PG 06 Capital PR

SHELL RESTRICTED
Project Management Discipline Guide
Capital Project Cost Management &

Management of Change
Project Guide 06
Document History
Author/
Date Issue Reason for change Reviewer Approver
Contributor
Aligned with ORM/ORP &
06 May 09 A P. Bowman N. Wright H. Mes
issued for cross-business use.
Update to align with the
21 Dec 09 B Project Management P. Bowman N. Wright H. Mes
Standardisation Program
The approved copy of this document is held in iPMS by the PTP-G group. All paper copies
are uncontrolled. Not subject to EAR-No transfer of Technology.
Project Guide 06 – Capital Project Cost Management
Table of Contents
1 Introduction 3
1.1 Objective 4
1.2 Terminology 5
1.3 Scope and Deviation Process 5
2 Application 6
3 Cost Management & Management of Change Organisation & Plan 7
3.1 Project Cost & Schedule Management Plan 7
3.2 Project Cost & Schedule Management Organisation 7
3.3 Project Cost and Management of Change tools 8
3.4 Project Cost & Schedule Management Review 9
4 Cost Mgt & Mgt of Change Activities per Project Phase 10
4.1 In the Identify & Assess Phase 10
4.2 In the Select Phase 10
4.3 In the Define Phase (BDP and BDEP) 11
4.4 In the Execute Phase 11
4.5 For Close Out Reporting 13
5 Cost Management and Management of Change 14
5.1 Degree of Cost Management 14
5.2 Project Cost & Schedule Management Plan (PCSMP) 15
5.3 WBS – Work Breakdown Structures 15
5.4 Cost Breakdown Structure (CBS) 17
5.5 Cost, Time and Resource Sheet (CTR) Development and Management 17
5.6 Budget Management 20
5.7 Management of Change 21
5.8 Commitments 23
5.9 Cost Risk Analysis 24
5.10 Contingency Management 25
5.11 Value of Work Done 26
5.12 Earned Value Management 28
5.13 Cost and Cash Forecasting 29
5.14 Cost Management of Contracts, Incentives & Claims 32
5.15 Cost Recovery 33
5.16 Revenue Costs and Capital Expenditure Recording 33
5.17 Payment Control and Invoice Processing 33
5.18 Foreign Exchange 37
5.19 Cost Allocations 37
5.20 Cost Reporting 37
5.21 Project Completion 38
5.22 Cost Data Collection and Feedback 38
6 References 40
6.1 Acronyms and Glossary of Terms 40
6.2 Project Standards and Guides: 40
6.3 Project Cost & Schedule Management Procedures 40
6.4 Other References 41
Appendix A. Example CTR sheet. 42
Appendix B. Typical Capital Project Cost Report OC1 43
Appendix C. Typical Management of Change Document 44
Appendix D. Typical Project Progress and Cost Report 45
Appendix E. Typical Project VOWD & Expenditure Curve 46
Appendix F. Total Project Overall Finance Picture 47
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1 Introduction
Project Guide 06 Capital Project Cost Management is one of a series of guidance documents
that form part of the Opportunity Realisation Process (ORP). Application of the ORP is
mandatory and provides for a standardised Governance, Assurance and Delivery process for
capital projects undertaken by Shell Group Companies, Affiliates and Joint Ventures where
Shell takes the lead project management role. The Project Standards (PS), Project Guides
(PG) and Value Improvement Practices (VIP) are an integral part of the project assurance
and delivery processes.
This PG supports Project Standard PS6 in providing detailed guidance on the application of
the mandated Project Cost Management processes, activities and deliverables.
This PG also acts as a handbook for Project Management, Project Services and the Project
Teams on how and when to execute the cost management activities, and also specifies the
contents and level of detail for the deliverables. It should be used through appropriate phases
of the project development to provide guidance for performing cost management. In addition,
it will assist in creating an awareness of relevant aspects of the project development and
implementation process and in transferring knowledge on the subject to other parties, such
as project sponsors, stakeholders, contractors, etc.
The application of professional project cost management processes and toolkits is essential
to the overall success of any organisation that manages a project or a series of projects
through all its realisation phases.
This guide should be seen as the beginning of understanding cost management and the
management of change processes but is not intended to be a full cost management manual.
This guide assists in creating an awareness of relevant aspects of the project controls
processes and in transferring knowledge on the subject to other parties, such as project
sponsors, stakeholders, contractors, etc.
The strong relationship between Cost Management, Management Of Change, Capital Project
Scheduling (PG04), Capital Project Contracting & Procurement (PG05) must be recognised
to deliver high performing projects. Therefore PG06 must not be read in isolation. This
simplistic interface diagram shows some of the key touch points between the functions after
the FID.
Group Investment Project P50 Progress
Work Remaining
Proposal - Budget and Target Updated
Performed work
Record Schedule Schedule
Degree of
control Cash
Cost Call
WBS/CBS/OBS Commitment VOWD Cost to
Forecast
MoAuthorities Records Records Complete
Contract Records Business
Strategy Plan
Commodity
Contract Contract Invoice, Costs by
Design Placement Service Entry CBS
Project and Contract Change Management Certain and

Agreed Changes, Pending Changes, Instructions, Emails & Claims Likely Risks
External Contingency
Influences Management
Issues, Trends and Risk Management
Project Reporting (P&T, PE&S, Gov, Venture Partner, Project Manager, Finance, etc)
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The interface between Capital Project Cost Estimating (PG03) and cost management in this
guide is threefold:
 The project has to be sanctioned on an initial baseline cost estimate converted into the
Work Breakdown Structure and CTR’s for cost control.
 The output of the commodity costs from the cost breakdown coding are the foundation for
future estimating
 The Management of Change requires Total Installed Cost (TIC) cost estimating to ensure
the benefits of the change are fully understood prior to approval
The goal of creating the proper project control criteria is to:
 Assist in executing a project in the most efficient and economical way.
 To inform management at any point in time during the project about the actual status of
the project, both in cost and time, so that, if required, corrective actions can pro-actively
be prepared and ultimately exercised in a timely fashion.
Project Cost Management is not just about juggling facts, figures and numbers against
statistical data. It requires professional and skilful observation, judgment and interpretation,
based on experience in the office and in the field. Consequently, project cost engineering
practitioners need to be educated and trained accordingly.
It is imperative to recognise that simply reporting cost information is not controlling.
Controlling includes the setting up, authorising, monitoring, forecasting and reporting, as a
total package. Financial control (not covered in this PG) is different in that it focuses on
payments and accounting controls, whereas project control concerns progress measurement
and cost and schedule forecasting.
All project control systems and criteria should be set up and agreed in the early stages of the
project, which is in Select and Define. In Execution it will become more difficult to change
without causing a major impact on the outcome of the project.
1.1 Objective
Project Cost Management and Management Of Change control processes are key elements
of Project Management with the primary objectives of:
 Setting of Work Breakdown Structures and underlying Cost, Time and Resource sheets
(CTR’s) that meet the degree of cost control required by the project services manager
for the assets to be developed;
 Setting of the Cost Breakdown Structures for cost analysis of commodities used in the
assets;
 Setting of project cost targets, the monitoring and reporting against these targets;
 Maintaining transparency of the compiled commitments, VOWD and cost forecasts;
 Managing project changes and their impact on the cost forecasts of the project;
 Strictly controlling cost through pro-active measures;
 Ensuring commitment, expenditure and invoice values are only authorised within the
approved project Manual of Authorities;
 Breaking down of the final capital value into fixed assets;
 Closing out the project and providing cost feedback by commodity into the project
estimating database for future estimating purposes.
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1.2 Terminology
The terminology used in project controls is key to understanding the information being
presented on a project.
 COST MANAGEMENT
The management of cost related activities achieved by collecting, analyzing, evaluating, and
reporting cost information used for budgeting, estimating, forecasting, and monitoring costs.
These cost activities are performed on a baseline of scope, cost, schedule and quality.
 MANAGEMENT OF CHANGE
Change control is the process that ensures that all changes made to a project’s baselined
scope, cost, schedule, and quality objectives or agreed benefits are identified, evaluated,
approved, rejected or deferred
More expansive terminology
The standardised Shell terminology, drawing from the most common industry definitions,
used in the Cost Management and Management of Change processes is fully documented in
the Glossary of Terms supporting the project control procedures. The glossary URL is
included in Section 6 References.
1.3 Scope and Deviation Process
The scope of the Project Controls Guide covers the management of costs and project
change during all phases of a project.
The Project Manager or Business Opportunity Manager should, in consultation with the
Project Services Manager, the Contract Manager, Asset Development Manager and the
Operating Company (location manager) and Project Finance Manager, define the degree of
control required during the select, define and execute phases of the project as early in the
lifetime of a project as possible. This degree of control will be documented in the Project Cost
& Schedule Management Plan for the project, a document that gets updated as the project
moves through each phase and is a subset of the approved Project Execution Plan
supporting the Group Investment Proposal (GIP).
Deviation from this Guide
This document is a guide and therefore not mandatory but highly recommended for all
projects whether mega, large or small. However the Project Standards and the short
standard statements included in Section 2 of the project controls procedures are mandatory
for projects over $ US 100 million. This guide aids the project team deliver the mandatory
requirements.
Any deviations from Project Standard 06 – Capital Project Cost & Schedule Management will
need approval by the relevant authority level, as defined in the Quality Management Systems
of the relevant project or business.
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2 Application
The activities presented in this guide are applicable to all capital projects. It covers
Greenfield, Brownfield, Revamp, New Venture, On-shore and Offshore projects. The
principles and methodology apply equally to small, simple projects as well as to large,
complex projects. The application of the Project Guide needs to be adapted to suit the risk
profile of the project, the degree of scope and cost control as determined by its size,
complexity, location and business environment.
The means of achieving fit-for-purpose application of the project Standard is through an open
discussion with the Project management team and project engineers guided by the Project
Services Manager. At this point, the risks and sensitivities of the project are reviewed and
appropriate application of the cost management and management of change processes
agreed. The outcome of this discussion is documented in the Project Cost & Schedule
Management Plan (PCSMP). The project team prepares the draft, fit-for-purpose PCSMP,
which is reviewed and updated in open discussion and approved by the relevant authority
level.
Issues and factors taken into account in this discussion include:
 Degree of complexity and novelty of the project
 Maturity of the location project delivery processes
 Experience, competence and availability of resources
 Level of stability and supportive social and political context
 Any high risk issue (e.g. hazardous process, new technology, social unrest or
environmentally sensitive location)
 Specific scope issues (e.g. Brownfield/Greenfield, onshore/offshore)
 Joint venture issues with different assurance requirements
 Projects where project stages are combined.
 Schedule-driven projects
 Level of Turnaround/Shutdown Integration
 Size of project
 Project Implementation Model
 Business Environment
 Commercial and Economic Environment, Compliance with local regulations
 Lessons Learned from previous projects
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3 Cost Management & Management of Change Organisation & Plan

The organisation of the project control section in a project team will depend on the degree of
control required, the contracting strategy and the size/complexity of the project. Often, for
larger projects, the cost engineering team is responsible for the control of costs, forms part of
the larger project services department, which is accountable for the management of costs,
schedule, administration, information management, permits, quality, and insurance matters
on the project. The project services manager reports to the project manager. For smaller
projects, the project control engineer may report directly to the Project Manager, either as a
direct member of the project team or as a part-time member, utilised from a matrix
organisation or another project.
Throughout the various phases of the project a description of how the project will be
controlled should be included in the relevant sections of the Project Cost & Schedule
Management Plan. Amongst others the control strategy with regard to cost control, the
financial authority levels, the project change management procedure and the philosophy of
use of allowances and contingencies should be established.
The Project Cost & Schedule Management Plan should be subject to review by all relevant
parties, which could include a peer review (see Section 3.4), in order to identify the strengths,
weaknesses, opportunities and risks in the systems and procedures of cost control.
3.1 Project Cost & Schedule Management Plan

