C H A P T E R

1 3

Project and Contract Management

Introduction and Commercial Application: Large, capital-intensive projects are
characteristic of the oil and gas industry. Planning and controlling a project which
may involve hundreds of personnel, millions of individual items and a significant
investment, has become a discipline in its own right. This section describes how and
why a typical project is organised in a number of well-defined stages, and discusses
the methods used to ensure that cost and time expectations are fulfilled, and
‘products’ delivered to an agreed specification.

Many oil and gas companies use contract staff to perform the part of a project

between preliminary design and commissioning. This is either because they do not
immediately have the staff or the skills to perform these tasks, or it is cheaper
and more efficient to pass the work to a contractor. Contracting out tasks is not
limited to project work, and affects most departments in a company, from the
drilling department through to the catering services. The fraction of a company’s
expenditure directed to contract services may be very significant, especially when
major projects are being performed. Every contract needs to be managed, and this
section outlines some of the reasons for contracting out work and the main types of
contract used in the oil and gas industry.

13.1. Phasing and Organisation

A ‘Project’ can be defined as a task that has to be completed to a defined

specification within an agreed time and for a specific price. Although simple to
define, a large project requires many people bringing different skills to bear, as the
task evolves from conception to completion. Large businesses, including those in
the oil and gas industry, find it more manageable to divide projects into phases,
which reflect changing skill requirements, levels of uncertainty and commitment of
resources.

As mentioned in Section 11.1, Chapter 11, a typical project might be split into

the following phases (

Figure 13.1

).

 Feasibility
 Definition and preliminary design
 Detailed design
 Procurement
 Construction
 Commissioning
 Review.

325

Also note that an alternative set of nomenclature for the same phased approach is

discussed in Section 15.3, Chapter 15.

13.1.1. Project phasing

The first three phases listed above are sometimes defined collectively as the pre-
project stage. This is the stage in which ideas are developed and tested, but before
large funding commitments are made.

In the feasibility phase the project is tested as a concept. Is it technically feasible

and is it economically viable? There may be a number of ways to perform a
particular task (such as develop an oil field) and these have to be judged against
economic criteria, availability of resources and risk. At this stage, estimates of
cost and income (production) profiles will carry a considerable uncertainty range,
but are used to filter out unrealistic options. Several options may remain under
consideration at the end of a feasibility study.

In the definition phase options are narrowed down and a preferred solution is

proposed. The project becomes better defined in terms of what should be built
and how it should be operated, and an assessment of how the project may be
affected by changes beyond the control of the company (e.g. the oil price) should
be made. Normally a clear statement should be prepared, describing why the option
is preferred and what project specifications must be met, to be used as a basis for
further work.

Feasibility

Procurement

Construction

Commissioning

Post Project

Review

Is it viable?

How should it look?
How can it be built?
What will it cost?

Prepare the assembly
instructions

Get the bits

Build it

Make sure it works

Could we have
done it better?

Definition

Preliminary

Design

Detailed

Design

Increasing Costs

Figure 13.1

Project phases.

Phasing and Organisation

326

Providing a project is viable, resources are available and risk levels acceptable,

work can continue on preliminary design and tighter cost estimates. The object of the
preliminary design phase is to prepare a document that will support an application
for funds. The level of detail must be sufficient to give fund holders confidence
that the project is technically sound and commercially robust, and may also have to
be used to gain a licence to proceed from government bodies. Tried and tested
engineering issues may not need a great deal of elaboration, but issues with a high
novelty value have to be identified and clearly explained. If work is subsequently
contracted out the document can form the basis for a tender. This phase is also
referred to as front end engineering design (FEED).

Once a project has been given approval then detailed design can begin. This phase

often signals a significant increase in spending as teams of design engineers are
mobilised to prepare detailed engineering drawings. It is also quite common for oil
companies to contract out the work from this stage, though some company
staff may continue to work with the contractor in a liaison role. The detailed
engineering drawings are used to initiate procurement activities and construction
planning. By this stage the total expenditure may be 5% of the total project budget,
and yet around 80% of the hardware items will have been specified. The emphasis at
the detailed design stage is to achieve the appropriate design and to reduce the need
for changes during subsequent stages.

