Ss 10 cost engineering management training- moustafa sec 5 part iii ch 22-..26

KSU- Ryd-CCP/CCT Cost Engi. Training 1018 BTA -Dr. Moustafa Ismail 2018 LEC- 10 22-26 1
Cost Engineering Management
CCT Training Course:
Association for the Advancement of Cost Engineering
King Saud University
March 2018
LECTURE 10 Ch 22- Ch 26
‫السالم‬‫وبركاته‬ ‫هللا‬ ‫ورحمة‬ ‫عليكن‬
2018 Certified Cost Technician

KSU- Ryd-CCP/CCT Cost Engi. Training 1018 BTA -Dr. Moustafa Ismail 2018 LEC- 10 22-26 2
Contact details
moustafa1_ismail@yahoo.com
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00966508297971- 00966560074207
March 2018

March 2018KSU- Ryd-CCP/CCT Cost Engi. Training 1018 BTA -Dr. Moustafa Ismail 2018 LEC- 10 22-26 3
CCP Certificate Section 5 ― Contracting for Capital Projects Ch. 23
 Definition of a Contract
 A contract is simply an agreement between two or more entities that is enforceable
within law. It is a business agreement, whereby one party agrees to perform work or
services for the other party for some consideration.
 Depending upon the nature of the business, and the jurisdiction in place contracts
may be either written or oral, some should be written to be enforceable.
 Two parties have a meeting of the minds on a subject, an agreement exists.
 Two parties agree and intend to be legally obligated to perform to the terms of an
agreement, a contract arise.

 Requirements of a Contract- basic elements
i. Offer―To be enforceable, there must be a clear, unequivocal offer by one party.
ii. Acceptance― the other party accepts completely without comments, the offer, a
contract can be formed. ( otherwise, the offer not accepted, no contract exists).
 Legality of Purpose― work or service to be performed must involve legal activities.
 Competent Parties―all parties must be competent―that is, possess the legal and
mental capacity to form a contract.
 Consideration- for most contracts is monetary in nature.( accommodation or office)

 Mistakes That Make Contracts Defective------------ unenforceable
i. Mistakes as to the Nature of the Transaction―fraud by one party (e.g., express
misrepresentation or concealment of material facts ‫األتفاق‬‫على‬‫موقع‬‫غير‬‫مسموح‬‫لمشروع‬‫معين‬) )
ii. Mistakes as to the Identity of a party- law doesn't compel contracting with another
iii. Mutual Mistakes as to the Identity of the Subject matter, Ex., a party may plan to
construct, 2 similar facilities in 2 different locations. During the bidding process,
engineering drawings may be inadvertently switched, such that drawings for
Facility A may be substituted for those of Facility B, a location at which Facility A
cannot be constructed.
iv. Mutual Mistakes as to the Existence of the Subject Matter―If 2 parties contract for
work in existing facility; but, unknown to a party the facility is destroyed by fire.

 Mistakes That Do Not Make Contracts Defective---- remain enforceable
i. Mistakes as to Value, Quality, or Price
ii. Mistakes as to the Terms of the For example, a party, after contract execution, learns
that they are required to provide weekly project schedules (at a cost of $1,000,000
over the life of the contract). That party’s failure to understand the requirement at
the time of contract execution, or include the cost in their bid, will not excuse them
from compliance nor render the contract unenforceable.
 Contents of a Contract
i. Invitation to Bid or Request for Proposal
ii. Instructions to Bidders
iii. Addenda Issued During the Bid Period
iv. Bid or Proposal
v. Contract Agreement
vi. Bonds
vii. General Conditions
viii. Special/P Conditions
ix. Scope of Work (plans, drawings,
specifications, special provisions, etc.)
x. Change Orders or Contract
Modifications