In order to achieve uniformity across projects, the contents of every Project Cost & Schedule
Management Plan should be standardised to the maximum possible extent. At the same time
sufficient room and flexibility should be given in the compiling of the Project Cost & Schedule
Management Plan, as every project and project setting is unique.
The Project Cost & Schedule Management Plan is the foundation on which the client’s
degree of control is set and the basis for the Contractor’s cost and schedule control
processes and systems are aligned. This foundation will directly influence the contracting
strategy.
For the contents of the Project Cost & Schedule Management Plan see Section 5.2.
3.2 Project Cost & Schedule Management Organisation

The basic tasks of the Project Cost Management team within the project are to establish,
assure, analyse, forecast, report and communicate costs against realistic targets and to
provide the project team with the tools to assist in meeting these targets, i.e. amongst others
the required analyses of issues, risks and trends. A pro-active approach needs to be followed
and demonstrated, in which timely solutions of potential problems are offered.
The accountabilities and responsibilities of the project cost control are given below and these
should be reflected in the appropriate job descriptions and adequate staffing levels to meet
these obligations included in the Project Staffing plan:
 Setting up, implementing and keeping up to date of the Project Cost & Schedule
Management Plan
 Setting up the controls requirements in the contracts
 Setting the recording, monitoring and reporting through the cost control systems
 Ensuring that the Contractor operates in compliance with Shell’s processes & systems
 Ensuring that commitments are within budgets and forecasts
 Initiating, coordinating and administrating of internal audits of Contractor’s financial,
commercial and scheduling performance on a regular basis and where necessary liaising
with the external auditors
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 Reporting on a regular basis to project management and liaising where required in this
context with the other disciplines in the project team and in Company’s organisation
 Managing the interface with Company organisation, the Business and Joint Venture
partners as far as costs, insurance, taxation, custom duties, legal, etc. are concerned
 Setting up and managing systems to control the Owners costs, the project contingencies
and if applicable, the project’s incentive scheme
 Carrying out time and cost risk analyses if and when required
 Review the cost baselines (benchmarks) on an ongoing basis
 Coordinating all cost matters with the business, such as capital investment, pre-
operational costs, fees, expenditure phasing, currencies, etc.
 Ensuring, if applicable, that the accounting systems between Company’s joint venture
partners enable proper control of the cost sharing between the partners
 Verifying Contractor’s invoices
 Participating in reviewing scope changes, extra work authorisations, change orders and
the like; carrying out estimates in this context if and when required
 Developing the Estimate at Completion at monthly intervals during the project
 Participating in identifying, recording and resolving financial/contractual disputes and
matters relating to insurance in liaison with the loss adjustor
 Preparing and managing the asset register for the project
 Developing and implementing cost management procedures for operation by the project
team
 Providing the project team timely with adequate cost information and assist technical
project team staff on matters related to cost issues
 Coordinating all manpower planning activities of the project team and for the organisation
of the Contractor, from a costing point of view
 Being the focal point for the preparation and issuing of the monthly progress report
 Participating in the regular cost and steering committee meetings
 Maintaining such cost records as will be required for the compilation of the final project
close out report
 Executing of financial controls on the Contract invoices, contracts and invoices from
vendors, subcontractors and erection contractors, disbursement and financial
reconciliation of the joint venture partners accounts
 Focal point for providing project feedback into the project cost and schedule databases
 Holding the secretary-ship of the project’s Contract Board and Change Control committee
The job descriptions of both project services manager and project control engineers should
be compiled in line with the above. For smaller projects, some of the above activities will not
be required and the job description should be tailored to suit.
3.3 Project Cost and Management of Change tools

In general the computer software packages and systems used for the cost control of a project
or across a series of projects should have the functionality and the capacity to perform the
calculations and produce the reports as per the requirements of this project guide.
From the Owner’s point of view it is advisable to apply uniformity and to use the same global
project control systems and Cost Breakdown Structure in particular. This will enable a
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worldwide benchmarking and the comparison of commodity cost data from an up-to-date
central database. This will create a cost efficient starting point for all cost estimating and
contractual negotiations. For projects on Brownfield existing sites the existing local systems
and “fit for purpose” tools can be used.
The project team and the running organisation of the Company should ensure that
synchronisation of systems should take place at the outset of the project.
Owner and Contractor(s) alignment should be sought as far as control software is concerned.
It is not recommended to force Contractor into using Company owned systems, as this will
unavoidably lead to duplication of work and inefficiency. As stated earlier in this guide, it is
much more efficient to let Contractor make use of his standard systems and to agree a
simple translation key between Contractor’s systems and Owner’s requirements. If, for a
specific purpose, the Contractor needs to apply an Owner’s system, this should be made
clear in the Invitation to Bid of the project.
The only non-negotiable Owner’s requirement should be the application by Contractor of the
Company’s work and cost breakdown structures.
Cost Management Tools currently available within Shell globally are:
 Dassian DP010 – SAP ERP add-in cost management tool for all projects – (under testing)
 PEMS – Developed jointly by Shell and Rider Hunt International (RHI) and the
recommended tool of choice for large projects (>US$ 100 million)
 CCRT – Developed by Houston for EP and recommended for use on smaller and
medium sized projects
 Spreadsheets – For small projects (<US$10 million) when this is more efficient than
setting up one of the above systems.
Change Control Tools currently available in Shell are:
 Access database with no workflow (set-up for Kashagan project)
 Various document/spreadsheet systems
 Dassian DP010 – SAP ERP add-in Management of Change tool – (under testing)
3.4 Project Cost & Schedule Management Review

As part of the assurance process the Project Manager in combination with the Quality
Assurance Manager will set a schedule for process reviews on the project. For project
controls the reviews should assess compliance with the mandatory requirements of the
Project Standard 06 and the mandatory elements in Section 2 of the globally approved
generic project procedures stored in the Project Services - Cost and Planning Toolbox. See
references.
The objective of the reviews is not only compliance but also to assess the efficiency of the
processes being performed, the transparency of the data and offer guidance on
improvements.
The focus of the reviews should be compliance with each of the activities in Section 5.
However special focus should be given on the degree of control set in the Project Cost &
Schedule Management Plan, WBS, CBS, documentation of the cost baseline in CTRs,
Management of Change and Cost Forecasting, which traditionally have needed additional
attention.
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4 Cost Mgt & Mgt of Change Activities per Project Phase
In line with the Opportunity Realisation Process (ORP) a project will be developed through
the following six Phases: -
 Identify
 Assess
 Select
 Define (BDP and BDEP sub-phases)
 Execute
 Operate
followed by Decommissioning & Abandonment
This document does not address the cost management during operations and abandonment,
however the principles still apply.
The following sections illustrate what the project must deliver for each phase to commence
the next.
Each phase has a gate review that must be passed to commence the next phase, see the
Project Guide on Assurance.
Project Standard 06 Project Cost & Schedule Management defines the mandatory Cost
Management and Management Of Change activities and deliverables for each Phase
4.1 In the Identify & Assess Phase
Throughout the Identify and Assess phase of the project the main objective should be to
develop the project feasibility of a variety of development options to support the requirements
of the deliverables for the Order of Magnitude, Study and Budget estimates.
Cost management will be the predominantly Shell manpower (time-writing) and a few small
study contracts.
As there is no baseline scope Change management is not required on the projects but can
be an issue on the number of feasible options to be investigated in this phase. The team is
looking for feasible developments that will require further definition in the next phase.
It is recommended that during the last part of the I&A phase the scope of the select phase
and the costs of the Shell and contractor team to deliver the selected option will be
developed into a CTR catalogue.
4.2 In the Select Phase
During the Select Phase of the project close attention should be paid to the following:
 Configuration of scope for Order of Magnitude and Study estimates
 Compilation of log of development/growth/changes in scope
 Sensitivity calculations regarding project factors, exchange rates, sourcing countries, etc.
 Delivery of Order of Magnitude and Study estimates, including cost risk analyses where
appropriate
 Initial setup of the WBS for the future phases of the work
 Forecast and report expenditure in this phase
 Cost control in Select set up systems, monitor and report for estimates and expenditures
 Develop the CTR catalogue for the Define phase and draft CTRs for the execution of the
project defining the scope, cost, schedule activities and delivery ownership
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 Integrated Level 1/2 schedule for the Define and Execution phases of the project, which
align with the costs included in the CTRs.
 Cost risk assessment using the TECOP methodology
 Monitor the costs of the team using time-writing to complete the deliverables on each
CTR .
4.3 In the Define Phase (BDP and BDEP)

During the project definition in the Define phase of the project close attention should be paid
to the following:
 Final configuration of scope to allow preparation of estimate to support the Investment
Proposal.
 Development of the CTR catalogue for the Execute phase supporting the WBS structure
 Management Of Change in scope to the project baseline and to the BDEP contractor
scope
 Sensitivity calculation regarding exchange rates, etc
 Detailed project/location factor study of local situation and sourcing countries
 Continued cost control in the BDEP phase including re-forecasting expenditure
 Delivery of Investment Proposal Estimate including 50/50 contingency based on a
quantitative cost risk analysis
 Issuing the detail breakdown and scope required for the commercial bid. Should be in line
with the CTR catalogue structure
 Reaching agreement with project or Operating Company’s finance department on the
configuration of cost management systems (e.g. ERP and the cost management tool) to
be used for cost management and developing interfaces between these systems and the
Contractor’s systems. (Note that the finance department is responsible for financial
issues such as payments, financing, cash calls, currency management etc. Financial
control should not be confused with cost control.).
 Analysis of Contractor’s estimates and/or bids and compare with owner’s estimate
 Participation in the negotiation of the contract prices
 Issuing the project Cost & Schedule Management requirements for the Contractor’s
Invitation To Tender
 Agreement with the Contractor regarding all project Cost & Schedule Management
systems, WBS, CBS, reports and data feedback during Execute for Owner’s database(s)
 In this phase the detailed expenditure curves should be issued in the “reporting currency
and the sourcing currencies” which are applicable to the project.
 Cost management and Management of Change systems and procedures that shall be set
up and instituted at this point in time for the implementation phase of the project:
 Confirming the Work Breakdown Structures for the Execute phase
 Updating the Project Cost & Schedule Management Plan for Execute
 Development of project calendars for the project and contractor’s month end close and
the information/meeting interfaces with the NOC or Co-Venturers
 Agreeing the responsibility split between the project team and the finance department of
the project or Operating Company for the duration of the implementation
 Agreeing with project or Operating Company’s finance department the procedures to be
used for amongst others bidding, financial authorities, contract committee, power of
attorney, payment of invoices, etc.
4.4 In the Execute Phase
During the Execute phase, Project Cost & Schedule Management should be executed as per
the systems as set up and agreed during the Define phase of the project and documented in
the Project Cost & Schedule Management Plan.
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It should be recognised and accepted that, during the Execute phase, the Managing
Contractor (where one exists) controls up to 75 % of the total project activities for and on
behalf of the Owner (Company).
It is recommended that the Owner does not demand a change in the control system of the
Contractor, as this will lead to an increase in cost and a decrease in quality. However, the
Contractor should be requested to fully conform to the Work Breakdown Structure, Cost
Breakdown Structure and any overhead allocation keys. The interface between the computer
systems of Contractor and Owner should be designed in such a way that Contractor’s cost
and schedule data can automatically be transferred in to the Owner’s control systems without
undue and unnecessary administrative activities.
It is imperative the Owner shall understand the differences in the definition between terms
used by the contractor and those of the owner so differences in reporting can be assessed
and understood.
Additionally in this phase there will be a number of issues on which both Contractor and
Owner should focus:
 Check and analyse Contractor’s data and react contractually when required
 Check and control regularly whether Contractor is following all the procedures and
obligations as agreed in the Contract.
 Control the capital and pre-operational scope and expenditure
 Execute the Project Cost & Schedule Management Plan
Often the pre-operational expenditure should be controlled separately from the capital
expenditure, i.e. by means of a separate Work Breakdown Structure.
It should also be realized that the finance department of the (future) operating company
should be responsible to ensure all project payments conform to the procedures of the
running/future organisation. For that reason the project team in general and the Project
Services Manager and Cost Engineer should work in close co-operation with the Company’s
finance department. Prior to project approval there should be agreement between the project,
the project services, the contract & procurement engineers and finance department on: -
 Reports to be issued
 Work Breakdown Structure and Cost Breakdown Structure
 Interface between systems and split of responsibilities
 Details of the asset breakdown
 Breakpoint between Capital and Operating Expenditure
 Financial and quality audits and the frequency thereof
 Phasing of expenditure
The above (which is not an exhaustive list) should be agreed and captured in the project
procedures, which comply with the approved standard generic global project procedures, and
will be a reference in the Project Cost & Schedule Management Plan.
In case of smaller projects or a series of small projects, the execution will often be carried out
without a Managing Contractor. However it is recommended that all control processes as
mentioned earlier and detailed out later in this project guide are applied as for a large project.
Project Cost & Schedule Management reports, which should be produced by the project
services team during the Execute phase of a project are, typically:
 Cost and Schedule progress report
 Input for the monthly project progress report in accordance with the global procedure
shall be.
o Detailed analyses of schedule and cost status, including re-forecast and
recommendation by project control section to project manager
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o Cost (i.e. input in the OC1 format, see section 5.20), including S-curves and
status against main contract incentive scheme
o Contracts report
o Commitment report
o Payments report
o Issues, Trends and Change log
o Contingency rundown report
 Monthly phasing report as detailed by project and group number per the Capital Project
Coding System or VOWD and expenditure, including actuals
 Monthly phasing report by currency as detailed by project group number, including
actuals
 Report on difference between original FID and actual spot exchange rates
It should be noted that the phasing reports are of high importance, since cash calls may need
to be arranged on a monthly basis in order to withdraw money from JV partners to pay
committed expenditures. Interest payments can be considerable and hence accurate cash
call forecasts are essential.
4.5 For Close Out Reporting
When the project premises have been met, the project should be financially closed out. The
closing out should conform to the Company’s procedures and the laws of the country in
which the investment has been made.
The main activities that should be carried out in this regard and the reports that should be
produced are:
 Compilation of the financial close out report including all scope and cost data
 Compilation of the Asset Breakdown conforming to the local requirements (e.g. financial,
legal, insurance, etc)
 Cost Data-book – the final feedback of the project’s cost and schedule data into the
central database in accordance with the cost breakdown structure.
 Closing out of all contracts including change orders and outstanding claims
 Novation of open contracts from the project entity to the operating entity
 Collection of all cost and schedule data for the Post Investment Review and Report
 Agreement and Handover of capital funds to complete punch-list work and any post first
hydrocarbon drilling
In this regard reference is made to the Project Guide 12b - Project Close Out Report.
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5 Cost Management and Management of Change

