| Chairman's Message and Articles | International Roundup - Vol 18, No 2 | |||||||||||||||||||||
| ||||||||||||||||||||||
Please note: All diagrams are in the pdf versions of the papers. These are not always included in the html version. |
||||||||||||||||||||||
ICEC Chairman's Message
|
||||||||||||||||||||||
Feature and Technical Articles
Click here to return to top of screen | ||||||||||||||||||||||
|
Message from the Chairman: A few steps to the future
IntroductionThe next ICEC international world congress will take place in April 2006 and ICEC should prepare itself once again to establish its influence and reinforce the network and skills of the ICEC society. To this end it remains urgent that ICEC and the associations of ICEC remain focussed on continuing the path of international co-operation, influence, development and the pro-active establishment of infrastructures to improve the knowledge, skills and attitudes of professionals through the ICEC Continuous Professional Development (CPD) system. Continuous professional developmentICEC, through its member associations, has established many CPD opportunities for professionals world wide and should continue to encourage member associations to implement sound CPD and accreditation systems. This will inevitably result in strengthening ICEC as a learned society. The Council Meeting and CongressICEC Members should also be prepared for active participation during the next council meeting and the world congress in Slovenia. Participation is important to share ideas within the council and to establish new networks and further ensure the interaction between associations and international bodies. It also affords the opportunity to influence the way forward and for associations to remain internationally relevant. The ICEC World Congress – 2006 - SloveniaMember associations and members of associations are also encouraged to participate in this wonderful opportunity, to network, meet friends, learn about new developments, share ideas and further develop association and individual skills. Most associations accept participation and attendance of the congress as a CPD activity which enables individuals to obtain or retain registration, certification or licensing. The congress promises to be an outstanding event with streams that should please cost engineers, quantity surveyors, project managers and other professionals in the engineering and built environments. The congress will focus on value and specifically added value for stakeholders. Interesting papers by experts from all over the world will be delivered on risk-, cost-, value-, traffic-management and quantity surveying. It is also important that academics and experts react to the invitation and send in their abstracts for adjudication. For cost engineering, quantity surveying and project management it is of utmost importance that pressing problems in many parts of the world also be debated to ensure that the challenges and opportunities that exist are understood. Same areas where the professions may add some value to the congress, that should also be debated, are:
The activities, meetings and social events promise to make the congress a very special event. Activities of ICECThe following activities, within ICEC or its member associations, are important and deserve the attention of all ICEC members:
Other fociThe debate within ICEC should continue and also include new trends and other areas of possible involvement. Some of these areas are: Globalization, emotional intelligence, poverty, conflict areas, health, safety, the environment, intellectual and skills maturity, and sustainable developments.It is important that the above activities should continue and grow and that the ICEC association’s influence strengthen towards enabling communities and sustainability. Professor JJP Verster References AIQS, 2004. World’s Best Practice in Quantity Surveying. What it means to you. AIQS Brochure. BRÜMMER, D.G., 2004. Challenges in Quantity Surveying in South Africa – Procuring the future. International Cost Engineering Council 4th World Congress, Volume 2 Click here to return to top of screen 
The rise of China, 25 years of globalisation Reprinted with permission from Hanscomb Means Report, International Construction Intelligence, Vol. 16, No. 9, July / August 2004 When Deng Xiaoping initiated economic reform policies in 1979 China was a relatively closed society. After gaining control in 1949, the communist government had limited trading partners. Historically China moves from open trade - the Silk Road - to discouraging trade - portions of the Ming and Qing dynasties. Is China poised to become the powerful global presence its size would ordain? The first economic reforms focused primarily on agriculture, but China began to open cautiously to the world. The government established five Special Economic Zones - three in Guangdong Province - in 1980. Other economic zones followed as the reforms expanded. The slow transition from centrally planned economy continued. In 1992, the economic reform program moved into the "socialist market economy" period. The move to open trade culminated in China's admission to the World Trade Organization (WTO) - after much negotiation - in December 2001. The coastal region - where most of the population lives - has attracted most of the foreign investment. China's "Western Development Strategy" began in 2000 to attract development in the inland regions. Realized values of foreign direct investment (FDI) into China reached USD 500 billion by the end of 2003. FDI totaled less than USD 19 billion during the 1980s. 
Foreign investment is enabling China to become a leading producer of many goods. However, increased consumption of basic commodities is a consequence of manufacturing growth. Construction to provide infrastructure supporting the growth consumes increasing amounts of cement and steel. Since reform began, the economy has enjoyed a historically unprecedented growth rate - an average annual growth rate of about 9 percent for 25 years. China's share of world Gross Domestic Product (GDP) is now 10 percent. GDP per capita rose to USD 1,087 in 2003 - a five-fold increase since reform began. Accompanying is a rise in spending for consumer goods - televisions, refrigerators, washing machines and mobile phones. Even automobile sales are rising. With the explosion of cars, there is mayhem on the already crowded roads of the major urban areas from the lack of rules. The Chinese now have the expression "che piq" (car temper) in their vocabulary to describe road rage. Sheer volume of consumption does not tell the potential. After all, this is the world's most populous country - 1.3 billion. (China and India have over one-third of the world's population.) A look at the underlying per capita values explains the real interest. Compared with other developed countries, the appetite for consumption can only grow. Investors are seeking markets and lower production costs. 
