Cost/Schedule Overrun in
Mega Construction Projects
Dr. George Jergeas P.Eng
Department of Civil Engineering
University of Calgary
Who am I
George F. Jergeas PEng
 BSc Civil Engineering
 MSc and PhD Construction Management
 Professor of Project Management
 Interests: Team alignment, avoidance
and resolution of disputes, project
performance and auditing
2
Agenda
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Objectives
Introduction
Reasons
Planning and Execution phases
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Lots of questions
Feasibility Study
Trend System
Auditing project performance
Some conclusions
3
Objectives
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Analysis of our current practice
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Not to blame anybody
Lessons to be learned
More questions than answers
Momentum for further discussions and
collaborations
Provide some initial recommendations
4
Introduction
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$1 Billion plus projects
20 Mega projects executed in Canada
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Husky’s Lloydminister Upgrader
Mobil’s Hibernia off-shore development
Petro-Canada Terra Nova off-shore project
Dow, Nova Chemicals, Syncrude, Suncor,
Shell
5
Introduction
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No major problems re quality, health
and safety, regulatory and
environmental
Projects running in excess of design
capacity
Making huge profits
No unskilled or unprofessional conduct
by APEGGA member or permit holder
6
Introduction
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Excellent Safety Record
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Shell Upgrader, Ft Sask. 6 million hours
Suncor Millenium, 5 million hours
Syncrude 4.6 million hours
Albian Sands/MRC Ft. McMurray, 3 million
hours
7
Introduction
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All have encountered significant
cost/schedule overruns in range
of 20 - 100%
Blame unfairly placed on
workers
8
Introduction
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“Delays Plague Terra Nova Oil Project
…Troubles cause Petro-Canada Stock to
Tumble … $1 billion overrun (50%) and 12
month delay”
Calgary Herald-February 20, 2001
Syncrude has unveiled the biggest cost
overrun in the history of the oil sand, with its
owners saying yesterday that its latest
expansion will cost $7.8 billion-- nearly double
the original estimate ….. More than a year’s
delay from the original deadline …”
Globe and Mail-March 5, 2004
9
Advances in Project
Management
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Availability of sophisticated computer
programs for
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Engineering design, project scheduling,
cost estimating and risk analysis
Improved construction technologies and
methods
Professional PM training is readily
available
PM associations - forums for discussions
10
But,
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Owners and contractors alike continue
to struggle in successfully managing
Mega projects
Resigned acceptance in the financial
community
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“Realistically … its just part of the business,
when you do these big, complicated
engineering projects .. “ Gord Currie, Canaccord
Capital Management, Calgary Herald, February 20, 2001
11
Reasons
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Size of the project
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Complexity of projects
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Many resources required
Technological complexity
Executed by virtual teams
Project organization structure
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Multiple owners that do not share same
culture
12
Reasons
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JV of Project contractors and
engineering firms are not aligned or not
set up to work effectively
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Different cultures
Need to ensure that their own
responsibilities are executed as well as
possible
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May be at the expense of the overall project
13
Reasons
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Unrealistic Expectations
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The original cost estimate and schedules
are developed to ensure project
sanctioning, not to provide a realistic goal
for the project teams
Poor/incomplete scope definition i.e.
inadequate front end loading
Poor quality/overly optimistic cost
estimates
14
Reasons
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Contracting strategies
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Project control
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Not appropriate for the situation
Nobody has single point responsibility
except the client who does not control
much of the work
Underestimation/under appreciation of
project complexity
Inadequate plan of execution
15
Reasons
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Unrealistic schedule
Poor project controls
Poor costing and budgeting practices
Poorly defined tasks and division of
responsibility
Lack of knowledgeable leadership in E,
P, C, Start-up of major facilities
Inexperienced/poorly equipped project
management personnel and supervisors
16
Reasons
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Shortage of skilled labour and lower
than anticipated labour productivity
High labour turnover
Changing customer requirements
Lack of understanding the costs of
changes
17
Reasons
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Lack of standardization and fit-for-purpose
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Inadequate use of shop fabrication/
modularization strategy
Little or no constructability reviews
Poor communication and follow-up
Poor site organization leading to excessive
time wastage
Inability to understand, plan, adapt,
implement procedures or systems
18
Mega Project Challenges
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Small vs. Mega project
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Overrun on small projects are not recognized
50% overrun on $100K
50% overrun on $4 billion
20 - 100% range equates to hundred of
millions of dollars, in supplemental
funding and foregoing many months of
productive operational activity
19
Mega Project Challenges
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Define and schedule work for 10,000
people every day
Organize, order, store and retrieve
80,000,000 material items
Manage worker turnover that can reach
200% annually
20
Mega Project Challenges
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On $2.5 Billion project
Engineering effort
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3.5 million manhours at a cost $100/hr
40 - 50,000 design drawings
10 - 20,000 vendor and shop drawings
Construction effort
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15 million construction hours
Labour force of 10,000 workers with a
turnover of 30,000 people
Supported by 500 - 800 staff personnel
21
Mega Project Challenges
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Field labour approx. 5000 manhours per
million dollars of capital ie. 10 - 15
million manhours at $85 to $100 per
hour.
If labour production is not carefully
managed this could easily double as it
has done historically.
22
Mega Project Challenges
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The task of managing a craft mix of 10,000
workers working in pairs doing at least two
different activities per day results in a never
ending 100,000 individual jobs in a 10 day shift
Each job requires a combination of the correct,
materials, location, access, tools, equipment,
scaffold, safety, quality, rigging, consumables,
welding, x-ray and many other inputs to allow
the worker to get his job done.
This task belong to management which to date
has not been able to plan, organize or execute
23
Mega Project Challenges
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Job sites
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Confusion
Insufficient use of tools, equipment,
material, labour
Work instruction vague
Engineering not prioritized
Poor worker productivity
No predictability of costs and schedules
Quality and safety are achieved
24
Ripple Effects
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Outsourcing
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New contractual strategies and arrangements
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Engineering services and labour
Lump sum v. cost plus
Supply of labour
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Union vs. Non-union
Foreign labour
25
Investigation Needs
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Study factors affecting project
performance during:
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Planning stage
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Execution stage
26
Planning Stage
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The front-end period up to the point of official
endorsement (project sanction) to proceed,
where AFE for full budget funding occurs, and
contract ratification with a major EPC
contractor for project execution takes place:
1. What accuracy of estimating and % of
engineering definition?
2. How “Targets” are established?
3. How “Targets” are agreed to by the Owner
and EPC contractor?
4. Suitability of methods employed?
27
Project Planning Stage
5. Are project cost-schedule targets reliable? How
verified, by whom?
6. What basis is specified for required EPC definition
to support project budget approval, schedule, and
sanction? Who sets?
7. Are the required deliverables and performance
expectations for work during execution stage
clearly defined, understood, accounted for in the
targets, and mutually accepted? Are exceptions
noted & quantified for potential risk/impact?
28
Project Planning Stage
8. Are the cost-scheduling methodologies selected
appropriate and capable of generating reliable
targets given the level of scope definition &
uncertainty? How reconciled?
9. Are scope uncertainties adequately captured &
quantified for impact on cost-schedule targets?
How done, by whom?
10. Are cost-schedule data representative of realworld conditions, given scope definition, and
cost-scheduling methods employed? How
applied/verified?
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Project Planning Stage
11. How are contractor/owner cost estimates
& schedules reconciled prior to execution?
How are deviations resolved/accepted, and
resulting targets deemed to be achievable?
By whom?
12. Are cost-schedule upper thresholds
established, and overrun tolerances
identified? What risk management practices
are put in place to protect project targets,
the owner & contractor?
30
The Feasibility Study
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A very comprehensive document
Considerable amount of work to scope
the project, select the technologies to
be used and present a business case
Lots of time and effort:
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What Owner wanted to do
How much it would cost
What the economics of the investment would
be and
What the risks might be
31
The Feasibility Study
