Page 4 of 462

1.0

THE ENGINEERING COMPANY

1.1

Foreword
The Engineering Companies, as the APS, carry out industrial plants.
The purpose of the carrying out of these plants is the one to close the
balance with a profit.
A private company, as the APS it is not an ONLUS association and nor a
public corporation or a hospital which, no matter how the final balance
goes, are always under the protection of the State.
Therefore, after having borne the operating costs, after having paid the
wages to their employees and fulfilled the payment due to suppliers and
to the third parties, it is indisputable right that the Company gets, for
his activity, a profit.
Bottom line: a word to be held in due consideration
Bottom line is the line that in the financial reports, after having
considered debits and credits, the plus and the minus, shows the final
result, and this final result has to be always positive.
Therefore the word to profit, understood as to take advantage and
then to gain, has not to be at all, confused with to impose on,
because to impose on a certain situation, in the negative sense of the
meaning, can bring a passing advantage, but, at the end, it does not
reward.
As far as this matter is concerned, the American people speak of a
triple bottom line, the ethical rule that has to be always observed;
profit certainly, but with the respect of the environmental (intended in
broad sense), with loyalty and clearness towards our partners.

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Loyalty and clearness outside our company, that is to say towards

Client, in primis, but also towards the suppliers; but loyalty and
clearness also inside our work ambient, therefore towards our
colleagues.

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Within a Company medium-large, as the APS, it is very important to

create serene and reassuring work conditions.
In the private companies, all the entrepreneurs, the courageous
investors, captains of industry, have always considered a very
important element for the successful of their companies, sometimes
born out of nothing, the harmony inside work ambient, without
conflicts between management and employees and without conflicts
between the same employees.
Riello, first of all the entrepreneur of burners and then the entrepreneur
of air conditioning units, said I would like people to happily work for
the company.
Mr. Marzotto, a textile industry magnate, said whoever works for
Marzottos company has to feel protected by the company.
Everybody has to contribute to create serene work conditions.
Above all, managers and leaders, facing the daily problems, have to
solve, together with their employees, the arisen problems, and then to
find the possible source of the problem speaking, with the guilty, but
of course in camera caritatis way, in a resolute manner but without
making a drama; the dramas of life are different.
Managers, the responsible of sector, and also minor leaders as middle
managerial staff, group leaders or simply elderly colleagues have to
demonstrate to the collaborators, rather than sympathy, empathy;
namely they have to share and to participate to difficulties and
emotions of others.
All people that have administrational assignments must be able to smile
and to convey this smile to others, creating a serene working
environment, that does not mean, obviously, hilarity or a joke
atmosphere, but, on the contrary, means to convey the energy caused
by a good humour towards constructive directions.

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In conclusion, the leader who infuses and transmits good humour in its
working group, reduces the hierarchical distances among the
collaborators, creating that emotional complicity which presents him
respected and pleasant leader.

Page 6 of 462

1.1.1 The Engineer in a Engineering Company

On the 23rd of March, 1865 five Yankee prisoners and a dog succeed in
their getaway, by means of a balloon, from Richmond (stronghold city
for the Southerns) at the time besieged by General Grant troops.
Flying over the Pacific Ocean, suddenly the balloon is cast away by a
terrible hurricane which drags it till an unknown island, not even
pointed out in the maps, without inhabitants, faraway from possible
communication areas.
Luckily, in the group of fugitive theres an engineer called Cyrus Smith.
This is the beginning of the well-known adventure romance written by
the famous French writer Jules Vernes The Mysterious Island, third
book coming from a trilogy begun with In Search of the Castaways
and Twenty Thousand Leagues under the Sea.
This engineer Cyrus Smith, helped by the other fugitives and, of course,
by the dog, though up to the more ingenious means to face the very
difficult situation in order to transform the inhospitable island in a
rather comfortable place provided of the primary subsistence means.
As a chemical-pharmaceutical engineer, succeeds in the production of
the quinine against the malaria.
By utilising the grass of a dugong, he isolates the glycerine from which,
after having been treated with soda and lime, he obtains soap; rather
easy to obtain the lime, in fact the island is quite provide with stones,
more difficult is to find elements to obtain the soda. But our engineer is
really a kind of genius and by the burning of seaweed he obtains the
soda.
At the end, after other complicated processes, possible only thanks to
his extraordinary initiatives, he succeeds in the production of nitroglycerine. With the nitro-glycerine, he takes down the level of a lake by
means of a moderate explosion and he creates an artificial waterfall to
be used for a little hydroelectric power station.
A real genius this Mister Cyrus Smith!

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But the figure of engineer that we have in mind is not Cyrus Smith.
In fact, the engineer is not the technician able to solve all possible
problems; in this case, a technical detailed know-how absolutely going
beyond the human possibilities should be required.

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The engineer must be able to face all the problems, delegating, if

manager or leader, to the other specialist engineers assigned to specific
duties. However, the engineer neither is a specialist technician, or
better, not only. An engineer can face and solve, and normally he is able
to do it, specific problems: for instance, a structures calculation or
flexibility analysis problem; but, if he studies, elaborates and delves into
the method of structures calculation or flexibility analysis, hes making
maths or applied mechanics, not engineering.
In fact, the engineer is not a scientist; the engineer activity begins there
where the scientific activity ends, with the rules, methodology and
theorems application. But the substantial difference between a scientist
and an engineer is in the mentality; the first one has, as purpose, the
certainty, the second one the result; the scientist can be in the
condition to stop the research and the final conclusion, the second one,
in any case, has to handle on his choices.