Procurement is a matter of getting the right materials together at the right time

and within a specified budget. For items which can be obtained from a number of
sources a tendering process may appropriate, possibly from a list of company approved
suppliers. Very exotic items, or items which are particularly critical, may be
acquired through a single source contract where reliability is paramount. Complex
items such as turbines will often be accompanied by test certification which has
to be checked for compliance with performance and safety standards. Equipment
must be inspected when the company takes delivery, to ensure that goods have not
been damaged in shipment. The procurement team may also be responsible for
ensuring that the supply of spare parts is secure. Spending at this stage can range
anywhere from 10 to 40% of the total project cost.

The character of a project construction phase can vary considerably depending

on the nature of the contract. The construction of a gas plant in a rural setting
will raise very different issues from that of a refurbishment project on an old
production platform. Construction activities will normally be carried out by
specialised contractors working under the supervision of a company representative
such as a construction manager (or resident engineer). The construction manager is
responsible for delivering completed works to specification and within time and
budget limits. When design problems come to light the construction manager must
determine the impact of changes and co-ordinate an appropriate response with the
construction contractor and design team.

As construction nears completion the commissioning phase will begin. The

objective of the commissioning phase is to demonstrate that the facility constructed
performs to the design specification. Typically a construction team will hand over
a project to an operating team (which may be company staff) once the facility or
equipment has been successfully tested. The receiving party will normally confirm

Project and Contract Management

327

their acceptance by signing a ‘hand over’ document, and responsibility for the
project is passed on. The hand over document may also carry a budget to finish
outstanding items if these can be handled more easily by the operator.

It is good practice to review a project on completion and record the reasons for

differences between planned and actual performance. Where lessons can be learned,
or opportunities exploited, they should be incorporated into project management
guidelines. Some companies hold post project sessions with their contractors
to explore better ways of handling particular issues, especially when there is an
expectation of additional shared activities.

The project phasing covered so far is still the most common approach used in

industry. However other concepts have also been tested. Parallel Engineering is a
project management style aimed at significantly reducing the time span from
discovery to first oil and thus fast tracking new developments. In the North Sea,
conventional developments during the 1990s on average took some 9 years from
discovery to first oil. Parallel engineering may help to half this time frame by
carrying out appraisal, conceptual design and construction concurrently. The
approach carries a higher risk for the parties involved and this has to be balanced
with the potentially much higher rewards resulting from acceleration of first oil.
For example, if conceptual design is carried out prior to appraisal results being
available, considerable uncertainty will have to be managed by the engineers. The
conceptual design needs to be continuously refined and possibly changed as
additional information becomes available. All tendering processes for vessels,
equipment and services are more difficult due to the lack of reliable data. Examples
of fast track developments include the Foinaven and Schiehallion Fields in the UK
West of Shetland basin.

Figure 13.2

contrasts traditional and fast track development

approaches.

PARALLEL ENGINEERING

TRADITIONAL METHODS

Discovery

First Oil

Projects

Appraisal

4-5 years

Discovery

First Oil

Appraisal

seismic drilling

Pre-project

concept selection

Project

design/construction

9 years +

Pre-projects

Figure 13.2

Parallel Engineering approach.

Phasing and Organisation

328

13.1.2. Project organisation

Although a single project manager may direct activities throughout a project life, he
or she will normally be supported by a project team whose composition should
reflect the type of project and the experience levels of both company and contractor
personnel. The make-up and size of the team may change over the life of a project
to match the prevailing activity levels in each particular section of the project
(

Figure 13.3

).

An organisation such as the example above includes sub groups for each of

the main activities and a support (or services) group to manage information and
procurement. Auditing commitments may be fulfilled by an ‘independent’ in-house
team or by external auditors.

13.2. Planning and Control

In order to manage a project effectively it is important to have planning

and control processes in place that are recognised and understood through all
supervisory and management levels. Large projects in particular can suffer if
engineering teams become isolated or lose touch with the common interests of the
project group or company business objectives.

Project planning techniques are employed to prepare realistic schedules within

manpower, materials and funding constraints. Realistic schedules are those that
include a time allocation for delays where past experience has shown they may be
likely, and where no action has been taken to prevent reoccurrence. Once agreed,
schedules can be used to monitor progress against targets and highlight departure
from plans.

13.2.1. Network analysis

A technique widely used by the industry is Critical Path Analysis (CPA or ‘network
analysis’) which is a method for systematically analysing the schedule of large
projects, so that activities within a project can be phased logically, and dependencies

Project Design

Engineer

Resident Engineer

(Construction

Manager)

Commissioning

Engineer

Project Services

Manager

Project Manager

Audit Team

Figure 13.3

Example of a project team organisation.

