time to confirm ___________________
in writing any additions, changes and clarifications to his technical
___________________
specifications and any adjustments to his price. The pre-award
meeting should not allow vendors to modify their base bids – ___________________
merely amplify and clarify bids already submitted. ___________________
___________________
Conditioning of Bids
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___________________
After the complete technical and commercial review, the next step
is to "condition" the bids. The conditioning process allows you to ___________________
take into account intangible and other factors which might ___________________
influence vendor selection. A low bid may not necessarily be the
___________________
cheapest bid. One vendor may require more engineering follow-up,
other may require more extensive expediting and inspection.
ES
Consider these points when conditioning bids: additional
engineering review required, late receipt of engineering drawings,
additional expediting/inspection required, learning curve for new
vendor, retraining of operators for new equipment model,
interchangeability of spare parts with existing equipment, support
local/national vendors, future service availability, ease of
maintenance and suitability of incorporation into plant layout.
Vendor Selection
UP
Having completed all the above steps, the vendor can now be
selected. Normally, this is not done by one person alone. The
technical and commercial evaluation will be signed off by the
technical management, commercial management and possibly the
client. If the case has been prepared properly, support and
approval may be a matter of circulating the forms for signature. In
some cases, it may be necessary to call a meeting and make a walk-
through presentation of the pros and cons of the bidders and justify
the basis for recommendation.
(c)
Pre-commitment Meeting
Once agreement and approval have been reached about the vendor,
call the vendor in for a pre-commitment meeting. This meeting is
to let him know that he is close to getting an order. But before you
actually place the order, be sure that all points are fully
understood and confirmed.
140
The agenda for the pre-commitment meeting would be to
CE
Notes
thoroughly review the enquiry document and specifications, all the
___________________ points arising from the pre-award meeting and any subsequent
___________________ correspondence and, in general, to be sure that the vendor has a
complete understanding of the requirements and that there are no
___________________
ambiguities in the scope of supply or his pricing arrangements. If
___________________ the pre-commitment meeting is complete with no outstanding
___________________ points, then the vendor may be verbally advised that he has
received the order. If, however, as a result of the pre-commitment
___________________
meeting there are still some points to be clarified or confirmed by
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___________________ the vendor, then the vendor should be required to put these in
___________________ writing before he officially receives the order.
___________________
Awarding the Order
___________________
The last step is to formally issue the order. A fax or letter of
commitment may be adequate initially. But this should be followed
up, as quickly as possible, with a formal purchase order. Attach all
ES
the updated specifications, data sheets and documents originally
included in the enquiry documents with the agreed amendments
marked therein.
Do not allow too much time to elapse between the fax or letter of
intent and the formal purchase order. In the final analysis, the
formal purchase order is the contract document, binding on the
vendor.
UP
Check Your Progress

Fill in the blanks:
1. Once agreement and approval have been reached about
the vendor, call the vendor in for a …………….. meeting.
2. Pre-award meetings should be held with short listed
bidders prior to …………….. .
Summary
This unit lists out and explains various steps involved in the
(c)
procurement of major equipment. Each stage of procurement

starting from vendor pre-selection to issue of enquiry, bid
evaluation, vendor selection and placement of order has been
described with special emphasis on various important points to be
considered at each stage.
Lesson End Activity 141
CE
Notes
Your organization wants to have a list of approved vendors for
___________________
each major equipment. List out the general criteria required for
enlisting a vendor. ___________________
___________________
Keywords ___________________
Project Procurement: This is the methods adopted by clients in ___________________

acquiring a building project. ___________________
-C
Vendor Selection: The process by which an organization ___________________
evaluates and decides with which suppliers they will conduct
___________________
business.
___________________
Bid Evaluation: After the submission deadline, the process of
___________________
opening, examining, and evaluating bids to determine the bidders’
responsibility, responsiveness, and other factors associated with
selection of a bid for contract award.
ES
1. Why vendor evaluation and registration is important?
2. Describe the steps involved in finalising ordering of major
plant equipments.
3. Why techno-commercial evaluation is necessary for major
equipments and systems?
UP
4. Describe steps involved for placing order after bid evaluation.

5. Make a check-list of the points to be included in the purchase
order so as to avoid disputes/additional costs during the
engineering, manufacture and delivery of the equipment.
Further Readings
Books
(c)

Pennsylvania, USA
142
CE
Notes
___________________
___________________
Web Readings
___________________
www.acquisition.gov
___________________
___________________
___________________
www.aia.org
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___________________
___________________ www.defence.gov.au
___________________ www.ncmahq.org
___________________
ES
UP
(c)
UNIT 13: Attributes of a Good Project Manager
Unit 13
143
CE
Notes
Activity
Attributes of a Good Project

Prepare a list of documents to
___________________
be issued with purchase
___________________
order.
Manager ___________________
___________________
Objectives ___________________
___________________
topics:
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___________________
\ Project Manager
\ Role of a Project Manager ___________________
\ Attributes of a Good Project Manager ___________________
___________________
Introduction
ES
Successful project management requires more than charts,
procedures and methods. The appropriate authority, responsibility,
style and training and experience for the project manager are
equally vital.
Project management will not reach its full potential unless hard
thought is given to the position and how the person filling it relates
to the project team.
A "project", as we now use the term, is a one-time unique
UP
endeavour by people to do something that has not been done the

same way before. A 'successful' project is finished within a time
and for a cost that makes it economical or profitable and serves its
intended function.
Because of its uniqueness, a project can turn sour by being finished
late or over budget, or by not performing the desired service.
Unexpected problems will usually arise to jeopardize success,
unless the management is structured and prepared to cope with
such problems.
It is possible to complete a project using the traditional vertical
(c)
pyramidal organization. But success is more likely by adopting the

‘project team and project management’ concept. In this concept, a
separate team is formed of personnel from the various functional
groups. A project manager is the leader. However, success isn’t
144 assured unless there is also a good understanding of why a project
CE
Notes
Activity manager is needed and what he is to accomplish.
Present a case depicting the
___________________
managerial attributes require
for ___________________
a good project Why a Manager
management.
___________________ The need for project management arises from the difficulty the
___________________ "boss" of the pyramidal organization has in expeditiously handling
the extra problems of the project in addition to his other
___________________
responsibilities. What is needed is an extension of this "boss"–the
___________________ manager who has the responsibility for the project and the long-
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___________________ term traditional organization. By having a project manager fill this
___________________
role, the objectives are:
___________________
z Centralize in one person, who has no other duties, all the
responsibility of the project.
___________________
z Have realistic goals set for the project (for all participating
groups), considering the resources that each can bring to bear.
ES
z Have decisions made on the project quickly enough to meet its
needs, and benefiting the project as a whole – not just a
portion.
z Provide a means of anticipating the problems during the
course of the project.
z Give one person the responsibility of quickly developing
solutions to the problems, so that the project will stay on
target for cost, schedule and serviceability.
UP
Success in accomplishing these objectives will depend upon the

type of person selected as the project manager and how his position
is set up. Thus, we need to consider his authority, responsibility
and accountability, reporting relationship, the style of project
management and the type of training required for him.
Authority and Responsibility

Perhaps the hardest problem is to decide on what authority a
project manager will have. Unless a separate organization is set up
for a project, with no connection whatever to the original, the
heads of the functional departments must retain authority over
(c)
their departments. This means managers of sales, engineering,

procurement, construction, estimating, manufacturing and
accounting will still report to the "boss" at the top of the pyramidal
structure. So the project manager will have no authority in the
permanent organization structure.
145
A project manager should have the 'same' authority as the "boss"
CE
Notes
for his project and only his project. He and his boss should 'share'
the responsibility for the project. To do this, the project manager ___________________
must report to the "boss". Any other solution makes the project ___________________
manager a mere coordinator. As such, he can't achieve the
___________________
objectives previously stated.
___________________
The Right to Lead ___________________
A project manager – to achieve a successful project – must have a ___________________
"stick" to induce progress. This is true because the needs of the
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___________________
project can appear to threaten the security and prestige of the
permanent functional organization. Unless the project manager ___________________
has a proper lever to properly assign personnel and motivate them ___________________
to meet needs (give priority to the project work), an effective team
___________________
may never be realized. The project will never be successful.
A project manager can create this lever by 'his own personality'. Or
ES
it can be created by written directives from the "boss". In effect,
this lever must be the same authority held by the man at the top of
the pyramid. The project manager, thus, is an extension of the
management itself.
By the same token, the responsibility of the project manager must
be a share of that held by the "boss". If a project goes sour, the
"boss' is accountable. The project manager must share this.
Style of Management
UP
If the project manager reports to the "boss", sharing his authority

and responsibility, then the style with which the project is
managed must reflect the influence of both the personalities
involved. There is no single type of personal approach to managing
a project which is successful. On the contrary, considerable
variation is tolerable.
Should the project manager take a very forceful lead, or simply
observe and report results? He will probably aggressively manage
in some area, coordinate in others, and in some situations only
observe.
(c)
Leadership Factor
Think in terms of what the project manager contributes. If the
project will proceed as well without him, he is contributing
nothing. Merely observing and reporting events to his superior
146 throws the job of managing the project back to his superior.
CE
Notes Furthermore, he makes little contribution if he does not anticipate
___________________ problems and take action to head them off. This is particularly true
if the project manager only criticizes the group perceived to be at
___________________
fault when things go wrong. The other groups in the project team
___________________
will do this anyway. They need no help from the project manager.
___________________
A project manager should be an aggressive leader. He should really
___________________ be a manager. He should set realistic objectives for the team –
___________________ planning, scheduling, arranging for staffing, motivating, directing
and measuring results.
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___________________
___________________ Discreet Use of Power

___________________ He must control, but not in a way that stifles the creativity of other
___________________ team members. Innovation should be encouraged because of the
project's uniqueness. But the project team members need a leader
if a team effort is to result, and the project is to be on time, on
ES
budget and satisfactorily completed.
In thinking about style, the project manager should review the
project status and evaluate his own contribution. Is the project
proceeding better because of his contribution? Or would it be going
well without him? Is his objective setting, planning, scheduling
and motivating saving money? Is it saving time and improving
serviceability? Or is it the reverse?
If the project manager cannot say that he is making a meaningful
UP
contribution, he should change style.
Experience Requirement
Suppose the project manager does report to the officer or manager
having overall responsibility for the project. He does share this
authority and responsibility. He uses a style of aggressive
leadership. Given these points, what then should be his
background?
In projects that involve sales, engineering, estimating,
procurement, construction and accounting, the project manager
cannot be an expert in all these. Perhaps by a rotation of
(c)
assignments he can have some experience in all of these. But this

does not necessarily create expertise.
Selecting a project manager is like selecting managers in general.
But there is a difference. A project manager deals with a task that
has a specific start and end. It has a scope that is or will be well 147
CE
defined. Notes
___________________
Planning and Scheduling
___________________
The decisions to be made by a project manager generally relate to
"what" and "when" tasks are to be done. The decisions on "how" ___________________
tasks are to be done are usually made by the project team group ___________________
heads. These decisions are probably based on policies and
___________________
procedures established by their permanent functional department
___________________
heads. Thus, the problem of deciding what background a project
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manager needs is simpler than for a functional manager. ___________________
On the other hand, a good project manager must possess a ___________________
multitude of diverse skills and good judgment in many areas. He ___________________

must be able to set goals, plan, schedule, organize, motivate and
___________________
measure results.
More than this, he must be people oriented. He must be dedicated
ES
to helping others to do their work in a manner that contributes to
the satisfactory completion of the project. In addition, there is one
more necessary characteristic. It isn't as widely recognized or
understood. This has to do with exercising control over the
decisions made by the group in the project team so that these
decisions aid and do not detract from achieving overall project
objectives.
Decision Making
UP
Successful project management requires an understanding of the

decision making process used by functional groups working on the
project. Particularly, the decisions that can be made by one group
that significantly affect what other groups must do.
A good project manager minimizes decisions made unilaterally by
one group of the team without careful consideration of the effects
on overall project costs, schedules and quality.
Examples of such unilateral decisions are many. For instance,
engineering may specify a material that is only marginally better
than another for the service conditions, but which will require
(c)
longer delivery and will upset the sequence of planned construction

operations. The same results can be caused by procurement
selecting a vendor's price that is lower, but for which a longer
delivery time will probably result.
148
On the other hand, construction could decide to try to finish the job
CE
Notes
sooner, to save on overhead type costs, without considering the
___________________
extra costs that will be required for overtime in engineering or
___________________ premium freight costs for expedited deliveries.
___________________ In the final analysis, the important objectives are the overall cost
___________________ and time requirements of the project. Savings in one sector are
only meaningful if larger expenditures are not required in other
___________________
sectors.
___________________
Knowing the People
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___________________
___________________ The best equipped person for the position of project manager is one
who knows and understands the working of the project-team group
___________________
that will make the most decisions affecting other groups and
___________________
overall project objectives. Usually, most of such decisions are made
by engineering. Once the work of engineering is finished, the
problems of other groups on the project are "cast in concrete". They
ES
cannot be changed.
The easiest way to gain this knowledge and understanding is by

doing engineering design work. This isn't the only way. A person
experienced in other fields who is perceptive, objective and
thoughtful can, by observation and inquiry, develop a good and
perhaps better understanding of the impact of engineering
decisions on the work done by other groups.
UP
In any case, the good project manager cannot have a distorted view
of the importance of work done by one particular group. Like a
sports team, each group on the project team needs understanding
and guidance. Only then can the efforts of all members contribute
to satisfactory completion of the project.
Check Your Progress

Fill in the blanks:
1. A good project manager …………………. decisions made
unilaterally by one group of the team without careful
(c)
consideration of the effects on overall project costs,

schedules and quality.
2. A project manager, to achieve a successful project, must
have a …………………. to induce progress.
Summary 149
CE
Notes
This unit lists out and explains the important attributes of a good
___________________
project manager. Importance of qualities like managerial skills,
leadership, creativity, decision making, etc. has been explained. ___________________
The need for a project manager and the authority he should have ___________________
in order to fulfil his responsibility has also been explained.
___________________
Lesson End Activity ___________________
___________________
How can leadership in project handling be best tested at the time
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of problematic phase, for example not conforming to allocated time ___________________
for task related to project, or delays in getting supplies and ___________________
problems related to proper execution of project?
___________________
___________________
Keywords
Leadership: In its essence, leadership in an organizational role
ES
involves (1) establishing a clear vision, (2) sharing that vision with
others so that they will follow willingly, (3) providing the
information, knowledge, and methods to realize that vision, and
(4) coordinating and balancing the conflicting interests of all
members or stakeholders.
Management Styles: They are characteristic ways of making
decisions and relating to subordinates.
Decision Making: The thought process of selecting a logical
UP
choice from the available options.

1. State the qualities required to become a successful project
manager.
2. What is the basic knowledge and experience required for a
project manager of large project?
3. In your opinion what more qualities a project manager should
have in order to be successful in the management of a project?
(c)
4. List out additional help that should be provided to a project

manager of a petroleum project to make him effective.
5. Draw an organization chart showing the position of project
manager vis-a-vis other discipline managers.
150
Further Readings
CE
Notes
___________________ Books
___________________
Pennsylvania, USA.
___________________
___________________
Turning Good Managers into Great Leaders, McGraw-Hill
___________________
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___________________
___________________ Distributors, Shahdara, Delhi
___________________
Web Readings
___________________
www.acquisition.gov
ES
www.aia.org
www.defence.gov.au
www.ncmahq.org
UP
(c)
UNIT 14: Modern Trends
Unit 14
151
CE
Notes
Modern Trends
___________________
___________________
___________________
Objectives
___________________
topics: ___________________
\ Brief History of Project Management ___________________
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\ Various Software Available, specifically for Project Management ___________________
\ Computer Software used in Engineering, Procurement and
Construction of a Project ___________________
___________________
___________________
Introduction
Project Management is a relatively young and emerging profession.
ES
It started its development from the fore runners 'Operations
Research and Operations Management' in the seventies.
Automated software was also developed for use in project
management. Focus of research during this period was PERT
(Project Evaluation and Review Techniques), cost and schedule
control, performance measurement, use of WBS (Work Breakdown
Structure) and life cycle management. The concept of design to cost
and life cycle costing appeared during this period.
UP
In 1982, IEEE organized a short course on project management

through video conference. The course book given to the
participants of the course was quite exhaustive. PERT and CPM
(Critical Path Method) were the main tools used in project
management and software were based on the use of these
techniques. Thrust areas of research during this period were:
Project risk management, Cost/schedule control systems and Team
building and quality management.
During the nineties, research was focused on human resource

development, including team building, leadership development and
(c)
motivation. With the advent of Personal Computers (PCs), a

number of PC based software were developed and widely used in
project management. This proved to be a good take-off platform for
project management.
152
Project Management Software
CE
Notes
Activity
Give___________________
a real life example of
More than 200 project management software are available in the
a company using ERP market. While some software are function specific (e.g. Time Sheet
___________________
effectively. Management) most of the software are general purpose and quite
___________________ flexible.
___________________ Some software are business/function specific (e.g. some software
___________________ are best suited for maintenance projects, some are specifically
made for IT projects) and have limited applicability, but most of
___________________
the software are general purpose and can be used across a full
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___________________ spectrum of industries/functions.
___________________
Also, most of the software use CPM (Critical Path Method) for
___________________ preparing the schedule. Some software use "critical chain" method
___________________ for schedule analysis, etc. (Scitor uses both critical path as well as
critical chain methods).
PM Software Categories
ES
Project Management software can be divided into two categories:
z PM software: These are software specially designed for PM
function. Most common software in this category are
Primavera, Micro Soft Project, Artemis, Milestones, Prince,
Scitor, etc.
Level-1 Software: Designed for single project planning.
These are simple, easy to use and understand but with
UP
limited data analysis capabilities, e.g. Milestone. Such

software are very useful for preparing summary
schedules, e.g. single page proposal schedule.
Level-2 Software: Designed for single project management
and aid project leaders in planning, tracking and
reporting. They provide comprehensive analysis of project,
progress reports and plan revisions, etc. MS Project may
fall in this category.
Level-3 Software: These software feature multi-project
planning, monitoring and control by utilizing a common
(c)
database and sophisticated cross-project monitoring and

reporting software, e.g. Primavera.
z ERP (Enterprise Resource Planning) Software: These are
the software which cater to all functions of business process
(e.g. finance, HRM, supply chain, etc.) and which have project
management function as modules, e.g. SAP R/3, BAAN, 153
CE
Peoplesoft & JD Edward, etc. Notes
As an example, most of the Indian oil companies (including RIL) ___________________

have implemented/are implementing SAP for other business ___________________
function (e.g. Finance, Supply Chain, Operations, etc.) but not for
___________________
project management (PM). For PM function P3, etc. is used.
___________________
Most of the ERP software provide open architecture and PM
___________________
software can be seamlessly integrated with ERP software. ERP
software's project management modules capabilities are limited. ___________________
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Therefore it is very common to use PM software (e.g. P3) and to ___________________
integrate it with ERP software, e.g. SAP R/3.
___________________
Also while ERP software focuses on most common business (mainly
___________________
production phase) functions, e.g. finance, inventory control, etc.
___________________
PM software focuses on PM functions only. As a result nowadays
most of the ERP and PM software have collaborated for providing
integrated solutions.
ES
Features of PM Software
Following features are generally offered by most of the Level-II
and III software.
z Planning, tracking and monitoring: These most common

features provides planning and tracking of projects' tasks,
resources and costs.
UP
z Reports: Different reports in the form of Gantt chart (bar-

chart), precedence network diagrams, tabular summaries and
business graphics are provided.
Some of the very common reports are:
Gantt chart report showing plan v/s actual;
Earned value analysis reports;
Critical path analysis reports;
Cost and schedule performance indices;

(c)
Cash flow reports;
What-if analysis;
Multi-project analysis.
154
Developments in PM Software
CE
Notes
During the past few years, all PM software has been improving
___________________ using internet technology. Most of the software are web-enabled
___________________ nowadays and offer internet based facilities such as:
___________________ z e-mailing of data, schedules and reports, etc.
___________________ z data (schedules, reports, etc.) publishing on Internet/Intranet
___________________
z data capturing using Internet/Intranet, thus having multi-
location capabilities
___________________
There are some other salient points about PM software:
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___________________
z most of the software allows data exchange, e.g. MS Project
___________________
data can be imported and used in P3 and vice versa;
___________________
z most of the time PM software data can be exchanged with MS
___________________ Office products, e.g. MS Excel and MS Access.
z all software allows customization (only degree varies) to suit
organization specific needs/systems.
ES
General Data Requirements
PM software data input requirements depend on the capabilities
and features of the software as software having resource planning
capabilities requires resource data to be input.
In general, following data is required as input by PM software:
z Scheduling data, i.e. activity definition, activity duration
estimate and relationship with other activities.
UP
z Cost/budget data, i.e. activity wise or group of activity wise

budgeted cost and actual cost.
z Resources data, i.e. activity wise or group of activity wise
budgeted resources and actual resource consumed.
Some software requires other data too, e.g. three time estimates for
simulating a schedule, WBS (work breakdown structure) in order
to organize data as per WBS.
Check Your Progress

Fill in the blanks:
(c)
1. In general, …………….., …………….. and ……………..

data is required as input by PM software.
2. Most of the ERP software provide ……………..
architecture and PM software can be seamlessly
integrated with ERP software.
Project Software Evaluation 155
CE
Notes
Generally only few companies may be buying PM software after
___________________
proper evaluation. Still it is interesting that more than 50 factors
may be used for software evaluation as used by National Software ___________________
Testing Laboratories of Conshohoken, Pennsylvania. Some ___________________
commonly used software are discussed below. ___________________
___________________
Primavera Project Planner (P3)
___________________
This is the most commonly used PM software. P3 is one of the
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products of PM family products offered by Primavera Inc. Till 5-6 ___________________
years ago P3 was the most flexible and feature packed software at ___________________
affordable prices. Other software which has been in the market for ___________________
long is Artemis but it is very costly and unlike P3 requires highly
___________________
trained personnel for customization. Through cost competitiveness
and aggressive marketing, particularly in Asia, P3 became the de-
ES
facto planning tool. Now MS project also has improved a lot and
can compete with P3.
P3 offers schedule preparation, costing/budgeting control, resource

planning, what-if analysis capabilities, variance analysis, reporting
and simulation (different software is needed), etc. But it is ironical
that most of the companies use only scheduling capabilities;
resource and cost modules are mostly not used fully.
UP
P3 is not so user friendly (as compared to MS Project) and it

requires good amount of training to be able to use all the features
of P3. This software is available from KLG Systel in India.
MS Project
MS Project has been improving its spread and quality along with
other Microsoft family products. Initially its capabilities were
mainly limited to preparation of bar-charts, PERT networks.
The current version (MS Project 2000) has everything in it, i.e.
schedule, cost and resource planning/control capabilities. Also it
(c)
has web-enabled capabilities. MS Project is a MS Office product

and it is very easily available. It is very cheap as compared to P3,
Artemis, etc. It is extremely user friendly. Most of its
icons/commands are in line with other MS Office products.
156
Milestone
CE
Notes
Activity This is very easy to use software and very useful in preparing
List ___________________
few project management
level-1 schedules. Milestone Simplicity is freely downloadable from
tools and software. How these
tools___________________
help in carrying out www.kidasa.com.
various project management
___________________ This software is very simple to use and offers all the
functions?
___________________ features required to prepare a schedule in the form of Gantt Chart.
___________________ Check Your Progress

___________________ Fill in the blanks:
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___________________
1. MS Project is a MS ………….. product.
___________________
2. ……………. is the most commonly used PM software.
___________________
___________________ Project Engineering and Construction

During the last 10-12 years, engineering procedures have
undergone a lot of improvement. From the conventional drawing
ES
boards, drafting has moved to PCs which has revolutionized the
production of drawings required for construction/procurement.
Following are the software commonly in use for engineering.
Microstation/Autocad: Autocad is the most widely used software
for drafting. Latest version of Autocad (ver. 14.0) offers many
facilities for drafting of engineering drawings. Microstation,
however, have more database thus allowing greater ease and
flexibility.
UP
PDS (Plant Design System): This system allows construction of

3-D model and is very useful in piping/cable routing as it allows
immediate review with regard to fouling/clashes of piping with
equipment/foundation/structures/maintenance space, thereby
obviating the need for last minute changes in piping routing so as
to avoid these problems during construction. Piping isometrics
along with Bill of Quantities (BOQ) can be directly extracted
though the use of this program. Further, this program allows
visual 3-D view of the plant/equipment thus aiding the erection
planning and execution. By using SETROUTE along with PDS,
(c)
cable routing and cable BOQs can be easily obtained thus

simplifying the procurement of bulk materials.
Procurement Tracking System (PTS): This software is ideal for
keeping complete track of equipment and bulk material
procurement. All activities associated with procurement, starting
from the raising of PRs (Procurement Requisitions) to the delivery 157
CE
of equipment to site are controlled through this system. This Notes
system can be developed in-house (using Microsoft Access) or ___________________
purchased from engineering consultancy organizations like
___________________
Bechtel.
___________________
Engineering Documentation: Engineering documentation these
days is mainly kept in the electronic (soft) form because: ___________________
___________________
z It is mainly generated in electronic form by use of
Autocad/Microstation software. ___________________
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z It occupies very little space, is easy to store and retrieve. ___________________
z It can be made available to virtually unlimited number of ___________________
persons through electronic media (Internet/Intranet). ___________________
z Review and approval of documents can be organized ___________________

on-line, thus, reducing engineering time.
Engineering Documentation Centre is generally assigned the
ES
responsibility of storage/retrieval/issue of engineering documents.
Various in-house developed software or custom-built software are
used for this purpose.
Project Construction
For scheduling, progress monitoring and resource allocation of
construction jobs, PM software like Primavera/MS Project are used
which provide the necessary Gantt (Bar) charts along with 'S' and
UP
Bell curves for review and analysis.

Design Review Stations which give a 3-D model of the
plant/equipment under construction have proved to be useful
assets in conceptualization and planning of erection activities.
These stations are nothing but TV monitors which show the plant
model through the use of PDS software. This is a very useful and
versatile tool offering a 'walk through' of the plant which is yet to
be constructed. Views from different angles provide the
construction engineer with complete visualization of the erected
equipment/structures/piping thus making the task of erection
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planning and deployment of construction equipment quite simple.

Establishment of a structural steel fabrication shop with automatic
structure fabrication machines may prove to be quite useful for
construction of large chemical/petrochemical/refinery projects. This
shop along with a pipe fabrication shop, in which pipes are bent to the
158 field requirements thus obviating the need for standard bend and
CE
Notes additional welding, can considerably reduce the construction period.
___________________
Check Your Progress
___________________
Fill in the blanks:
___________________
1. Engineering documentation these days is mainly kept in
___________________
the ……………….. form.
___________________
2. ……….. Centre is generally assigned the responsibility
___________________
of storage/retrieval/issue of engineering documents.
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___________________
___________________ Summary
___________________ A brief history of project management evolution and modern
___________________ trends in project management are described in this unit. Various
PC based software used in project management have listed along
with their merit and capabilities. Other software that can be
ES
effectively used in the management of engineering, procurement
and documentation have also been listed.
Lesson End Activity

Give brief about the new trends in development of project
management software and tools.
Keywords
UP
Project Management: The body of knowledge concerned with

principles, techniques and tools used in planning, control,
monitoring, and review of projects.
taking on a particular task.
Enterprise Resource Planning (ERP): Accounting oriented,
relational database based, multi-module but integrated, software
system for identifying and planning the resource needs of an
enterprise.
(c)

1. Describe evaluation of project management systems.
2. What are the major software available for project monitoring
and control?
159
3. How to select software most suited for your project?
CE
Notes
4. Describe a PM software that you are familiar with. How much
___________________
effective it was as per your experience?
___________________
5. In addition to computer software what are the other areas in
___________________
project management that need further development?
___________________
___________________
Books
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___________________
___________________
Pennsylvania, USA. ___________________
John H Zenger and Joseph Folkman, The Extraordinary Leader: ___________________

ES
Web Readings
www.acquisition.gov
www.aia.org
UP
www.defence.gov.au
www.ncmahq.org
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160
CE
Notes
___________________
___________________
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
ES
UP
(c)
UNIT 15: Case Study
Unit 15
161
CE
Notes
Case Study
___________________
___________________
___________________
Objectives
___________________
___________________
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___________________
Case Study: Hutchison Port Holdings Uses Project
Management Institute ___________________
Hutchison Port Holdings (HPH) is the world’s leading port ___________________

developer, operator and industry leader in using technology to
___________________
improve all aspects of port administration. HPH actively invests
in the development of modern port infrastructure and is
committed to playing a significant role in the development of the
ES
economies and the expansion of international trade opportunities
for the countries in which it operates. In order to coordinate its
many ports around the world, HPH created nGen, a scalable
system that would facilitate port operations in many languages on
several continents and across many different time zones.
Project Background
Today, HPH operates 236 berths in 40 ports around the world

along with a number of transportation-related service companies.
UP
In 2004, the HPH Group handled 47.8 million 20-foot equivalent

units (TEU), a standard measurement used to describe cargo
capacity. Increasing use of information technology (IT) at these
ports has streamlined the transportation supply chain and made
local manufacturers and import-export businesses more
internationally competitive. In order to remain competitive, HPH
needed to develop a new terminal management system to
efficiently and effectively control all port operations around the
globe.
The nGen system would control operations including ship and

yard planning, gate operations, vessel operations and
interactions, yard configuration and performance, overall
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operations monitoring, equipment utilization, productivity and

cost optimization. nGen was the first major system co-
development project between two of HPH’s subsidiary ports the
Hong Kong International Terminals (HIT), the flagship operation
of HPH in Hong Kong, and Yantian International Container
Contd…
162
Terminals (YICT) located in Shenzhen, China. The project team
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Notes
began work in February 2001. Their deadline was August 2005.
___________________ The original budget was set at US $10 million.
___________________ Challenges
___________________ Each of HPH’s ports vary in size and are required to comply with
___________________
differing sets of regulations contingent upon local trade and
customs policies. They are also located on different continents, in
___________________ different time zones, and with personnel who speak different
___________________ languages. The project team would need to create a solution that
could be used by each of HPH’s ports while accommodating all
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___________________
these variances.
___________________
While the project team faced the challenge of coordinating
___________________ logistics between geographically diverse locations, it also had to
consider the interests of a diverse group of stakeholders that
___________________
included terminal operations, operations development and
information services. The project would need to effectively
manage input from these groups.
ES
The scope of the project posed a challenge as well. The team
would have to ensure that it allocated adequate time to complete
each part of the project. Coordinating details and maintaining
schedules and budgets over the expansive range of this project
required a highly sophisticated level of project management skill
to be successful.
Project Management Solutions
The project team used methodologies from A Guide to the Project

UP
Management Body of Knowledge (PMBOK®Guide) to help the

nGen project meet HPH’s high standards of quality, cost and
scheduling goals. The PMBOK® Guide describes the project
lifecycle, which includes the initiating, planning, executing and
closing processes. As part of the initiating process, the project
team established the nGen project management office (PMO). Led
by the nGen project manager, the PMO had overall responsibility
for cost, time and quality management. It was also responsible for
providing project management training to key project staff from
various departments. During the initiating process, the PMO
officially established the project charter and scope. This is a
necessary step in the completion Flexibility on a Global Scale
(c)
Hutchison Port Holdings Uses Project Management Institute

Methodologies to Create a Global Port Management System
Flexibility on a Global Scale of a successful project as it provides

all stakeholders with the boundaries of a project and the
Contd…
UNIT 15: Case Study
benchmarks by which it will be measured, thereby ensuring that 163
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all parties are working toward the same goals. Notes
Within the planning process, project teams begin to assess a ___________________

project’s various objectives. For HPH, the nGen project team
___________________
began by addressing the massive scope of the project. As details
have to be meticulously coordinated throughout a project’s ___________________
lifecycle, the project team applied a phased approach to break the
___________________
project down into manageable segments.
___________________
Phase One of the project focused on the development and
deployment of nGen to meet the different operation needs of HIT ___________________
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and YICT, keeping in mind the flexibility and scalability ___________________
necessary for use of the system at other ports. During Phase Two,
___________________
the project team deployed the system at HPH’s other ports around
the globe. The team applied time management methodologies to ___________________
the nGen project to help ensure that it would meet the scheduling
___________________
requirements necessary for HPH and its clients. The
PMBOK®Guide has outlined the necessary steps for determining
the appropriate amount of time needed for any given activity,
ES
helping project teams to more accurately estimate important
milestones and completion dates. These steps include Activity
definition, sequencing, resource estimating, duration estimating,
schedule development and schedule control. By following these
steps and the techniques designed to facilitate each, project
managers can create project schedules that are more likely to
efficiently use resources and accurately estimate project
outcomes. The team used these steps and techniques in the
administration of the nGen project, facilitating the planning of
UP
disparate resources and activities worldwide.
The team was able to keep costs of the nGen project under control
through the use of cost management methodologies composed of
three activities: cost estimating, cost budgeting and cost control.
By applying these activities to maintaining and allocating
budgets throughout the project, the team was able to complete the
nGen project within its budget, helping HPH to better adhere to
its cost and business strategies.
Throughout the project, the team used communication

management methodologies outlined in the PMBOK®Guide to
communicate information about the project and manage
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stakeholder expectations. In order to facilitate communication

about the project, the HPH PMO established the nGen Steering
Committee, which consisted of senior HIT and YICT
management, to oversee the project direction and strategy. The
purpose of this steering committee was to communicate the
Contd…
164 planning process with stakeholders and give them an opportunity
CE
Notes to communicate their needs and concerns.
___________________ The project team also used project management methodologies in
___________________ planning for and avoiding risks to the project. The PMO dedicated
a risk management team specifically to defining and monitoring
___________________
the various risks that could affect the project and its components.
___________________ The team identified several risks, including the possibility of
___________________ programming defects and equipment malfunctions that could
cause potential delays, and was able to determine strategies for
___________________
avoiding these risks. For example, the PMO established an
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___________________ experienced team at each of the ports where HPH was to deploy
the nGen system to be able to quickly manage any defects or
___________________
malfunctions.
___________________
The Results
___________________
Using industry standard open platform technologies, nGen is
truly scalable across all non-proprietary computer system
hardware. The nGen architecture consists of modular systems
ES
with operational options that can be turned on or off depending on
user needs. From a small feeder terminal operation requiring a
small-scale server setup to large hub ports relying on full server
room support, nGen has been designed to support all platforms.
With nGen, HIT and YICT are well positioned to meet increasing
throughput and productivity requirements well into the next
decade and beyond. The nGen project has made the system more
accessible to all HIT and YICT business partners and operation
UP
staff. The interactive and community based systems also allow

customers to have greater control of the supply chain on a 24/7
basis through the latest Internet technology.
nGen will function in all other HPH ports. The nGen project has
also helped HPH to realize its mission as the leading container
terminal operator through excellence in service.
z The nGen team completed the project 10 percent under

budget.
z Phase One of the project went live at YICT in October 2003

and HIT in February 2005 according to schedule.
(c)
z The nGen Terminal Management System was deemed a

success by HPH, allowing for streamlined operational flow
and an interactive system which allows customers to have
greater control over the supply chain.
Contd…
UNIT 15: Case Study
Questions: 165
CE
1. Give a summary of this case study and bring out the critical Notes
points. ___________________
2. Explain the various phases of this project. ___________________
3. Write a short note on nGen based on this case. ___________________

Source:http://www.pmi.org/businesssolutions/~/media/PDF/Case%20Study/HPH_Case_Study_New.ashx
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
ES
UP
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166
CE
Notes
___________________
___________________
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
ES
UP
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UNIT 16: Contract Elements – Contract Formation
167
CE
Notes
___________________
___________________
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
ES
BLOCK-IV
UP
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168
CE
Notes
UNIT 16: CONTRACT ELEMENTS – CONTRACT
___________________ UNIT 18: THE NEED OF CONTRACT
FORMATION MANAGEMENT SOLUTIONS
z ___________________
Introduction z Introduction
z Types of Contracts
___________________ z Contract Management
___________________
UNIT 17: KEY BUSINESS DRIVERS FOR UNIT 19: CONTRACT MANAGEMENT FOR LEGAL
CONTRACT MANAGEMENT
___________________ DEPARTMENT
z Introduction
___________________ z Introduction
Legal Department and Contract Management
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z
z Contract Management
___________________
z Corporate Governance Legislation and Regulations

___________________ UNIT 20: CASE STUDY
z The Role of ERP Systems in Contract Management
___________________
___________________
ES
UP
(c)
Unit 16
169
CE
Notes
Contract Elements – Contract

___________________
___________________
Formation ___________________
___________________
Objectives ___________________
___________________
topics:
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___________________
\ Contracts
\ Types of Contracts ___________________
\ Importance of Contracts ___________________
___________________
Introduction
ES
The term "contract" can sound a bit ominous to many people.
Because of this, salespeople often use the term "agreement",
instead of the word "contract" because it is less intimidating.
However, whether you are signing an agreement or a contract, it
still boils down to the same thing. They are by any definition, a
contract under law and regardless of what you call it, they will
both be treated as equal and both are subject to contract law under
the legal system.
UP
It may sound like fairy tales to kids and grandkids that some of us
have grown up in houses where you never locked the door, where
you settled a deal with a handshake... and got what was promised
to you.
Unfortunately, that's just not the way it is anymore. You almost
never know the merchant or his parents and you can seldom get
anyone to give you a referral. Therefore, deals that are cooked up
and sealed with a handshake may be difficult to challenge.
You do have to realize though, that contractors are in the same
boat. Everyone who has been in business for long has run into the
(c)
nightmare client for whom they have completed all the work that
was specified, only to find out that the client expects more and
more. Then they want to wait to pay or suddenly cannot afford it,
or just refuse to pay. Occasionally, clients will even try to sell a
170 house and run from debts or refuse to pay because of some
CE
Notes
Activity ridiculous objection; hence, the contract.
What are the implications of
___________________
having legal contracts in
___________________
business dealings? Types of Contracts
___________________ Contracts are critical for just about any business deal. There are in
___________________ fact three kinds of contracts, a verbal contract, an implied contract,
and a written contract.
___________________
___________________ Verbal Contracts
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___________________ For the most part and to a limited extent, verbal contracts are just
___________________ as valid as a written contract. Some states may however, impose
limitations on the verbal contract if the value of it exceeds a
___________________
certain dollar value or the term of the contract is over a certain
___________________ period of time. In other words, holding someone to an agreement to
provide a service ten years down the road or a multi-million dollar
verbal agreement would probably be very tough in most states.
ES
The problem with verbal contracts is that they are often very hard
to prove, especially if they are very complicated or have no
independent witnesses. The parties themselves may not even recall
the exact details to which they agreed. Therefore, if neither side
can show a written contract, judges are often forced to apply
"fairness" or other governing state laws. The problem with
"fairness" is that at least one person won't consider it “fair”.
In general, try to avoid verbal contracts. Anyone that wants you to
UP
agree to something but won't put it into writing just isn't worth the
time. And they are very likely out to scam you.
Implied Contracts
Every item or service that is sold has an implied contract
associated with it. Implied contracts (sometimes referred to as
implied warranties) are not written contracts but they are
developed by state law. In legal circles, this is referred to as
"fitness for a particular use" or a "merchantability clause".
Example - It is reasonable to assume that when you buy a
(c)
computer, it will turn on and be able to perform certain tasks. If it

doesn't meet the typical and/or reasonable expectations of a normal
person, you have legal rights the merchant has a legal duty to
rectify the situation or refund your money.
171
There is only one exception to the implied contract rule. That
CE
Notes
exception is that if an item is sold "As Is", there are no warranties
of any kind. The "As Is" statement is meant to inform the ___________________
consumer that there are or may be defects and that any and all ___________________
warranties are void.
___________________
If you were to purchase a computer marked "As Is" and it did not
___________________
work properly, you probably have very few legal rights to a
___________________
remedy.
___________________
Written Contracts
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___________________
Whenever possible, try to obtain a written contract. Then you can
___________________
check to make sure that all promises that have been made are
included in the final deal. Written contracts will not only spell out ___________________
what the merchant is supposed to do and the price, but also let you ___________________
know what is required of you.
Written contracts vary significantly but there are common
ES
elements in all of them. Here are the most important ones:
Name, Address, Phone Numbers and License & Registration
Numbers, if any: This may seem like a no-brainer, but the
address should not be a post office box, but a street address. You
cannot serve legal papers to a post office box. If your contractor
won't give you a physical address, go elsewhere.
Start and Completion Dates: Establish both in writing. These
are very important, as a slow start or drawn out completion can be
UP
very aggravating or cost you money or other problems. It is not

unusual, however, for the contract to have some language about
delays due to "weather, acts of God and material delays" or
statements regarding delays caused by other (including you) that
are beyond their control.
Contractor Guarantee: Contractors will usually give some kind
of guarantee on their work. This clause should state what is
guaranteed and when it expires.
Detailed Description of Materials and Products: Brands,
(c)
models, colours, etc. should be detailed. The rule of thumb is that

the descriptions of the products and materials should be detailed
enough to order from.
In other words, a description of "Kenmore dishwasher" would not
be enough. You need to know which Kenmore dishwasher is to be
172 installed. Stating that the transmission is to be replaced is not
CE
Notes adequate. Is it new, rebuilt, or from salvage? Original Equipment
___________________ Manufacture (OEM) or replacement.
___________________ Techniques: When applicable, the technique as to how materials
___________________ will be applied should be detailed. For example, a painting contract
should state whether the paint will be sprayed or applied with a
___________________
brush and roller.
___________________
Statement on Product Warranties: It should be spelled out who
___________________ is responsible for servicing products under warranty. Copies of
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___________________ product warranties should be attached as part of the contract.
___________________ If there is a warranty on parts, does it include replacement labour
___________________ as well? A warranty on a $15 gallon of paint doesn't account for
much if you have to pay a contractor $250 in fees to apply the
___________________
paint.
Payment Information: This is crucial and should include the
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following: the price, or how the final billing amount will be
calculated; the payment schedule; and deposit requirements.
Change Order Stipulation: It should be included in the contract
that changes from the original contract will be put in writing, with
all costs clearly stated.
Permits and Fees: If your job requires permits, the contract
should state that all necessary permits have been obtained and
copies should be attached to the contract.
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Insurance: Copies of the contractor's insurance coverage should

be attached to the contract.
Settlement of Disagreement: The contract should also specify
how you and your contractor would settle any major
disagreements, be it mediation, arbitration or litigation.
Contracts should be dated and signed by both the homeowner and
the contractor. If any changes to the contract occur, both parties
should initial them.
Business Challenge
(c)
An estimated 80% of business-to-business transactions are

underpinned by legally binding contracts and agreements. Many of
these contracts contain clauses, terms, conditions, commitments
and milestones that need to be tracked and managed over the
contract's life to maximize business benefits and minimize
associated costs of risks. But, surprisingly, most organizations 173
CE
never actively manage their contracts during the agreement Notes
period. Contracts are archived away in departmental filing ___________________
cabinets never to be reviewed again until a problem arises or
___________________
contract has already expired.
___________________
Contract management enables an organization to be proactive in
the management of its contracts. An organization employing ___________________
contract management techniques has a deeper and more context ___________________

based understanding of the risks, obligations and benefits ___________________
associated with each contract.
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___________________
Organizations that do not manage their contracts effectively will
___________________
be at a tremendous competitive disadvantage.
___________________
While much of the initial focus surrounding contract management
___________________
has been centred on "buy-side" or procurement contracts, this book
will show that Contract Lifecycle Management (the term used to
describe the entire process of creating, negotiating, storing and
ES
managing legally binding contracts and agreements) applies to all
types of contracts, whether they are supplier, customer, real estate
or employee based. This book will also show that contracts need to
be made available to many groups within the enterprise to
effectively obtain the maximum benefits from the contracts. Your
business will not be able to enforce supplier compliance or be able
to efficiently deliver products or services if the contracts are
limited to a single business unit.
UP
Check Your Progress

1. Organizations that do not manage their contracts
effectively will be at a tremendous competitive
disadvantage.
2. An estimated 65% of business-to-business transactions
are underpinned by legally binding contracts and
agreements.
(c)
Summary
Contracts are critical for any business deal. There are three kinds
of contracts, a verbal contract, an implied contract, and a written
contract. Contract management enables an organization to be
proactive in the management of its contracts. An organization
174 employing contract management techniques has a deeper and
CE
Notes more context based understanding of the risks, obligations and
___________________ benefits associated with each contract
___________________
___________________
Lesson End Activity
___________________ What are the different contracts that come across in business or
project execution?
___________________
___________________
Keywords
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___________________
Contract: A contract is a written or spoken agreement, esp. one
___________________
concerning employment, sales, or tenancy that is intended to be
___________________ enforceable by law.
___________________
Implied Contract: It is an agreement which is not reduced to
writing but is created, under the common law, on the basis of the
behaviour of the parties which suggests that they are acting under
ES
an agreement.
guaranteed and when it expires.
Verbal Contract: It is an agreement that is oral and not written
down. It remains legally enforceable by the parties who have
agreed to it.
UP

1. What are contracts?
2. Write in short about three different types of contracts.
3. Explain the importance of managing contracts.
Further Readings
Books
(c)

Pennsylvania, USA.
175
CE
Notes
___________________
Web Readings
___________________
www.acquisition.gov
___________________
___________________
www.aia.org
___________________
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___________________
www.defence.gov.au ___________________
___________________
___________________
ES
UP
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176
CE
Notes
___________________
___________________
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
ES
UP
(c)
UNIT 17: Key Business Drivers for Contract Management
Unit 17
177
CE
Notes
Activity
Key Business Drivers for Contract

Make a presentation on the
___________________
legal costs involved in
___________________
Contract Management.
Management ___________________
___________________
Objectives ___________________
___________________
topics:
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___________________
\ Costs related to Managing Contracts
\ Corporate Governance and Regulations ___________________
\ Role of ERPs ___________________
___________________
Introduction
ES
Contract management has been described as one of the next big
technology investment areas for organizations of all sizes and
industries. What is the reason? For the simple reason that it can
help organizations earn more while doing so in a more cost
effective manner. Contract management helps to control the two
things at the centre of any organization – revenue and costs.
Contract Management
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Organizations are increasingly looking at contract management as

a way to keep bottom line costs down and increase net revenues
from business-to-business transactions. At the same time, they are
recognizing the value of Contract Management as they attempt to
become compliant to corporate governance legislation and
minimize exposure to risk.
Constant Pressure to Improve Business Efficiency

The business environment in many industries is becoming more
competitive with greater pressure than ever to operate more
(c)
efficiently with fewer resources. Nowhere is this equation truer

than in the procurement department of any organization. Many
procurement department heads have noted that they are under
constant pressure to deliver higher value with fewer resources. It
has been observed that the total value of supplier contracts can be
as much as 20% of the total cost base of an organization. Therefore,
178
any significant cost saving on those contracts translate to real
CE
Notes improvement to the bottom line.
___________________
High Costs of Creating and Managing Contracts
___________________
Legal costs relating to contract creation, approval and
___________________ maintenance constitute a significant cost to an organization,
___________________ particularly when contract work is outsourced to external law
___________________
firms. Internal legal specialists can also be high cost resources if
they spend excessive time creating, approving and maintaining the
___________________
legal integrity of the contracts.
-C
___________________
More significantly though, are the associated direct and indirect
___________________ costs of managing and administration of contracts and legal
___________________ agreements. A clear example of direct costs is the insurance firm
___________________
that employs 25 full time employees in one department to retype
data held within insurance policy documentation (or in other
words, sales contracts) into their various back-end systems. For
indirect costs consider the company that does not manage and
ES
control their contracts. These costs can take the form of
unfavourable commercial terms with the same supplier.
Many buy-side contracts include clauses that allow the contract to
automatically renew if written notice is not provided before a
defined period prior to the contract end date. This practice is
referred to as "ever-greening". In many cases, these auto-renewing
contracts will also include automatic price rises, which if allowed
to pass without manual intervention, can not only burden an
UP
organization with suppliers that they do not necessarily want to

retain, but also at a higher cost to the business. For example, a
large utility organization in India recently sought to cancel a
support agreement with one of their incumbent IT service
providers, only to find out that the service contract had
automatically renewed during the previous month. The
organization is currently in negotiations with the service provider
to pay a penalty charge to extract them from the support contract.
Conversely on the sell-side, contract renewals (for maintenance or
support contracts for insurance) are frequently a major issue for
(c)
many organizations. Understanding the contracts that are coming

up for renewal can provide an organization with the ability to
proactively engage with their clients to facilitate a higher renewal
rate. Contract management aims to improve contract renewal
revenue by 30%.
179
It is not only good corporate governance to be in control of your
CE
Notes
contracts, it can also significantly affect your bottom line.
Contracts on both the buy-side and sell-side frequently include ___________________
provisions for cost reductions or bonuses if certain milestones are ___________________

achieved, or penalty charges if they are not. Simply filing away a
___________________
contract once it has been signed may cause an organisation to
forfeit savings that were negotiated into the contract. ___________________
___________________
Check Your Progress
___________________
Fill in the blanks:
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___________________
1. Many …………………. contracts include clauses that
___________________
allow the contract to automatically renew if written
notice is not provided before a defined period prior to the ___________________
contract end date. ___________________
2. Contracts on both the buy-side and sell-side frequently
include provisions for …………………. if certain
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milestones are achieved, or …………………. charges if
they are not.
Corporate Governance Legislation and Regulations

Publicly traded companies and in particular, organizations that
operate in highly regulated environments must comply with
increasingly stringent legislation and regulations surrounding
UP
disclosures of corporate information. Contracts are used to manage

financial information that is critical to meet the compliance
regulations. Gartner Group proclaims that "organizations that are
not able to control their contracts are not able to control their
businesses". This is because so many business-to-business
transactions, whether they are with suppliers, customers,
partners, agents, or in other areas of the business are reinforced
with legally binding agreements.
It is no longer satisfactory to produce an archived paper contract to

a regulator or auditor when requested. Increasingly, organizations
(c)
will have to provide evidence that they are in control of the entire
contract process. This includes the contract creation, storage and
management process to satisfy corporate governance legislations
prevalent in the country.
180
Management of Risks and Liabilities
CE
Notes
Activity Hidden in the details of many contracts are terms, conditions and
“In any contract management
___________________ commitments that, if not tracked and managed, can leave an
implementation ERP system
___________________
integration must be given organization open to unnecessary risk. There have been many
serious consideration”. examples where contract terms have been changed, either by the
___________________
Discuss. buying or selling organization to win the business that can
___________________
ultimately turn a profitable transaction into an unprofitable one.
___________________ Extent of liability, warranty periods, penalty clauses, auto-
___________________ renewing clauses, and sales discounts are all examples of clauses
that any CFO or Corporate Counsel will be looking for before
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___________________
approving a contract. Having the ability to automatically flag any
___________________ of these key clauses that do not meet the organization's
___________________ expectations is a key part of any contract management system.
___________________
Check Your Progress
Fill in the blanks:
ES
1. ……………….. are used to manage financial information
that is critical to meet the compliance regulations.
2. Organizations that are not able to control their contracts
are not able to control their ……………….. .
The Role of ERP Systems in Contract Management

ERP systems can have a role to play in the overall contract
management lifecycle but this role of primarily focused on the post
UP
approval process, i.e. the administration of the approved contract

and contract terms. Independent expert analyst organizations
argue that, although some ERP systems include the capability to
store contract data, they are not always the most appropriate
systems for Enterprise Contract Management.
ERP systems, while normally the central repository for large
amounts of active and historical data, are often focused on back
office requirements. This presents a number of major problems on
the Contract Management area in that many of the key cost and
time saving features are generally found in the automation of
(c)
processes such as contract creation, contract review and

negotiation. Further, many of these functions revolve around
unstructured data (such as MS Word documents), which is
generally not well handled by ERP systems. ERP systems are
designed to handle large volumes of transactional data. They are
not well suited to the initial contract management phases that are 181
CE
predominantly content centric and not transactional data centric. Notes
In any contract management implementation ERP system ___________________

integration must be given serious consideration. The ability to ___________________
provide bidirectional data flow between the ERP system and the
___________________
contract management system is key. It is this data flow that is
critical to a well-integrated overall solution. However, because ___________________
some of the transactional data does exist in the ERP systems ___________________
should be used as the overall contract management solution – it is ___________________
simply a part of the overall system with components used that best
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___________________
address the needs of the various functions.
___________________
Check Your Progress ___________________
Fill in the blanks:
___________________
1. ERP systems, while normally the central repository for
large amounts of active and historical data, are often
ES
focused on ……………….. requirements.
2. In any contract management implementation ERP
system …………….. must be given serious consideration.
Summary
Legal costs relating to contract creation, approval and
maintenance constitute a significant cost to an organization.
Hidden in the details of many contracts are terms, conditions and
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commitments that, if not tracked and managed, can leave an

organization open to unnecessary risk. ERP systems can have a
role to play in the overall contract management lifecycle but this
role of primarily focused on the post approval process, i.e. the
administration of the approved contract and contract terms.
Lesson End Activity

List out various costs related to managing contracts. List those
activities that come under high-cost category. Also brief about
various activities in managing contracting process.
(c)
Keywords
Contract Management: Contract management or contract
administration is the management of contracts made with
customers, vendors, partners or employees.
182
Corporate Governance: It guarantees that an enterprise is
CE
Notes
directed and controlled in a responsible, professional, and
___________________
transparent manner with the purpose of safeguarding its long-
___________________ term success.
___________________ Regulated: Control or supervise (something, esp. a company or
___________________ business activity) by means of rules and regulations.
___________________
___________________
1. Describe the role of ERP systems in Contract Management.
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___________________
___________________ 2. What are the different costs involved in creating and

managing contract?
___________________
___________________
3. Explain the importance of corporate governance legislation
and regulations.
ES
Further Readings
Books
Pennsylvania, USA.
UP

Web Readings
www.acquisition.gov
www.aia.org
(c)
www.defence.gov.au
www.ncmahq.org
UNIT 18: The Need of Contract Management Solutions
Unit 18
183
CE
Notes
Activity
The Need of Contract

Enlist various steps
___________________ of
managing contract for project
___________________
procurement process.
Management Solutions ___________________
___________________
Objectives ___________________
___________________
topics:
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___________________
\ Strategies of Contract Management for CFOs & Procurement
\ The Trouble with Contracts Negotiated by Business Managers ___________________
\ The Need of Solutions to different Parties ___________________
___________________
Introduction
ES
The senior manager is responsible for overseeing the financial
activities of an entire company. The CFO's duties include financial
planning and monitoring cash flow. He or she analyses the
company's financial strengths and weaknesses and suggests plans
for improvement.
Procurement is defined as the action of obtaining or procuring
something. This unit will talk about Contract Management
Strategies used by these groups.
UP
Contract Management
Contracts are central to the running of an efficient and compliant
business. The Contract Management strategy used by CFOs and
for Procurement is given below:
Contract Management for CFOs

An enterprise Contract Management strategy should be a high
priority for Chief Financial Officers and the executive management
team. Contracts are so central to the running of an efficient and
(c)
compliant business, that managing contracts effectively has been,

and always be, a necessity. Eradicating significant cost out of
business, complying with corporate governance regulations,
managing enterprise risk and maximizing revenue systems are all
central functions of an Enterprise Contract Management strategy.
184 Compliance regulations require that CFOs must be able to ensure
CE
Notes that the information that is disclosed to the stakeholders is a true
___________________ and fair representation of their business. They must also provide
evidence that appropriate processes and control mechanisms are in
___________________
place to manage the information. Managing the information
___________________
contained in a contract and the overall contract lifecycle are the
___________________ critical to meeting the compliance regulations. That means that
___________________ the entire process of contract creation, secure negotiation,
management in a central electronic repository, integration of
___________________
contract data with back-end systems and contract reporting needs
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___________________ to be sponsored at an executive level and rolled out to the entire
___________________ organization.
___________________
Contract Management for Procurement
___________________
Buy-side or supplier contracts have rightly been one of the initial
core focus areas for of contract management because it is here that
the business can demonstrate visible cost savings. Businesses save
ES
money by reducing or eradicating many unnecessary costs
associated with automatic contract renewals and manual entry of
data into some type of tracking system. Procurement teams can
benefit from using contract management systems in a variety of
different ways. The following is an explanation of the common
challenges that contract management systems aim to solve for the
procurement team.
Trouble with Contracts Negotiated by Business Managers

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The Chartered Institute of Purchasing and Supply, an

international standards body that oversees best practice in
procurement, suggests that central procurement departments
achieve their greatest effectiveness when they control more than
80% of an organization's purchasing activity. The reality is that,
even where centralized procurement functions exist, a significant
proportion of purchasing is undertaken by employees in dispersed
business units at distributed locations. Although this may not be
seen to be an issue for some organizations, maverick buying and
engagement of suppliers can leads to increased costs and risks.
(c)
This can often lead to unfavourable commercial terms and

duplication of orders if one business function or unit buys goods
and services from the same supplier as another business function
or unit.
185
Increasingly, procurement terms want to be seen as the guardians
CE
Notes
of procurement best practice who provide a controlled, distributed
procurement structure that allows business flexibility, while also ___________________
meeting the organization's goals in terms of risk and cost ___________________
management. Best practice procedures should also extend to those
___________________
parts of the business that have a responsibility to ensure that
suppliers comply fully with negotiated terms and conditions. Easy ___________________
and frequent access to contracts is required to meet this need. If ___________________

contracts are archived away in filing cabinets, this is extremely ___________________
difficult to achieve.
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___________________
Contract management applications should be able to extract the
___________________
key variable data contained within contracts and automatically
upload the appropriate part of that data to back-end systems like ___________________
ERP, CRM and financial systems. The system should also be able ___________________
to provide business users at all levels, and relevant business
functions, access to that data, with up to date and meaningful
ES
management reports so that the organization can maximize the
value it is getting from its supplier contracts over their lifetime.
Using contract management techniques in this way can eradicate
the cost of manual data input from paper contracts to back-end
systems and can ensure that any information relating to contracts
(like expiry dates, value, related business units, etc.) can be
proactively managed across the business. This provides higher
quality information upon which decisions can be made.
UP
Duplication of Work in Creating and Managing Contracts

Organizations that have stronger buying power than their
suppliers often issue contracts to their suppliers that dictate the
terms and conditions for delivering goods and services. In this
process, they often duplicate much of the work creating the
contracts and agreements. Procurement and legal teams will
frequently re-use relevant clauses, terms and conditions of existing
contracts that pertain to certain types of suppliers when creating
new templates. This not only takes up significant time if the new
contract needs to be customised, but raises legal integrity issues
(c)
around the modification of standard clauses.

It has been noted that there is a tendency for organizations that
have strong buying power, to issue generic "supplier" contracts.
Because these organizations lack the internal resources to provide
customized contracts for each type of supplier, they must typically
186 enter lengthy negotiation cycles with their major suppliers to reach
CE
Notes a point where the contract is relevant to the products or services
___________________ being supplied. Organizations with many thousands of suppliers,
or supplier contracts that contain significant risk to the business
___________________
may also require resources to manually capture key contract data
___________________
in a database application or spreadsheet in an attempt to keep
___________________ track of key milestones.
___________________ If an organization has strong buying power and is able to insist
___________________ that their suppliers use their contracts, then a Contract
Management system should enable the organization to rapidly
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___________________
create customized legal agreements that maximize the value of the
___________________
supplier relationship, while minimizing the risk to the
___________________ organization. These systems are able to automatically extract the
___________________ key contract terms that are used by back-end systems. The
contract terms are also used to provide business managers with
useful information to ensure that those suppliers are providing the
maximum value from their goods and services.
ES
Automatically Renewing Supplier Contracts
Many supplier contracts include automatic renewal clauses of the
terms and conditions of the contract unless written notification is
provided by the buyer within a specified timeframe, e.g. ninety
days before the end of the contract. Gartner Group estimates that
as many as 60% of supplier contracts automatically renew without
the knowledge or agreement of the buying organization. It is
UP
standard practice in sales contracts that include auto-renewing

clauses to include automatic price rises, either in line with
inflation or company policy. In some cases, Gartner Group found
that up to 50% of these contracts had automatically renewed on
more than one occasion.
For this reason, it has become standard practice for some buying
organizations to issue a letter of non-renewal at the time of
contract execution to prevent the automatic renewal of the contract
upon its expiration.
Allowing the automatic renewal of contracts can be seen as
(c)
extremely poor business practice, often leading to costs increases

that could have been cost savings. Another aspect of not managing
automatic renewals is allowing supplier contracts that are no
longer desired to automatically renew without any review process.
Often this will lead to a financial commitment by the buying
organization that is no longer bringing any benefits to the 187
CE
organization. Notes
___________________
Securing and Controlling E-mail-based Contract Negotiation
___________________
It is common for contract negotiations that need to be conducted
___________________
between two or more parties, to take place via
e-mail. This type of negotiation is not only insecure, but it creates ___________________
multiple copies of the contract, thus losing control and ___________________

management of the contract. This lack of management leads to an
___________________
inability of knowing what is the most recent and correct version of
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the contract. A Contract Management system can help solve this ___________________
problem by providing a secure collaboration workspace for sharing ___________________
and modifying draft contracts and legal agreements. Once all
___________________
parties have reached an agreement on the terms, workflow
technologies may be used for obtaining the final internal ___________________
approvals.
ES
Lack of Supplier Compliance to Contracted Commitments
Most organizations do not like to admit it, but the "sign and forget"
attitude is commonplace practice with all types of contracts. Once a
contract has been negotiated and approved, a paper copy is
typically signed and archived either in filing cabinets or in of-site
storage. In relatively few instances, is the detail of what is
contained within those contracts dispersed to the business
functions that will be using the products or services? Many
contracts may also contain quality commitments and associated
UP
penalty clauses.
These clauses are often added by the contract negotiating teams to
insure that sufficient checks and balances are added to the
contract. It is rare for business managers who interact with the
suppliers to be in a position where they have the management
information to ensure that suppliers comply fully with the
commitments agreed in their contracts. Contracts Management
systems should not only service the procurement function, but
provide the business manager with proactive alerts and
management reports to help them maximize the value of their
(c)
supplier relationships. They should also track relationships

between the final contract negotiated and all related documents
created, reviewed and exchanged between parties. It is only with
this complete document relationship trail can a true and
188 meaningful understanding of the current, and historical contract
CE
Notes relationship be maintained and visible across the organization.
___________________
Spend Management and Supplier Performance Metrics
___________________
CEOs and CFOs are becoming increasingly interested in the value
___________________
that suppliers are providing to their organizations. When large
___________________
supplier contracts are due for renewal, it is standard practice in
___________________ some organizations to analyse how one particular supplier has
___________________ performed, either against their contracted commitments or against
other similar suppliers. Contract Management systems have a
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___________________
large part to play in the analysis of spends patterns and supplier
___________________ performance metrics as so many of the business-to-business
___________________ transactions relate to legally binding contracts and agreements.
___________________ In many cases, analysis of supplier performance either does not exist
or is a tedious process based on manually gathering and collating
data from internal functions, e.g. Finance, Operations or line
ES
managers. Spend Management and Supplier Performance
Management, although not always part of a core Contract
Management environment is nonetheless a critical part of an effective
supplier management environment that organizations should be
looking at to extract greater value from supplier relationships.
Erroneous Payments by Accounts Payable

It is estimated that up to 3% of invoices paid by finance are
erroneous. With such a high proportion of business-to-business
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transactions being related to legally binding contracts and

agreements, it can be assumed that a relatively high proportion of
these payments relate in some way to the terms of a contract.
Integration of contract terms to back-end systems like ERP is a
critical component of a Contract Management system. For a buyer
organization, an accounts payable system must be able to reconcile
key contract criteria (such as delivery times, costs per volume of
goods delivered, quality levels, start/end date of contracts, etc.)
against an invoice before issuing a payment.
For the supplier organization, poor management of their contracts
(c)
can lead to duplicated or incorrect invoices. A comprehensive

Contract Management system should be able to pass key contract
terms to the finance systems and be able to be used to ensure that
of the pre-agreed criteria have been met before payment is
authorized.
Streamlining the Bid Process 189
CE
Notes
Often, suppliers must go through some kind of official bid process
before a commercial contract is awarded. Bid documentation, like ___________________
requests for information and requests for proposals, frequently ___________________

take up a significant amount of time to create and manage despite
___________________
the fact that as much as 80% of the content is common to all the
___________________
documents in the bid process. Although not part of a core contract
management system, Bid and Proposal Management is a key part ___________________
of the pre-contract stage and should be effectively treated as part ___________________
of one single, logical process. This means that an end-to-end
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___________________
contract management system should allow bid and proposal
documentation to be generated in an automated or semi-automated ___________________
fashion that saves time and avoids the duplication of work. ___________________
___________________
Check Your Progress
Fill in the blanks:
ES
1. Suppliers must go through some kind of official
……………… process before a commercial contract is
awarded.
2. The ………………, an international standards body that
oversees best practice in procurement, suggests that
central procurement departments achieve their greatest
effectiveness when they control more than 80% of an
organization's purchasing activity.
UP
Summary
CFOs must also provide evidence that appropriate processes and
control mechanisms is in place to manage the information.
Businesses save money by reducing or eradicating many
unnecessary costs associated with automatic contract renewals and
manual entry of data into some type of tracking system. Contract
management applications should be able to extract the key
variable data contained within contracts and automatically upload
the appropriate part of that data to back-end systems like ERP,
(c)
CRM and financial systems. It has become standard practice for

some buying organizations to issue a letter of non-renewal at the
time of contract execution to prevent the automatic renewal of the
contract upon its expiration. Contract management systems have a
large part to play in the analysis of spends patterns and supplier
190 performance metrics as so many of the business-to-business
CE
Notes transactions relate to legally binding contracts and agreements.
___________________
___________________ Lesson End Activity

___________________ What are the limitations and advantages of different procurement
___________________ strategies put by CFOs and executive managers? Discuss in
groups.
___________________
___________________
Keywords
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___________________
Chief Financial Officer: The corporate executive having
___________________
financial authority to make appropriations and authorize
___________________ expenditures for a firm.
___________________
Contract Negotiations: It involves determining whether all
parties have realistic objectives, forming high calibre negotiating
teams, defining each partner’s contributions and rewards as well
ES
as protect any proprietary information, addressing termination
clauses, penalties for poor performance.
Chief Executive Officer: The corporate executive responsible for
the operations of the firm; reports to a Board of Directors; may
appoint other managers (including a president).

UP
1. What are the contract management strategies for:

(a) CFOs?
(b) Procurement?
2. What is supplier performance metrics?
3. Describe "Duplication of work in creating and managing
contracts".
Further Readings
(c)
Books
Pennsylvania, USA.
191
CE
Notes
___________________
___________________
Web Readings
___________________
www.acquisition.gov
___________________
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___________________
www.aia.org
___________________
___________________
www.defence.gov.au
___________________
www.ncmahq.org
ES
UP
(c)
192
CE
Notes
___________________
___________________
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
ES
UP
(c)
UNIT 19: Contract Management for Legal Department
Unit 19
193
CE
Notes
Activity
Contract Management for Legal

Make a presentation on
___________________
Contract Management
___________________
System.
Department ___________________
___________________
Objectives ___________________
___________________
topics:
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___________________
\ Self Service Contracts
\ Management of Enterprise Risk through Contracts ___________________
\ Sell-side Contract Management ___________________
___________________
Introduction
ES
It would be impossible to consider strategic contract management
without thinking of the central role that the legal function plays in
the contract creation, maintenance and management processes.
Contract lifecycle management can help reduce legal costs, risk
and streamline the process of contracts management throughout
the enterprise.
Legal Department and Contract Management

UP
The following are the various facets of the legal aspects of contract
management.
Time Equals Money

Requiring legal specialists to create draft copies of legal
documents, oversee the revision process, and maintain the legal
integrity of precedents, contract templates and clauses equates to
significant time and costs. In-house legal specialists tend to be
higher cost employees than other kinds of employees in an
organization. Their time is therefore at a premium and can often
(c)
be tied up drafting and reviewing contracts, when in reality much

of this work can be automated and deployed to business managers.
Some organizations employ the services of external law firms for
contract work at an even higher cost. In some cases, external legal
costs can be as high as six times the cost of internal legal
resources. Streamlining the contract process with a contract
194 management system can help reduce the time involved with
CE
Notes contract creation by up to 75%.
___________________
Self-service Contract Creation
___________________
A significant proportion of the legal team's time is spent drafting
___________________
new contracts and legally binding documentation. In many cases,
___________________ the creation of these new contracts will be achieved by cutting and
___________________ pasting information from similar agreements. In other instances, a
custom contract will need to be created for a specific transaction.
___________________
In both cases, these approaches will frequently require a detailed
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___________________ review and revision process to reach the final version of the
___________________ contracts. This cyclical process can add to the time and cost of
___________________
creating new contracts.
___________________ Contract Management systems should provide the ability to

streamline the creation of new contracts by automating the
manual processes involved in creating the first, legally binding
ES
draft. Ideally, the first draft should be created by qualified end
users and not constrained to the legal specialists. A contract
management system should allow in-house legal teams to
primarily be responsible for the creation of the intelligent contract
templates, while enabling end users to create their own legally
binding contracts. This automated (self-service) approach allows
for contract creation where non-legal specialists can insert contract
terms into a template that produces a legal, customized and
accurate initial draft of a contract.
UP
Automating the contract creation phase can significantly reduce

the time spent creating new contracts, minimize the number of
people involved in the process and reduce the review and approval
time. As with the procurement function, contract management
solutions provide the technology for the legal department to set the
parameters and best practice guidelines for creating new contracts,
but allow approved staff in dispersed business functions to
undertake most of the work.
Securing E-mail-based Contract Negotiations

(c)
As covered in the previous section, many contract negotiations take

place via e-mail, which is insecure, and can create significantly
more work for the legal teams to manage the multiple copies that
have been created. A contract management system will provide the
ability to collaborate securely with both internal and external
parties and maintain version control and document security.
Managing Enterprise Risk 195
CE
Notes
Corporate Counsels are sometimes referred to as the guardians of
corporate risk. They spend much of their time ensuring that legal ___________________
commitments made by the enterprise minimize the risk exposure ___________________
to the business. Risk management can be a huge problem for some
___________________
organizations that have poor contract management processes.
___________________
Mismanagement of contracts can lead to the lack of basic
information availability that is needed to fully understand the ___________________
impacts of the contracts on the business. ___________________
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As corporate governance and risk management regulations become ___________________
stricter for publicly traded companies and regulated organizations, ___________________
corporate counsels will increasingly become more accountable for
___________________
the risk that their businesses take on. The ability therefore, to
automatically extract the key variable data held within contracts ___________________
and use it to provide the Corporate Counsel and other business

managers with key information will increasingly be required
ES
functionality from any Contract Management system.
Simplified Contract and Clause Maintenance

Legal teams are often faced with the challenge of ensuring that
their contract templates are kept up to date with current
legislation, regulations or policies. In-house legal teams are
constantly challenged with the need to rapidly and easily change
contract clauses.
UP
A major global insurance company recently spent two months

trying to identify the contract types that included a particular
clause relating to the government's definition of disability; so that
a new definition could be updated and new accurate contracts
could be sent out to their customers.
A contract management system should provide a contract "clause
library" that will allow legal teams to select any relevant clauses
and electronically link them into the contract master template.
Equally, should the wording of a particular clause need to be
changed for any reason, the contract management system should
(c)
easily allow the clause to be updated and saved back into the
repository so that any contracts that use that clause can be
updated with minimal time and cost to the organization. During
this process the contract management system should be able to
identify those existing contracts that contain the old version of any
updated clause. This is a mandatory requirement so that analysis
196 can take place on those contracts and amendments can be issued to
CE
Notes them with existing contracted parties
___________________
Sell-side Contract Management
___________________
Many independent experts downplay the importance of contract
___________________
management for the commercial or Sell-side of an organization.
___________________ Sell-side contract management however, is just as important as
___________________ the buy-side. Proper management of sell-side contracts can
significantly enhance the revenue line of a business and avoid
___________________
costly expenses. This is particularly true when the organization is
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___________________ committed to legally binding milestones and obligations that must
___________________ be achieved in order for the organization to realize the full
___________________
commercial potential of the transaction.
___________________ In many cases, contracts negotiated and closed by sales people

with their customers and partners end up in paper filing cabinets
never to be referred to again until a problem arises or the contract
ES
expiration date draws near. However in most businesses products
or services sold will often have to be designed, built, delivered or
serviced by one or more other business functions. Access to the key,
relevant data that is locked within these contracts will be crucial
if organizations are to operate efficiently and differentiate
themselves from the competition.
Instant Access to Customer Contracts

From time to time, it may be necessary to refer to the actual
UP
contract between the selling organization and the customer. In

many organizations, finding the executed version of the contract is
an impossible task. Approved contracts are normally filed away in
"corporate" filing cabinets where staff can be assured that they are
accessing the final approved copy. This is not often the case as the
staff may actually have access to multiple versions of the contract,
never really knowing whether they have the approved version. It is
critical that staff have access to the approved version of the
contract when faced with the need to address an issue or answer a
customer's question. Contracts contain the particular milestones or
commitments that the organization must comply with before a
(c)
customer releases payment, or before the customer service

representative responds to a customer request. Another problem
facing staff is the ability to easily access contract documentation
across an enterprise. Time delays to access contract information
translate into customer retention issues. A true contracts
management system should provide a secure electronic repository 197
CE
where all contracts can be accessed with the proper retention Notes
schedules that can conform to corporate governance regulations. ___________________
Easing the Burden on Sales ___________________
Although every sales person loves to close large deals, many sales ___________________
people dislike the administration that accompanies the conclusion ___________________

of these business dealings. The creation of documentation such as
___________________
non-disclosure agreements, sales proposals and sales contracts
___________________
often takes up a significant proportion of time. Since many of the
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sales contract templates are generic, contract negotiations can take ___________________
a long-time, with multiple contract reviews and changes. This all ___________________
sidetracks the sales person away from what he or she does best-
___________________
selling.
___________________
A contract management system should provide a sales person with
the ability to rapidly and simply create customized sales
ES
documentation that can be used as the first draft for customer
review. By using intelligent contract templates and intuitive user
interfaces, sales contracts and legal documentation can be
produced in a fraction of the time. By automating the contract
creation process, customers will feel that they are receiving
customized service tailored to their requirements resulting in the
need for fewer edits to the contract. This will allow the sales people
more time so to sell.
UP
Proactive Approach in Contract Renewals

Just like the problem with supplier contracts automatically
renewing, it is common for sell-side contracts (like support &
maintenance contracts) to expire without the customer confirming
the renewal of the contract. There are many reasons why sell-side
contracts are not renewed, but using a contract management
system provides the sell-side organization with the tools necessary
to be proactive in obtaining contract renewals. Account and sales
managers should be alerted when their customer contracts are
about to expire. In some organizations, renewed maintenance and
support business can contribute a significant portion of the
(c)
revenue.
Maximizing Revenue while Minimizing Risk

It is sometimes the case that when a sales transaction is proposed,
the commercial terms may look attractive to the selling
198 organization, but ultimately may result in spiralling costs and risk.
CE
Notes Ensuring that a business transaction does not turn unprofitable is
___________________ a risk management exercise that sales managers and finance
directors have to manage. Understanding and adhering to preset
___________________
parameters for sales discounts, warranty periods, delivery
___________________
commitments, etc. is critical to an organization's ability to
___________________ maximize revenue while minimizing risk. Using a contract
___________________ management system will enable sales and finance directors to
obtain reports that automatically flag when one or more of the
___________________
preset parameters have been exceeded. Proactive management of
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___________________ the contract terms in the drafts stages is one more way that
___________________ contract management systems can help organizations manage
___________________
their risk exposure more effectively and extract greater value out
of business transactions.
___________________
Meeting Contractual Obligations

Managing contracts is an enterprise responsibility. A business can
ES
only deliver real value when the whole organization is acting upon
relevant and up-to-date information. Many areas of an
organization require access to contract terms that commit the
organization to certain milestones. It is rare to find an
organization that is able to extract these key terms from their
contracts and share them with the business units, so that each
relevant business unit is able to meet and/or exceed the
commitments agreed to in the contracts. That is why a critical
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component of a contract management system must be the ability to

provide business managers throughout the organization with
personalized reports to ensure that they are complying with the
terms and conditions of the contract.
Check Your Progress

Fill in the blanks:
1. Although every sales person loves to close large deals,
many sales people dislike the ………………. that
accompanies the conclusion of these business dealings.
(c)
2. Managing contracts is an ………………. responsibility.
Summary
Self-service Contract Creation, E-mail-based Contract
Negotiations, Sell-side and buy-side Contract are few legal contract
management entities. Some organizations employ the services of 199
CE
external law firms for contract work at an even higher cost. Notes
Streamlining the contract process with a contract management ___________________
system can help reduce the time involved with contract creation.
___________________
Automating the contract creation phase can significantly reduce
the time spent creating new contracts, minimize the number of ___________________
people involved in the process and reduce the review and ___________________
approval time. Many contract negotiations take place via e-mail,
___________________
which is insecure, and can create significantly more work for the
___________________
legal teams to manage the multiple copies that have been
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created. ___________________
___________________
Lesson End Activity ___________________
“Legal teams are often faced with the challenge of ensuring that ___________________
their contract templates are kept up to date with current
legislation, regulations or policies.” Explain with appropriate case
ES
presentation.
Keywords
Enterprise Risk: A term that encompasses all major risks faced
by a business, including pure risk, speculative risk, strategic risk,
operational risk and financial risk.
Contract Management: It’s a process of systematically and
efficiently managing contract creation, execution, and analysis for
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the purpose of maximizing financial and operational performance

and minimizing risk.

1. Write in brief about
(a) Sell-side contract management
(b) Self-service contract creation
(c) Clause maintenance.
(c)
2. Explain the Importance of instance access to customer

contracts.
3. How can we maximize revenue while minimizing risk?
200
Further Readings
CE
Notes
___________________ Books
___________________
Pennsylvania, USA.
___________________
___________________
___________________
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___________________
___________________ Distributors, Shahdara, Delhi.
___________________
Web Readings
___________________
www.acquisition.gov
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www.aia.org
www.defence.gov.au
www.ncmahq.org
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UNIT 20: Case Study
Unit 20
201
CE
Notes
Case Study
___________________
___________________
___________________
Objectives
___________________
___________________
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___________________
Case Study: Volkswagen Mexico Revs Up for Jetta Component
Production ___________________
To prepare for the production of its new Jetta, Volkswagen turned ___________________
to a combination of international plants and external suppliers to
___________________
produce portions of the car’s new motor and axle assemblies.
Volkswagen Mexico Components (VW Mexico) won a competitive
ES
bid to produce several motor and axle parts and assemblies,
including the front axles and corner module assemblies. The team
at the VW Mexico plant had 21 months and a budget of US$ 3.3
million to design and install the assembly line and begin mass
production of parts.
Background
VW Mexico won the competitive bid for the component assembly
project by proposing a fixed cost for part production. This meant
there would be no room for budget overruns. Any work that
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exceeded the budget would be incurred as a loss.

The front axle and corner module assembly production was
overseen by a Project Management Professional and the project
was one of the first to be managed by the VW Mexico project office,
which provided oversight for the entire portfolio of programs and
projects related to the production of Jetta components. The project
manager and team would have to help develop and introduce
internal processes that future teams would follow.
In addition, a new supplier was selected for the project while the
equipment procurement process was underway. This late addition
resulted in a two month delay in the acquisition of the assembly
(c)
lines.
Challenges
The VW Mexico team used standard management processes, as
described in A Guide to the Project Management Body of
Knowledge (PMBOK® Guide), to complete the assembly line
Contd…
202 project on-time and under budget. The PMBOK®Guide has
CE
Notes outlined the necessary steps for determining the appropriate
amount of time needed for any given activity, helping project
___________________
teams to more accurately estimate important milestones and
___________________ completion dates. These steps include Activity definition,
___________________ sequencing, resource estimating, duration estimating, schedule
development and schedule control. By following these steps and
___________________
the techniques designed to facilitate each, project managers can
___________________ create project schedules that are more likely to efficiently use
resources and accurately estimate project outcomes.
___________________
To oversee the complex project, VW Mexico established a project
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___________________
management office (PMO), which was responsible for monitoring
___________________ and controlling the overall budget and schedules for the Jetta-
___________________ related projects. Once VW Mexico was awarded the assembly
project, the PMO coordinated with the finance department to
___________________ obtain the resources necessary for the project.
A project manager was selected and the manufacturing
department manager was named project sponsor. The project
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manager, supported by a member of the planning department,
integrated the plans submitted by various project participants
and developed a work breakdown structure (WBS) and detailed
the timeline for the overall project. The WBS served as a roadmap
for each phase of the project.
While the manufacturing and quality departments were involved
throughout the project, other departments could be consulted as
necessary. The project manager was responsible for overseeing
the WBS and involving other departments at appropriate times.
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Solutions
From initiation to closing, the project was divided into five phases
with nine milestones over two years. The timeline included all
work from procurement and fabrication of equipment through
assembly line testing and optimization.
The final phase ended with the start of axle production and corner
module assembly. In addition, a corresponding quality plan was
developed using the standards of the components plant, which
was integrated into the timeline.
The project manager held regular meetings with the core team to
(c)
keep all departments informed of progress. The assembly line

supplier visited the VW Mexico plant on several occasions to
review progress and provide assistance in addressing any issues.
Additional departments were involved when needed, and a project
status report—detailing performance index to indicate progress
relative to the overall timeline and budget—was distributed
Contd…
UNIT 20: Case Study
monthly to all departments. Because of the strict budget 203
CE
adherence requirements for the project, financial resources were Notes
blocked to avoid overruns.
___________________
In each meeting, participants had the opportunity to request
___________________
specific changes to the WBS. Discussions were documented for
quality purposes and changes were approved by both the project ___________________
manager and project sponsor.
___________________
To ensure the project would be completed on time, the project
___________________
manager found creative ways to resolve timing issues created
earlier in the process. To offset a two-month delay in receiving ___________________
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assembly line equipment, the manufacturing group conducted ___________________
training while the maintenance group assisted the subcontractor
___________________
with installation of the assembly line equipment. By performing
these two events simultaneously, the project manager prevented ___________________
future delays that might cause the project to exceed the timeline.
___________________
Throughout the project, the PMO maintained oversight for the
overall budget. Other project elements were monitored by
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individual members of the project team. For example, a planning
team member monitored activities related to the WBS and quality
plan while a quality team member was responsible for ensuring
that the parts being produced met company quality specifications.
At the completion of each project phase, the project team analysed

the overall project status and conducted risk assessments for the
remaining phases. Any resulting changes to the WBS were
approved by the project manager and project sponsor.
The end of the project was marked by the transition to full

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production mode. The official project closing took place 12 weeks

after initial component production commenced.
Results
The VW Mexico team achieved and in many cases exceeded the

objectives for the assembly set-up project. Specifically:
z The entire project was completed within the specified budget
z The team met all delivery deadlines for each phase of testing
z Front axles and corner modules produced on the plant’s

assembly lines continued to meet Volkswagen’s quality
guidelines
(c)
The Jetta component assembly line project team also developed a

number of tools and practices to serve as standards for future
projects at the plant. Key learnings from the project will enable
future project teams to optimize communication between different
Contd…
204 areas of the VW Mexico plant and ensure the success of future
CE
Notes projects.
___________________ Questions:
___________________ 1. Using the Internet, find out what are the guidelines issued by
PMBOK®Guide.
___________________
___________________
2. Explain the various phases of this project.
___________________
3. Give a brief summary of this case, bringing out the critical
points.
___________________
Source: http://www.pmi.org/BusinessSolutions/~/media/PDF/Case%20Study/VW_Mexico_Case_Study_New.ashx
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___________________
___________________
___________________
___________________
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UP
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UNIT 21: The Five Cornerstones of a Contract Lifecycle Management Strategy
205
CE
Notes
___________________
___________________
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
ES
BLOCK-V
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206
CE
Notes
UNIT 21: THE FIVE CORNERSTONES OF A
___________________ UNIT 23: FIVE MYTHS OF CONTRACT
CONTRACT LIFECYCLE MANAGEMENT MANAGEMENT
STRATEGY
___________________ z Introduction
z Introduction
___________________ z The Myths
z Components of Enterprise Contract Lifecycle
___________________
Management Strategy UNIT 24: UNDERSTANDING AND IMPROVING
z
___________________
How Open Text Addresses Contract Management THE CONTRACTING PROCESS
___________________ z Introduction
UNIT 22: JUSTIFYING CONTRACT MANAGEMENT Understanding the Process
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z
___________________
z Introduction z Strategic Advantage
___________________
z Business case for Contract Management
___________________ UNIT 25: CASE STUDY
___________________
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UP
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Unit 21
207
CE
Notes
Activity
The Five Cornerstones of a

Make a presentation on
___________________
Contract Lifecycle
___________________
Management Strategy.
Contract Lifecycle Management ___________________
Strategy ___________________
___________________
Objectives ___________________
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After completion of this unit, the students will be aware of the following ___________________
topics:
___________________
\ Key Components of an Enterprise Contract Lifecycle Management
Strategy ___________________
\ How to Open Text Address Contract Management ___________________

\ Software used in Contract Management
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Introduction
This unit talks about the five cornerstones of Contract Lifecycle
Management Strategy. These cornerstones are: Automated
contract creation, Secure contract negotiation, Electronic contract
repository, Automatic upload of relevant contract data to back-end
systems, and Generation of proactive management reports and
alerts to encourage compliance to committed contract terms and
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conditions. These will be further explained in detail in this unit.
Components of Enterprise Contract Lifecycle

Management Strategy
There are five key components of an enterprise Contract Lifecycle
Management strategy:
z Automated contract creation,
z Secure contract negotiation,
z Electronic contract repository,
(c)
z Automatic upload of relevant contract data to back-end

systems, and
z Generation of proactive management reports and alerts to
encourage compliance to committed contract terms and
conditions.
208
Automated Contract Creation
CE
Notes
In order to provide a truly flexible system that eradicates cost at
___________________ every stage of the contract lifecycle, the contract management
___________________ system must provide the ability for trusted end users to make use
of technology to create contracts and legal documentation within
___________________
pre-planned and pre-approved parameters. This will enable
___________________
resource constrained groups such as legal and procurement to
___________________ focus on the creation of approved contract templates and best
___________________ practices.
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___________________
Secure Contract Negotiation
___________________ Contract negotiations between external parties often take place via
___________________ e-mail. This can create many problems for contract negotiators.
___________________
Sending an e-mail to five recipients will generate five separate
copies of the contract. If the five recipients wish to make any
comments or amendments to the contract, then there may be
multiple versions of the document in circulation. This not only
ES
creates significant work for the contract manager when attempting
to bring these versions together into a final contract, but can also
lead to a loss of control over what may be sensitive commercial
information. A comprehensive contract management strategy must
therefore accommodate the usage of a secure collaboration
environment for contract negotiations with external parties.
Secure collaboration workspaces allow the contract manager to
place a single copy of the contract into a virtual repository for
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access and review by any trusted third party. New versions and
changes to the content of the contract can be tracked and managed
within the negotiation workspace. Threaded discussions relating to
the contract along with tasks and meeting schedules can also be
managed in the collaboration workspace.
Once the contract has reached consensus within the collaboration
environment, then workflow technologies should be used to move
the contract through its final internal approval.
Electronic Contract Repository

(c)
A comprehensive Contract Management strategy should include

the implementation of a central electronic repository to store
contracts and agreements. Paper filing cabinets or shared folders
on a company network are not efficient mechanisms for storing
sensitive information like contracts. The contract repository not
only aids compliance to corporate governance legislation, but it will 209
CE
also enable authorized staff to instantly retrieve the latest version Notes
of any contract. ___________________
Many different segments of a business may require, at some point ___________________
in time, access to archived contracts. In some organizations where
___________________
contracts are archived in of-site paper stores, there are costs
associated with the retrieval of contracts. The legal group of a ___________________
large North American investment bank requires business ___________________

managers to complete a comprehensive business case before they ___________________
can authorize the release of any archived contracts for review. A
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___________________
central electronic repository would alleviate these costs by
providing authorized staff access to those saved contracts. ___________________
___________________
Automatic Upload to Back-End Systems
___________________
Most organizations manually key contract data into back-end
systems. Manually inputting data from a paper contract is not only
ES
inefficient and time consuming, but it can also result in costly
errors. A contract management strategy should insist on the use of
data transfer technologies that can automatically extract key
contract data and upload it to relevant back-end systems as
required without any manual intervention.
Proactive Report and Alert Management

While documented processes around the creation, review and
archiving of contracts are required to meet compliance
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requirements, the true commercial power of a contract

management system is in its reporting ability. Reports are used to
alert and provide actionable management information to staff
members who require that information to carry out their business
function. The terms of a contract can affect many parts of the
business. Specialists like sales managers or the procurement team,
will want to keep track of the finer detail relating to their principal
transactions. Other business functions like finance, legal,
operations, customer services, etc. may only need to view subsets of
the contract data to either ensure that suppliers are complying
(c)
with pre-negotiated terms or that customer commitments are being

met so that the business is maximizing revenue while minimizing
risk.
210
Check Your Progress
CE
Notes
Activity
With___________________
the help of Internet, find
Fill in the blanks:
out more information about
___________________
1. Most organizations …………….. key contract data into
Enterprise Content
Management.
back-end systems.
___________________
2. Contract negotiations between external parties often
___________________
take place via …………….. .
___________________
___________________ How Open Text Addresses Contract Management?
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___________________
Contract Management software provides an integrated platform
___________________ for Enterprise Content Management (ECM) and business
___________________ analytics, offering global organizations solutions to manage
business interaction information such as documents, records,
___________________
virtual deal, room discussions, e-mail, or financial data-linking
business processes, information and people.
ES
These packages address the business challenge of process-centric
enterprise content management. The integrated suite provides
higher content integrity and control, faster deployment,
streamlined maintenance, and guaranteed interoperability.
z Content Management: Key elements include a unified
repository, library services, version control, security profiles,
searching, imaging and web publishing.
z Records Management: Electronic records management
providing long-term access, audit and retention control.
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z Knowledge Management: Search and retrieval capabilities

across multiple data sources. Advanced semantic analysis and
categorization.
z Workflow: The glue that links content lifecycle management
processes connecting suite components and enterprise
applications.
z Collaboration: Support for team and real-time collaboration,
including secure instant messaging, file transfer, discussions,
and user presence.
z Mobility: Both a framework and an out-of-the-box solution
(c)
that enables interaction with enterprise content from any

wireless device.
z Query & Reporting: Embedded reporting provides rapid
access to underlying data sources and customizable reports,
including graphical representations of returned data.
211
z Data Integration: As a data integration tool, many software
CE
Notes
packages provide connectivity between data sources and target
systems for migrating repositories without programming or ___________________
data staging. ___________________
With right software for contract management, organizations will ___________________

be able to streamline the contract creation and approval process,
___________________
improve financial and contractual performance from suppliers and
___________________
customers, and maximize revenue performance by managing
compliance and ultimately decreasing operational staffing costs. ___________________
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Typical improvement gains can include reduction in operating ___________________
costs, shortened negotiation cycles, stronger compliance with
___________________
internal or external policies and regulations, reduced staffing, and
higher revenues. ___________________
___________________
Check Your Progress
State whether the following statements are True/False:
ES
1. …………….. reporting provides rapid access to
underlying data sources and customizable reports,
including graphical representations of returned data.
2. The …………….. suite provides higher content integrity
and control, faster deployment, streamlined
maintenance and guaranteed interoperability.
Summary
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There are five key components of an enterprise Contract Lifecycle

Management strategy: (1) Automated contract creation, (2) Secure
contract negotiation, (3) Electronic contract repository, (4)
Automatic upload of relevant contract data to back-end systems,
and (5) Generation of proactive management reports and alerts.
Contract Management software provides an integrated platform
for Enterprise Content Management (ECM) and business
analytics, offering global organizations solutions to manage
business interaction information such as documents, records,
virtual deal room discussions, e-mail, or financial data – linking
(c)
business processes, information and people.
Lesson End Activity

Find out what contract lifecycle management strategies are
implemented by an organization of your choice.
212
Keywords
CE
Notes
Enterprise Content Management: Enterprise Content
___________________
Management (ECM) is the strategies, methods and tools used to
___________________ capture, manage, store, preserve, and deliver content and
___________________ documents related to organizational processes.
___________________ Contract Management Software: It can be used to manage the
___________________ contract life-cycle, from identification of a need, through
negotiation, agreement, monitoring, and close-out.
___________________
Contract Negotiation: It is any discussion, either in person or
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___________________
through electronic means, that has as its primary goal to come to a
___________________
written agreement concerning a business matter.
___________________
Knowledge Management (KM): It comprises a range of
___________________ strategies and practices used in an organization to identify, create,
represent, distribute, and enable adoption of insights and
experiences.
ES
1. Write in short about:
(a) Automated contract creation
(b) Secure contract negotiation
(c) Electronic contract repository
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2. How does open text address contract management?

3. Describe the importance of software used in contract
management.
Further Readings
Books
Pennsylvania, USA.
(c)

Web Readings 213
CE
Notes
www.acquisition.gov
___________________
___________________
www.aia.org
___________________
___________________
www.defence.gov.au
___________________
www.ncmahq.org
___________________
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___________________
___________________
___________________
___________________
ES
UP
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214
CE
Notes
___________________
___________________
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
ES
UP
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UNIT 22: Justifying Contract Management
Unit 22
215
CE
Notes
Activity
Justifying Contract Management

Discuss in groups
___________________ the
importance of contract
___________________
management in project
execution.
___________________
Objectives
___________________
topics: ___________________
\ Principal Impact Areas of Contract Management ___________________
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\ How to Achieve the Levels of Improvement Suggested ___________________
\ Case for Contract Management
___________________
___________________
Introduction ___________________
Many leading independent analysts like Gartner and Meta Group,

ES
and Management Consultants like Accenture, Price Waterhouse
Coopers, and BearingPoint, have conducted detailed research into
the impact that the management or lack of management of
contracts will have on a business.
Business Case for Contract Management

The business case for contract management is extremely strong. It
is a technology solution that can show clear cost reductions as well
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as potential revenue enhancements across multiple business

functions.
The following table, created by Accenture, shows the principal
impact areas of Contract Management systems on an organization.
The right hand column indicates how these levels of improvement
suggested by Accenture can be achieved.
Table 22.1: Principal Impact Areas of Contract Management

Systems on an Organization
Area of Impact Improvement How?

Reduce legal costs 70% Lower external legal fees, rapid
(c)
updates to changes in clauses, shorter

negotiation cycles
Compliance with 90-100% Contracts are electronically achieved:
policies and instantly identifiable and retrievable
regulatory and retained for requisite timeframes
guidelines
Contd…
216 Faster negotiation 50% All changes & suggestions are made in
CE
Notes cycles one place. Version control cuts own the
number of copies and work to create
___________________ final version
Higher contract 1-2% Better management of contract
___________________
revenues milestones can help to exploit
___________________ discounts, bonus clauses, etc.
Increase in 30% Better management of contract
___________________ renewal revenue milestones better management of
contract expiry dates.
___________________
Reduction in 75-90% 3%of Finance payments are payments
___________________ erroneous erroneous. Accurate information
passed to Finance from Contract can
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___________________ help to reduce these.
___________________ Reduction in 10-30% Automation of upto80% of & operating

processing costs annual work associated with
___________________ creating and managing contracts.
Reduction in 10-20% Contract data is or increased
___________________ headcount productivity automatically extracted
and sent too their systems & reports
generated automatically – no need for
additional people
ES
Abolition of auto- 90-100% Standard reports highlight contracts
renewing expiring contracts
Check Your Progress

1. The business case for contract management is extremely
weak.
2. It is a technology solution but cannot show clear cost
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reductions.
Summary
The impact that the management or lack of management of contracts
have on a business and project execution and procurement process is
discussed. The technology solutions that have shown to clear cost
reductions as well as potential revenue enhancements across multiple
business functions are also discussed.
Lesson End Activity

(c)
How can digitization or use of contract management software be

justified? Discuss.
UNIT 22: Justifying Contract Management
Keywords 217
CE
Notes
___________________
efficiently managing contract creation, execution and analysis for
the purpose of maximizing financial and operational performance ___________________
and minimizing risk. ___________________
Electronic contract systems: They deal with the lifecycle ___________________

automation and management of contract documents from their
___________________
establishment to expiry.
___________________
Improvement: It is a change or addition by which a thing is
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___________________
improved.
___________________
Questions for Discussion ___________________
___________________
1. What are the areas of impact of contract management?
2. How these impacts are done?
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3. Highlight the major cases for contract management.
Further Readings
Books
Pennsylvania, USA.
UP

Web Readings
www.acquisition.gov
(c)
www.aia.org
www.defence.gov.au
www.ncmahq.org
218
CE
Notes
___________________
___________________
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
ES
UP
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UNIT 23: Five Myths of Contract Management
Unit 23
219
CE
Notes
Activity
Five Myths of Contract

Using the Internet find out
___________________
information about Leasing
___________________
Contracts, and discuss about
Management it in groups.
___________________
___________________
Objectives ___________________
___________________
topics:
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___________________
\ Myths of Contract Management
\ The Three Phases that Comprise the Contract Lifecycle ___________________
\ Important Business Benefits ___________________

\ Power of Contracts ___________________
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Introduction
For many corporations, it's time to take those contracts out of the
filing cabinet and put them to work for the company's bottom line.
For years the corporate contract has been an under-appreciated

document in the business world. It was considered critical to have,
but, once signed and sealed; employees often filed the contract
away, never to view it again.
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This habit of taking the contract for granted has led to the
development of a number of myths regarding the field of contract
management. For corporations, these myths minimize the need for
a task-specific contract management system and ultimately lead to
increased costs (both actual and opportunity) and decreased
profits.
The sections below take a look at the five most common

of these myths with the goal of setting the record straight: The
contract is a vital business tool, and it is high time it was taken out
of the filing cabinet and put to work for the firm.
(c)
The Myths
The myths are as explained below:
220
Myth 1
CE
Notes
Firms can manage their contracts with standard desktop
___________________ applications like Access, Excel or Word.
___________________
Standard desktop applications have come a long way since the
___________________ days of Wordstar v 1.0 and Quattro Pro, but they are still far from
___________________ being a substitute for a contract management system.
___________________ Leading contract management packages leverage the familiar

editing capabilities of word processing packages. However, word
___________________
processing software was not designed for multi-user collaboration
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___________________ or enterprise-wide visibility and it cannot measure operational and
___________________ financial performance against agreed upon contracts.
___________________ Contracts today tend to be highly complex and sophisticated
___________________ documents that are designed to take into account a wide range of
possible eventualities. As such, the system used to manage these
documents needs to be specialized, robust and offer the centralized
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capabilities of an enterprise contract management system. It
should effectively break up contracts into their various clauses and
then store them based as both a unified document as well as a
collection of clauses. For example, such a system should allow a
firm to sort for all contracts that could be impacted by a change in
a law, regulation or status of a customer or supplier.
Also, a viable enterprise contract management system should be
able to link to other systems such as enterprise resource planning
(ERP), legal or procurement solutions in a secure manner,
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permitting role-based access – an issue that is clearly germane to

highly confidential documents like contracts.
Myth 2
ERP and Customer Relationship Management (CRM)
solutions provide all the contract management capabilities
a firm needs.
While ERP and CRM solutions are important business tools and
are effective at what they do, they are not always designed to
handle the range of tasks associated with an effective contract
(c)
management system.
In general, ERP solutions focus on transactions related to the
product or service of the company, and CRM solutions focus on
collecting and utilizing data about the customer. While each of
these solutions touch on certain aspects of contract management,
only an enterprise contract management system can provide 221
CE
visibility into all of your contracts, validate that the transactions Notes
meet the terms and conditions of the contract and ensure ___________________
compliance. A contract represents a business relationship between
___________________
parties, and this relationship has a number of distinct phases. A
contract management system needs to address each phase. ___________________
The three phases that comprise the contract lifecycle are as ___________________
follows: ___________________
z Make: The Make phase of the enterprise contract ___________________
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management (ECM) lifecycle prepares the organization for ___________________
contract management and compliance measurement. During
___________________
the Make phase, ECM uses sourcing technology capabilities
that automate and manage the requests for proposal process, ___________________
reverse auction, supplier scorecarding, and bring the key ___________________

terms and variables into the contract creation process. Then
you can begin contract creation and negotiation and electronic
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archival processes. Benefits here include reduced legal risk
from the use of standardized contract terms and conditions,
faster audit preparation, a reduction in maverick contracting,
enhanced regulatory compliance and global contract visibility.
z Manage: The Manage phase of the ECM lifecycle administers
and monitors all aspects of executed contracts, including
pricing, rebates, royalties, collections, deductions and both
transaction and event-based compliance. Benefits include
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increased revenues and decreased expenses from adherence to

contract pricing and incentive optimization, a reduction in
collections and disputes due to questions involving contract
compliance, and elimination of unintended contract lapses.
Ensuring integrity and visibility into critical corporate
contracts can help ensure compliance with the Sarbanes-Oxley
Act of 2002.
z Maximize: The Maximize phase of the ECM lifecycle
measures operational and financial performance against
agreed upon commitments, and examines sales and
purchasing activity across the enterprise. It also analyzes
(c)
contract profitability and notifies senior management of non-

compliant events or transactions. Benefits include increased
revenue and expense control, enhanced trading partner
selection, faster contract renewal and improved business
intelligence and management reporting.
222
Myth 3
CE
Notes
The sales force can manage contract milestones and
___________________ expiration dates.
___________________
On the surface it may seem logical that the sales force should be
___________________ tasked with the responsibility of administering contract expiration
___________________ dates and milestones. A closer look, however, shows that this
policy can be very risky for a company. And this only applies to
___________________
sales contracts anyway. It does not include the procurement side of
___________________ the business, nor any other contracts.
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___________________ While it is true that the sales force's job is to be close to the
___________________ customer and that they should be familiar with the firm's
___________________
contracts, this is a relatively small part of contract management.
Contracts must be maintained with both customers and suppliers,
___________________
and the sales force may have no background at all with the latter.
Further, it is more than likely that the sales force is neither
ES
trained nor well suited to handle the detailed administrative tasks
necessary to effectively monitor multiple contracts. And, even if
the sales force is willing to take on this new responsibility, without
a centralized, systematic way to monitor contract data, even the
most diligent sales person – or any other person charged with
managing contracts – can miss a key date, thus costing the firm
funds and damaging its reputation.
In the same vein, failing to comply with key contractual obligations
could lead to an audit of the firm's financials. If the audit reveals that
UP
the firm’s financials are not in compliance with the Sarbanes-Oxley

Act of 2002, it could have serious implications, including steep fines,
penalties and even jail time. In the event of an audit, it is important
that a clear audit trail has been established for each contract – a task
that can be performed more efficiently by an automated system
rather than members of the sales force. The most effective contract
management systems provide automatic notification through the
company's e-mail system and incorporate escalation procedures if
action is not taken within a predefined period of time.
Myth 4
(c)
All of the firm's business transactions are compliant with

customer and supplier contracts.
Compliance with a contract is more often assumed than actually
verified. While it is easy to simply believe that the company is
complying with all of its contracts, the only way to be sure is to 223
CE
maintain a centralized system that stores all contract information Notes
in a functional data structure that is then tied to the company's ___________________
transaction reporting system (ERP) and financial systems. ECM
___________________
software will allow the firm to see when its transactions are
diverging from its agreements so it can take corrective action in a ___________________
timely fashion. ___________________

When one considers the fact that some form of contract governs 80 ___________________
percent of all B2B transactions and that the average Fortune 1000
___________________
company has between 20,000 and 40,000 contracts, the need for
-C
structure regarding contract data becomes clear. ___________________
By establishing this contract compliance system the firm can ___________________
achieve several important business benefits, including: ___________________
z Control: It ensures adherence to contracting best practices ___________________

through a centralized, searchable contract storage repository.
z Security: It protects and archives documents through proven
ES
document management technologies and business process
workflows.
z Speed: Speed facilitates internal and external communication
through collaboration features.
z Flexibility: It enables companies to define the contract terms
and transactions that need to be monitored and set tolerance
levels:
Savings: It reduces labour costs by eliminating the need to
UP
manually check and monitor milestones.

Enterprise Fit: It integrates with transactional systems
including ERP, CRM, supply chain management and other
transactional systems.
Risk Reduction: This contract related to audit trails is
preserved for future use and thus risks of a regulatory
audit are minimized.
Consistency: All contracts adhere to the corporate
standards and agreements with customers and suppliers
are consistent.
(c)
The achievement of the above tasks will significantly reduce the

chance of downstream problems including:
z Financial losses
z Non-compliance with the Sarbanes-Oxley Act of 2002
224
z Lawsuits and regulatory fines
CE
Notes
z Inaccurate revenue and expense forecasting
___________________
Incorrect packaging
___________________
Incorrect product specifications
___________________
Incorrect quantity shipped
___________________
Late shipment
___________________
Invoicing errors
___________________
Billing errors
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___________________
In today's challenging and competitive business landscape, savings
___________________ associated with avoiding these problems can make the difference
___________________ between profit and loss.
___________________
Myth 5
Contract management only impacts a few people within the
organization.
ES
The basis for this myth is the fact that traditionally only a limited
number of individuals had access to the firm's contracts, which
created the illusion that only a limited number of people used the
contract. Many employees may not know where to look for the
information, as a result, or they may not even associate the
contract with a source of critical information.
Contracts impact departments and functions throughout the
UP
organization and are therefore important to virtually every person

in the firm. However, not every element of the contract is equally
important to all areas of the company, which makes it is important
to have a contract management system that stores the contract in
a repository with role-based access. In this way, groups like legal,
finance, purchasing and shipping can access those elements of the
contract that are relevant to them.
To many it may seem that only major strategy agreements
between firms are classified as a contract, but when a broader
definition of contracts is used, it becomes apparent that contracts
have a wide impact across the enterprise and drive a significant
(c)
part of an organization's business. Some representative contract

types found throughout organizations include:
z Advertising/PR Agreements
z Agency Agreements
225
z Asset Purchase Agreements
CE
Notes
z Broker Agreements
___________________
z Bylaws
___________________
z Commercial Lease Agreements ___________________
z Confidentiality Agreements ___________________
z Contract Sales/Research ___________________
z Co-promotion ___________________
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z Distribution Agreements ___________________
z General Proxy ___________________
z Intellectual Property License ___________________
___________________
z Joint Marketing Agreements
z Joint Venture
ES
z Leasing Agreements
z Limited Liability Certificate of Formation
z Material Transfer Agreements
z M&A
z Outsource Services
z Partnership and Strategic Partnership Agreements
UP
z Patent Applications
z Power of Attorney
z Research Agreements
z Security Agreements
z Strategic Consulting
z Supplier Agreements
z Termination of Lease Agreements
z Value-added Reseller Agreements
(c)
In addition to those contract categories, there are other agreement

types that are handled by contract, such as a purchase
commitment, returns and replacement, incentives and discounts,
payment terms, and duration and expiration. Contracts extend to
all corners of a corporation and affect all employees.
226
The Power of Contracts: Believing these myths surrounding
CE
Notes
contract management is a common misconception without the
___________________
proper information. Fortunately, armed with the proper details
___________________ about what contract management can do, companies can save time
___________________ and money without risk or loss of opportunity.
___________________ In the present market environment, especially with new reporting

requirements mandated by the Sarbanes-Oxley Act of 2002,
___________________
increasing competition and tighter margins, companies must
___________________ explore every possible opportunity for improving business
-C
___________________ processes and ensuring the accuracy of their financial transactions.
___________________
For many companies, unlocking the power of the contract is an
excellent place to start.
___________________
___________________ Check Your Progress

1. All of the firm's business transactions are compliant
ES
with customer and supplier contracts.
2. Firms can manage their contracts with standard
desktop applications like Access, Excel or Word.
Summary
The five most common of these myths with the goal of setting the
record straight are discussed in detail. Companies must explore
UP
every possible opportunity for improving business processes and

ensuring the accuracy of their financial transactions.
Lesson End Activity

Find out with the help of Internet, and discuss about the following
contracts:
1. Patent Applications,
2. Research Agreements, and
3. Joint Venture
(c)
Keywords
Customer Relationship Management (CRM): It is an
information industry term for methodologies, software, and usually
internet capabilities that help an enterprise manage customer 227
CE
relationships in an organized way. Notes
Enterprise Content Management (ECM): It is a formalized ___________________

means of organizing and storing an organization’s documents, and ___________________
other content, that relate to the organization’s processes.
___________________
Contract: It is a written or spoken agreement that is intended to
___________________
be enforceable by law.
___________________
-C
___________________
1. What is the power of contracts?
___________________
2. "Contract management only impacts a few people within the
___________________
organization", is it a myth if yes justify yourself.
___________________
3. Explain the important business benefits that are achieved by
establishing contract compliances system.
ES
4. What are the different myths of contract management?
Further Readings
Books
Pennsylvania, USA.
UP

Web Readings
www.acquisition.gov
www.aia.org
(c)
www.defence.gov.au
www.ncmahq.org
228
CE
Notes
___________________
___________________
___________________
___________________
___________________
___________________
-C
___________________
___________________
___________________
___________________
ES
UP
(c)
UNIT 24: Understanding and Improving the Contracting Process
Unit 24
229
CE
Notes
Activity
Understanding and Improving the

How___________________
can leaders create
strategic advantage and
___________________
superior value when forming
Contracting Process supply arrangements?
___________________
Discuss.
___________________
Objectives ___________________
___________________
topics:
-C
___________________
\ Process of Contracting
\ Strategic Advantage ___________________
\ Superior Value ___________________
___________________
Introduction
ES
How leaders can create strategic advantage and superior value
when forming supply arrangements?
One of senior management's responsibilities is establishing and
continuously improving a value-creating contracting process,
thereby assuring the availability of key purchased goods and
services. Unfortunately many leaders fail to appreciate the
importance of this process. Since purchased goods and services
consume anywhere from 20% to 70% of most organizations' gross
UP
income, poor focus here can have a negative, high-dollar impact

that directly and rapidly affects the firm's bottom line.
What can you do to improve your understanding of these key
business arrangements and the steps that create them? And what
strategic advantages accrue to the firm with a superior grasp of the
contracting process?
Understanding the Process

As with so many other facets of commerce, an improved
(c)
understanding of the contracting process starts with asking the

right questions – so this section will centre on questions that you
can pose.
While interacting with supply professionals, these questions
usually involve the structural details of a given contract – the
230 "who, what, when, where and how" components. While these are
CE
Notes important, there is a higher understanding that you as the leader
___________________ must possess. Mastering this understanding is much the same as
learning to "play the game above the rim" (basketball) or knowing
___________________
the "inner game" of tennis.
___________________
Above all, you must look at contract formation as a business
___________________
process. Like any process it has discrete, replicable steps. So good
___________________ first questions include:
___________________ z What are the steps that lead to a contract in our organization?
-C
___________________ z How deeply within our firm do these steps lead?
___________________ z What parts of our firm and our supplier firms are involved
___________________ with each step?
___________________ The answers to the above will induce questions revealing more of
your process robustness, such as:
z Does this contract reflect the result of competitive bidding?
ES
z Did we review more than just a single alternative?
z Do we ask our managers to justify rigorously – with both data
(objective) and sound judgment (subjective) – the course they
recommend?
Of course, a part of the contracting process involves interaction
with your suppliers. Cornerstone has found helpful the simile of
contract negotiation as a detailed, quality conversation between
two organizations. For example, a good negotiation – like a
UP
conversation – requires active listening and temporary suspension

of judgment while the participants assure themselves of a
thorough understanding.
Like the writing of a business plan, the value of a contract
negotiation lies as much in the action as in the final result. So good
questions here are:
z What negotiation "styles" did each side use?
z What did the negotiation "map" look like?
(A negotiation "map" is a diagram of the most important contract
(c)
elements, showing what each looked like at the start and at the
end of the negotiation, and at each significant waypoint in
between.)
You should question especially those high-value contracts formed
with relatively little give and take. A lack of "conversation" here
may indicate a one sided arrangement that the prevailed upon 231
CE
party will later resent, or even terminate. This questioning is Notes
Activity
equally important even if it was your organization that prevailed. What strategic advantages
___________________
accrue to the firm with a
Check Your Progress ___________________
superior grasp of the
contracting process?
State whether the following statements are True or False: ___________________
___________________
1. Contracting process starts with asking the right
questions. ___________________
2. A part of the contracting process involves interaction ___________________
-C
with your suppliers. ___________________
___________________
Strategic Advantage ___________________
Your most important strategic advantage in having robust contract ___________________
formation processes is the value obtained from the internal and
external give-and-take these processes require. World-class
ES
contracting processes combine the collective business intelligence
and commercial savvy of each person who is a part of developing
and interpreting the data, and integrate the interpreted
information with the firm's strategy. They also consider and
integrate the key needs of the supplier. Contracting becomes
replicable, balanced and value focused.
The ability to apply a disciplined and largely data-driven process to

supply arrangements also creates increased respect within your
UP
supplier base and a preference among suppliers to do business

with you over your competitors. If your firm becomes known for its
thorough and fair contracting, good suppliers will compete even
more vigorously for your business. Over time this will build a solid
base of the most reliable vendors with which you may work with
greater confidence. You will also enjoy such advantages as being
the first to be favoured with new supplier products and
developments. Suppliers are also more likely to offer or concede
promptly "most favoured nations" treatment in their proposed
arrangements – yielding further advantage. None of these
(c)
advantages comes overnight. They require conscious reapplication

and continuous improvement of your ability to formulate and
shape a supply arrangement, to communicate its commercial needs
internally and externally, and to involve the right mix of people
from both sides and all significant levels.
232
Check Your Progress
CE
Notes
Fill in the blanks:
___________________
___________________
1. If your firm becomes known for its thorough and fair
………………, good suppliers will compete even more
___________________
vigorously for your business.
___________________
2. Over time this will build a solid base of the most
___________________ ……………… vendors with which you may work with
___________________ greater confidence.
-C
___________________
___________________
Summary
___________________ This material has provided an overview of the principal areas
where contract management systems can help an organization
___________________
reduce its cost base and improve revenue by streamlining the
processes that are employed to create and manage contracts and
legally binding agreements. Contracts that were previously hidden
ES
in filing cabinets can now be available to anyone who needs access
to the contract or contract terms. They also can be used to provide
staff with useful alerts and management reports on key contract
milestones.
Contract management systems help organizations that operate in
regulated environments to comply with stringent regulations and
guidelines that encompass the contract management processes.
These systems also benefit organizations with large numbers of
UP
contracts, of both high value and high risk, to better manage their
contracts throughout their negotiated period and assist the
organization with better access to the information.
Lesson End Activity

Make a presentation on contract management systems.
Keywords
Strategic Advantages: It may relate to technology, products,
(c)
your operations, your capabilities and/or your people that lead to

the potential for a sustainable competitive advantage.
Negotiating: Negotiating is all about reaching consensus between
two parties, and it assumes that both sides have power and can
move towards agreement.
233
Negotiation Styles: It varies with the person, their beliefs and
CE
Notes
skills, as well as the general context in which they occur. Here are
a number of different styles considered from different viewpoints. ___________________
___________________
1. How can leaders create strategic advantage when forming ___________________

supply arrangements? ___________________
2. How is the process followed? ___________________
-C
3. What is a contract manufacturing system? Explain. ___________________
___________________
Books ___________________

ES
Pennsylvania, USA.
Web Readings
UP
www.acquisition.gov
www.aia.org
www.defence.gov.au
www.ncmahq.org
(c)
234
CE
Notes
___________________
___________________
___________________
___________________
___________________
___________________
-C
___________________
___________________
___________________
___________________
ES
UP
(c)
UNIT 25: Case Study
Unit 25
235
CE
Notes
Case Study
___________________
___________________
___________________
Objectives
___________________
After analyzing this case, the student will have an appreciation of the
___________________
-C
___________________
Case Study: UIDAI's Aadhaar Project – Challenges Ahead
___________________
The case focuses on the Aadhaar project that was initiated by the
United Progressive Alliance (UPA), a coalition of central-political ___________________
left parties heading the Government of India (GoI), under the
___________________
guidance of Prime Minister of India, Manmohan Singh (Singh), to
provide identity to the 1.2 billion citizens of India.
ES
The project aimed to plug loopholes in welfare programs where
checking leakages and identifying beneficiaries was a major
challenge. With an Aadhaar, there was an absolute guarantee
that no two people would have the same Aadhaar, and it could not
be duplicated either.
Aadhaar previously called as the Unique identification (UID)

project was the 12 digit identification number provided by the
Unique Identification Authority of India (UIDAI) on behalf of the
GoI. The number served as proof of address and identity for
UP
citizens anywhere in India. In June 2009, Nandan Nilekani

(Nilekani), former CEO of Infosys Technologies Limited was
invited by Singh to head the Aadhaar project and was roped in
with the rank of a union cabinet minister as the Chairperson of
the UIDAI. In September 2010, the Aadhaar project was launched
by Singh and UPA Chairperson, Sonia Gandhi (Gandhi) in
Tembhali village in Maharashtra. The launch signified UIDAI's
core initiative of giving the poor and marginalized in India an
easily verifiable and mobile identity. Having invited Nilekani,
Singh had given him full autonomy during the implementation of
the Aadhaar project. Nilekani was also given a free hand by Singh
to recruit good talent and form his core team. Nilekani initiated
(c)
the Aadhaar project by launching a pilot project in Karnataka, in

October 2010. The success of the pilot project prompted the
UIDAI to roll out the Aadhaar project in other states of India.
Since the initiation of the Aadhaar, Nilekani received opposition

from several quarters - mainly from cabinet colleagues,
Contd…
236 bureaucrats, policy experts, activists, and a few state
CE
Notes governments. The Finance Ministry of India opposed that the
Aadhaar would result in duplication of expenditure since the
___________________
National Population Register (NPR) led by the Home Ministry
___________________ was also responsible for making a comprehensive identity
___________________ database. The Home Ministry questioned the security of
biometrics and expressed concerns over how the confidential data
___________________
would be protected. The Planning Commission said that the
___________________ UIDAI structure was against government procedures. On the
positive side, some policy makers felt that Singh's decision to
___________________
recruit Nilekani proved to be appropriate since Nilekani had
-C
___________________ retained immense goodwill amongst the stakeholders involved.
___________________ Moreover, the autonomy given to Nilekani by Singh led him to
prove the viability of the project.
___________________
The divided views over the Aadhaar project raised doubts
___________________
whether the project would be trashed and Nilekani would step
down from the post of the Chairman of the UIDAI. The debate
over duplication of data and security concerns raised by the Home
ES
Ministry came to an end after Singh intervened. In January 2012,
Singh in a meeting with Planning Commission Chairman, Montek
Singh Ahluwalia (Ahluwalia), Home Minister, P Chidambaram,
and Nilekani concluded that the Aadhaar would be given an
extended mandate of collecting biometric data of another 400
million residents in India. While the UIDAI was instructed to
enrol 600 million residents across 16 states and Union Territories,
the remaining 600 million residents would be recorded by the
Registrar General as part of the NPR. The NPR and the UIDAI
would then share the biometric data and de-duplicate the data to
UP
form a comprehensive biometric database. Nilekani's performance

in successfully steering this challenging project was being keenly
watched as it was one of the rare instances where the
Government had entrusted a project of this magnitude to a
corporate leader. Having achieved the initial breakthrough and
scored early successes it was to be seen how he would overcome
the new challenges and scale up the project.
Questions:
1. Analyze the issues highlighted in this case.
2. In what ways will proper project management help in proper

(c)
implementation of this project?

Source:http://www.icmrindia.org/casestudies/catalogue/Project%20Management/PROM013.htm
Glossary
Glossary
237
CE
Notes
___________________
“S” curve: A type of curve that shows the growth of a variable in ___________________
terms of another variable, often expressed as units of time.
___________________
Bell Curve: Symmetrical bell shaped curve traced by normal
___________________
distribution.
___________________
Bid Evaluation: After the submission deadline, the process of
___________________
opening, examining, and evaluating bids to determine the bidders’
-C
responsibility, responsiveness, and other factors associated with ___________________
selection of a bid for contract award. ___________________
Capital Cost: One-time setup cost of a plant or project, after ___________________
which there will only be recurring operational or running costs.
___________________
Chief Executive Officer: The corporate executive responsible for
the operations of the firm; reports to a Board of Directors; may
ES
appoint other managers (including a president).
Chief Financial Officer: The corporate executive having
financial authority to make appropriations and authorize
expenditures for a firm.
Communication Channel: A medium through which a message
is transmitted to its intended audience, such as print media or
broadcast (electronic) media.
UP
Construction Cost: Expense incurred by a contractor for labor,

material, equipment, financing, services, utilities, etc. plus
overheads and contractor’s profit.
Contract: A contract is a written or spoken agreement, esp. one
concerning employment, sales, or tenancy that is intended to be
enforceable by law.
efficiently managing contract creation, execution, and analysis for
the purpose of maximizing financial and operational performance
and minimizing risk.
(c)
Contract Management Software: It can be used to manage the

contract life-cycle, from identification of a need, through
negotiation, agreement, monitoring, and close-out.
238
Contract Negotiation: It is any discussion, either in person or
CE
Notes
through electronic means, that has as its primary goal to come to a
___________________
written agreement concerning a business matter.
___________________
Contract Negotiations: It involves determining whether all
___________________ parties have realistic objectives, forming high calibre negotiating
___________________ teams, defining each partner’s contributions and rewards as well
as protect any proprietary information, addressing termination
___________________
clauses, penalties for poor performance.
___________________
-C
___________________
___________________ guaranteed and when it expires.
___________________ Corporate Governance: It guarantees that an enterprise is
___________________ directed and controlled in a responsible, professional, and
transparent manner with the purpose of safeguarding its long-
term success.
ES
Crashing: Crashing of a network is to find out means to complete
the project at an earlier time schedule than planned, or reworked
time while updating.
Critical Path Method: Network analysis technique used in
complex project plans with a large number of activities. CPM
diagrams: (1) all activities, (2) time required for their completion,
and (3) how each activity is related to the previous and next
activity.
UP
Customer Relationship Management (CRM): It is an

information industry term for methodologies, software, and usually
Internet capabilities that help an enterprise manage customer
relationships in an organized way.
Decision Making: The thought process of selecting a logical
choice from the available options.
Electronic Contract Systems: They deal with the lifecycle
automation and management of contract documents from their
establishment to expiry.
Engineering Cost Estimate: Detailed cost estimate for a project,

(c)
computed by estimating the cost of every activity in a work

breakdown structure, summing these estimates, and adding
appropriate overheads.
Glossary
239
Engineering Plan: The engineering plan prepared by the project
CE
Notes
engineering manager expands the project plan in areas relating to
engineering. ___________________
Enterprise Content Management: Enterprise Content ___________________
Management (ECM) is the strategies, methods and tools used to ___________________

capture, manage, store, preserve, and deliver content and
___________________
documents related to organizational processes.
___________________
Enterprise Resource Planning (ERP): Accounting oriented,
___________________
relational database based, multi-module but integrated, software system
-C
for identifying and planning the resource needs of an enterprise. ___________________
Enterprise Risk: A term that encompasses all major risks faced ___________________
by a business, including pure risk, speculative risk, strategic risk, ___________________

operational risk and financial risk. ___________________
Feedstock: Raw material to supply or fuel a machine or industrial
process.
ES
Fixed Capital: Capital employed in assets of durable nature for
repeated use over a long period. It is also called fixed investment.
Implied Contract: It is an agreement which is not reduced to

writing but is created, under the common law, on the basis of the
behavior of the parties which suggests that they are acting under
an agreement.
Improvement: It is a change or addition by which a thing is
UP
improved.
Knowledge Management (KM): It comprises a range of
strategies and practices used in an organization to identify, create,
represent, distribute, and enable adoption of insights and
experiences.
Leadership: In its essence, leadership in an organizational role
involves (1) establishing a clear vision, (2) sharing that vision with
others so that they will follow willingly, (3) providing the
information, knowledge, and methods to realize that vision, and
(4) coordinating and balancing the conflicting interests of all
(c)
members or stakeholders.
Man Hour: Unit of work that represents the productive effort of
one person in one hour. Also called labor hour.
Management Styles: They are characteristic ways of making
decisions and relating to subordinates.
240
Manpower Forecasting: The prediction of future levels of
CE
Notes
demand for, and supply of, workers and skills at organizational,
___________________
regional, or national level.
___________________
Negotiating: Negotiating is all about reaching consensus between
___________________ two parties, and it assumes that both sides have power and can
___________________ move towards agreement.
___________________ Negotiation Syles: It vary with the person, their beliefs and
skills, as well as the general context in which they occur. Here are
___________________
a number of different styles considered from different viewpoints.
-C
___________________
Operating Cost: Cost per unit of a product or service, or the
___________________
annual cost incurred on a continuous process. Operating costs do
___________________
not include capital outlays or the costs incurred in design and
___________________ implementation phases of a new process.
Optimum: The most favorable conditions or level for growth,

reproduction, or success.
ES
Overtime: It is time in addition to what is normal, esp. time
worked beyond one's scheduled working hours.
Procurement: The process of obtaining goods and services from
preparation and processing of a requisition through to receipt and
approval of the invoice for payment. It commonly involves: (1)
purchase planning, (2) standards determination, (3) specifications
development, (4) supplier research and selection, (5) value
UP
analysis, (6) financing, (7) price negotiation, (8) making the

purchase, (9) supply contract administration, (10) inventory control
and stores, and (11) disposals and other related functions.
Procurement Cycle: Series of steps that must take place to

supply a production line or to replenish stock in a distribution
center. Identifying the items that must be procured and
determining the necessary quantities is the first step. This
information is used to generate a requisition which is sent to the
purchasing department. The assigned buyer requests bids and
awards the purchase order to a vendor. When the ordered items
(c)
arrive, they are entered into the inventory system. The parameters
for a procurement cycle may be set by a known production schedule
or vary based on consumer demand or other factors.
Procurement Plan: The procurement plan establishes the
procurement philosophy for the project.
Glossary
241
Program Evaluation and Review Technique (PERT): Project
CE
Notes
management technique that shows the time taken by each
component of a project, and the total time required for its ___________________
completion.
___________________
Project Cost Estimation: An approximation of the probable cost
___________________
of a product, program, or project, computed on the basis of
available information. ___________________
Project Execution: The third phase of the project management ___________________

process, in which the plans created in the prior phases (project ___________________
initiation and planning) are put into action.
-C
___________________
Project Management: The body of knowledge concerned with
___________________
principles, techniques, and tools used in planning, control,
monitoring, and review of projects. ___________________
Project Plan: Each Project Plan component is essentially a work ___________________
product resulting from sub-tasks in the Make Plan Project

Management task, but can be revised during other project
ES
management activities. It is important to document all
parameters that will have an impact on the project, its planning
and execution.
Project Procurement: This is the methods adopted by clients in
acquiring a building project.
taking on a particular task. A project risk can be internal to the
UP
business, it can involve external events or it can stem from any

other circumstances that can hamper the project’s overall success
and result in loss or embarrassment to the firm undertaking it.
Project Scheduling is the discipline of organizing and time-
phasing the activities required to complete the objectives of an
effort.
Regulated: Control or supervise (something, esp. a company or
business activity) by means of rules and regulations.
Revenue: The income generated from sale of goods or services, or
any other use of capital or assets, associated with the main
(c)
operations of an organization before any costs or expenses are

deducted. Revenue is shown usually as the top item in an income
(profit and loss) statement from which all charges, costs, and
expenses are subtracted to arrive at net income.
242
Risk: A probability or threat of a damage, injury, liability, loss, or
CE
Notes
other negative occurrence that is caused by external or internal
___________________ vulnerabilities, and that may be neutralized through preemptive
___________________ action.
___________________ Sensitivity Analysis: Simulation analysis in which key
___________________ quantitative assumptions and computations (underlying a decision,
estimate, or project) are changed systematically to assess their
___________________
effect on the final outcome. Employed commonly in evaluation of
___________________
the overall risk or in identification of critical factors, it attempts to
-C
___________________ predict alternative outcomes of the same course of action. In
___________________ comparison, contingency analysis uses qualitative assumptions to
paint different scenarios. It is also called what-if analysis.
___________________
Strategic Advantages: It may relate to technology, products,
___________________
your operations, your capabilities and/or your people that lead to
the potential for a sustainable competitive advantage.
ES
Vendor Selection: The process by which an organization
evaluates and decides with which suppliers they will conduct
business.
Verbal Contract: It is an agreement that is oral and not written
down. It remains legally enforceable by the parties who have
agreed to it.
Working Capital: The cash available for day-to-day operations of
an organization. Strictly speaking, one borrows cash (and not
UP
working capital) to be able to buy assets or to pay for obligations.

Also called current capital.
(c)

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UNIT 20: Case Study

Dr S R Das Dr S P S Narang Dr Sanket Goyal

SLM Development Team

Mr Kapil Mehra Mr A N Sinha

Course Code: MBCQ-724D

Course Name: Project Management & Contract Administration

Version: July 2013

© MPower Applied Learning Enterprise

Unit 1 Project Feasibility – Econometric Model ....................................................................... 3

Unit 6 Project Execution – Developing a Project Schedule.................................................... 59

Unit 11 Project Costs Control – II ........................................................................................... 117

Unit 16 Contract Elements – Contract Formation................................................................. 169

Unit 17 Key Business Drivers for Contract Management ..................................................... 177

Unit 22 Justifying Contract Management .............................................................................. 215

Unit 23 Five Myths of Contract Management........................................................................ 219

Unit 24 Understanding and Improving the Contracting Process.......................................... 229

Unit 25 Case Study .................................................................................................................. 235

Glossary ............................................................................................................................................ 237

___________________ UNIT 4: INITIATING A PROJECT – II

z Types of Project Estimates

Project Feasibility – Econometric

\ Operating Costs ___________________

can be developed on a PC is described here.

Developing a PC Econometric Model

important number for two reasons: first, it is required "upfront".

___________________ Table 1.1: Major Factors Affecting Project Profitability

15. Taxation Rates Poor Major

The need to maintain a high ROI to attract investors explains why

Plant, Refrigeration, Water treatment &

Tools, Consumables, Testing

6. Product Inventories 1–3

7. Products Account Receivables 1–2

9. Freight Payable 0.5 – 1

A major component of working capital is the cost of maintaining

on completion of the plant life.

recognized by the fact that a major reason for considering a new

Table 1.4: Check List of Items for Operating Cost Estimates 7

Normally, an investor or developer will want to make sure that

price must be competitive initially and as far as can be seen,

8 the capacity to pay. Most astute developers will attempt to

possible to hedge against adverse conditions by buying forward or

Nothing can be done about future government influences. The best

The Econometric Model ___________________

Columns are identified with their headings and year numbers.

average inflation rate is taken at mid-year point, hence N/2.

10 Table 1.5: The Econometric Model

working capital is needed each year to allow for escalation and

z Row 9 – Cost of Feed, $M: This value is the barrel

Plant labour is subject to escalation. At lower plant operating

to an increase of 5% per year by contract. The price in year N 13

z Row 18 – Product A Extra Price, $/BBL: Any product ___________________

25,000) × extra price. ___________________

z Row 20 – Product B Price, $/BBL: It is assumed that product

90% of the purchase price. The revenue will be 50,000 × (100-

___________________ z Row 29 – Discounted Annual Profit, $M: This converts the

z Row 31 – Loan/Interest Repayment, $M: This shows the

z Row 37 – Discounted Annual ROI, %: In the loan alternative,

Analysing the Financial Picture

Now that the econometric model is complete, it is possible to

Modifying the Variables

___________________ z Case E. Market for product B is less buoyant than anticipated,

Check Your Progress

1. The first step in preparing an econometric model is to