ENGINEERINGPROJECTMANAGEMENTENGINEERING PROJECTMANAGEMENTSecond EditionEdited byNigel J. SmithProfessor of Construction Project ManagementUniversity of Leeds#2002 by Blackwell Science Ltd,a Blackwell Publishing CompanyEditorial Offices:Osney Mead, Oxford OX2 0EL, UKTel: +44 (0)1865 206206Blackwell Science, Inc., 350 Main Street,Malden,MA 02148-5018, USATel: +1 781 388 8250Iowa State Press, a Blackwell Publishing Company,2121 State Avenue, Ames, Iowa 50014-8300, USATel: +1 515 292 0140Blackwell Publishing Asia Pty Ltd, 550 SwanstonStreet, Carlton South, Melbourne, Victoria 3053,AustraliaTel: +61 (0)3 9347 0300Blackwell Wissenschafts Verlag, Kurfu rstendamm 57,10707 Berlin, GermanyTel: +49 (0)30 32 79 060The right of the Author to be identified as the Authorof this Work has been asserted in accordance with theCopyright, Designs and Patents Act 1988.All rights reserved. No part of this publication may bereproduced, stored in a retrieval system, or transmitted,in any form or by any means, electronic, mechanical,photocopying, recording or otherwise, except aspermitted by the UK Copyright, Designs and PatentsAct 1988, without the prior permission of the publisher.First edition published 1995 by Blackwell Science LtdReprinted 1996, 1998Second edition published 2002 by Blackwell ScienceLtdLibrary of CongressCataloging-in-Publication DataEngineering project management/edited by Nigel J.Smith.2nd ed.p. cm.Includes bibliographical references and index.ISBN 0-632-05737-8 (alk. paper)1. EngineeringManagement. 2. ConstructionindustryManagement. I. Smith, Nigel J.TA190 .E547 2002658.4'04dc212002074568ISBN-0-632-05737-8A catalogue record for this title is available from theBritish LibrarySet in 10/13pt Timesby DP Photosetting, Aylesbury, BucksPrinted and bound in Great Britain byTJ International, Padstow, CornwallFor further information onBlackwell Science, visit our websitewww.blackwell-science.comContentsPreface xiList of Contributors xiiiAcknowledgements xvList of Abbreviations xvi1 Projects and Project Management 1DeniseBower1.1 Thefunction of projectmanagement 11.2 Projects 21.3 Project management 31.4 Project initiation 51.5 Projectsrisks 71.6 Project objectives 91.7 Project success 112 Value Management 16Tony Merna2.1 Introduction 162.2 Definitions 162.3 Why and when to apply VM 202.4 How to apply VM 222.5 Reviews 232.6 Proceduresand techniques 272.7 Benefitsof valuemanagement 282.8 Summary 283 ProjectAppraisal and RiskManagement 30Nigel Smith3.1 Initiation 303.2 Sanction 323.3 Project appraisal and selection 33v3.4 Project evaluation 373.5 Engineering risk 393.6 Risk management 393.7 Risk and uncertainty management 434 Project Management and Quality 44Tony Merna4.1 Definitions 444.2 Quality systems 464.3 Implementation 494.4 Quality-relatedcosts 504.5 Quality circles 524.6 Quality plans 534.7 Total qualitymanagement (TQM) 534.8 Businessprocess re-engineering (BPR) and TQM 555 Environmental Management 58Ian Vickridge5.1 Environmental impact 585.2 Environmental impact assessment(EIA) 605.3 Screening 625.4 Environmental legislation 635.5 Scoping 655.6 Base-linestudy 665.7 Impact prediction 675.8 Environmental impact statement 685.9 Presenting EIA information 695.10 Monitoring and auditingof environmental impacts 735.11 Environmental economics 755.12 Environmental management 806 Project Finance 86Tony Merna6.1 Funding forprojects 866.2 Sourcesof finance 876.3 Project finance 886.4 Financial instruments 896.5 Financial engineering 916.6 Debt financing contract 926.7 Types of loans 936.8 Appraisaland validityof financing projects 986.9 Risks 100vi Contents7 Cost Estimatingin Contracts and Projects 105Nigel Smith7.1 Cost estimating 1057.2 Cost and price 1077.3 Importance of the earlyestimates 1097.4 Estimating techniques 1127.5 Suitabilityof estimatingtechniques to projectstages 1197.6 Estimating forprocessplants 1217.7 Informationtechnology in estimating 1237.8 Realism of estimates 1248 ProjectStakeholders 127KrisMoodley8.1 Stakeholders 1278.2 Primaryprojectstakeholders 1278.3 Secondaryprojectstakeholders 1288.4 Understanding the interests and influences 1298.5 Stakeholdermanagement 1318.6 Stakeholders and communication 1348.7 Summary 1359 Planning 137Nigel Smith9.1 Planning 1379.2 Programming 1389.3 Network analysis 1399.4 Updating the network 1459.5 Resource scheduling 1469.6 Planning with uncertainty 1469.7 Software and modelling 14710 ProjectControl Using Earned Value Techniques 156Denise Bower10.1 Project control 15610.2 Earned valuedefinitions 15710.3 Thetheoryand development of earnedvalueanalysis 15910.4 Relationship of projectfunctions and earnedvalue 16110.5 Value of workdone control 16310.6 Earned valueanalysistechniques 16410.7 Application of EVA 16610.8 Examples of EVA 16710.9 Summary 172Contents vii11 Contract Strategy and theContractor Selection Process 174David Wright11.1 Context 17411.2 Factors affecting strategy 17511.3 Contractual considerations 17711.4 Contractor choice 17911.5 Project objectives 18011.6 Contractselection 18211.7 Project organisation 18611.8 Risk allocation 19311.9 Terms of payment 19411.10 Modelor standard conditionsof contract 20111.11 Sub-contracts 20412 Contract Policyand Documents 206David Wright12.1 Tenderingprocedures 20612.2 Contracting policy 20712.3 Contractplanning 20812.4 Contractor pre-qualification 21112.5 Contractdocuments 21212.6 Tender review 21312.7 Tender evaluation 21412.8 Typical promoter procedure 21513 Project Organisation Design/Structure 222Kris Moodley13.1 Organisations 22213.2 Building blocks of organisations 22313.3 Organisation types 22513.4 Internal and external projects 23113.5 The human sideof structure 23213.6 Structure of collaborativerelationships 23313.7 Structure in the international context 23413.8 Summary 23614 Design Management 238Peter Harpum14.1 Role of designs 23814.2 Understanding design 23914.3 Whatdesign has to do 24114.4 The role of designmanagement 243viii Contents14.5 Managingthe project tripleconstraints 24714.6 Design liability 25514.7 Briefing 25714.8 Interfacecontrol 25914.9 Design for manufacturing 26115 Supply ChainManagement 264StevenMale15.1 Background 26415.2 Perspectiveson terminology 26515.3 Supply chainstrategy 26615.4 Thenatureof the organisation 26915.5 World-classorganisationin manufacturing 27015.6 Theprojectvaluechain 27515.7 Procurementand the project value chain 27715.8 Prime contracting 28115.9 Theoperation of future construction supply chains 28515.10 Summary 28716 Team-BasedSupply Chainsand Partnering 290Denise Bower16.1 Background 29016.2 Team working 29116.3 Partnering 29216.4 Establishing the relationship 29816.5 Makingthe relationship work 30016.6 Benefitsof partnering 30016.7 Constraintsto partnering 30316.8 Summary 30517 Private FinanceInitiativeand PublicPrivatePartnerships 307Tony Merna17.1 Concessioncontracts 30717.2 Definition of concession projects 30817.3 Organisational and contractualstructure 30917.4 Concessionagreements 31117.5 Procurementof concession projectstrategies 31117.6 Concessionperiods 31317.7 Existing facilities 31417.8 Classification of concession projects 31517.9 Projectssuitable for concession strategies 31717.10 Risks fundamental to concession projects 317Contents ix17.11 Concession package structure 31917.12 Advantages and disadvantagesof concession projects 32117.13 The origins of PFI 32317.14 The arguments forprivately financed public services 32317.15 PFI in the UK 32517.16 Biddingand competition 32617.17 Output specification 32817.18 Financingpublicprivatepartnerships 32918 Aspects ofImplementingIndustrial Projects 333Nigel Smith18.1 Multi-disciplinaryprojects 33318.2 Industrial projects 33518.3 Largeengineering projects 33618.4 UK off-shore projects 33718.5 Legalsystems in the EU countries 33818.6 Innovation 33919 Project Management inDeveloping Countries 341Ian Vickridge19.1 Whatmakes developing countriesdifferent? 34119.2 The constructionindustryin developing countries 34519.3 Financeand funding 34619.4 Appropriate technology 34719.5 Labour-intensive construction 34919.6 Community participation 35119.7 Technology transfer 35219.8 Corruption 35319.9 Summary 35520 TheFuture forEngineering ProjectManagement 357Nigel Smith20.1 The role of the parties 35820.2 Guidelinesfor project management 35920.3 Project management the wayahead 362Suggested Answers to Exercises in Chapter 9 364Index 372x ContentsPrefaceIn many sectors of industry the significance of good project managementindeliveringprojectsinaccordancewithpredeterminedobjectiveshasbeenestablished.Industrialistsandengineeringinstitutionshavecalledfortheinclusionofasignificantproportionofprojectmanagementinhigher-level degrees, something realised by Finniston in his review of thefutureof engineeringin1980(EngineeringourFuture. Report of theCommitteeof InquiryintotheEngineeringProfession, ChairmanSirMontagueFinniston, HMSO, 1980). Sincethepublicationofthefirstedition of this book in 1995, a number of significant developments havetakenplace.ABritishStandardforProjectManagement,BS6079,hasbeen published, and the UK-based Association for Project Managementhas producedafundamental guidetoprocesses andpracticeentitledBodyofKnowledge,andhasdraftedastandardcontractforemployingproject managers. There has also been a marked increase in the teachingand delivery of university programmes and continuing professionaldevelopment (CPD) coursesin project management.Many organisations in the engineering, finance, business, process andother sectors are appointing project managers. Some have a very narrowbrief and a precise role, whereas others have a more strategic, managerialandmulti-disciplinaryfunction. This secondeditionbuilds uponthesuccessof thefirst editioninprovidingaclearpictureof theaimsofproject management based upon best practice. The improvements in thiseditionhavebeendrivenbychangesinthepracticeofprojectmanage-ment, and by the helpful comments made by book reviewers and readerssince1995.The original information on risk management is updated andenhanced.Theprincipleofuncertaintymanagementisrecognisedbyanew chapter on value management to balance the effective managementofadverseriskandopportunity.Changesinthemanagementofmajorprojects have resulted in more joint ventures, project partnering, specialproject vehicles andother forms of collaborative working. The newxieditionincludesnewchaptersonsupplyandvaluechainmanagement,andoneffective project partnering. The book is not aimedat anyparticularsectorofengineering,andrelatestothemanagementofanymajortechnical project.Newlyappointedprojectmanagersandstudentsofprojectmanage-ment at the MEng, MBA and MSc level will find the enhanced text andreferences beneficial. The book is concerned with the practice and theoryof project management, particularly inrelationtomulti-disciplinaryengineeringprojects, large and small, in the UKand overseas.Nigel J. Smithxii PrefaceList of ContributorsEditor: ProfessorNigel J. Smith, BSc, MSc, CEng, FICE, MAPM, isProfessorofConstructionProjectManagementintheSchool ofCivilEngineering, University of Leeds. After graduating from the Universityof Birmingham he has spent fifteen years in the industry working mainlyontransportationinfrastructureprojects. Hisacademicresearchinter-ests include risk