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Another distinction to be made is the one between the figures of the

engineer operating in the production field, for example for an
automobile industry or for any industrial plant, and of the engineer
working in an engineering company. The first one usually performs a
specific activity; we can suppose an engineer who works in the brake
system; he knows all or almost all on the matter, disk brake, ABS
system and the more appropriate brake system for each new vehicle
designed; the second one, does an activity which joins and coordinates
several elements, each time he faces the general problem relevant to the
goal to be reached; for instance, coordinating the design works of
process for a splitting column with the mechanical one, and with the
foundation definition of the connected instrumentation of the column,
the connecting piping; this is the global work requested in order to
realise, erect, connect the column to perform its function of splitting. In
this work, the engineer has got general methodologies and his activity is
unspecific, so it is in large measure independent from the found object.

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1.2

The Services Offered by an Engineering Company

Granted that the engineering companies carry out plants, always, both
directly and indirectly (providing for example to other entities the means
for the realisation), the offered services may vary from feasibility studies
and front end engineering, to services of only process or process and
instrumentation (recurrent combination) until complete engineering
services including the activities of all the technical departments:
Process, Instrumentation, Electrical, Civil Works, Piping, Mechanical.
The engineering activities are reflected in documents and drawings that
can be the most various, as:
Equipment list, general specifications, detailed specifications, data
sheets, calculations, block diagrams, flow diagrams, P & I, material
balances, general and detailed plot plans, piping layout M. T. O.,
sketches, drawings of equipment, architecture of control, wiring
diagrams, cables lists, bulk materials, architectural and structural
drawings, steel structure drawings etc.
According to the type of contract, in addition to services relating to
activities purely technical, services relating to procurement can be also
offered, i.e. the purchase of equipment and materials. The purchase can
be done according to the formula "in the name and on behalf of...
(client)" or can be done directly by the engineering company (this
depends from the type of contract).
Engineering, Procurement, Construction: E, P, C
If the contract also provides for the construction activities, there is the
complete classic form EPC (engineering, procurement, construction).
The percentage distribution in costs is, in principle:
E=10%

P=50%

C=40%

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So for a plant of 40 millions , the costs could be thus distributed:

Engineering

4 millions

Materials

20 millions

Construction

16 millions

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This splitting refers to a standard project, for example a refinery or a

petrochemical plant; for other types of plant, the allocation may vary.
For example for a plant for the production of false wood starting from
granules of polypropylene (a plant that we could define chemical manufacturing) gave (1984) the following real distribution:
E=8%

P=62%

C=30%

Therefore, clear prevalence of the cost of equipment and materials in

comparison with the construction costs; this is easy to understand
when one considers that all the train of production, really of high
technology, was contained in a single industrial shed (25x40 meters).
Some years ago APS prepared an offer for the revamping of the airport
of Algiers, regarding a system of distribution of the fuel to the aircraft,
by means of "hydrant pits" which had to replace the traditional loading
of aircraft made with the auto-tanks. The construction was out the
scope of the APS work, but on the basis of the assessment of the
engineering hours and the costs of equipment and materials, we are not
far from that which would have been the splitting of costs, namely:
E=10%

P=35%

C=55%

In this case the costs for the construction resulted higher than the one
of procurement because, in addition to the limited supply of the
electrical and instrumentation items, the civil works were very
imposing, including, among the other things, the demolition of paving of
the landing trips and of the parking places with the subsequent
reconstruction, after the laying of the distribution network of the fuel.

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The synthetic analysis of these two plants gives us the opportunity to

say that an engineering company provides not only refineries; on the
contrary the plants to be carried out may be the most varied: certainly
refineries, chemical and petrochemical plants, but also food plants,
pharmaceutical or purely manufacturing or combined chemical
manufacturing.

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But also plants that define "strange" is little, as the project for the
sterilization of the flies (engineering company CTIP) or chemical
installations for the production of dyestuffs, that made in China (CTIP)
with licence Ciba-Geigy, requiring unusual activities as the search for
particular pebbles that only the coasts of Normandy could offer (to that
to say by the licensor), for their roundness and absolute absence of
hollows (the presence of hollows would have created problems of
change-colour).
As far as the costs of materials and equipment are concerned, (those
that we have placed under the heading P, procurement), we must clarify
that they have nothing to do with the costs of the hours that are served
to the various departments for the definition, technical and economic, of
such equipment and materials.
If, for example, the machines department makes use of a number of
hours for the technical definition of equipment and the purchasing
office makes use of other hours for the economic and commercial
definition of the same equipment, the costs arising from the activities of
these two departments are attributable under the heading E,
engineering.
We will go back on the subject of engineering hours later, at the time we
want only to say that the activities relating to the procurement, carried
out by the technical departments involve a commitment percentage in
hours as indicated below:
15%

preparation of the material requisition for inquiry (M/R)

25%

technical analysis of the received tenders, alignments,

tabulations

5%

final improving with the selected supplier (s)

5%

technical preparation of the Order (M/R for order)

40%

drawings control of the selected supplier

10%

follow up

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These are the activities of the technical sections ICO, SPI, STM, ELT; as
explained, PRO and CIV are occasionally involved, in these phases.

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The Procurement departments performs the activities of procurement,

defining all the economic and commercial aspects of all the equipment
and materials combined in homogeneous groups: definition of the
vendor list, contacts with suppliers, economic tabulations of tenders,
final negotiations, orders, but also negotiations and definitions with
transport companies and with the contracting companies; considering a
standard project, you have an average 50-70 types of equipment and
materials, but you can arrive, according to the complexity of the plant,
also till 110-120 orders. As we shall see later on, the activities carried
out by APG involve a commitment of 9% of the total hours (inspection
and tests require an additional commitment of the 3-4%).
A more detailed description of the Procurement Activities is given in the
relevant chapter.
As regards the construction, the activities, for an engineering company,
can go from a simple assistance to the erection or from a supervision of
all activities, until the construction in the full sense of term; as we
apply to manufacturers for equipment and materials, so we apply to
subcontracting firms for the construction.
The different activities during the construction are shortly considered:
mechanical completion, pre-commissioning, commissioning, start-up,
test run.

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A complete and exhaustive description of these activities is given in the

chapter Construction Activities.

Page 12 of 462

1.2.1 Structure of an Engineering Company with Particular Reference to

APS

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The organization structure of the APS is illustrated in the attacched

charts.

For more information and details, man can refer to the Quality Manual,
man. Q.I. para 6.2 pages 17 26 and 29.
One small curiosity: the acronym of SPI, our piping section; SPI means
Sala Progettazione Impianti (Place of Plant Design).

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1.2.2 The Hours - Statistical Splitting of the Hours among the Various
Departments
The engineering services are rewarded by the Client with the payment of
the hours employed by the Engineering Company to perform the various
activities. Therefore, it is of great importance the concept of hour for an
Engineering Company.
Wrong calculation of the hours evaluation can produce missing gains or
losses in case under estimate of the hours, or a non-achievement of the
job in case of super estimate of the hours.
A first possible evaluation of the hours can be made on a statistical
basis (this is valid for a standard project).

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REFINERY OR PETROLCHEMICAL PLANT

PRO

10%

ICO

8,5%

SPI

22%

ELT

6,5%

STM

11%

CIV

7%

APG+Exp

12% (9 + 3)

GDP

13%

STP

7%

CPG

3%

This splitting applies, as above said, to a plant standard as refinery or a

petrochemical. Clearly the splitting may vary depending on the type of
plant. If we consider a pharmaceutical plant, regardless of the
percentages for APG, GDP, STP and CPG, the splitting relevant to
technical divisions, its sure different.

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Let's try to do some considerations: certainly the commitment of piping

decreases in what is lacking the great distribution of pipes, size and
extension of pipe rack is limited and fluids to distribute will be almost
exclusively those of utilities.
On the contrary the number of equipment and particular "machine"
increseas: freeze dryers, blister packaging machines, gelatin capsules
filling machines, trays etc.) that will be added to traditional ones as
reactors, pumps, compressors; therefore there will certainly be an
increase of the commitment for ICO, amongst other things air
conditioning plants will certainly be impressive and highly demanding
(laminar flow for white rooms).
On the contrary, we could have a decrease of commitment for the
instrumentation, since many equipment will be lead below its on board
instrumentation (small packages, in short).
One possible splitting, in percentage terms could be:

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PHARMACEUTICAL

PRO

12,5%

ICO

14,5%

SPI

15%

ELT

7%

STM

10%

CIV

6%

APG+Exp

12% (9 +3)

GDP

13%

STP

7%

CPG

3%

One municipal waste incineration plant (Japanese technology), the offer

of which was made by APS in the 2005, has given the following real (at
least as regards the stage of offer) splitting:

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MUNICIPAL WASTE INCINERATOR

PRO

6%*

ICO

18%

SPI

6%

STM

9%

ELT

12%

CIV

14%

APG

12 % (9 + 3)

GdP

13%

STP

7%

CPG

3%

Quality Control

1%

Such a low involvement of the process is explained by the

fact that the Japanese technology already included, in offer
phase, a complete documentation; therefore, at the end, only
a complementary process to the one supplied by the licensor,

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was necessary.

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1.2.3 Some Information about the Costs

Here below you will find some indications of costs for certain equipment
and materials, without any expectations to offer a personal prices list as
replacement of official prices list, which are, by the way, always in
continuous development. So, these are only indications that,
independently of an immediate advantage, can and must increase
cognitive luggage.
Piping
Carbon steel pipes

1,5 /kg

Stainless steel pipes

6 7 /kg

Carbon steel curves *

3 /kg

Stainless steel curves *

12 15 /kg

Carbon steel flanges *

3,5 /kg

Stainless steel flanges *

13 16 /kg

Carbon steel valves (piping) *

8 10 /kg

* Up to 3 4

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As far as the piping is concerned, you have to consider the following

splitting in weight percentages of the piping component:

Pipes, properly said

56%

Valves

21%

Fittings (curve, T pieces etc.)

13%

Flanges

9%

Others (springs, shoes, etc.)

1%

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Civil works
Rods for reinforcement, bolts

1, 2 /kg

Fire proofing

1.3001.400 /m3

Lean concrete

120 140 /m3

Control room (reinforced concrete)

650 /m3

Electric substation (reinforced concrete)

390 /m3

Offices (on several floors)

800 /m3

Sheds (In metallic structure)

50 /m3

Instrumentation

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Control valves with positioner

1

1.500

3.000

4.500

Pressure gauge

100

Thermometric pit

200

Test samples

900 - 950

Different pressure transmitter

1.900

Page 18 of 462

Machines and Vessels

Vessel carbon steel made

5 /kg

Air Cooler (150.000 m3/h)

170.000

Air Cooler (30.000 m3/h)

60.000

Fire pump (300 m3/h, 100 KW)

40.000

Air conditioning plant &

Control room

140 /m3

Electric part
UPS (30 autonomy)

30.000

Armed cables

(4 x 2,5 mm2)

2 /m

Armed cables

(4 x 10 mm2)

3 /m

Armed cables

(4 x 120 mm2)

30 /m

Lighting system local panel

(Eex-d)

3.000

1.2.4 Rapid Estimates

Now we will see how it is possible on the basis of statistical distribution
of the hours and on the knowledge of certain parameters (figures) attain
to rapid estimates for the evaluation of internal activities and
contractual commitments.
For example, knowing the number of P&I, which should be produced
during the execution of a project, it is possible attain to the
commitment in hours of the process department.

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In this case the magic number is 200; so if we expect a number of P&I,

amounting to 15, we have:
200 x 15 = 3.000 hours

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These are the hours that, with a good approximation, the process will
spend for the development of its activities.
We will now see how from this resulting number, it is possible to go up
again to the engineering total hours as well as to the total cost of the
plant.
As we can notice from the already view statistical splitting, the process
(in a standard installation) has a weight of 10% of the engineering total
hours; so:
10% x total engineering hours = 3.000
Total engineering hours = 3.000/0,1 = 30.000 hours
So we know that all the engineering applies 30.000 hours. We try to give
a unit cost per hour of engineering, for example, but it is only an
example, 60 /hour.
You will have:
30.000 x 60 = 1.800.000 engineering cost
But we also know, that for a standard installation, engineering play for
the 10% of the total cost of the plant, therefore we will have:
10% x Total cost plant = 1.800.000
Total cost plant = 1.800.000 / 0,1 = 18.000.000
Whereupon the simple knowledge of the number of P & I, we are now
able to go up to:
Process hours = 3.000
Engineering hours = 30.000
Engineering cost = 1.800.000
Total cost plant = 18.000.000
And, if we want, we can also traced back to:
Materials cost = 9.000.000
Construction cost = 7.200.000
Other indicator could be the number of items.

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Supposing to know the items number to be estimated for a certain

plant, multiplying the items number (exception made for spares parts)
for 60, the result will be the total hours that should be necessary for the
ICO department to develop its activities.

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For example:
Items to be estimated are 45; you will have
60 x 45 = 2.700 hours for ICO
But ICO amounts to 8.5% of the engineering hours for a standard plant,
therefore
8,5% x total engineering hours = 2.700
Total engineering hours = 2.700 / 0,085 = 31.700 hours
Assuming an hourly cost equal to 60 (but again, its an example) you
will have:
31.700 x 60 = 1.902.000 engineering cost
From which
10% Tot. plant cost = 1.902.000
Total plant cost = 1.902.000 / 0,1 = 19.020.000
So, also in this case, having the items number only weve been able to
go up to the whole plant costs amount.
Results obtained are obviously an approximation: we can consider a
deviation 15% on the final workmanlike fashion estimation.
Other statistical indicators could be:

Number of lines for SPI

Number of electric users for ELT

Number of control valves for STM

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Respectively multiplying these numbers by the statistical indicators you

will have the hours of SPI, of ELT and of STM.

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1.3

Preparation of a Proposal
Now we are going to simulate the preparation of a proposal just to verify
how the figures previously examined can result of a certain utility for
rapid estimates.
We suppose that our Commercial Director is coming back from Milan to
APS offices, when he has had a first interesting contact with a potential
client who has requested the presentation of an offer by APS.
Arrived in offices, our Commercial Director communicates to the
Direction the good news: within few days APS would receive the official
requests for the preparation of an offer on the EPC basis. The first
natural immediate question by direction is to know the possible amount
of work; to the negative answer of the Commercial Director who no
information about the economic matter had got by the Client,
hypotheses are put forward.
By analysing the poor documentation received, on realizes that the
plant could consist of about 70 items for vessels, tanks and columns.
Here the mechanism of rapid estimate starts.
Assuming 5 lines for each equipment (two in entrance, two out and one
drain) will have:
5 x 70 = 350 lines
Now using the statistical figure that is, for piping, 25 hours for lines, we
will have:
350 x 25 = 8.750 piping hours
from which, recalling that the weight of piping is equal to 22% of the
total engineering amount, we have:
22% tot. eng. = 8.750
tot.eng. = 8.750 / 0, 22 = 39.800 hours about
39.800 x 60 = 2.390.000
and while the engineering is the 10% of the total cost, we have:
project cost: 2.390.000/ 0,1 = 23.900.000

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Therefore, once the curiosity on the cost of the plant has been satisfied,
and the official client documents have been received, man can start to
prepare the offer.

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First of all, the direction shall appoint the proposal Manager; then the
secretariat of the proposal department, with possible assistance of the
proposal manager and the head of the tenders, will provide to distribute
the documents received by the client.
An Offer Start Memo shall be issued by the Commercial Department; it
shall be completed with indications relevant to the plant reference code
and the name of the Client; it shall also formalize the name of the
chosen proposal manager and it shall specify the scope of activities to
be quoted, information and documents to be carried out including the
relevant timetable.
Once completed the draw up of the Offer Start Memo, this shall be
distributed to all the technical departments, ING, PRV and STAFF.
The various departments shall ensure the evaluation of the hours and
the technical qualifications.
The Estimate Department, in cooperation with the various technical
responsibles, shall carry out the evaluation of costs relevant to
equipment and materials.
The proposal manager, collected the technical qualifications, shall
ensure the preparation of technical offer while the commercial
department shall ensure the drafting of the economic offer that will be
submitted to the General Direction.
Just during the last phase, before having established the price to be
exposed, allowances and the contingencies shall be considered.
Particular attention shall be paid during the planning phase; at this
purpose, the proposal Manager will be supported by the CPG manager
during the drafting of the Overall Master Schedule.
One of the most successful weapons can certainly be a planning made
with attention to the smallest details.
During the implementation of the offers, relations with the client will be
held by the proposal Manager for the parts of technical competencies
while the economic one will be managed by the sales manager.
Occasionally, it may happen that it would request the economic offer
submission only after the acceptance of the technical one.

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After having held the final negotiation, the Client will communicate the
name relevant to the engineering company that has awarded the order.

Page 23 of 462

1.4

Conclusion of Proposal
After having positively concluded the negotiation with the client gaining
the order assignment, the first project activities can start.
The contract, which in legal capacity ratifies the agreements reached by
the two parties for the plant implementation, shall be drawn up.
Depending on the circumstances but especially on the client, the
contract is discussed and drafted after the order, even if, of course,
already set up during the negotiation.
In the contract, the following is specified: names of the contracting
parties, the purpose of work, the definitions of terms and conditions
and of the various stages of activities, the obligations of the parties, the
compensation for the services that will be made, the hourly rates for
any additional services, terms of payment, management of variants,
guarantees, modalities for the execution of the test run, liability,
insurance, possible withdrawal, possible arbitration, rules to be used,
the dates and deadlines of the various phases and activities, the validity
of the contract and others, if any.

1.5

Types of Contract
The contracts are usually defined in accordance with the type of the
agreed payment (reimbursement). The Contractor, or Seller, is the
Company that already has awarded the order and now has signed the
contract with the client; the Owner is the Client or Buyer.
The various types of contract are essentially four; all other types of
contract may be considered variants of these.

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They are:

Cost plus

Cost plus with fixed fee

Lump sum or fixed price

Guaranteed Maximum Delta

Page 24 of 462

Cost plus
The term "cost plus" indicates that the Contractor shall be reimbursed
for all costs incurred and applicable to the contract, plus a percentage
of these costs for his overhead, and, obviously, profit.
Usually the percentage varies according to the agreed procedures and
services. The reimbursed costs for engineering services may be 215
220 %, or more, of the cost of engineering labour. Other costs such as
travels, communication costs, reproductions, clerical labour are
generally in the range of 106-110%.
The construction costs are in the range of 110 -125%; the equipment
and materials costs are in the range of 105-115%.
The criticism more immediate to this type of contract is that, since
profits grow directly with the costs, it should be in Contractor interest,
the increasing of costs for the purchase of the material or other costs.
This idea is erroneous; the staff of the Client (auditors, engineers) has
continuous access to documents and performs a direct control; for
example the staff is involved in negotiations with suppliers.
If the Owner has experience in the operations of engineering and
construction, the possibility of excessive uncontrolled costs is very low.
Many of the larger firms prefer the cost-plus contract to the other types
since they give them much more freedom and control over the contract.
There is considerable advantage to the owner in a cost-plus contract
when process design is incomplete or many changes will have to be
made in the original design. Really, the cost-plus contract, if properly
executed and if placed with a reliable contractor, can be as effective and
as economical as the lump-sum, or granted maximum or other types of
fixed price contracts.

Cost-Plus with Fixed Fee

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The term fee means compensation; this type of contract is similar to

the cost plus form except that the Contractor can only earn a specified
fee. All other payments are reimbursement for direct costs only.

Page 25 of 462

Lump Sum or Fixed Price

Lump sum means total amount, forfait.
This type of contract has the cost set at the beginning; it allows nothing
over or under an established total amount, unless, of course, changes
that must be agreed.
It remains always the uncertainty for the Contractor: if we take too
many margins in offer phase we can earn, but also we risk to loss the
job; if we have nothing left, we have good opportunities to get the job,
but we can also lose out.
Also the lump-sum contract is subject to criticism. Since the contractor
is limited to a fixed price, all possible savings increase his profit.
Therefore, the contractor may be accused of effecting savings at the
expense of quality.
Generally, however, specifications for the various items of the process
plan are very complete, or there is little possibility for extensive change
from the original proposal.
Also the Contractor must be careful to the fact that, since the price is
closed, the Client is not looking to put in the contract what is not due.
The fact is that this is the type of contract more used, but it is also the
one which involves more frequent opportunities of disputes.
Guaranteed Maximum Delta
Normally is applied to materials, when the Contractor purchases in the
name and on behalf of the Client; during the offering, the Contractor
after having make its estimates, indicates in a certain amount the cost
of materials (for example 20.000.000 ); then on agrees that if the final
cost will be 22.000.000 , then the Contractor will pay a penalty, for
example, 30% of the difference.
Delta = real cost - estimated cost = 22 millions 20 millions = 2 millions
30% of 2.000.000 = 600.000 of penalty

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If on the contrary, the Contractor saved money, spending 18.000.000 ,

he will have a bonus of 20% (not 30%!!)
Delta = real cost - estimated cost = 18 millions 20 millions = 2 millions
20% of 2.000.000 = 400.000 as bonus
1.6

Project Management

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1.6.1 The Plant Starts

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As already said, after having positively concluded the negotiation with

the client gaining the order assignment, the first project activities can
start. The initial stages such as the opening of the contract and
planning are very well summarized in paragraph 3.2 Operating
Processes Interactions of the Quality Manual, MAN-Q-1, revision 7
page 11 of 30, from which we have taken the figure here below:

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1.6.2 Constitution of a Project Team

GEC and DGE departments shall appoint a project manager; this
choice, on equal availability, is essentially dictated by:
a) Participation during the preparation of the proposal as Proposal
Manager;
b) Previous experiences on similar types of project;
c) Previous experience (positive!) with the client;
d) Knowledge of languages, in case the client requires for example,
the use of French (we think to an Algerian client).
In the selection of the project engineer, always on equal availability,
points b. and c. have to be applied; for the choice of the project
secretary, the knowledge of the official foreign language of the project is
very important.
The technical/cultural characteristics of a project manager should be:
knowledge, (not necessarily broaden), in the various fields of
engineering, of the financial administration and of the economy.
A project manager should not interfere more than the necessary in the
technical decisions.
If, for example, we have a project manager, coming from ICO
department, he should not interfere, during the management of the
project, in the activities which are duties of the responsible technician
of equipment and machinery.
It is not his task, it is not what is required; he must have a general
overview of all problems, without entering into technical details, that
could distract him.

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He must have considerable flexibility and predisposition to human

contact, in order to establish always good relations with 4 categories of
persons: the client, his team of the project group, the responsible for the
projects (GEC), and, even if the relation is not always direct, with the
Vendors.
The main goal of the project manager is: to manage the project in an
optimal way, carrying out the maximum profitability of the project but
always with the full satisfaction for the Client.

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A good harmony inside the team is indispensable to obtain by all the

employees of the group, the full commitment for the respect of the
contractual obligations; this harmony will help in the same time, with
professional development of the assigned staff.

1.6.3 Project Start Memo and First Documents

Once the project manager has been appointed and the number of
project assigned, the offer responsible (COM) compiles a written
communication, addressed to the general direction with a copy to the
commercial office and to the project manager, in which the main
aspects of the tender (that in the meantime became a proper project) are
summarized; the project manager also receives the final technical offer
and one copy of the contract (or the draft if the contract has not yet
defined with the Client).
A Project Start Memo is drawn up and distributed to the departments
involved in the execution of the project.
In this memorandum, the main points of the contract are summarized:
brief description of the scope of work, contractual dates, reference
documentation, applicable procedures, operating cycles; it is also
communicated the hours allocated to the various departments.
The technical documentation of the offer, pertinent to the relevant
doctrine, is distributed to the various departments, while the Overall
Master Schedule (the one prepared during the Offer Phase) is
distributed to everyone.
The first department that begins to operate is the Process; the first
document prepared and issued by the process are the Process Flow
Diagrams (PFD) and the Process Data Sheets of the more critical items,
in order that once they have been given to ICO, such data sheets can be
mechanised and, attached to the Material Requisition, can be sent, by
the Procurement, to the various suppliers.
Other document of high priority is the Item Index, which would be made
by the project group but many times it is drawn up by the process
together with the project group.

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Another document of almost immediate elaboration is the Architecture

of Control issued by the instrumentation department.
Really, this document does not require a great urgency, but it is one of
those documents who make a good impression on Client, for its
evidence and its immediate understanding.

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The piping department begins to work on general plot plan, starting

obviously from the one outlined in the proposal phase.
But on the choice of the priorities scale, we will back later.
For a deeper knowledge of the main activities/responsibilities of
Company Management, it is available the document MAN-Q-1 "Matrix of
the Responsibilities of Organization Units".

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Here below, you will find an abstract, in tables format, of the above
mentioned document.

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Now, we examine some documents.

The PDF (Process Flow Diagram) is drawn up by the process without the
cooperation of other departments.
The P&I is another document issued by the process department which,
during the drafting, make use of the collaboration of instrumentation,
but also of piping and mechanical departments.
It is very important the contact, the exchange of ideas among the
various departments; we are not talking about telephone calls, which
are not appropriate to have a proper interchange of data, but we mean
meet each others, exchange points of view, in other words, we are
talking about technical cooperation.

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As regards other subjects instead, such as the material balance and

calculations, are only process competences; but, on the contrary,
during the preparation of process specifications, especially for specific
kind of items, would be advisable turn to ICO responsible to get his
comfort and technical opinion.
The plot plan is a piping responsibility, but how would the piping draw
up this document without the cooperation of the instrumentation
department in the indication of the suitable position of control room? Or
how it can do without mechanical support that, already at this stage, he
is able to anticipate size and positions of the main equipment perhaps
indicating the open spaces for the maintenance?

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Whatever, all the departments work together in the execution of the plot
plan.
The civil that always seems a bit like an Independent Republic, must
make use of the collaboration of mechanical, but also of electrical,
before issue the loading plans.
In turn, the mechanical technician, during the examination, comments
and/or approval of the vendors equipment drawings, will need the help
of all the other departments, including the civil one.
The electrical and the instrumentation departments should collaborate
to find, if possible, a single suitable route for electrical and instrument
cables.

1.6.4 Initial Activities of the Project: Internal Kick-Off Meeting and KickOff Meeting with the Client
After having distributed the contractual documentation and the Project
Start Memo, the Project Manager shall arrange the project kick off
meeting. The main purpose of this meeting is the one to make a review
of the contract and the technical annexes thereto.
The involved people who participate to the meeting are: the project
manager, the project engineer/s, the project secretary, various
departments responsible and/or delegates (the ones assigned to the
project).

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The subjects under discussion and definition will be:

the contract, especially for a correct understanding of the scope of

work;

the first annex of the contract, which are the basic data of the
project; this is the opportunity to revisit, even if quickly: the
conditions of the place (climate and topographical conditions),
characteristics of the inlet products, characteristics of the final
products, codes / rules / standards, scope of the supply, battery
limits, the extension of engineering services, commissioning /
start-up / test run;

The Project Start Memo, already distributed;

The synthetic Overall Master Schedule (the one of the contract);

setting of the same for the subsequent release updated issues;

Quality Plan dedicated to the project;

Identification of critical equipment and activities;

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Verification of human resources for the respect of contractual

commitments;

Collection of comments and suggestions;

Setting of the meetings agenda in view of kick-off meeting with

the Client;

Short examination of the draft of Coordination Procedure to be

submitted to the Client.

We can define the Coordination Procedure as an appendix of the

contract, but without a legal value.
Its a document of extreme practicality; in which are defined:

Scope of work (in a synthetic form);

General information as:

Official heading of the project
Number of the project

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Language of the project

Names of the responsibles assigned to the project;

Addresses and information for the

correspondence (telephone, fax, e-mail);

Number and identification of letters, fax, e-mail, minute of

meeting;

Acronyms and numbers of the items;

Numbers and tags of the documents;

Modalities to be observed in the documents transmission and

definition of number of copies to be sent;

The weight conferred to the various engineering documents for

progress evaluation;

Definition (Synthetic) of the Program and Project Control.

transmission

of

the

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The project manager, or the project engineer, or the project secretary,

will draw up the minute of meeting relevant to this internal kick-off
meeting, to be distributed, after being signed by the project manager, to
the participants and to the interested parties.
The next step is to prepare with the client the meeting, which may take
place at the APS office or at the clients office.
It has to be specified that for an easier organization it would be
opportune to hold the meeting at the engineering company offices both
for documents quantity reasons and the participation of all personnel
involved in the project.
We must also say that the real need for this meeting with the client is
subject to the level of definition reached during the phases of the
negotiation.
The topics that will be treated depend on the relevant requirements of
the contract, but tentatively we can indicate the following:

Definition of the on hold matters;

Discussion and definition of the Coordination Procedure;

Verification/confirmation of the Norms and Codes to be used (in

particular possible local codes);

Examination of the preliminary general plot plan (orientation,

battery limit, tie-ins);

Examination of the final Vendor list (if applicable).

It will be task of the Engineering Company to elaborate the minute of

meeting and, therefore, its distribution in accordance with the
modalities already agreed in the coordination procedure.
The technical and economic aspects of the project are constantly
managed and maintained under careful control in order to be able to
timely intervene with corrective actions in case of possible problems.
With the support of the Cost Control it is possible to control the hours
employed on the project.

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The main activities that the project manager and his collaborators
should carry out in these beginning phases mainly concern in the
preparation and issue of documents.

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Among the following documents, normally the first ones to be issued at

the beginning of the project are:

General plot plan c;

P&I;

Equipment list c ;

Process specifications and data sheets;

Piping specifications;

General equipment specification;

Preparation of MR for critical items;

General instrument specification and architecture of control

system c;

Instrument list;

General specification of the electrical equipment;

General electric one-line diagram;

Soil investigation documents (if applicable).

Depending on the work loads, certain priorities have to be given.

These priorities shall essentially be dictated by contractual terms.

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If the contract declares penalties for delayed deliveries and we foresee

that there are critical items which require long deliveries, we will make
sure that the process department give precedence to the data sheets for
this equipment, so as that ICO, once that the data sheets have been
mechanised, could go right away into an offer request, maybe even
anticipating the technical part by e-mail or, better, via fax, because the
fax, having the sign of the sender, has more reliability. If instead there
are no critical items, priority could be given to the documents that need
the approval and/or comments of the client, especially if the said
documents are propaedeutic for others.
Otherwise, always taking into account the contract requirements,
priority could be established by more practical reasons; for example,
with a view to the monthly invoicing, it should be advisable to give
precedence to all those documents that, on equal terms (ceteris
paribus), have a percentage weight superior in order to have a
satisfactory monthly progress.
c

These documents put together and/or set up before the kick-off meeting with
the client.

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Periodical and extraordinary (if necessary) meetings for the reexamination and verification of project activities status shall be
scheduled.
The conditions that may require this kind of meetings may be the
following:

Emission of engineering documents to make sure, as much as

possible, that the work has been done according to the
contractual terms of the project;

The return by the clients of the approved and/or commented

documents, in order to realize which interventions client required
and if these are routine interventions or, on the contrary,
represent real contract variations.

1.6.5 Calculation of Engineering Activities Progress

We have previously mentioned a very important document which is the
Project Monthly Progress Report.
This document will be distributed, obviously to the client, as well as,
internally, to the various departments for the relevant competence.
This document shows the state of the project up to date, indicating the
most significant events of the month (new activities, meetings with the
client, order definitions, issuance of particularly important documents,
critical items, eventual corrective actions to be undertaken, previsions
for the next month, etc.).
For the calculation of the engineering activities progress, in case the
invoice is made on basis of the real progression of documents and their
issue, we propose the following example:

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It has already been established during the proposal, and then

confirmed in the contract, the weight relevant to the various
departments and various activities that produce a progress; here
bellow, a real example of a recent project:

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PRO 10%
SPI 25%

Attention!
Dont confuse these percentages with
those mentioned in the paragraph
dedicated to the statistical distribution of
the hours.

ELT 11%
STM 11%
ICO 9%
CIV 16%
Survey

4.6%

Telecommunication

5.4%

Design Specifications

4%

Operating Manual

4%

Three phases have been agreed for the issue of documents with
the relevant weight:

PHASE I

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PHASE II

PHASE III

First and following

issue for comments

Issue for
construction

Issue as built

30%

60%

10%

We will begin with Process; we have individuated for this

department the main documents and activities with relevant
weights:

Specifications

27%

PFD

9%

P&I

40%

Fluid list

3%

Utility & Chemical Consumption

10%

Line List

3%

Safety System

10%

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On hypothesizes that, at the beginning of the project, after a

month from the coming into force of the contract, two documents
have been issued: the PFD and half of the total data sheets.

with a total amount of 1.000.000 of engineering activities, we will

have:

1) 10% (process weight) x 1.000.000 x 9% (PFD weight) x 0.30

(phase 1 percentage)= 2.700
2) 10% (process weight) x 1.000.000 x 27% (specification weight) x
0.5% (half of the produced data sheets) x 0.30 (phase 1
percentage) = 4.050

Therefore, as far as the process is concerned these will be the amounts

to be invoiced (6.750 ).
We have made an example relevant the process department, but clearly
the procedure can be applied to all the documents produced by the
other departments.
1.6.6 Variants
With the word variant on intends any change in the project scope
which modifies the costs and/or completion dates of various activities,
and/or the contractual guarantees.
All parties involved in the execution of the project may originate
variants. Variants can arise from outside of the company or within the
company itself.

External variants

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A direct and explicit request from the client asking for additional
equipment or additional engineering services; this is the more
manageable case.

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Normally, as a first approach, the client will ask for a preliminary

evaluation. The engineering company will prepare a written answer
within 7-10 days, which will indicate:

brief description of changes;

preliminary estimate;

eventual impacts on contractual dates;

cost of services for the preparation (that will follow) of the detailed
cost estimate.

The clients answer could be:

the request is deleted (costs and time have scared him);

proceed in the preparation of a detailed estimate.

The project manager gives disposition to proceed with detailed offer

which will be completed, if necessary, with specifications and drawings.
In this case the engineering company will probably issue a request for
quotation (even if by fax) to vendors.
Also in this case the client may:

cancel the request of variants; the hours spent, however, for the
preparation of the detailed estimate will be charged to the clients
at the agreed cost;

officially approve the change

In this case the costs of material and equipment, the costs of

engineering hours and of construction (if applicable), will be considered
as approved change; the initial budget and the final estimate shall be
revised accordingly.
The above written is the easiest case to manage.