The Push-Pull of China Barry Piper, Director of Atkins Faithful & Gould in China, discussed the Push-Pull of China at the recent China Investment Forum. The significant pull factor for many is that China is an inexpensive place for business. Low cost and abundant labor and low start-up and operating costs attract labor-intensive industries. China offers investment incentives - import/export, tax and land - and the state provides large subsidies for infrastructure improvements. China's entry into the WTO only increases attractiveness for offshore procurement and manufacturing. Total import and export volume increased from USD 509.7 billion in 2001 to USD 851.2 billion in 2003. Exports are only slightly higher than imports. The push factors are many. China is transforming - still a work in progress - so there are higher risks. Rule of law is still an issue as the "sanctity of contracts" and protection of intellectual property rights remains a concern for investors. Internal protectionism remains high. Despite extremely high growth rates, there are serious concerns about the economy. State owned enterprise (SOE) reform is slow. Productivity increases compared with non-state enterprises are small. Their economic performance is lackluster. Authorities are phasing out uncompetitive companies - large consumers of energy and environmentally unfriendly companies are prime targets. The financial system has troubles intertwined with the SOEs. Loans to the non-profitable SOEs create an accumulation of bad loans. China has transferred funds to banks for several years. Estimates of non-performing loans vary widely - between RMB 2,000 billion and RMB 4,000 billion for the four large state-owned banks. Banks are selling their non-performing loans to state-owned asset management companies in preparation for public offerings of bank shares to investors. On the positive side, the savings rate of the Chinese is among the highest in the world. While it may be difficult to conceive in a rapidly expanding economy, unemployment-estimated at about 20 percent - is growing. Privatization and downsizing of SOEs are primary reasons. There are signs of unrest as the transformation from centrally planned to market oriented economy is painful. Investors must always consider quality. Quality of labor remains an issue, as does procurement quality control. It is inexpensive to do business in China, but quality can add to the cost. Investigate and understand typical quality of service and product. Consider local standards for Health, Safety and Environment (HSE) procedures. Without implementing "Western" standards for HSE, investors can expect higher rates of accidents and loss of life. Higher standards produce higher costs. Corruption problems are well known. Improved transparency is the government's goal, but investigations still find corruption at all levels of the government. The death penalty is a possible punishment for officials found guilty of corruption. George Kluempke of Braun Intertec, an infrastructure engineering company in Minneapolis, Minnesota, cautioned the group to remember that the "Chinese people are ethical, but the Chinese system applies ethics differently." Professional standards and policies are different. It is important to understand this. Piper noted that local contractors realize that the project completion date is critical. They might delay completion to have the contract renegotiated. It is part of the Chinese culture - negotiations aren't final. The contract is only the basis for further negotiations. Project budgets need to have reserves for the renegotiations. Culture Clash China is different from anywhere else in the world. Perhaps cultural aspects present the greatest challenges. "The Chinese have all the time in the world," said Piper. "They use attrition - wait you out - to get what they want." Your Chinese counterpart has some basic understanding of your cultural leanings just as you of the Chinese. Piper presented viewpoints from a publication of the Fujian Foreign Investment Bureau illustrating how the Chinese perceive other nationalities:
Kluempke said they would have liked "a better understanding of culture and business practice" before investing in China. Expectations Investors should realize that the Chinese have expectations of the foreign investor. China's opening-up policy was and remains about the desire to acquire needed foreign equipment and technology. The government expects their WTO agreement to act as a political lever to help accomplish the necessary internal reforms. The expectations of the foreign investor and a Chinese joint venture partner are likely to be very different. Kluempke told the group that it is important to "make sure the expectations are aligned." Their joint venture partner's goals were very different. Braun Intertec viewed the joint venture as a long-term investment, but sought a return on the investment. Local public entity partners were not focused on returning profit to investors. They wanted to improve the standard of living for themselves and the company employees. Piper quoted the Chinese saying "Sleeping in the same bed, but having different dreams," to illustrate the potential problems with joint ventures. Investors need to do their homework. Presenters left several keys to being successful in China:
"It is simple," said Piper about the approach to working in China, "starting right equals finishing right." 
Click here to return to top of screen Conducting project risk analysis, How to do it and how not to do it Dr Kenneth K Humphreys  I want to tell you a few things about Michael Curran, the President of Decision Sciences Corporation, who was the real pioneer of what this paper is about, project risk analysis. In 1964 he was ensconced in a career at Monsanto Chemical Company reading the Harvard Business Review, Jan/Feb 1964 issue. He was reading an article by David B. Hertz, "Risk Analysis in Capital Investment." This article has been so popular that it was republished in 1979 and has been reprinted many times since. Curran recognized that Hertz was talking about some particular technique most of us have some familiarity with. Although Hertz never used the term, he was talking about Monte Carlo Simulation and how it could be used to address key issues in the problem of capital planning. Monte Carlo Simulation is a technique devised by two brilliant mathematicians, John von Neuman and Oscar Morgenstern, the co-developers of game theory. They developed this to answer a problem in particle physics in the Manhattan Project in the 40's. Once von Neuman and Morgenstern developed game theory, it wasn't long before other scientists and engineers realized the power of Monte Carlo. But in the article Curran saw that for the first time someone was suggesting that we could use it in business practice. It made so much sense to him that in 1968 he formed a corporation to do this full time, Decision Sciences Corp. His firm has pioneered the field of project risk analysis in the United States. Curran observed that there were not many building blocks that decision makers use. In no particular order units is one of them. Units of service required or rendered, units constructed, square meters of building space, etc. Another building block is currency, in whatever way you count it-- Euros, dollars, yen, etc. In some cases we see combinations of these things in the decision process, for example dollars/square meter. Another is time. Time to complete a project, time to