management and procurement of projects using privatefinance.Hehas publishedfifteenbooksandnumerous refereedpapers.Heis currently Deanof the Faculty of Engineering.DeniseBower,BEng, PhD,MASCE, isaLecturerinProjectManage-ment in the School of Civil Engineering at the University of Leeds. Shewas formerly the Shell Lecturer in Project Management at UMIST. Sheis aleadingmember of EngineeringManagement PartnershipwhichoffersDiplomaandMastersDegreelevelqualificationstoengineersofall disciplines. She was a member of Latham Working Group 12 and hasanextensiverecordof consultancyworkwithclientsinconstruction,processengineering and manufacturing.PeterHarpum, after ten yearsmanagingmajor projectsin the oil,ship-ping and construction industries, Peter Harpum now works as a projectmanagementconsultantadvisingbluechipclientsinvariousindustrialsectors.Hehascarriedoutanumberofresearchprojectswithinterna-tional engineering and construction organisations, concentrating inparticular on the front-end of the project lifecycle. He has contributed tothedesign, content, anddeliveryofanumberofprojectmanagementcoursesatMasterslevelandcontinuestoworkasavisitinglectureratUMIST.PeterholdsaMastersDegreeinProjectManagement,andisworking on his doctoral thesison designmanagement theory.Professor Steven Male, holds the Balfour Beatty Chair in BuildingEngineeringandConstructionManagement,SchoolofCivilEngineer-ing, Universityof Leeds. His researchandteachinginterests includestrategic management in construction, supply chain management, valuexiiimanagementandvalueengineering.Hehas ledresearchprojects underthe EPSRC IMI programme `Construction as a Manufacturing Process';withtheDETR; DTI; and, withintheEuropeanUnion4thand5thFrameworks. He is a visiting Professor inthe Department of CivilEngineering, University of Chile. He works closely with industry and hasundertakenarangeofresearch, trainingandconsultancystudieswithconstructioncorporations, constructionconsultancy firms, blue chipand government clients.TonyMerna, BA, MPhil, PhD, CEng, MICE, MAPM, MIQA, istheseniorpartnerof theOrielGroupPractice andisalsoaLecturerintheDepartment of Civil and Construction Engineering at UMIST. Acharteredengineerbyprofession, hehasbeeninvolvedat thedesign,construction, operation and financing stages of many projects procuredin the UK and overseas.KrisMoodley, BSc, MSc, AIArb, isaLecturerinConstructionMan-agementintheSchoolofCivilEngineering,UniversityofLeeds.Aftergraduating fromNatal University, his initial employment was withFarrow Laing in Southern Africa, before his first academic appointmentat Heriot Watt University. He moved to Leeds four years later to pursueresearchinterestsinstrategicbusinessrelationshipsbetweenorganisa-tions and their projects. He has contributed to many publications and isco-author of the bookCorporate Communicationsin Construction.Ian Vickridge, BSc(Eng), MSc, CEng, MICE, MCIWEM, runs his owncivil engineeringconsultancyandisalsoaVisitingSeniorLecturerinCivil Engineering at UMIST. He has over thirty years experience in theconstruction industry gained in Canada, Hong Kong, Singapore, China,and Saudi Arabia as well as the UK. He is the Executive Secretary of theUK Society for Trenchless Technology and a reviewer of candidates forMembershipof the Institutionof Civil Engineers. He has publishedextensively on a variety of topics related to construction, environmentalmanagement and projectmanagement.DavidWright, MA, CIChemE, ACIArb, left OxfordwithadegreeinJurisprudence and spent 30 years in industry. He gained experience in theautomotiveindustry, theelectronicindustry, thedefenceindustryandthe chemical engineering andprocess industry. He was CommercialManager of Polibur Engineering Ltd and in the mechanical engineeringsector was European Legal Manager to the Mather & Platt Group. He isnowaconsultantonmattersofcontractandcommerciallaw.DavidisalsoaVisitingLectureratUMISTandaVisitingFellowinEuropeanBusiness Lawat CranfieldUniversity.xiv Listof ContributorsAcknowledgementsIamparticularlygratefultomyco-authorsandfellowcontributorstothis book, especially those who have participated in both editions,namely Dr Denise Bower, Dr Tony Merna and Mr Ian Vickridge. I amalso grateful to the new contributors Mr Pete Harpum, Professor SteveMale,MrKrisenMoodleyandMrDavidWright.Iwouldalsoliketothank again the contributors to the first edition, particularly ProfessorsPeter Thompson and Steven Wearne; also Dr Kareem Yusuf of IBM forhisnew contributionin software and modelling in Chapter 9.Theeditorandauthorswouldliketoexpress theirappreciationtoSally Mortimer for managing the existing artwork from the first edition,and new diagrams from the authors supplied in a wide variety of formatsfor processing. I would also like to thank Sally for checking and revisingeachof the many draft versions of every chapter. Nevertheless, theresponsibilityfor any errorsremainsentirelymy own.Nigel J.SmithxvList of AbbreviationsABS Assemblybreakdown structureACWP Actualcost of workperformedADB AsianDevelopmentBankADR Alternative dispute resolutionAfDB AfricanDevelopment BankAPM Association for Project ManagementBAC Budget (baseline) at completionBCWP Budgeted cost of workperformedBCWS Budgeted cost of workscheduledBOD BuildoperatedeliverBOL BuildoperateleaseBOO BuildownoperateBOOST BuildownoperatesubsidisetransferBOOT BuildownoperatetransferBoQ Billsof quantitiesBOT BuildoperatetransferBPR Businessprocess re-engineeringBRT BuildrenttransferBTO BuildtransferoperateCBA Costbenefit analysisCII Construction Industry Insitute (Texas)CPD Continuing professional developmentCPI Cost performanceindexCV Cost varianceDBOM DesignbuildoperatemaintainDBOT DesignbuildoperatetransferDCMF Design,construct, manageand financeDEO Defence Estates OrganisationDETR Department of the Environment, Transport and the RegionsDFA DesignforassemblyDfID Department forInternational DevelopmentxviDFM Designfor manufacturingDSM Dependencystructure matrixDTI Departmentof Trade and IndustryEBRD European Bankfor Reconstructionand DevelopmentECC Engineering and construction contractECGD ExportCredit Guarantee DepartmentECI European Construction InstituteEIA Environmental impact assessmentEIB European InvestmentBankEIS Environmental impact statementEMS Environmental management systemEPC EngineerprocureconstructEPIC EngineerprocureinstallcommissionEQI Environmental qualityindexERP Enterpriseresource planningEU European UnionEVA Earned valueanalysisFBOOT FinancebuildownoperatetransferFIDIC Fe de ration Internationaledes Inge nieurs Conseils(Lausanne)GUI Graphical userinterfaceHMPS Her Majesty's PrisonServiceIFC International FinanceCorporationIPT IntegratedprojectteamIRR Interestrate riskMoD Ministryof DefenceNEPA NationalEnvironmentalProtectionAgencyNGO Non-governmental organisationNIF Note issuance facilityNPV Net presentvalueOBS Organisational breakdown structureOECD Organisation for Economic Cooperation and DevelopmentPBS Productbreakdown structurePC ProcureconstructPEP Project execution planPERT Programme Evaluation and Review TechniquePFI Private finance initiativePIC ProcureinstallcommissionPIM Personalinformation managerPMI Project Management InstitutePSBR Public sectorborrowing requirementQA Quality assuranceList of Abbreviations xviiQC QualitycontrolQFD Qualityfunction deploymentRUF Revolving underwritingfacilitySCA Structured concession agreementSCM Supply chainmanagementSPI Schedule performanceindexSPV Special project vehicleSV Schedule varianceTCM Travelcost methodTCN ThirdcountrynationalsTQM TotalqualitymanagementTUPE Transfer of undertaking from previous employerUSGF US Gulf factorVA ValueanalysisVE ValueengineeringVM ValuemanagementVP ValueplanningVR ValuereviewingWBS Work breakdown structureWMG WarwickManufacturingGroupWTA Willingness to acceptWTP Willingness to payxviii List of AbbreviationsChapter 1Projects and Project ManagementThischapterdescribes the variousaspects of projectmanagement fromwhat a project is, through its various stages, to the key requirements forsuccess.1.1 The function of project managementManagingprojectsisoneoftheoldestandmostrespectedaccomplish-ments of mankind. One stands in awe of the achievements of the buildersofthepyramids,thearchitectsofancientcities,themasonsandcrafts-men of great cathedrals and mosques, and of the might of labour behindthe Great Wall of Chinaandother wonders of the world. Today'sprojects also command attention. People were riveted at the sight of theAmericans landing on the moon. As a new road or bridge is opened, as amajorbuildingrises, asanewcomputersystemcomesonline, orasaspectacular entertainment unfolds, a newgenerationof observers isinspired.All of these endeavours are projects, like many thousands ofsimilartask-orientatedactivities, yet theskillsemployedinmanagingprojects, whether major ones such as those mentioned above ormore commonplace ones, are not well known other than to thespecialists concerned. The contribution that a knowledge ofmanaging projects can make to management at large is greatlyunderratedandgenerallypoorlyknown. For years, project manage-ment was derided as a low-tech, low-value, questionable activity.Only recently has it been recognised as a central management dis-cipline. Major industrial companies nowuse project management astheir principal management style. `Management by projects' hasbecome a powerful way to integrate organisational functions andmotivate groups to achieve higher levels of performance andproductivity.11.2 ProjectsAprojectcanbeanynewstructure,plant,process,systemorsoftware,large or small, or the replacement, refurbishing, renewal or removal of anexisting one. It is a one-off investment. In recent times, project managershavehadtomeet the demands of increasingcomplexityinterms oftechnicalchallenge, product sophisticationand organisationalchange.One project may be much the same as a previous one, and differ fromit only in detail to suit a change in market or a new site. The differencesmay extend to some novelty in the product, in the system of production,or in the equipment and structures forming a system. Every new designofcar, aircraft,ship, refrigerator, computer, crane, steel mill, refinery,productionline,sewer, road, bridge,dock,dam, powerstation,controlsystem,buildingorsoftwarepackageisaproject.Soaremanysmallerexamples,andapackageofworkforanysuchprojectcaninturnbeasubsidiaryproject.Projects thus vary in scale and complexity from small improvements toexistingproductstolargecapitalinvestments. Thecommonuseoftheword`project' for all of these islogicalbecauseevery oneis:o an investment of resources for an objective;o a causeof irreversible change;o novel to some degree;o concernedwiththe future;o related to an expected result.A project is an investment of resources to produce goods or services; itcosts money. The normal criterion for investing in a proposed project istherefore that the goods or services produced are more valuable than thepredicted cost of the project.To get value from the investment, a project usually has a defined datefor completion. As a result, the work for a project is a period of intenseengineering and other activities, but is short in its duration relative to thesubsequent working lifeof the investment.A number of