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A Short Guide to Contract/Project Management for Project Owners.

The Need.

Today’s large-scale construction and engineering projects are more complex and more difficult to manage than their predecessors of even a few years ago. Owners and contractors alike frequently experience frustrating schedule delays, unanticipated cost overruns and continual disappointments as projects progress.

External pressures - such as energy and material shortages, inflated prices, changeable interest rates, hostile environmental and consumer groups, labour concerns and the mazes of government and bureaucratic regulations – complicate the management of large projects. Both inflation and the requirement to compress the project development schedules add to these pressures.

Clearly the management of a project conditions that are subject to control assumes new importance in this complex environment. Learning from experience, owners are exercising tighter control over their engineering firms and contractors. The challenge is to know how much to control and when to control.

In an effort to exercise control, owners and contractors frequently turn to sophisticated computer based systems, which sometimes become ends in themselves. Common sense controls often get lost in a deluge of computer printouts, forms and charts.

While owners are becoming more involved in their projects, their efforts often are too little too late or too much at the wrong time. Case studies of problem plagued projects often disclose a lack of effective early planning of how to organise, support and control the project.

Key Factors.

Obviously, management systems for large projects require the use of a computer, but the most important element of successful project management is not the computer or the software. More vital to a project success is a Contract/Project Management systems approach that first plans how a project will be arranged, executed and controlled and then implements effective control policies.

Project planning involves management action to :-
    Assess and document project risks in three critical areas namely technical, schedule and cost.
    Plan organisational, contractual and procedural controls selectively, recognising the risks involved.
    Document the details of project-planning efforts in a Project Management Plan.

Risk assessment is an organised process of analysing risks, evaluating alternative control strategies and techniques, and documenting the selected control strategy and techniques. Project owners need a methodology to evaluate three types of risk :-
    Technical – the risk that a design will not work.
    Schedule – the risk that a project will be late.
    Cost – the risk that a project will overrun.

The project participants representing engineering, construction, operations, purchasing, accounting, legal and other functions need to consider the following questions :-
    What can go wrong.
    How likely is it to go wrong.
    What would be the impact if it did go wrong.

Some of the most frequent risks are associated with the need for :-
    Approvals required by outside parties.
    State of the art or high technology design.
    Completing design of output in time for procurement and construction.
    Pre-commissioning testing and operating schedules.
    Experienced engineers, contractors and owner personnel.
    Available resources – funding, labour, materials and temporary and permanent equipment.     Changes in design as a result of approvals to meet operating, governmental regulations and project demand requirements.
    Methods to accommodate inflation, interest rates and currency fluctuations, the later particularly associated with projects outside the owner’s domestic domain.
    Lack of adequate communication vertically and horizontally.

Based on the identified risks, management can evaluate alternative control strategies, then select, document and communicate the control strategies and techniques that best match the risk circumstances.

Selective Controls.

The owner must establish overall policy guidelines for project planning and control. He should apply controls selectively based on the risk because controls are expensive and not all situations require the same degree of monitoring.

The risks involved in a specific project will help determine the specific control strategies and techniques required in such areas as :-

Organisation and Assignment of Responsibilities. One critical challenge an owner faces early in a project is how to organise the resources properly and assign responsibilities to help ensureeffective communication and understanding of responsibilities. He must consider such questions as how to organise internal resources and how to organise outside participants for the specific project. Once the owner defines the basic approach to organising the project, he must develop an organisation matrix to relate project control functions and responsibilities to specific elements of his organisation and to various parts of the outside participants’ organisations.

Contracting Approach. After establishing thee organisational strategy for a project, an owner can develop the basic strategy for contracting. Different types of contracts (e.g., cost plus, time and materials, unit price, fixed price lump sum, design build, etc) present different control challenges. The type of contract influences the degree of owner involvement and the nature of the controls he will exercise over the work. A fixed price lump-sum contract, for example, normally presents the minimum cost risk to an owner while a cost reimbursable contract represents maximum cost risk. Therefor the owner would normally define detailed cost controls to be used in the cost reimbursable contract and only summary level controls in the fixed price situation. However, the fixed price lump-sum contract may present significant schedule risk to the owner, so he would need to balance his summary level cost controls with detailed schedule controls.

Thus, the analysis of risks is an important element in determining the overall contracting strategy. Having identified them through the planning process, the owner must include the selected control techniques in specific contract terms and conditions.