 Types of contracts - four basic types of contracts
1. Fixed Price–Lump Sum Contracts― scope of work is well defined, the contracting
risks are clearly identified, price & T fixed, the contractor assumes risk for the fixed
price. C high risk.
a. Fixed Price With Economic Adjustment― some portions may be adjustable
under certain conditions. For example, asphalt, copper tubing, computer chips,
increases or decreases more than 15 percent from the bid price, payment for the
specified item(s) will be adjusted in accordance with the terms and conditions
of the Economic Price Adjustment (EPA) Clause of the contract.
b. Fixed Price With Incentives - certain incentive inserted into contract(T, cost,..)
2. Fixed Price - Unit Price - price is fixed for each unit of work rather than the entire
scope of work – thus, the name, unit price. The total value of the contract is a
function of the number of units. It also can be incentivized. Quantity V Clause is
provided for adjustment if any of unit quantities vary by +/- 15./ Risk shared

3. Cost Reimbursable Contracts
• Cost plus FF- not fixed, paid for legitimate actual cost incurred, plus a stipulated
profit. Such a contract is often referred to as a Cost Plus Fixed Fee (CPFF) contract
or a Time and Material (T&M) contract.
( Direct Costs- Indirect Costs (Overhead Costs)― (home office overhead)- Mark Up
• CPIF -may also be incentivized for meeting/ exceeding objectives.
4. Target Contracts―Guaranteed Maximum Price [GMP] contracts.)-
generally intended to provide economic incentive to contractor to attract completion at
lowest C, T.
Once agreement on time and cost is reached, these become the contractor’s targets. Final
actual costs & T are compared to target cost and underruns, are shared on predefined
bases. Overruns, unless caused by owner, generally assessed to Contractor.

 Requirements – Adv. And disadvantages:
 FP LS contract
o Good definition (of work scope) and stable project conditions.
o Effective competition in a buyer’s market.
o Several months for bidding and appraisal.
o Minimum scope changes.
• Advantages
o Low financial risk to owner since maximum risk is on the contractor.
o Cost and project viability are known before a commitment is made.
o Minimal owner supervision – mostly quality assurance & schedule monitoring.
o Contractor will usually assign its best personnel to the work.
o Maximum financial motivation of contractor―maximum incentive for the contractor to
achieve early completion at superior performance levels.
o Contractor has to solve his/her own problems and do so quickly.
o Contractor selection by competitive bidding is easy, apart from the deliberate low price.

• Disadvantages- FP – LS contract
o Variations (changes) are difficult and costly―the contractor, having quoted
keenly when bidding, will try to make as much as possible on extras.
o An early start is not possible because of the time taken for bidding & for
developing a good design basis.
o The contractor will tend to choose the cheapest and quickest solutions, making
technical monitoring and strict QC essential; schedule monitoring also.
o The contractor has a short term interest in completing the job, and may cause
long term damage to local union relationships by doing such things as setting
poor precedents/union agreements.
o Bidding is expensive for the contractor.
o Contractors will usually include allowances for contingencies in the bid price.
o Bidding time can be twice that required for other types of contracts.

• Summary of Risks by Contract Type
• Figures 23.1 and 23.2 depict the allocation of risk between owners and contractors.

• Project Delivery Methods

• Contractor Prequalification
 Past experience on similar projects, complexity, technical and schedule requirements.
 Past experience with the design build team proposed on this project.
 Current financial capability.
 Safety ratings on past projects.
 Experienced project team, etc.

 Key clauses:
• Audit― Changes― Contractor Responsibilities― Delays
• Differing Site Conditions or Changed - Dispute resolution- Force Majeure.
• Governing Law―Indemnification―Insurance― Late Completion Damages.
• Limitation of Liability― No Damages for Delay― Order of Precedence.
• Payments )Compensation/Remuneration)― Quantity variations- Schedules
• Suspension O Work-Termination-Time of the Essence-Warranty.
 Conclusion
• Involvement in the administration of contracts is one of the central roles of cost
engineers and practicing project controls professionals.
• Contract administration is a skill, which should be mastered by professionals who
practice cost engineering or project controls.
• Contract administration lies at the heart of what most cost engineers do on a daily
basis. Cost engineering is also an integral part of contract administration.
• The 2 areas are inextricably intertwined. one has to master the both skills.
End
of
Ch.
23