definitions of the term `project' have been proposed, andsomeare presented below.o The Project Management Institute (PMI), USA, defines a project as`atemporaryendeavourundertakentocreateauniqueproduct orservice'.o The UK Association for Project Management defines a project as `adiscrete undertakingwithdefinedobjectives oftenincludingtime,cost and quality(performance)goals'.2 Engineering Project Managemento The British Standards Institute (BS6079) defines a project as `auniqueset of coordinatedactivities, withdefinitestartingandfin-ishingpoints, undertakenbyanindividual ororganisationtomeetspecific objectives with defined schedule, cost and performanceparameters'.From the above definitions, it may be concluded that a project has thefollowing characteristics:o it is temporary,havinga start and a finish;o it is unique in someway;o it has specific objectives;o it is the causeand meansof change;o it involes risk and uncertainty;o it involves the commitment of human, material and financialresources.1.3 Project managementThedefinitionof project management stemsfromthedefinitionof aproject,andimpliessomeformofcontrolovertheplannedprocessofexplicit change.o ThePMI defines project management as `theart of directingandcoordinatinghumanandmaterial resources throughthe life of aproject byusingmodernmanagement techniques toachieve pre-determinedgoalsofscope,cost,time,qualityandparticipantsatis-faction'.o The UKAssociation for Project Management defines it as `theplanning, organisation, monitoringandcontrol of all aspectsof aprojectandthemotivationofallinvolvedtoachieveprojectobjec-tives safelyand within agreedtime,cost and performancecriteria'.o The British Standards Institute (BS 6079) defines it as `the planning,monitoring and control of all aspects of a project and the motivationof all those involved to achieve the project objectives on time and tocost, qualityand performance'.Thecommonthemeisthatprojectmanagementisthemanagementofchange, but explicitly planned change, such that from the initial concept,the change is directedtowards the unique creationof afunctioningsystem. In contrast, general or operations management also involves theProjects and Project Management 3management of change, but their purpose is to minimise and control theeffectsofchangeinanalreadyconstructedsystem. Therefore, projectmanagement directs all the elements that are necessarytoreachtheobjective, as well as those that will hinder the development. It should notbe forgotten that projects are managedwithand throughpeople.Project management must lookaheadat theneedsandrisks, com-municatetheplansandpriorities, anticipateproblems, assessprogressandtrends, get qualityandvalueformoney, andchangetheplansifnecessary to achieve the objectives.The needs of project management are dependent upon the relative size,complexity, urgency, importance and novelty of a project. The needs arealsogreaterwhereprojectsareinterdependent,particularlythosecom-peting for the same resources.Each project has a beginning and an end, and hence it is said to have alife-cycle. A typical life-cycle is defined by Wearne (1995) and shown inFigure1.1.Thenatureandscaleofactivitychangeateachstage.Eachstage marks a change in the nature, complexity and speed of the activitiesandthe resources employedas a project proceeds. Widely differentterminologyforthevariousaspectsofprojectmanagementareusedindifferent industries,but they can all be related to this diagram.Thedurationsofthestagesvaryfromprojecttoproject,anddelayssometimesoccurbetweenonestageandthenext.Stagescanalsoover-lap. Figure 1.1 shows the sequence in which the stages should be started.This is not meant to show that one must be completed before the next isFigure 1.1 Project life cycle.4 Engineering Project Managementstarted, however. Theobjective ofthe sequenceshouldbeto produce auseful result, so that the purpose of each stage should be to allow the nextto proceed.1.4 Project initiationAs showninFigure 1.1, aproject is likely tobe initiatedwhenitspromoter predicts that there will be a demand for the goods or servicesthe project will produce. The planners of the project should then draw ontherecordsandexperienceof previousprojects, andtheresultsfromresearch indicating new possibilities. These three sources of informationought to be broughttogether at this stage of a project.At this stage, there will usually be alternative ideas or schemes whichall seemlikely to meet the demand. Further progress requires thepromoter to authorise the use of some resources to investigate these ideasand the potential demand for the project. The term `sanction feasibilitystudy' is usedhere tomeanthe decisiontoincur the cost of theseinvestigations.Thenextmoveistoappraisetheideasinordertocom-pare their predicted cost withtheir predicted value.In emergencies, appraisal is omitted, or if a project is urgent there maybe no time to try to optimize the proposal. More commonly, alternativeproposalshavetobeevaluatedinordertodecidewhethertoproceed,and then how best to do so in order to achieve the promoter's objectives.FeasibilitystudyThe appraisal stage is also known as the `feasibility study'. The outputsfromthisphasecanonlybeprobabilistic, astheyarebaseduponpre-dictionsofdemandandcostswhosereliabilityvariesaccordingtothequalityoftheinformationused, thenoveltyoftheproposals, andtheamountandqualityoftheresourcesavailabletoinvestigateanyrisksthatcouldaffecttheprojectanditsuseful life. Thekeyfeatureofthisphase is the decision as to whetheror not the projectis viable that is,highrisklevels donot necessarilymeanthat theproject will not goahead, but rather thata higherrate of return is required.Afterthefirstappraisal, arepetitionoftheworkuptothispointisoften needed as its results may show that better information is needed onthepossibledemand, ortheconclusionsof theappraisal maybedis-appointingandrevisedideasareneededwhicharemorelikelytomeetthe demand. In addition, more expenditure has to be sanctioned.Repetition of the work may also be needed because the information usedProjects and Project Management 5to predict the demand for the project has changed during the time takentocomplete the work. Feasibility studies may therefore have toberepeated several times.Concludingthisworkmaytaketime, butitsoutcomewill bequitespecific: the sanctioning or rejection of the proposed project. If a projectis selected, the activities change from assessing whether it should proceedto deciding how best it should be realised and to specifying what needs tobe done.Design,developmentand researchDesignideasareusuallythestartofpossibleprojects,andalternativesareinvestigatedbeforeestimatingcostsandevaluatingwhethertopro-ceed any further. The main design stage of deciding how to use materialstorealiseaprojectusuallyfollowsanevaluationandselectionofthosematerials,asindicatedinFigure1.1.Thedecisionsmadeatthedesignstagealmostentirelydeterminethequalityandcost,andthereforethesuccess, of aproject. Scale andspecialisationincreaserapidlyas thedesign proceeds.Developmentinthecycleinvolvesbothexperimental andanalyticalworkto test the means of achieving a predictedperformance.Researchascertains the properties andpotential performance of the materialsused. These two are distinct in their objectives. Design and developmentshareoneobjective,thatofmakingideassucceed.Theirrelationshipistherefore important,as indicated in Figure1.1.Usually, most of the design and the supporting development work fora project follows the decision to proceed. This work may be undertakeninsub-stages inorder toinvestigate novel problems andreviewthepredictions of cost and value before continuing with a greater investmentof resources.ProjectimplementationThenfollowsthelargestscaleofactivitiesandthevarietyofphysicalworkneededtoimplement aproject, particularlythemanufactureofequipmentand the constructionwork necessary for its completion.Mostcompaniesandpublicbodieswhopromotenewcapitalexpen-ditureprojectsemploycontractorsandsub-contractorsfromthisstageon to supply equipment or carry out construction. For internal projectswithinfirmsthereisanequivalentinternalprocessofplacingorderstoauthoriseexpenditure on labourand materials.The sections of a project can proceed at different speeds in the design6 Engineering Project Managementandsubsequentstages,butallmustcometogethertotestandcommis-siontheresultingfacility. Theprojecthasthenreacheditsproductivestage, and should be meeting the specified objectives.The problems encountered in meeting objectives vary from project toproject. They vary in content and in the extent to which experience canbe adapted from previous projects in order to avoid novel problems. Thecriteria for appraisal also vary from industry to industry, but common toall projects is the need to achieve a sequence of decisions and activities, asindicated in Figure1.1.Figure 1.1 is a model of what may be typical of the sequence of workforoneproject.Projects arerarelycarriedoutinisolationfromothers.At the start, alternative projects may be under consideration, and in theappraisal stage these compete for selection. Those selected are then likelytosharedesignresourceswithotherswhichmaybeotherwiseuncon-nected, because of the potential advantages of sharingexpertise andother resources, but would therefore be in competition with them for theuseoftheseresources.Thissharingwillbesimilarthroughallthesub-sequent stages in the cycle.Aprojectisthuslikelytobecross-linkedwithothersateverystageshown in Figure 1.1. These links enable people and firms to specialise inone stage or sub-stage of the work for many projects. The consequence isoften that any one project depends upon the work of several departmentsor firms, each of which is likely to be engaged on a variety of projects fora variety of customers. In all of these organisations there may thereforebe conflicts inutilisingresources tomeet the competingneeds of anumberof projects, andeachpromoterinvestingaproject mayhaveproblems inachievingthe sequence of activities whichbest suits hisinterests.1.5 Project risksProjects are investments of resources, with a distinct increase in the levelof investment as the project passes from concept to implementation. Thisisdemonstratedbythe`typicalinvestmentcurve'showninFigure1.2.From this graph, deviations from the base investment profile (i.e. risks)canbeidentified. LineAindicatesincreasedincome, e.g. betterthanexpected sales price/volume, or lower operational costs. Line B indicatescompletion, e.g. the project is completed late, but the net revenue is thenas forecast. Line C indicates reduced net revenue, e.g. worse sales price/volume, or higheroperational costs.Allprojectsaresubjecttoriskanduncertainty.WhenyoupurchaseProjects and Project Management 7Figure 1.2 Typical investment curve.8EngineeringProjectManagementgoods fromaretailer, youareabletoviewthembeforepurchasetoensure that they meet your requirements. In other words, you are able toviewthefinishedproduct priortomakingyourinvestment. Unfortu-nately, thissituationisnotpossibleinprojectswherethepromoterisrequired to make an investment prior to receipt of the product.Accordingly, projects are subject touncertaintyandconsequent riskduringtheprojectdeliveryprocess. Suchrisksmaybegeneratedfromfactorsexternal totheproject (e.g. political change, market demand,etc.), or internally from the activities of the project (e.g. delays due to theweather or unforeseen conditions, etc.). The nature of risk is that it canhavebothpositiveandnegativeeffectsontheproject, inotherwords,thereare saidto be upside and downside risks.1.6 Project objectivesItisatthefrontendoftheprojectcyclethatthegreatestopportunityexists for influencing the project outcome. This principle is illustrated inFigure1.3.Thecurvesindicatethatitisduringthedefinitionandcon-ceptstages that the greatest opportunity existsto reducecostor to addvaluetotheproject. Thisopportunitydiminishesastheprojectpassesthrough sanction to implementation because as more decisions aretaken, the project becomes more closely defined. Conversely, the costs ofintroducingchangearemagnified, andhencethebesttimetoexplorePossibleaddedvaluePre-project Project OperationDecidewhat youwantDesignandconstructionEarningOpportunityCostof latechangeFigure 1.3 Opportunityto add value.Projects and Project Management 9options andmake changes is at the concept stage andcertainlynotduring implementation.Projectsareimplementedtomeettheobjectivesofthepromoterandtheproject stakeholders. Thetermstakeholdersisbeingusedheretomeanthose groups or individuals whohave avestedinterest intheproject, but may or may not be investors in it. Accordingly, it isimportantthattheproject'sobjectivesareclearlydefinedattheoutset,andthe relative importance of theseobjectives is clearlyestablished.Primary objectives are usually measuredinterms of time, cost andquality, and their inter-relationship is shown in Figure 1.4. The use of anequilateral triangleinthiscontextissignificant,sincewhilstitmaybepossible to meet one or two of the primary objectives, meeting all three isalmost impossible. The positioning of the project inrelationtotheprimaryobjectivesisamatterofpreference;whereearlycompletionisrequired, then time is dominant, as might be the case with the launch of anewproduct whereit isnecessarytoobtainmarket penetrationfirst.That is not to say that the project can be completed at any cost, and nordoesitmeanthatthequalitycanbecompromised, buttimeisoftheessence. Whereminimumcost development isrequired, suchasforacommunity housing project, quality and time may have to be `sacrificed'.Figure 1.4 The triangle of project objectives (adapted from Barnes and Wearne,1993).10 Engineering Project ManagementWhereultimatequalityisrequired,as,forexample,inhigh-technologyprojects, then cost and timemay be secondary issues.Therelativeimportanceofeachobjectivemustbegivencarefulcon-sideration because decisions throughout the project will be based on thebalance between them. Inadequate definitions and the poorcommunicationofobjectivesarecommoncausesoffailureinprojects.An alignment meeting should be held with all key staff to ensure that alldecisions are optimised in termsof the project objective.1.7 Project successThe evidence indicates that the success of projects now and in the futuremaydepend uponthe factorslisted below.Definition of project objectivesThegreatest lessonof project management isthat thefirst taskistoestablish, define and communicate clear objectivesfor everyproject.RisksTo succeed, the promoter's team should then assess the uncertainties ofmeetingtheproject objectives. If therisks arenot identified, successcannotbeachieved.Thevolumeofeventstakingtheteambysurprisewill be just toogreat for themtohave any chance of meeting theobjectives.Early decisionsManyproject successesdemonstratethevalueofcompletingmuchofthe design and agreeing a project execution plan before commitment tothecostlyworkof manufacturinghardwareorconstructinganythingon-site.Project planningThe form and amount of planning have to be just right. Not enough andtheproject is doomedtocollapsefromunexpectedevents. However,plans which are too detailed will quickly become out-of-date and will beignored.Time and moneyPlanningwhentodowork, andestimatingthecost of theresourcesrequired for it, must be considered together,except in emergencies.Projects and Project Management 11Emergencies and urgencyAprojectisurgentifthevalueofcompletingitfasterthannormal isgreater than the extra cost involved. The designation `emergency' shouldbe limited to work where the cost is no restraint on using any resourcesavailable to work as fast as is physically possible, e.g. in rescueoperationsto save life.A realemergency israre.A committed project teamDispersed project teams tend to correlate with failure; concentrated teamstendtocorrelate withsuccess. The committedproject teamshouldbelocated where the main risks have to be managed. The separation of peoplecausesamisunderstandingofobjectives,communicationerrorsandpooruseofexpertiseandideas. All peoplecontributingtoaproject, whetherpart-time or full-time,should feel that they are committed toa team.Theteamshouldbeassembledintimetoassessandplantheirworkand their system of communications. Consultants, suppliers, contractorsandotherswhoaretoprovidegoodsandservicesshouldlikewisebeappointedintimetomobilizetheirresources,trainandbriefstaff,andassess and plan their work.Representation in decisionsSuccess requires the downstream parties to be involved in deciding howtoachieve the objectives of a project, andsometimes insetting theobjectivesthemselves. Humansystemsdonotworkwell ifthepeoplewho make the initial decisions do not involve those who will be affectedlater.CommunicationsThe nature of the work on a project changes month by month, and so dothecommunicationsneeded. Thevolumeandimportanceof commu-nication can be huge.Manyprojectshavefailedbecausethecommunicationswerepoorlyorganized.Asystemofcommunicationneedstobeplannedandmon-itored, otherwise information comes too late, or goes to the wrong placefor decisions to be made. The information then becomes a mere record,andisoflittlevalue.Theserecordsarethenusedtoallocateblameforproblems, rather thanto stimulate decisions whichwill control theproblems. The results of informal communications also need to beknownand checked,as bad news often travels inaccurately.The promoter and the leaderEvery project, large or small, needs a real promoter, a project champion12 Engineering Project Managementwhois committedtoits success. Power over theresources neededtodeliver a project must be given to one person who is expected to use it toavoid, as well as tomanage, problems. Intherest of this book, thispersoniscalled`theprojectmanager'. Theprojectmanagermayhaveotherjobs, dependinguponthesizeandremotenessoftheproject. Inturn, every sub-project should have its leader with power over theresources it needs.Delegation of authorityInadequate delegation of authority has caused the failure of manyprojects, particularly where decisions have been restrained by therequirementforapproval bypeopleremotefromaproblem. Thishasdelayed actions and so caused crises, extra costs, and loss of respect andconfidence in management.Manyprojectshavefailedbecausetheauthorityforpartsofalargeproject was delegated to people who did not have the ability andexperiencetomakethenecessarydecisions. Gooddelegationrequiresprior checking that the recipients of delegated authority are equipped tomakethedecisionsdelegatedtothem, andsubsequent monitoringofhoweffectivelytheyaremakingthosedecisions. Thisdoesnot meanmakingtheir decisions for them.Changes to responsibilities, project scope and plansSomecrisesresultinginquickchangestoplansareunavoidableduringmanyprojects. Drive insolvingproblems is thenveryvaluable, butfailureto thinkthroughthe decisionsmadecan causegreater problemsand lossof confidence in projectleaders.ControlIf the plan for a project is good, the circumstances it assumes materialiseand the plan is well communicated, few control decisions and actions arerequired. Much more is needed if circumstances do change, or if peopledo not knowthe plan, or do not understand and acceptit.Control is no substitute for planning. It can waste potentially productivetime in reporting and explaining events too late to influence them.Reasons for decisionsIn project management, every decision leads to the next one and dependsupontheonebefore.Thereasonsfordecisionshavetobeunderstoodabove, below, beforeandafterinordertoguidethesubsequentdeci-sions.Without this, divergence from the objectivesis almost inevitable,and failure is its othername.Projects and Project Management 13Failure to give reasons for decisions and to check that they areaccurately understood by their recipients can cause divergent andinconsistentactions. Skill andpatienceincommunicationareparticu-larlyneededintherapidlychangingrelationshipstypical of thefinalstages of large projects.Using past experienceSuccessismorelikely iftechnicalandprojectexperiencefrompreviousprojectsisdrawnupondeliberatelyandfromwhereveritisavailable.Perhaps the frequent failure to do this is another consequence of projectsappearing to be unique. It is often easier to say `this one is different' thantotakethetroubleto drawexperience fromprevious ones.Allprojectshavesimilaritiesanddifferences.Theabilitytotransferexperiencefor-ward by making the appropriate comparisons is one of the hallmarks ofa mature applied science.Contract strategyContract terms shouldbe designedtomotivate all parties totrytoachievetheobjectivesoftheprojectandtoprovideabasisforprojectmanagement. Contract responsibilities andcommunications must beclear,andnotantagonistic.Thetermsofthecontractsshouldallocatetherisksappropriatelybetweencustomers, suppliers, contractorsandsub-contractors.Adapting to external changesMarketconditions,customer'swishesandothercircumstanceschange,andtechnicalproblemsappearasaprojectproceeds.Projectmanagershave to be adaptable to these changes, yet able to foresee those which areavoidable and actappropriately.Induction, team building and counsellingSuccess in projects requires people to be brought into a team effectivelyandrapidlyusingadeliberateprocess of induction. Success requiresteamworktobe developedandsustainedprofessionally. It requirespeople to counsel each other across levels of the organisation, to reviewperformance, to improve, to move sideways when circumstances require,and to respondto difficulties.TrainingProjectmanagementdemandsintelligence,judgement,energyandper-sistence. Trainingcannotcreatethesequalitiesorsubstituteforthem,but it can greatly help people to learn from their own and other people's14 Engineering Project Managementexperience.Aftercompletion,alargeprojectmayrequireretrainingofthegeneral management sothat theyunderstand, andobtainthefullbenefit of,its effect oncorporate operations.Towards perfect projectsThe chapters in this book describe the techniques and systems which canbeusedtoapplythelessonsofexperience.Allofthemshouldbecon-sidered, but some will be chosen as priorities depending upon thesituation and its problems.All improvements cost effort andmoney. Cost is oftengivenas areasonnot tomake achange. Insuchasituation, the organizationshould alsoestimate the cost of not removing a problem.ReferencesWearne, S.H. (1995) Engineering Project Management, 1st edn, (Ed. N.J. Smith)BlackwellScience,Oxford.Further readingAPM(1998) Bodyof Knowledge, 4thedn, Associationof Project Managers,Coventry.BS 6079 (2000) Guide to Project Management, British