Systems and Procedural Controls.After the owner defines organisational and contracting approaches, he can proceed to the definition of required systems and procedural controls. In the planning process the owner must consider those systems and procedures that outside participants will incorporate in their work on the project. He must also consider the internal systems and procedures he will use to control his own efforts and to monitor the work of the outside participants. General specifications of the systems and procedures to be used by outsiders are usually expressed in terms of the criteria that the outsiders’ systems must meet and are often included in the contract provisions. These normally include early warning, baseline, responsibility, change and accounting controls.

Early warning controls inform project personnel of potential problems in time for them to take effective action. These controls use experience from earlier project results to forecast the impact on later efforts. The early warning controls include :-
    Proper coding structure, (work breakdown structure, activity coding, or I. D number).
    Critical path schedule or logic linked bar chart.
    As accurate as possible estimates and forecasts. Use of say earned value forecasting.
    Procurement controls.
    Accurate monitor and measure of actual physical progress.
    Performance orientated cost control also linked to earned value forecasting.
    Reserve or contingency management.

Baseline controls measure actual performance against project baseline plan and identify variances. They also enable project personnel to trace the historical evolution of plans, changes and forecasts at completion of the project. The use of earned value will indicate the financial implications for the project.

Responsibility controls emphasise reporting against organisation responsibility assignments based on the coding structure opted for. They enable project managers to trace problems in relation to the plans, actual results and forecasts.

Change controls help minimise changes to the project scope and contracts. They help managers recognise potential changes at the earliest possible point, thoroughly evaluate their impact on technical, cost and scheduling performance, allow consideration for deferment to avoid increasing the project scope and approve appropriate changes at the proper level in the project organisation.

Accounting controls encompass activities to accurately capture the actual cost results of project efforts and make them available for analysis in a timely, controlled manner.

Documenting the Project Management Plan.

Many owners have found a project Management Plan useful. Such a plan documents the approach adopted to address the complex technical, schedule and cost concerns. The Project Management Plan gives the project manager a tool to organise his resources and lay the foundation for eventual (hopefully) project success.

The Project Mangement Plan typically includes :-
    Identification of major areas of risk and an anlysis of the impact of each risk.
    Description of the organisation and a detailed matrix showing the responsibilities of the owner and outside participants.
    Definition of the contracting strategies for the major areas of the project.
    Description of the project control techniques and who will provide them.
    Definition of the initial project cost and schedule plans.
    Definition of the tasks necessary to implement the Project Management Plan.

Project Implementation.

To implement a project, management must provide effective project planning and control systems.

Without question, large projects require a high degree of information technology to collect, organise and summarise the extensive detailed information concerning project events. Often, however, owners encounter significant difficulties in attempting to design and install effective support for project activities. The implementation of effective project planning and control systems requires documented policies and procedures clearly laid down and communicated. Also the application systems required to support an owner’s efforts on the project will vary depending on the size, nature and complexity of the project and how much each project will depend upon the systems of outside participants as well.

Benefits.

The contract/project management approach to project planning and control provides the tools for project owners to control technical, cost and schedule performance of medium to long term projects. The benefits of this approach include improved planning that recognises risks, clear assignment of responsibility, organised methods to track and control performance, early warning of potential problems and control over changes by continuous monitoring against authorised project baselines. This should mean fewer unfavourable end-of project surprises.

Well designed and properly implemented contract/project management systems offer project owners the tools they need to apply the right tools at the right tme. Effective contract/project management provides a systematic approach to gathering and organising the critical source of information. By highlightng needed information as the project progresses, contract/project management enables the owner to monitor costs more effectively and improve control over scheduling and productivity.

Contract/project management systems simplify the preparation of special reporting details demanded by government regulators, taxing authorities, lending institutions, and other owner accounting requirements. They also provide for closer job coordination and control necessitated by shorter implementation schedules, multiple project participants, currency management, world wide procurement ofmaterials and inflation.

Planning, reporting and control systems alone do not drive costs up or down. But the control of large projects is far more difficult and the risk of failure is far more significant without an effective management system.

Proven Solutions.

Contract/project management is complex, and each project has its own set of problems. However, it has been found that many of the problems occur with considerable frequency. Some of these have been summarised together with some solutions that may help reduce the problem areas. They have been dealt with in theorder they would normally occur on a project.

Project Start-up.
Problems.

    Unclear and inconsistent policies concerning work planning and control.
    Lack of formal responsibility assignment within the owner’s organisation in either construction, engineering, operational or financial divisions.
    Lack of formal assignment of responsibilities for many outside participants such as architects, engineers and contractors.
    Failure to base contract strategies on organised analysis of the risks associated with areas of work.