construct a building, etc. Again, combinations may appear, for example dollars/month or Euros/unit. The decision makers however often do not adequately consider a fourth variable, risk. What is this fourth variable? What is risk? Here is one definition. Risk: The degree of dispersion of variability around the expected or best value which is estimated to exist for the economic variable in question, for example a quantitative measure of the upper and lower limits which are considered reasonable for the factor being estimated. Isn't that confusing? An engineer wrote that - and it is a part of an American National Standard. I guess engineers understand that but it is better to define it with an example - an example in plain English. Risk (Plain English Explanation): I think it will cost $1 million, but there's a chance that it might be a little higher or a little lower. Let's explore this fourth variable -- risk or whatever else you may call it -- by a thought experiment. Let's suppose you have an investment decision before you. You have to choose either Alternative A or Alternative B. All you know about Alternative A is it has an estimated return rate of 50%; with Alternative B, it's 30%. You know nothing else. You choose "A". It's a no-brainer. But suppose someone comes along just before the decision is made to give you additional information. "A", with an estimated return of 50%, gives you a 15% chance of seeing it. With "B" you get a 90% chance of seeing it. Do you want to change your mind? 90%+ will want to change their minds. What has changed your mind? The fourth variable, of course -- certainty or risk or probability. Probability in certain quantitative decision making processes can make an immense difference in the final outcome. Probability. And that's what hurts us. We're dealing with the uncertainty world here. How can we pretend that uncertainty doesn't exist? Now, if you're talking about the first 3 of these variables - units, currency, time - you're talking about the world of accounting. There is no uncertainty in accounting. It is precise. But if you include probability in your discussions, it is no longer the world of accounting. It is the world of decision making and there is a vast difference. In accounting, if all of the rows and columns don't add up, you work day and night to correct things so that they will. You remove the uncertainty. That can't be done in decision making. Uncertainty always exists. You've got to become a risk analyst. What does that mean? Do you need to sit in front of a computer and bite your nails? Does it mean you have to have all the courses in probability theory and statistics? Do you really have to go through all that? No, you don't. You only have to understand what you already understand about probability theory, and I'm assuming you never had a course in it. You already understand 2 key issues:
It won't get lower than this; it won't get higher than that. A simple range to indicate the areas of risk and of opportunity. Here is Curran's rule that you should follow:
If you are worried about the degree of uncertainty in any bottom line and that uncertainty is the result of multiple numerical uncertainties, perform a risk analysis. The reason we can bring a powerful technique like Monte Carlo to bear on this problem and have managers understand it is due to the fact that business risk analysis is not rocket science. It's not the same. It is much simpler. If you talk to these decision makers and ask what level of variance that are willing to accept in making decisions related to quantitative values involving risk, they inevitably will say 5 to 10%. If you ask that same question of a rocket scientist he will ask if you are out of your mind. They can't tolerate errors for fear of the space vehicle going out into deep space instead of orbiting the earth or the target planet. They can't tolerate error. It's a different world. Because it is a different world and because we are more tolerant of some error in most engineering or construction projects, we can de-escalate the requirements on the part of the user of Monte Carlo. You don't have to understand all the nuances and the intricacies of the technique. You don't have to be a large company to benefit from this as was the case before the PC arrived. The only kinds of problems that were solved before the PC were big problems - big budgets, big problems. All of that has changed. Suppose you do a risk analysis and tell your management you have a 70% chance of success. You'd think they would jump for joy. They won't. They'll say something like this, "Well, wait a minute. I have a 70% chance of success. That must mean I have a 30% chance of failure. What if this project goes does not meet its objectives? How much of a loss am I going to have to take? In other words, What's my exposure?" There have been all sorts of attempts to answer that question, the most notable one being the worst case scenario wherein we take our plan and look at each item in the plan and make it the absolute worst we can imagine it ever to be and we calculate a whole new bottom line. We look at it and say, "Wow! That's terrible!" Of course, it's terrible. That's the theoretical worst case scenario. It's so mathematically remote that at best it is useless; at worst it's misleading. It may actually scare people off unduly. Anyhow, what we need is to have a good answer to this, not some theoretical answer. Guess what will give that to you? Monte Carlo Simulation. If, for example, you have performed a risk analysis and told management that they have a 70% chance of success and that they have a 65% exposure. What does that mean? That means that the bottom line decision variable can erode by as much as 65% of the target value. That's what it means. "Why?" will be the next question they'll ask. "Why will it be that way?" And specifically they want to look at a ranked list of risks and opportunities. The reason they want to look at such a list is so they can search for controllables, they can challenge the management team to come up with alternative strategies and tactics, and they can test these alternatives in a Monte Carlo environment. It turns out Monte Carlo is not only a great tool for evaluating a current plan; it's a marvelous tool for evolving a better one. It's used that way all the time. There are some follow-up questions we could address. On capital cost estimates, for example, when you ask your engineering estimators or quantity surveyors to give you answers, they always give you answers you don't like. Right? They are too vague. And then you understand why because at that very line above the last line of the estimate they put something in at the last minute. What's that called? Contingency. Why is it often 10%? Because they don't know what to put in there. It's not scientific. They don't know what to put in there. Some companies even have a policy of 10% contingency in all estimates. They don't know why. They know that it is necessary to include contingency but they don't know how much, so they use 10%. It is a nice round number. If you were using Monte Carlo you would know what to put in there because you would recognize that the amount of contingency needs to be balanced with the concept of confidence. Confidence in what? Confidence you won't overrun your budget. Now if you want to have a lot of confidence, the contingency required will increase. Everybody understands that. The allocation of contingency may also be important. And the competitive tendering problem is certainly an exciting application of risk analysis. We all understand the problem with that, right? Bid too low and you get the work you should never have had. Bid too high and some competitor will come in and take it away from you and make money on it. Those are bad scenarios. They can be addressed very well with Monte Carlo. When you sit down and look at risk analysis, you'll know how it's done. There are several ways to do it - heuristics, multiple linear regression, etc. Just take my word for it. That problem was solved years and years ago. There are now software programs on the market, PC-based, that do Monte Carlo. Technically they're excellent. They all answer the 3 questions. That's what you really need to understand. I could tell you all kinds of stories about how people have benefited from this. In 1991, for example, there was a project of $254 million by Alcan that everybody and his brother thought was going to overrun. It didn't. It under-ran. And it was completed 2 months early. Three other projects Alcan was managing at that same time were all completed 2-4% under plan. The CEO of Alcan said in Fortune, "Ever since we have been using these techniques, we've saved over a hundred million dollars in our capital planning." In medicine there is something called iatrogenic disease. It's a disease given to the patient by the physician. Iatros in the Greek means physician. Iatrogenic disease in other words is physician-induced disease. We also have risk analyst induced risk. How do we get that? By violating some of the simple rules I am going to explain thus understating the true exposure in the decision. It's just the opposite of the other problem where we do the worst case scenario and it overstates the exposure. You're going to tell the management, "Hey, the profit probably won't go lower than that." And indeed it can go down much further. or, "Our cost won't go higher than that" and it goes to the moon. This differential, this lack of understanding of the problem of proper exposure, we term iatrogenic risk. You know what? In your project estimate, your business plan, your forecast, your budget, whatever you call it, the uncertainty is concentrated in a select number of elements-- typically 10 to 20. And if you don't understand which ones they are, if you don't take the time and trouble to measure the uncertainty of each of them, if you don't take the time and trouble to combine those uncertainties into some bottom line uncertainty using a technique like Monte Carlo, you will never get to the right answer. This particular phenomenon basically means what? Not everything is important. That's what it means. And that's what this is saying. Very few things are really important. I don't care about all those others. This is called variously the Law of the Significant Few and the Insignificant Many or the 80/20 rule. Others refer to it by the name of a person who has been most honored in the literature. Who might that be? Pareto. It's Pareto's Law. Vilfredo Pareto was a brilliant Italian sociologist and economist. About 100 years ago he decided to examine how wealth was distributed from country to country. His conclusion was that in any given country a small percentage of the population would collectively account for most of the wealth. He published his findings, and the economists have been making hay out of this for a century. The fact of the matter is that this principle applies well beyond economics. It extends to such issues as the distribution of populations of people and much more. Let's make some very simple observations. If you take your plan--let's make it a simple plan, a cost estimate - once you understand how this applies to costs, you can easily extend it to any problem situation. Let's say it's an estimate of cost of what it will take to renovate an office building. It's a conceptual plan, not a detailed estimate. Let's assume that the conceptual estimate for the office renovation is $1 million. Let's further assume that of the $1 million, you have 3 components of cost: labor at $600,000, equipment at $300,000, and materials at $100,000. You and your project management team review this plan. You form a list, and on this list will be each element of your plan but in this specific order. The highest dollar value is at the top of the list, and the one that has the lowest is at the bottom of the list. They are all graduated in descending order in-between. Think about that list for a moment. If you start reading down from the top of the list, you will find that it is an example of Pareto's Law. It won't take many elements, starting at the top, to collectively account for most of that million dollar bottom line. We know this from experience. Is this example important in the proper management of the fourth variable. What do you think? The answer is "No." It's very important to understand that this list, although it is an example of Pareto's Law, is not the one we want to talk about. Guess what? He's so prevalent, he's in the plan in two distinctly different ways. That's the first way. Let's talk about forming a new list. In this list we'll rank all the elements of the plan in a much different fashion. Each element will be on this list based on how much it can change your bottom line. And we don't care in which direction. I want to know only the amount of change, positive or negative. I don't care what the value of that change is or what its sign is. I only want to know its magnitude. That's where we put the element on this list. We end up with a new list - a much different one. The one at the top of the list is there because there is no other element in that plan that can change the bottom line by more than it can. That's why it's at the top of the list. All the way down, in descending order, according to what they can do to, or for, the bottom line. With that list, we start looking down from the top. There's another Pareto effect. Specifically this effect. You look at the top of the list. It won't take many elements at all to collectively account for most of the uncertainty in your plan. Obviously this list isn't the same as the first list. This new list is the one we need to worry about. The really important question is when do I decide to draw the line on that kind of a list? When do I decide if something is critical or not? It took Michael Curran 4 years to figure out, and he did it empirically. He looked at a lot of decision processes in industry, government, and education with a rule of thumb in mind. He had to come up with a rule of thumb so that people could tell whether something was critical or not - so they would know whether they need a range or not. He first published this is 1973. He has never had reason to change what he found out then. It has stood the test of time. Here are the simple rules: Critical elements are those which can cause bottom line changes greater than:
The first rule is "You better know when it is important and when it's not." That is when it's critical and when it's not. This is what you're looking at in here. Criticality depends on 2 things. It depends on the nature of your bottom line--is it a cost or a profit type of line? Profit here doesn't necessarily mean what it means in accounting. In the risk analysis concept, profit is any variable which, when it gets higher and higher in value, it makes you happier and happier. Labor productivity is a good example of such a variable. If the bottom line is cost, as it is in our simple example of the office renovation problem, we look at the first row in the table. The next question is, "What is the nature of the planning process?" Have you measured everything you can reasonably be expected to measure here? Do you have a detailed plan? Or, in this case, a conceptual plan. So we're looking at ±0.5%. What that tells you is that number should be multiplied by your bottom line of a million dollars, and your answer is $5000. That's where the cutoff is. Anything in our plan that can change our bottom line up or down by at least $5000 should be deemed critical, should be given a range, should be paid the respect it's due. Because of our friend Pareto you won't find many - typically 10 to 20. This is true even with the largest of decisions. In our office renovation project what we are saying is, "Applying this principle, a change equal to or greater than $5000 at the bottom line qualifies the element as critical." $600,000 of our million dollar plan is in labor, $300,000 in equipment, and $100,000 in materials. How do you decide whether something is critical or not? Not by developing some crazy list, but by starting at the top of the pyramid and going down as far as necessary to find all of them. Always start at the top, never in the middle, or worse yet, at the bottom. That will produce a horrible outcome. Question: Can you change the bottom line up or down by at least, in this case, $5000? I'll repeat - Can you change the bottom line up or down by at least $5000? If you are asking that question of the bottom line itself, and your answer comes back No, that obviously tells you there's not enough uncertainty in this decision to warrant this kind of treatment. Forget about doing a Monte Carlo. It's a waste of time. If, on the other hand, the answer comes back Yes, that doesn't necessarily mean you've found a critical element. It means you are given permission to ask the same question of the numbers that support this number. So I say, "Yes, it's possible for that to change our bottom line by $5000." Then I go to the numbers that support this one and go to the next level down, asking the same question in turn of each of those numbers. For example, if I'm looking at materials, I'll ask the same question. "Can you change the bottom line by at least $5000?" I don't care if this thing changes. What matters is if it can change by at least $5000. If the answer is No, it has no critical elements. How could it? Eventually one of two things will happen. As you go down through the pyramid, you'll get to one of two conditions. One condition, which is not so frequent, is that a number looks critical. You look below the number to see what supports it, and there isn't anything there. What you've managed to do is discover a critical element at the very lowest level of detail. Much more frequently you will find elements at the higher end of the pyramid. And you get to a point where the answer is Yes. You look at the numbers that support that number. Each may have its own variability, but when you ask each the same question, not one of them has sufficient variability to change the bottom line by $5,000 or more. That means you go back to where you were, the one number that represents the others, and you call that number your critical element. That is the far more frequent event. You'll find these at various levels, but primarily in the middle level or top. One thing for sure, you won't find many because of Pareto. What about all the other elements? We need to understand there is a planning philosophy that works to the detriment of people who employ it. It goes like this: The boss says, "We want a good plan." What does that mean? Most people interpret that to mean a plan that's neither optimistic or nor pessimistic. You don't want to be too far out either way. How do you get there? Here's the philosophy. We'll get there if we take every piece of our plan and stick the target right in the middle - don't make it optimistic - don't make it pessimistic - stick it right in the middle. You put your plan together that way, and you won't have to worry. When this plan hits the real world, sure, something will go wrong, but you'll be able to look around and find something else going right to counteract it. Since we have so many elements in our plan, it'll be a wash. Do you recognize this thinking? It's called various things - the Pluses will equal the Minuses, and the more mathematically inclined refer to it as the Sum of the Deviations will approach zero. Others incorrectly call it the Law of Large Numbers. Whatever you call it, it's fallacious. It makes the assumption that uncertainty is spread evenly and equally around your plan. It isn't. It's concentrated, typically in 10 to 20 items. That's why it's wrong. Once we've identified those 10 to 20 elements, you can take the Pluses and Minuses approach to the rest of them, and you won't get burnt - unless there is a pervasive bias in the plan. Then you'll have to make some adjustments up or down to take that into account. But for that vast number of things that aren't critical, simply freeze them. If you have a little bias in the plan, freeze them a little higher or lower as appropriate. Now, what are we going to do with the items which have been identified as being critical? Give them a range and make an estimate of the probability that each item can be accomplished within the original plan, that is, for a cost item, the probability that it can be accomplished at a cost no greater than the originally estimated amount. And how do we do that? The very best way is get everybody involved. Everyone who understands the criticals should be there contributing to the process - well almost everybody. The one exception for that is, if you have a person who has undue influence on the group, don't invite him. Don't invite him or her because it will taint your result, particularly if that person is the boss. Let's do our own job and let's put down all of our rationale on why we think this range and probability are the way they are and now we can defend them more readily. We want to be prepared. We want to say, "This is the way it is." The process here is not as time-consuming as you may believe. In many cases, good risk analyses can be performed in a matter of hours. In some cases, it may take a day or two. When you get beyond two days, there is probably something going wrong. You are trying to reinvent the world or something like that. That's not to say there aren't cases where it will require a lengthy period of time to do a risk analysis. But in the normal course of events, that doesn't occur. We make the decision today. That's important. This is not some ivory tower theoretical thing. This is a thing you can do very readily. This should be a decision based upon the collective experience of our group of people who understand the variables. If you ask a very inexperienced manager to range this critical element, you are going to get what? You are going to get a very big range. Lack of experience breeds excessive conservatism. If you ask the estimator or quantity surveyor who came up with the figures, you are going to get a narrow range. It is human nature to defend your estimate. To agree to a wide range is akin to admitting failure. If you recognize these human weaknesses and structure the ranges properly, this is what you will learn:
There are some excellent pieces of software which you can use to perform risk analysis. Three of the best are REP/PC, @RISK, and Crystal Ball.
