Project engineering and management work

For the economic analysis of engineering and management work, it is first necessary to recall the observations made in Chapter 5, The

5 There is occasionally a sting in the tail here; if the plant performs subnormally in its initial years, there may be no profits on which to reduce the tax.

Project’s Industrial Environment. In particular, that the work of the project engineering and management team (costed as indirect field costs or IFCs) may be segregated into a core of essential activities and a variable amount of work which can only be justified if the benefits of the work exceed the costs.

Much engineering work is an iterative process, in which designs are conceptualized, developed and presented in a comprehensible format such as a drawing or model, reviewed, and then re-worked until approved. There is no inherent limit to the number of iterations of review and re-work. As projects become larger and more complex, with the participation of a greater number of disciplines carrying out interrelated activities, the need for correspondingly more review and consequential re-work becomes apparent. Failure to do so results in construction clashes, interface errors, and equipment accessibility problems. The costs of review may be reflected in additional manhours, or in additional activities of physical and computer modelling, process simulation and testing, and also in the cost of schedule delays while additional engineering work is done as a consequence of the review.

By economic consideration, the optimum amount of review and re-work, and hence the optimum amount of engineering, has been performed when a trade-off is reached between the benefit of review and the associated costs. The benefit, for this purpose, is the added value in terms of improved plant design and reduced construction cost with reduced error rectification.

The trade-off analysis can be expressed formally by the standard elementary economic theory of diminishing returns. It is illustrated in Fig 8.1 which shows the curve of direct field cost (DFC) against engineering cost (EC). ‘Diminishing returns’ says that the curve has a negative slope which is constantly increasing, asymptotically, to zero slope. The line of engineering cost against engineering cost is obviously a straight line with slope +1; adding the two curves yields the total cost (TC) of the engineered plant. By inspection or by differentiation, there is a minimum total cost when the rate of increase of DFC with respect to engineering cost is equal to –1, in other words, the incremental cost of engineering equals the associated decrease of DFC.

Care needs to be exercised when making historical comparisons of the engineering costs of projects on what was the engineering workscope on the job in question. As we have previously seen, the engineering and management scope can be shifted between the project engineering team, the equipment suppliers, the fabrication and construction contractors,

outside consultants, and the plant owner’s team. More specific examples of this practice include:

• the purchase of integrated packages of equipment rather than individual items;

• omission of drawings, such as piping isometrics or as-builts, which become the responsibility of the fabricator;

• using lump-sum rather than per-item contracts for construction;

• imposing field measurement checking responsibility on the contractor;

and

• reducing office checks.

The list above is potentially endless. The same overall engineering work is done, but the work is shifted to the direct field cost report.

Extra engineering work can be created by imposition of exacting design and documentation standards, and reduced by the acceptance of previous

Fig. 8.1 Optimization of engineering inputs

(The same logic applies to all management inputs)

project or standard designs. Procurement policies can have a major effect on the engineering work required for an order. The engineering work of construction support, manufacturing follow-up, and commis-sioning activities can be defined and reported in different ways, all of which will impact on the perceived engineering workscope.

Work can also be shifted between the study which precedes the project and the project itself. The owner/investor can decide as a matter of principle that the design basis produced for the study is frozen at the outset of the project, or that it must be re-worked completely as part of the project work.

It should be noted that the various ways of carrying out the project, and their impact on apparent engineering costs, are not just crafty devices for reducing or increasing engineering costs (although that may be the intention!). The best option may be different on different projects or for different contractors. There is no golden rule as to what is optimal.

Assessing engineering work as a percentage of plant capital cost can be misleading in other ways. If the design capacity of a plant is doubled, without any change to the complexity,⁶ there may be little or no change to the quantity of engineering work – the same number of documents have to be produced, with the same number of information items. But the capital cost of the plant can be expected to increase by a ratio of something like 2^2/3 (or 60 per cent). On this basis, the curve of engineering-cost/plant-cost ratio versus plant capacity will feature a continuously decreasing ratio as capacity increases. However, the concept of such a curve is more likely to be misleading in practice, because the process of trade-off (if allowed to take place) will dictate that extra engineering activities are economically justifiable on the larger plant. It is worth spending more time making improvements.

In conclusion, it can be very misleading to set standards or draw statistical comparisons on what should be the ‘correct’ number of manhours or engineering cost for a given project. There can of course be large differences in performance between different engineering teams.

Engineering performance is affected not just by the manhour input, but also by all the usual factors of skill, training, effort, use of advanced systems and software, availability of previous usable designs, and good management. One would expect a good return from better engineering, and arguably this can only be gauged from an expert assessment of how the work is done in relation to the challenges of a particular project, rather than by drawing up statistics on cost percentages.

6 Complexity is usually assessed by the number of mechanical equipment items.

The general observation about increased engineering work providing diminishing returns, and thus leading to an optimum at which the overall project costs are minimized, is in fact general to all project management activities. There is an optimum value for the intensity of each activity at which the marginal cost benefits become less than the cost of the input.

As the way in which each cost element responds to management input varies according to the circumstances of each project, and can even change from day to day (for example, as extra project management and engineering input are needed to solve supply problems), there is clearly no unique overall optimum value – ‘the right cost for project manage-ment for this type of project’ – except perhaps in cloud-cuckoo-land.