Cost Management during any phase of a project comprises the application of the cost
procedures, the configuration of cost management tools and the training of the team. This will
ensure the monitoring, analysis and reporting of the commitments, the project changes, the
actual project expenditure, the payments and the cost forecasts against the approved project
budget are fit for purpose. The early identification and registration of deviations together with
trend tracking enable project management to control the scope costs of the project. For this
purpose, all project activities should be broken down into controllable elements, details of
which will be explained in the next section.
Regular reporting of the cost forecast based on the accurate Commitments, Value of Work
Done and assessment of the cost of work remaining should detect any potential over or
under expenditure in good time for immediate project management action. Project progress
is continuously monitored, in physical and cost terms. In addition to these primary objectives
of cost control throughout the various phases of a project, it should provide data for:
 Capital expenditure phasing reflecting the anticipated progress of the Value of Work
Done
 Cash flow forecasts, based on the expenditure phasing taking due account of the
payment conditions
 A breakdown of the value of the final fixed assets
 Future estimating and planning purposes
5.1 Degree of Cost Management

Shell’s more recent portfolio of projects has moved the work from the heartland areas of the
Refineries/Plants, Gulf of Mexico and the North Sea to some exciting and less familiar
locations where
 The experience of Shell is limited;
 There is an unsophisticated contracting community;
 There are significant environmental and technical challenges;
 The availability of competent contractors is limited;
 The resource availability & planning capability (Plant turnaround or offshore Hook-up);
 The political landscape is complex;
 The history of commodity costs, inflation and exchange rates shows significant
variation.
As a result of the above issues the Project leadership team, guided by the Project Services
Manager, will need to give strong direction to the project team on the degree of work and
cost control required. This will be documented in the Project Cost & Schedule Management
Plan.
If the Project team are unsure of the capabilities of the contractor the team may wish to
control the work to a lower level of detail to ensure greater transparency of cost and work
performance. This level of control needs to reflected in the WBS, CTR breakdown which then
can be implemented through the type of contract.
The degree of the detail must be at a level that will also allow the desired metrics upon
completion of the project for estimating, cost recovery and benchmarking.
The conundrum of the project leadership team is that for every increase in the degree of
control required, the manpower needed to implement the control increases, however this cost
is small compared to the loss of work or cost control on a project
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During periods of strong competition between contractors their willingness to take on low
margin lump sum contracts means their only way the contractor can make more profit is via
claims for disruption and change. The project team must recognise that the contract has to
give them access to the information to defend against claims, for example impact of a
change on the critical path and total cost of a change including materials and implementation
and the impact on productivity performance, etc.
5.2 Project Cost & Schedule Management Plan (PCSMP)

The PCSMP documents the minimum standards of project controls systems and processes
required and will provide a clear and concise explanation of how cost and schedule project
controls shall be implemented, updated and followed throughout the Execution Phase of a
major project.
The PCSMP will include key references to applicable project procedures, standards and
guidelines and include the following list of topics:
 Project Controls Manpower & Organisation
 Project Controls Risks
 Degree of Cost Control
 Work & Breakdown Structures
 Cost Breakdown Structures
 Cost, Time and Resources (CTR) Catalogue
 Management of Change
 Cost Estimating
 Cost Re-Estimating and Forecasting
 Life Cycle Costing
 Budget Control - Project Budget - Annual Budget
 Planning, Schedule & Progress Management - Development of Schedules - Project
Calendar
 Project Reporting - Daily - Weekly - Monthly
 Probabilistic Risk Analysis
 Cost & Planning Close Out, Data Collection & Lessons Learned
 Project Controls Checklists
 Financial Authorities
 Computer systems to be used including all interfaces between these systems.
For smaller projects PCSMP can form an integral part of PES/PEP
For Cost Management and the Management of Change, the appropriate sections in the
PCSMP will address each of the topics listed in Section 5 of this Project Guide and also
document the Project Services Organisation managing these activities.
The approved generic Project Cost & Schedule Management Plan procedure is listed in
Section 6 References.
5.3 WBS – Work Breakdown Structures

A Work Breakdown Structure (WBS) is a hierarchical subdivision of the project work scope to
be controlled by the project team.
A WBS element is one of the subdivided components, either Hardware or Function, within
the WBS.
A Hardware Item is a physical component of the Project.
A Function is a service, including procurement, carried out to construct or decommission a
Hardware Item.
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Work is the performance of a function on an asset/hardware item e.g. detailed design of a

Utilities Building, installation of Module A., tie-in of Flowline X, etc
The work of a project is divided into manageable units WBSs and CTRs where components
of work, resources and budget can be more effectively managed and controlled.
Shell Project team CTRs will be further detailed into EPCm contractors CTRs and their sub-
contractor’s CTRs for more detailed levels of control. It is imperative that the whole hierarchy
of WBSs and CTRs is sound across the Contractual divisions,
W o r k B r e a k d o w n E x a m p le
H a r d w a r e / A s s e t C o m p o n e n ts
A n a ly s is b y H a r d w a r e
A re a 1 A re a 2 A re a 3 A re a 4
F u n c tio n
D e ta ile d
w o rk w o rk w o rk w o rk
D e s ig n
P ro cu re m e n t w o rk w o rk w o rk w o rk
C o n s tr u c tio n w o rk w o rk w o rk w o rk
A n a ly s is b y F u n c tio n
C o m m is s io n in g w o rk w o rk w o rk w o rk
T h e w o r k s c o p e fo r th e b u d g e t & s c h e d u le
Since nearly every project has a different variety of assets or hardware items it is
impossible to have a standard WBS for a project.
The levels in the WBS hierarchy of a project of a variety of assets/hardware items on a mega
project may be 6 or 7 whereas a small project may have 2 at which the function is applied
which convert the asset into an item of work
Within the ERP system the SAP WBS is erroneous terminology since the structure refers to a
Business financial breakdown by Region and OU and not work.
Underneath the WBS structure the work is further broken down into CTRs. The concept is
the CTR defines the scope, the duration, the resources, the deliverables and the costs for
piece of work and is equivalent to a Network in the ERP system, see the section below on
CTRs.
The linkage of schedule and cost data for the submission of phased costs for Business
planning is vitally important. Therefore a one to one match between individual CTR cost and
the CTR activity in the Level 2 schedule is imperative, otherwise allocations will be needed.
The WBS enables the following:
 Control of the work scope and associated budget;
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 Analysis and reporting by physical hardware or by functional activity;

 Selective and/or hierarchical reporting;
 Aligns with the Cost Time Resource (CTR) Catalogue global procedure to delineate
activity scope, cost and resources;
 Exchange of schedule information for an element of work between systems for cost
phasing.
Project contingency shall be maintained as a separate WBS and should be added to the total
base estimate of the CTR Catalogue to allow for the unknown scope, cost, schedule and
execution risks. Contingency will not be applied to individual CTRs.
The approved generic WBS procedure is listed in Section 6 References.
5.4 Cost Breakdown Structure (CBS)

A CBS identifies all the separate commodities and resources employed in developing an
asset or a group of assets irrespective of which asset or project they are incorporated on.
The CBS is a hierarchical structure of commodities that, through coding and the use of a
relational database, can be applied to line item costs for future collection or analysis.
There is no one Shell approved CBS commodity structure at present, however there is a high
probability that Shell will align with the industry and Norwegian Standard – Standard Cost
Coding System (SCCS) Z-014 which specifies the Code of Resources for both Up and
Downstream projects. See References
Reporting by commodity costs at the various levels of the CBS hierarchy assists in
comparing costs, cost negotiations and benchmarking between projects.
This capability is key for the Category Managers to assess the cost changes of commodities
across regions or projects.
The CBS enables the following:

 Analysis of commodity, material & resource utilisation at various levels;
 Commodity Category Management;
 Market trends of commodities;
 Negotiation strength based on factual comparative data;
 Feedback to commodity based estimating norms.
The approved generic CBS procedure is listed in Section 6 References.
5.5 Cost, Time and Resource Sheet (CTR) Development and Management
A Cost Time and Resource sheet is the fundamental building block of a project budget, the
CTR Catalogue (compilation of all CTRs for All WBSs) when completed totals to the
requested funds in the Investment Proposal.
The CTR breakdown of the scope will not always align with the estimating breakdown of the
project because the CTR breakdown is used for work management and cost control
purposes. For example % factors for project management and insurance in an estimate need
to be separated as CTRs for project control.
A CTR is a paper or electronic documents that defines: -

