The Consulting Engineer in
the 21st Century
Presented by:
1.
David C Russell
Summary
This paper looks at the challenging, and changing, role of
the consulting engineer in the 21st century. It looks at past
experiences and how to use consulting engineers in a highly
competitive world. The perspective is from both sides of the
industry, from that of the operating companies looking to
implement a project which requires specialised knowledge, to
the consulting engineers themselves, seeking to match their
expertise with the operating companies expectations.
Examples are given of how the resources bank of an engineering
consultancy can be used to improve and enhance the outcome of
pulp and paper company projects.
Consulting engineers also work for vendor and equipment supply
companies, both in the provision of engineering services and in
interfacing between different processing units.
The role of the consulting engineer is indeed a challenge in the
21st century, but by following a few simple guidelines, operating
companies, vendors and consultants can achieve a mutually
satisfying outcome at the end of the day.
2. Introduction
Until about 15-20 years ago, it was common for the pulp
and paper companies to have their own project engineering
departments. Some still do, but for the most part the large
engineering departments have shrunk to mere skeletons of
their former selves. For example, in the mid 1980’s Carter Holt
Harvey, Kinleith, had the largest projects engineering department
outside the public sector. The emphasis on core business and the
competitive nature of the pulp and paper business required a
different approach.
© Copyright Beca 2010, all rights reserved unless expressly agreed.
Senior Project Manager, Beca
Traditionally the preserve of civil and structural engineers,
the consulting engineering business has expanded to include
engineers of all disciplines. Initially a number of these came from
the pulp and paper companies themselves, with project and
operating backgrounds, but latterly the consultant companies are
supplementing their basic strengths with graduate engineers and
engineers from other industries and backgrounds. The consulting
engineering companies have become repositories or banks of
skills which are available for use by the pulp and paper operating
companies.
3.
The cost impact pyramid
Before looking more closely at the role of the consulting engineer,
it is timely to look at the cost impact pyramid, because of its
relationship to the success or failure of a project.
$1
Conceptual
$10
Preliminary
Design
$100 Detailed Design
$1,000 Final Delivered Drawings
$10,000 During Construction
$100,000 After Construction
Figure 1. The Cost Impact Pyramid
Page 1
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1.1 The Consulting Engineer in the 21st Century
The point of the cost impact pyramid is that good engineering
in the first phases of the project has a very substantial effect on
the later costs, particularly as the project moves towards start up.
The message is clear but not always recognised: money spent up
front is well repaid in the later stages of the project. Whilst hard
data is not easy to come by, anecdotal evidence suggests that the
return from good engineering in the front end of the project has
a yield of the order of ten fold in capital cost. That is, spending
an extra dollar on engineering at the front will save around $10
on capital.
4. The parties
We can define the main parties as these:
ƒƒ The consulting engineering company which sells expertise
and knowledge, supplementing that resident within the
operating and/or equipment supply companies;
ƒƒ The vendor or equipment supply company, which can supply
engineering services in addition to equipment, but may
also require the consulting engineering company’s service
to supplement its own, and/or to engineer the interfaces
between their units and the services required for these units;
ƒƒ The operating company, with a specific need, either on-going
or one-off, for project or maintenance engineering which it
cannot meet from its own resources.
The problem is therefore one of matching needs to resources.
We can now look in more detail at the nature of each player.
4.1 The operating company
An operating or manufacturing company derives its income from
the production of a product, for which there is a market. If both
product and market exist in an environment which generates
acceptable returns, the company generates sufficient income to
pay its staff, meet its bills, and generate a return to shareholders.
Company effort is directed towards production and marketing.
Engineering services are largely, although not exclusively, directed
towards solving problems in the process which are impeding
production and which by definition are short term in nature. The
emphasis remains, and will remain, on producing product at the
appropriate cost and quality.
4.2 The vendor
The main purpose of the vendor or equipment supply company
is to sell equipment. This may be specialised equipment, for
example digesters, screens, washing units, as well as complete
systems such as pulp dryers or paper machines.
The vendor company may offer engineering as well as
equipment. Within the industry, views differ on whether the
supply of engineering services is part of the vendor company’s
core business. Some vendor companies have moved away from
the engineering services area altogether whilst other companies
have sub-contracted the supply of engineering services.
Regardless of the approach, in times of high demand the vendor
company may look to the engineering consulting company to
supplement its own resources, in a similar manner to that of the
operating company.
