1. the engineering company.pdf

8/16/2019 1. The Engineering Company.pdf

1/42

Page 4 of 462

S T P - 0 1 1 / 1 3

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” andthen “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.

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 ourcolleagues.


2/42

Page 5 of 462

S T P - 0 1 1 / 1 3

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 courageousinvestors, 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

Marzotto’s 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.

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.


3/42

Page 6 of 462

S T P - 0 1 1 / 1 3

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 there’s 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”, thirdbook 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; rathereasy 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 nitro-

glycerine. 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!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.


4/42

Page 7 of 462

S T P - 0 1 1 / 1 3

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 ableto 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, he’s 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.

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.


5/42

Page 8 of 462

S T P - 0 1 1 / 1 3

1.2 The Services Offered by an Engineering Company

Granted that the engineering companies carry out plants, always, bothdirectly 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, CIf 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%

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

Engineering 4 millions €

Materials 20 millions €

Construction 16 millions €


6/42

Page 9 of 462

S T P - 0 1 1 / 1 3

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 airportof 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.

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.


7/42

Page 10 of 462

S T P - 0 1 1 / 1 3

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 forparticular 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 ofhours 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

These are the activities of the technical sections ICO, SPI, STM, ELT; as

explained, PRO and CIV are occasionally involved, in these phases.


8/42

Page 11 of 462

S T P - 0 1 1 / 1 3

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.

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

chapter “Construction Activities”.


9/42

Page 12 of 462

S T P - 0 1 1 / 1 3

1.2.1 Structure of an Engineering Company with Particular Reference to

APS

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).


10/42

Page 13 of 462

S T P - 0 1 1 / 1 3

1.2.2 The Hours - Statistical Splitting of the Hours among the VariousDepartments

The engineering services are rewarded by the Client with the payment ofthe 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).

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 apetrochemical. 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, it’s sure different.


11/42

Page 14 of 462

S T P - 0 1 1 / 1 3

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:

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:


12/42

Page 15 of 462

S T P - 0 1 1 / 1 3

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,

was necessary.


13/42

Page 16 of 462

S T P - 0 1 1 / 1 3

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”

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%


14/42

Page 17 of 462

S T P - 0 1 1 / 1 3

Civil works

Rods for reinforcement, bolts 1, 2 €/kg

Fire proofing 1.300–1.400 €/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

Control valves with positioner

1” 1.500 €

2” 3.000 €

3” 4.500 €

Pressure gauge 100 €

Thermometric pit 200 €

Test samples 900 - 950 €

Different pressure transmitter 1.900 €


15/42

Page 18 of 462

S T P - 0 1 1 / 1 3

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 thecommitment in hours of the process department.

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


16/42

Page 19 of 462

S T P - 0 1 1 / 1 3

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 upagain 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.

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.


17/42

Page 20 of 462

S T P - 0 1 1 / 1 3

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, it’s 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 we’ve 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

Respectively multiplying these numbers by the statistical indicators you

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


18/42

Page 21 of 462

S T P - 0 1 1 / 1 3

1.3 Preparation of a Proposal

Now we are going to simulate the preparation of a proposal just to verifyhow 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 € 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.


19/42

Page 22 of 462

S T P - 0 1 1 / 1 3

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.

After having held the final negotiation, the Client will communicate the

name relevant to the engineering company that has awarded the order.


20/42

Page 23 of 462

S T P - 0 1 1 / 1 3

1.4 Conclusion of Proposal

After having positively concluded the negotiation with the client gainingthe 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 forany 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 theCompany 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.

They are:

Cost plus

Cost plus with fixed fee

Lump sum or fixed price

Guaranteed Maximum Delta


21/42

Page 24 of 462

S T P - 0 1 1 / 1 3

Cost plus

The term "cost plus" indicates that the Contractor shall be reimbursedfor 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, sinceprofits 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

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.


22/42

Page 25 of 462

S T P - 0 1 1 / 1 3

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 theexpense 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

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


23/42

Page 26 of 462

S T P - 0 1 1 / 1 3

1.6.1 The Plant Starts

As already said, after having positively concluded the negotiation withthe 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:


24/42

Page 27 of 462

S T P - 0 1 1 / 1 3

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.

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 theprojects (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.


25/42

Page 28 of 462

S T P - 0 1 1 / 1 3

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) aresummarized; 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 relevantdoctrine, 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 processtogether with the project group.

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.


26/42

Page 29 of 462

S T P - 0 1 1 / 1 3

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".

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

mentioned document.


27/42

Page 30 of 462

S T P - 0 1 1 / 1 3


28/42

Page 31 of 462

S T P - 0 1 1 / 1 3


29/42

Page 32 of 462

S T P - 0 1 1 / 1 3


30/42

Page 33 of 462

S T P - 0 1 1 / 1 3

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.

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 specifickind 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?


31/42

Page 34 of 462

S T P - 0 1 1 / 1 3

Whatever, all the departments work together in the execution of the plot

plan.

The civil that always seems a bit like an “Independent Republic”, mustmake 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 Kick-Off 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).

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, batterylimits, 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;


32/42

Page 35 of 462

S T P - 0 1 1 / 1 3

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.

It’s 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

− Language of the project

Names of the responsibles assigned to the project;

Addresses and information for the transmission of 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.


33/42

Page 36 of 462

S T P - 0 1 1 / 1 3

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 client’s 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.

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.


34/42

Page 37 of 462

S T P - 0 1 1 / 1 3

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

the beginning of the project are:

General plot plan ;

P&I;

Equipment list ;

Process specifications and data sheets;

Piping specifications;

General equipment specification;

Preparation of MR for critical items;

General instrument specification and architecture of controlsystem ;

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.

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.

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


35/42

Page 38 of 462

S T P - 0 1 1 / 1 3

Periodical and extraordinary (if necessary) meetings for the re-

examination 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:

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:


36/42

Page 39 of 462

S T P - 0 1 1 / 1 3

PRO 10%

SPI 25%

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 PHASE II PHASE III

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%

Attention!

Don’t confuse these percentages withthose mentioned in the paragraph

dedicated to the statistical distribution of

the hours.

First and followingissue for comments

30%

Issue forconstruction

60%

Issue as built

10%


37/42

Page 40 of 462

S T P - 0 1 1 / 1 3

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 1percentage) = 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

A direct and explicit request from the client asking for additional

equipment or additional engineering services; this is the more

manageable case.


38/42

Page 41 of 462

S T P - 0 1 1 / 1 3

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 client’s 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 client’s

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.

It can happen on the other hand, that the client’s 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…”


39/42

Page 42 of 462

S T P - 0 1 1 / 1 3

Are they lawful requests? Do they respect the contract? It will be the

project manager and the involved collaborator’s duty to evaluate

whether or not to accept the client’s 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 this into

consideration? Well, it doesn’t matter, we will provide now.

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.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).


40/42

Page 43 of 462

S T P - 0 1 1 / 1 3

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).

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.


41/42

Page 44 of 462

S T P - 0 1 1 / 1 3

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

project’s program, summarizing by means of bars graphs the mainproject’s 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

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.


42/42

Page 45 of 462

- 0 1 1 / 1 3

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 ofthe 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, it’s 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.

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 anorganic 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.