ENGINEERING PROJECT MANAGEMENT ENGINEERING PROJECT MANAGEMENT Second Edition Edited by Nigel J. Smith Professor of Construction Project Management University of Leeds # 2002 by Blackwell Science Ltd, Second edition published 2002 by Blackwell Science a Blackwell Publishing Company Ltd Editorial Offices: Osney Mead, Oxford OX2 0EL, UK Library of Congress Tel: +44 (0)1865 206206 Cataloging-in-Publication Data Blackwell Science, Inc., 350 Main Street, Engineering project management/edited by Nigel J. Malden, MA 02148-5018, USA Smith.Ð2nd ed. Tel: +1 781 388 8250 p. cm. Iowa State Press, a Blackwell Publishing Company, Includes bibliographical references and index. 2121 State Avenue, Ames, Iowa 50014-8300, USA ISBN 0-632-05737-8 (alk. paper) Tel: +1 515 292 0140 1. EngineeringÐManagement. 2. Construction Blackwell Publishing Asia Pty Ltd, 550 Swanston industryÐManagement. I. Smith, Nigel J. Street, Carlton South, Melbourne, Victoria 3053, TA190 .E547 2002 Australia 658.4'04Ðdc21 Tel: +61 (0)3 9347 0300 2002074568 Blackwell Wissenschafts Verlag, KurfuÈ rstendamm 57, 10707 Berlin, Germany ISBN-0-632-05737-8 Tel: +49 (0)30 32 79 060 A catalogue record for this title is available from the The right of the Author to be identified as the Author British Library of this Work has been asserted in accordance with the Copyright, Designs and Patents Act 1988. Set in 10/13pt Times by DP Photosetting, Aylesbury, Bucks All rights reserved. No part of this publication may be Printed and bound in Great Britain by reproduced, stored in a retrieval system, or transmitted, TJ International, Padstow, Cornwall in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, except as For further information on permitted by the UK Copyright, Designs and Patents Blackwell Science, visit our website Act 1988, without the prior permission of the publisher. www.blackwell-science.com First edition published 1995 by Blackwell Science Ltd Reprinted 1996, 1998 Contents Preface xi List of Contributors xiii Acknowledgements xv List of Abbreviations xvi 1 Projects and Project Management 1 Denise Bower 1.1 The function of project management 1 1.2 Projects 2 1.3 Project management 3 1.4 Project initiation 5 1.5 Projects risks 7 1.6 Project objectives 9 1.7 Project success 11 2Value Management 16 Tony Merna 2.1 Introduction 16 2.2 Definitions 16 2.3 Why and when to apply VM 20 2.4 How to apply VM 22 2.5 Reviews 23 2.6 Procedures and techniques 27 2.7 Benefits of value management 28 2.8 Summary 28 3 Project Appraisal and Risk Management 30 Nigel Smith 3.1 Initiation 30 3.2 Sanction 32 3.3 Project appraisal and selection 33 v vi Contents 3.4 Project evaluation 37 3.5 Engineering risk 39 3.6 Risk management 39 3.7 Risk and uncertainty management 43 4Project Management and Quality 44 Tony Merna 4.1 Definitions 44 4.2 Quality systems 46 4.3 Implementation 49 4.4 Quality-related costs 50 4.5 Quality circles 52 4.6 Quality plans 53 4.7 Total quality management (TQM) 53 4.8 Business process re-engineering (BPR) and TQM 55 5 Environmental Management 58 Ian Vickridge 5.1 Environmental impact 58 5.2 Environmental impact assessment (EIA) 60 5.3 Screening 62 5.4 Environmental legislation 63 5.5 Scoping 65 5.6 Base-line study 66 5.7 Impact prediction 67 5.8 Environmental impact statement 68 5.9 Presenting EIA information 69 5.10 Monitoring and auditing of environmental impacts 73 5.11 Environmental economics 75 5.12 Environmental management 80 6Project Finance 86 Tony Merna 6.1 Funding for projects 86 6.2 Sources of finance 87 6.3 Project finance 88 6.4 Financial instruments 89 6.5 Financial engineering 91 6.6 Debt financing contract 92 6.7 Types of loans 93 6.8 Appraisal and validity of financing projects 98 6.9 Risks 100 Contents vii 7 Cost Estimating in Contracts and Projects 105 Nigel Smith 7.1 Cost estimating 105 7.2 Cost and price 107 7.3 Importance of the early estimates 109 7.4 Estimating techniques 112 7.5 Suitability of estimating techniques to project stages 119 7.6 Estimating for process plants 121 7.7 Information technology in estimating 123 7.8 Realism of estimates 124 8 Project Stakeholders 127 Kris Moodley 8.1 Stakeholders 127 8.2 Primary project stakeholders 127 8.3 Secondary project stakeholders 128 8.4 Understanding the interests and influences 129 8.5 Stakeholder management 131 8.6 Stakeholders and communication 134 8.7 Summary 135 9 Planning 137 Nigel Smith 9.1 Planning 137 9.2 Programming 138 9.3 Network analysis 139 9.4 Updating the network 145 9.5 Resource scheduling 146 9.6 Planning with uncertainty 146 9.7 Software and modelling 147 10 Project Control Using Earned Value Techniques 156 Denise Bower 