Vendor engineering is a valuable asset when used appropriately,
and that is when the design of components such as piping
systems is integrally connected and in close proximity to the
process equipment. However, two cautions should be noted
when operating companies start to consider whether vendor
engineering is suitable for their project:
1. Vendor engineering applies only to the package of work for
which that vendor is responsible. If the operating company
has “cherry picked” – selected what it considers the best
packages available from different vendors – then someone,
typically a consulting engineer, is required to connect the
various packages together in such a way as to achieve the
aims of the project.
2. Vendor engineering can be offered on a reduced fee or even
a no-fee basis. However, costs always appear in one form or
another, so operating companies should examine where the
engineering costs are located.
4.3 The consulting engineering company
The consulting engineering company has no “manufactured”
product in the normally accepted sense. Instead, it relies on
commissioned work to generate its income and to pay its
employees.
The two “products” which the consulting engineering company
markets are time and expertise.
Both “products” are related to resources. Time is related
through the availability of people to carry out the necessary
work. Expertise is available through the experience which the
consultant has acquired when working on different projects for
a range of operating companies, and from the additional skills
which are usually available from international ownership and/or
affiliation.
The use of its services is a direct result of the requirements of the
operating company and to a lesser extent, the vendor company.
An analysis of pulp and paper project activity shows this to be
cyclical: periods of high activity interspersed with periods of
relatively quiescent activity. For example, an analysis of activity
at the Kinleith mill complex over the last 15 years shows this
pattern, with the following peaks:
1985-86: Recovery boiler and evaporator installation.
1989-90:
Bleach plant revamp; new oxygen delignification;
screening and washing upgrade.
1996-98:
Paper machine modernisation
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1.1 The Consulting Engineer in the 21st Century
Obviously, a consultant engineering company, which relies on
major project work from one operating company, will have a lean
time indeed.
In order to survive during periods of low activity, a consultant
company needs a minimum of two clients, neither of whom are
carrying out major project work at the same time. Preferably,
the consultant company will also have client companies which
operate in different industries.
In addition, the consulting engineering company has available
to it a number of systems and procedures which provide a
disciplined approach to conducting a project, regardless of size.
These systems cover areas such as:
ƒƒ Quality systems, such as certification to ISO 9001.
ƒƒ Verification and Validation Procedures
ƒƒ Documentation Production and Control
ƒƒ Job management and contract administration
ƒƒ Risk Management
The implementation of these systems lends a degree of assurance
to the operating company that the conduct of its project is
proceeding in a disciplined and well-ordered manner.
A casual or informal request suggests that the work content, or
scope, is not well known or defined. In this case it is imperative
that the consultant responds to the request with an outline of
the scope, as he understands it, in order to confirm the operating
company’s request. At the very least, this provides an opportunity
to minimise misunderstanding at the outset of the project, when
the consultant has one expectation and the operating company
may have another, and different, expectation.
5.2 The invitation
The invitation to bid typically comes in the form of documents
from the operating company inviting the consultant to make a
proposal. Again the scope of work to be covered is critical and
it is not uncommon for the consultant to assist the operating
company in preparing the invitation to bid.
If the project is still in its initial stages, the consultant will respond
with a proposal for a pre-feasibility or feasibility study. The
proposal outlines the work to be covered, the resources to be
employed, the conditions of contract and the accuracy of the
cost estimate.
In the next section, we outline these in more detail for a typical
project.
The consulting engineering company needs to replenish its
“human capital” from time to time, through losses from natural
attrition, and retirements. What attracts graduates to join an
engineering consultancy? The answer is straightforward: a high
level of job satisfaction. Moving from one project to another,
each with its own particular challenges, provides the opportunity
to increase skills, knowledge and expertise, combined with an
always present challenge.
6.
5.
Typically projects proceed through a number of stages, each
with a different range of accuracy in the scope and estimate.
For example, the following criteria could be used for project
implementation and execution, as summarised in Table 1:
The relationships
The discussion above pre-supposes that a relationship exists
between the two parties. In order to develop the relationship, a
desire for closer contact must exist on both sides.
The process can begin in a number of ways, for example:
5.1 The informal approach
If the consultant is well known to the operating company, the
consultant may have advance notice of proposed new projects.
The process may begin on an informal basis from the operating
company’s perspective, such as a casual request to look into the
feasibility of a project.
However, “casual request” is not a term in the consultant’s
vocabulary, because of the constraints on the consultant’s
method of operation. The consultant has to respond formally
because it has to operate on the basis of a contract, both from
a quality and procedural point of view as well as from a liability
point of view.
Outlining the costs
In preparing a proposal, the consultant looks at both the cost
of the project, in terms of equipment, and the cost of services.