CCP Certificate Section 5 ― Strategic Asset Management Ch. 24
 Concepts ―TCM and Strategic Management
• TCM: defines a strategic asset as any physical or intellectual property that is of long
term or ongoing value to an enterprise.
• TCM is the sum of the practices and processes that an enterprise uses to manage the
total life cycle cost investment in its portfolio of strategic assets.
o Strategic assets may vary from industrial plants to transportation systems to
software programs; essentially anything that an enterprise makes significant
investments in can be considered a strategic asset.
o Each asset has a life cycle. Owner evaluates designs, builds, leases, maintains,
renovates, and eventually demolishes a building during its life cycle―
o Strategic Asset Management is the process where the building owner measures
the building’s operating performance, assesses improvement ideas, and
conceives, evaluates, & initiates building investment projects. Project resources
o As part of the cost management process, the building owner monitors the
operating cost and profitability of the existing building,

o Strategic Asset Management & Project Control sub-processes are linked in
TCM.
o “project system.” is the link between the owner’s Strategic Asset Management
and Project Control processes.
o In a stages-and-gates or “gated” project system, the performance of planning
tasks is done in successively more definitive stages.
o If the project is meeting its stated objectives at the review, the asset owner
approves sufficient funds to complete the next stage of plan development or to
complete the project. If the project is not meeting objectives, it can be cancelled,
re-scoped, or redirected.
Strategic Management- continue

o Project and asset performance must be measured and assessed together.
o The measurement step, closes the link between the Strategic Asset Management
and Project Control processes.
o Figure 24.1 illustrates the TCM process map.
o On the left half of the TCM process map, the asset owner performs following
steps for each asset in their portfolio, and project system.
i. Performance Measurement―measurements (e.g., safety, cost, operability, ..)
are taken of how well existing assets & the project system is performing.
ii. Performance Assessment―Performance measurements of assets and the
project system are compared to strategic plans. Corrective, mitigating, or improvement actions
Strategic Management- Measurements

iii. Planning― asset portfolio and project system improvement ideas are
conceptualized, evaluated, and converted into plans for investing resources in new
or improved assets or project systems.
iv. Implementation―Once owner decide to implement asset improvement or
development Investment plans and requirements are communicated to and
executed by project teams.
 Project teams request resources as necessary. Project performance is
measured & reported, thus continuing Strategic Asset Management cycle.
 Front end loading is the project definition phase. FEL
Strategic Management- Measurements- continue

Strategic Management- continue
The potential to influence the value of an
asset diminishes as asset planning and
implementation progress. Figure 24.3
illustrates this basic principle known as
the Influence Curve.
Figure 24.3
End
of
Ch.
24

March 2018
KSU- Ryd-CCP/CCT Cost Engi. Training 1018 BTA -Dr. Moustafa Ismail 2018 LEC- 10 22-
26 22
CCP Certificate Section 5 ― Change Management Practical Guide Ch. 25
Change Management
 Change Management Overview CM.
 The total cost management frame work (TCM) definition of change management:
o The process of managing any change to the scope of work and/or any deviation,
performance trend, or change to an approved or baseline project control plan.
 CM process is used to approve or disapprove changes in the scope and baseline plans.
 The process includes the identification, definition, categorization, recording, tracking,
analyzing, disposition (i.e., approval or disapproval for incorporation into approved or
baseline project control plans), and reporting of deviations, trends, and changes.

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 Owner Change Procedure
 Change Request―Any variance proposed by the client, and any contractor
initiated variance that the contractor PM believes should be a change order,
the owner may respond as follows:
i. Reject the proposed change request―Contractor will process the rejected
change in accordance with the internal change procedure.
ii. Approve the proposed change request immediately as a change order.
iii. Direct that a more detailed analysis of the change be made and that it be
resubmitted as a change proposal.
 Change Proposal―Upon request by the owner, the contractor will prepare a
change proposal, including any detailed analysis of the scope, price, schedule
impact, or other information.
 The client shall bear the cost of preparing any change proposal, regardless of
the disposition of the change.
 The owner shall have a reasonable period of time, to approve or reject any
change proposal.
 The owner may respond as follows:
i. Reject the change proposal.
ii. Approve the change proposal as a change order.