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No sufficient level of detailed work done
to achieve the level of accuracy and
confidence that the owners decision
makers place in it when a project is
approved
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To achieve a level of accuracy of the estimate
of 10-15%, we need a 30% engineering
completion
The right 30% - not just any 30%
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in particular considerable technical information/
engineering is required from equipment vendors
32
The Feasibility Study
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Limited input from Operations
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May be unknown at this time
Operations input is invaluable when
considering:
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Plant and equipment layout
Equipment selection
Determining the ongoing operations costs and
staffing needs
Laying out the pre-commissioning and
commissioning requirements and costs, startup and early production projections.
33
The Feasibility Study
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Downplays or overlooks Organizational
Performance - both at the Joint Venture
level and at the Project level
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New companies with new and unproven
technology in industry new to partners
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Complexity on complexity
Benchmarking and Risk Analysis
services
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External reviews
Several concerns are usually raised
Cost and schedule projections are not
aggressively challenged
34
The Feasibility Study
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Not challenged aggressiveness of start-up
and the production ramp up curves that
follows start-up
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Optimism and a lack of meaningful operations
input contributes to false hopes on the part of
the owners
Overlooking potential impact of new
technology and the inefficiencies and
problems that could result from a new joint
venture and sometimes new players
35
The Feasibility Study
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It is not easy to determine just how
seriously the project team take the
concerns that are raised in the external
reviews and respond to them. In some
instances the concerns are not referred
to at all and in others, while there is an
acknowledgement of the concerns and
the issues, there is only a comment that
they are being addressed and that
mitigating actions will be taken.
36
Delays in Engineering
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Early delays in achieving key milestones
such as:
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Substantial Completion of Engineering
Freezing Process Flow Diagram’s (PFD’s)
P&ID issued for design
Delays do not seem to be reflected on
final project completion date
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Fast-tracking the fast-track!
37
Delays in Engineering
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Before the production of construction
drawings can be taken, a number of
development steps must be completed:
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Production of PFDs - show the logic of the
various chemical steps that will be used in
the new facility.
The quantities of each of the process
streams will be shown
Review and approval of owner before the
next development step is released
38
Delays in Engineering
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Develop the Process and Instrument
Diagrams (P&IDs):
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Identify all the pieces of equipment required for
the process to work
Identify all piping required together with
identification number, size, wall thickness and
metallurgy, valve locations and type as well as
control logic and hook-up
P&IDs contain critical engineering detail
that must be agreed upon before the
construction drawings can be started
39
Delays in Engineering
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Series of extensive, time-consuming reviews by the engineering consultant and the owner
before P&IDs are approved and the detailed
discipline engineering can begin at earnest.
What is worrisome is that the PFD’s and
P&ID’s Milestones are some of the first
Milestones on the Schedule and it is only
once they have been reached that succeeding
activities can be started.
In fact the Engineering build up can only take
place once these early Milestones have been
40
achieved - hence their importance.
Delays in Engineering
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This undoubtedly would put pressure on the
completion of the succeeding activities.
The delay in Engineering can also be caused
by:
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Additional work by the steady stream of trends
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Either adding to original scope or requiring work already
completed to be re-done
Slower build-up of the engineering workforce than
planned
Lower engineering productivity than expected
Whatever the reason(s), how do Project
Managers react?
41
Multiple Choice: How do the PM
react?
A) Mechanical Completion and Start-up dates
will be changed to reflect the delay in
Engineering
B) Mechanical Completion and Start-up dates
will not be changed
C) All remaining activities will be squeezed into
a duration less than originally planned
D) The overlap of Engineering with Construction
activities will be increased
42
How do the PM react?
Answer is B, C and D
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All the remaining activities will be squeezed into less
than originally planned, and it is likely that the
overlap of Engineering with Construction activities
will increase
Assuming the overlap in the original schedule was
optimal, then the new overlap would be less than
optimal.
This will almost inevitably bring inefficiencies into the
execution process and likely cause additional rework,
thus pushing the costs up and putting more pressure
on the schedule completion dates.
43
Trend System
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Normal practice is that all changes to the
base (AFE) be documented so that the
potential cost and schedule impact can be
flagged and estimated. This gives the PM a
series of snapshots as the project develops
as to whether and to what extent time and
cost may be affected.
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History has shown that while the trends flag
individual activity changes, they do not give the
full picture.
44
Trend System (cont.)
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In variably, subsequent project reestimates and assessments indicate
higher levels of cost variations than
would be expected from the trend
indications.
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Trends are classified in four ways:
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Design development
Changes to the estimate
Estimate Omissions
Changes in Execution Strategy
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Trend System (cont.)
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When a trend is raised, the originator has to
indicate not only the estimated cost of the
trend but the schedule impact of the trend on
the activity being trended.
It is quite likely- especially in the first few
months of the project- that the schedule
impact resulting from individual trends would
not change the Mechanical Completion and
Start-up dates
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PM can mitigate the delays, by adding people ...
46
Trend System (cont.)
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However, the PM should regularly be assessing the
cumulative effects of the trends on the overall
schedule.
As the number of trends climbs, one thing is
certain - more work and more costs are being
added to the project, and more hours must be
spent before the project is completed.
This means that either the end dates slip or the
additional work identified will take away from the
flexibility that was originally in the schedule (if any)
thus making the probability of achieving the
47
schedule less likely
Cost Allowances and
Contingencies.
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To cover for design changes, material quantity increases
Historical and risk based
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covers for money that is going to be needed, but cannot be
allocated to specific activities or areas at this early stage
The PM should be “running down” the allowances and
contingencies according to some agreed upon plan
The run down of the allowances should match the
additional costs being identified through the trend process.
With the huge number of trends raised at this early stage,
it may well be that the allowances are proving to be
inadequate for additional costs being identified.
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Warning signal to the PM that events are not evolving as expected
48
Industrial Capacity and Skilled
Labour Availability
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Feasibility studies usually underplay the
skilled labour availability.
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Claim that project would not be affected by
labour shortages and project would fit
neatly into “lull” between other projects
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Slow reaction to Alberta Workforce
Supply/Demand Forecasts - COAA
Increased labour cost associated with shift
changes to make it more attractive to
construction workers to come the job
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Additional costs
49
Other Questions
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Are Canadian market & Geography factors
under-estimated? Are they unexpectedly
influencing project outcome (e.g.
remoteness, climate, terrain, operability,
supply/logistics)
Are the availability& resourcing of skilled
contractors, services, attrition, competing
work opportunities?
Are project learnings being captured in the
EPC market? What barriers to continuous
improvement in the PM practices exit, in
50
which areas, and why?
Other Questions
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Are new technologies &/ or designs
impacting progress/acceptance (e.g.
familiarity, operability & risk concerns)? Are
increasing specializations complicating PM
interfaces, processes and outcomes?
What are the effects of business
partnerships, joint-venture, contractual
interfaces … on outcomes?
Do Mega projects present unique
problems/issues?
51
Other Questions
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How is project definition best enhanced in
the planning stage to reduce uncertainties
by
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Simply extending engineering timeframe
Applying concurrent engineering methods
based on systems or sub-projects
How can cost-estimating and scheduling data
be enhanced in reliabilities? Are practices
limited to scaled adjustments from historical
data, or can real-market information be
obtained and relied upon. What level of
definition and kind of commercial/contractual
relationship would be required to obtain reliable
market information to support project scope,
52
The Execution Stage