At the same time the consulting engineer is confirming its
understanding of the project requirements with the client, which
may be either the operating company or the vendor company.
6.1 Stages of the estimate
Table 1. Phases and Range of Accuracy
Project Phase
Range of Accuracy
Conceptual
+ 50%
Approval in Principle
+ 25%
Execution
+10%
The level of accuracy is determined by the needs of the operating
company
For example, a project which is but one of a number is unlikely
to require or justify the expenditure necessary for a + 10% order
of accuracy. Instead, an order of accuracy around the 20-30%
mark is sufficient to indicate whether the project has sufficient
economic health to advance to the next stage.
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1.1 The Consulting Engineer in the 21st Century
Note that the order of accuracy is a plus/minus figure. It is not
always recognised that even a firm and fixed quotation could
be + 10% on the price – through items not included in the
quote (for example, freight/insurance, spare parts and possibly
exchange rate variations). Operating companies have a tendency
to assume that a plus/minus 10% quote is in fact a plus zero %
minus 10% quote but this is not the case. Even at this level the
numbers can be significant: on a $100 million project, 10% is
$10 million, not an insignificant amount.
Similar comments apply to the other order of accuracy estimates.
6.2 Resources
We have already seen that the consultant supplies resources
to complement those of the operating company, when the
workload requires this.
We can see through Figure 2 that the normal resource
requirement for a project is in a bell shaped curve, with the
requirements rising rapidly as the project gets underway,
followed by a peak, then a fall as the project is taken over by the
operating company’s production staff.
Consultant
Resources
7.
Ongoing relationships
The stage is now set for a fruitful and harmonious relationship,
but there are still some requirements which must be met from
the parties:
7.1 Corporate commitment:
Corporate commitment is required on both sides. If the operating
company abrogates its corporate commitment and employs a
“hands off “ type approach, the scene is being set for a poor,
and potentially disastrous, outcome. The operating company
must understand that it cannot pass its responsibilities over to a
consultant company without losing a large measure of control.
It is importance of the operating company having available a
team, with the necessary skills, to manage the consultant. The
maintenance of the consultant/operating company interface,
with a clear view of the objective, is a driving force in the success
or failure of the project.
7.2 Risk Management
One of the tensions which frequently develops on a project is the
assignment of risk. Risk in this context is defined as the risk that
the project will not generate the desired outcome and can be
broken into three major categories:
Resources
7.3 Process risk
Company
Resources
Time
The process risk covers the possibility that the process selected
for the project is inappropriate or only partly successful.
The operating company may wish to assign this process risk
to the consultant or to the equipment vendor. Whilst this may
appear attractive on the surface to the operating company, it
becomes less attractive when examined in detail:
ƒƒ The consultant and vendor companies will inevitably limit the
Figure 2. Resource Requirements
The span over which the resources are supplemented by the
consultant varies with the nature of the project, as does the
number of resources supplied. For example, on a recent major
pulp and paper mill upgrade, the resource requirement spanned
over an 18 month period and peaked at 160 supplementary staff
supplied by the consultant.
degree to which they are exposed to risk.
ƒƒ Insurance companies will not generally insure against process
risk.
ƒƒ More importantly, the party most at risk is not the consultant
or even the vendor, but the operating company, because
it has a much greater financial outlay than any other party.
A number of operating companies now accept that the
transference of process risk to another party is largely
impossible.
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1.1 The Consulting Engineer in the 21st Century
7.4 Schedule risk
Schedule risk - the risk of the project running beyond the agreed
date - would appear to be an area where the operating company
is largely responsible, but again a more detailed examination
reveals that both parties have obligations in this area.
The parties must agree on the project scope of work. If the
operating company changes its mind on the scope of the work,
a claim for the additional impact may be raised. This impact was
earlier illustrated in the Cost Impact Pyramid (Figure 1).
2. Unforeseen delays, usually equipment delays, which did
not come to light in the earlier and less detailed phase of
the project. Whilst the schedule will normally have some
float available, the operating company will wish to reduce
the float to the minimum and this may later impact on the
schedule.
3. Shutdown schedules, which impact on the time which is
available for installing the equipment for the project. This
applies to the situation when a project is implemented in an
existing mill.
ƒƒ The operating company must respond to requests for
information in a timely fashion. Whilst it is relatively common
for contracts to have “turnaround” clauses, these require a
reasonable degree of discipline for both parties. Again, if the
turnaround periods are not observed, the schedule can slip.
ƒƒ Information from the vendor company is also an area where
the timely flow of information contributes to the project’s
success.