 The exact source of scope of the work to deliver this one element of the whole project
scope;
 The responsible party for delivering this element of work
 The delivery duration for the work (one to one match with the activity in Level 2 Schedule)
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 The phased cost estimate/forecast to deliver the work over the schedule duration of work
 The resources to deliver this element
 The deliverables to be completed to close out this element of work
An example of a CTR sheet is given in Appendix A
A Shell CTR covering the design of Module A, at a high level, is in principle the same as a
Work Pack of subcontractor covering the welding of the cooling water system in module A at
a lower level. The difference is only in the depth of the detail.
This is the only way to exactly match duration, costs and resources to a scope of work and
importantly allocate costs and resources of a change to the correct asset of a project.
The example below shows a typical example of how the work of a mega project could be
subdivided into CTRs.
Every CTR should be ultimately identified by each of a WBS, OBS, CBS and GBS reference.
In order to identify these items in a consistent manner
Every project needs the costs to be reported on in a number ways, by asset, by organisation,
by geography, commodity type or by main function.
The following four structures can be imposed on the work in order to break it down into
manageable control elements:
 The Work Breakdown Structure (WBS), which subdivides the asset into manageable
portions upon which a function (design, procure, construct, etc) is applied. This creates
an element of work that can be sensibly managed.
 The Organisation Breakdown Structure (OBS), which should be created to cover the
organisational aspects of all activities or parts thereof, including contractors working on
the project. This aligns the owner with the particular element of work
 The Cost Breakdown Structure (CBS), which is a fixed hierarchical structure of
commodity codes (groupings of account codes), applied to line item scope/costs for an
asset into a cost unit/norm useful to the estimators.
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 The Geographical Breakdown Structure (GBS), which should be based on the logistical
aspects of the projects, e.g. the geographical location of the work and construction areas
Every CTR will identify through its coding or numbering system the linkage to the WBS, OBS,
CBS and GBS.
W B S - W o r k B r e a k d o w n S tr u c tu r e : W h a t?
O B S - O r g a n iz a tio n B r e a k d o w n S tr u c tu r e : W h o ?
G B S - G e o g r a p h ic a l B r e a k d o w n S tr u c tu r e : W h e r e ?
Figure 4.2.1
Breakdown structures should be developed and expanded as the work of the project
develops and passes through the project phases.
For effective cost control, it is essential for the estimating department, the project services
team, the contracts and procurement team and the finance department of the Company to all
make consistent use of the same cost codes developed for a certain project, enabling
compatibility in exchange of information from the various computerised cost recording
systems. When the cost control structure is being designed, the need for separate reporting
of contingency and currency fluctuations should also be taken into account.
The EPCm contractor (where one exists) will be required to submit his bid for the
implementation of the project in compliance with the Shell defined project Work and Cost
Breakdown structures. This will also apply to the activities of the subcontractor(s).
 Costs included in CTRs
The cost estimate of each CTR will be developed in accordance with good estimating
practices in Project Guide 03. Each CTR will include for the baselined scope the: -
o Cost estimate of the designed quantities
o Allowances
o Exchange rate
o Escalation/Market
o Inflation
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Each of these costs should not be treated as a separate item for cost control purposes. They
should be incorporated in the relevant work breakdown CTRs of the Investment Proposal.
 Owners Cost
Owner costs are costs covered in the separate CTRs within the total project budget.
Whenever possible the project management costs for separate assets should be segregated
to avoid allocations.
For further details reference is made to Project Guide 3, Capital Project Cost Estimating.
The approved generic CTR procedure is listed in Section 6 References.
5.6 Budget Management

 Budget Appropriation
The Execute phase begins when the Company (or other funding authority) approves a Group
Investment Proposal or Capital Budget Proposal. This point in time is also referred to as FID
– Final Investment Decision. The 50/50 value of the investment proposal, cost total of the
CTR catalogue is the baseline cost estimate against which the project will be controlled.
This investment proposal should include a clear and complete definition of the scope,
schedule and the cost of the project as detailed in the CTR sheets complied in the Catalogue
and will be supported by the Project Execution Plan developed at the end of the project
Define phase.
The amount approved by the Company and co-venturers, which is expressed in an agreed
currency, is referred to as the "Budget Appropriation" and is fixed unless any adjustment is
subsequently authorised in accordance with the scope change procedure of the project.
The budget appropriation will be loaded into the ERP system in line with the WBS and CTR
structures.
 Appropriation Breakdown
The first Estimate At Completion should be identical to the Breakdown of the Investment
Proposal into the WBS and CTR breakdown, the baseline. Only supplementary Investment
Proposals will amend this baseline breakdown.
 Budget Maintenance
Changes can occur in the manner of executing the project scope. Budget transfers can
redistribute budget costs between the different CTRs without affecting the total budget. For
example, transfers could arise from:
 Unfunded technical change requiring the drawdown from project 50/50 contingency
 Change in a project interface, which moves scope from one WBS to another. Example is
if the scope for the beachhead for an oil trunk-line is removed from the pipeline asset
scope to the onshore receiving station asset scope.
The approved Management of Change process shall be used to track changes and transfers.
It must be noted that the budget appropriation can only be changed with the consent of the
appropriate financial authority. These changes will be shown in the OC-1 cost report.
Budget maintenance is not a mechanism for aligning the estimate with actual cost.
Budget maintenance is seldom required if the original work breakdown structure and the
contracting strategy is sound and appropriate.
The approved generic Budget Management procedure is listed in Section 6 References.
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5.7 Management of Change

Proposals for changing the project baseline documents, scope, quality, schedule and cost,
should be strictly controlled at any point in time in the project once the Select Phase has
been completed.
It is strongly recommended not to make a distinction between various types of changes
throughout the project in terms of the procedure used for identifying and assessing the
changes. The three types of changes are Project Changes, Contract Variations and
Deviations. All these changes, however, should be categorised as “changes” and be treated
accordingly by a strict and straightforward change procedure.
ALL CHANGE COMMENCES FROM A BASELINE SCOPE, COST, SCHEDULE &

QUALITY
A Change is any modification to the agreed basis of the project as defined the relevant
baseline documentation.
Baseline documentation of the project includes any documents that specify details of the
asset design, development and operation.
A Change Proposal is a document that requests modification to the agreed basis of the
project as defined the relevant Base Documentation.
Reasons for Change Proposals can be classified into the following three categories:
 Mandatory – an enforced change to comply with safety, regulatory or corporate
requirements;
 Reactive – a change in response to a specific event;
 Elective – a discretionary change that is of benefit to the project or to future
operations.
 Scope management
Above all, changing the project scope, other than developing and defining the scope
throughout the Select and Define phases and carrying out the detailed engineering during the
Execute phase, should be discouraged in principle and by definition.
When at certain halt points the scope is fixed and frozen (the Baseline) under the
responsibility of the project team, a strict scope management should be applied in order to
safeguard the schedule, the cost and the quality of the project. It is obvious that unnecessary
and often late changes will lead to unacceptable problem situations in all three areas.
If major technical risks are ignored and not mitigated (engineering solution) in the design
phase then the later the introduction of the change the greater the cost of possible
deconstruction before construction and market price factors for accelerated deliveries.
During the total execution of the project, i.e. from the scouting/feasibility phase up to and
including the moment when sustained commercial quantities of on spec product flow into the
storage tanks, the project team has the responsibility to endeavour to take lessons learned
from other sites and project teams/organisations and the results from ongoing research and
development within the Group on board, if at all possible.
Clearly this must be exercised with extreme care regarding the premises of the project, i.e.
the schedule, the cost and the quality. This should be defined in the early stage of every
project in the project’s objectives and further detailed out in a professional scope change
procedure.
This is called Scope Management.
The management of change and deviation control procedures are required to keep a
complete overview of the number and the status of the changes.
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Approved changes should be reported as commitments, while pending changes, which are
likely to be approved, should be reported as uncommitted work in the cost forecast.
Project contingencies are added to the defined base scope to cater for any unknown that
could arise across the project. However, if these unknown scope items affect the Project
Manager’s approved budget, he would be fully entitled to call upon the authorising
organisation in order to request additional funds for these changes.
 Change Management
The starting points of the change procedure should be:
o At approval of the project or part of the project, the baseline is considered to be
fixed when agreed by the Project Manager;
o During implementation pre-screening of changes must occur so unnecessary
changes are avoided;
o The change procedure is designed to assist the Owner’s project team in executing
professional scope management;
o A change can only be considered for approval by the project’s management if the
original scope definition appears to be
 Unsafe;
 Inoperable;
 If there is a strong indication of project value improvement.
o Changes are only meant to take place and to be approved within the original
context of the project scope
o In order to obtain approval for a change all steps in the procedure must be taken.
A typical example of a change form is provided in Appendix C
It is essential for the expedient routing of the change to note that the Change Coordinator is
responsible to carry the proposal through the project organisation in order to gather the
required information and to obtain the necessary approvals:
 Change Request Proposal

The proposal should contain the justification for the change, indicating whether the present
scope is inoperable or unsafe or whether a potential project value improvement can be
realised.
 Screening of the Proposal
To ensure the change is valid and no abortive work is performed, three members of the
Change Review Panel will screen each request
 Definition of the Change
A complete basis of design should be prepared, including an Order of Magnitude estimate.
The basis of design should include a narrative description and a justification for the proposed
change, marked up process flow schemes, process engineering flow schemes and data
sheets. The potential effect on the project schedule needs to be investigated and reported
and the proposal needs to be discussed with the responsible process engineer/technologist
or technical discipline and all other relevant parties in the Owner’s team or Company’s
organisations.
The Contractor is unlikely to be involved at this stage of the change. The definition and the
Order of Magnitude estimate need to be prepared within the Owner’s organisation. The
Contractor should not spend any work hours during the proposal preparation.
The Owner’s team Change Coordinator will present the change to the Change Review Panel
for approval or rejection at this stage.
Funding for the change will have been sort and if funding cannot be found from an offset then
a drawdown from project contingency will need to be approved by the
 Development of the Contract Variations
Upon approval of the proposal, a change order request should be handed over to the EPCm
Contractor, who will indicate the number of engineering work hours and the time required for
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the definition of the proposed change. Subsequently the Contractor should obtain approval
from the Owner’s team, in line with the defined financial authorities, for the variation to
prepare the basic design and engineering package.
Upon this approval of the variation, the Contractor should prepare the basic design and
engineering package and a Budget cost estimate. The definition should be checked and
approved by the Owner’s team process coordinator and the construction/engineering
manager on technical and schedule aspects. The Cost Engineer should check the estimate
and the available funds in the appropriate project CTRs. In case of over expenditure the
appropriate Company procedure should be followed.
 Implementation
Once the design package has been completed the variation for the implementation scope will
need approval. Depending on the value the variation may have to be approved by the project
Tender Board, within the framework of the project’s financial authorities.
If applicable, in case of an incentives contract, the target project budget and/or the target
work hour budget will need to be adjusted. Subsequently the EPCm Contractor should
implement the approved change.
 Close Out
Following the implementation, the change should be closed out by confirmation by Contractor
and Owner’s team that the change has been implemented as per the design
The approved generic Management Of Change procedure is listed in Section 7 References.
5.8 Commitments
During the various phases of the project the cost engineer should assess commitments
monthly.
Please note the project definition of commitment is equivalent to assigned budget in SAP
terms. The term ‘Open Commitment’ in SAP equals the assigned budget less VOWD, so
zero at the beginning and end of a project.
 Engineering
A monthly evaluation should be made of the committed value of the engineering work to be
performed.
In a lump-sum contract, this is simplified into summation of the original contract value plus
approved variation orders. In an hourly rates contract, an assessment should be made of
outstanding work and relevant office expenses, with a careful evaluation of the cost of
activities which are started after most of the engineering has been completed, e.g.
engineering liaison, field modifications, as-built drawings etc.
 Materials (equipment and bulks)
The Commitment Report should give for each purchase order, arranged by selected code
numbers, the value of commitment and, where applicable, the estimated escalation. In
addition, the costs of delivery and handling should be included and recorded in the
appropriate accounts.
A record should also be kept of uncommitted work representing the estimated values of
purchase orders for which requisitions have been received or are expected, but which have
not yet been converted into purchase orders.
 Onshore Construction, Fabrication and Hook-Up
Following the same principles as used in the Engineering and Procurement phases, the
engineer in charge of cost control establishes a commitment record for all construction
contracts, temporary facilities, supervision costs, costs of vendor specialists, construction all
risks (CAR) insurance, field procured materials and generally all items not covered by
Engineering and Material Procurement.
Erection contracts must be evaluated monthly. Variation and extra work orders, which have
been approved, are included in the commitment record (those still under negotiation are
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recorded in the value of uncommitted work). In this evaluation, the effects of escalation and
delays in construction programmes, which may cause additional costs, must be included.
In a Schedule of Rates - Unit Rates contract all units are measurable from drawings. This
means that a value can be calculated for each drawing or package of drawings issued to a
contractor, which should be entered as a commitment.
Onshore construction contracts are often, by necessity, based on incomplete scope definition
for the Contractor, e.g. material take-off, civil drawings and hook-ups of instruments may not
yet be fully detailed. Other undefined costs will usually arise between the dates of
Mechanical Completion and Ready for Start-up. This additional work consists of activities not
included in the usual scope of construction contracts such as acid cleaning, hot testing,
instrument calibration etc., or it may result from operators' requests for changes and
modifications to the plant as designed. The estimated value of the undefined work is part of
the uncommitted work. Call-off contracts are part of the uncommitted work, as long the time
sheets are not agreed. After agreement of the timesheets, that part of the value agreed will
change from uncommitted to VOWD. Time writing by company personnel is seen as a Call
off contract. Similarly here, the agreed and used time is VOWD, while the future time-writing
values are uncommitted work.
Fabrication of modules or offshore facilities, as well as hook-up activities, should apply
similar guidelines as those above.
The approved generic Commitments procedure is listed in Section 6 References.
5.9 Cost Risk Analysis