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 Change Order
 Upon approval by owner, the PCM/CCM will complete the necessary forms
and obtain parties authorization signatures.
 If the owner provides verbal approval, the contractor PM is to send
acknowledgement in writing to the owner.
 Contractor Internal Change Procedure
 This procedure not dependent upon contract type & followed for all projects:
i. Project Manager’s Evaluation―PM may determine a Project Variance
Notice (PVN) is not a change order to the owner. PM may either approve or
reject the PVN, or indicate that it is an internal change.
ii. Reject the PVN―If PM determines that the change in scope should not be
implemented, the PM will reject the PVN and record in CO log
iii. Approve the PVN―If PM gives approval to implement the variance, he will
record PVN as an approved internal change and distribute copies to team.

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 Disputed Change
the owner may disagree with the contractor on what constitutes a change, or disagree
with the contractor on equitable compensation for time or cost to make the change, yet
direct the contractor to proceed with the change.
In this case, the contractor PM must perform the following:
i. Consult with the contract and legal departments to ensure the project follows the
proper course of action.
ii. Explicitly follow contractual change procedure and change management protocols.
iii. Dispute the change in writing.
iv. Receive written instruction from the owner defining the course of action.
v. Maintain separate and complete records of the time spent; work-hours expended,
costs incurred, and any schedule impacts for each disputed change.

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 Change Register
C will maintain a change register containing all PVNs, change requests; proposals,
pending change orders, change orders, disputed changes, cancelled changes. Logs will
include the PVN number, the change request, change proposal, C will issue the change
register to the client as specified in the contract.
 Pending Change Order
Each pending change order, owner direct proceeding in advance of written CO approval:
 is to be maintained in a change log,
 cost of the pending change must be considered in the forecast, but not in the
current budget nor in the approved revenue.
 If the detailed cost distribution for the change is known, it should be tracked
separately, in order to facilitate trending and forecasting.
 When approved, the current budget and revenue is to be updated.
 CO Identification: Identify each CO consecutively, using 3 character numeric block.

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CCP Certificate Section 5 ― Overview of Construction Claims & Disputes Ch. 26
 Changes/ Variations
 All contracts contemplate the probability of changes/variations to the work.
 It is incumbent upon both the owner & C to resolve change as quickly as possible.
 All impacted elements of changes/variations should be dealt with as promptly as
possible in order to avoid later disputes.
 Definitions
 Claim―The term claim is generally defined in law as a written demand or
assertion by one of the contracting parties seeking, as a matter of legal right,
payment of additional money, adjustment to the time of performance and/or
some other change/variation to the terms of the contract, arising under or
related to the contract.
 Change/Variation Order― a directive from the owner, to the contractor directing him
to perform work differently or perform different work than contracted.

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26 30
 CONTRACTOR CLAIMS
 Frequently, disagreements over contract requirements arise, which cannot be
resolved through the change/variation order process.
 Many design and construction contracts have clauses that address disputes or claims
and the notices required in order to properly assert a dispute or claim.
 Subcontractors often file claims against prime contractors; and, if entitlement has
been proven, prime contractors are likely to pass through such claims to
owners/employers.
 However, to pass through a subcontractor claim, the prime contractor must determine
that the claim meets all the requirements of the prime contract.
 Claims, like changes/variations, should be addressed promptly and resolved in
accordance with the terms of the contract, as soon as possible, and at the lowest
possible level in both the owner and the contractor organizations.
 The longer a claim remains unresolved , the harder & more expensive it is.

 Contractor Claim
 Frequently, disagreements over contract requirements arise, which cannot be
resolved through the change/variation order process.
 Many design and construction contracts have clauses that address disputes or claims
and the notices required in order to properly assert a dispute or claim.
 Subcontractors often file claims against prime contractors; and, if entitlement has
been proven, prime contractors are likely to pass through the claims to owner.
 Claims, like changes/variations, should be addressed promptly and resolved ASAP.
 The longer a claim remains unresolved , the harder & more expensive it is.