Project and Contract Management

329

identified. All activities are given a duration and the longest route through the
network is known as the critical path.

In

Figure 13.4

, the relationship between four activities of different duration is

shown. In this case the critical path is indicated by the lower route (6 days), since the
last activity cannot start until all the previous activities have been completed.

In reality all activities are listed and dependency relationships are identified.

Activities are given a duration, and an earliest start and finish date is determined,
based on their dependency with previous activities. Latest start and finish dates
(without incurring project delays) can be calculated once the network is complete,
and indicate how much ‘play’ there is in the system.

A typical ‘activity symbol’ convention is shown in

Figure 13.5

. Other informa-

tion that may be included in a network is: milestones (e.g. first oil), weather
windows and restraints (e.g. permit to continue requirements).

Once a network has been constructed it can be reviewed to determine whether

the completion date and intermediate key dates are acceptable. If not, activity
duration reductions have to be sought, for example, by increasing manpower or
changing suppliers.

13.2.2. Bar charts

Whilst network analysis is a useful tool for estimating timing and resources, it is not
a very good means for displaying schedules. Bar charts are used more commonly to
illustrate planning expectations and as a means to determine resource loading.

1 Day

3 Days

2 Days

1 Day

Activity

Critical Path

Figure 13.4

Project planning network.

3

Description

of Activity

2

5

3

Earliest

Start Date

Earliest

Finish

Duration

Latest
Finish

Latest

Start Date

Activity
Number 1

6

Figure 13.5

Activity symbol convention.

Planning and Control

330

The bar chart below is a representation of the network shown in

Figure 13.4

.

In addition the chart has been used to display the resource loading (

Figure 13.6

).

The bar chart indicates that activity ‘B’ can be performed at any time within

days 2, 3 and 4, without delaying the project. It also shows that the resource loading
can be smoothed out if activity ‘B’ is performed in either day 3 or 4, such that the
maximum loading in any period does not exceed 4 units. Resource units may be,
for example, ‘man hours’ or ‘machine hours’.

The resource loading can be represented in percentage terms (see

Table 13.1

) to

give an indication of the resource ‘weighting’ distribution on a daily basis and per
activity (note that activity ‘B’ has been moved to day 3 to smooth resource loading).

13.2.3. ‘S’-curves

By plotting the cumulative resource weighting against time, the planned progress
of the project can be illustrated, as shown in

Figure 13.7

. This type of plot is often

referred to as an ‘S’-Curve, as projects often need time to gain momentum and slow
down towards completion (unlike the example shown).

1

DAYS

Time

Activity

2

4

5

A

B

C

D

TOTAL

3

2

4

4

2

4

1

3

4

3

6

5

2

4

2

Figure 13.6

Bar chart with resource loading.

Table 13.1

Resource weighting matrix

Activity

Weight per Day

Weight per Activity (%)

1

2

3

4

5

6

A

15.0

15

B

5.0

5

C

20.0

10.0

10.0

40

D

20.0

20.0

40

Total

15%

20%

15%

10%

20%

20%

100

Project and Contract Management

331

Plots such as this can be used to compare actual to planned progress. If progress

is delayed at any point, but the completion date cannot be slipped, the plot can be
used to determine how many extra resource units have to be employed to complete
the project on time.

13.3. Cost Estimation and Budgets

At each phase of a project, cost information is required to enable decisions

to be taken. In the conceptual phase these estimates may be very approximate
(e.g.+40% accuracy), reflecting the degree of uncertainty regarding both reservoir
development and surface options. This is sometimes referred to as an ‘order of
magnitude cost estimate’. As the project becomes better defined the accuracy of
estimates should improve.

An appropriate estimate of technical cost is important for economic analysis.

Underestimating costs may lead to funding difficulties associated with cost overruns,
and ultimately, lower profitability than expected. Setting estimates too high can kill
a project unnecessarily. Costs are often based on suppliers’ price lists and historical
data. However, many recent oil and gas developments can be considered pioneering

100

90

80

70

60

50

40

30

20

10

1

6

15

20

15

10

20

20

15

35

50

60

80

100

Days

% Completed

per day

% of project

completed

Progress in %

2

3

4

5

Figure 13.7

Progress plot (or ‘S’-Curve).

Cost Estimation and Budgets

332

ventures in terms of the technology and engineering applied. Estimating solely on
the basis of historical costs can be inappropriate.