Solutions.     Assess and document risks and establish appropriate control strategies and techniques.
    Develop policies that provide the basis for organisation and systems implementation.
    Prepare a responsibility matrix that relates functions or activities to responsible parties.
    Assign and define specific management responsibilities to project personnel who will supervise the various work segments.
    Document organisation, contracting and selective control strategies in a Project Management Plan.
    Ensure that the plan is clearly communicated to all levels of responsibility in all divisions.

Design and Engineering.
Problems.

    Failure to schedule deign and engineering services adequately and to control costs properly.
    Failure to cost design changes accurately and review scope effects and cost before acceptance.
    Failure to compare submitted bid specifications or contractor quotes to the scope and costs contemplated in the owner’s estimate.
    Failure to involve all necessary personnel in the technical design process.

Solutions.

    Include preparation of specifications and drawings in the project schedule and co-ordinate procurement and construction schedules.
    Use adequate cost control and other performance monitoring techniques for engineering services. Include reimbursement clauses in the design engineering contracts.
    Make periodic design reviews and approve scope changes and associated costs.
    Reconcile completed contractor quotes with the original scope and cost estimates.
    Involve construction and operating personnel in the technical design process.
    Put the design and engineering works out to competitive bidding on clear contractual basis.

Contract Administration.
Problems.

    Failure to define scope of work to be performed in contracts adequately.
    Failure to sign or execute contracts properly.
    Making commitments that exceed the authorised contract amount.
    Authorising change orders or beginning additional work without sufficient cost analysis, documentation or appropriate approvals.
    Failure to provide sufficient forward analysis on the effects of proposed changes or variations.
    Failure to maintain an adequate hierarchical filing system. (say by contract overall, sub-contract, order / subject etc.).
    Failure to reflect changes in project cost reports in a timely and comprehensive manner.

Solutions.

    Evaluate risk associated with each contract and select appropriate contract control procedures.
    Develop standard terms and conditions for documenting control requirements in the contracts.
    Implement contract-preparation procedures to provide for adequate review and approval.
    Make an integrated review of the cost, schedule and technical impact of proposed major changes before approving them.
    Familiarise field personnel with key contract terms and conditions and change–control procedures.
    Maintain complete contract documentation records and perform periodic audits.
    Periodically review project status reports to evaluate potential changes and claims.

Cost Estimating and Budgeting.
Problems.

    Lack of documentation of formal estimating guidelines.
    Excessive preparation time for estimates.
    Inconsistent application of such factors as productivity and inflation.
    Failure to organise cost estimates to facilitate cost control. Information should be prepared according to the way work will be performed.
    Failure to associate contingency budgets with specific work segments or contracts and to document contingency assumptions properly.
    Failure to prepare detailed re-estimates or forecasts on a timely basis to reflect the probable cost of the remaining work.
    Failure to maintain cash forecasts on a timely basis.
    Failure to maintain budget baseline and to provide for formal approval of budget changes.

Solutions.

    Document procedures for estimate preparation, review and approval and ensure that project managers follow the procedures.
    Develop guidelines for accurate, timely re-estimates of work to be performed and for the adequacy of remaining contingencies.
    Periodically review the entire budget and compare to the original baseline and project feasibility estimate.
    Ensure that all costs are included in the project budgets.
    Ensure that there is a universality of productivity factors and that all libraries used are distributed and communicated.

Scheduling.
Problems.

    Failure to keep the schedule up to date and to routinely monitor performance against schedule.
    Excessive network detail for effective project operational use,
    Failure to provide exception reports.
    Problems submerged in excessive detail.
    Lack of sufficient detail for planning and control of individual tasks in summary or milestone schedules.
     Failure to schedule activities, including outside approvals, material procurement and commissioning.
    Lack of proper interfacing of scheduled work with cost-control and cash forecasts.
    Failure to relate schedule to opportunity costs of changes or delays.
    Lack of timely and sufficiently accurate input to scheduling systems.

Solutions.

    Define and document schedule control requirements, (network criteria, revision cycles, level of detail, etc).
    Develop detailed reporting procedures, including the use of exception reports and milestone reporting to executive management.
    Where possible and practical define schedule activities consistent with or related to cost accounts or costing breakdowns or methods.     Ensure inclusion of all significant activities in the schedule.
    Ensure that the schedule also reflects the requirements of the contractual documentation.
    Ensure that project managers maintain schedules on a current basis and properly execute supporting procedures.
    Ensure progress auditing, (monitoring of the work), is regularly carried out in a uniform manner.

Material management.
Problems.