Standards Institute,London.Morris, P.W.G. (1997) The Management of Projects, 2nd edn, Thomas Telford,London.O'Connell, F. (1996)HowtoRunSuccessful Projects, 2ndedn, PrenticeHall,London.PMI (2000) AGuidetotheProject Management Bodyof Knowledge, ProjectManagement Institute, Upper Darby, PA.Smith, N.J. (1998)ManagingRiskinConstructionProjects, Blackwell Science,London.Turner, R. (2000) The Handbook of Project-Based Management, 3rd edn, Gower,London.UNIDO(1994) Manual for the Preparation of Industrial Feasibility Studies,revisededn, UnitedNations Industrial Development Organization, NewYork.Wearne, S.H., Thompson, P.A. andBarnes, N.M.L. et al. (1989) Control ofEngineeringProjects, 2nd edn, Thomas Telford, London.Projects and Project Management 15Chapter 2Value ManagementThischapterincludesthebasicterminologyandproceduresassociatedwith value management. It then considers the role of value managementwithin the context of a project.2.1 IntroductionOverthepast decade, therehasbeenatrendtowardsapplyingvaluetechniques at ever earlier stages in a project's life-cycle. The term `valuemanagement' (VM) has becomeablanket termthat covers all valuetechniqueswhethertheyentail valueplanning(VP), valueengineering(VE) or valueanalysis (VA).VM is used by electronics, general engineering, aerospace,automotive and construction industries, and increasingly by serviceindustries. VMtechniques havealsobeensuccessfullyappliedonalltypesofconstructionfrombuildingstooffshoreoilandgasplatforms,and for all types of clients fromprivate industry to governmentalorganisations.2.2 DefinitionsThere are no universally accepted definitions, and a number of differentdefinitions have arisen to describe the same approach or stage ofapplication.According to the Institution of Civil Engineers (1996):Valuemanagement addressesthevalueprocessduringtheconcept,definition, implementation and operation phases of a project. Itencompasses a set of systematic and logical procedures and techniquesto enhanceprojectvalue throughthe lifeof the facility.16Valuemanagement(VM)isthetitlegiventothefull rangeofvaluetechniques available, which includethoselisted below.Value planning (VP) is the title giventovalue techniques appliedduringtheconceptor`planning'phasesofaproject.VPisusedduringthedevelopment of thebrief toensurethat valueisplannedintothewholeproject fromits inception. This is achievedbyaddressingandrankingstakeholders' requirementsin orderof importance.Valueengineering(VE)isthetitlegiventovaluetechniquesappliedduringthedesignor`engineering'phasesofaproject.VEinvestigates,analyses, comparesandselectsamongst thevariousoptionsavailablethosethat will meetthe value requirements of the stakeholders.Value analysis (VA), or value reviewing (VR), is the title given to valuetechniquesappliedretrospectivelytocompletedprojectsto`analyse'ortoaudit the project's performance, andtocompare acompleted, ornearly completed, design or project against predetermined expectations.VA studies are those conducted during the post-construction period andmaybepartofapost-occupancyevaluationexercise. Inaddition, thetermVAmaybe appliedtothe analysis of non-construction-relatedprocedures and processes, such as studies of organisational structure orprocurementprocedures.The typical terms for VMstudies at different stages of aproject,includingthevarious studies whichareundertaken, areillustratedinFigure 2.1. VP and VE are applied mainly in the concept and definitionphases, andgenerallyendwhenthedesignis completeandthecon-structionhasstarted.However,VEcanalsobeappliedveryeffectivelyduringconstructiontoaddress anyproblems or opportunities whichmay arise. The latter typically derive from feedback from the site relatingto specificconditions, performanceand methods.Maximum value is obtained from a required level of quality as the leastcost,thehighestlevelofqualityforagivencost,oranoptimumcom-promise between the two. Therefore, VM is the management of a processtoobtainmaximumvalueonascaledeterminedbytheclient. VMisabout enhancing value, and not only about cutting cost (which is often aby-product). The philosophy of VM centres on the identification of therequirements.Value management involves functional analysis, life-cycle costing,operating in multi-disciplinary groups using the job plan andcreativity techniques, and establishing comparative costs in relationto function.Functional analysisisatechniquedesignedtohelptheappraisal ofvalue by a careful analysis of function (i.e. the fundamental reason whythe project element or component exists or is being designed). It exploresValueManagement 17Figure 2.1 Value management structures at different project phases.Value managementValue planning Value engineering Value reviewPre-investment phaseUnbudgeted Budgeted projectsInvestment phaseImplementation Operation End of assetsConcept Pre-feasibility Feasibility AppraisalProcurementtrainingOperation Decommissioning Close outDefineprojectDefine projectapproachDevelopapproach/designFeedbackDevelopdetailedapproachProcurementand trainingHandover/post project evaluationNext projectStrategy: Corporate, Business & Project18EngineeringProjectManagementfunctionbyaskingthe initial question`what does it do?', andthenexamining how thesefunctions are achieved.Theprocessisdesignedtoidentifyalternative,morevaluableand/orcost-effectivewaystoachievethekeyfunctional requirements. Func-tional analysis is more applicable to the detailed design of specificcomponents(orelements)ofaproject.Becausethefunctioncannotbedefined so clearly in the project identification stage, functional analysis isless applicableto thisstage.Ajobplanisalogical andsequential approachtoproblemsolvingwhichinvolvestheidentificationandappraisal of arangeof options,brokendownintotheirconstituent stepsandusedasthebasisofthevalue management approach. The requirement is defined, differentoptionsforresolvingtherequirementareidentified, theseoptionsareevaluatedandtheoption(s)withthegreatestpotentialisselected(HMTreasury, CentralUnit on Procurement,1996).The sevenkey stepsof a job plan are givenbelow.(1) Orientation: the identificationof what has tobeachievedandthekeyproject requirements, prioritiesanddesirablecharacter-istics(2) Information: thegatheringofrelevantdataaboutneeds, wants,values,costs,risks,timescale and otherprojectconstraints.(3) Speculation: the generation of alternative options for theachievement of clientneedswithinstated requirements.(4) Evaluation: the evaluation of the alternative options identified inthe speculationstage.(5) Development: the development of the most promising options andtheir more detailedappraisal.(6) Recommendation foraction.(7) Implementation and feedback: an examination of how therecommendationswereimplementedinordertoprovidelessonsfor future projects.As speculation is crucial in the job plan, the quality of ideas generateddetermine the worth of the approach. Workshops are held where peoplework together to identify alternative options using idea generatingtechniques such as brainstorming.Life-cyclecostingis anessential part of valuemanagement. It is astructured approach used to address all elements of the cost of ownershipbased on the anticipated life-span of a project.In the case of a building, some broad categories which can be used forlife-cycle costing are givenbelow.ValueManagement 19o Investment costs: site costs, design fees (architect, quantity surveyor,engineer), legal fees, buildingcosts, taxallowances (capital equip-ment allowances, capital gains, corporationtax) anddevelopmentgrants.o Energy costs:heating,lighting,air conditioning, lifts,etc.o Non-energyoperationandmaintenancecosts: theseincludelettingfees,maintenance(cleaningandservicing),repair(unplannedrepla-cement of components), caretaker, security and doormen, andinsurance rates.o Replacement of components (i.e. planned replacement ofcomponents).o Residualorterminalcredits.Itisnecessarytoseparatethevalueofthe building from the value of the land when determining these creditsin the context of a building. Generally, buildings depreciate until theybecome economically or structurally redundant, whereas landappreciatesin value.Avaluemanagementplanisdrawnupwhichshouldbeflexible,reg-ularly reviewed and updated as the project progresses. This plan shouldestablish:o a series of meetingsand interviews;o a series of reviews;o whoshouldattend;o the purpose and timing of the reviews.2.3 Why and when to apply VMProjects suffer frompoor definition because inadequate time andthought are given to them at the earliest stages. This results in cost andtimeoverruns,claims,long-termuserdissatisfactionorexcessiveoper-atingcosts. Inaddition, anyproject shouldbe initiatedonlyafter acareful analysis of need. Therefore, oneof themajor tasks of stake-holders is to identify at the earliest possible stage the need for, and scopeof,any project.AnotherbasicreasontouseVMisbecausetherearealmostalwayselements involved in a project which contributeto poor value.Someoftheseare:o inadequate time availableo habitual thinking/tradition20 Engineering Project Managemento conservatism and inertiao attitudesand influences of stakeholderso lackof or poor communicationso lackof coordinationbetweenthe designer and the operatoro lackof a relationship between design and construction methodso outdated standards or specificationso absenceof state-of-the-art technologyo honest falsebeliefs/honest misconceptionso prejudicial thinkingo lackof the necessary expertso lackof ideaso unnecessarilyrestrictivedesign criteriao restricteddesign feeo temporary decisions that becomepermanento scopeof changesfor missing itemso lackof essential informationVMisprimarilyaboutenhancingvalue, andnotjustaboutcuttingcost (although this is often a by-product). VM aims to maximise projectvaluewithintimeandcost constraintswithout detriment tofunction,performance, reliabilityandquality. However, itshouldberecognisedthatimprovingproject valuesometimesrequiresextrainitial expendi-ture. ThekeydifferencesbetweenVMandcost-reductionarethattheformerispositive, isfocusedonvaluerather thancost, isseekingtoachieve an optimal balance between time, cost and quality, is structured,auditableandaccountable, andismulti-disciplinary. It seekstomax-imisethe creative potential of all departmental and projectparticipantsworking together.When properly organised and executed, VM will help stakeholders toachieve value for money (the desired balance between cost and functionwhichdelivers the optimumsolutionfor the stakeholders) for theirprojects by ensuring that:o the need for a projectis alwaysverifiedand supported by data;o projectobjectivesare openly discussed and clearly identified;o key decisions are rational, explicit and accountable;o the design evolves within an agreed framework of project objectives;o alternativeoptionsare always considered;o outlinedesignproposalsarecarefullyevaluatedandselectedonthebasis of defined performancecriteria.Indeed, VM depends fundamentally on whether or not stakeholders canagreeon the projectobjectives from the start.ValueManagement 21The key toVMis toinvolve all the appropriate stakeholders instructured team thinking so that the needs of the four main parties to aprojectcan be accommodated where possible. (HMTreasury, 1996)The single most critical