Cost & Schedule Risk Analysis (CSRA) is a risk analysis technique applied to both the
project Base Cost Estimate and the Base Schedule to:
 Develop probability distributions for the overall cost of the project and the completion date
in order to gain confidence in the Base Cost Estimate and the Base Schedule;
 Assist in understanding the criticality of, and the sensitivity to, a change to the schedule;
 Assist in understanding which risks and uncertainties have the greatest impact on the
cost and the schedule of the project;
 Model future cost and schedule risks and uncertainties;
 Understand the probabilities of meeting scheduled availability windows and model
uncertainties that limit the ability to work;
 Aim to focus resources and controls on reducing the impacts of the major cost or
schedule risks;
 Produce for Management a clear and concise Project Risk Analysis Report.
The key deliverable of the risk analysis process is a quantification of the overall combined
impact of the risks and uncertainties on the project Base Cost Estimate and the Base
Schedule.
The concept of Nodal Bias in schedule risk analysis is important and is a key reason why
project schedules are frequently exceeded, particularly for more complex projects. The
phenomenon occurs when two or more (sets of) activities occur in parallel and each has a
logical link between its finish date and the following activities.
More information on Nodal Bias in schedules can be found in the project procedure in
references
CSRA can be performed either deterministically or probabilistically. Deterministic techniques

are typically performed prior to DG3 where less Project definition is available. Specific
deterministic processes are not described in this procedure, however it is intended to
incorporate techniques for a full deterministic CSRA process in a future revision of this
document. Currently a deterministic Cost Risk Analysis methodology based upon the TECOP
principles is available in Project Guide 03.
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The probabilistic CSRA described in this procedure is a quantitative risk analysis technique
performed on both the Project Base Cost Estimate and the Base Schedule. CSRA provides a
P50 level (and other probabilistic levels if needed e.g. P10 and P90) for the cost and
schedule estimates by assessing the required cost and schedule contingency values.
Conversely, it can also be used to assess the probability of achieving a given cost or
schedule forecast.
Cost Risk Analysis (CRA) Requirements Related to the ORP Decision

Decision Gates (DG)
1 At DG 1: Deterministic method only.
3 At DG 3: Deterministic method as a minimum, Probabilistic optional.
4 At DG 4 (FID): Probabilistic method.

Reassessment during Execute - Probabilistic method.
Assess Select Define Execute
Schedule Risk Analysis (SRA) Requirements Related to the ORP Decision

Decision Gates (DG)
3 At DG 3: Pre-FID Schedule - Probabilistic method.

Post FID Schedule - Deterministic method as a minimum, Probabilistic optional.
4 At DG 4 (FID): Probabilistic method.

Reassessment during Execute - Probabilistic method.
Assess Select Define Execute
The approved generic Cost & Schedule Risk Analysis procedure is listed in Section 6
References.
5.10 Contingency Management

During the progress of the work the contingency requirement should decrease (unless
significant, previously unidentified, risks emerge which require a re-evaluation) and should be
regularly reviewed between the project cost engineer and project manager. The re-
assessment is used to prepare the 50/50 contingency portion of the "Estimate at
Completion". The EAC is the summation of the value of work done, value of outstanding
commitments, estimated value of uncommitted work, and the contingency requirements.
Project contingency shall be maintained as a separate WBS and should be added to the total
base estimate of the CTR Catalogue to allow for the unknown, scope, cost, schedule and
execution risks. Contingency will not be applied to individual CTRs.
In contingency management the three components of the Estimate At Completion should be
treated separately:
 VOWD does not require a contingency
 Value of outstanding commitments and Value of uncommitted work may both require
contingency to be assigned, since risks exist with each, although the nature and impact
can vary depending on contract type.
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The contingency will vary per individual project and for larger and, particularly, for mega or
“New Frontier” projects, the remaining required contingency should be established by means
of a formal risk assessment (e.g. by performing both a schedule and cost risk analysis) and
by making use of the project manager’s and control engineer’s experience.
Contingencies are reported in column 6 of the OC-sheet. The contingency forecast should
reduce with time as the work becomes committed and, ultimately, completed.
To provide some consistency and logic as to how the contingency is reduced over time,
contingency run-down curves can be used. The purpose of using this method is to keep from
retaining too much or too little contingency.
The formal transfer of the project manager’s contingency WBS to the under budgeted CTR
shall be performed using the Management of Change procedure to ensure transparency and
traceability.
A contingency run-down curve is simply a plot of contingency consumed over time. The
curve is plotted at the beginning of the project and is then used at each cost update to
determine how much contingency should be included in the forecast at that time in the
project. The curve starts at the contingency percentage that results from the probabilistic cost
estimate. The curve ends at a contingency of zero at the end of a project when all actual
costs are known. The shape of the curve in between depends on the expectation of how
uncertainty will decrease over time and should be based on the timing when the key risks
could occur.
The approved generic Cost Contingency procedure is listed in Section 6 References.
5.11 Value of Work Done

The procedure establishes the methodology for the calculation, processing and reporting of
Value of Work Done (VOWD) specifying the responsibilities of Project / Venture
Management, Project Services, Project Finance and Contracting & Procurement. It defines
VOWD, how it relates to the Enterprise Resource Planning (ERP) system, describes the
various types of agreements entered into throughout the lifespan of a project, and how the
VOWD is calculated and accounted for, and reported.
VOWD is defined as an estimate of “the cost of goods and services received, at a point in
time expressed in monetary terms, regardless of whether they have been paid for” and shall
be calculated in the local currency of the contract / work
VOWD is a key financial measure of the project costs because it is consolidated and
published in the Group financial results, which are subject to external regulation (including
Sarbanes Oxley or other new applicable regulations).
VOWD is the summation of:
 Value of invoices received and paid excluding excess payments due to pre-funding.
 Value of posted internal charges.
 Value of entries made into the ERP system to make provision for goods & services
received but not yet paid.
 General
The Value of Work Done (VOWD) is calculated by converting the quantity of work done per
CTR into its monetary value. Pre-funding, Certificates of ownership and milestone/stage
payments are not considered as VOWD.
In this way, progress measured in different ways can be assessed using the common
denominator of money and consolidated for reporting purposes.
In general, the manner in which VOWD is determined should be in line with the provisions of
the contract, as far as this will limit the effort required and speed up the availability of the
information.
26
Promptness of reports is absolutely vital for effective cost control. An exact calculation of
VOWD based on information a month old is of less use than less accurate calculations based
on yesterday's data.
In lump sum turnkey contracts, the contractor alone knows the true value of work done. It is
often difficult to get information on actual costs from the contractor as they are considered to
be commercially sensitive. A contractor should, however, be required under the contract to
report the percentage physical completion of each phase at CTR detailed level of:
o Design, engineering and procurement services.
o Materials arrived at site.
o Construction.
In addition, the contractor should provide the best estimate of the weighted value of each
phase in relation to the total contract value. The weighting should be agreed prior to the
commencement of each activity. From these data the composite physical completion
percentage can be calculated which, when applied to the known current contract value,
yields the total Value of Work Done.
 VOWD for design and engineering
Different yardsticks may measure the physical progress of the various design and
engineering CTRs:
a) If a work only CTR is measured in terms of physical progress, which in general is
a yardstick combining the documentary evidence produced (rules of credit) and
the effort expended, the VOWD is determined by applying the percentage of
physical progress to the current estimated value of that CTR including any
anticipated variations;
b) Progress of other design and engineering services CTRs, such as computer
costs, traveling expenses, fees etc., are measured in monetary terms, which
eliminates the need for conversion.
It should be noted that in option (a) spent man-hours do not necessarily represent the actual
physical progress in terms of deliverables because working productivity and efficiency is
subject to variation. The latest actual productivity factor should be applied to determine
current accrual amounts for VOWD
It should also be verified whether each CTR remains technically unchanged, as part of an
item may have been reported as completed but, because of changes, has to be re-done. If
the progress of such an item is measured in man-hours, more man-hours will be required
than originally estimated and progress should then be related to the revised estimated man-
hours. Similarly, the ultimate net value should be re-estimated in line with the extra man-
hours required, should these be the result of changes that increase the contract value. In the
case of contractor's mistakes, which are not reimbursable, the hours expended should be
reduced by the number of hours required to re-do the work, resulting in a reduction of the
Value of Work Done.
For lump sum or target-type engineering contracts, the actual amount of the progress
payment released should be entered as VOWD, provided that this percentage does not differ
substantially from the measurement of physical progress. Where the difference is substantial,
the percentage of physical progress should be set against the lump sum or target contract
value and the result entered as VOWD.
In a lump sum agreement, the contractor will be asked to disclose earned man-hours to
report physical progress for EVM. The alternative (a) should be used, in which the weighting
of "deliverables" (rules of credit) has to be agreed prior to signing the contract. The project
management and support progress may not be progressing at the rate of element/document
production so should be segregated from the work progress.
27
For hourly rates or cost-plus-fee contracts, it is recommended that the actual costs incurred
be entered as VOWD. The estimate of man-hours/costs to completion is reviewed by
measuring physical progress to obtain a current indication of productivity, and by then
comparing the actual consumption of man-hours to those originally estimated.
 VOWD for procurement
The Cost Control definition of VOWD for a CTR relating to catalogued material purchase
orders is the value of material/goods received on site. Small offsite pipe or steel fabrications
etc, will have the VOWD credited on receipted delivery at the main construction site..
Larger equipment or offsite fabrication of manufactured equipment or pre-assembled
modules covered by a contract with interim stages or milestones should have the VOWD
assessed on a monthly basis.
Procurement costs consist of:
 The purchase order value or applicable portion
 Supplementary delivery cost such as freight, insurance and duties, in general reported
on the Material Receipt Sheet (MRS)
 Material storage/handling at site (where applicable).
 Vendor Representative attendance (for specialist equipment)
The site warehouse, which receives the equipment and materials, functions as a focal point
for determining progress and value of work done. The engineer responsible for cost control
should maintain regular contacts with the Materials organisation and satisfy himself that the
issuing of MRS documents is prompt and accurate.
 VOWD for construction
For each erection contract or sub-contract, physical yardsticks representing production
should measure the physical progress of construction work. The progress of construction
work should not be measured solely in terms of man-hours expended.
The measurement of costs by monthly valuation will again depend on the type of contract
form:
 In lump sum or target construction contracts, a payment schedule may have been agreed
and this can then be accepted as VOWD. This implies that a regular check on physical
progress has to be carried out by estimating the quantity of work performed in
comparison with the payment due.
 In a schedule-of-rates contract, the monthly valuations made by quantity surveyors,
based on actual quantities of work, should also be reassessed regularly according to the
latest information and revised estimates of total quantities of units required.
 In an hourly rates or cost-plus-fee contract, the valuation of the monthly cost of labour,
staff, equipment and site establishment is taken as VOWD. Physical progress should be
counterchecked on a regular basis to allow the anticipated ultimate net value of work to
be reassessed regularly and EVM analysis to be performed.
The approved generic VOWD procedure is listed in Section 6 References.
5.12 Earned Value Management