 Universe of Claims―
 Under most contracts, claims types are limited, in the contrary causes are numerous.
 Typically, there are only eleven (11) types of claims in most contracts:
1. Owner/Employer Directed Change/Variation―
2. Constructive Changes/Variations
3. Differing Site Conditions
i. Type 1―Subsurface or latent (hidden) physical conditions at the site differing
materially from those indicated in the contract documents.
ii. Type 2―Unknown physical conditions at the site, of an unusual nature,
differing materially from those ordinarily encountered in work of the character
provided for in the contract.
iii. Type 3―Material that contractor believes may be material that is hazardous or
that is required to be removed to a specially licensed disposal as per the law.
4. Directed Suspension of Work

 Types of claims- continue
5. Constructive Suspension of
6. Force Majeure―Force majeure events are usually described as unforeseeable events
brought about or caused by third parties or acts of God.
7. Delays
8. Directed Acceleration
9. Constructive Acceleration
10. Termination for Convenience
11. Termination for Default

 Owner/Employer Claims
 Owner claims substantially limited compared to contractor’s claims- only 3 types:
1. Late Completion There are generally two types of late completion damages:
i. Actual Damages―in many large EPC projects, the parties agree to mutually
waive consequential damages, and as such, the actual damages the owner may
seek, are significantly restricted and are usually limited to Liquidated Damages.
ii. Liquidated Damages
2. False or Fraudulent Claims: If a claim can be proven to be false or fraudulent as
defined in various statutes, recovery may include restitution, civil penalties, costs,
punitive damages and attorney’s fees.
3. Design Deficiency or Standard of Care Claims―The basis contractor claims lies
in the deficient performance of the Architect/Engineer (A/E). In turn, employers
seek recovery from the A/E for the damages the contractor may recover.

March 2018
26 35
 Owner/Employer Claims- continue
4. Consequential Damages―Consequential damages, sometimes called Special
Damages, are damages that arise as a result of the failure of the owner or the contractor
to live up to their obligations under the contract.
 Burden of Proof
The basic equation of a successful claim is summarized as follows:
i. Notice – Formal/sometimes informal (constructive notice), communication from
one party seeking time and/or cost relief for an issue that has arisen.
o Notice gives the parties early warning of that issue and ability to mitigate and/or change
direction as to how to deal with the issue.
o Absent a contractually compliant notice, it will often be argued that the claimant has
waived its rights under the contract for relief.
ii. Liability/Entitlement― event or circumstance, which gives rise to a legal right to
adjustment under contract. For example, a variation/delay/differing site condition.

 Burden of Proof- continue
iii. Causation―The event or circumstance causes the contractor to do something or
take some action which otherwise would not have occurred were it not for the
event. For example some portion of the work is revised and performed differently
than originally planned and work has to be re-sequenced as a result.
iv. Damages /Quantum―The work costs more and/or takes longer than planned.
Notes:
 The burden of proof of all 4 elements of a claim rests squarely on claimant shoulders
 the claimant bears the burden of affirmatively proving all four elements of the claim
based upon a superiority of the evidence.
 To successfully recover in a claim situation, the claimant must document and prove
all four parts before becoming eligible to recover damages.

 Damages
 Damages are the costs or time incurred by a party as a result of one or more of the
claims previously discussed.
 Monetary damages must be proven with some reasonable degree of specificity.
 Many contracts allow the owner/employer to audit the contractor’s books and records
 Some contracts specifically require the contractor to submit a statement of
certification, under penalty of perjury.
 Damages associated W construction claims generally fall into these categories.
o Direct Costs― incurred as a direct result of the claim situation. (hard dollar)
 Examples include:
 Labor costs, including fringe benefits and payroll taxes
 Materials
 Equipment
 Subcontractor direct costs
 Mobilization/demobilization costs
 Storage costs

 Damages- continue
 Indirect Costs― cost not allocable to any specific item of direct work. Such indirect
costs may or may not be time related costs;
 2 basic types: field office overhead and HOO.
 Field Office Overhead include:
 Project management staff
 Superintendents
 Project office
 Temporary utilities and security
 Maintenance and clean-up
 Communications
 Project vehicles
 Laydown and maintenance area costs
 Office equipment

 Home Office Overhead―Examples of costs in this category include:
 Corporate management
 Accounting and payroll staff
 Other personnel costs
 Engineering
 Estimating
 Delay Costs―Delay costs are a category of costs that may be incurred by both contractors and
owner/employers when a key project completion milestone is delayed. Examples:
 Idle equipment
 Idle personnel
 Additional or extended storage costs
 Escalation costs of labor, materials, and equipment attributable solely to the delay
 Computers and office equipment
 Corporate insurance
 Home office space rent
 Central equipment yard