10.1 Project control 156 10.2 Earned value definitions 157 10.3 The theory and development of earned value analysis 159 10.4 Relationship of project functions and earned value 161 10.5 Value of work done control 163 10.6 Earned value analysis techniques 164 10.7 Application of EVA 166 10.8 Examples of EVA 167 10.9 Summary 172 viii Contents 11 Contract Strategy and the Contractor Selection Process 174 David Wright 11.1 Context 174 11.2 Factors affecting strategy 175 11.3 Contractual considerations 177 11.4 Contractor choice 179 11.5 Project objectives 180 11.6 Contract selection 182 11.7 Project organisation 186 11.8 Risk allocation 193 11.9 Terms of payment 194 11.10 Model or standard conditions of contract 201 11.11 Sub-contracts 204 12 Contract Policy and Documents 206 David Wright 12.1 Tendering procedures 206 12.2 Contracting policy 207 12.3 Contract planning 208 12.4 Contractor pre-qualification 211 12.5 Contract documents 212 12.6 Tender review 213 12.7 Tender evaluation 214 12.8 Typical promoter procedure 215 13 Project Organisation Design/Structure 222 Kris Moodley 13.1 Organisations 222 13.2 Building blocks of organisations 223 13.3 Organisation types 225 13.4 Internal and external projects 231 13.5 The human side of structure 232 13.6 Structure of collaborative relationships 233 13.7 Structure in the international context 234 13.8 Summary 236 14 Design Management 238 Peter Harpum 14.1 Role of designs 238 14.2 Understanding design 239 14.3 What design has to do 241 14.4 The role of design management 243 Contents ix 14.5 Managing the project triple constraints 247 14.6 Design liability 255 14.7 Briefing 257 14.8 Interface control 259 14.9 Design for manufacturing 261 15 Supply Chain Management 264 Steven Male 15.1 Background 264 15.2 Perspectives on terminology 265 15.3 Supply chain strategy 266 15.4 The nature of the organisation 269 15.5 World-class organisation in manufacturing 270 15.6 The project value chain 275 15.7 Procurement and the project value chain 277 15.8 Prime contracting 281 15.9 The operation of future construction supply chains 285 15.10 Summary 287 16 Team-Based Supply Chains and Partnering 290 Denise Bower 16.1 Background 290 16.2 Team working 291 16.3 Partnering 292 16.4 Establishing the relationship 298 16.5 Making the relationship work 300 16.6 Benefits of partnering 300 16.7 Constraints to partnering 303 16.8 Summary 305 17 Private Finance Initiative and Public±Private Partnerships 307 Tony Merna 17.1 Concession contracts 307 17.2 Definition of concession projects 308 17.3 Organisational and contractual structure 309 17.4 Concession agreements 311 17.5 Procurement of concession project strategies 311 17.6 Concession periods 313 17.7 Existing facilities 314 17.8 Classification of concession projects 315 17.9 Projects suitable for concession strategies 317 17.10 Risks fundamental to concession projects 317 x Contents 17.11 Concession package structure 319 17.12 Advantages and disadvantages of concession projects 321 17.13 The origins of PFI 323 17.14 The arguments for privately financed public services 323 17.15 PFI in the UK 325 17.16 Bidding and competition 326 17.17 Output specification 328 17.18 Financing public±private partnerships 329 18 Aspects of Implementing Industrial Projects 333 Nigel Smith 18.1 Multi-disciplinary projects 333 18.2 Industrial projects 335 18.3 Large engineering projects 336 18.4 UK off-shore projects 337 18.5 Legal systems in the EU countries 338 18.6 Innovation 339 19 Project Management in Developing Countries 341 Ian Vickridge 19.1 What makes developing countries different? 341 19.2 The construction industry in developing countries 345 19.3 Finance and funding 346 19.4 Appropriate technology 347 19.5 Labour-intensive construction 349 19.6 Community participation 351 19.7 Technology transfer 352 19.8 Corruption 353 19.9 Summary 355 20 The Future for Engineering Project Management 357 Nigel Smith 20.1 The role of the parties 358 20.2 Guidelines for project management 359 20.3 Project management ± the way ahead 362 Suggested Answers to Exercises in Chapter 9 364 Index 372 Preface In many sectors of industry the significance of good project management in delivering projects in accordance with predetermined objectives has been established. Industrialists and engineering institutions have called for the inclusion of a significant proportion of project management in higher-level degrees, something realised by Finniston in his review of the future of engineering in 1980 (Engineering our Future. Report of the Committee of Inquiry into the Engineering Profession, Chairman Sir Montague Finniston, HMSO, 1980).