    Lack of timely preparation of engineering specifications for purchasing purposes and activities.
    Failure to identify long lead and critical materials in advance.
    Lack of consistent schedules for steps in the material acquisition process, including take-offs, purchasing and site delivery.
    Failure to include commitments in progress reporting.
    Lack of timely buy-out reporting with forecasts of future purchases.
    Lack of timely reporting of local site purchases.
    Inadequate disposition and control of surplus material.

Solutions.

    Document formal procedures and develop system interfaces to assure consistent schedules for materials take-offs, purchasing and site delivery.
    Develop guidelines to ensure early identification of long lead time and critical items.
    Periodically review material budgets, commitments and estimates of remaining costs.
    Develop procedures to ensure proper handling of local site purchases and disposition of surplus materials. Include progress reports on a timely basis.

Project Accounting.
Problems.

    Lack of prompt time reporting and timely review of projects to ensure accurate charges.
    Failure to audit the contractor invoices for cost reimbursement contracts.
    Lack of routine audits of consultant charges, (architect and engineer).
    Lack of integrated source systems and consistent coding structures.
    Lack of integrated project accounting systems that are consistent with the company’s financial systems.
    Failure to maintain cash forecasts on a current basis and to allow for currency fluctuations.
    Failure to maintain records to simplify translation to fixed-asset categories upon project completion.
    Failure to consider reporting requirements of other investment partners and employed contractors.

Solutions.

    Develop and document formal project accounting procedures.
    Design and install suitable and compatible accounting systems.
    Develop a program for routinely auditing contractor, architect, engineer charges.

Cost Control and Reporting.
Problems.

    Failure to organise and report cost data in the proper sequence.
    Lack of complete and well supported forecasts or estimates.
    Cost feeder systems do not provide proper data.
    Excessive manual intervention by cost engineers and accountants.
    Failure of company personnel to verify reports prepared by outside participants for accuracy and completeness.
    Lack of estimated cost ay completion or cost to complete each work segment in cost reporting.
    Failure to include commitments in cost analysis or to maintain current commitment information.
    Failure to reconcile current costs to the original baseline budget.
    Reports do not reflect trends.

Solutions.

    Define cost and schedule control requirements for each management level including exception reporting for each area.
    Organise and collect cost data according to the project work breakdown structure to reflect performance earned.
    Design and install appropriate cost-accumulation and project management reporting systems.
    Analyse reports and recommend corrective actions.
    Reconcile project reports with general accounts and other financial reports.

Conclusions.

The senior or highest level of control within a well managed owner or his project team organisation will ensure that there are responsible, authorised personnel with small teams in place to ensure the optimum functioning of their schemes and projects on an overall monitoring basis. This AP should begin with a careful analysis of project conditions and risks and then define specific control criteria that reflect these factors and will aid the various managers develop and document their planning efforts into a Project Management Plan.

One of the responsibilities for this AP would be to carry out system compliance reviews and review the project control systems and techniques of consultants and contractors to determine if they comply with owner / project manager control criteria. This would include analysis and evaluation of ;-

    Policy organisation, systems and procedures proposed to meet the technical, cost and scheduling specifications of the contract.

    Review the capability of personnel and processing systems to accumulate accurate and timely data.

This auditing (monitoring) process should be taken further to review networks, cost estimates and status reports to verify that contractors are using agreed on systems and procedures. For cost reimbursable contracts may include an audit of costs charged to a project and develop support to guard against claims and possible litigation.

The AP (Authorised Person) should also be in a position to advise on support for personnel at all levels of management in the form of say training and furtherance of the necessary work skills in the appropriate sectors of the organisation. This can either be on a stand alone basis or integrated into the management system design and organisation and functioning of the owner / project manager.

The AP should also have expertise available to advise on systems and software suitability and where applicable be able to design and introduce any necessary custom built systems.

The overall intention and aim should be to streamline an owner’s organisation, make it cost effective and communicating intelligently at all levels vertically and horizontally with understanding and in a universally understood manner within the organisation. This will only be achieved if the topmost level of an organisation’s management is fully involved and seen to be involved, and in all probability, seen to be responsible for the efficient operation of the systems.

The foregoing, in the main, will apply to the larger owner / developer. Where owners are involved in say one off or a limited number of projects it may well be advisable to lay off his risk for an organisation of his own to control his project(s) by employing some form of external Project Management. This PM should have the necessary expertise in place to accommodate the above proposed guidelines. However, the small owner should still be aware of the necessary controls that should be in place for the successful management of his project(s).

David T Lewis.
17 Mar 02.