Earned Value Management (EVM) is a project management control tool which integrates
scope of work with both cost and schedule. The EVM method is an industry standard
measure of project performance and includes Earned Value Analysis (EVA) and Earned
Schedule (ES).
The EVA process combines both cost and schedule and is based on analysing the variances
between actual, earned and planned cost of work performed.
28
The ES process is only applicable to schedule and is based on analysing the variances
between the actual time and the planned time taken to reach the earned value.
EVM is a project control tool for performance monitoring and analysis. Corrective or recovery
actions based on EVM are key to the project success. This procedure only mandates the use
of EVA at the overall project level. However, greater benefit to the Project from EVA and ES
can be gained if the processes are also applied at lower levels within the project hierarchy. It
is therefore recommended that the processes be selectively applied to specific scopes of
work within the Project.
Generally, EVM formulae are more effective for control (i.e. give more meaningful results)
some time after the start date and some time before the end date of an activity or the entire
Project, typically in the 20 to 80 percent progress range. Close to start and end points the
formulae can be less accurate i.e. sensitive to the input data causing unrealistic fluctuations.
The results of Earned Value Management support the following:

 Early Warning - Early indications of expected project results based on project
performance, highlighting the possible need for preventative and corrective action.
 Costs Earned - Value management provides both a view of project status and an
indication of value for money.
 Forecasts - Based on current information and trends.
 Communication - EVM supports the communication between stakeholders.
 Objective Assessment - An overall non-subjective assessment of activities or the entire
Project.
The basic requirements for EVM, which must be available at the start of a project phase, are:
 A fully defined work scope with associated Work Breakdown Structure (WBS);
 Budgets assigned to the WBS and phased at Cost Time Resource (CTR) level;
 Detailed cost and schedule baselines;
 Agreed method of performance measurement (rules of credit);
For the more detailed calculations please refer to the EVM procedure in Section 6
References of this document
5.13 Cost and Cash Forecasting
 Estimated Value of Uncommitted Work

Estimated value of uncommitted work comprises the total value of all work still to be
authorised.
In the very early stage of the project, the estimated value of uncommitted work per CTR may
be considered as the difference between the amount of the appropriation breakdown and the
committed value. However, as soon as the VOWD per CTR has progressed sufficiently and
greater understanding has been gained of the work to be done, then the value of the
uncommitted part of the work should be independently estimated, (e.g. based on material
take offs (MTO’s) and other available information on quantities, man-hours, achieved
productivity etc.).
An estimate of uncommitted values for major equipment can be made with the help of an
equipment list or process engineering flow schemes. More difficult will be an assessment of
the reliability and completeness of bulk materials take-off documents as prepared in detailed
engineering. Only experience can provide guidance for the assessment of "pipe-line effects"
(changes working their way through the system, level of errors etc.) since these effects are
quite often underestimated.
29
A commitment value cannot readily be established for funds allocated to cover travel,
accommodation and miscellaneous charges. These costs should remain under "uncommitted
work" until such charges are made where they should be directly booked as "Value Of Work
Done".
Appraisal of the value of uncommitted work is crucial to the preparation of the Estimate at
Completion. However, a comprehensive monthly appraisal of every individual CTR may not
be practicable or even useful, in which case appraisal should be:
a) Selective and discretionary;
b) Addressed to vulnerable/significant items.
The estimated cost of foreseeable scope and implementation changes should be included in
this amount.
In reimbursable contracts, actual productivity rates and trends, if available, should be applied
in order to predict the impact on final project cost.
A productivity tracking system should be developed as early as possible for engineering
activities and construction activities to forecast the value of uncommitted work.
 The Estimate At Completion (EAC)

The EAC is the current forecast, at the reporting period cut-off, of the final cost of the project
including the Base Cost Forecast and required 50/50 Contingency. The Base Cost Forecast
(Anticipated Ultimate Net Value of Work) is the current forecast, at the reporting period cut-
off, of the final cost of the project, but excluding Contingency.
The EAC forecast is made up of two parts, the known and the provision for the unknown: -
The Known/Likely elements
 The committed cost
 Likely cost of the uncommitted work
 Likely use of allowances to complete the work
 Likely use of provisional sums for this CTR
 The impact of the likely trend of productivity on the remaining spend
 Likely cost of pending project changes
 Likely cost of known issues that have not formalised into a pending change
 Likely cost of the pending contractual variations (avoid double counting with project
changes)
 Likely costs to mitigate identified risks
 Likely overhead costs of the latest schedule forecast
The Unknown element
 50/50 contingency provision to meet the unknown risks ahead
During the assessment of risks it may transpire that there will be a minimum value of the risk
that will have to be paid. This minimum value will be treated as a known cost and included in
the base cost forecast to avoid double dipping between base and contingency forecasts. An
example could be a contractual claim where the Shell project team may feel a minimum of
$10 million is valid/justifiable (in the base cost forecast) but the team will defend the
contractor’s inflated remaining $90m (used in the contingency re-assessment).
The EAC and the changes in the EAC will be reported in the monthly cost report. The full
EAC should be updated on a regular monthly basis. The changes in the Estimate At
Completion must be logged so that the changes over the time of the project can be easily
tracked. The EAC is reported in the Overall Cost 1 (OC-1) Sheet (Appendix B) and is made
up of the following components at the reference date:
30
Term Column of Definition

OC-REPORT
sheet
Value of work done 1 Value of goods and services actually received, regardless of
(VOWD) whether or not they have been paid for. Measuring
technical/physical progress and converting it into a cost value
establish VOWD. Measuring and converting depends upon the
contract types.
VOWD is the same as the Actual Cost of Work Performed term
recognized in the industry
Value of Outstanding 2 = (3-1) Value of committed goods and services not yet received, i.e. the
commitments difference between cumulative commitments and the value of work
(OSC) done.
Total Commitment 3 Value of any contract, purchase order or other obligation between
(VOWD+OSC) the company and a supplier of goods and/or services.
Estimated Value of 4 Estimate of total value of work still to be committed such as
Uncommitted work (UNC) purchase orders and contracts still to be placed. Known changes
(UCW) (approved and pending) are part of uncommitted work if there is
no contract. This estimate should include activity or development
allowances for the UCW as per PG 3
Anticipated Ultimate Net 5 = (4 + 3) Anticipated cost of the completed project, comprising the
Value of Work (AUNVW) cumulative commitments and estimated value of uncommitted
work but excluding the required contingency
Required 6 Contingency required for outstanding activities (both OSC and
contingency UCW). Assessment as described in Section 4.3.6.4. It is not
applied to specific CTRs.
Estimate At Completion 7=5+6 Best estimate, at the time of reporting, of the final cost of the
(EAC) project, embracing the anticipated ultimate net value of work and
the required contingency.
Original Budget 8 The approved budget as per original scope including:
Activity estimate, being the estimate of the cost of the activity
Development allowance
Escalation
Contingencies
Approved Changes 9 An amount to cover costs for changes as a result of further
definition and errors emerging in the subsequent phases of the
project development. This covers implementation changes (within
the original budget) and this may also include scope changes
when approved. Records where contingency releases have been
made to CTRs under the contingency management process.
Current Approved Budget 10 = 8 + 9 The sum of the Original Budget and Approved Changes.
Anticipated Over (+)/ 11 = 10 - 7 Difference between the Estimate At Completion and the Current
Under (-) Expenditure Approved Budget, whether positive (overrun) or negative
(underrun).
Cost progress 12 = 1/5 Value of work done as a percentage of the anticipated ultimate net
value of work.
 Comparison with the Current Approved Budget

Whenever an Estimate At Completion forecast is prepared, it should always be compared
with the Current Approved Budget in its detailed elements. This comparison forms part of the
monthly Project Cost Review, which is one of the tools of cost control.
The difference between the Estimate At Completion and the Current Approved Budget is the
anticipated over- or under-expenditure, which should be predicted and explained.
In the case of anticipated over-expenditure, action will be required. It may become necessary
to obtain approval for an increase in the Budget Appropriation or to release funds from
contingency. Projected under-expenditure should be held as a Balance until its true extent
can be established with sufficient confidence at which time the amount of the Budget
Appropriation should be reduced.
31
The approved generic Cost & Cash Forecasting procedure is listed in Section 6 References.
5.14 Cost Management of Contracts, Incentives & Claims

 Incentive Control
Contractual Incentives are anticipated commitments and should be treated as separate CTRs
in the management of the contract. As soon the incentives are proved to have been
achieved, the value will shift from uncommitted to committed and VOWD. When an incentive
is missed the value of uncommitted work will be reduced by the value of the missed
incentive.
 Contract Claims
A claim is a request for compensation to cover costs incurred by the contractor for
circumstances that were either unspecified in the contract or for which the limits of the
contractor's responsibility were ambiguous or left open.
Some typical examples are:
i) Claims based on alleged wrong information as supplied by the Company at the time
of signing the contract, e.g. adverse soil conditions
ii) Claims based on Company's failure to fulfil its obligations, e.g. delay in giving access
to the site, late arrival of Company supplied materials, late arrival of permits
iii) Claims based on the item of work not being specified by Company in the job
documents, and thus "by definition" excluded from contractor's scope of work
iv) Claims based on additional effort required as a consequence of an agreed action,
e.g. additional supervision charges as a result of the fact that although for additional
concrete work a unit rate has been agreed, the final quantity is double that quoted in
the erection specification
v) Claims based on "unforeseen" extra costs, e.g. erection delays due to exceptional
and unexpected bad weather or industrial disputes
vi) Claims based on an instruction issued by Company to Contractor for which there is
no contractual provision
It is important that situations likely to give rise to claims are recognised at an early date, that
their impact on costs and schedule is assessed in the risk register and the minimum
expected outturn included in the cost forecast. The details need to be properly recorded so
as to put the Company in a sound position when the formal claim is submitted at a later date.
Contractually the contractor shall be made responsible for notifying the Company as soon as
such situations become apparent.
As soon as it is likely that a contractor will submit a claim, an assessment of its financial
implications should be made. Funds can be released from contingencies if agreed by the
Project Manager. Approved claims should be reported as commitments, while pending
claims, which are likely to be approved, should be reported as uncommitted work.
In general, the contractual implications of changes are registered in three types of
documents:
a) Variation or Change Orders, which record the change in cost and work content by a
contractor, usually an EPC contractor or an engineering Contractor, as a
consequence of an alteration ordered by the Company.
b) Extra Work Orders, which record additional work incurred by a contractor, usually an
erection contractor, as a consequence of design corrections or other rework/ changes
requested by the Company or otherwise caused by events outside the contractor's
control.
c) Amendment to Contract used for changing terms and conditions of the contract
32
A claim by the Company on a contractor will normally originate from the latter's failure to fulfil
certain contractual conditions/requirements. It is in the Company’s interest to get closure on a
claim as soon as it arises with a full and final settlement, this is while the parties who have
the knowledge of the claim issues are still available. Procrastination by the Project team will
only lead to protracted negotiations at the end of the contract, when many issues will be
tabled by the contractor will try to sow confusion and make arguments that support the
interlinking of all the claims.
The approved generic Cost Management of Contracts procedure is listed in Section 6
References.
5.15 Cost Recovery