 Owner/employer actual damages:
 Unless precluded in a Consequential Damages clause or determined to be a
consequential damage by a court or an arbitration panel, may include:
o Lost use of the facility
o Lost rental income
o Lost profits
o Delayed proceeds of the sale of the facility
o Increased or extended financing costs
o Extended general conditions and/or personnel costs
o Increased storage costs
o Holdover penalties
o Extended professional fees

 Impact Costs
o The productivity loss might be claimed using:
o Activity total costs (planned vs. actual)
o Measured Mile Analysis (un-impacted productivity vs. impacted productivity)
o Industry standard (actual vs. industry standard)
 Other Contractor Damages― not recoverable as result of specific contract
disallowance clauses or a Consequential Damages clause:
 Bond and insurance costs
 Loss of early completion bonus or completed plant performance )“name plate”)
bonus
 Lost profits as a result of restricted bonding capacity
 Interest cost
 Legal and consultant fees
 Claim preparation costs

o Other Employer Damages- may also incur costs as result of improper
performance by C:
o Defective work―repair or replacement costs
o Costs to complete the project
o Re-procurement costs―in the event of termination for default
o Extended warranty costs
o Third-party claim costs
o Legal and consultant fees

 Claims and Project Delivery Methods
o Unit Price
o Design-Bid-Build
o Design-Build
o Construction Management at Risk, the CM@R is initially engaged by the owner
to perform preconstruction services, estimating, scheduling, constructability
reviews. As the design nears completion, CM@R executes a construction
contract for a scope and specific price, commonly known as a Guaranteed
Maximum Price (GMP or G-max) contract. This method tends to generate fewer
claims since CM@R is more informed as to scope and risks of the project.
o Alliance Contracting (Integrated Project Delivery or IPD) ― requires a 3 way
contract between the owner, the contractor and the designer, which establishes
the risks and responsibilities of each party.
o Public Private Partnership
o Fast-Track Construction
o Multiple Prime Construction (usually general,
mechanical, electrical and plumbing)

 Analysis of a Claim
 Phase One―Entitlement and Causation Analysis
o Identify each issue
o Identify and evaluate all relevant contract language
o Establish issue files
o Analyze each issue
o Determine potential for contractual entitlement
o Allocate summary level or order of magnitude costs to specific issues if possible
to prioritize further analysis
o Request additional information, if necessary

 Phase Two―Delay Analysis
o Obtain baseline and updated project schedules, in native electronic format.
o Compare as-planned, schedule updates and as-built schedules to determine
which activities were delayed and whether concurrent delays occurred.
o Identify periods of delay, disruption or acceleration.
o Associate claim issues with the identified periods.
o Perform a detailed schedule analysis.
o Identify the party or parties responsible for the delay(s).
o Depending on the size of the project, schedule analysis can be very complex and
labor intensive. There are a number of forensic schedule/program analysis
methods, all with varying degrees of reliability and validity, depending upon the
actual circumstances of the delays and the records available. It is recommended
that unless team has considerable forensic schedule analysis experience,
competent professional advice should be conducted.

 Phase Three―Damage Analysis
o Determine direct costs associated with each claim issue that has entitlement.
o Determine potential indirect & impact costs, if any, associated with these issues.
o Determine OH costs, either from contract or project records for claim issue.
o Prepare damage calculations for each issue.
 Phase Four―Settlement Negotiations
o Complete the analysis of each issue before commencing negotiations.
o Meet with the other party to negotiate settlement of each issue.
o Use independent third-party-neutral as appropriate to facilitate settlement.
o Once settlement is achieved, draft and execute the appropriate settlement
documents complete with waiver of further claim concerning each issue settled.
Involvement of legal counsel in drafting such language is recommended.

 Dispute resolution:
 Negotiation - Mediation
 Arbitration - Litigation
 Alternative dispute resolution
End
of
Ch.
26

CCP Certificate Section 5 Project Labor and Cost Control Ch.21

Ss 10 cost engineering management training- moustafa sec 5 part iii ch 22-..26

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