The back-end of the project, and the period
from the conclusion of the planning stage
when the project is sanctioned and AFE
funding is granted, to commissioning/start-up
of industrial facilities.
 How effective teamwork and PM practices
to manage and control execution of scope?
 The role and interaction of both Owner and
EPC contractor
 The suitability of the practices employed
53
Execution Stage

How effective were PM practices in
controlling progress & mitigating
risk/uncertainty?
1. Are the cost-estimates & schedule from
planning stage suitably structured for
management/control purposes during
execution? If re-formatting is necessary, how
are funds/activities accurately re-packaged,
using what methods? How are variations
accounted for & resolved? Who decides?
54
Execution Stage
2. Are commitments made & monitored during
execution with knowledge of budget provisions?
Are controls in place to detect & manage
significant variations
3. How well do teams/stakeholders interact.
Mechanism to track relationship, manage issues
4. How are deliverables reviewed/ accepted.
What is the process for acceptance? How is
quality insured? How much how often do delays
and/or re-work occur?
55
Execution Stage
5. How well are risks & uncertainties managed &
controlled during execution to keep the project
on budget/ on-schedule? What methods are
used?
6. How promptly and accurately are scope
changes identified & captured. Is there an
approval process in place? How significant are
scope changes & variations on the overall
project outcome
7. How is performance managed & progress
managed? What practices are employed to keep
project on track? How effective are they with
56
the team?
Other Questions
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Can cost-estimating & scheduling practices be
structured so they carry-over from the planning
to execution stage and eliminate the risk of
unrecognized gaps in “re-translating” targets into
management/control formats? Could a
transferable WBS methodology in conjunction
with a project commitment plan be used in both
stages to define & control budget-schedule
targets?
Can/should owner & contractor integrate more
closely in the front-end to jointly determine
57
project approach to planning & control
A Solution
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Have a Vision
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Get some one who built a similar project
Vision for construction and commissioning
Engineer must visulize the plant operating
when developing PFD’s and P&ID’s
Turn the project by system for
commissioning