Of these, I personally prefer REP/PC for engineering and construction work. I have used it successfully on projects as high as $1 billion and even higher and with long construction schedules, some exceeding 10 years. All three packages however are excellent if applied properly but there are limitations with all of them which must be considered. However, failure to properly identify the critical variables, or to assume that some variables are critical when they are not, will yield an incorrect analysis and will understate risk. REP/PC has proprietary algorithms in the software to detect improperly identified critical variables. The other two pieces of software do not protect you against this. You must follow the rules outlined earlier for identifying the critical variables. The software itself will not do this job for you. REP/PC requires the ranges and probabilities for the critical variables as the input. This program unfortunately is a DOS program and is not available in a Windows version. That however is not a serious limitation for versions of Windows up through Me which support DOS. Unfortunately Windows XP does not support DOS and it is rapidly becoming the most common computer operating system. For practical reasons, that means that any company desiring to use REP/PC must maintain at least one computer equipped with Windows Me or an earlier version of Windows. @RISK and CRYSTAL BALL are fully Windows compatible and link directly to Excel or other spreadsheet software but do require that probability density functions be identified for each critical variable. This is generally not a problem, however, because of the fact that we are not dealing with rocket science. High precision is not required for the typical projects cost engineers and project managers work on. If the probability density functions are undefined (as will usually be the case), a simple triangular distribution can generally be safely assumed for each critical variable. This assumption is sufficiently accurate for cost work. Risk analysis is not difficult to perform properly and the benefits in project planning are great if the analysis is properly done. However, if it is not done properly, the results can be disastrous as the analysis can severely understate risk and lead to unsatisfactory conclusions about project viability. Click here to return to top of screen Contractual changes, Control value and manage risks Paper presented at the 2004 NORDNET, Helsinki, Finland, September 2004. Annette Kavaleff, Katja Koskelain and Marjaana Kousa 1. Abstract Changes during a project are more of a rule than an exception. This is why everyone involved in project business should realize the importance of change management. In the global contracting environment where emphasis is placed on minimizing costs and maximizing performance, poorly managed changes are hazardous. Change management has to be considered already when planning and negotiating a contract. Proactive contracting will strengthen project performance and eliminate communication difficulties among contracting parties. For a project, it is crucial to carefully define the scope and the other key contractual provisions, which should include a workable dispute resolving mechanism before signing a contract. Contractors and employers often rely on standard terms and conditions (STCs) to govern their relationship. No doubt, these are helpful instruments, but they should be used with awareness and care. When STCs constitute a part of a contract, it is essential for the contracting parties to truly understand how they allocate costs and risks between the parties and what requirements they set for variations and the communication of claims, notifications, etc. In this paper, the variations clauses of two STCs, namely Orgalime turnkey General Conditions 2003 and FIDIC Silver Book for EPC/turnkey projects, are examined in respect of the following three questions: Who is entitled to initiate variations? When and how is the variation established? Who bears the costs for the variation? The STCs are evaluated from both the employer’s and the contractor’s point of view and their main differences are discussed. Not surprisingly, the Orgalime turnkey conditions seem to be more contractor friendly and the FIDIC Silver Book more employer friendly. Neither of them, unfortunately, seems to provide sufficient detailed change control procedures. Contracting parties should take this into account and address change control issues upfront in their negotiations. An outline of change control procedure and issues to be addressed are presented in the last chapter. The task of such procedures is to provide efficient tools to agree on changes before they occur and to keep the project on track and within budgetary limits. 2. Keywords Change management, FIDIC, Orgalime turnkey, variations, changes, standard terms and conditions (STCs), proactive contracting, claim, scope, change control procedures 3. Introduction In any project there are likely to be changes to the original plan during the course of the project. This is true also for turn key projects, which are used as examples in this paper. Over the time of project implementation, new issues evolve. When negotiating a contract change management is often overlooked by the dealmakers. The acknowledgement of the mere fact that changes and variations are likely to occur may be seen as a weakness in the contracting process. The members of project teams should, however, not be “blue eyed”: On one hand, there are contractors who see an opportunity in changes: charging for changes may improve your results from the project. Employers should be aware of this when negotiating contracts and change clauses. On the other hand there are employers who take an uttermost restrictive view on changes and who will reserve the right to say the final word on a proposed change. In contractual vocabulary, change is a wide concept. Usually thereby is meant changes to the contract for both external and project internal causes. Herein we use change for claims, variations etc. which lead to a change of the contract. By variations, we mean variation to the scope of works i.e. usually changes that arise during the course of the project from project internal reasons. The parties may during the implementation of a contract have claims on each other. Claims may arise for a number of reasons e.g.: unforeseen conditions, acts by the authorities, variations, unsuccessful remedial work, delays, suspension, delayed payment, tests, insurances, force majeure, indemnities, termination etc. A claim may result in a change to the contract – but whether and how the claim impacts on the contract will depend on the content of the contract. In chapter 4, we stress the importance of proactive contracting in order to minimise changes and risks generally. In chapter 5 below we focus on some key issues in relation to variations by giving some illustrative examples of change management clauses based on the FIDIC (the International Federation of Consulting Engineers) Silver Book and Orgalime turnkey General Conditions 2003 for EPC/turnkey projects. Need of variations and project changes may arise as a consequence of poor initial planning, design errors, technical innovation, modernisation, emerging of new products, changed plans by the employer etc. Often variations creep into the scope and surface at a stage when the cost and time impact already is big. Variations may have been poorly dealt with in the contract or left to project management procedures to be established during the course of the project. In the absence of change procedures and when a variation later turns visible, project managers on both sides start reading the technical requirements, the scope, the functional requirements, which may have diverging contents at different priority levels of the contract (like the request for bid, the bid, other contractual appendices). It may emerge at such later time that the parties have a different perception of the intended end result of the project or delivery. The task to converge the parties’ opinions at this stage may be burdensome and collapse the project as has happened for example in many IT projects. Change control procedures are discussed in chapter 6 below. Bearing in mind the impact on project costs, schedule and quality of results both parties will benefit from a carefully considered procedure for changes, which is documented and agreed in advance. Change control processes must be established before work starts. When changes start to creep into the scope, it may be too late. The process should, however, not encourage changes unduly. A change is always an exception and must be justified. Bureaucracy should be avoided and small changes with little impact should be dealt with at working level. As in all business, activity focus must be on issues, which are material for the result or bottom line. It is worthwhile investing some time in agreeing on good change management procedure since it may cost more to have a bad one. If this approach is taken, resources will be freed for the main task for project teams on both sides, which are the implementation of the project and the creation of value to the parties. 