This process establishes the activities and controls to enhance Cost Recovery under an
existing Production Sharing Agreement (PSA) during the Select, Define & Execute phase of
a project. This document relates to PSAs where Shell operates, either individually or in a
consortium, as a Contractor to the Government.
Each PSA will have specific terms and conditions. The procedure (see references) highlights
areas of the PSA, which need to be clear to the project team. In cases where further
clarification is required, the project team must discuss with the Shell Commercial
Department. If necessary, the Commercial Department will communicate with the
Government for agreement.
The approved generic Cost Recovery procedure is listed in Section 6 References.
5.16 Revenue Costs and Capital Expenditure Recording

In accordance with established accounting standards, in projects in existing refineries and
chemical plants, only part of the expenditure may be of a "capital" nature, whilst the
remainder is treated as "revenue" expenditure. Often, however, it is difficult to separate all
the costs as they are incurred and to allocate them directly to capital and revenue as
appropriate.
For cost control purposes, capital and revenue expenditure should be considered together in
order to monitor the total cost of the project. For recording purposes, however, the revenue
costs should be shown and reported as a separate CTR. Thus, when the final cost review is
carried out, a check can be made to ensure that the correct amounts have been booked to
revenue and any accounting adjustments can made if required.
The amount of capital expenditure recorded in the company's books at the end of a given
accounting period should correspond to the value of work done at that date. The monthly
cost reports and accounting records should be regularly reconciled. In addition, the following
principles should be borne in mind for recording capital expenditure:
 Use of Supplier accounts should facilitate the prompt booking of invoices received prior to
payment;
 Advance payments to contractors and suppliers and retentions from progress payments
should be booked to agreed suspense accounts and recorded as capital expenditure but
not booked as Value of Work Done (see Section 4.3.6.1) until the work represented is
physically complete;
Periodic accruals should be made, based on the difference between Value of Work Done and
payments, covering work performed and goods received but not yet invoiced and/or
accounted for.
The approved generic Project Cost Reporting procedure is listed in Section 6 References.
5.17 Payment Control and Invoice Processing

The project team, in coordination with Company’s finance department processes, will
execute payment control, advance payments and accruals.
33
Contract payments are made in accordance with the Contract's specific terms and conditions,
which should include an indication of the time between the completions of the work, the
submission of the invoice and the actual payment. The contract should also be explicit about
adjustment of payment in case of deviations from the contractual progress schedule and/or
agreed incentive schemes.
If invoice processing is done outside the financial systems of the company, an accounts
payable procedure has to be developed, including the interface to the accounting books of
the company.
 Reimbursable and Cost-plus Contracts
Although reimbursable contract payments are straightforward, as the Contractor is paid at
cost for the services actually provided, the contract should, inter alia, clearly stipulate the
scope of the works, the documents which are required to support the invoices, the agreed
uplifts on actual work done to cover profit and overhead, the interval of invoicing, the time
between submission of invoice and actual payment and Company ‘s right to audit.
 Schedule of Rates Contracts
Contractor is paid for his services against a schedule of rates that includes profit and
overhead. Where an agreed "bill of quantities" is involved, the basic contract price will be
fixed unless quantities change. Besides the requirements as listed in Section 4.7.1.1, the
contract should include an adjustment mechanism if the scope of work changes and an
adjustment mechanism to cover escalation. As far as the former mechanism is concerned,
a schedule of rates contract is often based on a range of, say,  25% deviation limits from the
agreed bill of quantities. Beyond these limits the contract is re-negotiable. In a design and
engineering contract a lower and upper limit of man-hours is agreed beforehand. The profit
and overhead portion of the rates should reduce (even to zero) as the number of man-hours
increases above a certain ceiling. As far as the escalation mechanism is concerned, for short
duration contracts the rates are usually fixed. Long-term contracts are subject to adjustment
after pre-agreed periods following mutually agreed published national or technical price
indices, specified in the contract.
 Fixed price (Lump Sum) Contracts
General
Payments should not be significantly higher than is necessary to finance the Contractor's
actual expenditure, but the VOWD may be quite different from payments due under the fixed
payment schedule, especially for a lump-sum contract covering engineering, material
procurement and construction.
In lump-sum contracts, it is not easy to measure procurement progress in terms of VOWD. It
is obvious that adopting the standard philosophy of VOWD at delivery at site cannot be
applied here. Contractor has to make stage payments, which causes the measured progress
to lag behind payment by a considerable period of time. For example progress, expressed as
a percentage, should therefore be calculated as follows:
If Contractor is not willing to report actual order values in a lump sum contract, then pre-
contract open-book estimate values could be used or weighted. Alternatively an elaborate
points weighting system could be used to relate various equipment items to one another and
to bulk materials.
Progress of equipment could then be reported as a percentage, as follows:
34
Progress of bulk materials could then be reported as a percentage, as follows:
Using the appropriate units of measurement, this formula can be applied to all types of CTRs.
It is important that both the payment schedule and the scheduled progress, in terms of
VOWD or any other progress measuring system, are stipulated in the contract. This enables
verification of whether goods and services have been supplied as scheduled before the
payment of any instalment is released.
Furthermore, in lump sum contracts it is advisable to provide for withholding payments or
parts thereof, if the difference between actual and scheduled progress is in excess of
a specified limit and for revising the payment schedule in the event of excessive deviation
from scheduled progress.
 Payment By Milestones
For smaller contracts the fixed price is usually paid in instalments according to pre-agreed
milestones; for example 10% at contract award, 20% when all equipment delivered at site,
etc.
The payment schedule and progress milestones depend on the scope of the work and the
method of financing of Contractor's work. Fixed prices normally include interest.
The contract should clearly state the detailed defined scope of the work to be achieved at
each milestone, supporting documents for invoices, the procedures for initiating, submitting,
approval and payment of change orders, the schedule of deliveries to indicate the dates
when milestones are to be achieved, the incentive bonus or penalty clauses linked to the
delivery dates, as well as a facility whereby Contractor can claim compensation for escalation
and/or increased overheads and the time between invoice submission and actual payment.
 Progress payment
In major contracts, payment is made in accordance with a fixed payment schedule related to
physical progress that is represented by the Value of Work Done (VOWD).
Progress payment or payment-by-payment schedule should allow close matching between
the Contractor's expenditure, payment and minimum interest charges. At the pre-contract
stage it is essential to agree how payment will be scheduled according to physical progress.
The progress measurement system should also be clearly defined. The contract should
clearly include the following:
o The defined scope of the work in detail
o The extent and detail of supporting documents for invoices and claims
o The procedures for initiating, submitting, approval and payment of change orders
o The payment schedule(s) for each project phase as appropriate
o The progress schedule(s) and the method of measuring the progress of each CTR
o The deviation range in which the agreed payment schedule will not change ( 10% of
scheduled progress up to 50% completion, and 10% of remaining scheduled
progress from 50% onwards to total completion is suggested as consistent with the
accuracy of most progress measurement systems)
o The adjustment mechanism to be applied, if actual progress is outside the agreed
range of tolerance. (See Fig 4.7.1 below)
o The timing of payment adjustments and the re-negotiation of the payment and
progress schedules. (Progress payments should be adjusted as soon as actual
35
progress falls outside the allowable deviation if the trend is diverging and scheduled
progress re-negotiated after 3 months outside the allowable deviation)
o Payment time after invoice submission related to progress. For example, progress
achieved at end of July cut-off and formally submitted/agreed in mid-August would
initiate payment on 1st September.
Payment if actual progress lags behind scheduled progress could be:
In which S=scheduled progress, A=actual progress, d=difference between maximum range of

tolerance and scheduled progress.
36
Figure 4.7.1
The approved generic Management of Invoices procedure is listed in Section 6 References.
5.18 Foreign Exchange

Project cost management should be exercised in the agreed local currency. Shell utilises
$US as the Reporting currency. For the approval of the Group Investment Proposal where
multiple currencies are to be considered a set off GIP Exchange Rates are selected against
both the Local and Reporting Currency.
Analysis of transactions, such as commitments, value of work done or payments converted at
the Spot Rates compared against the conversion at GIP rates will give an indication of the
impact of exchange rate movement. For cost forecasting purposes the corporate planning
exchange rates shall be used for the appropriate years.
It should be recognised that variations caused by exchange rate fluctuations over time
between the appropriation budget in the local currency and the US dollar (or other base
currency) is not the subject of local control. These differences are reported separately as a
‘’below the line’’ item. The Company should endeavour to accommodate these differences at
Group level or per joint venture, which should be agreed at the time of project approval.
In countries where hyperinflation is occurring, it is advisable not to employ the local currency
as the base currency for cost control purposes. In such cases use should be made of a
“stronger” currency, typically USD, and costs incurred in the local currency translated into the
base currency with due allowance for changes in the rate of exchange. If a hyperinflation on
local currency is allowed to float reasonably freely against a harder currency by its country's
government, it will be found, over time, that the local inflation will be compensated, more or
less, by a corresponding devaluation of the local currency (the principle of Purchasing Power
Parity – PPP).
The approved generic Exchange Rate Application procedure is listed in Section 6
References.
5.19 Cost Allocations

As a general principle cost allocations lead to lower degrees of control and in some cases
are unacceptable.
The WBS structure and CTRs should be constructed at a level of detail that will ensure
minimal allocations, across assets, is required.
If allocations are required it is imperative the principles of the allocations are agreed with all
co-venturers. This agreement can then be translated into the EPCm contract breakdown
during the Define phase of the project.
If purchase orders and bulk items are broken down to a level of detail (MTO) that identifies
the relationship of the material to an asset then allocations can be avoided.
The approved generic Project Cost Allocation procedure is listed in Section 6 References.
5.20 Cost Reporting

The elements of cost control described in the foregoing sections can now be drawn together
into the procedures necessary for reporting costs and monitoring against the budget. This
process, carried out regularly, critically and analytically, is the essence of cost control in
action. Plans and estimates must be regularly reviewed and corrected, measurements of
actual cost compared with these plans and estimates, deviations - both actual and potential -
identified and actions taken to resolve them.
The results of this process are recorded in the cost review section of the Project progress
report, which serves to inform the Company of the cost progress, forecast of final cost at
37
project completion, and expected over/under-expenditure. The cost review should comprise
the current status of the project milestones, the physical progress and the cost status against
the budget.
 Cost control reports
The overall cost sheet OC1 (see Appendix B) summarises the status of the detailed CTRs in
a standard format. An example of the overall cost sheet is given in Attachment 1 of this
project guide.
The cost control report must include the following essential elements of the overall cost
picture including:
 The OC-1 table
a. The Value Of Work Done (actual vs planned)
b. The commitments
c. Issues, Trends and Changes
d. The forecast expenditure
e. The Estimate At Completion
f. The Budget
g. The actual payment (excl. accruals) mandatory
h. $’s vs time
 The Planned vs Actual cost curves
 A Change Register
 Risk Register
 Contingency drawdown
The textual element of cost report should highlight critical areas; the differences compared to
the previous reporting date and elucidate the corrective actions taken if required.
The approved generic Project Cost Reporting procedure is listed in Section 6 References.
5.21 Project Completion