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150 turnover packages
Steam system, condensate system,
electrical system, pumps ...
58
Completion
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Mechanical completion: All pieces in place and
mechanically work and they do what they
supposed to do ie the motor would turn. No
process fluid in the plant
Pre-commissioning: Getting the utilities in the
plant such as steam, air … Fill the system and
check for leaks. No process fluid in the plant
Commissioning: Commissioning is done on
system by system basis to get all the systems to
work together. Process fluid is used to get the
59
plant starting up.
Back to construction


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Engineering working on the wrong
sequence
Owner does not know what sequence
they need
Construction demand a constructiondriven engineering

Sit down with engineering
60
Back to construction


Use density and complexity to decide
which areas to start design
Engineering have to design by Systems,
then develop General Arrangements
drawings by area
61
A Solution
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
Study plot plan and its sub-blocks
Decide the density and complexity

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Estimate total Manhours or work effort
Divide total work manhours between the sub-blocks
Estimate manpower required by dividing area
(Square Feet) of sub-blocks by 200 i.e., 200 SF/man
Draw a schedule based on density and complexity.
Level manpower and optimize schedule, using preassembly, overtime, two shifts, weekend work … etc.
62
A Solution
#3
Air cooler
25%
#2
Heat exchanger-30%
#1 Pipe Rack - 15%
#4
30%
63
Design by Discipline
Process
Long lead items
Mechanical/vendor print
Civil
Electrical
Instrumentation
64
Design by Discipline

30 manhours per drawings


Includes meetings
Drawings Control

Use RACI chart to control
65
Drawings Control
Drawings
Time
GC G C F M J W B
F M S F W L S k R
Budget Actual
W/Hrs. W/Hrs.
Earned Diff.l
66