4. Minimise changes by contracting with care and foresight Management of changes starts with drafting and negotiating the contract with care and foresight. It is crucial to know how the commercial heart of the contract and what rules governs it. It is not enough to pay attention only to the change control clause, since the basis for its application is some heavy contractual stuff allocating the business value and the risks. As highlighted in the introduction claims may arise for numerous reasons like delays, defects, omissions etc. It is important that those reasons are foreseen as far as possible and that the consequences are dealt with in the contract in order to minimise costs and conflicts. There will be surprises anyway and the resources should be spared to tackle those. The role of the lawyer is to be a member of the project team from the very beginning, because only then he or she can focus on proactive contracting and avoid disputes. When looking at the causes for claims and variations it is advisable to start with the scope of the works. The scope must be carefully and clearly defined. As an employer, you must check that the bid responds to your bid request. As a contractor, you must make sure your changes to the scope proposed in your bid will be part of the contract. Both parties have a task to avoid contradictions or misunderstandings. Make sure your lawyer is familiar with the scope since it is the basis of the remedies clauses etc. The negotiators and project team members must be aware what the price is supposed to include/cover and how it is structured. The general assumption is that the price agreed shall cover the scope described in the contract, unless otherwise agreed. Is the price defined as a lump sum or based on unit prices, or both? If the scope is defined in detail, missing details may lead to changes and have impact on the price. If the scope is defined functionally, by end results, there may be less risk for changes of the price. The contractual change mechanism is often placed in connection with the price clause providing unit prices etc. as a basis for changes to be agreed on. Scope and price are essential, but you should not yet give up and leave the rest to your lawyer alone. There are many more clauses having a substantial impact on your business results. The contract is not only a legal document to be put in an archive after signing, but it shall also provide the guidelines for the project work and management in order to minimise conflicts. For example, the documentation may enable the employer to apply for permits required by the authorities and to operate the delivery. Incomplete or faulty documentation can have a major impact on the results and delay the project. Claims and changes relating to the documentation must be foreseen and dealt with. The intellectual property rights to both the delivery and the documentation will have impact on how the results can be used (for example right to amend standard documentation in order to obtain permits). Time is money and the delivery should happen on time. The delivery may be delayed for different reasons: contractor is delayed, contractor’s subcontractor is delayed, employer is delayed, force majeure, ground conditions, delays by the authorities (which may initially be caused by either of the parties) etc. These delays will have to be dealt with in the contract in different ways depending on the risk division agreed by the parties. Usually a party will have to bear the risks and costs of delays on his side. Attention must be paid to careful definition of the causes of delays and their consequences. The delivery shall be tested against agreed criteria and be repaired or replaced should the criteria not be met. Passing of tests is usually a precondition for taking over the delivery. It is important for both parties to establish a procedure for how the test criteria shall be met. The payment schedule usually ties in with the progress of the delivery and a clear definition of the take over conditions is essential for both parties. The remedies clauses must not be forgotten either. Consequences of delays, liquidated damages for failed performance, obligation to remedy and repair belong to this group of issues. Furthermore, if the project totally fails, the rejection and termination may come into the picture. The legal system to which the contract in question belongs must not be forgotten either since claims may arise on tort basis. For large projects the remedies provided by the law in the Nordic countries in case of termination are difficult: the performance on both sides should go back (it may be easy to give back monies, but how about a factory installed at a piece of land?). This is why there must be detailed provisions how to valuate the delivery and compensate the suffering party should the worst thing happen. In contractual words, pay attention to clauses like Documentation, Intellectual Property Rights, Reporting, Schedule, Delays, Testing, Take Over, Guarantees, Indemnities, Liabilities, Insurances, Rejection, Termination etc. These clauses may give rise to claims and they are all linked with the scope, the price and the change or variations clauses. 5. Variations - Some key issues and how they are resolved in standard terms and conditions Contractors and employers often rely on STCs to govern their relationship. No doubt these are helpful instruments, but they should be used with awareness and care. When STCs constitute a part of a contract, it is essential for the contracting parties to truly understand how the conditions allocate risks between the parties. The party is able to minimize his own risks and estimate properly the value of the contract only after he has identified the risks which he is about to agree to bear. This is especially true when the allocation of risks is not in equilibrium but rather one of the parties is to bear most of the risk. FIDIC (the International Federation of Independent Consulting Engineers) Conditions of Contract for EPC/Turnkey Projects also known as the Silver Book contains, in addition to clauses governing the claims of the Contractor resp. Employer, a contract clause on variations (Clause 13 Variations and Adjustments). Orgalime (Liaison group of the European mechanical; electrical; electronic and metalworking industries) Turnkey Contract for Industrial Works consists of three integrated parts, the main Contract Document, the General Conditions and the Checklist. The General Conditions which contain a clause for variations (Clause 8 Variations). For more information on these two above mentioned organizations see websites: www.fidic.org and www.orgalime.org. The following issues highlight a just a few aspects of these standard conditions on variations, which should be taken into consideration by the parties: Issue 1: Who is entitled to initiate variations?
Difference: It is clear under both standard conditions that the Employer/Purchaser has a general right to instruct or propose variations for whatever reasons, whereas the Contractor’s right is qualified by the interest of the Employer/Purchaser. The rights of the Employer are stronger under FIDIC Silver Book since the variation has to be executed by the Contractor on the mere instruction by the Employer. Under Orgalime Turn Key the risk that the works stops after a variation proposal should be taken into account. The value engineering under both standard conditions is in the control of the Contractor since it is restricted to his opinion on the matter. Issue 2: When and how is the variation established?
Differences: The Contractor is obligated under FIDIC Silver Book to act on Employer’s instruction, whereas Orgalime Turn Key requires agreement of both parties or expert resolution to implement a variation. This is an important difference. Under FIDIC Silver Book the Contractor is very exposed to the Employer’s decision making and may have to wait to achieve justice, but under Orgalime Turn Key again there may be long delay to the project which may cost more than the dispute in question. Orgalime Turn Key also enables the Contractor to refuse variations not foreseen. In a long project, the need for a variation may not be foreseen. Issue 3: Who bears the costs for the variation?