Cost estimates can usually be broken into firm items, and items which are more

difficult to assess because of associated uncertainties or novelty factor. For example,
the construction of a pipeline might be a firm item but its installation may be
weather dependent, so an ‘allowance’ could be included to cover extra lay-barge
charges if poor sea conditions are likely (

Figure 13.8

).

Firm items such as pipelines are often estimated using charts of cost vs. size and

length. The total of such items and allowances may form a preliminary project
estimate. In addition to allowances some contingency is often made for expected but
undefined changes, for example to cover design and construction changes within
the project scope. The objective of such an approach is to define an estimate that
has as much chance of under running as over running (sometimes termed a 50/50
estimate) (

Figure 13.9

).

A budget containing a number of 50/50 project estimates is more likely to

balance than if no allowances or contingencies are built in. However such systems
should not be abused to give insurance against budget overrun; inflated estimates
tend to hide inefficiency and distort project ranking. Allowances should generally be
supported by statistical evidence, and contingencies clearly qualified. Contingency
levels should normally reduce as planning detail increases.

Minimum risk estimates are sometimes used to quantify either maximum exposure

in monetary terms or, in the case of an annual work plan containing multiple
projects, to help determine the proportion of firm projects. Firm projects are those
which have budget cover even if costs overrun. A minimum risk estimate is one

Project

Initiation

Note

40%

Estimate

Conceptual

Phase

Feasibility

Report

Feasibility

Phase

Detailed

Design

Execution

Phase

Commitment

and Control

N

N

Approval ?

Approval ?

Approval ?

25%

Estimate

N

Definition

Phase

Development

Plan

15%

Estimate

Figure 13.8

Cost estimate evolution.

Project and Contract Management

333

with little or no probability of overrun, and can be used to reflect the risk associated
with very complex or novel projects.

This may be referred to as the p90 cost estimate. Note that it is at the high end

of the range, whereas to a typical subsurface engineer a p90 reserves estimate is at the
low end of the range. Care must be taken when quoting p90 and p10 estimates, as
they may mean different things to different disciplines or even to different companies!

13.4. Reasons for Contracting

Many oil and gas companies do not consider the detailed design and

construction of production facilities as part of their core business. This is often the
stage at which work is contracted out to engineering firms and the client company
will switch manpower resources elsewhere, although some degree of project
management is commonly retained.

Contracts are used by an oil company where

 the services offered by a contractor can be provided more cheaply or more

efficiently than using in-house resources

 the services required are of a specialist nature, and are not available in-house
 services are required for a peak of demand for a short period of time, and the oil

company prefers not to recruit staff to meet this peak.

0

50

90 100

base case
estimate

contingency

overrun potential

low risk

estimate

50 / 50

estimate

Cost x

Probability of cost being less than x

Figure 13.9

Estimates and contingency.

Reasons for Contracting

334

13.5. Types of Contract

To protect both parties in a contract arrangement it is good practice to make a

contract in which the scope of work, completion time and method of reimburse-
ment are agreed. Contracts are normally awarded through a competitive tendering
process or after negotiation if there is only one suitable contractor.

There are many varieties of contract for many different services, but some of the

more common types include

 Lump Sum contract; contractor manages and executes specified work to an agreed

delivery date for a fixed price. Penalties may be due for late completion of the
work, and this provides an incentive for timely completion. Payment may be
staged when agreed milestones are reached.

 Bills of Quantities contract; the total work is split into components which are

specified in detail, and rates are agreed for the materials and labour. The basis of
handling variations to cost are agreed.

 Schedule of Rates contract; the cost of the labour is agreed on a rate basis, but the

cost of materials and the exact hours are not specified.

 Cost Plus Profit contract; all costs incurred by the contractor are reimbursed in full,

and the contractor then adds an agreed percentage as a profit fee.

Lump sum contracts tend to be favoured by companies awarding work (if the

scope of work can be well defined) as they provide a clear incentive for the
contractor to complete a project on time and within an agreed price.

The choice of contract type will depend on the type of work, and the level of

control which the oil company wishes to maintain. There is a current trend for
the oil company to consider the contractor as a partner in the project (partnering
arrangements), and to work closely with the contractor at all stages of the project
development. The objective of this closer involvement of the contractor is to
provide a common incentive for the contractor and the oil company to improve
quality, efficiency, safety and most importantly to reduce cost. This type of contract
usually contains a significant element of sharing risk and reward of the project.

Project and Contract Management

335