ƒƒ Timely decision making by the operating company. For
example, it would be normal for the consultant to obtain
quotes on equipment and put these forward to the operating
company with a recommendation. Normally an allowance is
made in the schedule for the operating company to consider
the recommendation and authorise negotiations to proceed
with the preferred vendor. Any delays, either through lack of
resources or because the operating company wants different
avenues pursued, will impact on the schedule. The solution is
to have an agreed list of vendors at the outset, together with
an agreed timetable for decision making.
ƒƒ Agreement on the schedule. Typically the operating company
will have a target completion date, within which the
consultant prepares a schedule of the necessary activities.
After agreement on the schedule, it is common for one of
three processes to take place:
1. The operating company delays the start date but maintains
the end date. This places the consultant in an awkward
situation: it must either increase resources (although these
may not be available) and incur additional costs, or inform
the operating company that the schedule can no longer
be met.
7.5 Budget risk
The risk of over-spending the budget depends largely on two
factors: the schedule, discussed above, and the quality of
estimating, covered in Section 8 (i). In all respects, the cost
estimate must be realistic even if this means that the project is
revaluated on its economic justification. All engineers tend to be
optimists, and occasionally budgets reflect this optimism.
The role of the consultant is to prepare a realistic budget, which
is generally higher than the operating company’s first estimate.
The consultant knows, through experience, of the many
unaccounted-for items which could crop up in the project.
In turn, the operating company needs to be quite clear on why
it is carrying out the project, and to identify the go/no go point.
Most consultants, and probably most operating companies,
know of projects where enthusiasm over-ruled good sense, and
a project proceeded which in retrospect failed to produce the
required return on investment because the costs escalated to a
higher than expected point.
For example, a project which starts with a budget of $100 million
is considered, on the normal grounds of project assessment, to
give an acceptable return on funds employed. If this budget has
been unduly optimistic, and the real figure is $150 million, a point
may have been reached where the market cannot accommodate
the extra cost associated with production.
For any project, the consultant can assist in the management
of the project budget, with a range of tools . One of the basic
tools is a cost curve. This curve measures the actual expenditure
against the forecast expenditure, and an example for an actual
project is given in Figure 3:
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1.1 The Consulting Engineer in the 21st Century
With the realisation that a closer relationship between operating
company and consultant usually works better than a distant
relationship, EPC contract arrangements should be entered into
with considerable forethought and recognition of the inherent
risks.
8.2 Liability
Figure 3. Project Cumulative Cost Curve
This curve flags up significant departures from the planned
budget at an early stage. A lower expenditure than forecast
in the budget may indicate a schedule problem; a higher
expenditure than forecast may indicate an optimistic budget.
Such curves are applicable to both large and small projects.
8. Structural considerations
The operating, vendor and consulting companies have decisions
to make on the structure of their project, and in these the
consultant also has a role.
8.1 EPC or EPCM
Liability covers the area of who pays when the project does not
perform as expected. As already discussed, it is difficult, if not
impossible, for the operating company to pass its process risk to
the consultant. As well, open liability would not be acceptable to
a consultant.
Most standard forms of contract limit consultant liability to set
sums. For example, the IPENZ Conditions of Engagement (Short
Form – Commercial) limits consultant liability to the greater of
five times the value of the fees or NZ$100,000. The conditions of
engagement also require that the consultant carries professional
indemnity insurance for the value of the contract liability.
9.
Rules and results
Finally, what is the 21st century formula for a productive and
mutually satisfying relationship between operating, vendor and
consulting engineering companies? The following are general
points which should lead to an harmonious understanding
between all parties:
Two major structural forms of project structure exist: EPC
(Engineer, Procure, Construct) and EPCM (Engineer, Procure,
Construction Management). The essential differences between
these two forms are:
ƒƒ A common goal for the outcome of the project and what it is
EPC: Fixed price, little or no operating company involvement. The
owner shifts costs, schedule and process risks to the contractor.
ƒƒ A defined scope of work agreed to by all parties.
EPCM: Work up to a target manhour/cost budget, higher
operating company involvement.
ƒƒ A plan which outlines the resources required and available,
The price of an EPC type project arrangement is almost always
higher than an EPCM arrangement, because the risk carried by
the consultant is higher. Furthermore, EPC type contracts are a
“hands off” type of approach from both parties.
designed to achieve.
ƒƒ Clear lines of communication and a willingness to share
information.
ƒƒ A defined budget and schedule for controlling the project.
and matches need with demand.
Other more project specific criteria could be added, but when the
project concludes, all parties want to be able to state:
The project worked, and it was achieved on schedule and within
budget.
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