Project completion is achieved when all the goods and services provided for in the budget
appropriation have been received and accepted to the satisfaction of the Company.
Depending on the EPC contract and the definitions therein, the following milestones should
be recorded:
 Ready for start up, i.e. facilities are ready for intake of hydrocarbons
 Product in Tank, i.e. sustained commercial quantities of on spec product received in
storage tanks
 Acceptance, i.e. contractual acceptance by Company of completion of the project
 Commitment Stop, i.e. the date after which no further expenditure may be authorised,
which should be as early as practicable following Acceptance
 Financial Closure, i.e. the date by which all outstanding invoices, charges and claims
relating to the project have been submitted and paid or settled. This should be put
into effect as soon as practicable, in order to enable the closing of the budget item
and to avoid unnecessary administrative effort. For accounting purposes,
depreciation of the asset should commence when it has been completed or put into
use.
5.22 Cost Data Collection and Feedback

 General
In order to continuously improve the quality of Shell’s projects, it is absolutely necessary to
capture the completed project data into a common database, so that future projects can
38
benefit from the historic performance and commodity costs form the CBS commodity codes.
The project control organisation of a project plays a vital role in this regard, as it will act as
the focal point to gather and report the required information.
The feedback of data is required in four categories, being the input for the IPA benchmarking
throughout the project, the input into the project’s close out report, the setting up of the asset
break down structure for the operating Company and the input into a common project
database based on the Shell Commodity codes.
In this context reference is made to Project Guide 03, Capital Project Cost Estimating.
 IPA benchmarking
IPA is used to perform external benchmarking both during Select, Define and post project
completion. As applicable, projects should undergo an evaluation near the end of the Define
phase, prior to authorisation, and also an evaluation at the completion of the projects. These
typically involve data collection interviews between IPA and the Shell project team.
IPA will determine the FEL Index (Front End Loading), which indicates how well the project
has prepared for the next phase.
 Input to Close-out report

It is important for the continuous upgrading of the quality of Shell projects in general and the
project control systems in particular that all relevant project data regarding cost and schedule
are gathered, recorded and fed back at the end of each distinct phase of the project
development (Select and Define) and throughout Execute (Detailed Design, Procurement,
Construction, Commissioning and Start-Up), in order to facilitate the feedback into the
common project data base upon the completion of the project.
The requirement for the project data feedback are laid down by the project controls group as
well as the organization of collecting this data.
For further details of the contents of the close out report reference is made to Project Guide
12b, Project Close-out.
The approved generic (Cost Estimating) Data Collection procedure is listed in Section 6
References.
39
6 References
6.1 Acronyms and Glossary of Terms
The acronyms for the cost management processes are incorporated in the Glossary of terms
for the project control procedures procedure number PSM-I-U-001182-FA-6180-0004
In the table below are included the key acronyms used in this project guide
Acronym Expanded Version of the Acronym
PCSMP Project Cost & Schedule Management Plan
WBS Work Breakdown Structure
CTR Cost, Time and Resource
CBS Cost Breakdown Structure
Enterprise Resource Planning - directionally this is Global SAP for Downstream and
ERP
SAP Blueprint for Upstream
The Estimate at Completion = The base Cost Forecast + the forecast of the required
EAC
50/50 contingency to complete the scope of work
6.2 Project Standards and Guides:

 Project Guide 02c – Capital Project Estimate & Schedule Assurance Review (ESAR)
 Project Standard & Guide 03 – Capital Project Cost Estimating
 Project Standard 04 – Capital Project Scheduling
 Project Guide 04 – Capital Project Scheduling & Schedule Management
 Project Standard & Guide 05 – Capital Project Contracting & Procurement
 Project Standard 06 – Capital Project Cost & Schedule Management
 Project Standard & Guides 08 – Capital Project Technical Scope Definition (Preparation
of Key Front End Engineering Documents)
 Project Standard & Guide 10 – Capital Project Execution & Management Planning
6.3 Project Cost & Schedule Management Procedures

During 2008 and 2009 Cross-business global generic project control procedures were
developed and approved under the Project Management Standardisation programme. These
generic global procedures are applicable to all Shell projects. They are intended for
modification by each project so they are configured to the organisation of that project. The
section 2 of the procedure lists the mandatory control activities on any Shell project over $US
100 million.
The procedures listed below are available on the Cost and Planning Toolkit web site under
the matured standards column in both word document format for configuring to the specific
project and in pdf format for the approved procedure
URL = https://sww-knowledge-epe.shell.com/teamsiep/livelink.exe/Open/37165431
40
The generic global project procedures:
Procedure Title Procedure Document Number

Monthly Project Management Report PSM-I-U-001182-FA-6180-0001
Management of Change PSM-I-U-001182-FA-6180-0002
Project Cost & Schedule Management Plan PSM-I-U-001182-FA-6180-0003
Glossary of Terms PSM-I-U-001182-FA-6180-0004
Project Services & Finance Handover PSM-I-U-001182-FA-6180-0005
Project Authorisations Framework PSM-I-U-001182-FA-6180-0006
Project Calendar PSM-I-U-001182-FA-6180-0007
Integrated Project Planning PSM-I-U-001182-FA-6180-0010
Progress Management PSM-I-U-001182-FA-6180-0011
Job Pack Management PSM-I-U-001182-FA-6180-0012
Project Cost Reporting PSM-I-U-001182-FA-6180-0020
Cost Contingency PSM-I-U-001182-FA-6180-0021
Value of Work Done PSM-I-U-001182-FA-6180-0022
Commitments (Assigned Budget) PSM-I-U-001182-FA-6180-0023
Work Breakdown Structures (WBS) PSM-I-U-001182-FA-6180-0024
Earned Value Management PSM-I-U-001182-FA-6180-0025
Cost & Cash Forecasting PSM-I-U-001182-FA-6180-0026
Cost Time Resources (CTR) Catalogue PSM-I-U-001182-FA-6180-0027
Cost Management of Contracts PSM-I-U-001182-FA-6180-0028
Cost Breakdown Structures (CBS PSM-I-U-001182-FA-6180-0029
Cost Recovery PSM-I-U-001182-FA-6180-0040
Budget Management PSM-I-U-001182-FA-6180-0041
Management of Invoices PSM-I-U-001182-FA-6180-0044
Project Cost Allocation PSM-I-U-001182-FA-6180-0045
Exchange Rate Application PSM-I-U-001182-FA-6180-0046
(Cost Estimating) Data Collection PSM-I-U-001182-FA-6180-0060
Cost & Schedule Risk Analysis PSM-I-U-001182-FA-6180-0090
6.4 Other References

Norsok Standard – Z014 Standard Cost Coding System Revision 2002
http://www.standard.no/en/sectors/Petroleum/NORSOK-Standard-Categories/Z-Stand-Cost-
Coding/Z-014/
Please note that the following DEPs are now obsolete

DEP 01.00.09.10-Gen – Asset Breakdown for onshore facilities
DEP 40.10.01.11-Gen – Capital Project Coding System
41
Appendix A. Example CTR sheet.
42
Appendix B. Typical Capital Project Cost Report OC1
43
Appendix C. Typical Management of Change Document

Change Proposal Form: Part 1
RECORD - To be completed by Initiator
CHANGE PROPOSAL NUMBER: BUDGET OWNER:
INITIATOR: DATE:
REVIEWED BY: DATE REVIEWED:

(MOC COORDINATOR) (MOC COORDINATOR)
TREND NUMBER: (IF APPLICABLE)
Reason for Change

MANDATORY REACTIVE ELECTIVE
Description/Justification of Change
TITLE:
DETAILS:
Initiator’s Impact Assessment
HSSE
COST
SCHEDULE
44
Appendix D. Typical Project Progress and Cost Report

The listing below shows a typical list of elements that comprise the Progress and Cost report.
Introduction
Management Summary
Health, Safety and Environment
Sustainable Development
Organisation
Quality Assurance/Quality Control
Engineering
Procurement
Construction
Civil/Structural
Mechanical
Electrical
Instrumentation
Rotating Equipment
Commissioning/Start up/Turnover
Progress and Cost Control
Physical/Cost Progress
Capital Cost ()(Estimate At Completion)
Pre-operational Cost
Project Incentives/Milestones
Attachment 1 Overall EPC Schedule
Attachment 2 Progress Curve (Weighted total EPC)
Attachment 3 Progress Curve (Weighted E, P, and C)
Attachment 4 Turnaround Progress
Attachment 5 Overall Financial Picture
Attachment 6 Progress Total Project VOWD
Attachment 7 Cost Curve Total Project
Attachment 8 OC1 Cost Sheet Total Project
Attachment 9 Cost Sheet Pre-operational Expenditure
Attachment 10 Project Staff Histograms
Attachment 11 Change Management
Attachment 12 Photographs
45
Appendix E. Typical Project VOWD & Expenditure Curve
46
Appendix F. Total Project Overall Finance Picture
Note: Site Current Estimate shown above is equivalent to Estimate At Completion in this
document
47

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Project Management Discipline Guide

Capital Project Cost Management &

Project and Contract Change Management Certain and

Issues, Trends and Risk Management

1.3 Scope and Deviation Process

3 Cost Management & Management of Change Organisation & Plan

3.1 Project Cost & Schedule Management Plan

3.2 Project Cost & Schedule Management Organisation

3.3 Project Cost and Management of Change tools

3.4 Project Cost & Schedule Management Review

4 Cost Mgt & Mgt of Change Activities per Project Phase

4.1 In the Identify & Assess Phase

4.2 In the Select Phase

4.3 In the Define Phase (BDP and BDEP)

4.4 In the Execute Phase

4.5 For Close Out Reporting

5 Cost Management and Management of Change

5.1 Degree of Cost Management

5.2 Project Cost & Schedule Management Plan (PCSMP)

For smaller projects PCSMP can form an integral part of PES/PEP

5.3 WBS – Work Breakdown Structures

Work is the performance of a function on an asset/hardware item e.g. detailed design of a

 Analysis and reporting by physical hardware or by functional activity;

5.4 Cost Breakdown Structure (CBS)

The CBS enables the following:

The approved generic CBS procedure is listed in Section 6 References.

A CTR is a paper or electronic documents that defines: -

An example of a CTR sheet is given in Appendix A

5.6 Budget Management

5.7 Management of Change

ALL CHANGE COMMENCES FROM A BASELINE SCOPE, COST, SCHEDULE &

A typical example of a change form is provided in Appendix C

 Change Request Proposal

The approved generic Management Of Change procedure is listed in Section 7 References.

5.9 Cost Risk Analysis

CSRA can be performed either deterministically or probabilistically. Deterministic techniques

Cost Risk Analysis (CRA) Requirements Related to the ORP Decision

1 At DG 1: Deterministic method only.

2 At DG 2: Deterministic method only.

3 At DG 3: Deterministic method as a minimum, Probabilistic optional.

4 At DG 4 (FID): Probabilistic method.

Assess Select Define Execute

Schedule Risk Analysis (SRA) Requirements Related to the ORP Decision

1 At DG 1: Deterministic method only.

2 At DG 2: Deterministic method only.

3 At DG 3: Pre-FID Schedule - Probabilistic method.

4 At DG 4 (FID): Probabilistic method.

Assess Select Define Execute

5.10 Contingency Management

5.11 Value of Work Done

5.12 Earned Value Management

The results of Earned Value Management support the following:

5.13 Cost and Cash Forecasting

 Estimated Value of Uncommitted Work

 The Estimate At Completion (EAC)

Term Column of Definition

 Comparison with the Current Approved Budget

5.14 Cost Management of Contracts, Incentives & Claims

5.15 Cost Recovery

5.16 Revenue Costs and Capital Expenditure Recording

5.17 Payment Control and Invoice Processing

Progress of bulk materials could then be reported as a percentage, as follows: