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ENGINEERING PROJECT
MANAGEMENT
ENGINEERING PROJECT
MANAGEMENT

Second Edition

Edited by

Nigel J. Smith
Professor of Construction Project Management
University of Leeds
# 2002 by Blackwell Science Ltd, Second edition published 2002 by Blackwell Science
a Blackwell Publishing Company Ltd
Editorial Offices:
Osney Mead, Oxford OX2 0EL, UK Library of Congress
Tel: +44 (0)1865 206206 Cataloging-in-Publication Data
Blackwell Science, Inc., 350 Main Street, Engineering project management/edited by Nigel J.
Malden, MA 02148-5018, USA Smith.Ð2nd ed.
Tel: +1 781 388 8250 p. cm.
Iowa State Press, a Blackwell Publishing Company, Includes bibliographical references and index.
2121 State Avenue, Ames, Iowa 50014-8300, USA ISBN 0-632-05737-8 (alk. paper)
Tel: +1 515 292 0140 1. EngineeringÐManagement. 2. Construction
Blackwell Publishing Asia Pty Ltd, 550 Swanston industryÐManagement. I. Smith, Nigel J.
Street, Carlton South, Melbourne, Victoria 3053,
TA190 .E547 2002
Australia
658.4'04Ðdc21
Tel: +61 (0)3 9347 0300
2002074568
Blackwell Wissenschafts Verlag, KurfuÈrstendamm 57,
10707 Berlin, Germany
ISBN-0-632-05737-8
Tel: +49 (0)30 32 79 060
A catalogue record for this title is available from the
The right of the Author to be identified as the Author
British Library
of this Work has been asserted in accordance with the
Copyright, Designs and Patents Act 1988.
Set in 10/13pt Times
by DP Photosetting, Aylesbury, Bucks
All rights reserved. No part of this publication may be
Printed and bound in Great Britain by
reproduced, stored in a retrieval system, or transmitted,
TJ International, Padstow, Cornwall
in any form or by any means, electronic, mechanical,
photocopying, recording or otherwise, except as
For further information on
permitted by the UK Copyright, Designs and Patents
Blackwell Science, visit our website
Act 1988, without the prior permission of the publisher.
www.blackwell-science.com
First edition published 1995 by Blackwell Science Ltd
Reprinted 1996, 1998
Contents

Preface xi
List of Contributors xiii
Acknowledgements xv
List of Abbreviations xvi

1 Projects and Project Management 1

Denise Bower
1.1 The function of project management 1
1.2 Projects 2
1.3 Project management 3
1.4 Project initiation 5
1.5 Projects risks 7
1.6 Project objectives 9
1.7 Project success 11

2 Value Management 16
Tony Merna
2.1 Introduction 16
2.2 Definitions 16
2.3 Why and when to apply VM 20
2.4 How to apply VM 22
2.5 Reviews 23
2.6 Procedures and techniques 27
2.7 Benefits of value management 28
2.8 Summary 28

3 Project Appraisal and Risk Management 30

Nigel Smith
3.1 Initiation 30
3.2 Sanction 32
3.3 Project appraisal and selection 33

v
vi Contents

3.4 Project evaluation 37

3.5 Engineering risk 39
3.6 Risk management 39
3.7 Risk and uncertainty management 43

4 Project Management and Quality 44

Tony Merna
4.1 Definitions 44
4.2 Quality systems 46
4.3 Implementation 49
4.4 Quality-related costs 50
4.5 Quality circles 52
4.6 Quality plans 53
4.7 Total quality management (TQM) 53
4.8 Business process re-engineering (BPR) and TQM 55

5 Environmental Management 58
Ian Vickridge
5.1 Environmental impact 58
5.2 Environmental impact assessment (EIA) 60
5.3 Screening 62
5.4 Environmental legislation 63
5.5 Scoping 65
5.6 Base-line study 66
5.7 Impact prediction 67
5.8 Environmental impact statement 68
5.9 Presenting EIA information 69
5.10 Monitoring and auditing of environmental impacts 73
5.11 Environmental economics 75
5.12 Environmental management 80

6 Project Finance 86
Tony Merna
6.1 Funding for projects 86
6.2 Sources of finance 87
6.3 Project finance 88
6.4 Financial instruments 89
6.5 Financial engineering 91
6.6 Debt financing contract 92
6.7 Types of loans 93
6.8 Appraisal and validity of financing projects 98
6.9 Risks 100
 Contents vii

7 Cost Estimating in Contracts and Projects 105

Nigel Smith
7.1 Cost estimating 105
7.2 Cost and price 107
7.3 Importance of the early estimates 109
7.4 Estimating techniques 112
7.5 Suitability of estimating techniques to project stages 119
7.6 Estimating for process plants 121
7.7 Information technology in estimating 123
7.8 Realism of estimates 124

8 Project Stakeholders 127

Kris Moodley
8.1 Stakeholders 127
8.2 Primary project stakeholders 127
8.3 Secondary project stakeholders 128
8.4 Understanding the interests and influences 129
8.5 Stakeholder management 131
8.6 Stakeholders and communication 134
8.7 Summary 135

9 Planning 137
Nigel Smith
9.1 Planning 137
9.2 Programming 138
9.3 Network analysis 139
9.4 Updating the network 145
9.5 Resource scheduling 146
9.6 Planning with uncertainty 146
9.7 Software and modelling 147

10 Project Control Using Earned Value Techniques 156

Denise Bower
10.1 Project control 156
10.2 Earned value definitions 157
10.3 The theory and development of earned value analysis 159
10.4 Relationship of project functions and earned value 161
10.5 Value of work done control 163
10.6 Earned value analysis techniques 164
10.7 Application of EVA 166
10.8 Examples of EVA 167
10.9 Summary 172
viii Contents

11 Contract Strategy and the Contractor Selection Process 174

David Wright
11.1 Context 174
11.2 Factors affecting strategy 175
11.3 Contractual considerations 177
11.4 Contractor choice 179
11.5 Project objectives 180
11.6 Contract selection 182
11.7 Project organisation 186
11.8 Risk allocation 193
11.9 Terms of payment 194
11.10 Model or standard conditions of contract 201
11.11 Sub-contracts 204

12 Contract Policy and Documents 206

David Wright
12.1 Tendering procedures 206
12.2 Contracting policy 207
12.3 Contract planning 208
12.4 Contractor pre-qualification 211
12.5 Contract documents 212
12.6 Tender review 213
12.7 Tender evaluation 214
12.8 Typical promoter procedure 215

13 Project Organisation Design/Structure 222

Kris Moodley
13.1 Organisations 222
13.2 Building blocks of organisations 223
13.3 Organisation types 225
13.4 Internal and external projects 231
13.5 The human side of structure 232
13.6 Structure of collaborative relationships 233
13.7 Structure in the international context 234
13.8 Summary 236

14 Design Management 238

Peter Harpum
14.1 Role of designs 238
14.2 Understanding design 239
14.3 What design has to do 241
14.4 The role of design management 243
 Contents ix

14.5 Managing the project triple constraints 247

14.6 Design liability 255
14.7 Briefing 257
14.8 Interface control 259
14.9 Design for manufacturing 261

15 Supply Chain Management 264

Steven Male
15.1 Background 264
15.2 Perspectives on terminology 265
15.3 Supply chain strategy 266
15.4 The nature of the organisation 269
15.5 World-class organisation in manufacturing 270
15.6 The project value chain 275
15.7 Procurement and the project value chain 277
15.8 Prime contracting 281
15.9 The operation of future construction supply chains 285
15.10 Summary 287

16 Team-Based Supply Chains and Partnering 290

Denise Bower
16.1 Background 290
16.2 Team working 291
16.3 Partnering 292
16.4 Establishing the relationship 298
16.5 Making the relationship work 300
16.6 Benefits of partnering 300
16.7 Constraints to partnering 303
16.8 Summary 305

17 Private Finance Initiative and Public±Private Partnerships 307

Tony Merna
17.1 Concession contracts 307
17.2 Definition of concession projects 308
17.3 Organisational and contractual structure 309
17.4 Concession agreements 311
17.5 Procurement of concession project strategies 311
17.6 Concession periods 313
17.7 Existing facilities 314
17.8 Classification of concession projects 315
17.9 Projects suitable for concession strategies 317
17.10 Risks fundamental to concession projects 317
x Contents

17.11 Concession package structure 319

17.12 Advantages and disadvantages of concession projects 321
17.13 The origins of PFI 323
17.14 The arguments for privately financed public services 323
17.15 PFI in the UK 325
17.16 Bidding and competition 326
17.17 Output specification 328
17.18 Financing public±private partnerships 329

18 Aspects of Implementing Industrial Projects 333

Nigel Smith
18.1 Multi-disciplinary projects 333
18.2 Industrial projects 335
18.3 Large engineering projects 336
18.4 UK off-shore projects 337
18.5 Legal systems in the EU countries 338
18.6 Innovation 339

19 Project Management in Developing Countries 341

Ian Vickridge
19.1 What makes developing countries different? 341
19.2 The construction industry in developing countries 345
19.3 Finance and funding 346
19.4 Appropriate technology 347
19.5 Labour-intensive construction 349
19.6 Community participation 351
19.7 Technology transfer 352
19.8 Corruption 353
19.9 Summary 355

20 The Future for Engineering Project Management 357

Nigel Smith
20.1 The role of the parties 358
20.2 Guidelines for project management 359
20.3 Project management ± the way ahead 362

Suggested Answers to Exercises in Chapter 9 364

Index 372
Preface

In many sectors of industry the significance of good project management

in delivering projects in accordance with predetermined objectives has
been established. Industrialists and engineering institutions have called
for the inclusion of a significant proportion of project management in
higher-level degrees, something realised by Finniston in his review of the
future of engineering in 1980 (Engineering our Future. Report of the
Committee of Inquiry into the Engineering Profession, Chairman Sir
Montague Finniston, HMSO, 1980). Since the publication of the first
edition of this book in 1995, a number of significant developments have
taken place. A British Standard for Project Management, BS6079, has
been published, and the UK-based Association for Project Management
has produced a fundamental guide to processes and practice entitled
Body of Knowledge, and has drafted a standard contract for employing
project managers. There has also been a marked increase in the teaching
and delivery of university programmes and continuing professional
development (CPD) courses in project management.
Many organisations in the engineering, finance, business, process and
other sectors are appointing project managers. Some have a very narrow
brief and a precise role, whereas others have a more strategic, managerial
and multi-disciplinary function. This second edition builds upon the
success of the first edition in providing a clear picture of the aims of
project management based upon best practice. The improvements in this
edition have been driven by changes in the practice of project manage-
ment, and by the helpful comments made by book reviewers and readers
since 1995.
The original information on risk management is updated and
enhanced. The principle of uncertainty management is recognised by a
new chapter on value management to balance the effective management
of adverse risk and opportunity. Changes in the management of major
projects have resulted in more joint ventures, project partnering, special
project vehicles and other forms of collaborative working. The new

xi
xii Preface

edition includes new chapters on supply and value chain management,

and on effective project partnering. The book is not aimed at any
particular sector of engineering, and relates to the management of any
major technical project.
Newly appointed project managers and students of project manage-
ment at the MEng, MBA and MSc level will find the enhanced text and
references beneficial. The book is concerned with the practice and theory
of project management, particularly in relation to multi-disciplinary
engineering projects, large and small, in the UK and overseas.

Nigel J. Smith
List of Contributors

Editor: Professor Nigel J. Smith, BSc, MSc, CEng, FICE, MAPM, is

Professor of Construction Project Management in the School of Civil
Engineering, University of Leeds. After graduating from the University
of Birmingham he has spent fifteen years in the industry working mainly
on transportation infrastructure projects. His academic research inter-
ests include risk management and procurement of projects using private
finance. He has published fifteen books and numerous refereed papers.
He is currently Dean of the Faculty of Engineering.
Denise Bower, BEng, PhD, MASCE, is a Lecturer in Project Manage-
ment in the School of Civil Engineering at the University of Leeds. She
was formerly the Shell Lecturer in Project Management at UMIST. She
is a leading member of Engineering Management Partnership which
offers Diploma and Masters Degree level qualifications to engineers of
all disciplines. She was a member of Latham Working Group 12 and has
an extensive record of consultancy work with clients in construction,
process engineering and manufacturing.
Peter Harpum, after ten years managing major projects in the oil, ship-
ping and construction industries, Peter Harpum now works as a project
management consultant advising blue chip clients in various industrial
sectors. He has carried out a number of research projects with interna-
tional engineering and construction organisations, concentrating in
particular on the front-end of the project lifecycle. He has contributed to
the design, content, and delivery of a number of project management
courses at Masters level and continues to work as a visiting lecturer at
UMIST. Peter holds a Masters Degree in Project Management, and is
working on his doctoral thesis on design management theory.
Professor Steven Male, holds the Balfour Beatty Chair in Building
Engineering and Construction Management, School of Civil Engineer-
ing, University of Leeds. His research and teaching interests include
strategic management in construction, supply chain management, value

xiii
xiv List of Contributors

management and value engineering. He has led research projects under

the EPSRC IMI programme `Construction as a Manufacturing Process';
with the DETR; DTI; and, within the European Union 4th and 5th
Frameworks. He is a visiting Professor in the Department of Civil
Engineering, University of Chile. He works closely with industry and has
undertaken a range of research, training and consultancy studies with
construction corporations, construction consultancy firms, blue chip
and government clients.
Tony Merna, BA, MPhil, PhD, CEng, MICE, MAPM, MIQA, is the
senior partner of the Oriel Group Practice and is also a Lecturer in the
Department of Civil and Construction Engineering at UMIST. A
chartered engineer by profession, he has been involved at the design,
construction, operation and financing stages of many projects procured
in the UK and overseas.
Kris Moodley, BSc, MSc, AIArb, is a Lecturer in Construction Man-
agement in the School of Civil Engineering, University of Leeds. After
graduating from Natal University, his initial employment was with
Farrow Laing in Southern Africa, before his first academic appointment
at Heriot Watt University. He moved to Leeds four years later to pursue
research interests in strategic business relationships between organisa-
tions and their projects. He has contributed to many publications and is
co-author of the book Corporate Communications in Construction.
Ian Vickridge, BSc(Eng), MSc, CEng, MICE, MCIWEM, runs his own
civil engineering consultancy and is also a Visiting Senior Lecturer in
Civil Engineering at UMIST. He has over thirty years experience in the
construction industry gained in Canada, Hong Kong, Singapore, China,
and Saudi Arabia as well as the UK. He is the Executive Secretary of the
UK Society for Trenchless Technology and a reviewer of candidates for
Membership of the Institution of Civil Engineers. He has published
extensively on a variety of topics related to construction, environmental
management and project management.
David Wright, MA, CIChemE, ACIArb, left Oxford with a degree in
Jurisprudence and spent 30 years in industry. He gained experience in the
automotive industry, the electronic industry, the defence industry and
the chemical engineering and process industry. He was Commercial
Manager of Polibur Engineering Ltd and in the mechanical engineering
sector was European Legal Manager to the Mather & Platt Group. He is
now a consultant on matters of contract and commercial law. David is
also a Visiting Lecturer at UMIST and a Visiting Fellow in European
Business Law at Cranfield University.
Acknowledgements

I am particularly grateful to my co-authors and fellow contributors to

this book, especially those who have participated in both editions,
namely Dr Denise Bower, Dr Tony Merna and Mr Ian Vickridge. I am
also grateful to the new contributors Mr Pete Harpum, Professor Steve
Male, Mr Krisen Moodley and Mr David Wright. I would also like to
thank again the contributors to the first edition, particularly Professors
Peter Thompson and Steven Wearne; also Dr Kareem Yusuf of IBM for
his new contribution in software and modelling in Chapter 9.
The editor and authors would like to express their appreciation to
Sally Mortimer for managing the existing artwork from the first edition,
and new diagrams from the authors supplied in a wide variety of formats
for processing. I would also like to thank Sally for checking and revising
each of the many draft versions of every chapter. Nevertheless, the
responsibility for any errors remains entirely my own.

Nigel J. Smith

xv
List of Abbreviations

ABS Assembly breakdown structure

ACWP Actual cost of work performed
ADB Asian Development Bank
ADR Alternative dispute resolution
AfDB African Development Bank
APM Association for Project Management
BAC Budget (baseline) at completion
BCWP Budgeted cost of work performed
BCWS Budgeted cost of work scheduled
BOD Build±operate±deliver
BOL Build±operate±lease
BOO Build±own±operate
BOOST Build±own±operate±subsidise±transfer
BOOT Build±own±operate±transfer
BoQ Bills of quantities
BOT Build±operate±transfer
BPR Business process re-engineering
BRT Build±rent±transfer
BTO Build±transfer±operate
CBA Cost±benefit analysis
CII Construction Industry Insitute (Texas)
CPD Continuing professional development
CPI Cost performance index
CV Cost variance
DBOM Design±build±operate±maintain
DBOT Design±build±operate±transfer
DCMF Design, construct, manage and finance
DEO Defence Estates Organisation
DETR Department of the Environment, Transport and the Regions
DFA Design for assembly
DfID Department for International Development

xvi
 List of Abbreviations xvii

DFM Design for manufacturing

DSM Dependency structure matrix
DTI Department of Trade and Industry
EBRD European Bank for Reconstruction and Development
ECC Engineering and construction contract
ECGD Export Credit Guarantee Department
ECI European Construction Institute
EIA Environmental impact assessment
EIB European Investment Bank
EIS Environmental impact statement
EMS Environmental management system
EPC Engineer±procure±construct
EPIC Engineer±procure±install±commission
EQI Environmental quality index
ERP Enterprise resource planning
EU European Union
EVA Earned value analysis
FBOOT Finance±build±own±operate±transfer
FIDIC FeÂdeÂration Internationale des IngeÂnieurs Conseils
(Lausanne)
GUI Graphical user interface
HMPS Her Majesty's Prison Service
IFC International Finance Corporation
IPT Integrated project team
IRR Interest rate risk
MoD Ministry of Defence
NEPA National Environmental Protection Agency
NGO Non-governmental organisation
NIF Note issuance facility
NPV Net present value
OBS Organisational breakdown structure
OECD Organisation for Economic Cooperation and Development
PBS Product breakdown structure
PC Procure±construct
PEP Project execution plan
PERT Programme Evaluation and Review Technique
PFI Private finance initiative
PIC Procure±install±commission
PIM Personal information manager
PMI Project Management Institute
PSBR Public sector borrowing requirement
QA Quality assurance
xviii List of Abbreviations

QC Quality control
QFD Quality function deployment
RUF Revolving underwriting facility
SCA Structured concession agreement
SCM Supply chain management
SPI Schedule performance index
SPV Special project vehicle
SV Schedule variance
TCM Travel cost method
TCN Third country nationals
TQM Total quality management
TUPE Transfer of undertaking from previous employer
USGF US Gulf factor
VA Value analysis
VE Value engineering
VM Value management
VP Value planning
VR Value reviewing
WBS Work breakdown structure
WMG Warwick Manufacturing Group
WTA Willingness to accept
WTP Willingness to pay
Chapter 1
Projects and Project Management

This chapter describes the various aspects of project management from

what a project is, through its various stages, to the key requirements for
success.

1.1 The function of project management

Managing projects is one of the oldest and most respected accomplish-

ments of mankind. One stands in awe of the achievements of the builders
of the pyramids, the architects of ancient cities, the masons and crafts-
men of great cathedrals and mosques, and of the might of labour behind
the Great Wall of China and other wonders of the world. Today's
projects also command attention. People were riveted at the sight of the
Americans landing on the moon. As a new road or bridge is opened, as a
major building rises, as a new computer system comes online, or as a
spectacular entertainment unfolds, a new generation of observers is
inspired.
All of these endeavours are projects, like many thousands of
similar task-orientated activities, yet the skills employed in managing
projects, whether major ones such as those mentioned above or
more commonplace ones, are not well known other than to the
specialists concerned. The contribution that a knowledge of
managing projects can make to management at large is greatly
underrated and generally poorly known. 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 now use project management as
their principal management style. `Management by projects' has
become a powerful way to integrate organisational functions and
motivate groups to achieve higher levels of performance and
productivity.

1
2 Engineering Project Management

1.2 Projects

A project can be any new structure, plant, process, system or software,

large or small, or the replacement, refurbishing, renewal or removal of an
existing one. It is a one-off investment. In recent times, project managers
have had to meet the demands of increasing complexity in terms of
technical challenge, product sophistication and organisational change.
One project may be much the same as a previous one, and differ from
it only in detail to suit a change in market or a new site. The differences
may extend to some novelty in the product, in the system of production,
or in the equipment and structures forming a system. Every new design
of car, aircraft, ship, refrigerator, computer, crane, steel mill, refinery,
production line, sewer, road, bridge, dock, dam, power station, control
system, building or software package is a project. So are many smaller
examples, and a package of work for any such project can in turn be a
subsidiary project.
Projects thus vary in scale and complexity from small improvements to
existing products to large capital investments. The common use of the
word `project' for all of these is logical because every one is:

o an investment of resources for an objective;

o a cause of irreversible change;
o novel to some degree;
o concerned with the future;
o related to an expected result.

A project is an investment of resources to produce goods or services; it

costs money. The normal criterion for investing in a proposed project is
therefore that the goods or services produced are more valuable than the
predicted cost of the project.
To get value from the investment, a project usually has a defined date
for completion. As a result, the work for a project is a period of intense
engineering and other activities, but is short in its duration relative to the
subsequent working life of the investment.
A number of definitions of the term `project' have been proposed, and
some are presented below.

o The Project Management Institute (PMI), USA, defines a project as

`a temporary endeavour undertaken to create a unique product or
service'.
o The UK Association for Project Management defines a project as `a
discrete undertaking with defined objectives often including time,
cost and quality (performance) goals'.
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