element inaVMprogramme is top-levelsupport. (Nortonand McElligott1995)VMcan also provide otherimportant benefits:o improved communicationand teamworking;o a sharedunderstandingamongkey participants;o better qualityprojectdefinition;o increased innovation;o the elimination of unnecessary cost.Itisapparentthatallstakeholdersshouldparticipateintheprocess.The only differences are connected with the level and stage of theinvolvement, and with the party responsible for holding the procedures.It is paramount that all stakeholders (investors, end-users and otherswithareal interest intheproject outcome, suchastheproject team,owner, constructors, designers, specialist suppliers) must be involved intheprocess,especiallyduringtheVPandVEstages.Inaddition,whileon larger or more complex projects an independent/external valuemanager isneeded,as wellas an external team with the relevant designand technical expertise, on smaller ones VM might be undertaken by theproject sponsor'sprofessionaladviser,projectmanagerorconstructionmanager. Insomecasesanexternal professional must undertakethisrole.However,whenestablishingastructurefordealingwithvalueformoneyonprojects,theremaybeaneedforexpertassistance,particu-larly at the `review' stages.2.4 How to apply VMThere is no single correctapproachto VM, but although projects vary,there are a number of stages which are common to all of them. Some ofthesestagesmayoverlapdependingonthetypeofproject.Theprojectsponsorshouldensurethatavaluemanagementplanisdrawnupandincorporated into an early draft of the project execution plan (PEP). Thisplan should establish:o a series of meetingsand interviews;o a series of reviews;22 Engineering Project Managemento whoshouldattend;o the purposeand timingof the reviews.Itshouldnotbearigidschedulebutaflexibleplan,regularlyreviewedandupdatedas theproject progresses. It is essential that theprojectsponsorandthevaluemanagerprepareforreviewsbydecidingontheobjectivesandoutputsrequired,thekeyparticipants,andwhatwillberequired of themat different stages.Thepreciseformatandtimingofreviewswill varyaccordingtotheparticular circumstances and timetable. Too many and the process maybe disrupted and delayed, especially at the feasibility stage. Too few andopportunitiesforimprovingdefinitionandtheeffectivenessofthepro-posals may be lost. Each of these reviews also provide an opportunity toundertakeconcurrentriskassessments. ToexploitthebenefitsofVMwhileavoidingunnecessarydisruption,thereareatleastsevenobvious`opportunity points' for reviews which arise on the majority of projects.These are:o duringtheconceptstage,tohelpidentifytheneedforaproject,itskey objectives and its constraints;o during the pre-feasibility stage, to evaluate the broad projectapproach/outline design;o duringtheschemedesign(feasibilitystage), toevaluatedevelopingdesignproposals;o duringthedetaileddesign(appraisal stage), toreviewandevaluatekey designdecisions;o during construction/implementation, to reduce costs or improvebuildabilityor functionality;o during commissioning/operation, to remedy possible malfunctions ordeficiencies;o duringdecommissioning/endof assets, tolearnlessons for futureprojects.2.5 ReviewsAll reviews should be structured to followthe job plan. Issues ofbuildability, safety, operationandmaintenanceshouldbeconsideredduringall VMreviews and evaluationoptions.The first review shouldcoverthe items listed below.(1) List all objectives identified by stakeholders.(2) Establishahierarchyof objectives byrankingtheminorder ofValueManagement 23priority. It is important tostress that the aimis toproduce apriority listing, not simply to drop lesser priorities. Reducing the listruns the risk of having to reintroduce priorities at a later stage, withall theassociateddetrimental impactsoncost, timeandquality.VMaims toeradicate the needfor late changes, it shouldnotencouragethem.(3) Identify broad approaches to achieving objectives by brain-storming.(4) Appraise the feasibility of options (reject/abandon, delay/post-pone).(5) Identifypotentially valuable options.(6) Consider, andpreferablyrecommend, themostpromisingoptionfor further development.Thefirst review should showthe following results.(1) Confirmation thatthe project is needed.(2) A description of the project, i.e. what has to be done to satisfy theobjectives and priorities.(3) A statement of the primary objective.(4) A `hierarchy' of projectpriorities.(5) A favoured option(s) forfurtherdevelopment.(6) A decision to proceed.(7) A decision to reject/abandon or postpone/delay,if necessary.This balanced statement of needs, objectives and priorities, agreed by allstakeholders,helps the projectsponsor to produce the projectbrief.Thesecondreview shouldcoverthe items listed below.(1) Review the validity of the hierarchy of objectives with stakeholdersand agreemodifications.(2) Evaluate the feasibility of the options identified.(3) Examinethemostpromisingoptiontoseeifitcanbeimprovedfurther.(4) Develop an agreed recommendation about the most valuableoptionwhich can form the basis of an agreedprojectbrief.(5) Produce a programmefor developing the project.Thesecondreview shouldshow the following results.(1) Aclearstatementoftheprocessestobeprovidedand/oraccom-modated.24 Engineering Project Management(2) A preferred outline designproposal.(3) The basis of a case forthe continuationof design development.Duringthethirdphase/feasibilitystage,some1030%ofthedesignwork will be completed. That is why VE techniques are also part of thisstage which shouldcoverthe following points.(1) Reviewtheproject requirements andthehierarchyof objectivesagreed at the last review.(2) Checkthat the keydesigndecisions takensince the last reviewremainrelevant to the hierarchyof objectives and priorities.(3) Review key decisions against the project brief by brainstorming toidentifywaysofimprovingthedesignproposalsoutlinedtodateand to identify options.(4) Evaluate options in orderto identify the most valuable one.(5) Developthemostvaluableoptiontoenhancevalue, focusingonand resolvingany perceived problems.(6) Agree on a statement of the option to be taken forward, and agreeon a plan forthe continueddevelopment of the design.The third reviewshouldshow the following results.(1) A thoroughevaluation of the sketchdesign.(2) Clear recommendations forthe finalisationof the sketchdesign.(3) The basis of a submission for final approval to implement, abandonor postpone the project.VEisaimedat findingtheengineering, architectural andtechnicalsolutions tohelptranslate the designscheme selectedbyVPintoadetaileddesignwhichprovidesthebestvalue,byanalysing,evaluatingandrecommending the proposals of the constructor andaddressingproblems that mayemerge during construction.Byreviewingdesignproposalsinthisway, thevalueteamwill seekanswers to the following questions to help determine value andfunction.o What is it (i.e.the purpose of the projector element)?o What does it do?o What does it cost?o How valuable is it?o What else could do the job?o What will thatcost?ValueManagement 25Thefourth review should show the following results.(1) PromotionofacontinuousVMapproachthroughoutthedesignprocess.(2) Finalisation of the original and proposed designs and the basis forthe changes, according to the findings of the previousreview.(3) Adescriptionof thevalueproposals, andanexplanationof theadvantagesanddisadvantagesofeachintermsofestimatedsav-ings, capital, operatingandlife-cyclecosts, andimprovementsinreliability, maintenanceor operation.(4) A prediction of the potential costs and savings, the redesign fee andthe time associatedwiththe recommended changes.(5) Atimetable for decisions of the owner, implementation costs,proceduresandanyproblems(suchasdelays)whichmayreducebenefits.Thefifth review should show the followingresults.(1) Promotionof acontinuous VMapproachthroughout the con-structionprocess.(2) Anassessmentandevaluationofthecontractors'proposedchan-ges.(3) Aninvestigationandverificationof thefeasibilityof significantchanges and the cost savings claimed, as well as the implications ofincluding themin the programme.(4) Some forward-looking, practical recommendations for improve-ments which can be implemented immediately.(5) Checkthat any risks to the project are being managed.Thesixth review shouldshow the following results.(1) Ameasureof thesuccessof theproject inachievingitsplannedobjectives.(2) Identification of the reasons forany problems that have arisen.(3) A decision on what remedial actions shouldbe taken.(4) Anassessment of whether the objectives of the users/customershavebeenmet. If thoseobjectiveschanged, orwereexpectedtochangeduringthecourseof theproject, toassesswhetherthosechangeswere accommodated.(5) Acheckthatanyoutstandingwork, includingdefects, havebeenremedied.(6) A record of the lessons which have been learnt which could improveperformanceon subsequentor continuing projects.26 Engineering Project ManagementPractitioners and users of VM must obtain feedback on its success, sincefeedbackinfluencesthe results by raising the following questions.o Havegood ideasemerged?o Wereany adopted?o Weretheyimplemented?o Didthe expected valueimprovement result?o If not,why not?Factorswhichwill beassessedincludethejudgement, involvement,support, application, dedication, foot-dragging, approval process, sys-tems appropriateness, use, effectiveness and management of the changeprocessof the stakeholders.Actions thatcan emerge fromthe feedbackinclude:o a change of personnel;o a change of approach;o a change of system;o a rerunof the exercise.2.6 Procedures and techniquesThere are many procedures and techniques available within VM for thevalueteamtouseastheyseefit,whetherappliedformerorintuitively.Typicaltechniques and procedures include:o information gatheringo costanalysiso life-cycle costingo Pareto's lawo basicand secondaryfunctionso costand wortho FAST diagramming (functionanalysis)o creative thinking and brainstormingo criteria weightingo valuetreeo checklists/attribute listingo analysis and ranking of alternativesValueManagement 272.7 Benefits of value managementProperlyorganisedandexecutedVMprovides astructuredbasis forboththeappraisal anddevelopmentofaproject, andresultsinmanybenefits to that project. There followsa verybrief listof such benefits.o Provides a forum for all concerned parties in a project development.o Develops a sharedunderstandingamongkey participants.o Provides an authoritative review of the entireproject, not just a fewelements.o Identifiesprojectconstraints, issuesandproblemswhichmightnototherwise have been identified.o Identifies and prioritises the key objectives of a project.o Improves the qualityof definition.o Identifies and evaluates the meansof meeting needsand objectives.o Deals with the lifecycle,not just initialcosts.o Usually results in remedying project deficiencies and omissions, andsuperfluousitems.o Ensures all aspects of the designare the most effective for theirpurpose.o Identifies and eliminates unnecessary costs.o Provides a means to identify and incorporate project enhancements.o Provides a priority framework against which future potential changescan be judged.o Crystallisesan organisation'sbrief priorities.o Maintainsastrategicfocusontheorganisation'sneedsduringthedevelopment and implementation of a project.o Provides management with the information it needs to makeinformeddecisions.o Permits a largereturn on a minimalinvestment.o Promotes innovation.2.8 SummaryThekeyfeaturesofthevalueprocessandtheapplicationofVMtoithavebeendescribed,andtheimportanceofvalueplanning,teamworkandperseveranceemphasised.Theincentivesandbenefitstoallstake-holdershavebeenidentifiedanddiscussed. Theseareunderpinnedbythreeparticularaspects:theindependenceofthevaluemanagerclearlytoestablishthestakeholders'valuecriteria;theplannedapplicationofteambrainstorming; the inclusionof appropriate enablingclauses incontractsand agreements.28 Engineering Project ManagementThe factors needed to ensure success of VM include:o a systematic approach;o an integrated teamenvironment;o the establishmentof valuecriteria;o focusing on the function;o the facilitation of creativityas a separate stage;o consideration of a projectona life-cyclecost basis;o a collaborativeand non-confrontationalworkingenvironment;o the generation of recordsand an audit trail.VMmust havecomprehensivetopmanagement understandingandsupport, and an enthusiastic, sustainedand innovativeapproach.ReferencesHMTreasury(1996) Central Unit onProcurement GuidanceNote54, ValueManagement, HMSO, London.Institutionof Civil Engineers (1996) CreatingValue inEngineeringProjects,Thomas Telford, London.Norton,B.R.andMcElligott,W.C.