Difference 1: Under FIDIC Silver Book, the Contractor bears the costs of preparation in case of Value Engineering, whereas under Orgalime the Purchaser bears the costs if he proposes a variation. Both conditions leave room for interpretation and scope for more specific agreement, but in different matters. Difference 2: FIDIC Silver Book gives some steering on the cost division which implies a faster resolution period if agreement cannot be reached than under Orgalime. Project management requires, however, in most cases more detailed guidelines and steering on cost/benefit division, especially in cases where variations are likely. As is clear from this limited comparison, the process and cost/benefit sharing differ depending on the STCs we have chosen and negotiated. The examples show that the employer under FIDIC Silver Book is in control of the change process, whereas the employer under Orgalime Turn Key has less power to initiate and implement a variation. The above comparison does not comprise all clauses relating to changes or variations of these STCs, but a more thorough examination shows that the change and variations clauses may not provide sufficient tools to manage changes as part of normal project management. This fact should be considered prior to signing the contract and a procedure be established as part of the contract documentation. 6. Change control procedure as part of project and contract management Change control is an essential part of contract management and it should at least:
As a minimum, a contract provides that changes are only valid if agreed upon by the parties. This is clear since in most jurisdictions a contract shall be implemented as it is written and a change would not automatically be accepted. It is, however, necessary to state that changes must be agreed in writing. The grey area often a cause for disputes is changes originating from insufficiently defined contractual clauses like scope, price etc. The example procedure shown below may seem detailed and burdensome, but the mission is to catch the issues upfront, in advance and have the rules clear when the project starts. If project managers only have to apply the rules, not to invent them, they are freed from the tensions relating to negotiations and conflicts. A workable change control mechanism should address at least the following questions:
The above issues have been summarised in the following picture: Bio Summaries: Author: Anette Kavaleff Co-author: Marjaana Kousa
Degrees: Master of Laws with court training 2001, Master of Laws 30.10.1998, University of Helsinki Co-author: Katja Koskelainen Degrees: Master of Laws 2003; Vocational Qualification in Business and Administration, Finance and Risk Management Professional activities: International contract law; Construction contracting Click here to return to top of screen Needs Four-Level-Certification, the Four-Level-Qualification? Klaus Pannenbäcker AbstractThe Four-Level-Certification (4-L-C) of IPMA is today in more than 30 Countries introduced. The Member Associations are responsible to run this Career System of project management personal. Most of the interested experts are experienced and successful project managers, but they are not able to explain “why”. It would be unfair, to enter into a certification process without any “refreshment” in basic knowledge. But this preparation should follow the level specific requirements of the four career levels. Due to this demand a Four-Level-Qualification (4-L-Q) is in the final development phase and should be presented to the distinguished audience during the 3rd SENET Conference. Keywords: 4-L-C Programme, PM Qualification, PM Training IntroductionIt is recognised, that Project Management is an additional profession to be successful in a basic profession.Examples:
Each project responsible person is therefore a leader, manager, controller, crisis manager. The more complex the project is, the more project management competencies are required. This is the background for a career path, finally for the IPMA 4-Level-Certification Programme (4-L-C). IPMA developed this system and the IPMA National Associations are the local organiser. In about 28 of nearly 40 countries worldwide a growing number of project management responsibles in all four 4 Levels are certificated every year. Details are published in the IPMA Yearbook. Most of the certificants asked before starting their certification process: “How and where can I prepare myself for my certification?”--- The GPM Deutsche Gesellschaft für Projektmanagement (in short GPM) therefore started the development of a in order to fulfil this market requirement. This combined system follows the rules of EN 17024, the updated EN 45013. Generally and clearly explained Due to this requirement IPMA recommended to its National Associations (NA) to set up the training activities as a division of the NA and to cerate an independent body for the certification objectives and processes. 1. Four – Level – Certification (4-L-C) The well known figure is this pyramid. The higher the level, the smaller is the number of certificated individuals. This is the traditional hierarchy in each organisation. And it is also very traditionally that these levels can only be reached as career path with extraordinary competences.  The figure also shows, the higher the level that greater are the Competences = Knowledge + Experience + Personality The IPMA Regulations and Guidelines (ICRG) explain compulsory the contents and processes of the whole certification system. Due to the fact that each NA follows this ICRG and IPMA checks latest after the 4th year of starting the certification in its country, each National Association can assure international recognition of its certificated project management personal. 2. Four – Level – Qualification (4-L-Q)The keyword “Qualification” does not mean in this connection to have reached a specific capability of doing something properly, in this sense is Qualification = Education + Training + Coaching  The figure shows in red colour from the bottom to the top the number as well as the type of qualification hours, the certificant needs for a successful certification. It seems to be logical that:
The International Competence Baseline (ICB) defines the objectives of project management in practise. Therefore this document is and must be the same baseline for the:
 The gap between the blue and the red “world” will explain that each certificant can enter into the 4-L-C, without any previous conditions. The “bridge” between blue and red is the self assessment at the end of a qualification and at the beginning of the certification. Due to this requirement the new ICB includes the taxonomy of each PM element: exemplary cases describe the number of points to be given. SummaryThis combined “Q + C – System” of IPMA is able to start with a new generation of Qualifying and Certifying. Using these two keywords we as member of IPMA through our National Association recognise that Project management as professional discipline is not so well accepted, because we have no common “language”. Our “clients”, the individuals and their organisations, expect from us more clarification as well as global acceptance in wording and in processes. The certification with four levels is on its best way to become worldwide recognition. Here we have to thank IPMA and the Assessors. Now we have to increase our competences in an adequate Four - Level - Qualification Programme is a programme of:
GABO Anlagentechnik und Prozessmanagement GmbH, Click here to return to top of screen | ||||||||||||||||||||||
PO Box 301 Deakin West ACT 2600 AUSTRALIA |
National Surveyors House 27 - 29 Napier Close Deakin ACT AUSTRALIA |
|