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It can happen on the other hand, that the clients request is not explicit,
but is between the lines.
For example, making comments on drawing, the client could say in
this case it would be best to also provide or good engineering
practice would require this additional drawing

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Are they lawful requests? Do they respect the contract? It will be the
project manager and the involved collaborators duty to evaluate
whether or not to accept the clients request without any penalty for the
project.
Once it is decided to proceed, work will be carried out according to the
already examined modifications.
Internal changes
If, on the contrary, the modification becomes necessary to produce
corrective actions for oversights during the proposal phase or for errors
or incongruities, then the change is internal and it should be opportune
trying to not involve the client. The change matter has always been and
will always be, in the execution of projects, cause of discussion which,
sometimes, are transformed result in dispute.
Attention should be given to the fact that not necessarily the request of
changes has to generate quarrels.
In fact with a contract of cost-plus type, the engineering company does
not run the risk of penalty, even if, something has been forgotten.
Was a spare pump necessary? Did we not take
consideration? Well, it doesnt matter, we will provide now.

this

into

Since the total cost for the realization of the plant is not fixed, we will
invoice the cost of the pump plus the delta agreed in the contract.

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It is true that the client could reprove us: if you would have woken up
earlier maybe you would have got a better price! (for example the prices
may, in the meantime, be increased).

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1.6.7 Notes on Cost Control

Cost Control activities mainly consist as follows:

To provide means which can permit an appropriate record and an

easily traceability of the all approved changes.

To provide a methodology which permits to perform a suitable

control of the trend of costs and to be sure that there are no
deviations from the pre-fixed goals and plans and, on contrary
case, to intervene with proper corrective actions;

To carry out timely comparisons among the foreseen budget costs

and those foreseen for the completion of the project;

To provide data and statistical parameters that, collected in an

opportune manner in the Project Closing Report, can represent an
useful source of information for future projects.

For more details on this subject, reference has to be made to the Project
Control chapter.

1.6.8 Planning and Scheduling

The planning and scheduling management is another essential project
manager responsibility which influences the possibility to carry out the
project according to the scheduled contractual timetable.
The project manager is assisted in this activity by a specialist on the
matter (the Planner Engineer).

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In any case, it is very important that the program settings are rigorous
but at the same time realistic and achievable. For this purpose it is
necessary to provide:

To establish all the milestones of the project and not just the
contractual ones.

To identify the logical sequences and the interdependences of the

various activities.

To establish the number and duration of the working phases

necessary to complete the various activities.

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The Overall Master Schedule (O.M.S.) is an instrument always utilised

in the planning and scheduling management as a sort of Bar
chart/Gantt chart, which offers an immediate representation of the
projects program, summarizing by means of bars graphs the main
projects activities assigned to the various working phases, such as
Engineering, Purchases and Construction.
The Overall Master Schedule permits a comparison among the activities
reached results and the foreseen goals and the scheduled expiry.
The O.M.S. is distributed to all the involved departments and
obliviously to the Client.
For more details on this subject, reference has to be made to the Project
Control chapter.
1.6.9 Administrative and Financial Activities

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Also in the administrative and financial field, the project manager

carries out various activities that may be simple collaborations with
various company department and/or real involvements, such as:

Cooperation with the Direction in the drafting of project budget: it

usually occurs when the project manager has already participated
to the previous offer phase and subsequent order acquisition.

Elaboration of periodical reports on the project status. Among

these the Monthly Progress Report previously mentioned.

Control and verification together with the administration

department about the complying among scheduled date and the
invoicing, providing and assuring the availability of possible
documentation requested by the contract.

The support to the administration department in the expediting

activities relevant to the expired invoice payment.

The support to the financial specialists in the activities

concerning the contacts with the banks and financial institutes.

Collaboration in the draw up of insurance for the project risks

coverage.

Activities relevant to the customs, railway, airport, postal and

courier office, with the possibility to collect, samples, parcels and
letters, leaving a discharge receipt.

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1.6.10 Closing of the Project

Towards the completion of the work, the project manager will be
engaged in propaedeutic activities in order to obtain by the client the
reports (partial or complete) relevant to the mechanical completion and
the letter of acceptance (provisory and later definitive) relevant to the
carried out works; after having obtained the works acceptance, he will
issue the relevant contractual invoices. He will subsequently verify that
they have been paid in accordance to the contractual modalities and
timetables and that the guarantee documents, issued by the company,
have been given back once the guarantee contractual time expired.
After having completed all these activities, the project manager will
issue an internal communication which will make official the closing of
the project; starting from this moment no further hours could be
charged to the project, except for the authorised ones.
Obviously the project manager, even if he is involved in other activities
or another project, shall always keep in mind the last possible contract
expires, as for example the mechanical guarantees of which expiring
date is after the closing of project.
The last act of the project manager, once having completed all of the
works including those on site, will be the drafting and issuing of a very
important document: the Project Close-Out Report. There are not
enough words to describe the big usefulness, not only for the project
itself, but also for future projects and subsequently for the Company.
However, its is a fact that this document rarely sees the light of day
since not often there is time to draft it before passing to another project,
and, anyway, in the rare occurrence when it has been produced, it is
neglected and even forgotten.

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Everyone just should completely understand the very high importance

of this document, which going over again and reconstructing the history
of the project, becomes a rich source of information, experience and
suggestions, useful and constructive for other similar works.
In conclusion, the first goal of the Project Close-Out is that it can be
used as a guide for improvements of future works and to collect in an
organic way the statistical data for costs and performances of various
involved departments, so that this return data can be used according
to appropriate methodologies, to update statistical indicators to be
implied for estimates and controlling of future projects.