(1995)ValueManagementinConstruction,Macmillan, London.Further readingConnaughton, J.N. and Green, S.D. (1996) Value Management in Construction:A Client'sGuide, CIRIA,London.Webb, A. (1994) Managing Innovative Projects, Chapman& Hall, London.ValueManagement 29Chapter3Project Appraisal and RiskManagementProject appraisal, sometimes referred to as feasibility study, is animportant stage in the evolution of a project. It is important to consideralternatives, and identify and assess risks at a time when data is uncertainor unavailable. This chapter outlines the stages of a project, anddescribesrisk management techniques in detail.3.1 InitiationAnindividualproject,howeversignificantandpotentiallybeneficialtothe promotingorganisation, will onlyconstitute part of acorporatebusiness. It isalsolikelythat, intheearlystagesoftheproject cycle,several alternative projects will be competing for the available resources,particularly finance. The progress of any project will therefore be subjecttoinvestment decisions bytheparentorganisationbeforetheprojectisallowedto proceed.Inmost engineeringprojects, therateof expenditurechanges dra-maticallyas the project moves fromthe early stages of studies andevaluations, which consume mainly human expertise and analyticalskills, to the design, manufacture and construction of a physical facility.Atypical investment curveisshowninFigure3.1, andindicatesthatconsiderable cost will be incurredbefore any benefit accrues tothepromoter from use of the completedproject(orasset).Whenconsideringtheinvestmentcurve, thelife-cycleoftheprojectcanbedividedintothreemajorphases:theappraisalandimplementa-tionoftheproject,followedbytheoperationofthecompletedfacility.Thepreciseshapeofthecurvewill beinfluencedbythenatureoftheproject, by external factors such as statutory approvals, and also by theproject's objectives. Inthe public sector, appraisal mayextendovermany years and be subjected to several intermediate decisions toproceed. Ina commercial situation, the needfor early entry intoacompetitivemarketmay outweighall other considerations.30PROJECT APPRAISALPROJECT IMPLEMENTATIONOPERATION OF THE ASSETINITIATIONP R O J E C T A C C O U N T B A L A N C E M O N E YTIMEDEFINITIONCONCEPTDESIGNCONSTRUCTIONCOMRegulatory approvalPlanningapprovalContract award +SANCTIONCOMPLETIONCostCost and benefitFigure3.1Projectcashflow.ProjectAppraisaland Risk Management 31Twoimportant factors emerge whenstudying the investment curve:o That interest payments compounded over the entire period when theproject account is in deficit (below the axis in Figure 3.1) will form asignificantelement of projectcosts.o That the investor will not derive anybenefit until the project iscompletedand in use.Itislikelythatatleasttwoindependentandformalinvestmentdeci-sionswill benecessary; theyarelabelled`initiation' or`viability', and`sanction' in Figure 3.1. The first signifies that the ill-defined ideaevolvedfromresearchandstudiesofdemandisperceivedtooffersuf-ficientpotential benefit towarrant theallocationofaspecificprojectbudget forfurther studies,andthedevelopmentof theprojectconcept.The subsequent sanctiondecisionsignifies acceptanceor rejectionofthese detailed proposals. If the decision is positive, the organisation willthen proceed with the major part of the investment in the expectation ofderivingsome predicted benefit whenthe projectis completed.Alltheseestimatesandpredications,whichfrequentlyextendoveraperiod of many years, will generate different degrees of uncertainty. Thesanction decision therefore impliesthat the investor is prepared to takethe risk.3.2 SanctionWhenaprojectissanctioned,theinvestingorganisationiscommittingitselftomajorexpenditureandisassumingtheassociatedrisks.Thisisthe key decision in the life-cycle of the project. In order to make a well-researcheddecision, thepromoter will requireinformationunder theheadings listedbelow.(1) Clear objectives. The promoter's objectives in pursuing thisinvestment must be clearly stated and agreed by senior managementearly inthe appraisal phase, for all that follows is directedatachieving these objectives in the most effective manner. Theprimary objectives of quality, time and cost may well conflict, and itis particularlyimportant that the project teamknowwhether aminimumtime for completionor minimumcost is the priority.These are rarely compatible, and this requirement will greatlyinfluence both the appraisal and the implementation of the project.(2) Market intelligence. This relates to the commercial environment in32 Engineering Project Managementwhich the project will be developed and later operated. It isnecessarytostudyandpredicttrendsinthemarketandtheecon-omy, and anticipate technological developments and the actions ofcompetitors.(3) Realistic estimates/predictions. It is easy to be over optimistic whenpromotinganewproject.Estimatesandpredictionsmadeduringappraisal will extendoverthewholelife-cycleoftheimplementa-tion and operation of the project. Consequently, single-figureestimates are likely to be misleading, and due allowance foruncertainty and exclusionsshouldbe included.(4) Assessment of risk. A thorough study of the uncertainties associatedwith the investment will help to establish confidence in the estimate,andtoallocateappropriatecontingencyfunds.Moreimportantlyat thisearlystageof project development, it will highlight areaswheremore informationis needed, andwill frequentlygenerateimaginative responses to potential problems, thereby reducing risk.(5) Project execution plan. This shouldgive guidance onthe mosteffective way to implement the project and to achieve its objectives,takingaccountofall constraintsandrisks. Ideally, thisplanwilldefine the likely contract strategy, and include a programmeshowingthe timingof key decisions and the award of contracts.Itiswidelyheldthatthe successof a ventureis largely dependent ontheeffortexpendedduringtheappraisalprecedingsanction.However,there is conflict between the desire to gain more information and therebyreduceuncertainty,theneedtominimisetheperiodofinvestment,andthe knowledge that expenditure on appraisal will have to be written off ifthe projectis not sanctioned.Expenditure onthe appraisal of major engineeringprojects rarelyexceeds 10% of the capital cost of the project. However, the outcome oftheappraisal,asdefinedintheconceptandbriefacceptedatsanction,will freeze 80% of the cost. The opportunity to reduce the cost during thesubsequent implementation phase is relatively small, as shown inFigure3.2.3.3 Project appraisal and selectionProject appraisal is aprocess of investigation, reviewandevaluationundertakenas theproject, or alternativeconcepts of theproject, aredefined. This study is designed to assist the promoter to make informedand rational choices concerning the nature and scale of investment in theProjectAppraisaland Risk Management 33Possibilities ofreducing costP e r c e n t a g e c o s tInvestmentdecisionAccumulated amountof investmentDecision stepsAPPRAISALIMPLEMENTATIONPreplanningPlanningDesign and constructequipmentInstallation of equipmentTimeFigure3.2Graphofthepercentagecostagainsttimetaken,showinghowtheimportantdecisionsforanyprojectaremadeatthestartofthatproject.34 Engineering Project Managementproject, andtoprovidethebrief forsubsequent implementation. Thecoreof theprocess is aneconomicevaluation, basedonacashflowanalysisofallcostsandbenefitswhichcanbevaluedinmoneyterms,which contributes to a broader assessment called costbenefit analysis. Afeasibility studymay formpart of the appraisal.The appraisal is likely to be a cyclic process repeated as new ideas aredeveloped, additional informationreceivedanduncertainty reduced,until the promoter is able tomake the critical decisiontosanctionimplementationoftheprojectandcommittotheinvestmentinantici-pation of the predicted return. It is important to realise that if the resultsof the appraisal are unfavourable, this is the time to defer further workor abandon the project. The consequences of an inadequate orunrealistic appraisal can be expensive.Ideally, all alternative concepts andways of achievingthe projectobjectives shouldbeconsidered. Theresultingproposal preparedforsanctionmustdefinethemajorparametersoftheproject:thelocation,thetechnologytobeused, thesizeof thefacility, andthesourcesoffinanceandrawmaterials, togetherwithforecastsof themarket andpredictionsof thecostbenefit of theinvestment. Thereisusuallyanalternative way to utilise resources, especially money, and this is capableof beingquantified,however roughly.Investment decisions maybeconstrainedbynon-monetaryfactorssuch as:o organisational policy, strategy and objectives;o the availability of resources such as manpower, management ortechnology.ProgrammeItwillbenecessarytodecidewhenisthebesttimetostarttheprojectbasedonthepreviousconsiderations.Normally,thismeansassoonaspossible,becausenoprofitcanbemadeuntiltheprojectiscompleted.Indeed, it may be that market conditions or other commitments impose aprogramme deadline; for example, a customer will not buy your productunlessitisavailablebymid-2002,whenthecustomer'sprocessingfac-tory will be ready. In inflationary times, it is doubly important tocomplete a project as soon as possible because of the adverse relationshipbetween time and money. The cost of a project will double in 7.25 yearsat a rateof inflation of 10%.ProjectAppraisaland Risk Management 35It will therefore be necessary to determine the duration of theappraisal, design and constructionphaseso so that the operation datecan be determined,o so that project costs can be determined,o and so that the promoter's liabilities can be assessed and checked forviability. It may well be that the promoter's cash availability definesthe speedat which the project can proceed.The importance of time should be recognised throughout theappraisal.Manycostsaretime-related,andwouldbeextendedbyanydelay. Theprogrammemustthereforeberealistic, anditssignificancetaken fully into account, when determining the objectives of the project.Riskand uncertaintyThe greatest degree of uncertainty about the future is encountered earlyinthelifeofanewproject.Decisionstakenduringtheappraisalstagehave a very large impact on final cost, duration and benefits. The extentandeffectsofchangearefrequentlyunderestimatedduringthisphase,althoughtheseareoftenconsiderable,particularlyindevelopingcoun-tries and remote locations. The overriding conclusion drawn from recentresearch is that all parties involved in construction projects would benefitgreatly fromreductions in uncertainty priorto financialcommitment.At the appraisal stage, the engineering and project management inputwill normallyconcentrate on providing:o a realistic estimate of capitaland runningcosts;o a realistic time-scaleand programmes forprojectimplementation;o appropriate specificationsfor performancestandards.At appraisal, thelevel of project definitionislikelytobelow, andthereforetheriskresponseshouldbecharacterisedbyabroad-brushapproach. Itis recommended thatefforts should concentrate on:o seekingsolutions which avoid/reducerisk;o considering whether the extent or nature of the major risks are suchthatthenormal transferroutesmaybeunavailableorparticularlyexpensive;o outlining any special treatment which may need to be considered forrisk transfer, for example for insurance or unconventionalcontractualarrangements;36 Engineering Project Managemento settingrealisticcontingencies, andestimatingtolerances consistentwith the objective of preparing the best estimate of anticipated totalprojectcost;o identifying comparative differences inthe riskiness of alternativeprojectschemes.Engineering/project managers will usually have less responsibility foridentifying the revenues and benefits from the project; this is usually thefunction of marketing or development planning departments. Theinvolvement of project managers in the planning team is recommended,as the appraisal is essentially a multi-disciplinary brainstorming exercisethroughwhichthepromoterseekstoevaluateall alternativewaysofachieving these objectives.For many projects this assessmentis complex, as not all the benefits/disbenefits will be quantifiable in monetary terms. For others, it may benecessary to consider the development in the context of several differentscenarios(orviewsofthefuture).Inallcases,thepredictionsarecon-cerned with the future needs of the customer or community. They mustspantheoverall periodof development andoperationof theproject,whichislikelytorangefromaminimumof8or10yearsforaplantmanufacturingconsumerproducts,to30yearsforapowerstationandmuchlonger for public works projects. Phasingof the developmentshould alwaysbe considered.Even at this early stage of project definition, maintenance policies andrequirementsshouldbestatedasthesewillaffectbothdesignandcost.Special emphasis shouldbe giventofuture maintenance during theappraisal of projects indevelopingareas. Thecost of dismantlingordecommissioning may also be significant, but is frequently convenientlyignored.3.4 Project evaluationThe process of economic evaluation and the extent of uncertaintyassociated with project development require the use of a range offinancialcriteriaforthequantificationandrankingofthealternatives.Thesewill normallyincludediscountingtechniques, but caremust betakenwheninterpreting the results forprojectsof long duration.Costbenefit analysisInmostengineeringprojects,factorsotherthanmoneymustbetakenintoaccount. Ifadamisbuilt, wemightdrownahistoricmonument,ProjectAppraisaland Risk Management 37reduce the likelihood of loss of life due to flooding, increase the growthof newindustrybecauseof thereducedrisk, andsoon. Costbenefitanalysis provides a logical framework for evaluating alternative coursesofactionwhenanumberoffactorsarehighlyconjecturalinnature.Iftheevaluationisconfinedtopurelyfinancialconsiderations,itfailstorecognisetheoverall social objective, whichistoproducethegreatestpossible benefit for a givencost.At its heart lies the recognitionthat nofactor shouldbe ignoredbecause it is difficult, or even impossible, to quantify in monetary terms.Methods are available to express, for instance, the value of recreationalfacilities, and although it may not be possible to put a figure on the valueof human life,it is surely not something we can afford to ignore.Essentially, costbenefit analysis must take into account all the factorswhich influenceeither the benefits or the cost of a project. Imaginationmust beusedtoassignmonetaryvalues towhat at first sight mightappear to be intangibles. Even factors to which no monetary value can beassigned must be taken into consideration. The analysis should beappliedtoprojectsof roughlysimilarsizeandpatternsof cashflow.Thosewithahighercostbenefitratiowillbepreferred.Themaximumnet benefit ratio will be marginally greater than the next most favouredproject. Thescopeofthesecondarybenefitstobetakenintoaccountfrequently depend on the viewpoint of the analyst.Incomparingalternatives, itisobviousthateachprojectshouldbedesignedat theminimumcost whichwill allowthefulfilment of theobjectives,includingtheappropriatequality,levelofperformanceandprovisions for safety. Perhaps moreimportantly, theviewpoint fromwhich each project isassessedplaysacriticalpartinproperly assessingboththebenefitsandcostwhichshouldbeattributedtoaproject.Forinstance,ifaprivateelectricityboardwishestodevelopahydroelectricpowerstation,itmayderivenobenefitfromthecoincidentalprovisionof additional public recreational facilities, which therefore cannot enterinto its costbenefit analysis. However, a public-sector owner could quiteproperlyinclude therecreational benefits inits costbenefit analysis.Again, as far as the private developer is concerned, the cost of labour isequal tothemarket rateof remuneration, nomatterwhat theunem-ployment level. For the public developer, however, intimes of highunemployment, the economic cost of labour may be nil, since the use oflabour in this project does not preclude the use of other labour for otherpurposes.38 Engineering Project Management3.5 Engineering riskAn essential aspect of project appraisal is the reduction of risk to a levelwhichisacceptabletotheinvestor. Thisprocessstartswitharealisticassessmentofalluncertaintiesassociatedwiththedataandpredictionsgeneratedduringappraisal. Manyof the uncertainties will involve apossiblerangeof outcomes, i.e. it couldbebetterorworsethanpre-dicted. Risks arisefromuncertainty, andaregenerallyinterpretedasfactorswhichhaveanadverseeffectontheachievementoftheprojectobjectives.It is helpful to try to categorise the risks associated with projects bothasaguidetoidentification, andtofacilitatetheselectionofthemostappropriaterisk-managementstrategy. Onemethodistoseparatethemoregeneral riskswhichmightinfluenceaproject, butwhichmaybeoutside the control of the parties to the project, from the risks associatedwithkeyprojectelements;theseare referred toas global andelementalrisks, respectively.Global risks may be capable of being influenced by governments, andcanbesub-dividedintofoursections: political, legal, commercial andenvironmentalrisk.Politicalriskwouldincludeeventssuchasapublicinquiry, approvals, regulationofcompetitionandexclusivity, whereaschanges in statue law, regulations and directives would all be legal risks.Commercialriskscanincludethewideraspectsofdemandandsupply,recession and boom, social acceptability and consumer resistance.Environmental risksareeasiertoidentify, butasglobal riskstheyaremorespecificallytodowithchangesinstandards,inexternalpressure,and in environmental consents.The elemental risks are those associated with elements of the project,namelyimplementationrisks andoperationrisks. For some projectsthere will also be financial risks and revenue risks. These risks are morelikelytobecontrollableormanageablebythepartiestotheproject.Typicalexamples of these risksare givenin Tables3.13.4.3.6 Risk managementThe logical process of risk management maybe defined as:o identificationof risks/uncertainties;o analysis of the implications(individual and collective);o responseto minimise risk;o management of residual risk.ProjectAppraisaland Risk Management 39Table 3.1 Implementationrisks.Risk category DescriptionPhysical Natural: pestilence and disease, ground conditions,adverseweather conditions, physical obstructionsConstruction Availability of plant and resources, industrial relations,quality, workmanship, damage, constructionperiod, delay,construction programme, constructiontechniques,milestones, failureto complete, type of constructioncontracts, cost of construction,insurances, bonds, access,insolvencyDesign Incomplete design, design life, availability of information,meeting specificationsand standards, changes in designduring construction, design life, competition of designTechnology New technology,provision for change in existingtechnology, development costsTable 3.2 Operational risks.Risk category DescriptionOperation Operating conditions,raw materials, supply, power,distribution of offtake, plant performance, operating plant,interruption to operationdue to damage or neglect,consumables, operating methods,resources to operatenewand existing facilities, type of O&M contract, reducedoutput, guarantees, underestimation of operatingcosts,licencesMaintenance Availability of spares, resources,sufficient time for majormaintenance, compatibilitywith associated facilities,warrantiesTraining Cost and levels of training, translation of manuals, calibreand availability of personnel, training of principal personnelafter transfer40 Engineering Project ManagementTable 3.3 Financial risks.Risk category DescriptionInterest Type of rate (fixed, floating or capped), changes in interestrate,existing ratesPayback Loan period, fixed payments, cash-flow milestones, discountrates,rate of return, scheduling of payments, financialengineeringLoan Type and source of loan, availability of loan, cost ofservicing loan, default by lender, standby loan facility, debt/equity ratio, holding period, existing debt, covenants,financialinstrumentsEquity Institutionalsupport, take-up of shares, type of equityofferedDividends Time and amounts of dividend paymentsCurrencies Currencies of loan, ratio of local/base currenciesTable 3.4 Revenue risks.Risk category DescriptionDemand Accuracyof demand and growth data, ability to meetincrease in demand, demand over concession period,demand associated with existing facilitiesToll Market-ledor contract-led revenue,shadow tolls, toll level,currenciesof revenue,tariff variation formula, regulatedtolls, take and/or pay paymentsDevelopments Changes in revenue streams from developments duringconcession periodProjectAppraisaland Risk Management 41Riskmanagement canbeconsideredasanessential part of acon-tinuousand structuredprojectplanningcycle.Risk management:o requires that you accept that uncertaintyexists;o generatesastructuredresponsetorisk intermsofalternative plans,solutionsand contingencies;o isa thinking processrequiring imagination and ingenuity;o generates a realistic (and sometimes different) attitude in project staffby preparing them for risk e